Ecclesiastl.8fe Regulatory News (ELLA)

Ecclesiastical Insurance Office plc announces results

for the year ended 31 December 2017

Performance driven by strong underwriting results and investment returns

Ecclesiastical Insurance Office plc ("Ecclesiastical"), the specialist financial services group, today announces its full year 2017 results.

Highlights

· Profit before tax of £82.2m up 32% (2016: £62.5m)

· Underwriting profit1 of £27.1m (2016: £20.1m), giving an improved COR1 of 86.9% (2016: 89.8%), driven by strong underwriting results in the UK and Ireland

· Investment returns also ahead of prior year at £72.3m (2016: £54.4m), underpinned by strong performance of global equity markets

· Gross written premium (GWP) increased to £342.9m (2016: £310.1m), supported by high retention levels in existing markets and substantial growth in overseas territories

· Launched new products to meet customers' evolving needs, including charity and heritage in the UK and Ireland and cyber in Canada and Australia. Successfully entered new markets including farming in the UK, selected health professionals in Australia and property owners in Ireland and Australia. Also successfully entered e-trading channel in the charity sector

· More than £27m was donated to good causes during 2017. We have now reached £45m towards our target of £100m in charitable donations by the end of 2020

· Continued external recognition of the Group as a trusted and specialist financial services organisation, including Insurance Company of the Year 2017 at the Better Society Awards for the second year running, and 1st place Gold Ribbon by Fairer Finance as most trusted provider of UK Home Insurance

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, said:

"2017 was another successful year for Ecclesiastical and we saw significant growth across all our territories. We continued to explore new opportunities, including entering new markets in the UK, Ireland and Australia, and launched a number of new products to meet our customers' needs. Our strong financial performance enabled us to invest significantly in the future of our business, developing our capabilities so that we can continue to meet our customers' changing needs.

Alongside this, we made further progress towards our goal of becoming the most trusted and ethical specialist financial services group with continued external recognition for the way we do business. For the second year running, we were named Insurance Company of the Year by the UK's Better Society Awards and ranked by UK customers as the Fairer Finance most trusted home insurance provider for the fourth consecutive time. EdenTree, our investment management business, was named MoneyFacts Best Ethical Investment Provider for an extraordinary ninth year in a row. For the 11th consecutive year, we were recognised by UK brokers as the best insurer in the charity, heritage and education sectors, as well as in the faith sector where we measured broker sentiment for the first time.

Working together to contribute to the greater good of society, our focus on sustainable, long-term growth has enabled us to fulfil our charitable purpose. Last year we donated over £27m to good causes, helping to change thousands of lives for the better. I'm delighted that we have now raised £45m towards our £100m fundraising target and I would like to thank all our colleagues, customers, brokers and business partners for their continued support."

ECCLESIASTICAL INSURANCE OFFICE PLC

ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 31 DECEMBER 2017

The Company has now approved its annual report and accounts for 2017.

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 2017. The annual report and accounts will be available on or before 28 March 2018 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 2017 will be submitted to the National Storage Mechanism and will shortly be available for inspection at www.morningstar.co.uk.

Chairman's Statement

The journey continues

2017 saw the Group benefit further from its drive for sustainable, profitable growth.

I am pleased to report increased profits for the third successive year at £82.2m, (2016: £62.5m), underpinned by strong investment returns, GWP growth across our territories and good underwriting profit.

The profits we made in 2017 enabled us to pay £26m to our charitable owner Allchurches Trust and £1.5m through our own giving programme, meaning we have given £45.2m since setting our new target in 2016 of giving £100m to charity by 2020.

The Group's pleasing and consistent financial performance reflects the continued progress of our strengthened management team in harnessing the Group's core strengths - our deep understanding of our customers' needs, the properties we insure and our specialist markets. 

Specialism is our strength

We are a specialist financial services Group with a diversified portfolio of insurance, investment management, broking and advisory businesses. Our aim is to be the most expert, ethical and trusted player in all our chosen markets, providing our customers with the specialist products and services they prize.

Feedback from our customers and partners confirms that we are recognised as one of the few true specialists in the markets we serve.

We do not seek to compete in terms of scale with the large generalist players in our chosen markets. With trust in financial services remaining low, our focus instead remains on exceeding our customers' service expectations and differentiating ourselves through our responsible approach to business.

