Sabre Insur Regulatory News (SBRE)

SABRE INSURANCE GROUP PLC

Sabre delivers strong results, in line with expectations

Sabre Insurance Group plc (the "Group", or "Sabre"), one of the UK's leading private motor insurance underwriters, reports its full year results for the year ended 31 December 2017.

Financial highlights

· Continued focus on underwriting discipline which led to an improvement in our combined operating ratio of 68.5% (FY 2016: 69.3%)

· Loss ratio decreased to 46.5% (FY 2016: 47.7%) benefitting from continued positive prior year claims experience and continued cautious pricing strategy in 2017

· Expense ratio stable at 22.0% (FY 2016: 21.6%) reflecting the Group's tight control of costs and variable cost base

· Underwriting profit (1) increased by 5.5% to £59.0m (FY 2016: £55.9m)

· Adjusted profit after tax of £53.3m (FY 2016: £53.9m), and EPS of 14.5p (FY 2016: 17.0p), with £0.7m of investment losses compared to a gain of £3.5m in prior year

· Delivered strong returns, with return on opening SCR of 92.1% (FY 2016: 93.2%) and return on tangible equity of 81.8% (FY 2016: 96.3%)

· Strong organic capital generation resulting in a solvency coverage ratio of 160% (FY 2016: 128%), at the top end of our 140%-160% target range

· Controlled growth in GWP of 7.2% to £210.7m (FY 2016: £196.6m)

Operational highlights

· Completed successful main market IPO in December 2017

· High levels of service and support delivered to our customers and brokers throughout the year 

· Appointment of a strong PLC board to complement the experienced executive and operational management team

· Direct websites re-designed to improve customer journey and sales conversion

· Progressed the transition to a new hybrid cloud IT infrastructure, due to complete in mid-2018

· Maintained high levels of staff retention, with staff employed at IPO now shareholders in the business

Note (1): Underwriting profit is calculated as net earned premium less net insurance claims and total expenses

Geoff Carter, Chief Executive Officer of Sabre, said:

"I am pleased to be announcing that Sabre delivered a strong financial and operational performance in 2017 as we present our first set of results as a listed company."

"Sabre has a number of competitive advantages which have contributed to this success. Our strong underwriting capability underpinned by our expert analysis and unique data set based on over 15 years' of experience provides us with an unrivalled ability to price risk across the risk spectrums. This, together with our diversified multi-channel distribution network and strong claims management expertise, has been key to driving our strong financial performance in 2017 including delivering a combined operating ratio of 68.5%."

"I would like to thank all of our people for their contributions to the business in what has been a transformational year for Sabre. Our successful IPO allows us to continue to build on our competitive strengths and we look to the future with confidence and excitement, focused on delivering long-term value to all of our stakeholders."

Dial in details and webcast:

The Group will host an update webcast for investors and analysts at 8:30am GMT on 22 March 2018, link to webcast: https://3xscreen.videosync.fi/2018-03-22-sabre-insurance/.

Dial-in: United Kingdom: +44 20 3713 5011, Access code: 492-915-541

This announcement contains inside information for the purposes of Article 7 of the Market Abuse Regulation (EU) No 596/2014

The annual report will shortly be available for inspection via the National Storage Mechanism at morningstar.co.uk/uk/NSM and also on the sabre website www.sabreplc.co.uk/investors

Forward looking statements

This announcement may include statements that are, or may be deemed to be, "forward-looking statements". These forward-looking statements may be identified by the use of forward-looking terminology, including the terms "believes", "estimates", "plans", "projects", "anticipates", "expects", "intends", "may", "will" or "should" or, in each case, their negative or other variations or comparable terminology, or by discussions of strategy, plans, objectives, goals, future events or intentions. These forward-looking statements include all matters that are not historical facts and involve predictions. Forward-looking statements may and often do differ materially from actual results. Any forward-looking statements reflect Sabre's current view with respect to future events and are subject to risks relating to future events and other risks, uncertainties and assumptions relating to Sabre's business, results of operations, financial position, prospects, growth or strategies and the industry in which it operates.

Forward-looking statements speak only as of the date they are made and cannot be relied upon as a guide to future performance. Save as required by law or regulation, Sabre disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements in this announcement that may occur due to any change in its expectations or to reflect events or circumstances after the date of this announcement.

Media enquiries:

Tulchan Communications

James Macey-White & Michelle Clarke 0207 353 4200

Sabre@tulchangroup.com

For investor enquiries:

Geoff Carter & Adam Westwood 0330 024 4696

adam.westwood@sabre.co.uk

CHIEF EXECUTIVE'S BUSINESS REVIEW

I am pleased to present my first Chief Executive's review following our successful listing on the Main Market of the London Stock Exchange in December 2017. The support we received from a wide range of high quality investors is testament to the strength of our business, the wider Sabre team, and our prospects going forward. I would like to welcome our new shareholders. I am also pleased to announce another strong financial and operational performance driven both by underwriting discipline and our competitive strengths. Reporting such a strong business performance while also completing a successful IPO is testament to the strength of the Sabre team and a great achievement.

Strategic progress and focus 

Our strategy has been consistent for many years - we focus on underwriting private motor insurance in the UK, and our success is underpinned by several core trading principles: 

· Maintaining market leading underwriting performance through a disciplined and actuarially driven pricing strategy 

· Expanding our extensive and proprietary dataset combined with investment in data enrichment

· Maintaining a broad underwriting footprint with unique business model biased toward the specialist, higher premium segments

· Utilising our robust and effective claims management function to ensure a firm but fair approach to claims 

· Effectively leveraging our diversified, multi-channel distribution network

· Targeting controlled attractive growth across the cycle whilst maintaining our underwriting discipline 

· Using our streamlined operating model to efficiently control expenses 

· Ensuring a prudent case and a consistent portfolio reserving approach 

· Maintaining a conservative approach to risk management through the use of reinsurance, a simple and low risk investment strategy and prudent solvency coverage ratio. 

