Ecclesiastl.8fe Regulatory News (ELLA)

15 March 2017

Ecclesiastical Insurance Office plc announces results

for the year ended 31 December 2016

Performance driven by strong underwriting results and investment returns

Ecclesiastical Insurance Office plc ("Ecclesiastical"), the specialist financial services group, today announces its full year 2016 results.

Highlights

· Profit before tax of £62.5m up 17% (2015: £53.6m)

· Underwriting profit1 of £20.1m (2015: £13.5m), giving a significantly improved COR1 of 89.8% (2015: 93.2%), driven by strong underwriting results in the UK & Ireland

· Investment returns also ahead of prior year at £54.4m (2015: £47.5m) underpinned by fair value gains on equities and supported by currency gains

· Gross written premium (GWP) increased to £310.1m (2015: £308.2m), supported by currency gains and down slightly on an underlying basis; overseas businesses delivered good GWP growth in local currency

· New Art & Private Client product launched, catering to the needs of the high net worth market. Refreshed Education, Property Owners and Cyber products launched, and new ParishPlus proposition for the UK Anglican church

· Over £24m granted to charity during 2016 thanks to strong financial performance, enabling Group to meeting its £50m three-year target in March 2016 and contribute £17m to its new target of £100m in charitable donations by the end of 2020

· Continued external recognition of the Group's position as a trusted, specialist insurer, including UK Insurance Company of the Year award at the Better Society Awards and most trusted home insurance provider in UK Fairer Finance rankings

1 Underlying or alternative performance measure, refer to the Reconciliation of Alternative Performance Measures note in this announcement for further explanation

Mark Hews, Group Chief Executive Officer of Ecclesiastical commented:

"2016 saw us win and retain a range of significant real estate, education, heritage and charity accounts across our territories, from historic palaces to cutting edge property developers. With the introduction of a new art and private client product, we strengthened our offering to the high net worth market and also added refreshed education, property owner and cyber security products. We enhanced our senior team, recruiting a new managing director for the UK general insurance business and a new art and private client director.

I am pleased that the transformation of our business has resulted in strong results in 2016, reflecting the consistent financial performance we have achieved over the last three years. We have delivered this through applying strong underwriting disciplines and managing our exposure to risk tightly.

Our enhanced management team has focused on taking the right decisions that yield long-term, ethical and sustainable growth, resulting in a third year of improved profitability. Our strong underwriting results were supported by healthy investment returns, helped by equity gains and supported by currency gains.

As we move into 2017, we do so amidst global political uncertainty. However given our financial strength, ethical approach and specialisms, we look forward with confidence and optimism, energised to work together for our customers and for the good of society as a whole.

As a brand whose purpose is to do good, our focus remains on helping change people's lives for the better. In 2016, we gave over £24m to charity, helping us achieve our three-year target of giving £50m to charity in March 2016 and contribute £17m to our new target of giving a further £100m by 2020. We thank all of our customers, brokers and business partners for their support. Together we have been able to give to so many charitable causes here in the UK, as well as in Canada, Australia and Ireland."

ECCLESIASTICAL INSURANCE OFFICE PLC

ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 31 DECEMBER 2016

The Company has now approved its annual report and accounts for 2016.

This Annual Financial Report announcement contains the information required to comply with the Disclosure and Transparency Rules, and extracts of the Strategic Report and 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 2016. The annual report and accounts will be available from 17 March 2017 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 2016 has been submitted to the National Storage Mechanism and will shortly be available for inspection at www.morningstar.co.uk.

Chairman's Statement

A year of achievement

This year has been a year of achievement for Ecclesiastical. In March, we reached our goal of giving £50m to charity in three years, thanks to a transformation in our financial performance over this period. I am delighted that, as a result, more than 3,000 good causes have benefited. Ecclesiastical performed well in 2016, in a year where there was much uncertainty in the external environment.

Once again, we delivered strong underwriting profits and investment returns, with profit before tax increasing for the second year running. These results have been driven by the continued focus of our management team on creating an efficient, sustainable and profitable business.

Our profits and capital strength allowed us to pay £24m to our charitable owner, give £0.7m to the good causes we support directly and attain the challenging charitable goal we set ourselves three years ago. This is a significant achievement and I would like to thank our customers, business partners and employees for the part they have played in this success.

Reflections of a new Chairman

I believe Ecclesiastical is a very different kind of financial services business.

Over time, our charitable purpose has fostered a very special working environment, in which people are intent on doing the right thing. The energy, approach and values this environment inspires are evident in every Ecclesiastical colleague I have met over the last 12 months.

At the root of this difference is our charitable ownership.

While Ecclesiastical and Allchurches Trust, our shareholder and owner, are separate organisations, we are both committed to improving people's lives through charitable endeavour. Allchurches Trust therefore prizes long-term value generation over short-term results, allowing Ecclesiastical to focus on building a sustainable and profitable business so we can provide meaningful support to good causes for years to come.

In practice, our shareholder's longer-term focus enables us to prioritise customers' needs, especially when the worst happens. We look actively for ways to pay their valid claims and we dedicate the time and expert resources required to resolve their problems. Across the Group, decision making is shaped by our strategic aim of being the most trusted and ethical player in all our markets. In 2016, this approach saw us achieve significant external recognition across all our territories.

Ecclesiastical's distinctive ethical positioning already gives us a competitive edge, against a background of ongoing public mistrust in financial services companies. To harness this advantage fully, we must combine our values, commercial acumen and knowledge of emerging trends to provide products and services that give comfort to our customers and protect them against the risks they face in today's rapidly changing world.

