Ecclesiastl.8fe Regulatory News (ELLA)

ECCLESIASTICAL INSURANCE OFFICE PLC

ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 31 DECEMBER 2014

The Company has now approved its annual report and accounts for 2014.

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 2014. The annual report and accounts will be available from 25 March 2015 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 2014 has been submitted to the National Storage Mechanism and will shortly be available for inspection at www.morningstar.co.uk.

Chairman's Statement

2014 has seen Ecclesiastical transform its underlying results and rebuild the foundations for sustainable profit from its core business. Profit before tax of £48m is below that reported last year, but nevertheless a pleasing outcome with strong underwriting profits, the first reported for five years, supported by a more 'normal' investment return.

The underwriting profit of £9m generated a combined operating ratio (COR) of 95.9% and was driven by a turnaround in performance in each of our business units around the world, most of which delivered results ahead of our expectations for the year. In the UK, we have seen the reduction in liability claims frequency and severity that we expected and the property portfolio has continued to perform well. 

While we have seen a return to underlying profitability in our liability book in the UK, we have taken the opportunity to strengthen further our reserves for physical and sexual abuse claims. We welcome the increase in transparency and openness that means victims of abuse feel able to come forward, and have taken the action we feel is necessary to ensure we are appropriately reserved for potential claims.

The transformation in Ireland's results has been faster than expected, and I thank the Irish team for the quality and speed of their decision-making in addressing the past drivers of poor underwriting performance. Our Australian business has also delivered a marked turnaround in underwriting performance and is starting to rebuild scale with good-quality new business wins.

Canada has continued to deliver controlled growth, increasing gross written premium (GWP) by 7% (in local currency) this year, and also reported a strong underwriting profit following the challenging weather events of 2013.

We have much to do to achieve our ambition to be the most trusted and ethical specialist financial services group, but I am pleased with the progress made during 2014. I would particularly like to thank Mark Hews and Jacinta Whyte for the work they have done to transform our business since their appointments into their new roles during 2013. 

I also thank our staff for all they have achieved over the last two years. The actions we have had to take to address business performance have meant significant change to our structures and ways of working. We have also had to reduce headcount to ensure our cost base remains sustainable, and it is never easy to lose valued colleagues under these circumstances. Great credit should go to our staff for the way they have responded to these challenges.

During 2014 we have also strengthened our Board membership which has increased from nine members to eleven. In April 2014 we appointed Ian Campbell as Group Chief Financial Officer and Executive Director. Ian joined the Group in late 2012 as Group Finance Director and prior to that held senior finance roles at Cox Insurance, Aspen Insurance and Torus Insurance, focusing on property and casualty reinsurance and insurance. In September 2014 we also appointed Caroline Taylor as a Non-Executive Director of the Group. Caroline brings 26 years' experience in financial services and a strong track record in investment management, including global markets, and risk management.

I am committed to ensuring the effectiveness of the Board and as part of this process we have undertaken an external evaluation of the Board and its Committees. More detail on this can be found in the Group Nominations Committee Report in the full financial statements.

The profits we delivered over the last two years, combined with our continued capital strength, have meant that we have been able to pay a grant of £23.5m to our charitable owner, Allchurches Trust Limited, getting us almost halfway towards our goal of giving £50m to charity over three years.

The actions we have taken to address underwriting performance have meant a planned material reduction in GWP. We are content with this reduction, which has undoubtedly led to the increase in sustainable underlying underwriting results.

Looking ahead to 2015, there are a number of opportunities we wish to pursue and more information on these initiatives can be found in the Strategic Report in the full financial statements. We have significant headroom available in our core specialist areas and intend to pursue a disciplined approach to underwriting, maintaining our focus on the long-term stability and profitability of our business.

Last year I stated that the Board was satisfied that the Group's strategic approach would deliver steady and measurable performance against its objectives. The results we have seen during 2014 demonstrate that our strategy, and the way it is being implemented, is starting to work. My fellow Directors and I have confidence that Ecclesiastical is now well placed to pursue successfully the opportunities and challenges that lie ahead and give back more to good causes.

