Ecclesiastl.8fe Regulatory News (ELLA)

 ECCLESIASTICAL INSURANCE OFFICE PLC

ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 31 DECEMBER 2011

The Company has now approved its annual report and accounts for 2011.

This Annual Financial Report announcement contains the information required to comply with the Disclosure and Transparency Rules, and extracts of the Directors' Report forming part of the full financial statements.

The financial information set out below does not constitute the Company's statutory accounts for the year ended 31 December 2011. The annual report and accounts will be available from 23 March 2012 on the Company's website at www.ecclesiastical.com. Copies of the audited financial statements are also available from the registered office at Beaufort House, Brunswick Road, Gloucester GL1 1JZ.

A copy of the Company's statutory accounts for the year ended 31 December 2011 has been submitted to the National Storage Mechanism and will shortly be available for inspection at www.hemscott.com/nsm.do.

Directors' Report

Review of Group Operations

1 Turnover of the Group incorporates general and life insurance GWP, and fee and commission income generated by our investment management, broking and advisory operations

2 'Other' costs include amortisation of intangible assets on business acquisitions, and one-off corporate costs in the prior year

Introduction

Over the course of 2011 we continued to make progress and grow our business in a turbulent financial environment and highly competitive insurance market. We also faced a number of major natural catastrophes, which significantly impacted our underwriting result for the year.

Against this backdrop, the business performed well. We have been able to hone our strategy and maintain focus on the major initiatives required to move Ecclesiastical forward. These form the major elements of our ongoing change programme for the coming year and beyond.

Organisational and operating structures

During the year we made a number of changes to our organisational and operating structures. On 1 January 2011, we transferred to Ecclesiastical the business of our UK subsidiary Ansvar Insurance Company Limited under a Part VII transfer as part of our strategy to reduce the number of companies within the Group. Ansvar now operates as a business division in the UK.

We also restructured our UK general insurance operations, with a number of the support functions being more aligned with the business units.

In April, the Group launched a new property investors proposition into the London market. This move built upon our existing skills and expertise and the Group's strong reputation as a property insurer. It is serviced by a specialist team of experienced property underwriters based in our London office.

Since the launch we have established ourselves as a credible alternative to those UK insurers who have traditionally dominated this market, and we achieved strong premium growth in 2011. We are targeting further premium growth in this sector in 2012, both in London and the regions. Underwriting control will remain with our dedicated team in London to ensure the quality of business written is maintained.

As previously reported, our 2011 underwriting result was adversely affected by both the severe floods and storms in Australia and the earthquakes in New Zealand. The latter led to the announcement in November of our managed withdrawal from the New Zealand market. This is progressing according to plan and our priority remains meeting claims as quickly and fairly as possible. We have also refocused our Australian business, withdrawing from the intermediated personal lines business.

We have continued to diversify the Group by growing all other areas of the business, including the management of third party investments, our owned broker businesses and long-term insurance supporting retail funeral plan sales; and we have expanded our financial advisory operations.

As might be expected, our online presence has been growing: the volume of our business transacted via the internet more than doubled during the year.

Financial performance

Gross Written Premium (GWP) for our general insurance businesses grew by 4% to £465 million (when excluding our London Market run-off business, EUML, from the current and prior year figures). This growth was broadly in line with our plans, despite the relatively static general insurance rating environment.

Our general insurance businesses were affected particularly by the Australian weather and the New Zealand earthquake events during the year, further detailed later in this review. The greatest devastation resulted from the February aftershock in Christchurch, and gross claims incurred exceeded the previous year's largest ever recorded for the Group.

To date, the reinsurance programme has responded well to contain net costs for this event. However, as noted earlier, claims continue to evolve and the Board has considered a range of contingent risk management actions to help manage the risk of further adverse developments should these occur.

In November, we announced our intention to make an orderly withdrawal from New Zealand in 2012. Our underlying Group COR, which has been calculated excluding the exceptional losses in Australasia and related catastrophe reinsurance costs, was 97.5%, broadly in line with our long-term target.

Elsewhere, strong profits generated by the property account in the UK were partly offset as the frequency and cost of liability claims continued to escalate.

Our owned brokers continued to grow and made increased profit contributions.

Despite uncertainty in financial markets, it is pleasing to report that our investment management business further developed as a standalone source of income and profit to the Group.

As part of our continuing commitment to our charitable owner, Allchurches Trust, we increased the level of our underlying grant to them to £10.25 million (2010: £9.25 million, plus a special grant of £10 million), enabling them to support more good causes.

Results of key operations

General insurance

Our UK general insurance operations, including the Ansvar business division, grew in line with our plans during the year in what remains a challenging environment. GWP increased by 8% from £303 million to £326 million, adjusted on a management basis to remove our London Market business, which is now in run-off and reported within the 'Other' general insurance segment.

In addition to the expansion of our product offering, which generated high profile business wins, retention levels remain high within our core niches, reinforcing our position as a credible insurer in these sectors.