Corporate culture

I am proud to have joined a Board with such a single-minded focus on achieving the success of this special organisation. Drawn from different and diverse backgrounds, they are a cohesive, close-knit team, who are passionate about what they do for Ecclesiastical.

As a Board, we find Ecclesiastical's strong corporate culture especially compelling and recognise its importance in delivering long-term business success. Unlike many in our sector, our purpose and strategy are linked inextricably to our culture and drive positive behaviours, as evidenced by high customer satisfaction scores and external recognition.

We will ensure that Ecclesiastical rolls out our Customer Promise initiative, detailed in the Strategy in Action section in the full annual report and accounts, effectively across the Group, uses performance management processes to reward the positive behaviours we foster and reports on its progress robustly.

Board changes

I would like to thank my fellow directors for their support and hard work in the past year. In particular, I want to express my thanks to two colleagues who left us in March 2016: Will Samuel, who served us so well as Chairman for seven years; and David Christie who retired as a Non-Executive Director and Deputy Chairman after 15 years which included three years as Deputy Chairman. It is also my pleasure to welcome David Henderson who joined us as a Non-Executive Director in April 2016, bringing extensive financial services experience and human resources knowledge to the Board.

Continuing the transformation

The last three years have seen strong delivery, both financially and strategically. Thanks to the determination and focus of the management team and a robust change programme, Ecclesiastical has become a profitable, better skilled and more focused business, meeting its three-year £50m target ahead of schedule, and developing the confidence to thrive in our chosen areas of expertise.

March 2016 saw the launch of our new strategic target - to give £100m to charity by the end of 2020. With £17.7m already given to charity since April, I have every confidence that we will attain this challenging goal.

Chief Executive's Report

A caring business with a heart

Ecclesiastical is proud to be a trusted, caring business with a charitable purpose. In 2016, we demonstrated the strength of that purpose by achieving our goal of giving £50m to charity in three years.

We celebrated this achievement with a Service of Thanksgiving at Gloucester Cathedral, where we heard moving and inspiring stories from some of over 3,000 charities we have helped in that time.

Sitting in that magnificent building, I was reminded forcibly of what sets our company apart. Most businesses do not exist to give money to great charitable causes and make people's lives better. We do.

Shaped by our charitable ownership

In the world of financial services, Ecclesiastical's business model is unique.

Owned by a charity, we are not driven by the need to grow at any cost in order to satisfy short-term shareholder or owner demands. Instead, we are encouraged by our charitable owner to build a sustainable, ethical, values-driven business over the longer-term.

Our ownership also drives us to deliver unrivalled levels of customer relationship and care, putting customers first, particularly in times of need.

In this sense our insurance business seeks to provide insurance that you can believe in, rather than cheap insurance that may not provide the level of cover you expected at your time of need.

Indeed, for 130 years we've been trusted to protect so much of Great Britain's irreplaceable heritage and history insuring as we do palaces, world heritage sites, treasure houses, independent schools, churches and cathedrals - in fact the majority of the country's Grade I listed buildings.

Strong results that benefit society

I am pleased to report that 2016 has been an outstanding year. We have delivered a pre-tax profit of £62.5m compared with £53.6m in 2015 and an underwriting profit of £20.1m, up from £13.5m the previous year. This generated a Group combined operating ratio of 89.8%, a significant improvement on the 93.2% achieved during 2015. These profits saw the Group's capital position remain strong on all measures.

We delivered these results against an uncertain external environment. Benign weather conditions and higher than expected releases from prior year claims in most of our territories acted in our favour, though we were impacted by natural disasters such as the Fort McMurray wildfires in Canada and flash floods in the UK in June. The recently announced reduction in the Ogden discount rate to minus 0.75% had a minimal impact on our 2016 results as our liability portfolio is less sensitive to the level of the rate due to low frequency of catastrophic injury cases, and our discontinued UK Motor business is at an advanced stage of run off. Investment markets rallied following considerable volatility after the Brexit decision and US presidential election, with an overall positive impact on our investment returns, supported by post-Brexit currency movements.

Thanks to our strong financial results, we were able to make charitable donations in excess of £24m exceeding our £50m target in March 2016 and helping to change people's lives for the better. Many lives have been touched by the kindness and compassion of the charitable organisations that we have supported here in the UK, as well as overseas in Canada, Australia and Ireland.

As I look back on our financial and charitable achievements, I take great pride in what makes Ecclesiastical different. First and foremost, we are a brand with a purpose - a business that generates sustainable profits to help those who need it most.

Trusted to do the right thing

Financial services remains the least trusted industry in the world, according to a respected global survey*. I am delighted that Ecclesiastical continues to buck this trend, as evidenced by external recognition. This speaks to our aim of being the most trusted and ethical business in our chosen markets, and is testimony to the store we set on doing the right thing for our customers.

*2016 Edelman Trust Barometer

In my role as Group CEO, I am privileged to meet many people from all walks of life and am frequently touched to receive unsolicited praise for our outstanding service. Some people tell me about the fair and compassionate way our claims teams handled their claim and how we were on their side in difficult times. Some tell me about exceptional advice received from our expert, specialist advisors and I have heard many complimentary remarks about our ethical investment offerings. Many of those I speak to feel compelled to write to us with their thanks.

Such feedback is powerful and it is amplified by independent survey evidence. In the UK, our customer satisfaction levels are 99-100% across the board, while 98% of our customers are satisfied with how we have handled their claim. For the tenth consecutive year, UK brokers have named us as the best insurance provider for charity, education and heritage.