These principles have been used to inform our key performance indicators ('KPIs'), the most important of which is our combined operating ratio which reflects the strength of our underwriting capabilities. We will report on these KPIs regularly and see these as the means by which our success and progress should be judged. 

We are agnostic about the mix of business that we underwrite and the proportion of business from each distribution channel, although we have traditionally attracted policies from the higher average premium segment than the more mainstream motor insurers. 

We believe that our extensive and proprietary data set which stretches back 15 years, our sophisticated pricing model and our analytical skills provide ample opportunity to deliver controlled growth across the cycle within our current market. Any expansion in our product offering over the medium term would be complementary to the business we already write and supplement the strong profitability and shareholder returns we achieve in our core activities. 

In summary, we generate high quality profitability through our disciplined, actuarially-driven underwriting strategy. This, combined with a focus on operating efficiencies, means we continually deliver strong organic capital generation, underpinning our sustainable dividend policy across the cycle.

Performance in 2017 

Our key focus is the profitability of the business that we underwrite. This was positive in 2017 with a loss ratio of 46.5% and combined operating ratio of 68.5%. Our strong cost discipline across the organization resulted in an expense ratio of 22.0%, including distribution costs.

We saw an increase in GWP of 7.2% to a total of £210.7m with strong contributions from both our broker channel and direct brands with little additional marketing expenditure. 

At our IPO we announced our intention to operate within a solvency coverage ratio range of 140% to 160%. Given this, it is pleasing to report that at year end our solvency position was 160%, evidence of our strong balance sheet, organic surplus capital generation and conservative approach to risk management.

Our people

I would like to pay tribute to our people. Sabre benefits from an incredibly talented, long serving and committed workforce. Many people have stepped up to ensure the business continued to perform very strongly as the directors led the IPO process.

Given this, we were delighted to be able to reward all staff employed at the point of listing with share awards. All staff received at least £3,600, with significant additional awards based on years of service.

On behalf of all the staff I would also like to thank Keith Morris and Angus Ball, the two founders of the modern Sabre. They established a unique and exceptionally successful strategy and culture that the management team have maintained and intend to evolve in conjunction with our new board.

Life as a listed company

Looking to the years ahead I would like to reiterate our strategic focus which will guide everything we do. Sabre has historically delivered strong returns for our shareholders. Those returns have been the direct result of our business having underwriting discipline and a streamlined operating model, giving us confidence we can continue to deliver our targeted payout ratio of 70% going forward, with additional distributions of surplus capital to maintain our solvency coverage ratio within our target range.

The IPO in December allows us to continue to build on our competitive advantages with absolute consistency in our strategy and a more diverse shareholder base. That is why we are confident we can continue to deliver attractive and consistent returns regardless of the market environment. 

We are confident that Sabre will prove to be an attractive investment as we focus on ensuring our activities continue to deliver long-term shareholder value.

Outlook

The Group has delivered a strong financial performance in 2017 and remains focused on its core principles of market leading underwriting performance and delivering attractive returns. Whilst our strategy seeks to deliver controlled growth across the cycle, we will not drive short term growth at the expense of underwriting profitability or shareholder returns.The impact of the Ogden rate uncertainty and industry-wide reductions in personal injury frequency resulted in competitive pricing pressure in the last few weeks in 2017 and this continued into the first two months of this year, resulting in a modest reduction in premium income relative to the equivalent period last year. However, we have since taken pricing actions, reflecting the reductions in personal injury frequency, and as a result in recent weeks, we have seen premium income come back to the run rate seen in the same period in 2017. Throughout the period we have continued to focus on our high quality underwriting performance, ensuring that new business is written in line with a combined operating ratio consistent with our historical average. Looking into the rest of 2018, we are confident that our focus on our core principles will continue to deliver a strong underwriting performance with a combined operating ratio in line with, or better than, our historical average. This will allow us to continue to strengthen our capital position even further, and underpins our confidence in delivering an attractive dividend in 2018, per our stated policy.

CHIEF FINANCIAL OFFICER'S REVIEW

Highlights

The Group's operations continued to achieve strong profitability in 2017, reporting a combined operating ratio for the year of 68.5%. Premium grew in-line with expectation during 2017, with favourable market conditions allowing for an increase in written premium while holding a consistent loss ratio on business written. This allowed us to grow our underwriting profit to £59.0m, from £55.9m in 2016. Adjusted profit before tax was adversely affected by investment losses of £0.7m on the Group's portfolio of UK Government bonds, compared to a gain of £3.5m in 2016. Group profit after tax in 2017 includes £7.5m cost related to the corporate transaction activity carried out during the year.

The Directors have not proposed a final dividend for 2017, in line with the dividend strategy set out in the Group's prospectus at the time of IPO. Further, the Group did not pay an interim dividend in November 2017. As such, the Group carries significant excess capital, over its Solvency Capital Requirement, into 2018.

The Group has introduced Return on Tangible Equity ("ROTE") as a key performance indicator, as it provides a measure of the efficiency with which the Group utilises its available resources. The Group's ROTE reduced to 81.8% at 31 December 2017 from 96.3% at 31 December 2016, primarily due to the Group's decision to increase the minimum level of excess capital it holds over its Solvency Capital Requirement ("SCR").