Group Chief Executive's Review

Just over one year ago, we set out a new vision for the Group. This was clear, stretching and inspirational. It was to work together to be the most trusted and ethical specialist financial services group, giving £50m to charity over three years.

That goal represented a step change for us, not just in terms of the quantum, but also in terms of clarity of focus. We are, in essence, underlining the benefits of being owned by a charity and emphasising the reason that so many of us work for and support Ecclesiastical Insurance Office plc. Put simply, this is to give help, support and money to those who need it most. This has been, and continues to be, a guiding light for every decision that we make.

Underpinning this ambitious goal has been a stretching set of business plans, alongside a radical Group-wide change programme, the main elements of which were set out in last year's report.

When we look back at where we were as a Group one year ago, and review performance against these plans, we can view the overall progress as nothing short of transformational.

Our 2014 results are a profit before tax of £48.2m including an underwriting profit of £9.2m. The profits we have delivered have enabled us to pay grants of £23.5m to our charitable owner, Allchurches Trust Limited (ATL), as well as making other charitable donations directly to other great causes. 

Our progress in each of our strategic business divisions: Specialist Insurance; Investment Management; and Broking and Advisory, has also surpassed expectations for the year. 

Most trusted specialist insurer

Each of our core underwriting areas saw an improvement in performance with every territory making a positive contribution. Our underwriting results were the best they have been for over five years.

In the UK we restructured our business to a regional basis and re-engaged with brokers through nationwide roadshows and specialist events, supported by new collateral. These initiatives saw us win key accounts across our specialist areas including heritage, charity and property investors. Underlying customer retention rates also held up for our core business.

Focusing on our strengths saw our property account again perform well, while liability performance improved markedly, albeit this was offset by an anticipated increase in abuse claims. We have also addressed our cost base to ensure that it is aligned with the new size and structure of the organisation.

In January and February 2014, many of our customers were badly affected by the winter storms in the southern parts of the UK, and this gave us an opportunity to show how our values are reflected in the way we support our customers when they need us most. As part of our ongoing weather monitoring, our claims teams identified the potentially affected areas in advance of the floods happening and contacted many customers to give them proactive advice to support them in case of flooding.

After the events had occurred, we fast-tracked smaller claims and helped get our customers back into their homes as quickly as possible. Overall, 99% of customers affected by flooding were happy with the claims service that they had received from Ecclesiastical.

We are proud of our claims teams for this achievement in dealing with losses after events have occurred, but we are equally proud of our UK and international risk management teams who seek to prevent losses occurring in the first place. As the largest insurer of Grade I listed buildings in the UK, many of which are irreplaceable, we recognise that it is even more important than ever to provide extensive risk advice and support to ensure that our nation's heritage is not endangered in the first place. We congratulate both teams on their work in 2014.

Turning to our overseas businesses, the Ireland team has instituted extensive change over the last two years after the liability account drove significant losses in the territory. The early 2014 storms affected the profitability of the property account but due to the initiatives pursued, the Irish business has contributed consistent profits over the last three quarters and reported a positive return for the year. This is a remarkable achievement in such a short time for a territory that reported losses of £15.3m over the past two years.

Our Australian business achieved an underlying underwriting profit in the year, when excluding the impact of movements in discount rates. This is again a transformation given underwriting losses of £9.4m over the last two years and is testimony to the development and execution of a business-wide change programme by the new leadership team. Both the property and liability portfolios have performed as expected in 2014, and although falling discount rates led to a reported underwriting loss overall; this latter component was offset by corresponding positive asset growth.

In Canada we also saw a return to underwriting profits as the territory did not suffer the same level of weather events it experienced in 2013. Work to deliver a new administration platform continues at pace. Premiums grew 7% before translation as good-quality business continues to be identified and won by the team.

