Ecclesiastical Insurance Office plc Annual Report 2013

Plain-text annual report

Annual Report & Accounts 2013 Together we will be the most trusted and ethical specialist ﬁnancial services group, giving £50m to charity over three years. Table of Contents 2013 Highlights Who We Are What We Do Chairman’s Statement Group Chief Executive’s Review Our Business Model Our Strategy Key Performance Indicators Financial Performance Risk Management Corporate Responsibility Report Section 1/Introduction 5 6 7 8 Section 2/Strategic Report 12 16 19 26 30 34 38 Section 3/Corporate Governance Board of Directors Directors’ Report Corporate Governance - Board Governance - Group Finance and Investment Committee Report - Group Nominations Committee Report - Group Risk Committee Report - Group Audit Committee Report - Group Remuneration Report Independent Auditor’s Report 50 52 56 56 60 62 66 68 74 90 Section 4/Financial Statements Consolidated Statement of Proﬁt or Loss Consolidated and Parent Statement of Comprehensive Income Consolidated and Parent Statement of Changes in Equity Consolidated and Parent Statement of Financial Position Consolidated and Parent Statement of Cash Flows Notes to the Financial Statements 95 96 97 98 99 100 Section 5/Other Information Directors and Executive Management United Kingdom Regional Centres United Kingdom Business Division and International Branches Insurance Subsidiaries and Agencies Notice of Meeting 154 155 156 157 158 Ecclesiastical Insurance Ofﬁce plc 1 2 Ecclesiastical Insurance Ofﬁce plc Wellington Arch N O I T C E S Section 1/Introduction 2013 Highlights Who We Are What We Do Chairman’s Statement 5 6 7 8 3 Ecclesiastical Insurance Ofﬁce plcEcclesiastical is a specialist insurance, risk advisory and asset management group with a distinctive ethical positioning and a reputation for delivering excellent service. 4 Ecclesiastical Insurance Ofﬁce plc Section 1/2013 Highlights 2013 Highlights Finances Industry recognition Profit/(Loss) before Tax £m 2013 2012 2011 -8 38 Shareholders’ Funds £m 2013 2012 2011 456 436 Donations £m 2013 2012 2011 5.5 5.7 67 2013 2013 THE CLAIMS AWARDS WINNER Professionalism Community Top 10 UK Company Donor 494 11.7 Follow us on Twitter: @EcclesNews Connect with us on LinkedIn, Facebook or YouTube 5 Ecclesiastical Insurance Ofﬁce plcSection 1/Who We Are Who We Are We are a specialist financial services group with a distinctive ethical positioning and a reputation for delivering excellent service. We were established by Anglican churchmen in 1887 to provide protection to church properties. Over the last 126 years we have developed into a specialist ﬁnancial services provider, offering a range of products and services to customers in selected markets. Allchurches Trust Limited, a registered charity, owns us and the grants we pay to them ultimately go to charitable causes. We are the eighth largest corporate donor to charity in the UK.* Financially secure We maintain a strong capital base at all times, with regulatory capital cover at 2.6 times the required level at the end of 2013. Professional In the UK we are one of the select few CII Chartered Insurers whose entire UK operations have been accredited with chartered status. Strong expertise in specialist markets We insure 97% of Anglican churches within the UK. We also insure one in ﬁve UK charities and some of the most iconic and precious buildings, castles, rural estates and treasure houses in the UK and abroad, including more Grade I and II listed buildings than any other insurer. Ethics at the heart We were one of the ﬁrst providers to establish a range of ethical investment funds; today, our funds have been regularly recognised by numerous ethical fund awards. * UK Guide to Company Giving 2013/2014, published by the Directory of Social Change 6 Ecclesiastical Insurance Ofﬁce plcSection 1/What We Do What We Do We are a specialist insurance, risk management, investment management and advisory group. We sell our products and services to businesses, organisations and individuals directly and through intermediaries. Our organisation is split into three divisions which primarily operate from the UK: Group strategic divisions Specialist Insurance Investment Management Broking and Advisory Ecclesiastical UK Ansvar UK Ecclesiastical Ireland Ecclesiastical Canada Ansvar Australia Our insurance businesses provide a range of commercial insurance products, and risk management support for the education, faith, charity, heritage, ﬁne art and property investors markets. Our key areas of expertise lie in valuing and protecting old and unusual properties, particularly those which are Grade I and II listed. We also provide household insurance to members of the clergy and ﬁne art insurance to the high net worth market. Ecclesiastical Investment Management (EIM) South Essex Insurance Brokers (SEIB) Our multi-award winning investment management team provides ethically screened and non-screened investment products to retail and institutional customers. Our institutional funds are aimed at the charity and faith markets. EIM also manages the majority of the Group’s ﬁnancial investments. Lycetts* Ecclesiastical Financial Advisory Services (EFAS) SEIB and Lycetts provide tailored insurance solutions to customers in the heritage, equine, high net worth, and specialist motor insurance sectors among others. Lycetts also provides ﬁnancial advice. EFAS offers independent ﬁnancial advice to the clergy as part of our service offering for the Anglican community in the UK, and also markets and administers prepayment funeral plans under the Perfect Choice brand. * Part of Ecclesiastical Insurance Group (EIG) Ecclesiastical Insurance Ofﬁce plc 7 Section 1/Chairman’s Statement Chairman’s Statement I am pleased to report that Ecclesiastical has had another proﬁtable year, delivering a proﬁt before tax of £67m (2012: £38m). Ecclesiastical has delivered above benchmark investment performance over many years, and 2013 was no exception. Proﬁtability in 2013 was again driven by a strong investment return of £74m. Results This proﬁt was partially offset by an underwriting loss of £8m (2012: £25m loss). Whilst underwriting losses have reduced to around a third of what they were last year, results are not where I would like them to be, and the Group remains sharply focused on restoring underwriting proﬁtability. Liability claims frequency and severity continues to impact both our UK and Irish operations. In the UK, losses from liability were more than offset by proﬁts from our core property portfolio which delivered an exceptional Combined Operating Ratio (COR) of 78% in 2013, despite the weather events in the last weeks of the year. Ireland also reported a good underwriting proﬁt from its property book, but they could not offset the scale of losses on liability, which included prior year deterioration and, as in the UK, a further strengthening of reserves for physical and sexual abuse claims. Actions have been taken to address liability performance, which has included exiting from certain markets including motor and care. These actions are discussed in more detail in the Strategic Report which starts on page 11. In Australia, results continued to be impacted by the high cost of reinsurance. We have changed our business model for our operations in Australia and have entered into a 100% quota share arrangement for their property business, commencing from 2014, which we expect to restore underwriting proﬁtability in this territory. During the year, the Group paid an interim grant of £4m to its charitable owner, Allchurches Trust Limited. The Board expects to make a further grant in respect of what has been a very proﬁtable year for the Group and will make its decision in March 2014. January 2013 Former CEO Michael Tripp announces his retirement. February 2013 Ecclesiastical gives a record number of bursaries to clergy as part of its Ministry Bursary Awards scheme in the 25th anniversary year of the awards. 