2014 Interim Results Presentation 4 August 2014 Agenda G R O U P - - PowerPoint PPT Presentation

G R O U P

2014 Interim Results Presentation

4 August 2014

G R O U P

Welcome & overview Stuart Vann, Chief Executive Officer Financial results Darren Ogden, Chief Finance Officer Business update & outlook Stuart Vann, Chief Executive Officer Questions & answers

Agenda

Slide 1

G R O U P

Gross written premiums £260.4m

(1.9)%

In-force policies 1.974m

+2.1%

Earnings per share 10.9 pence

+2.7%

Dividend per share 5.1 pence

2014: Headlines

Slide 2

Financial Operational & Strategic

LASPO Reforms & Claims Rating & Cycle Underwriting Initiatives Operational Initiatives

G R O U P

Financial results

Darren Ogden, Chief Finance Officer

Slide 3

G R O U P

Group financials

Slide 4

2014 HY 2013 HY

Mvt

2013 FY Gross written premiums (£m) 260.4 265.4

(1.9)%

535.8 Trading profit (£m) 61.0 65.2

(6.4)%

130.6 Profit before tax (£m) 57.1 56.9

0.4%

118.4 Profit after tax (£m) 45.5 44.3

2.7%

93.2 Combined operating ratio (%) 90.9 89.6

(1.3)ppts

89.7 Loss ratio (%) 66.4 65.7

(0.7)ppts

65.9 Expense ratio (%) 24.5 23.9

(0.6)ppts

23.8 Investment return (%) 1.2 1.1

0.1ppts

2.2 In-force policies (“IFPs”) (millions) 1.974 1.855

2.1%*

1.933 Earnings per share

(pence)

10.9 10.6

2.7%**

22.4 Dividend per share

(pence)

5.1 2.5

N/A

15.8 Key points

• Gross written premiums 1.9% lower

driven by a reduction in both Motor and Home

• Trading profit £4.2m lower due to £3m

exceptional weather costs in Q1 2014 and reduction in share of JV profits

• Profit after tax increased 2.7% through

lower non-trading and finance costs, aided by reduction in tax rate

• Dividend of 5.1 pence per share
• Reserves remain in excess of 15%

above our actuarial best estimate

* Movement calculated against the 2013 full year position ** The earnings per share movement has been calculated using the earnings per share correct to two decimal places

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Trading profit

Slide 5

HY 2014

Income streams

Underwriting

£22.5m 37%

Non-underwritten ASR

£25.5m 42%

Investment income

£7.6m

12% Share of JV (Gocompare)

£5.4m

9%

£17.1m

HY ’13 £18.3m

£5.4m

HY ‘13 £6.6m

£25.5m

HY ‘13 £26.1m

£7.6m

HY ‘13 £7.5m

£5.4m

HY ‘13 £6.7m

Motor underwriting Home underwriting Non-underwritten ASR Investment Income Share of JV (Gocompare)

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Motor

Slide 6

• Gross written premiums down 1.8% reflecting

market conditions

• Modest growth in in-force policies
• Trading profit down £1.2m – largely driven by

Q1 weather impact of £1m

Key points 2014 HY 2013 HY

Mvt

2013 FY Gross written premiums (£m) 217.9 221.9

(1.8)%

446.5 Trading profit (£m) 17.1 18.3

(6.6)%

41.0 Loss ratio (%) 68.3 67.6

(0.7)ppts

67.2 Expense ratio (%) 23.4 23.2

(0.2)ppts

22.7 Combined operating ratio (%) 91.7 90.8

(0.9)ppts

89.9 In-force policies (000s) 1,421 1,328

2.6%*

1,385 ASR per IFP (£) 67.4 74.5

(9.5)%

70.5 excluding Claims Income (£) 63.3 64.3

(1.6)%

64.3 In-force policies (‘000s) 1,221 1,328 1,421 1,255 1,385 2012 2013 2014 HY FY

* Movement calculated against the 2013 full year position

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• Prior accident year reserves continue to develop favourably
• £1m of exceptional weather claims in Q1 2014
• Increase in current year loss ratio as claims benefits from LASPO are not sufficient to offset rate

reductions

• We continue to take a conservative view with regards to LASPO and set reserves for the 2014 accident

year on a prudent basis.