This reflects the expert, specialist knowledge we have built up over 130 years and our passion for our customers. Our trusted status makes us distinctive in our markets, and gives us a keen competitive edge.

Externally, this difference was recognised in a number of high-profile ways. We were named Insurance Company of the Year at the Better Society Awards in the UK, and were finalists at the equivalent award in Australia. We were awarded a national award for customer care at the industry's Claims Awards for service. We have been ranked the most trusted home insurance provider by Fairer Finance, ahead of 47 other insurers. EdenTree was named MoneyFacts Best Ethical Investment Provider for the eighth consecutive year, while in Canada, we were recognised as a Top Employer for Young People for the fifth year in a row.

Of course, we are not perfect and never will be. But I know that we strive to do the right thing - and we aim to be a 'beacon of light' in an era where there is so much distrust in financial services.

Progress in detail

We have achieved a transformation in our financial performance over the last three years, by applying robust underwriting disciplines and managing our exposure to risk tightly. Our strong underwriting performance was supported by a healthy return on investments, helped by equity gains and better than expected fair value movements on bonds as yields fell further compared with the previous year. The weakening of sterling following the Brexit vote has also contributed to the result, boosting the value of overseas operations and foreign investments.

Global gross written premium (GWP) increased slightly, as a result of currency gains on premiums written by our overseas businesses, in addition to growth in local currency. The year saw us win and retain a range of significant real estate, education, heritage and charity accounts across our territories, from historic palaces to cutting-edge property developers.

Our UK and Ireland businesses reported a modest decline in GWP, with very high retention levels despite the ongoing transfer of academies to the Department of Education's own risk protection arrangement. We continued to manage our portfolio rigorously to maximise profitability, resulting in a slight decline of 3.4% in GWP and a substantial £13.4m increase in underwriting profits. In response to changing customer needs we launched a number of innovative products, including our ParishPlus proposition for the UK Anglican church, Real Estate, Art & Private Client, Cyber and Education insurance policies. We also strengthened our senior team, recruiting a new Managing Director for the UK general insurance business and augmenting our Art & Private Client team.

In Canada and Australia, our businesses delivered GWP growth of 5% and 0.3% respectively in local currency. Underwriting losses of £3.4m in Canada and £1.2m in Australia were due in part to exceptional natural disasters, including Canada's Fort McMurray wildfires which proved the most costly catastrophe in the nation's insurance history, and a number of smaller catastrophe events in Australia.

Profit before tax from our investment management business, EdenTree, reduced to £1.6m compared to £1.8m the previous year as we continued to invest in that business. Funds under management increased from £2.3bn to £2.5bn, despite market uncertainty and reduced investment appetites. The division continued to build its reputation as one of the investment industry's most influential thought leaders, winning an award for the Best Thought Leadership Paper on Sustainable Investment at the Investment Week Sustainable Investment Awards 2016.

Our insurance broker, SEIB, grew profits to £2.4m from £2.2m in 2015, thanks to improved underwriting performance in core schemes. The company launched a new product for commercial drone owners and, as a result of expertise gained during the development of its cyber product in 2015, is building a reputation as an expert in the new technology space.

Expert, dedicated people

Ecclesiastical's achievements would not be possible without the expertise and dedication of our employees. Their determination to go the extra mile for customers, business partners and good causes is inspirational, and I would like to take the opportunity to thank every one of them.

The specialism of our expert teams is distinctive - for example, we have a substantial in-house risk management team in the UK and are proud to continue to hold Chartered Insurer status across our UK businesses and in Ireland.

We have done much to strengthen our senior management team over the last three years and in 2016 augmented our Group Management Board further with three new directors responsible for compliance, strategy and brand and communications.

Diversity in its broadest sense is respected and welcomed across our Group, and we aim to be at the forefront of best practice in this area. As such, in the UK, we became a founding signatory of the Women in Finance Charter, an initiative to promote gender balance at all levels across the financial services sector.

Transparency on abuse claims

We have previously reported on the techniques used to ensure we are reserved appropriately for latent claims of physical and sexual abuse (PSA) against our customers and our approach has been shown to be prudent over recent years.

In 2016, as the UK's Independent Inquiry into Child Sexual Abuse (IICSA) started its investigations, we took the decision to make public our longstanding approach to handling PSA claims, in order to give transparency to our customers and to the victims and survivors of abuse.

In May 2016, we published our guiding principles on handling PSA claims, the first such principles to be published by a UK insurer. The guidelines and our claims handing approach have secured favourable comment from claimant lawyers, both on publication and at IICSA's first seminars on the civil justice system which we were invited to attend. We encourage other insurers to follow suit.

Looking forward to 2020

In the last three years, we have implemented a Group-wide change programme, restructured our Group and strengthened key disciplines, exited loss-making business and acquired new businesses and, most importantly, strengthened the quality and solidity of our underlying income so that we can look to the future with confidence and optimism.

Our strategy - to be the most trusted and ethical company in our chosen markets - remains consistent and serves us well, and we have now enhanced this with a new and ambitious vision for the period to 2020:

To work together to be the most trusted and ethical specialist financial services group, giving £100m to charity.

The launch of this refreshed vision, supported by a new change programme, marks the next chapter in our transformation. This will be underpinned by substantial strategic investment, particularly in new systems and technologies that will make us more efficient and agile, allowing us to offer even better value for money and deliver on our promise to customers. We will also continue to invest in our people, to strengthen and deepen our expertise and seek to acquire businesses, teams and individuals who fit our group values and share our aspirations.