8 Ecclesiastical Insurance Ofﬁce plcAnnual Report and Accounts 2013 Board Good governance plays a critical role in ensuring that Ecclesiastical remains a successful and sustainable company. The Board remains committed to applying the highest standards of corporate governance throughout the Group and voluntarily adopted the Financial Reporting Council’s (FRC) UK Corporate Governance Code (the Code) in 2010. We have continued this approach and are reporting in accordance with the new edition of the Code published by the FRC in September 2012. During the year I have particularly focused on ensuring that the Code’s principles on leadership and board effectiveness have been applied. A key element of this is ensuring that the Board has the right mix of individual Non-Executive Directors with the right mix of experience and expertise who are provided with the right information to challenge constructively and support the Executive team. As the industry continues to evolve, I recognise the importance of having experienced insurance professionals on the Board, and I am therefore pleased to report that the Board’s balance of skills and expertise has been enhanced during the year with the appointment of Tim Carroll in March 2013. Tim brings with him a wealth of general insurance industry knowledge and experience having held roles as CEO of Swiss Re’s UK holding company, CEO Europe of GE Insurance Solutions, President and CEO of GE Reinsurance Inc in the USA and Active Underwriter of Canopius Syndicate 4444 at Lloyd’s. outstanding track record of building effective insurance businesses and high performing teams. As previously announced, Michael Tripp retired as Group Chief Executive in May 2013. After a comprehensive external and internal search, Mark Hews was appointed to succeed Michael from 1 May 2013. Mark joined the Group in April 2009 as Group Chief Financial Ofﬁcer. He has more than 20 years experience in the insurance industry, previously being CEO of M&S Life and on the Board of HSBC Life. Before that he was Finance Director at Norwich Union Healthcare and a consultant at Deloitte (formerly Bacon and Woodrow). Steve Wood, who was Managing Director of our UK business and an Executive Director, left the Group in June 2013. The Board was pleased to appoint S. Jacinta Whyte as Deputy Group Chief Executive and an Executive Director on 16 July 2013. Jacinta joined the Group in 2003 to lead the transformation of the Canadian branch, and has assumed responsibility for the Group’s general insurance operations. She remains General Manager and Chief Agent of the Canadian business, but is also acting as Managing Director of our UK business following Steve’s departure. Jacinta commenced her career as an underwriter for Sun Alliance in Dublin and over her 30-year career with RSA she held a number of senior executive positions in both Ireland and Canada. She brings a wealth of experience along with an During the year we carried out performance evaluations of the Board and assessed the outcomes of the Committee evaluations which were undertaken in 2012. On pages 56 to 59 of this year’s Corporate Governance Report we describe the methodology used and the outcome of the evaluations. Outlook There has been a signiﬁcant amount of change across the Group during the last two years, as the business has been reshaped and underperforming areas are being addressed. I would like to thank every employee for their continued commitment, dedication and hard work during 2013. The Board appreciates the challenges and uncertainty that a period of change can bring and is grateful for everyone’s focused efforts to continue moving the business forward. Ecclesiastical’s vision is to become the most trusted and ethical specialist ﬁnancial services group, giving £50m to charity over three years. The Board is satisﬁed that the strategic approach, set out on pages 11 to 47 of this report, should deliver steady and measurable performance against this objective. Will Samuel Chairman March 2013 We report a pre-tax proﬁt of £38m in our 2012 annual results. April 2013 The list of the UK’s top company donors published by the Directory of Social Change ranks Ecclesiastical as the eighth biggest company donor in the UK. 9 Ecclesiastical Insurance Ofﬁce plc10 Ecclesiastical Insurance Ofﬁce plc Ecclesiastical’s surveyors conduct thousands of surveys every year. N O I T C E S Section 2/Strategic Report Group Chief Executive’s Review Our Business Model Our Strategy Key Performance Indicators Financial Performance Risk Management Corporate Responsibility Report 12 16 19 26 30 34 38 11 Ecclesiastical Insurance Ofﬁce plcSection 2/Group Chief Executive’s Review Group Chief Executive’s Review Ecclesiastical plays a unique role in the ﬁnancial services industry in the UK. We are one of the only specialist ﬁnancial services groups owned by a charity, an ownership which drives the Group’s ethos and values and ensures that meeting our customers’ needs is right at the heart of our business model. I feel honoured to have been asked to work with a talented Board and team to lead the Group forward. My ﬁrst seven months as Group Chief Executive have provided me with the opportunity to visit all of our business units, and speak with employees, customers and business partners. I was encouraged that we are already perceived by many as a Group that is determined to do right by its customers. This has reinforced my view that Ecclesiastical is ideally placed to build on its reputation and expertise as a specialist to continue to generate proﬁts for the beneﬁt of our charitable owner, Allchurches Trust Limited. This is the platform that I want to build on. However, two other key themes have emerged during the year as critical opportunities which we need to pursue. May 2013 Mark Hews appointed as Group Chief Executive Ofﬁcer. We win the Post Magazine Claims Awards Customer Care Award. June 2013 We announce new Group management structure and team. We receive the Business in the Community CommunityMark Award. 