Ecclesiastl.8fe Regulatory News (ELLA)

ECCLESIASTICAL INSURANCE OFFICE PLC

HALF-YEARLY FINANCIAL REPORT FOR THE PERIOD ENDED 30 JUNE 2014

INTERIM MANAGEMENT REPORT

In our annual report and accounts we set out our refreshed strategy and outlined the actions we had taken to tackle unprofitable areas of our business and shape it for the future. I am pleased to report a profit in the first half of 2014 of £18.4m before tax, which was ahead of expectations. I believe this demonstrates that the actions we have taken are having a positive effect and it reflects the effort put in by our teams to improve our business.

We report an underwriting profit of £2.9m (COR 97.5%) at the half year, which is particularly pleasing after the challenges our general insurance businesses have faced over recent years as well as the claims costs of £9m net from the storms and floods at the start of the year in the UK.

Our strong results of 2013 enabled us to pay a grant of £8.5m to our owner, Allchurches Trust, in March of this year, the first instalment in our goal to donate £50m to charity over a three year period. We expect to make a further significant grant payment to Allchurches Trust in early September reflecting our strong performance in the first half of 2014.

Financial performance

The first half has seen us return to an underwriting profit while maintaining a good investment return. We have delivered a pre-tax profit of £18.4m (H1 2013: £24.4m profit). In this first half, outperformance against expectations has come from underwriting profitability rather than investment performance.

General insurance

Our underwriting performance for the half year was a profit of £2.9m (H1 2013: £8.9m loss), representing a 97.5% COR (H1 2013: 106.0%), as we have seen the majority of our business units deliver significantly improved underwriting performance compared with the prior year.

UK

Our UK business delivered an overall underwriting profit of £4.4m (COR 95.0%). Premiums have reduced as expected following our exit from motor business and the actions taken to address profitability issues in liability, particularly our decision to exit the non-charity care segment. Gross written premium (GWP) was £118.6m in the first half (H1 2013: £153.8m).

Our property portfolio continued to perform well, despite the floods and storms at the start of the year. Our liability business has also returned to profit in the first half as our actions to address losses have taken effect. These profits were partially offset by losses within our run-off motor business, where our reserve in respect of one particularly large claim resulted in a loss to the account of £1.5m.

Ireland

Similar to the UK, the actions taken to address liability performance in Ireland have started to take effect, with the portfolio breaking even in the first half following significant losses experienced last year. The early season storms saw a small loss on property, contributing to an overall underwriting loss in the first half of £0.4m (H1 2013: £5.5m loss). GWP has also fallen as we expected, totalling £6.1m in the first half (H1 2013: £7.9m).

Australia

Our business in Australia was another that saw a turnaround in performance in comparison to recent years following the change in business model for its property portfolio. We report an underwriting loss of £0.6m in the first half in Australia (H1 2013: £7.8m loss).

Canada

Our Canadian business has benefitted from more settled weather conditions in the first half of 2014 compared with recent years and reported an underwriting profit of £0.6m (H1 2013: £1.5m loss).

Central Operations

We strengthened our reserve in respect of adverse development reinsurance cover sold to ACS (NZ) Limited by £1m in the first half of 2014 which has driven the overall underwriting loss of £1.1m reported by this segment.

Investment management

We are proud that our investment team continues to win awards and recognition for both its funds and its employees, and that it has continued to contribute to the Group result with investment return of £14.1m at the half year (H1 2013: £33.2m), which is in line with expectations.

Whilst investment performance was in line with expectations overall, global investment markets were somewhat mixed over the course of the opening six months of the year and remain supported by the ongoing accommodative monetary policy measures deployed by central banks. Equity markets across developed economies broadly outperformed their counterparts in emerging markets with a number of indices attaining new all-time highs. Government bond yields broadly declined, defying the widely held consensus that yield curves would come under pressure as US and UK central banks moved towards tightening monetary policy.

Our retail investment business generated a profit of £2.1m (H1 2013: £1.0m profit), with funds under management continuing to grow, increasing by £26m in the first six months of the year. The results were supported by a performance related fee generated by exceptionally strong investment performance compare to benchmark.

Broking and Advisory

South Essex Insurance Brokers (SEIB) continued to provide a steady income to the Group with a profit before tax of £1.4m (H1 2013: £1.2m), a growth of 15% on the prior year period. This includes the acquisition of the business of Lansdown Insurance Brokers, a specialist broking firm that is a good fit with SEIB and will help widen its offering to a number of new specialist areas and further build the capacity and expertise of the division.

Ecclesiastical Financial Advisory Services Limited (EFAS), our small financial advisory business, continued its turnaround to report a break even over the first half of the year (H1 2013: £0.4m loss).