We continue to improve our sales and underwriting capability to ensure risk selection is based on sound underwriting principles. The development of our academy programme to support this objective is discussed under the 'Our People' heading further on in this review.

Underwriting action was taken on the motor account in the UK following the losses reported in 2010. Rating increases have been achieved in specific areas of the account, and risk selection has become more sophisticated. Both of these factors contributed to a significant improvement in performance. The property account results returned to a healthy profit, with milder winter weather at the latter end of the year. Liability claims continue to escalate both in frequency and cost due to a significant increase in 'slip and trip' claims and increases in the number of latent abuse claims. We are taking action to improve profitability in the current poorest performing areas, notably in the care sector.

Increased brand awareness in Ireland has enabled us to grow in our target markets. We achieved 8% GWP growth overall despite uncertain economic conditions. As in the UK, 2011 claims were much less severe compared with the freezing weather events which adversely impacted the prior year performance. We have identified opportunities for further growth in Ireland, and have appointed a new Managing Director, David Lane, who will be responsible for the delivery of our future plans.

Our Ansvar subsidiaries in Australasia suffered a number of natural catastrophes during the year which severely impacted profit, due to the increased number and cost of claims and also through additional reinsurance costs to back-up and reinstate cover. Of the overall £16.9 million underwriting loss for this territory, the Australia business contributed a loss of £11.8 million largely relating to the floods and storms in Queensland and Victoria, along with Cyclone Yasi, all of which occurred in January and February 2011.

Our New Zealand business incurred an unusually high level of claims from three significant earthquake aftershocks in the Canterbury region. The total gross claims cost from the earthquakes stretching across 2010 and 2011, which continues to evolve, is estimated at NZ$0.8 billion at the end of 2011, with this estimated total covered by our group catastrophe reinsurance programme. The net overall underwriting result for New Zealand in 2011 was a loss of £5.1 million.

The series of earthquakes in New Zealand has significantly increased the cost of reinsurance protection in this territory, making underwriting uneconomic for the size of our subsidiary. This prompted our decision to withdraw from underwriting within New Zealand and the business ceased being on risk from 1 January 2012.

Alternative cover has been offered to Direct customers by Lumley Insurance and further back-up cover, excluding earthquake, from Ansvar in Australia.

A claims operation will be maintained in New Zealand to manage the earthquake losses. This has been an extremely tough year for everyone affected, and we would like to thank our staff for their hard work and professionalism through such a difficult period.

During the year we refocused the business in Australia and exited from intermediated personal lines business to concentrate on business within our core niches as planned. Growth in our target segments has been promising, and we have further strengthened the team in Australia to give a sharper focus on business development, underwriting disciplines and service delivery.

In Canada, the tripartite customer relationship strategy, embedded globally, drove higher-than-average industry retention of 98% and also provided new customer referrals, delivering GWP of £34 million, an increase of approximately 16%. There were significant new business successes within the core niches, particularly faith and education. However, a number of weather events increased the cost of claims, and, together with a spike in latent abuse claims, resulted in a small underwriting loss.

Overall, our run-off operations progressed satisfactorily, including savings recorded on the previous year large claims for our London Market business. However, after inclusion of central underwriting expenses and £5.8 million of Group reinsurance reinstatement and back-up costs, this segment reported a loss of £7.3 million.

The Group remains committed to reducing its expense ratio (underwriting expenses expressed as a proportion of GWP) and last year made progress against this objective. The one-off reductions in GWP relating to EUML and Australasia increased the expense ratio to 18.6% (2010: 17.2%), excluding this the ratio remained at or below the 2010 level across our other territories. We expect the changes we have made to bring further benefits in future.

We successfully piloted a new servicing model in the UK Schemes area, and we will continue to roll this out across the UK businesses to increase efficiency and improve service levels. We completed an external benchmarking exercise of all the key functions in the UK and identified several opportunities to reduce costs within the business.

We will continue to work to improve the way we operate and to expand our offering, including our internet capability, in order to enhance our reputation for customer service and make us first choice for customers and business partners.

Investments

Investment result - management basis

**estment resultementareholder fundnsurance businessy eg for GF1 Management figures presented in this review relate to portfolio investments supporting the general insurance and life shareholder fund. Other Group investments, including those of the index-linked long-term insurance business, form part of the reviews of those operations.

Total return by asset class, incorporating income and capital gains/(losses)

The performance of our investments in 2011 reflects the turbulent market conditions that persisted throughout the year.

Despite the low level of economic growth, inflation remained stubbornly above its target level throughout the year, reflecting rising energy and food costs.

The FTSE All Share index fell by 6.7% (2010: +10.9%). The FTSE 100 Index fell less sharply (5.6%), demonstrating its relative defensive properties compared with the falls of 12.6% and 14.9% in the more economically sensitive FTSE 250 Mid Cap Index and Small Cap Index respectively. Our UK equity portfolio outperformed these, reflecting its defensive orientation.