12 Ecclesiastical Insurance Ofﬁce plcAnnual Report and Accounts 2013 Delivering our results Overall it has been a successful year for Ecclesiastical, with pre-tax proﬁts of £67m (2012: £38m), resulting from strong investment returns and a mixed underwriting performance, enabling us to give an interim grant of £4m to Allchurches Trust Limited in respect of 2013 with a further grant expected to be approved by the Board in March 2014. Our investment performance outperformed benchmarks in most asset classes, contributing to a strong return of £74m (2012: £57m). Our underwriting result was an £8m loss (2012: £25m loss), representing a Combined Operating Ratio (COR) of 102.9% (2012: 108.5%). Royal Institution of Great Britain In the UK we achieved an underwriting proﬁt of £10m (2012: £12m loss), as actions taken to address proﬁtability within our liability account have started to take effect. We also beneﬁted from strong proﬁts from our property account, despite the weather events at the end of the year. We reserved a total of £5.6m for flood claims in December, and still achieved a COR of 95.3% overall in the UK (2012: 105.5%). UK flood and storm losses have continued into the ﬁrst quarter of 2014 and we expect to reserve a further £6.5 million to cover these losses. We won a number of major accounts during 2013, including Longleat House, Castle Howard, the Military Museums and The Royal Institution of Great Britain, and now insure the majority of Grade I listed buildings in the UK. Firstly, there was a consistent theme that we needed to refocus the Group in order to deliver results. This has involved going through every part of our business, thoroughly and systematically, and taking robust, decisive action to ensure that every part of our Group contributes a suitable return to support our future charitable giving. Secondly, there was a desire from all of our stakeholders to make a fresh start, to step up our energy and drive to take the Group forward with a strategy which gives each of our Specialist Insurance, Investment Management and Broking and Advisory divisions a clear and compelling direction. As a result we have refocused our strategy on the areas where we can differentiate ourselves from our competitors, building on our ethos, values and past success. My ambition is captured in our new objective to be the most trusted and ethical specialist ﬁnancial services group, with the aim of giving £50m to charity over the next three years. Our business model and developed strategy can be found on the pages that follow in this Strategic Report. July 2013 We win the British Insurance Awards Best Risk Management Initiative of the Year category and are shortlisted in the community investment category. Jacinta Whyte appointed as Deputy Group Chief Executive and UK Managing Director. August 2013 We achieve CII Chartered Insurer Status. We announce a pre-tax proﬁt of £26.6m in our 2013 half-year results. 13 Ecclesiastical Insurance Ofﬁce plcSection 2/Group Chief Executive’s Review Insurance Brokers (SEIB) reporting proﬁts in line with those reported in 2012 at £2.5m. For a more detailed analysis, please see the Financial Performance section later on in this Strategic Report starting on page 30. Shaping our business for the future To support and grow these results, we are tackling the unproﬁtable areas of our business and shaping it for the future. We have delivered on many actions this year, and have seen our underwriting loss reduce to a third of that reported in 2012 (2013: £8m loss; 2012: £25m loss). Following the announcement in 2012, we withdrew from the UK motor insurance market during 2013, as this did not ﬁt with our strategy of being a specialist insurer. This has resulted in a reduction of £26m Gross Written Premiums (GWP) but has cut our exposure to a market that is typically price driven and has been loss making for the vast majority of insurers over many years. Our businesses outside of the UK faced a variety of challenges that impacted on their underwriting results. Ireland has been faced with escalating liability claims and reports an underwriting loss of £9m for the year (2012: £6m loss). We believe action taken to address this had started to take effect towards the end of 2013. Our Australian business continued to be impacted by the high cost of reinsurance, but achieved a smaller underwriting loss than 2012 of £4m (2012: £5m loss), with underwriting proﬁts expected to return in 2014 as they will beneﬁt signiﬁcantly from new reinsurance arrangements. Our Canadian business reported an underwriting loss of £1.1m in 2013 (2012: £0.3m loss) as it was impacted by record breaking catastrophe events in the year. Losses to the Group from these events were minimised by our effective management of concentration risk and our prudent approach to reinsurance. Our Investment Management division performed strongly yet again, with our asset management business, Ecclesiastical Investment Management (EIM) winning many awards during the year for both its investment performance and its ethical credentials. Net inflows from external customers increased to nearly £100m this year, with funds under management increasing to £2.2bn. Our Broking and Advisory division continued to provide a stable income stream for the Group, with South Essex In July I was delighted when S. Jacinta Whyte accepted a new role as Deputy Group Chief Executive, and also assumed direct control over the UK General Insurance business. We have started the process of restructuring the UK General Insurance divisions to make it easier for customers and business partners to do business with us. We have reshaped our management structure to create a greater focus and drive behind each of our business areas and we have strengthened our regional operations for intermediated business to enhance our service offering to customers, taking our decision-making closer to brokers. These changes will help to support our objective of being the most trusted and ethical specialist ﬁnancial services group. During July, following underwriting losses seen in 2012 and again this year, as a result of continuing increases in the frequency and severity of liability claims, we concluded a detailed strategic review of our insurance business in Ireland. The outcome of this review has resulted in exiting some liability-led business mainly within the motor and care markets, where we don’t believe we can make a proﬁt in the long-term. We are pushing through appropriate rate increases on the liability business retained. We can see good opportunities for proﬁtable growth in Ireland but within a much tightened risk appetite focusing on property-led faith, charity and heritage business. September 2013 We begin the repositioning of our UK General Insurance business. October 2013 Our investment business wins Best Ethical Investment Provider Award from MoneyFacts for the ﬁfth year running. We are shortlisted for the CII Public Interest Awards for our anti-metal theft campaigning over the years. 