14 August 2018 esure Group plc interim results for the six months ended 30 June 2018 and proposed acquisition by a subsidiary of funds managed by Bain Capital Private Equity (Europe) LLP Continued growth in premiums and policies in a period impacted by exceptional weather costs Headline results Gross written premiums up 12.0% to 440.3m (1H 2017: 393.3m) In-force policies up 8.5% to 2.449 million (1H 2017: 2.258 million) Profit before tax of 36.1m (1H 2017: 45.1m) includes an impact of 14m from adverse weather related claims costs in the Home and Motor accounts; excluding these costs profit before tax is 50.1m (1H 2017: 45.1m) Solvency coverage (1) of 154% (1H 2017: 157%) Proposed Acquisition The Board is pleased to have reached agreement with Blue (BC) Bidco Limited ( Bidco ), a wholly owned subsidiary of funds managed by Bain Capital Private Equity (Europe) LLP on the terms of a recommended all cash offer for the entire issued and to be issued ordinary share capital of esure Group plc ( esure ) by Bidco (the Proposed Acquisition ) Consequently, Bidco has today announced its firm intention to make an offer for esure under Rule 2.7 of the Takeover Code. A copy of the Bidco announcement is available on the esure website at www.esuregroup.com Under the terms of the Proposed Acquisition, each esure shareholder will be entitled to receive 280p in cash for each esure share held, representing a premium of approximately 37 per cent. to the closing price per esure Share of 204 pence on 10 August 2018 (being the last business day prior to the possible offer announcement released by esure on 13 August 2018) In light of the Proposed Acquisition, the Board is not recommending the payment of an interim dividend (1H 2017: 4.1 pence per share) Sir Peter Wood, Chairman, said: The first half of 2018 demonstrates that esure continues to deliver profitable growth and it is pleasing to see that we have grown our market share in motor during this period. Alongside these results, I m pleased to be announcing the Proposed Acquisition today, because it is a great outcome for shareholders, for the company, and for customers. Since its IPO in 2013, esure has grown to nearly 2.5 million in-force policies, delivered more than 800 million of annual gross written premiums, and returned just under 300 million to shareholders in dividends as well as the considerable value delivered to shareholders through the demerger of GoCompare. Darren Ogden, Interim Chief Executive Officer, said: The first half of 2018 has seen continued growth in premiums and polices in a period impacted by exceptional weather costs. The Motor account grew strongly, underpinned by the Group s footprint expansion programmes which now account for over 400,000 in-force policies. In addition, the Home account returned to growth in the month of June, aided by the Group s investment in its underwriting and data capability. The Group will remain disciplined in its rating actions as it targets 3 million in-force policies by 2020. The UK suffered a number of adverse weather events in the first half of 2018 and these contributed to exceptional costs of 14m in the Home and Motor accounts. I would like to thank colleagues for their hard work and dedication in supporting our customers during these difficult times. The Group remains well placed to continue delivering profitable growth in 2018.
For further information: esure Chris Wensley Head of Investor Relations & Strategy t: 01737 641324 e: ir@esure.com Citigate Dewe Rogerson Chris Barrie t: 0207 638 9571 e: esure@citigatedr.co.uk Deutsche Bank Tadhg Flood Claire Brooksby James Ibbotson 02075458000 Notes (1) The solvency coverage is estimated and unaudited About esure Group plc esure Group plc is an efficient, customer-focused personal lines insurer, founded in 2000 by Chairman, Sir Peter Wood, Britain s foremost general insurance entrepreneur. The Group is one of the UK s leading providers of Motor and Home insurance products through the esure and Sheilas Wheels brands. Cautionary statement Certain statements made in this announcement are forward-looking statements. Such statements are based on current expectations and assumptions and are subject to a number of known and unknown risks and uncertainties that may cause actual events or results to differ materially from any expected future events or results expressed or implied in these forward-looking statements. Persons receiving this announcement should not place undue reliance on forward-looking statements. Unless otherwise required by applicable law, regulation or accounting standard, the Group does not undertake to update or revise any forward-looking statements, whether as a result of new information, future developments or otherwise. No profit forecasts or profit estimates No statement in this announcement is intended as a profit forecast or profit estimate for any period and no statement in this announcement should be interpreted to mean that earnings or earnings per share for esure for the current or future financial years would necessarily match or exceed the historical published earnings or earnings per share for esure. Further information This Announcement is for information purposes only and is not intended to and does not constitute, or form part of, an offer to sell or an invitation to purchase any securities or the solicitation of an offer to buy, otherwise acquire, subscribe for, sell or otherwise dispose of any securities, pursuant to the Proposed Acquisition or otherwise, nor shall there be any purchase, sale, issuance or exchange of securities or such solicitation in any jurisdiction in which such offer, solicitation, sale, issuance or exchange would be unlawful prior to the registration or qualification under the laws of such jurisdiction. esure Group plc 2018 Interim Results 2