Revenue

The Group saw an increase in gross written premium of 7.2% in 2017, across both the broker and direct channels. Despite increasing reinsurance costs resulting primarily from the Ogden rate change in February 2017, net earned premium also increased by 2.6%. Other technical income continues to generate a small contribution to profit, down on 2016 primarily due to a one-off credit in the prior year. As the Group operates a primarily broker-based business, it does not expect to generate significant non-premium income. Investment return was below that recorded in 2016, down by £4.2m. The Group invests almost exclusively in UK Government bonds. It generally holds these investments to maturity, therefore any market value movements, which can generate in-year gains and losses, are unwound as the bonds regress towards par value. In 2016, there was a significant increase in the market value of low-risk investment bonds following the UK's vote to leave the European Union. In 2017, bond values decreased, possibly due to the increase in the official rate of interest in November.

Operating Expenditure

Net claims incurred and net operating expenses are presented after reclassifying £6.0m (FY 2016: £5.9m) of claims expenses from net claims incurred into operating expenses. Net claims incurred were reflective of the Group's strong underwriting performance achieved in 2017. The loss ratio benefitted from continued positive development on prior-year claims and cautious pricing in advance of the Group's reinsurance renewal. In line with prior years and the Group's expectation, the current accident-year loss ratio continues to exceed the Group's expected ultimate loss ratio and the actual financial-year loss ratio, reflective of the reserve held against relatively uncertain current-year claims. Net operating expenses reflect a stable expense ratio over the year, with the Group having maintained a tight control of costs and favouring variable cost bases through outsourcing operations, which are heavily volume-dependent.

Taxation

In 2017 the Group paid £10.2m in corporation tax, an effective tax rate of 18.3%, as compared to an effective tax rate of 17.6% in 2016. The effective tax rate charged to the Group is slightly below the prevailing UK corporation tax due to a deductible interest expense incurred by the Group prior to IPO. Post-IPO, the Group structure has been simplified such that no such interest expense is incurred and as such the effective tax rate should revert to the marginal rate of UK corporation tax.

Earnings per Share

Basic and diluted Earnings per share for 2017 is 14.5 pence compared to 17.0 pence for 2016. This reduction is primarily a result of the one-off costs in 2017 associated with the corporate transaction. Adjusted earnings per share, which excludes these adjusting items, is 17.5 pence, which better reflects the earnings generated by the underlying core business.

Cash and Investments

The Group continues to hold a low-risk investment portfolio and cash reserves sufficient to meet its future claims liabilities. The increase in cash and financial investments against the previous year is the result of the decision to increase the level of solvency capital held on an ongoing basis to 140% to 160% and the payment of an interim dividend in November 2016, whereas no interim dividend was paid in November 2017.

Insurance liabilities

The Group's net insurance liabilities continue to reflect the underlying profitability and volume of business written. There was a significant increase in gross insurance liabilities in 2017, driven primarily by a small number of large claims. As the Group holds excess-of-loss reinsurance contracts across its entire book at an excess of £1.0m, the majority of these claims were absorbed by the reinsurance market, which drove the 120.1% increase in the reinsurers' share of insurance liabilities.

Leverage

The Group continues to hold no external debt. All of the Group's capital is considered 'Tier 1' under Solvency II. The Directors continue to hold the view that this currently allows the greatest operational flexibility for the Group.

Dividends

The Group paid £31.7m to shareholders as dividends in 2017 and £55.9m in 2016. In both years, the Group operated a policy to pay out all excess capital over the Solvency Capital Requirement plus a suitable buffer. However, in 2017 the last such dividend was in July, as compared to November in 2016, hence the lower overall dividend in 2017. This allowed the Group to build significant excess capital prior-to IPO. Dividend policy post-IPO is to pay out an ordinary dividend of 70% of profit after tax, subject to a preferred operating window of 140% to 160% of excess Solvency II net assets. The Group will consider passing excess capital to shareholders by way of a special dividend.

Calculation of Key Performance Indicators

Gross Written Premium

The Group's GWP comprises all premiums in respect of policies underwritten in a particular financial period regardless of whether such policies relate in whole or in part to a future financial period. The ability to underwrite policies and generate premium is a key measure of the Group's implementation of its strategy, and the Directors believe this measure is an appropriate quantification of how successful the Group is at achieving its strategy.

Loss Ratio

Loss ratio measures net insurance claims (2017: £92,912k, 2016: £92,721k), less claims handling expenses (2017: £6,044k, 2016: £5,878k), relative to net earned premium (2017: £186,866k, 2016: £182,107k, expressed as a percentage.

Expense Ratio

The Group's expense ratio is a measure of total expenses (which comprises commission expenses and operating expenses) (2017: £34,994k, 2016: £33,488k), plus claims handling expenses (2017: £6,044k, 2016: £5,878k), relative to NEP, (2017: £186,866k, 2016: £182,107k) expressed as a percentage.

Combined Operating Ratio

The Group's combined ratio is the ratio of total expenses (which comprises commission expenses and operating expenses) (2017: £34,994k, 2016: £33,488k), plus net insurance claims (2017: £92,912k, 2016: £92,721k) relative to NEP, (2017: £186,866k, 2016: £182,107k), expressed as a percentage.