14 Ecclesiastical Insurance Ofﬁce plcAnnual Report and Accounts 2013 In November we announced our exit from the non-charitable care market in the UK, a sector where liability claims have escalated over recent years, particularly in relation to abuse claims. This allows us to focus our underwriting on providing insurance to the customer segments that closely align to our ethical objectives. In December we concluded the negotiation of new reinsurance arrangements for our business in Australia to commence in 2014. It had become clear that the existing business model for Australia was unsustainable. Reinsurance costs rose substantially following the catastrophe events in Australia during 2011, which made it difﬁcult for smaller operations to be proﬁtable. By moving to a 100% quota share arrangement in 2014 for the property business we expect to return underwriting back to proﬁtability. In the same month, Andrew Moon, Chief Executive of Ansvar Australia, announced his retirement. Andrew has led our business in Australia through one of the most challenging periods in its history, and I would like to thank him for leaving it well on track to achieve its vision to be the leading insurer in its specialist segments. We recently announced the appointment of Warren Hutcheon as the new Chief Executive of Ansvar Australia. Warren is currently Chief Executive of the Victorian Managed Insurance Authority, and will take up his new position with us in early May 2014. Summary and outlook We have achieved a lot in 2013 through the hard work and commitment of our employees, working together in what have often been very challenging circumstances. Whilst there is much to do in the years ahead, I believe we have made strong initial progress and I have been impressed at how so many colleagues have risen to the challenge. I would like to thank everyone for the contribution they have made this year. Our capital strength has been maintained throughout the challenges of the last few years, and our net assets have ended the year at a record high of £494m (2012: £456m). I believe that we have much to look forward to in 2014 and beyond, but there is no doubt that we will continue to face challenges from the competitive environment in which we operate. Equity markets have performed strongly over the last two years, but that level of return cannot be guaranteed in the future. Our underwriting results have started to reflect the decisive actions that we have taken to return the Group to stable underwriting proﬁts, but the frequency and severity of liability claims, including those relating to physical and sexual abuse could remain a challenge for us. We also need to ensure that we continue to communicate effectively with our broker partners and customers as we make the changes necessary to reshape our business for the future. We make a real difference to the lives of people in the markets and communities in which we operate, and I believe that our ﬁnancial strength and committed ethical approach give our business strong foundations upon which we can build our charitable giving. We have high aspirations, to give £50m to charity over the next three years, and there is so much goodwill and energy drawing us together to achieve this. I thank all existing supporters of the Group for their contribution in helping us achieve our objectives. It is only with this support that we can give so much to good causes. I would also like to take the opportunity to welcome others, whether prospective customers, business partners or employees, to consider joining us. I feel conﬁdent that with everyone’s ongoing support and commitment to deliver the changes required we will continue to build a Group that always seeks to stand by its customers, a Group that gives so much to charitable causes and a Group of which we can all be proud. Mark Hews Group Chief Executive November 2013 We win the Financial Services Forum Award for Marketing Effectiveness with our Hands Off Our Church Roofs campaign. December 2013 Our annual Christmas Carol Service at Gloucester Cathedral raises more than £3,000 for Gloucestershire charities. 15 October 2013 Ecclesiastical Insurance Ofﬁce plcSection 2/Our Business Model Our Business Model Ecclesiastical is a unique business in the UK financial services sector due to our charitable ownership. This ownership structure drives the ethics and culture of our business, enhancing the Group’s reputation in the market as a brand that customers and business partners can trust. When combined with our excellent customer service, this trust results in high levels of customer loyalty, which in turn is a key driver of the profit we generate for our owner, Allchurches Trust Limited. As a Group, we aim to create value by making the most of the characteristics which set us apart from our competitors: Profits to Charity Strong Customer Loyalty Unique Ownership Trusted Brand Strong Ethics and Culture Good Reputation Our ambition is to be the most trusted and ethical specialist ﬁnancial services group, giving £50m to charity over three years. In order to support this ambition, our business model is designed to enable us to deliver exceptional service to our customers and business partners and also ensure our business remains stable and sustainable over the very long term. 16 Ecclesiastical Insurance Ofﬁce plcAnnual Report and Accounts 2013 Our business model supports our aim of delivering long-term value. FOCUS ON SPECIALIST MARKETS We focus on those markets where we can bring our experience and expertise to bear. ACTIVELY MANAGE RISK EXPOSURE We maintain a disciplined approach to risk selection, portfolio management and pricing. We provide risk management advice to help our customers reduce their likelihood of losses. MANAGE CAPITAL AND INVEST PRUDENTLY We hold sufﬁcient capital and structure our reinsurance programme and investment strategy to ensure we can meet customers’ needs at all times. We only invest in businesses that are meeting, or have the potential to meet, the Group’s return on capital target. DELIVER EXCEPTIONAL CUSTOMER SERVICE We act in a way that builds trust with our customers and seek to be recognised for fairness and providing a consistently high level of service, that anticipates and meets customer and business partner expectations. PEOPLE AND CULTURE We seek to attract and retain high performing staff and invest in their development to ensure Group businesses maintain their competitive edge. We aim to be seen as a ‘go to’ employer for professionals looking to pursue careers in the core technical disciplines of ﬁnancial services businesses. Deliver sustainable profit to support charitable giving Harrow School 17 Ecclesiastical Insurance Ofﬁce plc“Together we will be the most trusted and ethical specialist ﬁnancial services group, giving £50m to charity over the next three years.” 