Motor loss ratio

Slide 7

68.3% 1.8% (0.5)% (2.4)% 67.2%

2013 Loss Ratio PY movements Exceptional weather Current year HY 2014 Loss Ratio Motor

G R O U P

Home

Slide 8

• Gross written premiums down 2.3% reflecting

market conditions

• Trading profit down £1.2m due to exceptional

weather costs of £2m in Q1 2014 – at the lower end of our previous guidance

• Excellent underlying loss ratio driven by good

risk selection

Key points HY 2014 HY 2013

Mvt

FY 2013 Gross written premiums (£m) 42.5 43.5

(2.3)%

89.3 Trading profit (£m) 5.4 6.6

(18.2)%

9.6 Loss ratio (%) 56.9 56.1

(0.8)ppts

59.3 Expense ratio (%) 30.0 27.5

(2.5)ppts

28.9 Combined operating ratio (%) 86.9 83.6

(3.3)ppts

88.2 In-force policies (000s) 553 527

0.9%*

548 ASR per IFP (£) 18.8 20.8

(9.6)%

19.2 In-force policies (‘000s) 480 527 553 504 548 2012 2013 2014 HY FY

* Movement calculated against the 2013 full year position

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Home loss ratio

Slide 9

• Exceptional weather costs of £2m in Q1 2014
• Continue to see favourable development of prior accident year reserves – strong favourable

development on Q4 2013 weather events

• Current year benefiting from the Group’s approach to risk selection

56.9% 3.6% 3.6% (4.8)% 59.3%

2013 Loss Ratio PY movements Exceptional weather Current year HY 2014 Loss Ratio Home

G R O U P

£40 £60 £80 HY 2013 2013 HY 2014 ASR per IFP ASR per IFP (ex Claims Income) £15 £20 £25 HY 2013 2013 HY 2014 ASR per IFP

HY 2013 HY 2014

Non-underwritten additional insurance products Underwritten additional insurance products Claims Income

• Additional services revenue up 5.7%,

excluding Claims Income, broadly in line with policy growth

• Motor ASR per IFP, excluding Claims Income,

down £1 in line with guidance of £1 to £2 reduction for the full year

• Home ASR per IFP down, as expected, through

strategic pricing to aid core customer conversion and retention

Key points

Additional services revenues

Slide 10

Motor ASR per IFP Home ASR per IFP Additional services revenues £45.4m

ex-Claims Income

£48.0m

ex-Claims Income

£51.0m £51.0m

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Investment returns

Slide 11

• Investment return of 1.2% in first half of 2014

(HY 2013: 1.1%)

• Continue to seek reasonable yield with

conservative risk appetite

Return on invested funds Gocompare(1) Investment income

• Share of trading profit from joint venture down

19.4% to £5.4m (HY 2013: £6.7m)

• Lower share of profit due to increased spend
• n advertising campaign and media
• Expect 2H 2014 to be up on the first half of the

year

Share of Gocompare trading profit

Note: See appendix I for footnotes

8.3 8.1

• 1.1
• 1.4

0.3 0.9

• 2.0

0.0 2.0 4.0 6.0 8.0 10.0

HY 2013 HY 2014

£m

Interest and other income Investment charges Net gains and losses on investments

£6.7m £5.4m HY 2013 HY 2014

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Regulatory capital & dividend

Slide 12

Key points 2013

• Interim dividend of 5.1 pence per share represents a payout ratio of 70% of profit after tax

(50% base dividend and 20% special dividend)