We believe firmly that this approach helps us to stand out in an increasingly competitive and homogenised market.

As chairman, I have become keenly aware of the high levels of recognition our brand enjoys and the positive, often affectionate feedback we receive from those who have dealt with us. This is a strong indication of the significant influence and reach of our business into its communities, both through our work supporting customers and business partners and also our charitable endeavours within those communities. 

Governance

The financial services sector continues to respond to regulatory changes. In 2017 our Group gave considerable and sustained management focus to preparing for our internal model application to the Prudential Regulation Authority, with emphasis not only on the technical elements of the application but also on enhancing management systems to control and manage risk.

Board developments

During the year there were a number of important changes to the Board. In March 2017 we announced that chairman Edward Creasy was stepping down. I would like to thank Edward for the wide-ranging and considerable contribution he made to Ecclesiastical Insurance Group, firstly as chairman of our insurance broker Lycetts and latterly as chairman of the Ecclesiastical Insurance Office Group Board.

In April we welcomed Andrew McIntyre, who brings his extensive experience of financial services to the Board, while in September the Board was further strengthened by the appointment of Chris Moulder, former director of general insurance at the Prudential Regulation Authority.

I would like to take this opportunity to thank all my fellow directors for their expertise and support during a busy year.

Our people

I never cease to be impressed with the motivation and desire of our people to serve customers better and make the business better, and their firm alignment to the Group's charitable purpose. They also deserve the Board's thanks and congratulations for the successes of 2017 and the continued upward trajectory of the business.

It is important to us that we support and invest continuously in our employees, whose specialist skills and knowledge are our biggest asset. To this end, in 2017 we launched a new leadership development programme for leaders across our Group, while continuing to develop our ongoing programme of training courses. 

To support our established diversity policy, in 2017 we undertook a number of initiatives including the production of our first diversity report, online training for all employees on unconscious bias, specific training for recruiting managers and the publication of our gender pay gap statistics.

Looking to the Future

In 2018 and beyond, we will continue to focus on creating competitive advantage from our position as a trusted specialist in our chosen markets and through our responsible approach to doing business.

We will also, thanks to a number of years of profitable growth, take the opportunity to invest in our business, with particular emphasis on improving our technology and infrastructure as well as on delivering the second phase of our change programme.

With committed and motivated teams across the Group, we are well placed to continue punching well above our weight in the markets and communities in which we operate. 

Chief Executive's Report

Doing business differently

In the world of financial services, Ecclesiastical treads a different path. 

For us, charitable giving is not something we do as part of our corporate responsibility programme, or something we do to meet our reporting obligations. 

Instead, it's the very reason we exist. 

This is because, unlike others in our sector, our sole purpose is to contribute to the greater good of society. A significant proportion of our profits are channelled towards funding good causes, through independent grants from our charitable owner or our own considerable donations to the communities we serve.

This very different purpose means we are able to do business in a very different way. 

Yes, we work hard to be successful, so our growing profits can be used to help even more people who find themselves in need. 

But we also strive to be the most trusted and caring business in our chosen markets. A business that supports its customers not just by giving them first-class service and products, but by prioritising their needs should the worst happen.

Our approach is shaped by our charitable purpose. 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 driven by building a sustainable, ethical, values-driven business over the longer-term, providing insurance that you can believe in rather than cheap insurance that may not provide the cover you expected at your time of need.

It is for this reason that for 130 years, we have been trusted to protect so much of the heritage and history in the countries where we operate, insuring as we do palaces and castles, World Heritage sites, museums, treasure houses, independent schools and cherished faith buildings - including the majority of the UK's Grade I listed buildings.

Society demands more

Today's consumers and employees are demanding higher standards and increased responsibility from businesses, led by millennials - 'the most socially responsible generation that ever existed'1. 

This trend is evidenced by international surveys showing that a third of consumers are now choosing to buy from brands they believe are doing social or environmental good2 and 73% of millennials are prepared to pay more for products from such brands3. Furthermore, 67% of global consumers want to work for companies that are giving back to society4.

As businesses debate how best to secure the trust of such consumers, I believe it has never been more important for companies such as ours to demonstrate that it is possible to be commercially successful while fulfilling a charitable purpose, so that others may consider doing business differently. 