Adjusted Profit After Tax

The Group's adjusted profit after tax measures profit from operations, net of tax (2017: £45,343k, 2016: £52,293k), adjusted to offset the effect of amortisation of intangible assets (2017: £887k, 2016: £1,619k) and exceptional expenses excluding tax (2017: £7,058k, 2016: £0) which do not relate to the Group's underlying performance (such as fees incurred in connection with acquisitions or capital markets transactions).

Solvency Coverage Ratio

The Group is required to maintain regulatory capital at least equal to its SCR. The SCR is calculated based upon the risks presented by the Group's operations and the various elements of its balance sheet. The Group's solvency coverage ratio is the ratio of the Group's regulatory capital in a particular period (2017: £97,873k. 2016: £74,283k) to its SCR (2017: £61,087k, 2016: £57,852k) for the same period, expressed as a percentage.

Return on Tangible Equity

The ability to generate profits while maintaining capital at an appropriate level is an important part of the Group's strategy, and the Directors believe that Return on Tangible Equity is an appropriate quantification of how successful the Group is in achieving this strategy. Return on Tangible Equity is measured as the ratio of the Group's adjusted profit after tax to its average tangible equity over the financial year (2017: £65,181k, 2016: £55,981k), expressed as a percentage.

Consolidated Statement of Comprehensive Income

for the year ended 31 December 2017

The attached notes form an integral part of these financial statements.

Consolidated Statement of Financial Position

As at 31 December 2017

The attached notes form an integral part of these financial statements.

The financial statements were approved by the Board of Directors and authorised for issue on 21 March 2018. Signed on behalf of the Board of Directors by:

Director

Consolidated Statement of Cash Flows

for the year ended December 2017

Consolidated Statement of Changes in Equity

for the year ended December 2017

Notes to the Consolidated Financial Statements

As at 31 December 2017

Corporate information

Sabre Insurance Group plc is a company incorporated in England and Wales. The address of the registered office is Sabre House, 150 South Street, Dorking, Surrey, RH4 2YY, England. The nature of the Group's operations is the writing of general insurance for motor vehicles. The Company's principal activity is that of a holding company. All of the Company's subsidiaries are located within the United Kingdom, and share a registered office with the Company, with the exception of Barbados TopCo Limited, which is located in Guernsey, registered office Heritage Hall, Le Marchant Street, St Peter Port, Guernsey, GY1 4HY.

1. Accounting policies

Sabre Insurance Group plc was incorporated as a limited company on 21 September 2017. On 11 December 2017, Sabre Insurance Group plc acquired the entire share capital of the former ultimate holding company of the Group, Barbados TopCo Limited. Sabre Insurance Group plc was introduced as a new parent to the Sabre Insurance Group by the principal investors who were the same before and after the reorganisation.

Sabre Insurance Group plc's ordinary shares were admitted to trading on the London Stock Exchange on 11 December 2017. On the basis

that the transaction was effected by creating a new parent that is itself not a business, the transaction is considered to be outside the scope of IFRS 3 Business Combinations. It has therefore been accounted for using the pooling of interest method as a continuation of the existing Group. The result is that the Consolidated Financial Statements of Sabre Insurance Group plc are the same as those previously presented by Barbados TopCo Limited, except for the share capital being that of Sabre Insurance Group plc.

These financial statements present the Sabre Insurance Group plc group financial statements for the year ended 31 December 2017, comprising the consolidated statement of comprehensive income, consolidated statement of financial position, consolidated statement of changes in equity, consolidated statement of cash flows and related notes, as well as the comparatives.

The financial statements of the Group have been prepared in accordance and fully comply with International Financial Reporting Standards (IFRSs), as issued by the International Accounting Standards Board (IASB) and adopted by the EU.

The financial statements have been prepared on an historical cost basis, except for investment properties and those financial assets that have been measured at fair value.

The financial statements values are presented in Pounds Sterling (£) rounded to the nearest thousand (£'k), unless otherwise indicated.

The Group presents its statement of financial position in order of liquidity. An analysis regarding recovery or settlement within 12 months after the reporting date (current) and more than 12 months after the reporting date (non-current) is presented in the respective notes.

Financial assets and financial liabilities are offset and the net amount reported in the statement of financial position only when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the assets and settled the liability simultaneously.

As permitted by IFRS 4 Insurance Contracts, the Group continues to apply the existing accounting policies that were applied prior to the adoption of IFRS, with certain modifications allowed by the standard effective subsequent to adoption for its insurance contracts.

(a) Premiums

Insurance and reinsurance written premiums comprise all amounts during the financial year in respect of contracts entered into regardless of the fact that such amounts may relate in whole or in part to a later financial year. All premiums are shown gross of commission payable to intermediaries (where applicable) and are exclusive of taxes, duties and levies thereon. Insurance and reinsurance premiums are adjusted by an unearned premium provision which represents the proportion of premiums that relate to periods of cover after the balance sheet date as described in (b) below.

Claims incurred include all losses occurring through the year, whether reported or not, related handling costs and any adjustments to claims outstanding from previous years. Significant delays are experienced in the notification and settlement of certain claims, particularly in respect of liability claims, the ultimate cost of which cannot be known with certainty at the balance sheet date. Reinsurance recoveries (or amounts due from reinsurers) are accounted for in the same period as the related claim.

(i) Unearned premiums are those proportions of the premiums written in a year that relate to the periods of risk subsequent to the balance sheet date. They are computed principally on a daily pro-rata basis.