Overseas, the troubling financial conditions of the Eurozone inevitably contributed to large falls in World indices. The March 2011 earthquake, tsunami and nuclear meltdown in Japan and various other factors served to stifle the rate of expansion of the global economy, and our investments were not immune to the impact.

Our low exposure to a stronger US performance also dampened our overall equity return. The Group pursues a long-term investment strategy, and is relatively well placed to cope with shorter-term periods of volatility. As a further defensive measure, during the year, and at year end, derivative contracts were put in place to limit losses in the event of a further substantial fall in equity markets.

The FTSE Government All Stocks Index rose 11.0% over the year (2010: +2.8%) reflecting Bank of England intervention and investors' desire for so-called 'safe haven' assets. Corporate bonds generally underperformed gilts, reflecting the negative impact of lowered economic expectations and, notably, investor worries about the debilitating effects of the credit crisis on the financial sector.

In the UK, our gilt holdings rose less sharply than the market due to their shorter-dated profile. Overseas, our bond-weighted portfolios generally benefited from the fact that the global turmoil tended to push yields down and market values up, in particular in Australia where we recorded gains.

Ecclesiastical Investment Management

Ecclesiastical Investment Management (EIM) has been a key recent success story for the Group. We have reaped the rewards of effective marketing campaigns, becoming a recognised presence on fund platforms and growing our funds under management at an impressive rate.

Our funds have continued to receive awards. In particular our Amity International Fund was named Best in Sector over 5 years, Best Global Large-Cap Equity Fund and Best Global Growth Fund.

Although 2011 was a difficult year for asset managers, our sales achievements were impressive, with £128 million net new funds added to the Ecclesiastical Investment Funds (up from £110 million in the previous year), and an additional £14 million invested in our newly launched special charity investment vehicle. EIM's fee and commission income grew by 32% to £9.6 million, including £7.4 million in respect of managing external funds and the EIF, and profit increased from £0.5 million to £1.2 million.

Long-term insurance

2011 was the first full year in which our life insurance business was focused solely on providing Whole of Life policies to support the funeral planning products made available by business partners such as the National Association of Funeral Directors. This mutually beneficial relationship continued to generate strong growth.

We increased GWP by some 40% to £19 million, while managing our expense base within planned levels. The financial security and transparency of our offering is well regarded in the market, and compares well to alternatives where funeral pre-payment funds are invested in funeral plan trusts. Investment conditions, however, continue to prove challenging. The significant fall in yields on those index-linked bonds in which we are required to invest reduced the available profit margin, and adversely affected performance. On the other hand, we benefited from a number of one-off technical factors that led to an improvement in the pre-tax result, to a profit of £0.7m. We have agreed changes to our management fee structure that are designed to improve profitability.

Broking

We continued to grow our owned brokers ahead of plans in a competitive environment. Good progress was made in defining strategies which promote their independent success.

South Essex Insurance Brokers (SEIB) continued to provide a steady income stream and is successfully providing diversification of Group earnings, confirming the strategic rationale for the purchase of this business. Both commission and profit increased over 2011 despite the low rating conditions prevalent across the market. SEIB continues to build on its relationships with key customers and to grow in its established specialisms.

Our aim of continually improving efficiency whilst providing exceptional service was recognised by an award for Customer Service Provider of the Year.

Our immediate parent Ecclesiastical Insurance Group increased its stake in Lycetts during the year and now holds a controlling stake of this business (56.2%). It is envisaged that this stake will increase further over the coming years. Lycetts continued to grow organically, with the strongest percentage growth in rural and bloodstock, the two largest divisions of the business. It also acquired Farmers and Mercantile Insurance Brokers during the year, increasing the reach of the operation.

Our owned brokers present further opportunities for the Group in the years ahead.

Advisory

Ecclesiastical Financial Advisory Services (EFAS) provides independent financial planning support and advice to the clergy and their families as well as to the Church and associated customer groups. Work has continued on developing our fee-based advice model to replace commission income in the lead-up to implementation of the Retail Distribution Review (RDR) in January 2013.

Fee income has grown by 33%, and now represents 23% of new business income. In the current climate of uncertainty, we have seen a dip in investor confidence that has delayed investment decisions.

Prior to the introduction of RDR, we have been working to ensure that our people gain the necessary adviser qualifications. We expect all advisers to become DipFA QCF Level 4 qualified in 2012.

Governance

Our ongoing objective is to make sure our governance matches rapidly changing best practice. Although we are not legally required to apply the UK Corporate Governance Code, we comply with it voluntarily. During the year we revised the Terms of Reference of all of our Committees and increased the remit of the Group Remuneration Committee to encompass the requirements of the FSA Remuneration Code, to which EIM is already subject.

We also strengthened the role of the Group Risk Committee and its reporting to the Group Audit Committee. Our Non-Executive Directors played an active part in this process.

During the year an overarching policy framework was adopted by all Group companies. This aims to ensure that policies are applied consistently across all Group operations in accordance with the Risk Framework.