Important notices Deutsche Bank AG ("Deutsche Bank") is authorised under German Banking Law (competent authority: European Central Bank) and, in the United Kingdom, by the Prudential Regulation Authority. It is subject to supervision by the European Central Bank and by BaFin, Germany's Federal Financial Supervisory Authority, and is subject to limited regulation in the United Kingdom by the Prudential Regulation Authority and Financial Conduct Authority. Neither Deutsche Bank nor any of its subsidiaries, branches or affiliates will be responsible to any person other than esure for providing any of the protections afforded to clients of Deutsche Bank nor for providing advice in relation to any matters referred to in this announcement. Neither Deutsche Bank nor any of its subsidiaries, branches or affiliates owes or accepts any duty, liability or responsibility whatsoever (whether direct or indirect, whether in contract, in tort, under statute or otherwise) to any person who is not a client of Deutsche Bank in connection with this announcement, any statement contained herein, or otherwise. Deutsche Bank, acting through its London branch, is acting as corporate broker and financial adviser to esure and no other person in connection with the contents of this announcement. Disclosure requirements of the Takeover Code (the Code ) Under Rule 8.3(a) of the Code, any person who is interested in 1% or more of any class of relevant securities of an offeree company or of any securities exchange offeror (being any offeror other than an offeror in respect of which it has been announced that its offer is, or is likely to be, solely in cash) must make an Opening Position Disclosure following the commencement of the offer period and, if later, following the announcement in which any securities exchange offeror is first identified. An Opening Position Disclosure must contain details of the person s interests and short positions in, and rights to subscribe for, any relevant securities of each of (i) the offeree company and (ii) any securities exchange offeror(s). An Opening Position Disclosure by a person to whom Rule 8.3(a) applies must be made by no later than 3.30 pm (London time) on the 10th business day following the commencement of the offer period and, if appropriate, by no later than 3.30 pm (London time) on the 10th business day following the announcement in which any securities exchange offeror is first identified. Relevant persons who deal in the relevant securities of the offeree company or of a securities exchange offeror prior to the deadline for making an Opening Position Disclosure must instead make a Dealing Disclosure. Under Rule 8.3(b) of the Code, any person who is, or becomes, interested in 1% or more of any class of relevant securities of the offeree company or of any securities exchange offeror must make a Dealing Disclosure if the person deals in any relevant securities of the offeree company or of any securities exchange offeror. A Dealing Disclosure must contain details of the dealing concerned and of the person s interests and short positions in, and rights to subscribe for, any relevant securities of each of (i) the offeree company and (ii) any securities exchange offeror(s), save to the extent that these details have previously been disclosed under Rule 8. A Dealing Disclosure by a person to whom Rule 8.3(b) applies must be made by no later than 3.30 pm (London time) on the business day following the date of the relevant dealing. If two or more persons act together pursuant to an agreement or understanding whether formal or informal, to acquire or control an interest in relevant securities of an offeree company or a securities exchange offeror, they will be deemed to be a single person for the purposes of Rule 8.3.2. Opening Position Disclosures must also be made by the offeree company and by any offeror and Dealing Disclosures must also be made by the offeree company, by any offeror and by any persons acting in concert with any of them (see Rules 8.1, 8.2 and 8.4). Details of the offeree and offeror companies in respect of whose relevant securities Opening Position Disclosures and Dealing Disclosures must be made can be found in the Disclosure Table on the Takeover Panel s website at www.thetakeoverpanel.org.uk, including details of the number of relevant securities in issue, when the offer period commenced and when any offeror was first identified. You should contact esure Group plc 2018 Interim Results 3
the Panel s Market Surveillance Unit on +44 (0)20 7638 0129 if you are in any doubt as to whether you are required to make an Opening Position Disclosure or a Dealing Disclosure. Relevant securities in issue In accordance with Rule 2.9 of the Code, esure confirms that, as at the date of this announcement, it has 419,092,661 ordinary shares of 1/12p each in issue and admitted to trading on the London Stock Exchange. The International Securities Identification Number (ISIN) of the shares is GB00B8KJH563. Publication on a website In accordance with Rule 26.1 of the Code, a copy of this announcement will be available at www.esuregroup.com. The content of the website referred to in this announcement is not incorporated into and does not form part of this announcement. The person responsible for arranging for the release of this announcement on behalf of esure is Darren Ogden, Interim Chief Executive Officer. Disclaimer This announcement contains inside information which is disclosed in accordance with the Market Abuse Regulation which came into effect on 3 July 2016. The esure Group plc LEI number is 213800KOI3F5LM54PT80. The person responsible for arranging the release of this announcement on behalf of the esure Group is Alice Rivers. esure Group plc 2018 Interim Results 4
Review of 1H 2018 Group 1H 2018 1H 2017 Gross written premiums ( m) 440.3 393.3 In-force policies (millions) 2.449 2.258 Trading profit ( m) 42.2 51.5 Profit before tax ( m) 36.1 45.1 Earnings per share (pence) 7.4 8.7 Dividend per share (pence) - 4.1 Combined operating ratio (%) 100.9 96.6 Loss ratio (%) 76.9 71.2 Expense ratio (%) 24.0 25.4 Investment return gross (%) 0.6 0.9 Solvency coverage (%)* 154 157 *The solvency coverage at 1H 2017 and 1H 2018 are estimated and unaudited. The solvency coverage at 1H 2017 is after allowing for the interim dividend. Premiums, policies and profit 1H 2018 1H 2017 Gross written premiums ( m) 440.3 393.3 Motor ( m) 398.4 351.3 Home ( m) 41.9 42.0 In-force policies (millions) 2.449 2.258 Motor (millions) 1.972 1.740 Home (millions) 0.477 0.518 Profit before tax ( m) 36.1 45.1 Gross written premiums increased 12.0% to 440.3m (1H 2017: 393.3m) driven by strong growth in Motor and a stable performance in Home. In-force policies increased 8.5% to 2.449 million (1H 2017: 2.258 million) through continued growth in the Motor account. Profit before tax was lower at 36.1m (1H 2017: 45.1m) driven by exceptional weather costs, a reduction in prior year reserve releases in Motor and a lower investment return. The Group incurred exceptional weather costs of 14.0m in the first half of 2018 that impacted the Home and Motor accounts. Adjusting for these items the Group s profit before tax increased 11.1% to 50.1m (1H: 45.1m). Motor 1H 2018 1H 2017 Gross written premiums ( m) 398.4 351.3 In-force policies (millions) 1.972 1.740 esure Group plc 2018 Interim Results 5