(ii) The provision for claims outstanding includes individual case estimates, an incurred but not reported ("IBNR") provision and a provision for related claims handling costs. When claims are initially reported, case estimates are set at fixed levels based on previous average claims settlements. As soon as sufficient information becomes available, the case estimate is amended by a claim handler within the Claims Department to reflect the expected ultimate settlement cost of the claim, including external claims handling costs. The case estimate will be amended throughout the life of a claim as further information emerges. Case estimates generally do not allow for possible reductions in our liability due to contributory negligence, favourable court judgments or settlements until these are known to a high probability.

The IBNR provision includes the estimated cost of claims incurred, but not reported, at the balance sheet date ("pure IBNR") and any difference between the case estimates and the estimated ultimate cost of reported claims ("IBNER"). The IBNR is set after considering the results of various statistical methods based on, inter alia, historical claims development trends, average claims costs and expected inflation rates. The provision for claims handling costs is estimated based on the number of outstanding claims at the balance sheet date and the estimated average internal cost of settling claims.

The provision for claims outstanding is based on information available at the balance sheet date. Significant delays are experienced in the notification and settlement of certain claims and accordingly the ultimate cost of such claims cannot be known with certainty at the balance sheet date. Subsequent information and events may result in the ultimate liability being less than, or greater than, the amount provided. Any differences between provisions and subsequent settlements are dealt with in the consolidated statement of comprehensive income. Claims provisions are not discounted, with the exception of PPOs (periodic payment orders), which are discussed more fully in Note 2.1.

(iii) Provision is made for unexpired risks when, after taking account of an element of attributable investment income, it is anticipated that the unearned premiums will be insufficient to cover future claims and expenses on existing contracts. The expected claims are calculated having regard to events which have occurred prior to the balance sheet date. Unexpired risk surpluses and deficits are offset when business classes are managed together and a provision is made if an aggregate deficit arises.

Deferred acquisition costs represent a proportion of commission and other acquisition costs that relate to policies that are in force at the year end. Deferred acquisition costs are amortised over the period in which the related premiums are earned. Such costs are identified as being directly attributable to the acquisition of business, or are indirectly attributed to acquisition activity through an allocation exercise.

Investment income consists of interest receivable for the year. Income is credited to the consolidated statement of comprehensive income at the amounts receivable, with no associated tax credit for income from the United Kingdom. Interest receivable is accounted for on an accruals basis.

Net realised gains / (losses) on investments are calculated as the difference between net sales proceeds and the cost of acquisition.

Unrealised gains / (losses) on investments represent the difference between the carrying value at the year end and the carrying value at the previous year end or purchase value during the year. Net movements in the year are taken to the profit and loss account and disclosed as unrealised gains / (losses) on investments.

Investment expenses and charges consist of the expenses relating to the management of the investment portfolio.

The taxation charge in the income statement is based on the taxable profits for the year. It is Company policy to relieve profits where possible by the surrender of losses from Group companies with payment for value.

Deferred tax is recognised in respect of all temporary differences that have originated but not reversed at the balance sheet date where transactions or events have occurred at that date that will result in an obligation to pay more, or a right to pay less or to receive more, tax, with the following exception.

Deferred tax assets are recognised only to the extent that the Directors consider that it is more likely than not that there will be suitable taxable profits from which the future reversal of the underlying timing differences can be deducted.

Deferred tax is measured on an undiscounted basis at the tax rates that are expected to apply in the periods in which timing differences reverse, based on tax rates and laws enacted or substantively enacted at the balance sheet date.

Listed securities and equities at market bid price at the date of the statement of financial position less accrued interest where applicable.

Financial investments are classified according to their nature and use. All financial investments held by the Company are classified as being held at fair value through the statement of comprehensive income. While it is the Company's intention to hold the bonds within its portfolio to maturity, the Company recognises that certain assets may be sold in the normal course of business in order to enhance short-term liquidity. The Company invests only in financial assets which are quoted on liquid markets, therefore all investments are classified as 'Level 1' under the IFRS hierarchy.

Expenditure on computer equipment and fixtures and fittings is capitalised and depreciated over five years, the estimated useful economic lives of the assets on a straight line basis. Depreciation is charged to the consolidated statement of comprehensive income and is included in administrative expenses. Owner-occupied property is held at fair value, with subsequent revaluation gains taken through other comprehensive income. A fair value assessment of the owner-occupied property is undertaken at each reporting date with any material changes in fair value recognised. Owner-occupied property is also revalued by an external qualified surveyor, at least every three years.

Goodwill only arises upon a business combination and is initially measured as the residual cost of the business combination after recognising the acquiree's identifiable assets, liabilities and contingent liabilities. After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group's cash generating units that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units.

Notes to the Consolidated Financial Statements continued As at 31 December 2017

1. Accounting policies continued

Acquired businesses are reviewed to identify assets that meet the definition of an intangible asset in accordance with IAS 38 'Intangible Assets'. The cost of intangible assets acquired in a business combination is their fair value at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and accumulated impairment losses. The useful economic lives of intangibles assets are assessed to be either finite or indefinite.

Intangible assets with finite lives are amortised over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset with a finite useful life are reviewed at least at each financial year end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for by changing the amortisation period or method, as appropriate, and are treated as changes in accounting estimates. The amortisation expense on intangible assets with finite lives is recognised in the consolidated statement of comprehensive income in the expense category consistent with the function of the intangible asset.

Intangible assets relating to customer relationships are amortised over a five-year period.

Intangible assets with indefinite useful lives are tested for impairment annually either individually or at the cash generating unit level. Such intangibles are not amortised. The useful life of an intangible asset with an indefinite life is reviewed annually to determine whether indefinite life assessment continues to be supportable. If not, the change in the useful life assessment from indefinite to finite is made on a prospective basis. Gains or losses arising from derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognised in the consolidated statement of comprehensive income when the asset is derecognised.