1 Who Cares Wins: Why Good Business Is Better Business, David Jones, 2011

2 Europanel/Flamingo/Unilever, January 2017

3 The Sustainability Imperative, Nielsen Report 2015

4 Global Shopper survey, Nielsen Q1 2015

Our profits change lives and benefit society

I am delighted to report that in 2017 we again delivered strongly against our charitable purpose, with a pre-tax profit of £82.2m compared to £62.5m in 2016 and GWP growth of 11% to £343m. 

These excellent results enabled us to make donations of £27.5m during the year, meaning that we have now given £45.2m of the £100m target we set ourselves in April 2016. In doing so, we have supported around 2,750 charities worldwide, helping to improve the lives of many thousands of people. Thanks to the considerable sums we give every year, we are now ranked as the UK's fourth largest UK corporate donor by value, alongside major international companies5. 

However, looking at our charitable donations as a percentage of our profit we stand alone. The rankings show that we give over 30% of our profits to charity5. 

Of course this is about so much more than financial metrics; the thousands of good causes we have supported since we set our new target are wide ranging and touch lives in moving ways. They range from charities supporting children who have been bereaved of their parents, through to hospices that provide so much care to loved ones in their final days. 

They range from charities supporting vulnerable people like the homeless, or those suffering from addiction problems with alcohol or drugs, through to parish churches setting themselves up as a community hub in deprived areas. They include charities that support people whose lives have been destroyed by natural catastrophes all over the world. Reviewing the long list of charities supported and the thousands of thank you letters received is a humbling and uplifting experience.

Clearly, our charitable purpose is a powerful force for good. 

It is also a powerful motivator. The fact that our profits change lives makes our people look at their work in a different way. It motivates them to be even better at what they do and to go above and beyond for our customers. And because we give them the opportunity to contribute directly to the causes closest to their hearts, it motivates them to do good in our communities. With our employees committed to the company's charitable goals6, it is no surprise that our employees' engagement reached a record high in 20176.

5 2016-17 UK Guide to Company Giving

6 Ecclesiastical employee survey, November 2017

A trusted business

Lack of trust in institutions and businesses has become a pervading social theme and every year, the leading global trust survey shows that financial services remains the least trusted industry in the world 7.

Yet every year, independent surveys show that our own customers and business partners continue to put their trust in Ecclesiastical - a remarkable achievement in today's climate of mistrust.

For the 11th consecutive year, we were recognised by UK brokers as the best insurer in the charity, heritage and education sectors, as well as in the Faith sector where we measured broker sentiment for the first time. Our UK customer satisfaction levels remained exceptionally high at 97-99% across all sectors, while 98% of customers were satisfied with how we handled their claim. 

I am proud to report that we again received many external accolades for the way we do business. For the second year running, we were named Insurance Company of the Year by the UK's Better Society Awards and ranked by UK customers as the Fairer Finance most trusted home insurance provider for the fourth consecutive time. In the UK our chartered status was renewed, making us one of only 5 composite UK insurers to hold this prestigious status.

EdenTree, our investment management business, was named MoneyFacts Best Ethical Investment Provider for an extraordinary ninth year in a row, while our Canadian insurance business was recognised as a Top Employer for Young People for the fifth consecutive year.

One of the most inspiring parts of my job is receiving written and verbal thanks for the outstanding work and compassion shown by our exceptional people. This year it gladdened us all to be described as 'fantabulous' for the very first time, by the Archbishop of York John Sentamu for the restoration of a rural church.

We do not take the trust placed in us for granted and work hard to remain 'fantabulous' in the eyes of our customers. In striving to do this, we will continue to put their needs first as befits a values-driven business. 

7 Edelman Trust Barometer 2017

Progress in detail

2017 marked a fourth year of robust financial performance, testimony to the focus on achieving sustainable, profitable long-term growth that has underpinned our turnaround.

We achieved a pre-tax profit of £82.2m compared to £62.5m in 2016 and GWP growth of 11% to £343m. Our underwriting profit increased to £27.1m from £20.1m the previous year, resulting in a Group combined operating ratio of 86.9% compared to 89.8% during 2016. 

In 2017 we benefitted from exceptional investment returns driven by stable investment income and double-digit returns on equities as stock markets rose, due to the low value of sterling and strong growth in the world economy. These returns reflect our long-term strategy of holding a relatively high proportion of higher risk assets, which we believe will continue to deliver strong returns over the long-term while our capital strength allows us to withstand short-term market volatility, such as that seen at the beginning of 2018. 