18 Ecclesiastical Insurance Ofﬁce plc Section 2/Our Strategy Our Strategy Our ambition is to be: The Most Trusted Specialist Insurer The Most Trusted Specialist Adviser The Best Ethical Investment Provider We will achieve this by delivering a range of initiatives that build on and strengthen our sources of competitive advantage: The expertise and experience that the Group has in each of its business divisions The strength of relationship the business has with the Church of England Our charitable ownership, which acts as a differentiator in certain areas of the market A trusted brand and reputation, which enables the Group to build a strong relationship and position with customers where ethics and trust are a signiﬁcant part of their culture 19 Ecclesiastical Insurance Ofﬁce plcSection 2/Our Strategy Most Trusted Specialist Insurer We aim to be the most trusted specialist insurer, offering unrivalled expertise and knowledge in our core sectors, excellent claims service and the best products in the market meeting all our customers’ needs. How we are planning to achieve this:  Continue to ensure that our customers’ interests are at the heart of how we do business.  Increase our knowledge and understanding of our customers’ needs through a comprehensive research programme, and ensure that this knowledge is translated into market-leading products and propositions.  Enhance our approach to broker management, building stronger relationships with key strategic partners.  Continue to invest in strengthening our risk management, underwriting and claims management skills and capabilities.  Complete the transformation of our Australian, Irish and UK operations, exiting non-core and unproﬁtable business lines and reshaping the business model so it meets the needs of today’s competitive environment. 20 Photograph by Oskar Proctor Ecclesiastical Insurance Ofﬁce plc▶▶ STRATEGY IN ACTION: In 2013 we won a number of important and prestigious new accounts including The Royal Institution of Great Britain, Castle Howard and Longleat House. These demonstrate that the Group’s expertise in its core sectors is valued by both customers and brokers. In the UK we commenced the transformation of our UK General Insurance business. In 2014 we will continue to simplify our processes to make it easier for brokers to deal with us and strengthen our regional presence in order to enhance our service to customers and brokers. We took corrective actions to address profitability issues in the UK and Irish care markets, including exiting segments and reviewing pricing. In Australia, we negotiated a new reinsurance arrangement which became effective from 2014 onwards, which we believe will transform the profitability of our property business in that market. Annual Report and Accounts 2013 Case study Strengthening our position in heritage In January 2013 the Group secured both the property and ﬁne art insurance of Castle Howard in Yorkshire. The castle is one of England’s grandest stately homes and is part of the Treasure Houses of England heritage group. Bringing Castle Howard onto the company’s books was a result of our expert teams of surveyors and underwriters working closely with the broker and the customer, demonstrating the value our long- standing heritage and ﬁne art expertise would bring to everyone involved. The Castle was the ﬁrst of many prestigious heritage properties signed onto our books in 2013, thus successfully helping us grow our heritage property portfolio. of Anglican Churches insured with Ecclesiastical. MORE GRADE I A N D GRADE II listed properties are insured by Ecclesiastical than any other insurer. We insure one in ﬁve of the UK’s top 3,000 charities in some way. We were voted the Best Provider of insurance for charity, education and heritage by brokers due to our experience in the market and comprehensive cover (Broker tracking survey 2013). 21 Ecclesiastical Insurance Ofﬁce plcSection 2/Our Strategy Most Trusted Specialist Adviser SEIB has been arranging horse related insurance for nearly 50 years. We aim to be the most trusted specialist adviser in the markets we operate in by providing our customers with the best independent and impartial financial advice meeting their needs. How we are planning to achieve this:  Continue to enhance the service proposition so that it meets and exceeds the expectations of our customers.  Grow and strengthen the teams in our Broking businesses to ensure they continue to be seen as market leaders in their target segments.  Identify new market segments in which to grow either organically or through acquisition.  Pursue CII Chartered Status for the Broking businesses. 22 Ecclesiastical Insurance Ofﬁce plc▶▶ STRATEGY IN ACTION: A number of new products and existing product enhancements were developed by SEIB in 2013, which are now ready to be rolled out in 2014. In 2013 SEIB introduced a new system of monitoring customer satisfaction for all transactions to ensure customers are treated fairly and efficiently. Ecclesiastical Financial Advisory Services (EFAS) has many years experience of working with the clergy and church community. Our advisory team is fully independent and qualified to meet the Retail Distribution Review requirements. Annual Report and Accounts 2013 Case study Customer care at the heart SEIB’s customer care has attracted industry attention and recognition for a number of years already and that’s not a surprise with their latest customer feedback showing that 97% of SEIB’s customers are very satisﬁed with their service and over 99% would recommend the broker. In 2013 SEIB was shortlisted for the annual UK Broker Awards in the customer care category based on their excellent customer feedback. In 2013 SEIB was listed among the UK’s Top 100 brokers in the Insurance Age annual Top 100 UK Brokers survey and also recognised as one of the eight ‘high climbers’ in the listing. 3 1 0 2 The EFAS customer satisfaction survey* showed that all the customers questioned were extremely or very satisﬁed with the service received from their Ecclesiastical Financial Adviser and agree they were treated fairly. 100% The EFAS customer satisfaction survey* showed that 100% of the customers questioned were extremely or very satisﬁed with the arrangement of their ﬁnancial review, their adviser’s knowledge, the advice and information provided to them, ensuring the product met their needs and circumstances, and with the accuracy and clarity of documentation they received. * EFAS Customer Satisfaction Survey 2014 (qualitative research, Ecclesiastical electronic survey) 23 Ecclesiastical Insurance Ofﬁce plcSection 2/Our Strategy Best Ethical Investment Provider We aim to be the best ethical investment provider and thought leader in socially responsible investment by further enhancing our own ethical credentials and proposition and by leading the debate on ethical investment issues that matter to our customers. How we are planning to achieve this:  Strengthen the ethical position of our funds and continue to build the industry-leading reputation of our socially responsible investment funds.  