We strengthened our approach to Enterprise Risk Management with the appointment of a new Group Risk and Actuarial Director, and to Group Internal Audit with a new Director of Group Internal Audit and Compliance. Our Three Lines of Defence approach is set out in more detail in our Corporate Governance and Risk reports of the full financial statements.

Our people

Our people continue to be the heart and soul of Ecclesiastical. In 2011, we continued to invest in their development and well-being and to support them at every stage of their career with us. Our professional academy programme, led by our sales academy, went from strength to strength.

Our academy approach - which includes underwriting and claims as well as sales - gives our people the technical skills and support they need to provide the standard of service expected by our customers, whilst maintaining our core disciplines. We also continue to invest in Community Relations programmes, which are separately detailed in this document and on our website.

Over 300 of our people attended 'bite-size' learning courses which provide short, accessible training on topics such as time management. Our 'discovery' talent-spotting programme is designed to recognise employees with potential. We are supporting those with the highest potential to take on projects outside their area of work to stretch and develop them.

We also re-launched our induction programme to ensure those people joining our organisation get the very best experience in their first months with us. During the year we took a difficult decision and, in line with many other companies, limited the accrual of future benefits under our closed final salary pension scheme.

In 2011 we welcomed several new senior members to our team, and said goodbye to several too. Nigel Gray joined as our Group Risk and Actuarial Director and Caroline Taplin as our HR Director, both have joined our Group Executive Team; and John Schofield joined as Director of Group Internal Audit and Compliance. David Lane was appointed Managing Director for Ireland in January 2012 and also joins the Group Executive Team.

We said goodbye to Kevin Bogue, our Group Risk and Actuarial Director, who had been with Ecclesiastical for more than 30 years; Graham Johnson, our Transformation Director; and Ronan Foley, Managing Director of our Ireland business. I would personally like to thank each of them for their hard work and dedication and wish them the best for the future.

Awards

Our awards span various areas of our business.

We have already mentioned three investment awards for our Amity International Fund which were from Lipper, Morningstar UK and Money Observer.

In addition the Higher Income Fund won Best in Sector over 3, 5 & 10 years for the fifth consecutive year from Lipper, and was runner-up for the Best Direct Mail Pack Award at the prestigious Money Marketing Awards.

EIM won the Moneyfacts Best Ethical Investment Provider award for the third year running, and an Ethical Investment Association Transparency award, which recognised our work in becoming a signatory to the European Transparency Code.

SEIB was named Customer Service Provider of the Year at Insurance Age UK Broker Awards 2011, and our sales academy won Employer Partner of the Year in the University of Gloucestershire Enterprise Awards. Our Group Credit Management team has received an accreditation for Quality in Credit Management, becoming the first insurer to do so, while our Casualty Claims team won the Training and Development award in the Manchester Insurance Awards.

We were shortlisted or runner-up in a long list of further awards including the UK Claims Excellence Awards, British Insurance Awards, Risk Management Awards and Underwriting Service Awards organised by Post Magazine.

Outlook

Looking forward, the rating environment is showing no widespread signs of hardening. However, we made significant progress in 2011 in improving both our operations and our governance, and I am confident that the actions we have taken will stand us in good stead as we pursue our objective to provide excellent, specialist expertise and distinctive service to all our customers.

Michael Tripp

Group Chief Executive, Ecclesiastical

Principal activity

The Group operates principally as a provider of general insurance in addition to offering a range of financial services, with offices in the UK, Ireland, Canada, Australia and New Zealand.

Ownership

At the date of this report the entire issued Ordinary share capital of the Company and 5.6% of the issued 8.625% Non-cumulative Irredeemable Preference shares were owned by Ecclesiastical Insurance Group plc. In turn, the entire equity capital of Ecclesiastical Insurance Group plc was owned by Allchurches Trust Limited.

On 20 March 2012 the Directors approved a proposal for all of the issued Ordinary shares of 10p each to be sub-divided into 2.5 Ordinary shares of 4p each, for which a resolution will be put to the forthcoming AGM for approval.

Dividends

Dividends paid on the Non-cumulative Irredeemable Preference Shares were £9,181,000 (2010: £5,731,000).

The Directors do not recommend a final dividend on the Ordinary shares (2010: £nil), and no interim dividend was made in respect of either the current or prior year.

Charitable and political donations

Charitable donations paid and provided for by the Group in the year amounted to £11.7 million (2010: £20.6 million).

During the last ten years, a total of £92.9 million (2010: £85.5 million) has been provided by Group companies for church and charitable purposes.

It is the Group's policy not to make political donations.

Principal risks and uncertainties

The principal risks and uncertainties, together with details of the financial risk management objectives and policies of the Group, are disclosed in the Risk Report and notes 3 and 4 to the full financial statements and are set out later in this announcement.

Going concern

A review of the Group's business activities is provided above. In addition, the Risk Report below and the additional notes on Insurance and Financial Risk in this announcement disclose the Group's principal risks and uncertainties, including exposures to insurance and financial risk and the Group's objectives for managing capital.