Gross written premiums have fallen by 16% in the year across the Group following the actions we have taken to address underwriting performance. Retention of business in our core niches remained strong and we are strengthening our relationships with customers and brokers to support our aim for controlled profitable growth over the medium term.

Best ethical investment provider

Our Investment Management division continues to go from strength to strength, with both our funds and our managers winning awards for investment performance and our ethical approach. Gross inflows for 2014 totalled £292m, a record figure for a single year. Our performance was strong within a volatile investment market and this has been demonstrated by our 2014 net inflows totalling close to £100m for a second year in a row. Funds under management have now passed £2.3 billion. 

During 2014 we delivered a new IT back-office platform and also worked with our outsource partners to improve the way we work together. The cost and efficiency savings captured by these initiatives helped to drive the strong profit before tax of £3.2m in 2014, a new record. Our investment management team moved into new offices in the City of London at the start of 2015 which will provide a better environment for growing the business.

In parallel, the investment returns on our general insurance funds were £33m. This was down on last year (£65m), when world markets saw particularly strong returns (FTSE All Share Index return of 20.8% compared to 1.2% in 2014), and we believe this reflects a more normal return on our portfolio.

Most trusted specialist adviser

South Essex Insurance Brokers (SEIB), our insurance broker, continued to grow and provide a stable flow of income for the Group. We acquired the specialist broking firm Lansdown Insurance Brokers, which has widened our broker proposition to include new specialist areas. Profit before tax grew to just over £3m for 2014, supported in part by this successful acquisition and the synergies that are starting to flow.

Our team of fully independent advisors, Ecclesiastical Financial Advisory Services (EFAS), continues to review and refine their offering to the Anglican clergy, and closer operational links are being developed between our advisory and broking businesses.

For a more detailed analysis of our financial results, please see the Financial Performance section.

Working together for the greater good

Our vision, goals and how we intend to achieve them sets us apart from other financial services companies. We wish to work together, for the greater good, by living up to the highest standards of values and ethics. We share the same values as our charitable owner, which allows us to work towards these goals in a way that delivers real benefit to our colleagues, our customers, our charities and our communities.

We are not driven by growth; we are driven by doing the right thing. In the long term, we believe this approach will drive ethical and sustainable growth. This belief is being encapsulated, for the first time in 2015, by including ethical conduct measures as a material element of our Group bonus calculation, as well as incorporating them into our long-term incentive plan (LTIP). We have set a high bar for the behaviour we expect from ourselves and our colleagues and recognise that achieving these standards should be rewarded.

We are also launching a 'Greater Giving Programme' in early 2015 to build on the best of what Ecclesiastical already does, to tie us more closely to our markets and to encompass our new approach to life. This framework will highlight and emphasise our giving to our charitable owner, our giving to good causes, our giving to our customers (in terms of the ethical and fair products and services we provide), our giving to our communities (via opportunities for our employees to volunteer), and our giving to our employees (in terms of reward, training, development and our working environment). More information on our new Greater Giving Programme can be found in the Corporate Responsibility Report in the full financial statements.

In addition, it was pleasing to see that our Canadian business was recognised as being one of Canada's Top 100 Employers for Young People for the third successive year. This highlights the Group's philosophy of seeking to invest heavily in the development and training of our employees, ensuring we have a high calibre professional workforce aligned behind our goals. Our doors are always open to talented like-minded individuals who share these aspirations.

Looking ahead to 2015

Our capital strength has been maintained throughout the challenges of the last few years and our net assets have ended the year at £495m, after payment of grants to ATL. Available capital relative to our regulatory capital requirements remains very strong. 

This financial strength, alongside our committed ethical approach, gives us robust foundations upon which we can build and invest, as well as face challenges from the competitive environment in which we operate.

The transformation delivered in 2014 represents an important step in Ecclesiastical's history. It is a moment where the Group has successfully changed the course of its underwriting performance, and there is increasing energy and passion around our new vision, both from within and outside the Group.