Combined operating ratio (%) 97.6 95.3 Loss ratio (%) 75.7 72.6 Expense ratio (%) 21.9 22.7 Trading profit ( m) 49.5 48.1 Underwriting ( m) 8.2 12.8 Non-underwritten additional services ( m) 38.3 30.0 Investments ( m) 3.0 5.3 Gross written premiums increased 13.4% to 398.4m (1H 2017: 351.3m) as a result of the in-force policy growth. In-force policies increased by 13.3% to 1.972 million (1H 2017: 1.740 million) with the Group s core and footprint expansion segments showing good levels of growth in the period. In addition, the Group continues to retain a significant proportion of its customers. Trading profit is 2.9% higher at 49.5m (1H 2017: 48.1m). The reduction in underwriting profit to 8.2m (1H 2017: 12.8m) reflects an increase in the loss ratio which has been impacted by a reduction in the level of favourable development of prior accident year reserves. In addition, the adverse weather conditions seen in the first half of the year impacted the account by 7.0m (1H 2017: nil). The combined operating ratio increased by 2.3ppts to 97.6% (1H 2017: 95.3%) driven by an increase in the loss ratio of 3.1ppts to 75.7% (1H 2017: 72.6%), partly offset by an improvement in the expense ratio of 0.8ppts to 21.9% (1H 2017: 22.7%). Favourable development of prior accident year reserves of 4.9m equated to 1.4% of net earned premiums (1H 2017: 11.0m; 4.0%). 1H 2018 1H 2017 Reported net loss ratio (%) 75.7 72.6 Prior year reserve releases (%) 1.4 4.0 Current accident year net loss ratio (%) 77.1 76.6 Non-underwritten additional services increased 27.6% to 38.3m (1H 2017: 30.0m) with a strong performance delivered across all income streams. Home 1H 2018 1H 2017 Gross written premiums ( m) 41.9 42.0 In-force policies (thousands) 477 518 Combined operating ratio (%) 130.1 104.9 Loss ratio (%) 87.5 61.6 Expense ratio (%) 42.6 43.3 Trading (loss) / profit ( m) (7.3) 3.4 Underwriting ( m) (11.8) (2.0) Non-underwritten additional services ( m) 4.2 4.8 Investments ( m) 0.3 0.6 Gross written premiums were broadly stable at 41.9m (1H 2017: 42.0m) and in-force policies reduced 7.9% to 477 thousand (1H 2017: 518 thousand). The Group has invested in its underwriting capability and this resulted in the Group delivering growth in the Home account from the month of June. esure Group plc 2018 Interim Results 6
Home delivered a trading loss in the period of 7.3m (1H 2017: profit of 3.4m). The Group s underwriting performance was significantly impacted by the adverse weather events in the first half of the year, notably the Beast from the East, alongside flash flooding in May. The adverse weather events resulted in claims costs in the Home account of 7m more than expectations in the first half of the year. The combined operating ratio of 130.1% (1H 2017: 104.9%) is 25.2ppts higher than 1H 2017 largely driven by an increase in the loss ratio due to the adverse weather costs. The loss ratio of 87.5% (1H 2017: 61.6%) was impacted by c18ppts of exceptional weather costs in the period. The expense ratio improved by 0.7ppts to 42.6% (1H 2017: 43.3%). Favourable development of prior accident year reserves of 3.1m equated to 7.9% of net earned premiums (1H 2017: 3.7m; 9.0%). 1H 2018 1H 2017 Reported net loss ratio (%) 87.5 61.6 Prior year reserve releases (%) 7.9 9.0 Current accident year net loss ratio (%) 95.4 70.6 Non-underwritten additional services were lower at 4.2m (1H 2017: 4.8m) driven by the reduction in in-force policies in the period. Additional services revenues 1H 2018 m 1H 2017 m Non-underwritten additional insurance products 6.5 5.6 Policy administration fees and other income 12.2 10.5 Claims income 4.7 3.8 Instalment income 27.4 21.8 Non-underwritten additional services 50.8 41.7 Underwritten additional insurance products 18.8 17.2 Total income from additional services 69.6 58.9 Motor 64.9 53.5 Home 4.7 5.4 Non-underwritten additional services 50.8 41.7 Other operating expenses (8.3) (6.9) Non-underwritten additional services trading profit 42.5 34.8 Motor 38.3 30.0 Home 4.2 4.8 ASR per IFP Motor ( ) 66.3 63.8 ASR per IFP Home ( ) 21.3 19.4 Total income from additional services increased 18.2% to 69.6m (1H 2017: 58.9m) driven by a strong performance across all income lines. Non-underwritten additional services trading profit increased 22.1% to 42.5m (1H 2017: 34.8m) ahead of the Group s in-force policy and premium growth as it leveraged the efficient expense base. Instalment income, where customers choose to pay monthly, has also benefited from an increase in the proportion of customers choosing this method of payment. esure Group plc 2018 Interim Results 7