• Interim special dividend set on a conservative basis – as per guidance given at full year preliminary

results announcement

• Retained capital provides capacity to fund prospective premium growth
• The Group continues to hold a capital buffer, above that required under its ICG, which it believes will

set it in good stead as it heads towards Solvency II

IGD coverage HY 2014

369% 308% Coverage Post dividend 391% 366% Coverage Post dividend

Dividend Calculation HY 2014

HY 2014 Profit after tax (a) £45.5m Payout Ratio – Base (b) 50% Payout Ratio – Special (c) 20% Payout ratio (b+c) = (d) 70% Adjustment for interim (e) 67% Interim dividend (a)*(d)*(e) £21.3m Interim dividend per share 5.1p Base dividend per share 3.6p Special dividend per share 1.5p

G R O U P

Business update & outlook

Stuart Vann, Chief Executive Officer

Slide 13

G R O U P

What has been happening during H1 2014.....

Slide 14

Underwriting & Operational initiatives Regulation Cycle LASPO & Claims Rating

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esure’s motor rating experience and premiums

Slide 15

Mix Rates AWP

8% 2% 6%

1H 2013 v 1H 2014

• Average written premium down 6%

compared to 1H 2013

• Targeted rate increases in Q2...
• ...resulting in a drop in the level of new

business conversion, with in-force policy growth lower in Q2 compared to Q1

Quarterly Motor gross written premiums Motor experience

2012 2013 2014

Q1 Q2 Q3 Q4

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£1,000 £1,400 £1,800 £2,200 £2,600 £3,000

Jan-12 Jan-13 Jan-14

LASPO & Claims – Market perspective

Slide 16

Market frequency

• Frequency has declined around 8% year-on-

year, without adjusting for the increase in the Claims Portal limit from £10k to £25k which came into effect in July 2013

• Encouraging frequency benefit from LASPO

Reforms to date

• No. of claims notification forms created and sent to a compensator using MoJ claims portal1

Note: See appendix I for footnotes Source: Ministry of Justice Claims Portal MI

Market general damages Period of stability Increase in general damages

• Upward trend in general damages broadly in

line with LASPO uplift and Judicial College Guidelines (“JCG”) increases

• Important to continuously monitor lawyer

responses to the LASPO Reforms

Note: See appendix I for footnotes Source: Ministry of Justice Claims Portal MI

Average General Damages Offered after Contribution

10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000 100,000

Jun-10 Jun-11 Jun-12 Jun-13 Jun-14

G R O U P

May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14

LASPO & Claims – esure view

Slide 17

esure view

• Consolidation of law firms
• Tactical changes by lawyers resulting in new

trends

• Remain cautious on reserving small bodily

injury claims

% of personal injury claims settled post LASPO (as at 30 June 2014)

Settlements

c75%

Market rates

LASPO benefits

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The UK Motor Market & Cycle

Slide 18

Pricing Index FY 2012 FY 2013 HY 2014 Confused.com/ Towers Watson(1) (12.7%) (12.5)% (10.1)% AA(2) (6.5)% (14.1)% (11.4)% ABI(3) N/A (9.1)% N/A Market rating & performance Market rating Market cycle indicators

Pricing weakens Underlying results deteriorate Reserve surpluses depleted Higher pricing Time to earn through

M A R K E T

• 20%

0% 20% 40% 60% 90% 100% 110% 120% 130% 2007 2008 2009 2010 2011 2012 2013

Reported Net Combined Operating Ratio (lhs) confused.com/Towers Watson Pricing Index (rhs)

EY1 predict the market COR for 2014 will be 109.3%

Note: See appendix I for footnotes Source: EY Motor Seminar Market Results Presentation

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Regulation

Slide 19

Competition and Markets Authority (“CMA”) Other

The key measures outlined by the CMA:

• Better information for consumers
• FCA to review how insurers inform consumers about additional insurance products
• Ban on “Wide Most Favoured Nation” clauses

The CMA have initiated further consultation on Remedy 1C concerning the proposed rate cap on temporary replacement vehicles Other personal injury related regulatory considerations:

• Ban on inducements to claim
• Exaggerated claims
• Approach to medical reports

G R O U P

Underwriting initiatives

Slide 20

What’s next? Continuous

• Number of underwriting initiatives to

evaluate quote footprint studying areas where we currently have no historical underwriting presence

• As with segment re-entry, this will be on a

gradual basis; testing and learning about segments over an 18 month to 3 year period

• Many of our peers quote 60-80% of the

market

• Retention rates maintained at around 80% in both Motor and Home
• Sheilas’ Wheels continues to be a positive for the Group with the portfolio over 90% female
• Segment re-entry is ongoing with current performance continuing to provide a positive

contribution to the Group Current estimated quotability c40%

“Test & Learn” Initiatives

Quotability

Source: Management information

Increased quotability

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Operational initiatives

Slide 21

IMe Law

• Alternative business structure licence

approved and likely to go live in Q3

• Partnership with Irwin Mitchell
• Further enhancement to our customer

proposition

Customer Reinsurance Information Technology

• Customer satisfaction and service at the heart
• f everything we do
• Enhancing our “customer culture” focus within

the Group

• “Voice of the customer” programme launched

to improve journey and feedback loops

• Early renegotiation of Capgemini contract

resulting in an IT estate refresh

• Capitalisation of assets in the region of

£20-25m by December 2015

• Depreciation to start in December 2015
• Efficiency and effectiveness benefits expected
• Conservative approach to reinsurance remains
• Renewed Motor programme on 1 April 2014

with a deductible of £1m

• Programme selected based on economic and

capital calculations

• Renewed Home programme on 1 July 2014

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Summary

• Solid performance in a tough market
• Reserves remain in excess of 15% above our actuarial best estimate and the capital position

remains strong

• Good progress on underwriting initiatives – well positioned for turn in market

Outlook

• Highly competitive rating environment to continue for the remainder of the year in both Motor &

Home

• Further reduction in gross written premiums for the full year
• Continue to expect that the UK motor market will not turn until Q1 2015 at the earliest
• Combined operating ratio to be broadly similar to the half year position, assuming normal

weather for the remainder of the year

• Poised for growth when market conditions permit

Outlook & summary

Slide 22

G R O U P

Slide 23

Thank you Questions & Answers

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Appendix

Slide 24

G R O U P

Regulation

Slide 25

Competition and Markets Authority (“CMA”)

• Assuming rate reductions in 2014 reverse in 2015 so rates are neutral compared to end of 2013
• Earning patterns show it would take until mid 2016 for earned premium to recover to 2013 level
• Lag in earnings will impact profitability

Theory of Harm (“ToH”) Objective Remedy esure view ToH1 – Remedy A

• Measures to improve

claimants’ understanding of their legal entitlements To give consumers better information of their legal rights at policy inception and point of claim Provide a statement of consumer rights and responses to frequently asked questions:

• with the annual policy

documentation; and

• at the first notification of loss

following an accident. In addition, responses to frequently asked questions should be available

• n the insurer’s website

Support the finding

ToH1 – Remedy C

• Measures to control the cost
• f providing replacement

vehicles to non-fault claimants To reduce the cost of replacement vehicle provision to non-fault claimants

• The CMA have initiated further

consultation on Remedy 1C Support measures in reducing the cost of replacement vehicles

ToH1 – Remedy F

• Improved mitigation in

relation to the provision of replacement vehicles to non- fault claimants To reduce frictional costs incurred by insurers and Credit Hire Operators (“CHOs”), when there is a dispute over the need of replacement vehicle CHOs and the non-fault customer must sign a ‘mitigation declaration’ Support the finding, however marginal impact is expected

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Regulation (cont.)