In 2015 we wish to build on this success and increase our momentum. We have clear and consistent business plans. We have an ambitious Group-wide change programme part implemented, and we have an increasingly high-performing, aligned team, with ethics running through their bloodstream, working hard to make a difference. We thank all our employees for their enormous contribution and commitment throughout what has been a year of extensive and, at times, unsettling change. They complete the year knowing that their efforts are already reaping rewards for those in need.

Equally, we thank our customers and our business partners whom we seek to serve, and serve extremely well. It is only with their ongoing loyal support that we can give so much to good causes and build our combined momentum, working together for the greater good.

Business Review

Financial Performance

In 2014 we achieved a pre-tax profit of £48.2m (2013: £66.9m). We saw the benefit of the actions taken over the last two years to turn around our general insurance business performance and report our first underwriting profit since 2009. Our investment and broker businesses also continued to grow their contribution to our profits.

General insurance

Our underwriting performance for the year was a profit of £9.2m (2013: £8.2m loss), resulting in a Group COR of 95.9% (2013: 102.9%). As already discussed in the Group Chief Executive's Review, each of our core underwriting areas saw an improvement in performance this year with every territory making a positive contribution to the turnaround in performance.

United Kingdom

Our insurance businesses in the UK reported an underwriting profit of £9.8m (2013: £9.8m).

Refocusing on our core niches and putting into place our new regional structure has seen the core UK business improve its performance over recent years, and this performance was sustained in 2014.

The storms and floods that hit the UK at the start of 2014 had a net cost to our property account of £8m. However, with no further significant weather events during 2014, the profitability of our property account exceeded expectations over the year as a whole.

Having withdrawn from the non-charitable care sector and focused on pricing risks appropriately, the performance of the non-abuse related liability account has improved considerably. However, we have taken the opportunity to strengthen reserves in respect of physical and sexual abuse claims during the year. We recognise and welcome the increase in transparency and openness that means victims of abuse feel able to come forward, and believe we are now appropriately reserved for potential claims. This action has, however, resulted in the overall liability account remaining loss-making despite the turnaround in underlying performance.

As expected, following our exit from the motor business, non-charity care and schemes not aligned to our niches, GWP decreased in the year, falling by 20% to £234.0m (2013: £291.3m). While we recognise that GWP has fallen significantly we are satisfied that we have taken the correct decisions, as demonstrated by the more consistent underwriting profitability in the UK over the last two years. Moderate sustainable profitable growth is being targeted as we build on our strengths and continue to position ourselves as the insurer of choice in our chosen segments.

Ireland

Our operations in Ireland generated an underwriting profit of £0.6m, a significant improvement on the 2013 loss of £9.1m, which was driven by performance in the liability portfolio. The team identified and implemented a series of corrective actions, commencing in late 2013 and continuing throughout 2014.

These actions included lapsing unprofitable business in selected niches and, while they resulted in a 12% fall in GWP, before translation, to £11.5m (2013: £13.6m), the quality of the portfolio was improved and there were notable new business wins during the year. Retention was in line with expectations and the team was strengthened by proactive recruitment across all areas.

Australia

Australia reported an underwriting loss of £1.1m (2013: £4.2m loss). The improvement in the underwriting performance was mainly due to the impact of new property reinsurance arrangements and a reduction in operating expenses. The Australian business delivered an underlying profit before discount rate movements relating to reductions in market interest rates. The negative reserve movements were more than offset by corresponding market gains in Ansvar Australia's investment portfolio which are not included within the underwriting result.

A new Chief Executive Officer, Warren Hutcheon, was appointed on 1 May 2014. Following a review of the business, a new operating model was announced on 1 September 2014. The key objective of the model is to better align the business with our specialist insurer strategy and the needs of our broker partners.

In 2014, GWP reduced by 12% to £40.1m (2013: £45.7m), primarily due to a 12% weakening of the Australian dollar against sterling during the year. Retention rates improved significantly in 2014 following the completion of the remediation of the business's property portfolio in mid-2013 and increasing focus on retaining core business.