Life Business

Ecclesiastical Life Limited reported a profit before tax of £0.4m at the half year (H1 2013: £0.4m loss) following the decision last year to cease writing new funeral plan business. This is in line with our expectations that modest profits will emerge as the existing book runs off.

Related party transactions

Related party transactions and changes to them since the last annual report are disclosed in note 7 to the condensed set of financial statements. The latest annual report is available from the registered office and at www.ecclesiastical.com/general/investorrelations/reportandaccounts.

Principal risks and uncertainties

The principal risks and uncertainties that could have a material impact on the Group's performance, such that actual results differ from expected and historical results, are detailed in note 1 to the condensed set of financial statements. The principal risks and uncertainties that were disclosed in the Risk Management section of the Strategic Report and notes 3 and 4 to our latest annual report still apply.

Going concern

The Group has considerable financial resources: financial investments of £912.2m, 97% of which are liquid (H1 2013: financial investments of £955.3m, 96% liquid); cash and cash equivalents of £89.8m and no borrowings (H1 2013: cash and cash equivalents of £104.3m and no borrowings); and a regulatory enhanced capital cover of 2.6 (H1 2013: 2.7). 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 half-yearly financial report.

There have been no material subsequent events to disclose in this report.

Outlook

We have continued to successfully drive forward the changes required to reshape our business to deliver the strategic goals we set out in our 2013 annual report. We are pleased with the progress made so far which is reflected in the more consistent financial performance across all of our business units in the first half of the year, particularly the return to an overall underwriting profit.

I thank all the supporters of the Group for their continued contribution in helping us achieve our objectives, especially our staff who have shown huge commitment to our programme of change.

We operate in a challenging commercial environment, one in which competition for general insurance business is intensifying. We will continue to seek out good quality business in our specialist markets and not pursue business where competition drives rates to uneconomic levels. We will not seek growth for growth's sake, but focus on acquiring profitable business which will support our aim to give £50m to charitable causes over three years.

I remain confident that we are on track to deliver the changes required to build a group that makes a real difference to the lives of people in the markets and communities in which we operate.

Mark Hews

Group Chief Executive

RESPONSIBILITY STATEMENT

We confirm that to the best of our knowledge:

(a) the condensed set of financial statements has been prepared in accordance with IAS 34, 'Interim Financial Reporting' and gives 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 as a whole;

(b) the interim management report includes a fair review of the information required by DTR 4.2.7R (indication of important events during the first six months and description of principal risks and uncertainties for the remaining six months of the year); and

(c) the interim management report includes a fair review of the information required by DTR 4.2.8R (disclosure of related party transactions and changes therein).

The Board of Directors is as per the latest audited annual financial statements, with the following changes:

- I.G. Campbell was appointed to the Board on 30 April 2014.

By order of the Board,

Mark Hews Will Samuel

Group Chief Executive Chairman

20 August 2014

CONDENSED CONSOLIDATED STATEMENT OF PROFIT OR LOSS

for the 6 months to 30 June 2014

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

for the 6 months to 30 June 2014

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

for the 6 months to 30 June 2014

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

at 30 June 2014

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

for the 6 months to 30 June 2014

NOTES TO THE HALF-YEARLY FINANCIAL REPORT FOR THE PERIOD ENDED 30 JUNE 2014

1. General information

The information for the year ended 31 December 2013 does not constitute statutory accounts as defined in section 434 of the Companies Act 2006. A copy of the statutory accounts for that year has been delivered to the Registrar of Companies. The auditor reported on those accounts: its report was unqualified, did not draw attention to any matters by way of emphasis without qualifying the report, and did not contain a statement under section 498(2) or (3) of the Companies Act 2006.

The half-yearly financial report was approved by the Board on 20 August 2014. The Group results for the six month periods to 30 June 2014 and 30 June 2013 are unaudited, but have been reviewed by Deloitte LLP whose review report is at the end of this report.

The principal risks and uncertainties of the Group are in respect of insurance risk and financial risk. 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. 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 underwriting exposure is protected through the use of a comprehensive programme of reinsurance and proactive claims handling. Net retention limits are in place and the Group arranges catastrophe reinsurance cover to protect against aggregations of losses.

The most important components of financial risk are interest rate risk, credit risk, currency risk and equity price risk. The Group is exposed to equity price risk because of financial investments held by the Group and stated at fair value through profit or loss. The Group mitigates this risk by holding a diversified portfolio across geographical regions and market sectors, and through the use of derivative contracts from time to time which would limit losses in the event of a fall in equity markets. These principal risks and uncertainties, together with details of the financial risk management objectives and policies of the Group, are disclosed in the latest annual report.

The Group derives insurance premiums from a range of geographical locations and classes of business. Depending on the location and class of the risk, there may be a seasonal pattern to the incidence of claims. However, given the mix of business that the Group writes, overall the half-yearly results are not subject to any significant impact arising from the seasonality or cyclicality of operations.