Maintain our strong and above average long-term investment performance on all our funds.  Develop and strengthen our institutional fund offering and grow our presence in the charity funds market.  Further develop the IT systems put in place during 2013 to help improve our customer service and enable the business to meet the changing needs of the regulator. 24 Ecclesiastical Insurance Ofﬁce plc▶▶ STRATEGY IN ACTION: In 2013 we grew our pooled funds assets under management to almost £900m, the highest ever level, which is treble the amount we had in 2008. Growth of our pooled funds was achieved through long- term outperformance across the majority of our funds and an increasing profile as the leader in the socially responsible investment market. As our assets under management have grown, so has our client base, with our geographical reach of independent financial advisers and wealth managers extending throughout the UK. Equally, our charity funds saw further investment and growth from both the charity and church communities. We invested £2m into our special charity investment vehicle during 2013. Annual Report and Accounts 2013 Case study Performance, longevity, stability The Amity UK Fund was the Group’s ﬁrst retail fund and one of the UK’s ﬁrst socially responsible retail funds. It seeks to invest in a portfolio of companies which make a positive contribution to society and the environment through sustainable and socially responsible practices. The fund aims to achieve long-term capital appreciation and a reasonable level of income by investing principally in UK companies. It has been managed by Sue Round since it was launched in 1988, so in 2013 she celebrated her 25th anniversary managing the fund. For 2014 we believe the fund is well positioned for the continuing recovery in the economy, focusing on companies offering robust balance sheets, solid cash flows, growing dividends and strong market positioning. Our investment team has over 25 years’ experience in the socially responsible investment market. In addition to our strength in socially responsible investing, our funds and fund managers received more than 10 industry awards and accolades during 2013, most notably the Best Ethical Investment Provider of the Year award from MoneyFacts for the ﬁfth year running. 25 Ecclesiastical Insurance Ofﬁce plcSection 2/Key Performance Indicators Key Performance Indicators Financial MEASURE DONATIONS The amount donated by Ecclesiastical to charities and our charitable owner each year. This is the main measure of our ambition, which is to give £50m to charity over three years. PERFORMANCE The ordinary grant to Allchurches Trust Limited was reduced in 2012 to reflect challenging underwriting performance. An interim grant of £4m was paid to Allchurches Trust Limited during 2013, with the remaining £1.5m of donations going to other charitable causes. The Board expects to approve a further grant in respect of 2013, which will be paid during 2014. Donations m £ 25 20 15 10 5 0 10.0 Special Grant 9.8 10.6 11.7 5.7 5.5 9 0 0 2 0 1 0 2 1 1 0 2 2 1 0 2 3 1 0 2 PRA CAPITAL AND ECR COVER* The capital resources available to meet the Prudential Regulation Authority’s (PRA) regulatory requirements. PRA capital has increased during the year due to an increase in retained earnings following the proﬁt achieved during the year. The Enhanced Capital Requirement (ECR) is a risk-based statistical calculation based on the business written and assets held. ECR coverage is the ratio of PRA capital available to meet this requirement. Our target is to exceed regulatory capital requirements at all times. Our ECR coverage reduced due to an increase in our capital requirement. This was mainly due to our net PRA equity exposure increasing as a result of reducing the amount of hedging we had in place at the end of the year. Ecclesiastical remains ﬁnancially very strong, despite the last few years of economic uncertainty and volatility for the insurance industry. PRA capital and ECR cover PRA Capital ECR 400 300 332 387 353 362 371 m £ 200 3.3x 3.0x 3.1x 2.7x 2.6x 100 0 9 0 0 2 0 1 0 2 1 1 0 2 2 1 0 2 3 1 0 2 PROFIT/(LOSS) BEFORE TAX* The Group’s proﬁt or loss (excluding discontinued operations) before deduction of tax. Our target is to generate sufﬁcient proﬁt to enable us to give £50m to charity over three years. The Group returned to proﬁt in 2012 despite worsening underwriting performance. This was due to strong investment returns for the year. We achieved a further increase in proﬁt for 2013, which was supported by reduced underwriting losses when compared to 2012 and also another good year of strong investment returns. More information on underwriting performance is given below. See the Financial Performance report on page 30 for more details. Profit/(Loss) before tax m £ 100 50 0 -50 79 9 0 0 2 50 0 1 0 2 -8 1 1 0 2 38 2 1 0 2 67 3 1 0 2 26 Ecclesiastical Insurance Ofﬁce plcAnnual Report and Accounts 2013 MEASURE PERFORMANCE COMBINED OPERATING RATIO* The sum of Ecclesiastical’s general insurance incurred losses and expenses divided by earned premiums for each ﬁnancial year. The Group target for the COR has been set at 95%. Combined Operating Ratio Our COR improved compared to 2012 as the actions we have taken to restore underwriting proﬁtability started to take effect. The ratio remains below our longer term target, primarily driven by liability claims experience in the UK and Ireland. See the Financial Performance report on page 30 for more details. % 85 95 105 115 90 102 105 109 103 9 0 0 2 0 1 0 2 1 1 0 2 2 1 0 2 3 1 0 2 GROSS WRITTEN PREMIUM* The total value of general insurance and life insurance policies that have been written during the year. We do not have a speciﬁc growth target, but our aim is to achieve moderate growth of around 5% in our selected markets over the long term, with our focus on the quality of the business we write. Gross Written Premium As expected, GWP fell in 2013 following our withdrawal from motor and selected other markets as we look to focus on business where we can leverage our underwriting expertise. We expect a further modest fall in GWP for 2014 following our decision to exit the non-charitable care sector in the UK. See the Financial Performance report on page 30 for more details. m £ 550 450 350 250 495 484 481 448 399 9 0 0 2 0 1 0 2 1 1 0 2 2 1 0 2 3 1 0 2 NET EXPENSE RATIO* Total expenses as a proportion of the net premium earned in the year. These expenses include acquisition costs, administration costs, the movement in deferred acquisition costs and commission paid less commission received. Our aim is to make year-on-year improvements in the Net Expense Ratio. Net Expense Ratio Our Net