Our capital position remains strong and we are well placed to weather continuing market volatility and currency instability, supported by our unique ownership which allows us to take a long-term view and ride out periods of market turbulence. In this context, we are alive to the long-term risks that our defined benefit pension scheme brings and intend to continue our practice of periodic reviews in consultation with others, seeking to balance interests all round.

We expect the insurance market to remain highly competitive but are confident that we can continue to confront such challenges successfully, thanks to our specialist expertise, our reputation and our focus on doing the right thing for our customers. Our consistent results over the past three years are testament to this success.

Our financial strength, ethical approach and specialist teams are the bedrock on which we will continue to build our business.

Working together for the greater good

With one transformative charitable target achieved and another ahead of us, we remain energised and inspired to work together for our customers and for the good of society as a whole.

As we embark on our next challenge, I would like to thank our customers, our business partners and our employees for helping us to achieve our charitable goal. Thank you for working with and trusting us to do the right thing. For those of you who are considering working with or for us, I would urge you to talk to us and experience the 'Ecclesiastical difference' first-hand. We welcome the opportunity to work with people who share our vision and want to make a difference to those in need.

As I look back at the achievements of the past year and forward to the exciting future that we are working towards, I am reminded of the quotation shared at our Service of Thanksgiving last June:

 "Do all the good you can, by all the means you can, in all the ways you can, at all the times you can, to all the people you can, as long as you can."

These words are John Wesley's but they describe what has always driven Ecclesiastical. I am confident that by continuing to do the right thing for our customers, our business partners and our communities, we will meet our challenging new target, building a financial Group that is the most trusted and ethical in its markets. A Group that is formed from a unique blend of business, charity and faith. A Group that sets the standard for doing business differently. A Group that, instead of paying big corporate dividends, gives in all the ways it can to help as many as it can.

Business Review

Financial Performance Report

Our consistent financial performance continued in 2016 and we report a pre-tax profit of £62.5m (2015: £53.6m).

The last three years have seen strong delivery, both financially and strategically. We have delivered a robust change programme during this time and have become a profitable, better skilled and more focused business. We have continued to invest in the business, and this investment in IT, brand and innovation has increased our expense ratio in the short term, but the success of these initiatives is clear in our building track record of strong and sustainable profits.

General insurance

Our underwriting performance1 for the year was a profit of £20.1m (2015: £13.5m profit), resulting in a Group COR1 of 89.8% (2015: 93.2%). The relatively benign weather in the UK and Ireland and more favourable development of prior year claims on the Group's liability business has meant that, despite some significant catastrophe events in Canada and Australia, we have delivered a third consecutive year of improvement in underwriting profits.

1 Alternative performance measure, refer to the Reconciliation of Alternative Performance Measures note in this announcement for further explanation.

United Kingdom and Ireland

In the UK and Ireland underwriting profits increased to £25.0m (2015: £11.6m profit) giving a COR of 82.5% (2015: 92.3%).

The UK and Ireland property business showed improved underwriting performance compared with last year. Relatively benign weather was experienced in the UK and Ireland across most of the year with December also being drier and warmer than the long-term average. The flash floods in June, though unexpected, were significantly less costly than weather events at the end of 2015. The number of large fire related losses also returned to more normal levels this year which contributed to the increase in profits.

Our liability business performance continues to improve and produce strong profits, enhancing the overall positive underwriting performance for the year. Current year claims performance was better than expected, and we have also had the benefit of reserve releases as historical claims have been settled at amounts that were less than anticipated.

This combination of low claims experience across both property and liability portfolios in the same year means we have achieved what we consider to be an unusually low COR this year. While we do expect to continue to deliver underwriting profits in the UK and Ireland in the future, we would not expect claims to be so low on a consistent basis.

In 2016, GWP has fallen by 3.4% to £220m, (2015: £228m). Commercial insurance business in the UK and Ireland continues to be competitive. In the face of that competition, retention levels remain very high, reflecting the value that our customers and business partners place on our expertise and service. The main downward pressure on growth came in the education sector where we faced continued pressure from the Department for Education's risk protection arrangement for academy trusts, and in the very crowded household sector where we continue to focus on underwriting discipline over growth. Increased investment in expertise, innovation and development of new products has seen GWP in our Commercial, Art & Private Client and Real Estate niches grow by more than 5% in 2016.

Our strategy over the medium-term remains to achieve moderate GWP growth by adding good-quality business in our existing areas of expertise, at a steady pace, using our specialist capabilities to differentiate ourselves in the marketplace. We expect the business environment to remain very competitive, particularly for commercial property business. We will continue our approach, in accordance with our philosophy of safeguarding our underwriting performance by seeking profit ahead of growth.

Ansvar Australia

Our Australian business reported an underwriting loss of Aus$2.2m giving a COR of 106.7% (2015: Aus$0.2m profit, COR of 99.4%). The business was affected, for a second consecutive year, by a higher than average number of catastrophe events which was an issue for the whole Australian market. However, the reinsurance arrangements in place reduced the impact of these at the net level.

GWP grew by 0.3% in local currency to Aus$76.4m (2015: Aus$76.2m). Retention rates remained very strong, and new business was 21% ahead of the prior year.

Canada

Canada continued its track record of delivering growth, reporting a 5% increase in GWP in the year in local currency. The branch's contribution to GWP increased to Can$81.8m (2015: Can$77.9m).