Investment return 1H 2018 m 1H 2017 m Investment income 8.2 6.4 Net (losses) / gains on investments (2.5) 1.4 Investment charges (2.5) (2.1) Net investment return 3.2 5.7 Other income 0.1 0.2 Total investment return 3.3 5.9 Investment return Gross (%) 0.6 0.9 Investment return Net (%) 0.3 0.7 The Group achieved a gross investment return of 0.6% (1H 2017: 0.9%) and a net investment return of 0.3% (1H 2017: 0.7%). Investment income has increased 28.1% to 8.2m (1H 2017: 6.4m) as the Group benefitted from higher yields on investments held within its Surplus portfolio. The net investment return is lower yearon-year at 3.3m (1H 2017 : 5.9m) due to steepening at the shorter end of the UK yield curve, although this is matched by the discounting credit recognised on Solvency II Technical Provisions. Additionally, the one-off gain of 2.0m in 1H 2017 did not repeated in 1H 2018. Trading profit 1H 2018 1H 2017 m m Trading profit / (loss) 42.2 51.5 Motor 49.5 48.1 Home (7.3) 3.4 Trading profit, being earnings before interest, tax, non-trading expenses and amortisation of acquired intangible assets, is management's measure of the overall profitability of the Group's operating activities. The Group's reportable segments are Motor and Home and these delivered a trading profit of 42.2m (1H 2017: 51.5m). Reconciliation of trading profit to profit before tax 1H 2018 m 1H 2017 m Trading profit 42.2 51.5 Non-trading costs (1.1) (1.0) Finance costs (4.3) (4.3) Amortisation of acquired intangible assets (0.7) (1.1) Profit before tax 36.1 45.1 The Group incurred 4.3m in finance costs (1H 2017: 4.3m) relating to the 125.0m of 6.75% ten year tier two Subordinated Notes issued on 19 December 2014 ( the Notes ). Profit after tax The Group s profit after tax reduced to 30.8m (1H 2017: 36.5m) largely as a consequence of the adverse weather events in period. esure Group plc 2018 Interim Results 8
Earnings per share Earnings per share reduced to 7.4 pence (1H 2017: 8.7 pence) in line with the reduction in profit after tax. Dividend per share In light of the Proposed Acquisition, the Board is not recommending the payment of an interim dividend (1H 2017: 4.1 pence per share). Cash flow 1H 2018 1H 2017 m m Profit after tax 30.8 36.5 Net cash generated from / (used in): Operating activities 50.2 61.3 Investing activities (9.0) (3.4) Financing activities (43.6) (48.0) Net (decrease) / increase in cash and cash equivalents (2.4) 9.9 Cash and cash equivalents at the beginning of the year 46.6 25.5 Cash and cash equivalents at the end of the period 44.2 35.4 The Group s cash and cash equivalents at the end of the period are 44.2m (1H 2017: 35.4m). Operating activities were a net inflow of 50.2m (1H 2017: net inflow of 61.3m) driven by the Group s strong growth in the first half of the year. Investing activities were a net outflow of 9.0m (1H 2017: net outflow of 3.4m) reflecting the Group s investment in property, plant, equipment and software. Financing activities were a net outflow of 43.6m (H1 2017: net outflow of 48.0m) of which 39.3m reflects the Group s 2017 final dividend and 4.3m relates to the interest payable on the Notes. The Group s cash flow statement can be found on page 15. Investments The Group manages its investment portfolio to maintain liquidity and preserve capital. Investments are held to meet the Group s cash flow requirements, pay customers claims and seek a suitable return for an acceptable level of risk. Strategic investment allocations The Group s investment portfolio is in the process of transitioning towards the following strategic asset allocations and target returns. The Group s target allocations and target returns are outlined below: esure Group plc 2018 Interim Results 9
Investment categories Target allocations Gross target returns Cash & Liquidity 5% 0.1% Claims 65% 1.0% Surplus 30% 3.5% At the end of 2017, the Group had committed 150m to new investments. As at 30 June, 83m of these committed funds had been drawn down. The remaining 67m are expected to be drawn down by investment managers over the next 12 months. As at the 30 June 2018 the Group held the following investments: 1H 2018 FY 2017 % m % m Total 100 991.6 100 975.9 Cash & Liquidity 8 80.7 8 76.6 Liquidity funds 36.5 30.0 Cash 44.2 46.6 Claims 61 607.5 63 613.5 Liquidity funds 125.1 149.7 Fixed income 482.4 463.8 Surplus 31 303.4 29 285.8 Liquidity funds 123.1 192.5 Equity 120.0 53.9 Fixed income 60.3 39.4 The Group s total assets under management are 1.6% higher at 991.6m (2017: 975.9m). The Cash & Liquidity portfolio continues to reflect accessible cash for operational activities and includes a buffer for adverse events. At 8%, the allocation is higher than the Group s target allocation due to the timing of certain contractual outflows payable in July 2018. The Claims portfolio is constructed with reference to the expected future cost of the Group s technical liabilities as defined under Solvency II. The duration of the Group s assets and liabilities has remained broadly stable across the period at 3.4 years (2017: 3.7 years) and 2.5 years (2017: 2.9 years), respectively. The Group continues to designate newly acquired assets within this portfolio as available for sale ( AFS ) to minimise the impact of interest rate changes on the Group s earnings. At 30 June 2018 the Group has designated 415.0m as AFS (FY 2017: 342.0m) and 127.2m as fair value through profit and loss (FY 2017: 160.3m). The Surplus portfolio seeks to deliver returns in asset classes that are aligned with the Group s risk appetite, in particular with reference to its solvency capital requirements. In line with the Group s strategic asset allocation commitments to infrastructure equity have been fully deployed and the remaining commitments relate to investments in the direct lending asset class. The remaining surplus assets continue to be invested across a mixture of liquidity funds, equities and fixed income. The Group s total investment duration is 1.8 years (FY 2017: 2.2 years). esure Group plc 2018 Interim Results 10
Claims portfolio Fixed income 1H 2018 FY 2017 m m Total 482.4 463.8 Corporate bonds 238.0 227.6 Government bonds 172.4 159.6 Floating rate notes 41.2 39.0 Covered bonds 30.8 37.6 Claims portfolio Credit risk quality 1H 2018 % FY 2017 % AAA 17 17 AA 36 36 A 24 26 BBB or below 23 21 The credit risk quality of the claims backed fixed income portfolio remains strong with 77% held in assets rated A or above. Reserving The Group holds claims reserves, to cover the future cost of settling claims that have been incurred but not settled at the balance sheet date, whether already known to the Group or not yet reported, net of associated reinsurance recoveries. Due to the inherent uncertainties in reserving, the Group adopts a prudent approach to reserving through reserving in excess of the actuarial best estimate. Over time the inherent uncertainties in the actuarial best estimate reduce and the Group releases the margin above the best estimate. The Group s reserve margin is comfortably in excess of its actuarial best estimate. The Group benefited from favourable development of prior accident year reserves of 8.0m in 1H 2018 (1H 2017: 