Expense Ratio decreased in 2013 to 36%, with the fall in earned premiums offset by net expenses decreasing as the beneﬁts of efﬁciency programmes and improved commission agreements took effect. The restructuring of the UK General Insurance and Australian businesses led to one-off expenses but should, together with further efﬁciency programmes, help mitigate the impact of lower premiums in the near future. % 45 40 35 30 25 37 9 0 0 2 35 0 1 0 2 40 39 36 1 1 0 2 2 1 0 2 3 1 0 2 * These ﬁgures have not been restated, they are as reported in the appropriate year’s report and accounts 27 Ecclesiastical Insurance Ofﬁce plcSection 2/Key Performance Indicators Non-Financial MEASURE PERFORMANCE BROKER SATISFACTION Results from broker opinion surveys carried out each year by our Internal Insight team. Brokers are asked to rate their experience, on a six-point scale: 1 – extremely dissatisﬁed to 6 – extremely satisﬁed. We measure the level of positive satisfaction, particularly extremely and very satisﬁed. Our aim is to achieve over 90% satisfaction. DIRECT CUSTOMER SATISFACTION Results from internal customer satisfaction surveys carried out each year, relating to how well customers felt their claims were handled. The results of this survey include settled and partially settled property claims. Customers are asked to rate their experience on a six-point scale: 1 – extremely dissatisﬁed to 6 – extremely satisﬁed. We measure the level of positive satisfaction, particularly extremely and very satisﬁed. Our target is to achieve at least 90% satisfaction. Ecclesiastical’s broker service results have been good over the last three years, with particularly good ratings being received in 2012. For 2013, 79% of our brokers were satisﬁed with the service we provided, 43% of these were very or extremely satisﬁed. As explained earlier in this report, during the year we have exited areas of business where we do not believe we can make a sustainable proﬁt, for example motor, and an announcement has been made to say that we are also exiting the non-charitable care market in the UK. Brokers most affected have expressed dissatisfaction with these decisions, and this, we believe, has led to the reduced level of overall satisfaction recorded in 2013. Ecclesiastical prides itself on maintaining very high levels of satisfaction, particularly in relation to claims when customers need us most. In 2013, 92% of customers were either extremely or very satisﬁed with the way their claim was handled and a further 5% were fairly satisﬁed. This is well above our target for 90% satisfaction. Similar results were also seen for surveys on general satisfaction levels, in particular, 100% of our home and commercial customers were satisﬁed with their new business experience with us. Broker Satisfaction Survey 100 93% 94% % 80 60 40 20 0 79% 1 1 0 2 2 1 0 2 3 1 0 2 ■ Extremely Satisﬁed ■ Very Satisﬁed ■ Fairly Satisﬁed Claims Satisfaction Survey – Direct 100 97% 96% 97% % 80 60 40 20 0 1 1 0 2 2 1 0 2 3 1 0 2 ■ Extremely Satisﬁed ■ Very Satisﬁed ■ Fairly Satisﬁed 28 Ecclesiastical Insurance Ofﬁce plc In 2013, 92% of customers were either extremely or very satisﬁed with the way their claim was handled. © Chatsworth House Trust Reproduced by permission of Chatsworth Settlement Trustees. Ecclesiastical Insurance Ofﬁce plc 29 Section 2/Financial Performance Financial Performance In 2013 we achieved a pre-tax profit of £66.9m (2012: £37.8m). Our investment performance remained strong and our broker business, SEIB continued to report stable profits. This was partially offset by a loss from our general insurance business. General Insurance 2013 saw a number of changes for our general insurance operations as we began to refocus the business. Our underwriting performance for the year was a loss of £8.2m (2012: £24.6m loss), resulting in a Group COR of 102.9% (2012: 108.5%). United Kingdom Our insurance businesses in the UK reported an underwriting proﬁt of £9.8m (2012: £12.3m loss). The UK business has been repositioned as a specialist insurer. We have withdrawn from the motor insurance market and from the non-charitable care sector to focus on our core business where we can leverage our underwriting expertise. The new regional structure will enable us to be an underwriting-led specialist insurer operating closer to the communities in which we serve. Towards the end of 2013, the St Jude storm coupled with the December storms and floods impacted our property account. Prior to these storms and floods 2013 was a relatively benign year for weather events, enabling us to deliver a proﬁt on our property account ahead of expectations. We continued to focus on our liability business, ensuring that our preferred risks were priced appropriately. However, claims experience has led to a strengthening of our liability abuse and asbestos reserves. Despite the remedial action taken in 2012 to mitigate the losses, particularly in the care sector, we have taken the decision to exit the non- charitable care sector during the year. The repositioning and refocusing of the business has resulted in GWP decreasing by 13% in the year to £291.3m (2012: £336.6m). Ireland An underwriting loss of £9.1m (2012: £6.2m loss) was reported by our general insurance operation in Ireland, driven by losses across the liability portfolio. Remedial underwriting actions undertaken during 2012 and 2013 will take time to fully impact the underwriting result, although the second half of 2013 saw a marked improvement in the underlying performance of the liability account. The property account returned a healthy proﬁt. Australia Australia reported an underwriting loss of £4.2m (2012: £5.2m loss). We have continued the transformation of our Australian business, and in 2013 the underwriting performance of the underlying portfolio has been strong with a gross COR of 71%. However, despite all the actions taken, the cost of reinsurance has remained uneconomically high following the catastrophe events in Australia that took place in 2011, which has signiﬁcantly impacted the net results with a net COR of 114.8%. We recognised that the cost of the existing business model for Australia was unsustainable in the longer term and have therefore moved to a 100% quota share arrangement for property business which became effective from 1 January 2014. As a result of the new quota share arrangement, the £6.5m unexpired risk reserve that we were holding at the end of 2012 was released, which has more than halved the reported underwriting loss. The liability business has continued to perform well during 2013. Despite achieving rate increases, the refocusing of the business has led to a higher than expected lapse rate. A 3% fall in GWP to £13.6m (2012: £14.0m) is reported. The 30% fall in GWP to £45.7m (2012: £65.1m) is a result of the transformation work carried out in Australia to reduce our exposure to catastrophe risk. This has included exiting personal lines 