The Group has considerable financial resources and, as a consequence, the Directors believe the Group is well placed to manage its business risks successfully and continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the annual report and accounts.

Risk Report

Enterprise Risk Management

The Group has adopted the following high-level definition:

Enterprise Risk Management: "The proactive enterprise-wide strategic process designed to identify and manage all the individual and aggregated risks that could impact the organisation's ability to deliver its objectives."

It deals with both managing downside risks (threats) and supporting upside risks (opportunities). Risk arises as much from missed opportunities as it does from possible threats.

The Group follows the Risk Management Standard as published by the Institute of Risk Management. Risk Management is a central part of the Group's strategic management. It is the process whereby the Group methodically and consistently addresses the risks attaching to its activities with the aim of achieving sustained benefit within each activity and across the portfolio of all activities. The benefits and opportunities should be viewed not just in the context of the Group itself but in relation to the many and varied stakeholders who can be affected.

The focus of good risk management is the identification and treatment of these risks.

It is a continuous and evolving process which runs throughout the Group's strategy and the implementation of that strategy. It addresses all the risks surrounding the Group's activities past, present and, in particular, future on an enterprise-wide basis.

It is integrated into the culture of the Group with an effective policy and a programme led by the Group Executive Team. It assigns responsibility throughout the organisation with each manager and employee responsible for the management of risk as part of their job description. It supports accountability, performance measurement and reward, thus promoting operational efficiency at all levels.

Management of key risks and uncertainties

Each year the Board assesses the Group risks and action plans are drawn up to manage these risks to the target level defined by the Board. The key material risks identified are summarised below.

Insurance risks and uncertainties:

Pricing risk

Pricing risk is described as the risk of failing to price adequately for claims costs, expenses, cost of capital and profit requirements; failure to manage portfolio risk; failure to manage the underwriting cycle; and failure to establish appropriate underwriting disciplines.

Disciplined underwriting and pricing is central to the business and key to the success of the Group. Since 2010 we have established sales, claims and underwriting academies to support these activities and to ensure the correct skill set is maintained and developed. Benchmarking of actuarial pricing techniques together with the high level of underwriting expertise and market knowledge underpinned by technical audits allows the Group to manage this risk.

A clear focus on being a specialist and a strategy of diversification within the type of business underwritten and between territories helps to manage the underwriting cycle and reduce the variability of the expected outcome.

Reinsurance risk 

Reinsurance risk is defined as the risk of failing to access and manage reinsurance capacity to support the overall capital management strategy.

A strong reinsurance programme is a key part of the Group's business model. It has enabled the Group to accept and grow the insurance business. Its appetite for this exposure to the reinsurance market has therefore always been accepted as high, and a robust mitigation framework is in place to manage the risk. The reinsurance strategy is long-term and is based on achieving objectives through establishing long-term relationships rather than opportunistic purchases.

The capital management strategy helps pull together all risks to the capital position (including reinsurance and investment risks) in an integrated way.

Claims reserving risk

Claims reserving risk is defined as the risk of actual claims and benefit payments exceeding the carrying amount of the insurance liabilities.

The Group's careful selection of risks starts with the strategy to underwrite primarily property business, with longer tail liability business only underwritten as part of a comprehensive package. This helps reduce the average time to receiving and paying out claims and hence the uncertainty surrounding claims reserving.

Claims development and reserving levels are closely monitored. To ensure that prudent provisions are made an addition is made to the most likely outcome. This approach generally results in a favourable release of provisions in the current financial year, arising from the settlement of claims from previous financial years. Claims reserves are reviewed and signed off by an Executive Reserve Sign-Off Management Committee and the Board, acting on the advice and recommendations of a suitably qualified and experienced internal actuarial team.

More information on pricing, reinsurance and claims reserving uncertainties can be found in the Insurance Risk section within this announcement and note 29 to the full financial statements.

Competition and distribution risk

Competition and distribution risk is described as the risk of failing to recognise and address changes in a competitive market, particularly competitors' actions within the niches the Group operates in, as well as the impact on resources including talent management both from a local and global perspective.

From a distribution and concentration risk perspective, this includes an imbalance of bargaining power with major distributors plus customer concentration with a small number of distributors.

The Group Executive Team is aware of the Group's key competitors. They are monitored and their impact on our markets is managed. There is a strong focus on delivering excellent customer service through our chains of distribution. Having a number of distribution channels helps diversify the distribution risk as does transacting business with a broker panel which is well diversified to avoid concentration risk.

Market, Credit and Liquidity risks and uncertainties:

Market risk includes uncertainty around investment performance (e.g. interest rate movements and falls in the values of equities) and currency risks (exchange rate movements).