14.7m) and this equated to 2.1% of net earned premium (1H 2017: 4.6%). Reinsurance The Group purchases reinsurance as a risk transfer mechanism to mitigate risks that are outside the Group s appetite for individual claim or event exposure and to reduce the volatility caused by large individual and accumulation losses. By doing so, the Group reduces the impact that an event can have on its capital position and its underwriting results in both Motor and Home. The Group has in place excess of loss reinsurance programmes for its Motor and Home underwriting activities. The purpose of these programmes is to provide cover for both individual large losses, for Motor and Home, and accumulation losses arising from natural and other catastrophe events for Home. Motor and Home reinsurance treaties are in place covering all years in which the Group has underwritten policies in each line of business. The Group s reinsurance programmes are reviewed on an annual basis and capital modelling is used to identify the most appropriate structure and risk retention profile, taking into account the Group s business objective of minimising volatility and the prevailing cost and the availability of reinsurance in the market. The Group has no quota share reinsurance or co-insurance arrangements in place. esure Group plc 2018 Interim Results 11
Capital The Group seeks to manage its capital in order to maintain a level of capitalisation and solvency to ensure that regulatory requirements are met with an appropriate buffer and that there is sufficient capital available to fund profitable growth opportunities. The solvency capital requirement ( SCR ) is the level of capital the Group is required to hold to meet its obligations if a 1 in 200 year event were to occur in the next 12 months. The Group s normal operating range of coverage of its SCR is 130 150%. The capital surplus above the SCR provides an appropriate level of capital coverage and should enable the Group to continue to meet its regulatory capital requirements. The Group adopts the standard formula to calculate its capital requirements under Solvency II. The Group s capital position is outlined below: 1H 2018 m* FY 2017 m Own Funds 426.9 415.4 Tier 1 305.9 290.1 Tier 2 121.0 125.3 Solvency Capital Requirement 277.5 266.4 Coverage 154% 156% *The 1H 2018 figures quoted are estimated and unaudited. The 2017 solvency coverage is audited. The Group s Own Funds increased 2.8% to 426.9m (FY 2017: 415.4m). The SCR increased 4.1% to 277.5m (FY 2017: 266.4m) driven by the committed investible funds at the year end being invested in the period and the Group s growth ambitions. Own Funds comprise Tier 1 and Tier 2 qualifying capital. The Notes meet the qualifying criteria of a Tier 2 capital instrument and qualify up to a maximum of 50% of the SCR. The quality of the Group s capital remains strong with 72% in Tier 1 and 28% in Tier 2. Solvency Capital Requirement The Group s SCR allocation by risk type, based upon the undiversified capital requirement, can be seen below: 1H 2018 FY 2017 Underwriting risk 72% 75% Market risk 17% 15% Operational risk 8% 8% Credit risk 3% 2% The main risk driver is underwriting, consisting of premium, reserve and catastrophe risk, reflecting the capital requirements of the core business activities for the Group. The movement between Underwriting risk and Market risk reflects the investment of committed funds within the Group s investment portfolio towards its strategic asset allocation. esure Group plc 2018 Interim Results 12
Dividend Policy The Group s dividend policy is to target a base dividend of 50% of profit after tax and enhance the base dividend with a further special dividend, if the Group has excess capital and distributable reserves. In determining the level of special dividend at the interim and final stage the Board will consider a number of factors which include but are not limited to: the level of available distributable reserves; opportunities for growth; potential strategic opportunities; the outlook for future capital generation; and headroom required to absorb adverse capital events. The Board remains committed to returning excess capital to shareholders where it does not believe it can utilise the retained capital for further opportunities to enhance shareholder value. The interim dividend is typically paid in October of the relevant financial year and the final dividend in May of the following financial year, in the approximate proportions of one-third and two-thirds, respectively. esure Group plc, the parent company of the Group, is a non-trading holding company that derives its profits from dividends paid by its subsidiary companies. The Board reviews the level of distributable reserves at least bi-annually, to align with the proposed interim and final dividend declaration dates, and aims to maintain distributable reserves that provide sufficient cover for these dividends. Outlook The Group remains well placed to deliver profitable growth in 2018 and expects to deliver a combined operating ratio in the region of 98-99%, assuming normal weather for the remainder of the year. The Group will remain disciplined in its rating actions as it targets 3 million in-force policies by 2020. esure Group plc 2018 Interim Results 13
Condensed consolidated statement of comprehensive income Reviewed Reviewed Audited 6 months ended 6 months ended Year ended 30 June 2018 30 June 2017 31 Dec 2017 Notes m m m Gross written premiums 440.3 393.3 820.2 Gross earned premiums 419.8 341.7 734.0 Earned premiums, ceded to reinsurers (38.0) (25.0) (56.2) Earned premiums, net of reinsurance 381.8 316.7 677.8 Investment return and instalment interest 30.7 27.7 61.5 Other income 5 23.4 19.9 42.0 Total income 435.9 364.3 781.3 Claims incurred and claims handling expenses (305.4) (272.3) (592.5) Claims incurred recoverable from reinsurers (1.5) 36.0 77.8 Claims incurred, net of reinsurance 12 (306.9) (236.3) (514.7) Insurance expenses (78.5) (69.6) (140.5) Other operating expenses (10.1) (9.0) (18.8) Total expenses (395.5) (314.9) (674.0) Finance costs (4.3) (4.3) (8.7) Profit before tax 36.1 45.1 98.6 Taxation expense 8 (5.3) (8.6) (18.2) Profit attributable to the owners of the parent 30.8 36.5 80.4 Other comprehensive income Items that will not be reclassified to profit or loss: Revaluation of land and buildings - - 0.8 Tax relating to items that will not be reclassified - - 0.0 - - 0.8 Items that are or may be reclassified to profit or loss: Available-for-sale financial assets - change in fair value (2.4) 0.5 1.5 Tax relating to items that are reclassified 0.4 0.1 (0.1) (2.0) 0.6 1.4 Total comprehensive income for the period attributable to owners of the parent 28.8 37.1 82.6 Earnings per share (pence per share) - ordinary shares, basic 7 7.4 8.7 19.2 - ordinary shares, diluted 7 7.3 8.6 19.0 The notes on pages 16 to 34 form part of these financial statements. esure Group plc 2018 Interim Results 14