The territory was affected by large property losses from the Fort McMurray wildfire in Alberta and two severe weather catastrophe events. Our Canadian business reported an overall underwriting loss of Can$6.2m giving a COR of 110.3% (2015: Can$1.9m profit, COR of 96.4%). Liability reserves were strengthened during the year to take account of adverse claims development but overall, the liability account returned a profit in line with expectations.

Other insurance operations

General insurance profits were reduced slightly by development of prior accident years from our businesses in run-off, resulting in an overall loss of £0.3m (2015: £0.8m profit).

Investments

Investment returns, which fell sharply after the EU referendum result, rebounded strongly in the second half of 2016 to end the year at £54.4m (2015: £47.5m).

This investment performance reflects the rise in UK stock markets, in December, to an historic high and the positive effect of the low pound on the value of our overseas investments held both directly and indirectly through collective investment schemes.

The small and mid-cap bias in our equity portfolio dampened returns in 2016. The weakness of the pound following the Brexit vote provided a favourable tailwind for the larger-cap international dollar-earners of the FTSE 100 where total returns of 19% were achieved. By contrast, the more UK domestically focused FTSE250 only achieved 6%.

Falling bond yields in 2016 had a positive effect on the values of longer dated bonds. The shorter duration of our bond investments resulted in underperformance relative to the broader FTSE Allstock index, and reflects the Group's strategy of favouring capital protection over marginal increases in returns. When measured against the shorter duration FTSE Gilts 0-5yrs index of 2.6%, our fixed income portfolio returns of 3.2% were slightly ahead.

Our direct property investments outperformed the broader Investment Property Databank (IPD) All Properties index over the year, returning 4.7%. This was, in part, due to its greater exposure to the industrial property segment which outperformed the office and retail segments. The portfolio's limited exposure to the weak Central London property market was also beneficial.

The downward movement in yields also reduced the discount rate applied in calculating the present value of certain long-tail general business insurance liabilities. The change in discount rate on those liabilities resulted in a £7.7m loss being recognised within investment returns (2015: £2.3m profit).

The investment result includes £1.3m in respect of our long-term insurance business performance which is discussed later in this report. A £12.2m profit on the bond portfolio backing the non-profit fund (2015: £0.9m loss) was partly offset by a £10.9m loss (2015: £1.9m profit) from the impact of the change in discount rate on the long term business liability.

Investment management

The Group's investment management business, EdenTree, saw a moderate reduction in pre-tax profits to £1.6m (2015: £1.8m). The result reflects continued strategic investment in the brand, and in technology, as the business targets increased traction with wealth managers, discretionary fund managers and the institutional end of the market.

The asset management sector as a whole has seen significant outflows of funds over the course of 2016 with the result of the EU referendum and US election, plus the continued weakness in Asia and Emerging markets, contributing to sentiment for much of the year. While EdenTree saw net outflows to its funds of £28m (2015: £15m net inflow) overall, its funds for charity investors grew by 11%. Total funds under management grew 5.9% to £2.5bn (2015: £2.3bn), despite the net outflows, as asset values pushed higher towards the end of the year.

Long-term insurance

The life business insurance result for 2016 was a loss of £0.7m (2015: £1.0m profit). Ecclesiastical Life Limited is closed to new business and the expected favourable run-off of the business during the year was more than offset by the long-term impact of increased compliance costs with Solvency II.

Broking and advisory

The broking and advisory business comprises our insurance broker and financial advisory businesses, SEIB Limited (SEIB) and Ecclesiastical Financial Advisory Services Limited (EFAS).

In 2016, SEIB recovered well from the disruption in the prior year, caused by the transition of one scheme to another provider, reporting a rise in profit before tax to £2.4m (2015: £2.2m).

EFAS continues to focus on its core independent financial advisory business and, with effect from 1 February 2016, EFAS ceased to take on new funeral plan administration customers. All funeral plan business from that date is now administered by a related party, Ecclesiastical Planning Services Limited. EFAS reported a small loss before tax of £0.3m in the year (2015: £0.3m loss).

Overall, our broking and advisory business reported an increase in pre-tax profit to £2.1m (2015: £1.9m profit).

Directors' Report

Principal activities

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, and Australia

Ownership

At the date of this report, the entire issued Ordinary share capital of the Company and 1.5% of the issued 8.625% Non-Cumulative Irredeemable Preference Shares of £1 each ('Preference shares') were owned by Ecclesiastical Insurance Group plc. In turn, the entire issued Ordinary share capital of Ecclesiastical Insurance Group plc was owned by Allchurches Trust Limited, the ultimate parent of the Group.

Dividends

Dividends paid on the Preference shares were £9,181,000 (2015: £9,181,000).

The directors do not recommend a final dividend on the Ordinary shares (2015: £nil), and no interim dividends were paid 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 £24.7 million (2015: £20.6 million).

During the last 10 years, a total of £139.8 million (2015: £130.0 million) has been provided by Group companies for church and charitable purposes.

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

Principal risks and uncertainties

The directors have carried out a robust assessment of the principal risks facing the Group including those that threaten its Business Model, future performance, solvency and liquidity. The principal risks and uncertainties, together with the financial risk management objectives and policies of the Group, are included in the Risk Management section.

Going concern

The Group has considerable financial resources: financial investments of £866.5m, 94% of which are liquid (2015: financial investments of £843.1m, 95% liquid), cash and cash equivalents of £89.5m and no borrowings (2015: cash and cash equivalents of £108.7m and no borrowings). Liquid financial investments consist of listed equities, open-ended investment companies, government bonds and listed debt. The Group also has a strong risk management framework and solvency position, and has proved resilient to stress testing. As a consequence, the directors have a reasonable expectation that the Group is well placed to manage its business risks successfully and continue in operational existence for at least twelve months from the date of this report. Accordingly, they continue to adopt the going concern basis in preparing the Annual Report and Accounts.