We seek to mitigate our exposure to risk by holding a balanced portfolio of businesses and saw the benefit of this in our insurance business as significant natural events including winter storms, floods and wildfires in Canada were offset by benign weather conditions in other territories.

In the UK and Ireland GWP grew by 5% with positive contributions from most sectors. We achieved a £33m underwriting profit compared to £25m in 2016. This was driven by an exceptionally low level of weather claims for the second time in three years and a large reduction in case reserves as older claims continue to close, coupled with an associated release of IBNR reserves. This exceptional underwriting performance is unlikely to be sustained into the future, underpinned as it is by a confluence of favourable factors on our property and liability accounts.

We continued to monitor and consult on the shape of our defined benefit pension scheme and any potential long-term risks it may present.

The Canadian and Australian insurance businesses delivered GWP growth of 6% and 26% respectively in local currency. Canada experienced an underwriting loss of £7.2m due to a number of large property claims and reserve strengthening in relation to physical and sexual abuse claims, while Australia's underwriting profit of £0.7m was driven by strong revenue growth and reserve releases on the liability account.

EdenTree, our investment management business, saw profits increase from £1.6m in 2016 to £1.7m, benefitting from higher fee income due to higher fund valuations as assets performed strongly and supported by strong levels of net new money from both retail and institutional clients. These factors saw funds under management increase to £2.7bn from £2.5bn the previous year. The company also launched its new Amity Short Dated Bond Fund during the year.

SEIB, our insurance brokerage, enjoyed moderate growth, increasing profit to £2.5m from £2.4m in 2016. It reinforced its reputation as a provider of specialist insurance that meets customers' changing needs, with new and refreshed products for the equine, small pets, vineyards and funeral director sectors.

Looking forward to 2020

We look forward to 2020 with optimism and confidence, having achieved so much in the last four years.

Our consistently strong financial performance is enabling us to invest significantly in the future of our business. In 2016, having reached our goal of giving £50m to good causes over three years, we launched the second phase of our change programme to support a new target of giving £100m by 2020.

This programme is designed to position us for further profitable growth in our existing markets, both organic and inorganic, and to develop new market segments which capitalise on our existing specialisms and knowledge.

I am pleased to report that we have made considerable progress, with over 90% of the programme's 2017 deliverables attained and many others in train. 

We are also strengthening technology and systems across the Group. Having upgraded our IT platforms in Canada, streamlined EdenTree's front-end operations and embarked on a project to integrate the systems of our broker businesses, we are now investing in a new core operating system for our UK and Ireland general insurance business. This will improve processes for front-line staff, provide a platform for business growth and better serve our customers and partners.

The changes effected in our Group have been made by exceptional, reshaped teams in our businesses worldwide. We are committed to ongoing investment in developing their specialist knowledge and expertise, so we can continue to anticipate and meet our customers' changing needs. 

In 2018, the UK's Independent Inquiry into Child Sexual Abuse (IICSA) will continue to scrutinise institutions in England and Wales. We will provide information and expertise as required by IICSA and will refresh our industry leading guiding principles on handling abuse claims, principles that have been received so positively by a number of audiences, including lawyers representing abuse survivors. We encourage other insurers to follow suit in the interests of the abuse survivors.

We will maintain our prudent reserving strategy for potential claims of physical and sexual abuse against our policyholders.

Our financial strength, robust reinsurance programme and hedged investment portfolio see us not only well positioned to withstand the uncertainty of insurance and investment markets, but also to capitalise on the opportunities that such events may present. 

We expect the insurance market to remain extremely competitive in most of our sectors. However, our consistent results demonstrate that we are able to overcome such challenges successfully, thanks to our specialist focus, exceptional service and trusted status.

Working together in a movement for good

This is our 130th year and over the past three decades the amount we have given to charity exceeds £220m. Quite something for a small financial services group of around 1,200 people.

For this, I say a heartfelt thank you. 

Thank you to our customers and our business partners for trusting us to protect the places and things that are irreplaceable to those who own and care for them. Thank you to our employees, for working so exceptionally hard every day to do the best for our customers. 

And thank you to people across all those groups who have volunteered, raised money and nominated charities for us to support on their behalf.