For staff who were employees on 8 February 2002, the Company operates a non-contributory defined contribution Company personal pension scheme. The contribution by the Company depends on the age of the employee.

For employees joining since 8 February 2002, the Company operates a matched contribution Company personal pension scheme where the Company contributes an amount matching the contribution made by the staff member.

Contributions to defined contribution schemes are recognised in the consolidated statement of comprehensive income in the period in which they become payable.

Cash and cash equivalents comprise cash in hand and demand deposits with banks together with short-term highly liquid investments that are readily convertible to known amounts of cash and subject to insignificant risk of change in value.

Insurance and other receivables are recognised when due and measured on initial recognition at the fair value of the consideration received or receivable. Subsequent to initial recognition, insurance receivables are measured at amortised cost, using the effective interest rate method. The carrying value of insurance receivables is reviewed for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable, with the impairment loss recorded in the statement of comprehensive income.

Trade and other payables consist primarily of reinsurance balances and indirect taxes due. Reinsurance payables represent premiums payable to reinsurers in respect of contracts which have been entered into at the date of the financial position.

Instalment income comprises the interest income earned on policyholder receivables, where outstanding premiums are settled by a series of instalment payments. Interest is earned over the term of the policy using the effective interest method.

Other operating income consists of marketing fees, commissions resulting from the sale of ancillary products connected to the Group's direct business, and other non-insurance income such as administrative fees charged on direct business. Such income is recognised once the related service has been performed. Typically, this will be at the point of sale of the product.

The Group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are entities over which the Group has control. Subsidiary companies are consolidated using the acquisition method. Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Group obtained control, and continue to be consolidated until the date when such control ceases. In preparing these consolidated financial statements, any intra-group balances, unrealised gains and losses or income and expenses arising from intra-group trading are eliminated. Where accounting policies used in individual financial statements of a subsidiary company differ from Group policies, adjustments are made to bring these policies in line with Group policies.

The fair value of equity instruments granted under share-based payment plans are recognised as an expense and spread over the vesting period of the instrument. The total amount to be expensed is determined by reference to the fair value of the awards made at the grant date, excluding the impact of any non-market vesting conditions. At the date of each statement of financial position, the Group revises its estimate of the number of equity instruments that are expected to become exercisable. It recognises the impact of the revision of original estimates, if any, in the income statement, and a corresponding adjustment is made to equity over the remaining vesting period. The fair value of the awards and ultimate expense are not adjusted on a change in market vesting conditions during the vesting period.

Basic earnings per share are calculated by dividing profit after tax attributable to equity shareholders of the parent company by the weighted average number of ordinary shares in issue during the period. Diluted earnings per share requires that the weighted average number of ordinary shares in issue is adjusted to assume conversion of all dilutive potential ordinary shares. These arise from awards made under share-based incentive schemes. Share awards with performance conditions attaching to them are not considered to be dilutive unless these conditions have been met at the reporting date. Shares held in employee share trusts are excluded from the weighted average number of shares in issue until they have vested unconditionally with the employees.

At the date of authorisation of these financial statements, the following standards and interpretations were assessed to be relevant and are effective for annual periods beginning on or after 1 January 2018:

The Group intends to adopt the standards and interpretations in the reporting period when they become effective. The Board does not anticipate that the adoption of these standards and interpretations in future periods will materially impact the Group's financial results in the period of initial application although there will be revised presentations to the financial statements and additional disclosures.

The Group has not early adopted these standards and their impact is yet to be fully assessed. However, based on the Directors' current assessment, the impact is not expected to be significant. IFRS 17 was released in May 2017; therefore the Directors are yet to assess the implications of this standard on the subsequent financial reporting of the Group.

In July 2014, the IASB issued the final version of IFRS 9 Financial Instruments that replaces IAS 39 Financial Instruments: Recognition and Measurement and all previous versions of IFRS 9 and which was endorsed by the EU in 2016. IFRS 9 addresses the classification, measurement and derecognition of financial assets and financial liabilities, introduces new rules for hedge accounting and a new impairment model for financial assets and is effective for annual periods beginning on or after 1 January 2018. The Board does not anticipate that the introduction of this standard would have a material impact on the Group's financial results. In September 2016, the IASB published amendments to IFRS 4 Insurance Contracts that address the accounting consequences of the application of IFRS 9 to insurers prior to the adoption of IFRS 17, the forthcoming accounting standard for insurance contracts. The amendments to IFRS 4 include a deferral approach that provides an entity, if eligible, with a temporary exemption from applying IFRS 9 until 1 January 2021. The Group is eligible to apply the deferral approach. The Group expects to take advantage of this deferral approach and delay its adoption of IFRS 9 until 1 January 2021 to align with the effective date of IFRS 17 as introduced by the amendments to IFRS 4 Insurance Contracts.

The effective date for IFRS 17 is 1 January 2021. Following the issuance of the full and final version of IFRS 17, the Group plans to perform a detailed impact assessment of the implementation of IFRS 17 and IFRS 9 on its results, financial position and cash flows during 2018.

IFRS 16 is effective for periods beginning on or after 1 January 2019. The standard provides a single lessee accounting model, requiring lessees to recognise assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value. This is in contrast to the current standard which differentiates between operating and finance leases. The Group's current analysis is that this will not have a material impact on the Group's results.

IFRS 15 is effective for periods beginning on or after 1 January 2018. The standard specifies how and when an IFRS reporter will recognise revenue as well as requiring such entities to provide users of financial statements with more informative, relevant disclosures. The standard provides a single, principles based five-step model to be applied to all contracts with customers. The Group's current analysis is that this will not have a material impact on the Group's results.