Condensed consolidated statement of financial position Reviewed Reviewed Audited As at As at As at 30 June 2018 30 June 2017 31 Dec 2017 Notes m m m Assets Intangible assets 9 21.2 13.6 16.6 Deferred acquisition costs 47.0 42.5 44.9 Property, plant and equipment 10 28.0 30.3 29.3 Financial investments 11 955.3 878.2 929.3 Reinsurance assets 12 363.2 322.5 370.2 Insurance and other receivables 334.0 277.5 307.0 Cash and cash equivalents 11 44.2 35.4 46.6 Total assets 1,792.9 1,600.0 1,743.9 Equity and liabilities Share capital 0.3 0.3 0.3 Share premium account 45.8 45.5 45.8 Capital redemption reserve 44.9 44.9 44.9 Other reserves 3.1 3.5 5.1 Retained earnings 194.2 173.6 201.9 Total equity 288.3 267.8 298.0 Liabilities Insurance contract liabilities 12 1,252.5 1,098.8 1,214.5 Borrowings 11 123.2 122.9 123.1 Insurance and other payables 115.0 98.7 96.7 Deferred tax liabilities 0.2 1.6 0.9 Derivative financial liabilities 11 7.9 0.9 0.2 Current tax liabilities 5.8 9.3 10.5 Total liabilities 1,504.6 1,332.2 1,445.9 Total equity and liabilities 1,792.9 1,600.0 1,743.9 The notes on pages 16 to 34 form part of these financial statements. Registered number: 07064312 esure Group plc 2018 Interim Results 15
Condensed consolidated statement of changes in equity Share premium account Capital redemption reserve Share capital Other reserves Retained earnings Total equity Notes m m m m m m 6 months ended 30 June 2018 At 1 January 2018 0.3 45.8 44.9 5.1 201.9 298.0 Profit for the year - - - - 30.8 30.8 Other comprehensive income - - - (2.0) - (2.0) Total comprehensive income - - - (2.0) 30.8 28.8 Transactions with owners Issue of share capital 0.0 0.0 - - - 0.0 Share-based payments - - - - 0.9 0.9 Deferred tax on share-based payments - - - - (0.1) (0.1) Dividends 6 - - - - (39.3) (39.3) Total transactions with owners 0.0 0.0 - - (38.5) (38.5) At 30 June 2018 0.3 45.8 44.9 3.1 194.2 288.3 6 months ended 30 June 2017 At 1 January 2017 0.3 45.4 44.9 2.9 178.0 271.5 Profit for the year - - - - 36.5 36.5 Other comprehensive income - - - 0.6-0.6 Total comprehensive income - - - 0.6 36.5 37.1 Transactions with owners Issue of share capital 0.0 0.1 - - - 0.1 Share-based payments - - - - 2.3 2.3 Deferred tax on share-based payments - - - - 0.7 0.7 Dividends 6 - - - - (43.9) (43.9) Total transactions with owners 0.0 0.1 - - (40.9) (40.8) At 30 June 2017 0.3 45.5 44.9 3.5 173.6 267.8 Year ended 31 December 2017 At 1 January 2017 0.3 45.4 44.9 2.9 178.0 271.5 Profit for the year - - - - 80.4 80.4 Other comprehensive income - - - 2.2-2.2 Total comprehensive income - - - 2.2 80.4 82.6 Transactions with owners Issue of share capital 0.0 0.4 - - - 0.4 Share-based payments - - - - 3.5 3.5 Deferred tax on share-based payments - - - - 1.0 1.0 Dividends 6 - - - - (61.0) (61.0) Total transactions with owners 0.0 0.4 - - (56.5) (56.1) At 31 December 2017 0.3 45.8 44.9 5.1 201.9 298.0 The notes on pages 16 to 34 form part of these financial statements. esure Group plc 2018 Interim Results 16
Condensed consolidated statement of cash flows Reviewed Reviewed Audited 6 months ended 30 June 6 months ended 30 June Year ended 31 Dec 2017 2018 2017 Cash flows from operating activities Notes m m m Profit after tax for the period 30.8 36.5 80.4 Adjustments to reconcile profit after tax to net cash flows: - Finance costs 4.3 4.3 8.7 - Depreciation and revaluation of property, plant and equipment 10 2.5 2.4 4.8 - Amortisation of intangible assets 9 2.8 2.3 4.6 - Share-based payments 0.9 2.3 3.5 - Taxation expense 5.3 8.6 18.2 - Total investment return (3.3) (7.8) (13.0) - Instalment interest (27.4) (21.8) (48.5) - Loss on the disposal of property, plant and equipment 0.4-0.2 Operating cash flows before movements in working capital, tax and interest paid 16.3 26.8 58.9 Sales of financial investments 399.9 436.5 707.4 Purchase of financial investments (423.1) (475.5) (792.7) Interest, rent and dividends received less investment management expenses on financial investments 3.8 7.1 7.9 Instalment interest received 29.7 25.9 53.3 Changes in working capital: - Increase in insurance liabilities including reinsurance assets, unearned premium reserves and deferred acquisition costs 42.9 61.0 126.6 - Increase in insurance and other receivables (26.2) (32.8) (61.9) - Increase in trade and other payables including insurance payables 17.1 18.5 15.3 Taxation paid (10.2) (6.2) (15.3) Net cash generated from operating activities 50.2 61.3 99.5 Cash flows from investing activities Purchase of property, plant and equipment, and 9,10 (9.0) (3.4) (9.4) software Net cash used in investing activities (9.0) (3.4) (9.4) Cash flows used in financing activities Proceeds on issue of ordinary shares 0.0 0.1 0.4 Interest paid on loans (4.3) (4.2) (8.4) Dividends paid 6 (39.3) (43.9) (61.0) Net cash used in financing activities (43.6) (48.0) (69.0) Net (decrease)/ increase in cash and cash equivalents (2.4) 9.9 21.1 Cash and cash equivalents at the beginning of the year 46.6 25.5 25.5 Cash and cash equivalents at the end of the period 44.2 35.4 46.6 The notes on pages 16 to 34 form part of these financial statements. esure Group plc 2018 Interim Results 17