Canada

Our Canadian branch reported an underwriting profit of £1.7m (2013: £1.1m loss), as the territory did not suffer the same levels of catastrophe weather events that had driven the losses in the previous year.

The 12% fall in the value of the Canadian dollar against sterling meant that the branch's contribution to Group GWP fell to £39.4m (2013: £41.2m) but GWP grew by 7% before translation, with strong retention rates of 94%, continuing a trend that has seen its premiums more than double since 2008.

Central operations

Profits from internal reinsurance arrangements in this segment were offset by corporate costs and a further modest strengthening of reserves in respect of adverse development reinsurance cover sold to ACS (NZ) Limited in 2012, resulting in an overall loss of £1.7m (2013: £3.7m loss).

Investments

The effects of persistent weak global economic activity and muted inflation were offset by the monetary policy measures deployed by the world's major central banks which helped to support positive returns across most asset classes during the year. Over the course of 2014, the FTSE All Share Index produced a return of 1.2% while the FTSE 100 Index generated a return of 0.7%. Our UK equity portfolio increased by 2.7%, outperforming both indices, reflecting its lower weighting in poorly performing sectors such as oil and mining.

Government bond yields decreased across the developed world over the course of the final quarter and gilts followed the global trend. The prospect of the Bank of England raising base rates has been pushed further into the future as inflation pressures have diminished, with wage inflation remaining restrained and falling commodity prices placing downward pressure on prices. Yields on corporate bonds reached record lows at the end of the year, although they failed to keep pace with gilts as credit spreads widened, reflecting both the deteriorating economic picture globally and the move towards gilts as risk aversion increased.

Longer dated gilts performed strongly while shorter dated gilts (

Investment management

EIM's funds under management grew again in 2014, as new business inflows and positive market movements saw a 5% growth to £2.3bn.

For a second year in succession EIM attracted nearly £100m net new flows from third parties into Ecclesiastical investment funds. A further £5m was invested into our special charity investment vehicle. Overall fee income for EIM increased by 11% to £14.3m and pre-tax profits increased to £3.2m. 

EIM further consolidated its position as a leader in sustainable and responsible investment, with the company winning the Moneyfacts Best Ethical Investment Provider Award for a sixth consecutive year, with it and its funds continuing to win awards, as shown in the Strategic Report in the full financial statements. EIM was rated Platinum by Citywire and Andrew Jackson was awarded Fund Manager of the Year for the UK Growth sector. Across the team our fund managers continue to be highly rated, with Robin Hepworth, Sue Round and Chris Hiorns all holding Citywire ratings.

Long-term insurance

As reported last year, Ecclesiastical Life Limited ceased writing new business from the end of April 2013. The result for 2014 was a small loss of £0.2m (2013: £0.4m profit) as pressure on index linked bond yields offset the underlying expected favourable run-off of the business.

Broking and Advisory

SEIB continued to provide a steady income stream to the Group, with the acquisition of the business of Lansdown Insurance Brokers widening its offering to a number of specialist areas and further building its capacity and expertise. The acquisition and SEIB's operations in niche markets saw commission and fee income grow by 25% to £9.1m (2013: £7.3m). Net profit before tax increased to £3.0m (2013: £2.5m).

EFAS, our small financial advisory business, has reported a loss before tax of £1.0m. The continuing business improved its performance following the rationalisation of its independent financial advisers business, reducing its loss from £0.8m to £0.4m. The company agreed to sell its mortgage book as part of the rationalisation of its operations. This sale completed on 20 January 2015 and a loss on disposal of £0.7m was recognised in 2014.

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 none 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 (ATL), the ultimate parent of the Group.

Dividends

Dividends paid on the Preference shares were £9,181,000 (2013: £9,181,000).

The Directors do not recommend a final dividend on the Ordinary shares (2013: £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 £25.2 million (2013: £5.5 million).