2. Critical accounting estimates and judgements

For the valuation of insurance contracts, estimates are made both for the expected ultimate cost of claims reported at the reporting date, consisting of a claims reserve and estimate of the sufficiency of these reserves (through the calculation of an Incurred But Not Enough Reported (IBNER) estimate, and for the expected ultimate cost of claims incurred, but not yet reported, at the reporting date (IBNR). It can take a significant period of time before the ultimate claims cost can be established with certainty.

The ultimate cost of outstanding claims is estimated by using a range of standard actuarial claims projection techniques, such as Chain Ladder and Bornheutter-Ferguson methods. The main assumption underlying these techniques is that the Company's past claims development experience can be used to project future claims development and hence ultimate claims costs. As such, these methods extrapolate the development of paid and incurred losses, average costs per claim and claim numbers based on the observed development of earlier years and expected loss ratios. Historical claims development is analysed by accident years and types of claim. Large claims are usually separately addressed, either by being reserved at the face value of loss adjuster estimates or separately projected in order to reflect their future development. In most cases, no explicit assumptions are made regarding future rates of claims inflation or loss ratios. Instead, the assumptions used are those implicit in the historical claims development data on which the projections are based. Additional qualitative judgement is used to assess the extent to which past trends may not apply in future, (e.g. to reflect one-off occurrences, changes in external or market factors such as public attitudes to claiming, economic conditions, levels of claims inflation, judicial decisions and legislation, as well as internal factors such as portfolio mix, policy features and claims handling procedures) in order to arrive at the estimated ultimate cost of claims that present the likely outcome from the range of possible outcomes, taking account of all the uncertainties involved.

The gross carrying value at the reporting date of insurance liabilities is £242,388k (2016: £182,941k).

Liability claims may be settled through a Periodic Payment Order ("PPO"), established under the Courts Act 2003, which allows a UK court to award damages for future loss or any other damages in respect of personal injury. The court may order that the damages either partly or fully take the form of a PPO. To date, the Company has two PPOs within its outstanding claims reserve. Reinsurance is applied at the claim level, and therefore as PPOs generally result in a liability in excess of the Company's reinsurance retention, the net liability on acquisition of a PPO is not significantly different to that arising in a non-PPO situation. Management will continue to monitor the level of PPO activity. Once the level of projected PPO activity, and the volume of historical data available for modelling, becomes sufficient the firm will apply statistical modelling in respect of PPOs within the IBNR reserve.

3. Risk management

The Board of Directors has ultimate responsibility for ensuring that the Group has sufficient funds to meet its liabilities as they fall due. The Group carries out detailed modelling of its assets and liabilities and the key risks to which these are exposed. This modelling includes the Group's own assessment of its capital requirements for solvency purposes. Prior to 1 January 2016 the assessment was submitted to the PRA as the Individual Capital Assessment ("ICA"). The ICA quantified the insurance market, counterparty, liquidity and operational risk within the Group.

From 1 January 2016, the Group has managed its solvency with reference to the Solvency Capital Requirement ("SCR") calculated using the Standard Formula. The Group has developed sufficient processes to ensure that the capital requirements under Solvency II are not breached, including the maintenance of capital at a level higher than that required through the Standard Formula. In previous years Sabre Insurance Company Limited managed its capital position on both a Solvency II basis and on the previous regulatory basis. From 1 January 2016, the Group considers its capital position to be its net assets on a Solvency II basis and monitors this in the context of the Solvency II SCR. As at 31 December 2017, the Company holds significant excess Solvency II capital.

The Group's IFRS capital comprised:

The Solvency II position of the Group is given below:

The following table sets out a reconciliation between IFRS net assets and Solvency II net assets:

(1) In line with industry practice, the IFRS risk margin is an explicit additional reserve in excess of the actuarial best estimate which is designed to create a margin held in reserves to allow for unforeseen adverse development in open claims.

The adjustments set out above have been made for the following reasons:

- Adjusted IFRS net assets: Equals Group net assets on an IFRS basis, less goodwill and intangibles.

- Removal of unearned premium reserve and deferred acquisition costs: The unearned premium reserve must be added back as premium and deferred acquisition costs must be removed as they are not deferred under Solvency II.

- Solvency II premium provision: A premium reserve reflecting the future cash in and outflows in respect of insurance contracts is calculated and this must be discounted under Solvency II.

- IFRS risk margin: Solvency II reserves must reflect a true "best estimate" basis. Therefore, the IFRS risk margin is removed from the claims reserve.

- Discount claims provision: The provision held against future claims expenditure for claims incurred is discounted in the same way as the Solvency II premium provision.

- Solvency II risk margin: The Solvency II risk margin represents the premium that would be required were the Group to transfer its technical provisions to a third party, and essentially reflects the SCR required to cover run-off of claims on existing business. This amount is calculated by the Group through modelling the discounted SCR on a projected future balance sheet for each year of claims run-off.

- Change in deferred tax: As the move to a Solvency II basis balance sheet increases the net asset position of the Group, a deferred tax liability is generated to offset the increase.

The Group's SCR, expressed on a risk module basis, is set out in the following table:

The Group's capital management objectives are:

- to ensure that the Group will be able to continue as a going concern; and

- to maximise the income and capital return to its equity.

The Board monitors and reviews the broad structure of the Group's capital on an ongoing basis. This review includes consideration of the extent to which revenue in excess of that which is required to be distributed should be retained.