We are, together, demonstrating that the way Ecclesiastical does business is a powerful movement for good - a 'beacon of light' that I hope others will follow.

In 2018 we wish to build on this success and increase our momentum. We are clear in our vision and sure in our purpose. We have record financial strength, an ambitious group wide transformation programme well on track, and we have a high-performing, aligned team, with strong ethics and values running through their bloodstream working hard to make a difference.

On behalf of so many beneficiaries and customers worldwide, we thank all our supporters. Whether we realise it in the cut and thrust of our day to day lives or not, there is no doubt that we are working together in a movement for good, touching and transforming lives in our villages, in our towns, in our communities, in this country and abroad. Because that is what we exist to do.

Business Review

Financial Performance Report

2017 has been a very successful year for the group and we report a pre-tax profit of £82.2m (2016: £62.5m), our best financial result in over a decade.

We have delivered consistently strong financial results over the last few years together with successful delivery against strategic objectives; 2017 has continued that trend and our financial results were also supported by favourable investment market performance during the year. We continue to make significant investment across the Group to upgrade and build our capabilities to deliver even greater value and benefits to customers. This new programme of business change will support us in achieving our business strategy and ambitious charitable aim but, in the short term, will continue to impact our expense ratio. The success of these wide-reaching initiatives, however, will ensure our profitable growth can be maintained in the longer term. 

General insurance

Our underwriting performance1 for the year was a profit of £27.1m (2016: £20.1m profit), resulting in a Group COR1 of 86.9% (2016: 89.8%). Another year of largely 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 higher than average claims experience in our Canadian business, we have delivered a fourth 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 £32.7m (2016: £25.0m profit) giving a COR of 77.1% (2016: 82.5%). This is an exceptional underwriting result which has been driven by a number of favourable factors on both the property and liability accounts all occurring in the same year. It is not a level of underwriting performance we expect to be sustained into the future. 

The underwriting result on the property account was ahead of last year. The weather in the UK and Ireland has again been very settled across most of the year, with Storm Doris and ex-tropical storm Ophelia being the only notable exceptions. The latter mainly affected geographical areas where we have limited exposure and, with the number of fire related losses also down on both 2015 and 2016, we have seen an increase in profits. The property result also benefitted from a distribution from our pooled terrorism reinsurance arrangements reflecting a surplus in the pool.

The underwriting result from the liability account was very favourable, which was consistent with the prior year. Current year claims performance was again 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. The run-off of liability claims in respect of the unprofitable business we exited in 2012 and 2013 is now well progressed and we don't expect to see prior year releases continuing at the levels seen in the last two years.

We expect the UK and Ireland segment to continue to deliver underwriting profits in the future, but consider it very unlikely that claims will continue to be so low on an ongoing basis.

In 2017, GWP has grown by 5% to £231m, (2016: £220m). We have seen high retention levels across our UK and Ireland business which shows the trust our customers have in us to deliver both value and exceptional service. One of our largest markets, Real Estate, saw GWP growth of 8% as we continue to attract prestigious new customers. Our Art & Private Client business grew by more than 50% in 2017, with our recent investment in deepening our expertise, innovation and product development resonating with the market. Commercial insurance business in the UK and Ireland remains highly competitive and our growth of 9%, in that context, shows we are able to compete and succeed in the tough environment. GWP in respect of household business fell by 13%, reflecting a continued focus on risk selection in what is a highly competitive market.

We expect the soft market conditions to continue, with excess capacity adding to the intense competition in the UK market. Our strategy over the medium-term is unchanged and remains to leverage our deep underwriting expertise, focusing on adding good-quality business to deliver measured GWP growth, as we look to embed a step change improvement in our specialist capabilities through the use of technology and innovation. In doing so, we will continue to seek profit over growth, maintaining our strong underwriting discipline in accordance with our group-wide underwriting philosophy.

Ansvar Australia

Our Australian business reported an underwriting profit of AUD$1.2m giving a COR of 96.9% (2016: AUD$2.2m loss, COR of 106.7%). The 2017 performance was driven by the growing liability account which benefitted from prior year releases, partly offset by losses on property business. The property result reflected the impact of Tropical Cyclone Debbie and the New South Wales hail storm, but losses on those events were in part offset by releases on catastrophe event claims from prior years. The reinsurance arrangements in place also helped reduce the impact of the property loss at the net level.