Notes to the financial statements For the six months ended 30 June 2018 1. General information esure Group plc is a company incorporated in England and Wales. Its registered office is The Observatory, Reigate, Surrey, RH2 0SG. The nature of the Group's operations is the writing of general insurance for private cars and homes. The Company's principal activity is that of a holding company. All of the Company's subsidiaries are located in the United Kingdom, except for esure S.L.U., which is incorporated in Spain. 2. Accounting policies Basis of preparation These condensed consolidated interim financial statements present the Group s financial information for the six months ended 30 June 2018 and have been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the European Union (EU). They do not include all of the information required for full annual financial statements, and should be read in conjunction with the consolidated financial statements of the Group for the year ended 31 December 2017 which are prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the EU. These condensed consolidated interim financial statements have been presented in Sterling and rounded to the nearest hundred thousand. Throughout these condensed consolidated financial statements any amounts which are less than 0.05m are shown by 0.0, whereas a dash (-) represents that no balance exists. These condensed consolidated interim financial statements have been prepared on a going concern basis. The Directors have assessed the Group s prospects and viability for the next 12 months and beyond, including cash flow forecasts and regulatory capital surpluses. Based on this robust assessment, the Directors confirm that they have a reasonable expectation that the Group has adequate resources to continue in operational existence for at least the next 12 months from the date of this report. New and amended accounting standards As required by the FCA s Disclosure and Transparency Rules, the condensed set of financial statements have been prepared applying the accounting policies and presentation that were applied in the preparation of the Group s published consolidated financial statements for the year ended December 2017, with the exception of: Applying IFRS 9 Financial Instruments ( IFRS 9 ) with IFRS 4 Insurance Contracts ( IFRS 4 ); and IFRS 15 Revenue from Contracts with Customers. Applying IFRS 9 with IFRS 4 The Group has not previously applied any version of IFRS 9 and its predominant activity is issuing contracts within the scope of IFRS 4. It is therefore eligible to and will be applying the temporary exemption from applying IFRS 9. The Group has determined that its activities are predominantly connected with insurance as both the carrying amount of its liabilities arising from contracts within the scope of IFRS 4 is significant compared to the total carrying amount of all its liabilities and the percentage of the total carrying amount of its liabilities connected with insurance relative to the total carrying amount of all its liabilities is greater than 90%. Revenue from Contracts with Customers IFRS 15 became effective on 1 January 2018. The Group has reviewed the treatment of all income streams under the new standard and the impact on the Group is immaterial. esure Group plc 2018 Interim Results 18
Notes to the financial statements For the six months ended 30 June 2018 2. Accounting policies (continued) Basis of preparation (continued) The financial information contained in these condensed consolidated interim financial statements does not constitute statutory accounts of esure Group plc within the meaning of Section 435 of the Companies Act 2006. Statutory accounts for esure Group plc for the year ended 31 December 2017 have been delivered to the Registrar of Companies. The auditor has reported on the accounts, their report: (i) was unqualified; (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report; and (iii) did not constitute a statement under Section 498 (2) or (3) of the Companies Act 2006. 3. Critical accounting judgements and estimates The Group s 2017 Annual Report and Accounts provide details of significant judgements and estimates used in the application of the Group s accounting policies. There have been no significant changes to the judgements and estimates during the interim period. Key sources of estimation uncertainty and critical judgements in applying the Group's accounting policies Insurance contract liabilities Estimates have to be made both for the expected ultimate cost of claims reported at the reporting date and for the expected ultimate cost of claims incurred but not reported ('IBNR') at the reporting date. It can take a significant period of time before ultimate claims cost can be established with certainty for some types of claims. The ultimate cost of outstanding claims is estimated by carrying out standard actuarial projections in line with the Institute and Faculty of Actuaries Technical Actuarial Standards. These techniques use past claims information and development patterns of these claims to project the expected future claims cost both for notified and non-notified claims. Similar judgements, estimates and assumptions are employed in the assessment of adequacy of provisions for unearned premium and hence whether there is a requirement for an unexpired risk provision. Please refer to note 12 for additional details. 4. Segmental information The Group makes decisions on customer acquisition and retention based on contribution. In addition to the underwriting contribution from Motor and Home, a diversified suite of additional insurance products and services provide opportunities to deliver enhanced customer contributions. Operating segments The Group has two operating segments as described below. These segments are also the Group's reportable segments and represent the manner in which the business is regularly reported to the Group's executive and Board of Directors. Motor underwriting This segment incorporates the revenues and expenses attributable to the Group's Motor insurance underwriting activities inclusive of additional insurance products underwritten by the Group and related non-underwritten additional services. Investment income is allocated to the segment on the basis of premium income. esure Group plc 2018 Interim Results 19