A robust management framework is in place to mitigate the impact to the Group of falls in the value of equities and changes in interest rates. The Investment function manages the portfolio in accordance with the investment strategy and guidelines agreed by the Finance and Investment Committee of the Board. Large equity falls have been experienced in recent years and, although significant for the Group, the coverage of risk-based capital requirements has been maintained at a strong level. The equity portfolio typically has a beta of around 1. Currency risk is appropriately monitored and controlled with oversight by the Finance function.

Key elements of credit risk are exposure to counterparty risk through investments and the purchase of reinsurance. Investment counterparty risk is controlled by the investment strategy and guidelines. Reinsurer credit risk is controlled by the Reinsurance Security Committee through careful selection and monitoring of reinsurance partners with appropriate financial strength. Liquidity risk arises from mismatching between liabilities and assets (both by timing and nature).

Increases in reinsurance balances due to catastrophe events in Australia and New Zealand increase the credit risk and liquidity risk for the Group. These territories operate regional reinsurance programmes with extra protection provided by the Group's global catastrophe reinsurance. All reinsurers on the programme have a minimum 'A-' rating from Standard & Poor's or equivalent from another rating agency.

More information on market, credit and liquidity risks can be found in the Financial Risk section later in this report.

Operational risks and uncertainties:

Business intelligence risk

Business intelligence risk is described as the risk of shortfalls in the quality or availability of management information for decision making.

Over the last two years there has been an extensive programme focusing on accuracy, completeness and appropriateness of data and efficiency of producing information through the development of a new data warehouse and local activity.

Regulatory and legal risk

Regulatory and legal risk is described as the risk of non-adherence to current regulations due to incorrect interpretation or purposely ignoring it. It also includes proposed legal and regulatory changes and inability to identify them in a timely manner.

In 2011 we have strengthened our compliance and legal teams and the reporting framework as well as developing a legal and regulatory training package for all staff.

When we assess these risks, their interactions and the effect of management actions are considered.

Risk management

The Group Executive Team is responsible for managing the above risks and for ensuring that a strong control framework is in place in all areas of the business. Each Group Executive member assesses the strategic risks identified by the Board in relation to the specific areas they manage on an annual basis or when a major change affects their area.

In addition to this, each operational manager is responsible for identifying and managing the operational risks in their own area formally at least on a bi-annual basis, and to undertake the necessary actions to ensure the risks are managed to the level consistent with the Board risk limits set in the risk appetite.

All actions are regularly reviewed and progress is monitored and reported to the Group Risk Committee at strategic level and to the Management Risk Committees at operational level through a bi-monthly report.

The Group Audit Committee provides independent assurance of the strength and effectiveness of the Group's internal systems of control through the activities of the Group Internal Audit and Group Compliance functions as well as the external auditor.

Risk appetite

The Group has a mature risk appetite framework which sets the risk limits and tolerances the Board is willing to accept in the following categories: Capital, Profit and Corporate Responsibilities. These limits are linked directly to the level of economic capital the Board requires to protect its customers and owners in the long and short term.

The level of risks is monitored regularly against the appetite and strategic decisions are made with appropriate reference to it.

Stress testing framework

A comprehensive scenario and stress testing framework is continuing to be developed to expand the existing financial risks stress testing assessment part of the planning process, and the operational risk scenario testing. The aim is to integrate the two processes together with the reverse stress testing to deliver a true Enterprise Risk reporting framework.

Directors' Responsibility Statement

The following statement is extracted from page 51 of the 2011 annual report and accounts, and is repeated here for the purposes of the Disclosure and Transparency Rules. The statement relates solely to the Company's 2011 annual report and accounts and is not connected to the extracted information set out in this announcement. The names and functions of the Directors making the responsibility statement are set out pages 30 and 31 of the full annual report and accounts.

The Directors confirm to the best of their knowledge:

CONSOLIDATED INCOME STATEMENT

For the year ended 31 December 2011

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the year ended 31 December 2011

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

for the year ended 31 December 2011

The equalisation reserve is not distributable and must be kept in compliance with the insurance companies' reserves regulations

The revaluation reserve represents cumulative net fair value gains on owner-occupied property.

The translation reserve arises on consolidation of the Group's foreign operations.

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

At 31 December 2011

CONSOLIDATED STATEMENT OF CASH FLOWS

For the year ended 31 December 2011

NOTES TO THIS ANNUAL FINANCIAL REPORT ANNOUNCEMENT OF RESULTS

for the year ended 31 December 2011

1 Accounting policies

The Company has prepared this announcement of its consolidated results using the same accounting policies and methods of computation as the full financial statements for the year ended 31 December 2011 as prepared under International Financial Reporting Standards (IFRS) as adopted for use in the EU.

2 General Information

Whilst the financial information included in this announcement has been prepared in accordance with the recognition and measurement criteria of IFRS, this announcement does not itself contain sufficient information to comply with IFRS. Full financial statements that comply with IFRS were approved by the Board of Directors on 20 March 2012.