The Group has considerable financial resources and, 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 half-yearly financial report.

2. Accounting policies

Ecclesiastical Insurance Office plc (hereafter referred to as the "Company"), a public limited company incorporated and domiciled in England, together with its subsidiaries (collectively the "Group") operates principally as a provider of general insurance in addition to offering a range of financial services with offices in the UK, Australia, Canada and Ireland.

The annual financial statements are prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with IAS 34, Interim Financial Reporting.

The same accounting policies and methods of computation are followed in the condensed set of financial statements as applied in the Group's latest audited annual financial statements.

There have been no newly issued Standards or changes to existing Standards during the interim period which impact on the condensed set of financial statements.

3. Segment information

The Group segments its business activities on the basis of differences in the products and services offered and, for general insurance, the underwriting territory. This reflects the management and internal Group reporting structure. Group activities that are not reportable operating segments on the basis of size are included within an 'Other activities' category.

The activities of each operating segment are described below.

- General business

United Kingdom

The Group's principal general insurance business operation is in the UK, where it operates under the Ecclesiastical and Ansvar brands.

Australia

The Group has a wholly-owned subsidiary in Australia underwriting general insurance business under the Ansvar brand.

Canada

The Group operates a general insurance Ecclesiastical branch in Canada.

Ireland

The Group operates an Ecclesiastical branch in the Republic of Ireland underwriting general business across the whole of Ireland.

Central operations

This includes the Group's internal reinsurance function, corporate underwriting costs, adverse development cover sold to ACS (NZ) Limited and operations that are in run-off or not reportable due to their immateriality.

- Investment management

The Group provides investment management services both internally and to third parties through Ecclesiastical Investment Management Limited.

- Broking and Advisory

The Group provides insurance broking through South Essex Insurance Brokers Limited and financial advisory services through Ecclesiastical Financial Advisory Services Limited.

- Life business

Ecclesiastical Life Limited provides long-term insurance policies to support funeral planning products.

- Other activities

This includes corporate costs relating to acquisition and disposal of businesses.

Inter-segment and inter-territory transfers or transactions are entered into under normal commercial terms and conditions that would also be available to unrelated third parties.

Segment revenue

The Group uses gross written premiums as the measure for turnover of the general and life insurance business segments. Turnover of the non-insurance segments comprises fees and commissions earned in relation to services provided by the Group to third parties. Segment revenues do not include net investment return or general business fee and commission income, which are reported within revenue in the consolidated statement of profit or loss.

Group revenues are not materially concentrated on any single external customer.

Segment result

General business segment results comprise the insurance underwriting profit or loss, investment activities and other expenses of each underwriting territory. The Group uses the industry standard net combined operating ratio (COR) as a measure of underwriting efficiency. The COR expresses the total of net claims costs, commission and underwriting expenses as a percentage of net earned premiums.

The life business segment result comprises the profit or loss on insurance contracts (including return on assets backing liabilities in the long-term fund), shareholder investment return and other expenses.

All other segment results consist of the profit or loss before tax measured in accordance with IFRS.

4. Changes in estimates

The estimation of the ultimate liability arising from claims made under general insurance business contracts is a critical accounting estimate. There are various sources of uncertainty as to how much the Group will ultimately pay with respect to such contracts. There is uncertainty as to the total number of claims made on each class of business, the amounts that such claims will be settled for and the timing of any payments. During the six month period, changes to claims reserve estimates made in prior years as a result of reserve development resulted in a release of £17m (H1 2013: £10m).

5. Tax

Income tax for the six month period is calculated at rates representing the best estimate of the average annual effective income tax rate expected for the full year, applied to the pre-tax result of the six month period.

6. Dividends

Dividends paid on the 8.625% Non-Cumulative Irredeemable Preference shares amounted to £4.6m (H1 2013: £4.6m).

7. Related party transactions

Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation.

Charitable grants to the ultimate parent company are disclosed in the condensed consolidated statement of changes in equity.

There have been no other changes to related party transactions in the period which require disclosure.

8. Holding company

The ultimate holding company is Allchurches Trust Limited, a company limited by guarantee and a registered charity.

9. Financial instruments' fair value disclosures

IAS 34 requires that interim financial statements include certain of the disclosures about the fair value of financial instruments set out in IFRS 13, Fair Value Measurement and IFRS 7, Financial Instruments Disclosures.

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

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

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

Level 3: fair values measured using inputs for the asset or liability that are not based on observable market data (unobservable inputs). This category includes unlisted 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 period.

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

All the above gains or losses recognised in profit or loss are presented in net investment return within the statement of profit or loss.

The valuation techniques used for instruments categorised in Levels 2 and 3 are described below.