During the last 10 years, a total of £115.1 million (2013: £95.3 million) has been provided by Group companies for church and charitable purposes.

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

Principal risks and uncertainties

The 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 £892.4m (including current assets classified as held for sale), 98% of which are liquid (2013: financial investments of £946.5m, 97% liquid); cash and cash equivalents of £107.5m and no borrowings (2013: cash and cash equivalents of £107.2m and no borrowings); and a regulatory enhanced capital cover of 2.9 (2013: 2.6). 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 the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the annual report and accounts.

Risk Management

Introduction

The core business of Ecclesiastical is general insurance. Thus, risk selection, pricing, reinsurance strategy, portfolio management and regulatory compliance play an important part in our business model.

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 which will enable us to achieve our strategy and objectives, and ensure that all individual and aggregated risks to our objectives are identified and managed on a consistent basis. 

The risk management process is integrated into the culture of the Group and is led by the Group Management Board (GMB), which is supported by three Executive Risk Management Committees:

§ The (Non-Life) Insurance Risk Committee which has oversight of the non-life insurance risks of the Group including counterparty risk

§ The Investment and Market Risks Committee which has oversight of the investment and market risks of the Group

§ The Group Operational Risk Committee which has oversight of the operational risks of the Group.

The risk management process supports accountability, performance measurement and reward, thus promoting operational efficiency at all levels.

On an annual basis the GMB identifies key strategic risks and allocates responsibility for each of them. Any risk management actions that arise are regularly monitored.

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

§ The first line (Business Management) is responsible for strategy, performance and managing risks arising;

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

We have a continuously evolving approach to Enterprise Risk Management and use emerging experience to refine our approach. During 2014 key improvements included:

§ Strengthening of the Risk function with increased technical knowledge and actuarial capability;

§ Improved embedding of the risk framework within the first line of defence which included establishing local risk committees;

§ Commencement of risk oversight visits that are being conducted by the second line;

§ Enhancement of the qualitative risk profiles including an increased focus on business plans and emerging risks;

§ Continued development of quantitative risk profiling capabilities;

§ A refreshed Group-wide risk appetite proposal which was approved by the Group Risk Committee, and included strategic business units' (SBUs) risk appetites;

§ Improved reporting to the Group Risk Committee; and

§ Refinements to the Own Risk Solvency Assessment (ORSA) process which were approved by the Board and submitted to the Prudential Regulatory Authority (PRA).

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 has been 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 reported to the Group Risk Committee at each meeting. A formal escalation process exists for activities outside of risk appetite.

The risk appetite is refreshed annually and is signed off and approved by the Board.

The principles that underpin our risk appetite are based on the overall ambition of Ecclesiastical to operate as an independent and successful financial services group, operating with the highest standards of integrity to deliver financial products and services for the benefit of the church and community. As such, the Board takes the reputation of the Group seriously and will not undertake any activity whose outcome might reasonably be expected to have a sufficiently negative reputational impact on the Group and undermine the sustainability of the business model.

At the highest level of our risk appetite there are strategic statements which set the minimum levels of capital and solvency that the Group wishes to maintain, and they contain broad ranges of the magnitude of exposure to different risk types that are desirable. This includes limits on the type, nature, size and concentration of insurance risks that will be accepted by the Group together with the Board's requirements for a Group-wide reinsurance strategy. We purchase reinsurance cover to protect against property catastrophe events that are predicted to occur once every 250 to 500 years, depending upon the territory.

A key objective of our risk appetite is to ensure that we have sufficient capital to meet our liabilities 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) and A.M. Best.

Quantitative risk measures and stress testing framework

The primary tool used to measure aggregate risk is our internal model, which has been calibrated to estimate the capital resources required to deliver our business plan and meet UK regulatory risk-based capital requirements.