Risk Management

Introduction

The Group's business model is explained in detail in the Our Business Model and Strategy section in the full financial statements. The operations of the Group present a number of risks including Insurance, Market, Credit, Liquidity, Operational, Conduct, Reputational and Strategic.

An enterprise-wide risk management framework has been embedded across the Group, with the purpose of providing the tools, guidance, policies, standards and defined responsibilities to enable us to achieve our strategy and objectives. This also ensures that individual and aggregated risks to our objectives are identified and managed on a consistent basis.

The risk management framework is integrated into the culture of the Group and is owned by the Board. Responsibility for the implementation and oversight is delegated via the Group Chief Executive to the Group Risk Function, led by the Group Chief Risk Officer. This is supported by three executive Risk Management Committees:

§ the Insurance Risk Committee which has oversight of the general insurance risks of the Group including counterparty risk;

§ the Market and Investment Risk Committee which has oversight of the market and investment risks of the Group; and

§ the Group Operational, Regulatory and Conduct Risk Committee which has oversight for all the operational and conduct risks of the Group.

Strategic risks are overseen by the Group Management Board (GMB) and the life insurance risks by the Life Management Committee.

The risk management process demands accountability and is embedded in performance measurement and reward, thus promoting clear ownership for risk and operational efficiency at all levels. On an annual basis, the Group Risk Committee (on behalf of the Board) carries out a formal review of the key strategic risks for the Group with input from the GMB and the Strategic Business Units (SBUs). The Group Risk Committee allocates responsibility for each of the risks to individual members of the Group's executive management. Formal monitoring of the key strategic risks is undertaken quarterly including progress of risk management actions and any gaps in risk mitigants are challenged by the Risk Committees.

The key to the success of this process is the deployment of a strong Three Lines of Defence Model whereby the:

§ 1st Line (Business Management) is responsible for strategy, performance and management of risks arising from business activities;

§ 2nd Line (Reporting, Oversight and Guidance) is responsible for establishing minimum standards, appropriate reporting, oversight and challenge of our risk profiles and risk management activities within each of our businesses. This includes executive Risk Management Committees and is subject to oversight and challenge by the Group Risk Committee; and the

§ 3rd Line (Assurance) provides independent and objective assurance of the effectiveness of the Group's systems of internal control. This activity principally comprises the Group Internal Audit function which is subject to oversight and challenge by the Group Audit Committee.

We continue to seek improvements to our risk management framework and strategy. During 2016, key improvements included:

§ further embedding of the risk management framework within the 1st line of defence;

§ further enhancement of the qualitative risk profiles with a focus on business plans; 

§ continued development of quantitative risk profiling capabilities to ensure all material risks are captured and the implementation of the Management Internal Model validation framework;

§ further refinements to our Group risk appetite to provide further clarification around the risk-taking parameters;

§ further enhancement of stress testing and scenario analysis undertaken both as a validation tool for the Management Internal Model and as a method of assessing operational risk for the Group;

§ continued enhancement of the control risk self-assessment (CRSA) process; and

§ further embedding of the own risk and solvency assessment (ORSA) process.

Risk appetite

The risk appetite defines the level of risk-taking that the Board feel is appropriate for the Group as we pursue our business objectives. It is defined in line with the different categories of risk that the Group faces, and provides the backdrop against which the business plan is developed and validated. This ensures that the risk profile resulting from the business plan is in line with the risk-taking expectations of the Board. Compliance with the risk appetite is formally monitored every quarter and reported to the Group Risk Committee at each meeting.

The risk appetite is refreshed formally at least annually with approval and sign-off by the Board together with an ongoing assessment of continued appropriateness for the business.

Our overarching risk appetite sets the minimum levels of capital and solvency that the Group wishes to maintain. Further statements detail the maximum exposure to different risk types that are deemed to be acceptable. This includes limits on the type, nature, size and concentration of insurance risks that will be accepted by the Group and limits on the mix of assets to be held within the Group's investment portfolio.

The main objective of our risk appetite is to ensure that we have sufficient capital to meet our liabilities and maintain our financial strength in extreme adverse scenarios. The risk appetite aims to achieve and support a credit rating of at least single A minus from Standard & Poor's (S&P).

Quantitative risk measures and stress testing framework

We measure our individual and aggregate risk exposures using our Management Internal Model, which has been calibrated to determine our internal view of the capital resources required to deliver our business plan and used in our ORSA. Over the last year, in addition to adjusting the calibration of the model to reflect updated risk exposures, we have continued to improve both the scope and methodology of our Management Internal Model to better reflect the risk profile and have carried out a full cycle of independent model validation. The model has become further embedded in our strategic decision-making processes. For example, the Management Internal Model was used as an input to the development of our reinsurance strategy and pricing decisions and setting of investment strategy.

With the introduction of Solvency II at the start of 2016, our regulatory capital requirement is currently being calculated using the standard formula. However, during 2017, we will apply for regulatory approval to use our Management Internal Model as the basis for the calculation of our regulatory capital requirements.

One key component of Solvency II is our stress testing and scenario analysis framework which contributes to the validation of our internal capital requirements within the ORSA.

Through assessing the impact of adverse risk scenarios on our business plan, operations and financial health it provides a quantitative and qualitative assessment of the Group's ability to respond to financial, insurance and operational shocks. It also provides assurance to the Board on the robustness of our risk mitigation and control improvement strategies.