The financial information set out above does not constitute the Company's statutory accounts for the years ended 31 December 2011 or 2010, but is derived from those accounts. Statutory accounts for 2010 have been delivered to the Registrar of Companies and those for 2011 will be delivered following the Company's annual general meeting. The auditors have reported on those accounts; their reports were unqualified, did not draw attention any matters by way of emphasis without qualifying their report and did not contain statements under sections 498(2) and 498(3) of the Companies Act 2006.

This announcement was approved at a meeting of the Board of Directors held on 20 March 2012.

Ecclesiastical Insurance Office plc is a subsidiary of Ecclesiastical Insurance Group plc which is an investment holding company whose ordinary shares are not listed.

The ordinary shares of Ecclesiastical Insurance Office plc are not listed.

Copies of the audited financial statements are available from the registered office at Beaufort House, Brunswick Road, Gloucester GL1 1JZ.

The following information is included in this announcement in compliance with the Disclosure and Transparency Rules and has been extracted from the full financial statements for 2011.

Insurance Risk

The risk under any one insurance contract is the possibility that the insured event occurs and the uncertainty of the amount of the resulting claim. By the very nature of an insurance contract, this risk is unpredictable and difficult to quantify with certainty.

The principal risk that the Group faces under its insurance contracts is that the actual claims and benefit payments exceed the carrying amount of the insurance liabilities, which may occur if the frequency or severity of claims and benefits are greater than estimated. Insurance events are unpredictable and the actual level of claims and benefits may vary from year to year from the estimates established using statistical techniques.

Factors that typically aggravate insurance risk include lack of risk diversification in terms of type and amount of risk, geographical spread and type of customer covered.

Experience shows that the larger and more diversified the portfolio of similar insurance contracts, the smaller the relative variability about the expected outcome will be. The Group's insurance underwriting strategy aims to diversify the type of insurance risks accepted in order to reduce the variability of the expected outcome.

General business risks

General insurance business classes written include property and liability. Property cover mainly compensates the policyholder for damage suffered to their properties or for the value of property lost. Property may also include cover for pecuniary loss through the inability to use damaged insured commercial properties. Liability insurance contracts protect policyholders from the liability to compensate injured employees (employers' liability) and third parties (public liability). Motor policies provide both property and liability cover for the insured. Injury, death or incapacity as a result of an unforeseen event is covered by the accident class of business.

In all operations pricing controls are in place, underpinned by sound statistical analysis and market expertise and appropriate external consultant advice. The Group manages risks to limit severity through its underwriting strategy, a comprehensive reinsurance programme and proactive claims handling. Net retention limits are in place and the Group arranges catastrophe reinsurance cover to protect against aggregations of losses.

Frequency and severity of claims

Property classes

For property insurance contracts, including the property element of motor contracts, the number of claims made can be affected by weather events, changes in climate and crime rates. Individual claims can vary in amount since the property insured is diverse in both size and nature. The cost of repairing property varies according to the extent of damage, cost of materials and labour charges.

Climate change may give rise to more frequent and severe extreme weather events, such as river flooding, hurricanes and drought, and their consequences, for example, subsidence claims.

The maximum claim payable is limited to the sum insured. The Group has the right to re-price the risk on renewal. It also has the ability to impose deductibles, reject fraudulent claims and pursue third parties for payment of some or all costs. These contracts are underwritten on a reinstatement basis or repair and renovation basis as appropriate. Costs of rebuilding properties, of replacement or indemnity for contents and time taken to restart operations for business interruption are the key factors that influence the level of claims. Individual large claims are more likely to arise from fire, storm, earthquake or flood damage. The greatest likelihood of an aggregation of claims arises from weather, earthquake or recession-related events.

Liability classes

For liability insurance contracts, including the liability element of motor contracts, the frequency and severity of claims can be affected by several factors. The most significant are the increasing level of awards for damages suffered, the courts move to periodic payments awards and the increase in the number of cases that were latent for a long period of time. Inflation, from these and other sources, is a significant factor due to the long period typically required to settle these claims.

The Group has the right to re-price the risk on renewal. It also has the ability to impose deductibles, reject fraudulent claims and pursue third parties for payment of some or all costs. The severity of bodily injury claims is highly influenced by the value of loss of earnings and the future cost of care.

Concentrations of risk

The underwriting strategy is designed to ensure that the underwritten risks are well diversified in terms of type and amount of risk and geographical spread. The Group protects its gross underwriting exposure through the use of a comprehensive programme of reinsurance. The concentration of insurance risk for the financial year before and after reinsurance by territory in relation to the type of risk accepted is summarised below, with reference to written premiums:

Sources of uncertainty in the estimation of future claim payments

Property classes

The property classes, including property damage under motor contracts, give rise to a variety of different types of claims including fire, theft, business interruption, weather damage, subsidence, and accidental damage to insured vehicles. There can be variability in both the number of claims in each period and the size of those claims. If a weather event happens near the end of the financial year, then the uncertainty about ultimate claims cost in the financial statements is much higher because there is insufficient time for adequate data to be received to assess the final cost of claims.