GWP grew by 26% in local currency to AUD$96.3m (2016: AUD$76.4m). Retention rates remained very strong, and new business was 73% ahead of the prior year with growth initiatives implemented in both 2016 and 2017 delivering as expected.

Canada

Our Canadian business continued its track record of delivering growth, reporting a 6% increase in the branch's contribution towards group GWP at CAD$86.9m (2016: CAD$81.8m).

The territory reported an overall underwriting loss of CAD$12.1m giving a COR of 118.5% (2016: CAD$6.2m loss, COR of 110.3%). Canada had another difficult year following on from the 2016 Fort McMurray wildfire in Alberta, with property business being impacted by a number of weather events and fire losses. This was compounded by a loss on liability business as reserves were strengthened during the year to take account of adverse claims development.

Investments

Investment returns for the year were £72.3m (2016: £54.4m) with UK stock markets concluding a strong year with solid gains in the fourth quarter, ending the year at another record high. Over the course of 2017 global equity markets trended higher on the back of continued optimism in the outlook for the global economy. The return to volatility at the beginning of 2018 is a timely reminder that the stable market returns, seen over the last two years, cannot be taken for granted.

The small and mid-cap bias in our UK equity portfolio had a positive impact in 2017. The FTSE small-cap and FTSE 250 mid-cap indices delivered +18.2% and +17.8% respectively significantly higher than the FTSE 100 large-cap return of +11.9%. Our direct property investments also performed well in the year.

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. The fund's fixed interest portfolio benefitted from a healthy allocation to corporate bonds, as well as solid performance from long-dated preference shares and permanent interest bearing shares, whilst investments in government bonds were broadly flat on the year.

A slight downward movement in yields 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 £1.4m loss being recognised within investment returns (2016: £7.7m loss).

The investment result includes a £3.2m return (2016: £12.2m) on assets backing our long-term insurance business, which is discussed later in this report, partly offset by a £0.4m loss (2016: £10.9m loss) from the impact of the change in discount rate on the long-term business liability. The net return of £2.8m (2016: £1.3m) was offset by a £2.4m increase (2016: £2.0m) increase in long-term insurance claims liabilities reflecting the close match of assets and liabilities, as we would expect.

Investment management

The Group's investment management business, EdenTree, saw a rise in pre-tax profits to £1.7m (2016: £1.6m) and has made good progress on its strategy to develop its presence in the Charity and Institutional markets. Net inflows to funds of £121m (2016: £28m net outflow), were the second best in EdenTree's history, with institutional business boosted by a mandate win from a European global bank. Total funds under management grew 8.8% to £2.7bn (2016: £2.5bn), further supported by global equity markets which concluded a strong year with solid gains in the fourth quarter. The business has continued to develop its capabilities throughout 2017, investing in technology and systems, to meet the needs of its customers and support the new MiFID II reporting requirements which become effective from 2018.

Long-term insurance

The life business insurance result for 2017 was a profit of £0.4m (2016: £0.7m loss). Ecclesiastical Life Limited is closed to new business and the expected favourable run-off of the business during the year was partly offset by the long-term impact of increased audit costs. The increase has resulted from reclassification as a public interest entity (PIE), under the European Union audit legislation, which became effective during the year. 

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). SEIB reported a rise in profit before tax to £2.5m (2016: £2.4m). EFAS reported a small loss of £0.2m in the year (2016: £0.3m loss). 

Overall, our broking and advisory business reported an increase in pre-tax profit to £2.3m (2016: £2.1m 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 2.5% (2016: 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 (2016: £9,181,000).

The directors do not recommend a final dividend on the Ordinary shares (2016: £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 £27.5 million (2016: £24.7 million).

During the last 10 years, a total of £154.0 million (2016: £139.8 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 £859.7m, 93% of which are liquid (2016: financial investments of £866.5m, 94% liquid), cash and cash equivalents of £93.8m and no borrowings (2016: cash and cash equivalents of £89.5m 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;

§ 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 key function holders.