Over the year this stress testing and scenario analysis framework has been further refined and embedded within everyday operations, thereby helping to inform and drive business planning and decision-making processes.

Principal risks

The Board of directors has carried out a robust assessment of the principal risks that could have the highest potential to damage the Business Model, the Strategy or solvency of the Group both in the short and long term. Those risks identified are as follows:

Directors' Responsibility Statement

The following statement is extracted from page 118 of the 2016 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 2016 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 on pages 112 and 113 of the full annual report and accounts.

The directors confirm to the best of their knowledge:

§ The financial statements, prepared in accordance with IFRS, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole.

§ The Strategic Report within the 2016 annual report and accounts includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

§ The Annual Report and financial statements, taken as a whole, are fair, balanced and understandable, and provide the information necessary for shareholders to assess the Company's position and performance, Business Model and Strategy.

CONSOLIDATED STATEMENT OF PROFIT OR LOSS

For the year ended 31 December 2016

* The impact of discount rate changes on insurance contract liabilities has been presented within net investment return for the first time in the current year. In the prior year the impact was included in claims and change in insurance liabilities, and reinsurance recoveries. The comparative financial statements have been restated to the revised basis, detailed in the notes to this announcement.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the year ended 31 December 2016

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the year ended 31 December 2016

The equalisation reserve was previously required by law and maintained in compliance with the insurance companies' regulations and INSPRU prudential sourcebook for insurers. Solvency II replaces these rules with effect from 1 January 2016 and does not require an equalisation reserve to be held. The reserve was transferred to retained earnings on 1 January 2016.

The revaluation reserve represents cumulative net fair value gains on owner-occupied property. Further details of the translation and hedging reserve are included in the notes to this announcement.

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

For the year ended 31 December 2016

* For the Group and Parent, the comparative financial statements have been restated to reflect a reclassification of cash and cash equivalents to financial investments, detailed in in the notes to this announcement.

CONSOLIDATED STATEMENT OF CASH FLOWS

For the year ended 31 December 2016

* For the Group and Parent, the comparative financial statements have been restated to reflect a reclassification of cash and cash equivalents to financial investments, detailed in in the notes to this announcement.

NOTES TO THIS ANNUAL FINANCIAL REPORT ANNOUNCEMENT OF RESULTS

for the year ended 31 December 2016

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 2016 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 15 March 2017.

The financial information set out above does not constitute the Company's statutory accounts for the years ended 31 December 2016 or 2015, but is derived from those accounts. Statutory accounts for 2015 have been delivered to the Registrar of Companies and those for 2016 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 to 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 15 March 2017.

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 2016.

Insurance Risk

Through its general and life insurance operations, the Group is exposed to a number of risks, as summarised in the Risk Management section of the Strategic Report. The risk under any one insurance contract is the possibility that the insured event occurs and the uncertainty of the amount and timing of the resulting claim. Factors such as the business and product mix, the external environment including market competition and reinsurance capacity all may vary from year to year, along with the actual frequency, severity and ultimate cost of claims and benefits. This subjects the Group to underwriting and pricing risk (the risk of failing to ensure disciplined risk selection and achieve the required premium), claims reserving risk (the risk of actual claims payments exceeding the amount we are holding in reserves) and reinsurance risk (the risk of failing to access and manage reinsurance capacity at a reasonable price).

(a) Risk mitigation

Statistics demonstrate that the larger and more diversified the portfolio of insurance contracts, the smaller the relative variability in the expected outcome will be. The Group's underwriting strategy is designed to ensure that the underwritten risks are well diversified in terms of type and amount of risk and geographical spread. In all operations pricing controls are in place, underpinned by sound statistical analysis, market expertise and appropriate external consultant advice. Gross and net underwriting exposure is protected through the use of a comprehensive programme of reinsurance using both proportional and non-proportional reinsurance, supported by proactive claims handling. The overall reinsurance structure is regularly reviewed and modelled to ensure that it remains optimum to the Group's needs. The optimum reinsurance structure provides the Group with sustainable, long-term capacity to support its specialist business strategy, with effective balance sheet and profit and loss protection at a reasonable cost.

Catastrophe protection is purchased following an extensive annual modelling exercise of gross and net (of proportional reinsurance) exposures. In conjunction with reinsurance brokers the Group utilises the full range of proprietary catastrophe models and continues to develop bespoke modelling options that better reflect the specialist nature of the portfolio. Reinsurance is arranged to cover up to a 1/250 loss, which increases to a 1/500 loss where earthquake risk exists.

(b) Concentrations of risk

The core business of the Group is general insurance, with the principal classes of business written being property and liability. The miscellaneous financial loss class of business covers personal accident, fidelity guarantee and loss of money, profits and licence. The other class of business includes cover of legal expenses and also a small portfolio of motor policies, but this is in run off in the United Kingdom since November 2012. The Group's whole-of-life insurance policies support funeral planning products. These classifications have changed in 2016 in line with how the business looks at the classes of business under Solvency II, with the prior year restated.

Below is a table summarising written premiums for the financial year, before and after reinsurance, by territory and by class of business:

(c) General insurance risks

Property classes

Property cover mainly compensates the policyholder for damage suffered to their property or for the value of property lost. Property insurance may also include cover for pecuniary loss through the inability to use damaged insured commercial properties.

For property insurance contracts, there can be variability in the nature, number and size of claims made in each period.