Claims payment, on average, occurs within a year of the event that gives rise to the claim. However, there is variability around this average with larger claims typically taking longer to settle.

Subsidence claims are difficult to predict because the damage is often not apparent for some time. Changes in soil moisture conditions can give rise to changes in claim volumes over time. The ultimate settlements can be small or large with a greater risk of a settled claim being re-opened at a later date.

Liability classes

The settlement value of claims arising under public and employers' liability and the liability element of motor contracts is particularly difficult to predict. There is uncertainty as to whether any payments will be made and, if they are, the amount and timing of the payments. Key factors driving the high levels of uncertainty include the late notification of possible claim events and the legal process.

Late notification of possible claims necessitates the holding of provisions for incurred claims that may only emerge some years into the future. In particular, the effect of inflation over such a long period can be considerable and is uncertain. A lack of comparable past experience makes it difficult to quantify the number of claims and, for certain types of claims, the amounts for which they will ultimately settle. The legal and legislative framework continues to develop which has a consequent impact on the uncertainty as to the length of the claims settlement process and the ultimate settlement amounts.

Claims that may arise from the liability portfolios include damage to property, physical injury, disease and psychological trauma. The Group has a different exposure profile to most other commercial lines insurance companies as it has lower exposure to industrial risks, where uncertainty is higher. Therefore, claims for industrial diseases are less common for the Group than injury claims such as slips, trips and back injuries.

Claims payment, on average, occurs about three years after the event that gives rise to the claim. However, there is significant variability around this average.

Note 29 in the full financial statements presents the development of the estimate of ultimate claim cost for public and employers' liability claims occurring in a given year. This gives an indication of the accuracy of the estimation technique for incurred claims.

Sources of uncertainty

The ultimate settlement cost of incurred general insurance claims is inherently uncertain. Such uncertainty includes:

Prudence in the provisions for outstanding claims

The group has taken into account the uncertain nature of claims reporting and settlement when provisioning for outstanding claims.

Provisions for latent claims

The public and employers' liability classes can give rise to very late reported claims, which are often referred to as latent claims. These can vary in nature and are difficult to predict. They typically emerge slowly over many years. The Group has reflected this uncertainty and believes that it holds adequate reserves for latent claims that may result from exposure periods up to the reporting date.

Long-term business fund

The Group provides Whole of Life insurance policies to support the funeral planning products, for most of which the future benefits are linked to inflation.

The principal risk that the Group faces under these contracts is that the actual claims payments exceed the carrying amount of the insurance liabilities, which may occur if the timing of the claims are different from assumed. Insurance events are unpredictable and the actual level of claims may vary from year to year from the estimate established using actuarial techniques.

Uncertainty in the estimation of the timing of future claims arises from the unpredictability of long-term changes in overall levels of mortality. The Group bases these estimates on standard industry and national mortality tables. The most significant factors that could alter the expected mortality rates profile are epidemics, widespread changes in lifestyle and continued improvement in medical science and social conditions. The primary risk on these contracts is the level of future investment returns on the assets backing the liabilities over the life of the policyholders. The investment risk within this has been largely mitigated by holding fixed interest assets of a similar term to the expected liabilities profile. The mortality risk is retained by the Group and directly impacts shareholders' equity.

The amount reserved under the long-term business technical provision is set out below:

Financial Risk

The Group is exposed to financial risk through its financial assets, financial liabilities, reinsurance assets and insurance liabilities. In particular the key financial risk is that the proceeds from its financial assets are not sufficient to fund the obligations arising from its insurance contracts. The most important components of financial risk are interest rate risk, credit risk, currency risk and equity price risk.

There has been no change from the prior period in the nature of financial risks that the Group is exposed to. The Group's management and measurement of financial risks is informed by either stochastic modelling or stress testing techniques.

Categories of financial instruments

* Cash and cash equivalents have been presented with loans and receivables.

Fair value hierarchy

The fair value measurement basis used to value those financial assets and financial liabilities held at fair value is categorised into a fair value hierarchy as follows:

Level 1: fair values measured using quoted prices (unadjusted) in active markets for identical assets or liabilities. This category includes listed equities in active markets, listed debt securities in active markets and exchange traded derivatives.

Level 2: fair values measured using inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). This category includes listed debt or equity securities in a market that is not active and derivatives that are not exchange traded.

Level 3: fair values measured using inputs for the asset or liability that are not based on observable market data (unobservable inputs). This category includes unlisted equities, including investments in venture capital, and suspended securities. The effect of reasonably possible changes to the assumptions used in determining the fair value of these assets is not significant to the values disclosed.

There have been no transfers between the different levels of investments in the current year.

Fair value measurements based on level 3

Fair value measurements in level 3 for the Group consist of financial assets, analysed as follows.

All the above gains or losses included in profit or loss for the period are presented in net investment return within the income statement.

Interest rate risk

The table below summarises the maturity dates for those assets and liabilities that are exposed to interest rate risk.