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 seek to develop and improve our risk management framework and strategy on an ongoing basis to ensure it continues to enable us to achieve our strategy and objectives. Recent key improvements have included:

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

§ greater focus on the key controls in place to manage the risks to the business plans;

§ continued development of quantitative risk profiling capabilities to ensure all material risks are captured;

§ enhancement and further embedding of our Internal Model validation framework;

§ material enhancement of the Group's stress testing and scenario analysis which is undertaken both as a validation tool for the Group's Internal

§ improved reverse stress testing;

§ strengthened approach to the Control Risk and Self-Assessment (CRSA) process; and

§ continued embedding and enhancement 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 annually with approval and sign-off by the Board and there are ongoing assessments to ensure its 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

Since the introduction of Solvency II at the start of 2016 our regulatory capital requirement has been calculated using the standard formula approach. However, we have applied for regulatory approval to use our Internal Model as the basis for the calculation of our regulatory capital requirements. 

Individual and aggregate risk exposures are calculated using our Internal Model, which has been calibrated to determine our internal view of the capital resources required to deliver our business plan and further evaluated within 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 Internal Model to better reflect our current risk profile and completed several cycles of independent model validation. Use of the model has also continued to embed within our strategic decision-making processes, for example its use as an input to the development of our reinsurance strategy, pricing decisions and setting of investment strategy.

The performance of stress testing and scenario analysis is a key component of our risk management framework, which further contributes to meeting the Solvency II requirements. 

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 helps us to understand the risks faced under extreme conditions and provides assurance to the Board on the robustness of our risk mitigation and control improvement strategies. It is also used as a tool for the validation of our internal capital requirements within the ORSA process.

Over the year this stress testing and scenario analysis framework has been further refined and embedded across the business, 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. 

The impacts of Brexit for the Group are being assessed as more information becomes available, however, it has not been assessed as a principal risk. Impacts of Brexit are referred to under Market Risk and Pension Risk below.

The principal risks identified by the Board are as follows:

Directors' Responsibility Statement

The following statement is extracted from page 112 of the 2017 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 2017 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 104 to 106 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 2017 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 2017

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the year ended 31 December 2017

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the year ended 31 December 2017

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 replaced 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

At 31 December 2017

CONSOLIDATED STATEMENT OF CASH FLOWS

For the year ended 31 December 2017

NOTES TO THIS ANNUAL FINANCIAL REPORT ANNOUNCEMENT OF RESULTS

for the year ended 31 December 2017

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 2017 as prepared in accordance with 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 14 March 2018.

The financial information set out above does not constitute the Company's statutory accounts for the years ended 31 December 2017 or 2016, but is derived from those accounts. Statutory accounts for 2016 have been delivered to the Registrar of Companies and those for 2017 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 14 March 2018.

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 2017.

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 to obtain the appropriate 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 purchased in line with the Group's risk appetite.

(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, income and licence. The other class of business includes cover of legal expenses and also a small portfolio of motor policies, but this has been in run off in the United Kingdom since November 2012. The Group's whole-of-life insurance policies support funeral planning products.

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 in particular 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 particularly 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. 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 may make 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 evolve, 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 26 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, there is a risk that returns on assets held to back liabilities are insufficient to meet future claims payments, 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. Brexit has continued to result in greater uncertainty in relation to the economic risks to which the Group is exposed, including equity price volatility, 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

*Financial liabilities are held at amortised cost.

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 (2016: 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 26(a)(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.

Group financial investments with variable interest rates, including cash and cash equivalents, and insurance instalment receivables are subject to cash flow interest rate risk. This risk is not significant to the Group.

(d) Credit risk

The Group has exposure to credit risk, which is the risk of non-payment of their obligations by counterparties and financial markets borrowers. Areas where the Group is exposed to credit risk are:

§ counterparty default on loans and debt securities;

§ deposits held with banks;

§ reinsurers' share of insurance liabilities (excluding provision for unearned premiums) and amounts due from reinsurers in respect of claims already paid; and

§ amounts due from insurance intermediaries and policyholders.

The carrying amount of financial and reinsurance assets represents the Group's maximum exposure to credit risk. The Group structures the levels of credit risk it accepts by placing limits on its exposure to a single counterparty. Limits on the level of credit risk are regularly reviewed. The Group also manages its exposure to credit risk in relation to credit risk ratings. Investment grade financial assets are classified within the range of AAA to BBB ratings, where AAA is the highest possible rating. Financial assets which fall outside this range are classified as sub-investment grade. 'Not rated' assets capture assets not rated by external ratings agencies.

A detailed breakdown of the Group's current debt securities and cash credit exposure by credit quality is shown below.