Notes to the financial statements For the six months ended 30 June 2018 4. Segmental information (continued) Home underwriting This segment incorporates the revenues and expenses attributable to the Group's Home insurance underwriting activities and related non-underwritten additional services. Investment income is allocated to the segment on the basis of premium income. Segmental revenues, expenses and other information An analysis of the Group's results by reportable segment is shown below: Reviewed Six months ended 30 June 2018 Motor Home Total m m m Gross written premiums 398.4 41.9 440.3 Earned premiums, net of reinsurance 342.8 39.0 381.8 Investment income 3.0 0.3 3.3 Instalment interest income 24.8 2.6 27.4 Other income 21.3 2.1 23.4 Total income 391.9 44.0 435.9 Net incurred claims (259.4) (34.2) (293.6) Claims handling costs (11.9) (1.4) (13.3) Insurance expenses (63.3) (15.2) (78.5) Other operating expenses (7.8) (0.5) (8.3) Total expenses (342.4) (51.3) (393.7) Trading profit 49.5 (7.3) 42.2 Amortisation of acquired intangibles (0.7) Non-trading costs (1.1) Finance costs (4.3) Profit before taxation 36.1 Tax expense (5.3) Profit after taxation 30.8 Net expense ratio 21.9% 42.6% 24.0% Net loss ratio 75.7% 87.5% 76.9% Combined operating ratio 97.6% 130.1% 100.9% esure Group plc 2018 Interim Results 20
Notes to the financial statements For the six months ended 30 June 2018 4. Segmental information (continued) Segmental revenues, expenses and other information (continued) Reviewed Six months ended 30 June 2017 Motor Home Total m m m Gross written premiums 351.3 42.0 393.3 Earned premiums, net of reinsurance 275.5 41.2 316.7 Investment income 5.3 0.6 5.9 Instalment interest income 19.2 2.6 21.8 Other income 17.1 2.8 19.9 Total income 317.1 47.2 364.3 Net incurred claims (200.1) (25.4) (225.5) Claims handling costs (9.3) (1.5) (10.8) Insurance expenses (53.3) (16.3) (69.6) Other operating expenses (6.3) (0.6) (6.9) Total expenses (269.0) (43.8) (312.8) Trading profit 48.1 3.4 51.5 Amortisation of acquired intangibles (1.1) Non-trading costs (1.0) Finance costs (4.3) Profit before taxation 45.1 Tax expense (8.6) Profit after taxation 36.5 Net expense ratio 22.7% 43.3% 25.4% Net loss ratio 72.6% 61.6% 71.2% Combined operating ratio 95.3% 104.9% 96.6% esure Group plc 2018 Interim Results 21
Notes to the financial statements For the six months ended 30 June 2018 4. Segmental information (continued) Segmental revenues, expenses and other information (continued) Audited Year ended 31 December 2017 Motor Home Total m m m Gross written premiums 734.3 85.9 820.2 Earned premiums, net of reinsurance 596.3 81.5 677.8 Investment income 12.0 1.0 13.0 Instalment interest income 43.3 5.2 48.5 Other income 36.3 5.7 42.0 Total income 687.9 93.4 781.3 Net incurred claims (436.5) (53.5) (490.0) Claims handling costs (21.5) (3.2) (24.7) Insurance expenses (113.4) (27.1) (140.5) Other operating expenses (13.8) (1.0) (14.8) Total expenses (585.2) (84.8) (670.0) Trading profit 102.7 8.6 111.3 Amortisation of acquired intangibles (2.2) Non-trading costs (1.8) Finance costs (8.7) Profit before tax 98.6 Tax expense (18.2) Profit after tax 80.4 Net expense ratio 22.6% 37.2% 24.4% Net loss ratio 73.2% 65.6% 72.3% Combined operating ratio 95.8% 102.8% 96.7% 5. Other income Reviewed Reviewed Audited 6 months ended 6 months ended Year ended 30 June 2018 30 June 2017 31 Dec 2017 m m m Brokerage and commission income 6.8 6.0 13.1 Claims and related income 4.7 3.8 7.8 11.5 9.8 20.9 Policy administration fees and other income 11.9 10.1 21.1 Other income 23.4 19.9 42.0 esure Group plc 2018 Interim Results 22
Notes to the financial statements For the six months ended 30 June 2018 6. Dividends During the six months ended 30 June 2018, a dividend per share of 9.4p ( 39.3m) was declared by the Board of Directors as a final dividend for the year ended 31 December 2017. The Board of Directors paid a 2017 interim dividend per share of 4.1p ( 17.1m). 7. Earnings per share Basic Basic earnings per share is calculated by dividing the earnings attributable to the owners of the Group and the weighted average of Ordinary Shares in issue during the period, excluding Ordinary Shares held as employee trust shares. A calculation is also shown based on the earnings from continuing operations attributable to the owners of the Group. Diluted Diluted earnings per share is calculated by dividing the earnings attributable to the owners of the Group by the weighted average of Ordinary Shares in issue during the period adjusted for any dilutive potential Ordinary Shares. A calculation is also shown based on the earnings from continuing operations attributable to the owners of the Group. The difference between the basic and diluted weighted average number of shares outstanding during the year, being 5,428,444 (31 December 2017: 5,586,240; 30 June 2017: 5,428,444), relates to the dilutive potential of the share-based payment arrangements. Reviewed Reviewed Audited 6 months ended 6 months ended Year ended 30 June 2018 30 June 2017 31 Dec 2017 m m m Profit after taxation 30.8 36.5 80.4 Weighted average number of Ordinary Shares (million) - basic Unadjusted earnings per share - basic (pence) Weighted average number of Ordinary Shares (million) - diluted Unadjusted earnings per share - diluted (pence) 418.7 417.9 418.0 7.4 8.7 19.2 424.5 423.4 423.6 7.3 8.6 19.0 esure Group plc 2018 Interim Results 23
Notes to the financial statements For the six months ended 30 June 2018 8. Taxation The Group incurred an effective tax rate of 14.7% in the six months ended 30 June 2018 (30 June 2017: 19.1%; 31 December 2017: 18.5%) on continuing operations. The prevailing UK tax rate at 30 June 2018 is 19%. 9. Intangible assets Reviewed Acquired Customer Software brands relationships Total m m m m Cost As at 1 January 2017 13.8 24.2 11.3 49.3 Additions in the year 8.7 - - 8.7 Disposals in the year (0.7) - - (0.7) As at 31 December 2017 21.8 24.2 11.3 57.3 Additions in the period 7.8 - - 7.8 Disposals in the period (0.6) - - (0.6) As at 30 June 2018 29.0 24.2 11.3 64.5 Accumulated amortisation and impairment As at 1 January 2017 5.7 19.6 11.3 36.6 Amortisation for the year 2.4 2.2-4.6 Disposals in the year (0.5) - - (0.5) As at 31 December 2017 7.6 21.8 11.3 40.7 Amortisation for the period 2.1 0.7-2.8 Disposals in the period (0.2) - - (0.2) As at 30 June 2018 9.5 22.5 11.3 43.3 Net book value As at 31 December 2017 14.2 2.4-16.6 As at 30 June 2018 19.5 1.7-21.2 esure Group plc 2018 Interim Results 24