Over the last year we have improved both the scope and methodology of our internal model to better reflect the risk profile. The model has become further embedded in our strategic decision-making processes. For example, the internal model was used to inform the setting of the refreshed risk appetite and as an input to the development of our reinsurance strategy and pricing decisions.

We have continued to refine a comprehensive stress testing and scenario analysis framework to complement our quantitative risk measures and meet regulatory requirements.

This framework seeks to stress the business plan and identifies potential outcomes generated in the scenarios other than those in the central plan assumptions, providing evidence to the Board that the plan is robust. This is also used to identify additional actions that can be taken, including contingency plans, to mitigate any risks or potential adverse experiences identified. As such the Group uses stress and scenario testing as a key component of its business planning process.

Principal risks

The following table shows the principal risks we face that could have the highest potential to damage our Group both in the short and long term.

Directors' Responsibility Statement

The following statement is extracted from page 75 of the 2014 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 2014 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 70 and 71 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 2014 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; and

§ 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 2014

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the year ended 31 December 2014

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the year ended 31 December 2014

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

For the year ended 31 December 2014

CONSOLIDATED STATEMENT OF CASH FLOWS

For the year ended 31 December 2014

NOTES TO THIS ANNUAL FINANCIAL REPORT ANNOUNCEMENT OF RESULTS

for the year ended 31 December 2014

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 2014 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 24 March 2015.

The financial information set out above does not constitute the Company's statutory accounts for the years ended 31 December 2014 or 2013, but is derived from those accounts. Statutory accounts for 2013 have been delivered to the Registrar of Companies and those for 2014 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 24 March 2015.

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 2014.

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. 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 relation to our long-tail liability risks) and reinsurance risk (the risk of failing to access and manage reinsurance capacity at a reasonable price).

(a) Risk mitigation

Experience shows 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 and supported by proactive claims handling. The overall reinsurance structure is regularly reviewed and modelled to ensure that it remains optimum to our needs. The optimum reinsurance structure can best be described as the one that provides us with sustainable, long-term capacity to support our specialist business strategy. This combines effective balance sheet protection at the same time as producing, over time, the required underwriting result and return on capital.

Catastrophe protection is purchased following an extensive annual modelling exercise of our gross and net (of proportional reinsurance) exposures. In conjunction with our reinsurance brokers we utilise the full range of proprietary catastrophe models, as well as continue to develop bespoke modelling options that better reflect the specialist nature of our 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 Group has also underwritten a small portfolio of motor policies, but this class is in run-off following the decision in November 2012 to focus on the principal classes. The accident class of business covers injury, death or incapacity as a result of an unforeseen event. The Group's whole-of-life insurance policies support funeral planning products.

With reference to written premiums, the concentration of insurance risk for the financial year before and after reinsurance by territory in relation to the type of risk accepted is summarised below.

(c) General insurance risks

Property classes

Property cover mainly compensates the policyholder for damage suffered to their properties 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, subsidence, accidental damage to insured vehicles and theft. Subsidence claims are difficult to predict because the damage is often not apparent for some time. Changes in soil moisture conditions can give rise to changes in claim volumes over time. The ultimate settlements can be small or large with a greater risk of a settled claim being re-opened at a later date.

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 severe 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 then the uncertainty about ultimate claims cost in the financial statements is much higher because there is insufficient time for adequate data to be received to assess the final cost of claims.

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 renovation basis as appropriate. Costs of rebuilding properties, of replacement or indemnity for contents and time taken to restart operations for business interruption are the key factors that influence the level of claims. Individual large claims are more likely to arise from fire, storm 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, the courts' move to periodic payments awards and the increase in the number of cases that have been latent for a long period of time.

The severity of bodily injury claims is highly 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 uncertainty as to whether any payments will be made and, if they are, the amount and timing of the payments. Key factors driving the high levels of uncertainty include the late notification of possible claim events and the legal process.

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

Claims 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. 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. The risk that actual claims payments exceed the carrying amount of the insurance liabilities may occur if the timing of claims is different from assumed.