Listed debt and equity securities not in active market (Level 2)

These financial assets are valued using third party pricing information that is regularly reviewed and internally calibrated based on management's knowledge of the markets. Where material, these valuations are reviewed by the Group Audit Committee.

Non exchange-traded derivative contracts (Level 2)

The Group's derivative contracts are not traded in active markets. Foreign currency forward contracts are valued using observable forward exchange rates and interest rates corresponding to the maturity of the contract. Over-the-counter equity or index options and futures are valued by reference to observable index prices.

Unlisted equity securities (Level 3)

These financial assets are valued using observable net asset data, adjusted for unobservable inputs including comparable price-to-book ratios based on similar companies, and management consideration of expected future performance and associated risks of holding the asset. Where material, these valuations are reviewed by the Group Audit Committee.

The valuation is most sensitive to the level of underlying net assets, the euro exchange rate, the price-to-book ratio chosen and an illiquidity discount applied to the valuation to account for the risks associated with holding the asset. If the price-to-book ratio and illiquidity discount applied changed by +/- 10% the value of unlisted equity securities could move by +/- £3m.

The increase in value during the period is the result of an increase in underlying net assets, partially offset by the movement in the euro exchange rate, with the other inputs remaining unchanged from the year end.

Unlisted debt (Level 3)

Unlisted debt is valued using an adjusted net asset method whereby management uses a look-through approach to the underlying assets supporting the loan, discounted using observable market interest rates of similar loans with similar risk, and allowing for unobservable future transaction costs. Where material, these valuations are reviewed by the Group Audit Committee.

The valuation is most sensitive to the level of underlying net assets but it is also sensitive to the interest rate used for discounting and the projected date of disposal of the asset, with the exit costs sensitive to an expected return on capital of any purchaser and estimated transaction costs. Reasonably likely changes in unobservable inputs used in the valuation would not have a significant impact on shareholders' equity or the net result.

The decrease in value during the period is primarily the result of increased uncertainty over the recoverability of one small loan.

10. Acquisition of business

On 15 April 2014, South Essex Insurance Brokers Limited acquired the assets of Lansdown Insurance Brokers (hereafter referred to as Lansdown). Lansdown is an Insurance broker across a variety of classes of business, with a particular specialism in blocks of flats and apartments and high net worth homes. Lansdown was acquired as part of the Group's strategy to identify new market sectors in which to grow, either organically or through acquisition, and is included within the Broking and Advisory segment.

The amounts recognised in respect of the identifiable assets acquired are as set out in the table below.

The net cash outflow arising on acquisition was £5,000,000.

The goodwill of £4,428,000 arising from the acquisition consists of intangibles not qualifying for separate recognition, such as workforce, synergies and new business opportunities. None of the goodwill is expected to be deductible for income tax purposes.

The fair value of the acquired identifiable intangible assets of £1,160,000 is provisional pending determination of the final valuations for those assets.

The contingent consideration arrangement requires £2,100,000 of retained commission income to be received for the twelve months to 15 April 2015, with the potential amount of the future payment that the Group could be required to make being between £0 and £1,000,000.

The fair value of the contingent consideration of £600,000 was estimated based on current commission forecasts, without discounting as the payment is payable after exactly one year from the date of acquisition.

No material acquisition-related costs were incurred in relation to the transaction.

Lansdown contributed £331,000 revenue and £231,000 to the Group's profit before tax for the period between the date of acquisition and the balance sheet date. If the acquisition of Lansdown had been completed on the first day of the financial year, Group revenues for the period would have been £162,395,000 and Group profit before tax would have been £18,742,000.

11. Contingent liabilities

In the 2013 annual report and accounts the Group reported that it is in correspondence with HM Revenue and Customs regarding the treatment of its preference share capital for group tax purposes. Following further correspondence the Group has made a £0.3m provision for a further tax charge that we now consider to be probable in respect of this issue. Our estimate of the possible additional tax cost in the event the issue is not settled as expected is £3.4m.

INDEPENDENT REVIEW REPORT TO ECCLESIASTICAL INSURANCE OFFICE PLC

Introduction

We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2014 which comprises the condensed consolidated statement of profit or loss, the condensed consolidated statement of comprehensive income, the condensed consolidated statement of changes in equity, the condensed consolidated statement of financial position, the condensed consolidated statement of cash flows and related notes 1 to 11. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

This report is made solely to the Company in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board. Our work has been undertaken so that we might state to the Company those matters we are required to state to it in an independent review report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company, for our review work, for this report, or for the conclusions we have formed.

Directors' responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

As disclosed in note 2, the annual financial statements of the Group are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting," as adopted by the European Union.

Our responsibility

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2014 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

Deloitte LLP

Chartered Accountants and Statutory Auditor

London, United Kingdom

20 August 2014