The Group's objectives, policies and processes for managing capital have not changed during the historical period.

Notes to the Consolidated Financial Statements continued As at 31 December 2017

3. Risk management continued

The Strategic Report sets out the principal risks faced by the Group. Detailed below is the Group's risk exposure arising from its insurance activities and use of financial instruments specifically in respect of insurance risk, market risk and counterparty risk.

The Group has identified that, in general, recognition from revenue in insurance contracts can be complex. However, given the short-term nature of the Group's policies, this is not a source of material risk to the Group.

The principal risk the Group faces under insurance contracts is that the actual claims and benefit payments, or the timing thereof, differ from expectations. This is influenced by the frequency of claims, severity of claims, actual benefits paid and subsequent development of long-term claims. Therefore, the objective of the Group is to ensure that sufficient reserves are available to cover these liabilities.

The Group issues only motor insurance contracts, which usually cover 12 months' duration. For these contracts, the most significant risks arise from severe weather conditions or single catastrophic events. For longer-tail claims that take some years to settle, there is also inflation risk.

The above risk exposure is mitigated by diversification across a large portfolio of policyholders and geographical areas within the UK. The variability of risks is improved by careful selection and implementation of underwriting strategies, which are designed to ensure that risks are diversified in terms of type of risk and level of insured benefits. This is largely achieved through diversification across policyholders. Furthermore, strict claim review policies to assess all new and ongoing claims, regular detailed review of claims handling procedures and frequent investigation of possible fraudulent claims are all policies and procedures put in place to reduce the risk exposure of the Group. The Group further enforces a policy of actively managing and promptly pursuing claims, in order to reduce its exposure to unpredictable future developments that can negatively impact the business. Inflation risk is mitigated by taking expected inflation into account when estimating insurance contract liabilities.

The Group purchases reinsurance as part of its risk mitigation programme. Reinsurance ceded is placed on a non-proportional basis. This non-proportional reinsurance is excess-of-loss, designed to mitigate the Group's net exposure to single large claims or catastrophe losses.

Amounts recoverable from reinsurers are estimated in a manner consistent with the outstanding claims provision and are in accordance with the reinsurance contracts. Although the Group has reinsurance arrangements, it is not relieved of its direct obligations to its policyholders and thus a credit exposure exists with respect to ceded insurance, to the extent that any reinsurer is unable to meet its obligations assumed under such reinsurance agreements. The Group's placement of reinsurance is diversified such that it is not dependent on a single reinsurer. There is no single counterparty exposure that exceeds 25% of total reinsurance assets at the reporting date.

The principal assumption underlying the liability estimates is that the Group's future claims development will follow a similar pattern to past claims development experience. This includes assumptions in respect of average claim costs, claim handling costs, claim inflation factors and claim numbers for each accident year. Additional qualitative judgements are used to assess the extent to which past trends may not apply in the future, for example: one-off occurrence; changes in market factors such as public attitude to claiming: economic conditions; and internal factors such as portfolio mix, policy conditions and claims handling procedures. Judgement is further used to assess the extent to which external factors such as judicial decisions and government legislation affect the estimates.

Other key circumstances affecting the reliability of assumptions include variation in interest rates and delays in settlement.

The motor claim liabilities are primarily sensitive to the reserving assumptions noted above. It has not been possible to quantify the sensitivity of certain assumptions such as legislative changes or uncertainty in the estimation process.

The following analysis is performed for reasonably possible movements in key assumptions with all other assumptions held constant, showing the impact on profit before tax and equity. The correlation of assumptions will have a significant effect in determining the ultimate claims liabilities, but to demonstrate the impact due to changes in assumptions, assumptions had to be changed on an individual basis. It should be noted that movements in these assumptions are non-linear.

The table shows the impact of a 10% increase in the loss ratio applied to all underwriting years which have a material outstanding claims reserve and a 10% increase in net outstanding claims across all underwriting years, taking into account the impact of an increase in the operational costs associated with handling those claims.

(1) Counterparty credit risk

Counterparty credit risk is the risk that one party to a financial instrument will cause a financial loss to the other party by failing to discharge an obligation. The two main sources of counterparty risk for the Company are investment counterparties and reinsurance recoveries.

The following policies and procedures are in place to mitigate the Company's exposure to credit risk:

- A Company credit risk policy which sets out the assessment and determination of what constitutes credit risk for the Company. Compliance with the policy is monitored and exposures and breaches are reported to the Company's Audit and Risk committee. The policy is regularly reviewed for pertinence and for changes in the risk environment.

- Reinsurance is placed with counterparties that have a good credit rating and concentration of risk is avoided by following policy guidelines in respect of counterparties' limits that are set each year by the Board of Directors and are subject to regular reviews. At each reporting date, management performs an assessment of creditworthiness of reinsurers and updates the reinsurance purchase strategy, ascertaining suitable allowance for impairment.

- The Company sets the maximum amounts and limits that may be advanced to corporate counterparties by reference to their long-term credit ratings.

- The credit risk in respect of customer balances incurred on non-payment of premiums or contributions will only persist during the grace period specified in the policy document or trust deed until expiry, when the policy is either paid up or terminated. Commission paid to intermediaries is netted off against amounts receivable from them to reduce the risk of doubtful debts.

The following tables demonstrate the Company's exposure to credit risk in respect of overdue debt and counterparty creditworthiness.

Overdue debt 

There were no material financial assets that would have been past due or considered for impairment at the year end.

Notes to the Consolidated Financial Statements continued As at 31 December 2017

3. Risk management continued