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

Finance 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. The Group's management and measurement of financial risks is informed by either stochastic modelling or stress testing techniques.

(a) Categories of financial instruments

(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 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 for the Group 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. Investment strategy is set in order to control the impact of interest rate risk on anticipated Group 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 long-term business, the average duration of the Group's fixed income portfolio is two years (2013: 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 long-term insurance funeral plan business, 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 can be mitigated by purchasing fixed interest investments with durations that precisely 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 long-term business assets and liabilities that are exposed to interest rate risk.

Group financial investments with variable interest rates, including cash and cash equivalents, insurance instalment receivables and mortgage loans 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:

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

§ deposits held with banks;

§ amounts due from insurance intermediaries and policyholders; and

§ counterparty default on loans and debt securities.

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.

Reinsurance is used to manage insurance risk. This does not, however, discharge the Group's liability as primary insurer. If a reinsurer fails to pay a claim for any reason, the Group remains liable for the payment to the policyholder. The creditworthiness of reinsurers is considered on a regular basis through the year by reviewing their financial strength. The Group Reinsurance Security Committee assesses, monitors and approves the creditworthiness of all reinsurers, reviewing relevant credit ratings provided by the recognised credit rating agencies, as well as other publicly available data and market information. The Committee also monitors the balances outstanding from reinsurers and maintains an approved list of reinsurers.

There has been no significant change in the recoverability of the Group's reinsurance balances during the year with all reinsurers on the 2014 reinsurance programme having a minimum rating of 'A-' from Standard & Poor's or an equivalent agency at the time of purchase, with the exception of MAPFRE RE whose rating was adversely impacted by the sovereign rating of Spain. However, MAPFRE RE was upgraded by Standard & Poor's to 'A-' in February 2014 and then to 'A' in May 2014 with a stable outlook.

Group cash balances are regularly reviewed to identify the quality of the counterparty bank and to monitor and limit concentrations of risk.

The Group's credit risk policy details prescriptive methods for the collection of premiums and control of intermediary and policyholder debtor balances. The level and age of debtor balances are regularly assessed via monthly credit management reports. These reports are scrutinised to assess exposure in more than one region in respect of aged or outstanding balances. Any such balances are likely to be major international brokers who are in turn monitored via credit reference agencies and considered to pose minimal risk of default. The Group has no material concentration of credit risk in respect of amounts due from insurance intermediaries and policyholders due to the well-diversified spread of such debtors.

Collateral is held over loans secured by mortgages. The debt securities portfolio consists of a range of mainly fixed interest instruments including government securities, local authority issues, corporate loans and bonds, overseas bonds, preference shares and other interest-bearing securities. Limits are imposed on the credit ratings of the corporate bond portfolio and exposures regularly monitored. Group investments in unlisted securities represent less than 1% of this category in the current and prior year. The Group's exposure to counterparty default on debt securities is spread across a variety of geographical and economic territories, as follows:

(e) Liquidity risk

Liquidity risk is the risk that funds may not be available to pay obligations when due. The Group is exposed to daily calls on its available cash resources mainly from claims arising from insurance contracts. An estimate of the timing of the net cash outflows resulting from insurance contracts is provided in note 27 to the full financial statements. The Group has robust processes in place to manage liquidity risk and has available cash balances, other readily marketable assets and access to funding in case of exceptional need. This is not considered to be a significant risk to the Group.

Non-derivative financial liabilities consist of finance leases, which are not material to the Group, and other liabilities for which a maturity analysis is included in note 30 to the full financial statements.

(f) Currency risk

The Group operates internationally and its main exposures to foreign exchange risk are noted below. The Group's foreign operations generally invest in assets and purchase reinsurance denominated in the same currencies as their insurance liabilities, which mitigates the foreign currency exchange rate risk for these operations. As a result, foreign exchange risk arises from recognised assets and liabilities denominated in other currencies and net investments in foreign operations. The Group mitigates this risk through the use of derivatives from time to time.