Slide 26

Competition and Markets Authority (“CMA”)

• Assuming rate reductions in 2014 reverse in 2015 so rates are neutral compared to end of 2013
• Earning patterns show it would take until mid 2016 for earned premium to recover to 2013 level
• Lag in earnings will impact profitability

Theory of Harm (“ToH”) Objective Remedy esure view ToH 4 – Remedy B

• transparent information

concerning ‘Protected No Claims Bonus’ (“PNCB”) To reduce information asymmetries between motor insurers and consumers when purchasing PNCB The following information is to be provided at the point of sale:

• the implied price of PNCB;
• the step-back procedures; and
• the average No Claims Bonus

(“NCB”) discount according to the number of NCB years Support the findings of this remedy

ToH 4 – Remedy A&C

• Provision of all add-on pricing

from private motor insurance (“PMI”) providers to price comparison websites (“PCWs”)

• Clearer description of add-ons

To reduce information asymmetries between motor insurers and consumers in relation to add-ons; and the point of sale advantage held by motor insurers when selling add-ons Recommendations to the FCA:

• Whether insurers and brokers

should be required to provide their prices for the add-ons they offer to PCWs

• Work with providers to improve

descriptions of PMI related add-

• ns

Support the findings of this remedy

ToH 5

• Price comparison websites

and Most Favoured Nation (“MFN”) clauses To strengthen rivalry over premiums offered on different PCWs “Wide” MFN clauses will be prohibited but there will be a carve

• ut to allow “narrow” MFNs’, where

insurers must charge a price equivalent to, or higher, directly on its own website Supportive of finding and no impact is expected from the remedy

G R O U P

19% 18% 20% 17% 38% 43% 23% 22%

2013 HY 2014 Government bonds FRN's Corporate bonds Covered / RMBS

Investment portfolio

Slide 27

• The Group deploys a conservative investment

strategy with the underlying objective of capital preservation

• Short duration of approximately one year with

84% of investments in ‘A’ rated and above

Key points Fixed income Credit rating Asset allocation £614.1m £596.9m

Note: Credit rating relates to investments bearing credit risk and cash and cash equivalents

79.9% 81.7% 16.6% 12.7% 3.6% 5.6%

2013 HY 2014

Fixed income Cash & liquidity funds Equities

34% 24% 26% 16%

AAA AA A BBB or below or not rated

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References

Slide 28

Slide 11 1. Gocompare – The Group holds a 50% shareholding in Gocompare.com Holdings Limited (“Gocompare”) Slide 16 1. Ministry of Justice Claims Portal – http://www.claimsportal.org.uk/en/about/executive-dashboard/ Slide 18 1. Ernst & Young “UK motor insurance results seminar: Tipping point?” held on 17 June 2014 Slide 28 1. Confused.com/Towers Watson Pricing Index published 9 July 2014 2. AA British Insurance Premium Index (“AA”) – Q2 2014 Average Private Comprehensive Motor Insurance Premium published 23 July 2014 3. Association of British Insurers (“ABI”) – Q4 2013 Average Private Comprehensive Motor Insurance Premium published 27 January 2014

G R O U P

The information contained in this presentation has not been independently verified and this presentation contains various forward-looking statements that reflect management’s current views with respect to future events and financial and

• perational performance. The words “growing”, “scope”, “platform”, “future”, “expected”, “estimated”, “accelerating”,

“expanding”, “continuing”, “potential” and “sustainable” and similar expressions or variations on such expressions identify certain of these forward-looking statements. Others can be identified from the context in which the statements are made. These forward-looking statements involve known and unknown risks, uncertainties, assumptions, estimates and other factors, which may be beyond esure Group plc’s (the “Group’s”) control and which may cause actual results or performance to differ materially from those expressed or implied from such forward-looking statements. All statements (including forward-looking statements) contained herein are made and reflect knowledge and information available as of the date of preparation of this presentation and the Group disclaims any obligation to update any forward-looking statements, whether as a result of new information, future events or results or otherwise. There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on forward-looking statements due to the inherent uncertainty therein. Nothing in this document should be construed as a profit forecast.

Slide 29

Disclaimer