The nature of claims may include fire, business interruption, weather damage, escape of water, subsidence, accidental damage and theft. Subsidence claims are particularly difficult to predict because the damage is often not apparent for some time. The ultimate settlements can be small or large with a risk of a settled claim being reopened at a later date.

The number of claims made can be affected by weather events, changes in climate and crime rates. Climate change may give rise to more frequent and extreme weather events, such as river flooding, hurricanes and drought, and their consequences, for example, subsidence claims. If a weather event happens near the end of the financial year, 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.

Individual claims can vary in amount since the risks insured are diverse in both size and nature. The cost of repairing property varies according to the extent of damage, cost of materials and labour charges.

Contracts are underwritten on a reinstatement basis or repair and restoration 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 cost of claims. Individual large claims are more likely to arise from fire, storm or flood damage. The greatest likelihood of an aggregation of claims arises from earthquake, weather or fire events.

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.

Liability classes

The main exposures are in respect of liability insurance contracts which protect policyholders from the liability to compensate injured employees (employers' liability) and third parties (public liability).

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. Therefore, claims for industrial diseases are less common for the Group than injury claims such as slips, trips and back injuries.

The frequency and severity of claims arising on liability insurance contracts, including the liability element of motor contracts, can be affected by several factors. Most significant are the increasing level of awards for damages suffered, legal costs and the potential for periodic payment awards.

The severity of bodily injury claims can be influenced by the value of loss of earnings and the future cost of care. The settlement value of claims arising under public and employers' liability is particularly difficult to predict. There is often uncertainty as to the extent and type of injury, whether any payments will be made and, if they are, the amount and timing of the payments, including the discount rate applied for assessing lump sums. On 27 February 2017, the Lord Chancellor and Secretary of State for Justice made an announcement in relation to decreasing the Ogden discount rate from 2.5% to -0.75% which affected the discount rate applied. The impact of this change is detailed in the notes to this announcement. 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 payment, on average, occurs about three to four years after the event that gives rise to the claim. However, there is significant variability around this average.

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, during which time there can be particular uncertainty as to the number of future potential claims and their cost. 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.

Note 27 to 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.

(d) Life insurance risks

The Group provides whole-of-life insurance policies to support funeral planning products, for most of which the future benefits are linked to inflation and backed by index-linked assets. Although assets are well matched to liabilities, the risk that returns on assets held to back liabilities are insufficient to meet future claims payments may occur, particularly if the timing of claims is different from that assumed. This is not one of the Group's principal risks and new policies are no longer being written in the life fund, with only minimal premiums now being received each year.

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 and its own experience. 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 interest rate and inflation risk within this has been largely mitigated by holding index-linked assets of a similar term to the expected liabilities profile. The main residual risk is the spread risk attached to corporate bonds held to match the liabilities. The small mortality risk is retained by the Group.

Financial risk and capital management

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 the financial risks to which the Group is exposed, although the impact of Brexit has resulted in greater uncertainty in relation to the economic risks to which the Group is exposed, including equity price volatility, narrowing of interest and discount rates, movements in exchange rates and long-term UK growth prospects. The Group's management and measurement of financial risks is informed by either stochastic modelling or stress testing techniques.

(a) Categories of financial instruments

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

** Financial liabilities are held at amortised cost.

As described in the notes to this announcement, the comparative period has been restated for cash held on deposit, which has been reclassified from cash and cash equivalents to financial investments.

The directors consider that the carrying value of those financial assets and liabilities not carried at fair value in the financial statements approximates to their fair value.

(b) 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 bid 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 debt and equities, including investments in venture capital, and suspended securities. Where a look-through valuation approach is applied, underlying net asset values are sourced from the investee, translated into the Group's functional currency and adjusted to reflect illiquidity where appropriate, with the fair values disclosed being directly sensitive to this input.

There have been no transfers between investment categories in the current year.

Fair value measurements based on level 3

Fair value measurements in level 3 consist of financial assets, analysed as follows:

(c) Interest rate risk

The Group's exposure to interest rate risk arises primarily from movements on financial investments that are measured at fair value and have fixed interest rates, which represent a significant proportion of the Group's assets, and from those insurance liabilities for which discounting is applied at a market interest rate. The Group's investment strategy is set in order to control the impact of interest rate risk on anticipated cash flows and asset and liability values. The fair value of the Group's investment portfolio of fixed income securities reduces as market interest rates rise as does the present value of discounted insurance liabilities, and vice versa.

Interest rate risk concentration is reduced by adopting asset-liability duration matching principles where appropriate. Excluding assets held to back the life business, the average duration of the Group's fixed income portfolio is two years (2015: two years), reflecting the relatively short-term average duration of its general insurance liabilities. The mean term of discounted general insurance liabilities is disclosed in note 27 (a) part (iv) to the full financial statements.

For the Group's life business, consisting of policies to support funeral planning products, benefits payable to policyholders are independent of the returns generated by interest-bearing assets. Therefore, the interest rate risk on the invested assets supporting these liabilities is borne by the Group. This risk is mitigated by purchasing fixed interest investments with durations that match the profile of the liabilities. For funeral plan policies, benefits are linked to the Retail Prices Index (RPI). Assets backing these liabilities are also linked to the RPI, and include index-linked gilts and corporate bonds. For practical purposes it is not possible to exactly match the durations due to the uncertain profile of liabilities (e.g. mortality risk) and the availability of suitable assets, therefore some interest rate risk will persist. The Group monitors its exposure by comparing projected cash flows for these assets and liabilities and making appropriate adjustments to its investment portfolio.

The table below summarises the maturities of life business assets and liabilities that are exposed to interest rate risk.