esure Group plc Annual Report and Accounts for the year ended December 31 2016 Annual Report and Accounts for the year ended 31 December 2016 2016 Focused Controlled Scalable Who we are 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. Contents Strategic report page 01 Governance page 32 Financials page 74 Highlights 01 Board of Directors 32 Independent auditors report 74 Business overview 2016 02 Chairman’s letter 34 Consolidated statement Chairman’s statement 04 Leadership 36 of comprehensive income 77 How we create value 06 Effectiveness 38 Consolidated statement of Our strategy 08 Board Committees 40 financial position 78 Key performance indicators 10 Audit Committee 40 Consolidated statement Chief Executive Officer’s statement 12 Nomination Committee 44 of changes in equity 79 Operating Review 14 Risk Committee 45 Consolidated statement Finance Review 16 Remuneration Committee 46 of cash flows 80 Risk management 22 Directors’ Remuneration Policy 51 Notes to the financial statements 81 Principal risks 25 Directors’ Report 68 Parent Company statement Our people 28 Statement of Directors′ of financial position 122 Responsibilities 73 Parent Company statement of cash flows 123 Parent Company statement of changes in equity 124 Notes to the parent company financial statements 125 Corporate Information 128 Glossary of terms 129 Shareholder information 130 Strategic Report Governance Financials A year of strong growth in premiums, policies and profit Financial highlights Premiums and policies Profit Dividends Gross written premiums Trading profit from: Underlying profit after tax £655.0m Continuing operations £80.5m £84.6m In-force policies Discontinued operations Full year dividend (per share) 2.2m £24.5m 13.5p represents a payout ratio of 70% of underlying profit after tax Profit before tax from continuing operations £72.7m Trading profit from continuing operations, 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 trading profit from continuing operations of £84.6m (2015: £72.1m) includes Motor underwriting, Home underwriting, Investments and Non-underwritten additional services. Trading profit from discontinued operations of £24.5m (2015: £20.2m) is the profit generated from Gocompare.com up to demerger on 3 November 2016. Underlying profit after tax of £80.5m excludes a non-cash disposal gain of £213.6m on the Demerger of Gocompare.com; amortisation of acquired intangible assets of £10.4m; and £14.5m of fees associated with the Demerger of Gocompare.com. Reported profit after tax of £269.2m includes these items. For further information on the other alternative performance measures – please refer to the end of the report for definitions. Highlights • Premiums and profits up 19% from continuing operations • Strong growth in policies • Expansion of competitive quote footprint in Motor from c55% to c70–80% of the market • Evolution of life-time value customer contribution modelling • Enhanced counter fraud capabilities • Claims inflation mitigation strategies enhanced • High customer retention and satisfaction • Demerger of Gocompare.com esure Group plc Annual Report and Accounts for the year ended 31 December 2016 01 Business overview for 2016 from continuing operations Group Motor underwriting esure Group offers Home and Motor insurance Motor underwriting is esure Group’s largest product products under its esure and Sheilas’ Wheels brands line by in-force policies. Motor insurance policies are and has over two million in-force policies. sold through the Group’s esure and Sheilas’ Wheels brands and distributed through price comparison websites and direct to consumers. Gross written premiums Gross written premiums £655.0m £563.7m (2015: £550.3m) (2015: £461.0m) In-force policies In-force policies 2.174m 1.606m (2015: 2.001m) (2015: 1.435m) Trading profit Trading profit £84.6m £8.9m (2015: £72.1m) (2015: £6.7m) Read more about Trading profit after tax on page 18 Key brands Profit before tax £72.7m (2015: £60.9m) Read more about the Group Read more about Motor underwriting on pages 16–21 on pages 16–21 Contribution is the trading profit / (loss) generated from underwriting, non- underwritten additional services revenues and investments 02 esure Group plc Annual Report and Accounts for the year ended 31 December 2016 Strategic Report Governance Financials Home underwriting Additional services and investments Home underwriting is a significant product line In addition to underwriting returns, the Group derives with over half a million in-force policies. Home income from Non-underwritten additional services insurance policies are sold under the Group’s esure and targets a return on its investment activities. and Sheilas’ Wheels brands and distributed through price comparison websites and direct to consumers. Gross written premiums Total income from additional services £91.3m £106.5m (2015: £89.3m) (2015: £102.9m) In-force policies 0.568m (2015: 0.566m) Trading (loss) / profit Trading profit on non- Trading profit from underwritten additional investments £(2.4)m services (2015: £4.2m) £60.0m £18.1m (2015: £55.1m) (2015: £6.1m) Key brands Read more about Home underwriting on pages 16–21 esure Group plc Annual Report and Accounts for the year ended 31 December 2016 03 Chairman’s statement '2016 has been a significant and positive year for the Group. Premiums are ahead of expectations; Gocompare.com has been demerged allowing both businesses to thrive and reach their full potential; capital is at the top of our risk appetite; and we have once again paid a special dividend, demonstrating the Board's commitment to return excess capital to shareholders.' Introduction 2016 has been a significant and positive year for the Group as we continue to deliver value to all our stakeholders. We have exceeded our growth expectations for the year with gross written premiums up 19% to £655m through enhancements to our underwriting capabilities and by taking advantage of favourable market conditions in Motor; demerged Gocompare.com from the Group ('the Demerger') to allow both businesses to thrive and reach their full potential; and further strengthened our robust capital position providing us with the capital flexibility to continue our growth ambitions and deliver strong returns. Insurance We have always said that we will only grow when we believe it is profitable to do so and throughout 2016 the favourable rating environment in Motor allowed us to grow strongly, albeit the Home insurance market continued to be challenging. The management team remain focused in Sir Peter Wood / Chairman delivering the Group’s growth strategy through initiatives, such as footprint expansion, in a controlled manner and I believe they continue to make the right decisions in dynamic market conditions. We are encouraged that the Government continues to explore options to lower whiplash claims costs which in turn could lead to lower premiums for customers, although we are mindful of the recent change in the Ogden discount rate to minus 0.75% and the impact this could have on customer premiums across the market. Demerger of Gocompare.com On 3 November 2016, Gocompare.com demerged from the Group and listed on the London Stock Exchange. Since acquiring full control of Gocompare.com in early 2015 the Group successfully repositioned the business and strengthened its management team with the introduction of Matthew Crummack as chief executive officer in June 2016. The return of Gio Compario reinvigorated Gocompare.com’s marketing proposition; an expense review addressed the cost base; and focus was given to the many opportunities available to Gocompare.com to grow outside of its core markets. Both esure and Gocompare.com are now positioned to thrive and reach their full potential and we wish the new management team at Gocompare.com well for the future. 04 esure Group plc Annual Report and Accounts for the year ended 31 December 2016 Strategic Report Governance Financials Capital and dividends The Group’s capital coverage above its solvency capital requirement has always been appropriate for the business GOCOMPARE.COM that we are, and continue to be, a low risk personal lines insurer. As part of the Demerger, the Group received a dividend from Gocompare.com that further strengthened 2006 its robust capital position. The Group’s capital position is Founded by a team of insurance at the upper end of our risk appetite, after allowing for the comparison experts final dividend that is inclusive of a special element, and gives us the capital flexibility to pursue further profitable growth opportunities. 2007 Joint venture with esure alongside The Board has recommended a final dividend of 10.5 pence a start-up loan to fund marketing and growth per share, and in conjunction with the interim dividend of 3.0 pence per share, gives a full year dividend of 13.5 pence per share representing a payout ratio of 70% of underlying profit after tax. Since the Group became public in 2013, the Board 2009 has returned £240m to shareholders through dividends, Gocompare.com reports first profit underpinning the Board’s commitment to return excess of £12m. Gio Compario takes to the stage capital to shareholders. Board 2010 Once again the Board have demonstrated the value Start-up loan repaid and esure acquires stake that their wealth of experience and knowledge bring to our Group and I would like to thank them for their input throughout the year. We have benefitted from a year of relatively little change after Anne Richards left us in 2011–2014 February 2016 and I am delighted that Peter Shaw and Alan Highly profitable and cash-generative business with £54m paid in dividends Rubenstein joined the Board in March 2017, giving us further strength and depth.