30 Ecclesiastical Insurance Ofﬁce plcFinancial Performance Canada Floods 2013 Ecclesiastical Insurance Ofﬁce plc 31 Section 2/Financial Performance business during 2011 and 2012 and reducing our exposure to property risks in high catastrophe risk areas. Canada Our Canadian branch reported an underwriting loss of £1.1m (2012: £0.3m loss), having been impacted by catastrophe weather events during the year. Canada experienced its largest insured natural catastrophe event in history when flooding hit Calgary on 21 June 2013. The careful management of our exposure and effective reinsurance programme contained both the gross cost (£6.7m) and net cost (£1.2m) for the branch. This was closely followed by the Toronto rainstorm on 8 July 2013, which was the third worst natural catastrophe in Canadian history; again this was contained at a £0.9m net loss for the branch. The resulting losses on the property account, however, offset the strong proﬁts generated by the liability account. Canada continued its track record of strong year-on-year growth in GWP, which increased by 11% to £41.2m (2012: £37.0m) with good retention rates of 94%. Central operations Proﬁts from internal reinsurance arrangements and positive movements on claims expenses for run-off operations in this segment were offset by corporate underwriting costs and a strengthening of reserves in respect of adverse development reinsurance cover sold to ACS (NZ) Limited in 2012, resulting in an overall loss of £3.7m (2012: £0.6m loss). We entered into a contract with ACS to provide additional reinsurance cover in respect of the February 2011 Christchurch earthquake. Under the terms of this contract, the Group must meet the cost of any claims from this event that are in excess of the value of other reinsurance contracts already in place up to an agreed maximum of approximately NZ$24m (£12m). At the end of 2013 we held a reserve of NZ$18.7m (£9.3m) in respect of this contract.. in base rates as the domestic economy improved. Our preference for corporate bonds over gilts, together with our weighting towards shorter-dated bonds enabled us to outperform the index. Investments Global economic expansion was restrained by three main forces in 2013; a recession in the Eurozone, ﬁscal consolidation in the United States and a structural slowdown in many emerging markets. Despite this, equity markets across developed economies delivered strong returns, outperforming emerging market assets and global bond indices. The UK economy outperformed the majority of its European counterparts in 2013. Whilst the decline in real wages continued, domestic consumer spending grew, which was supported by improving credit conditions, low interest rates, solid employment growth and a resurgent housing market. The Bank of England, however emphasised that interest rates would not be increased until the UK economy demonstrated a more established recovery. Over the course of 2013, the FTSE All Share Index produced a total return of 20.8% compared with 18.7% posted by the FTSE 100. Our UK equity portfolio increased by 24.4%, outperforming both indices, reflecting its higher weighting to medium-sized companies. The improved market conﬁdence experienced over the course of the year supported the closure of our equity futures contracts that were put in place to limit potential losses in equity markets. Our UK bond portfolio produced a total return of 1.6% in 2013, while the FTSE Government All Stocks Index recorded a -4.0% total return over the course of the year as investors began to price in the possibility of a near-term increase Investment management EIM saw continued growth in funds under management, which have increased to £2.2bn reflecting new business inflows and positive market movements. EIM attracted nearly £100m net new flows from third parties into Ecclesiastical Investment Funds, which resulted in us climbing further up the rankings of top- selling asset managers on the platforms. A further £2m was invested into our special charity investment vehicle. Overall fee income for EIM increased by 21% to £12.8m, and this mainly reflects the growth of pooled funds to over £890m. Pre-tax proﬁts increased by nearly 45% to £1.7m. EIM further consolidated its position as a leader in sustainable and responsible investment, with the company winning the Moneyfacts Best Ethical Investment Provider Award for the ﬁfth consecutive year and Blue & Green Tomorrow’s Sustainable Fund Manager of the Year. EIM and its funds continued to win awards: the Amity Sterling Bond Fund won Money Observers Best Ethical/SRI bond Fund; and the Higher Income Fund was named Best Fund (Mixed Asset Class) over ﬁve years by Lipper. Our Fund Managers continue to be highly rated, with Robin Hepworth rated by Trustnet as an Alpha Trustnet Manager, placing him in the top 10% of all Fund Managers. Andrew Jackson and Sue Round currently hold Citywire ratings of AAA for their three-year risk-adjusted performance. 32 Ecclesiastical Insurance Ofﬁce plcLong-term insurance Ecclesiastical Life Limited ceased writing new funeral plan business from the end of April 2013. Since then, the insurance policies backing the funeral plans have been written by an alternative life insurance company. Our life business recorded a proﬁt of £0.4m, which was in line with our expectations of modest proﬁts emerging from the existing book of business. Broking and Advisory SEIB continued to provide a steady and consistent income stream to the Group. The equine and pets insurance market is very competitive, and although SEIB beneﬁts from its operations in niche markets, commission and fee income only grew by 1% to £7.3m (2012: £7.2m). Net proﬁt before tax was in line with 2012 at £2.5m. EFAS, our small ﬁnancial advisory business, has reported a loss before tax of £0.8m. During the year EFAS rationalised its Independent Financial Advisers business in order to provide a more focused approach to our core church market. Fee and commission income, however, increased by 91% in the year as EFAS began providing administration services for the NAFD funeral plan offering. Ian Campbell Director Group Finance Longleat Safari & Adventure Park. Ecclesiastical Insurance Ofﬁce plc 33 Section 2/Risk Management Risk Management The core business of Ecclesiastical Insurance Office plc is general insurance. Thus, risk selection, pricing, reinsurance strategy, portfolio management and regulatory compliance play an important part in our business model. We have established an Enterprise Risk Management framework to ensure that risks are managed well on a consistent basis. This is overseen by the Group Risk Committee. Enterprise Risk Management Enterprise Risk Management is a proactive group-wide strategic process designed to identify and manage all the individual and aggregated risks that could have a signiﬁcant impact on our ability to deliver our objectives. This process is integrated into the culture of the Group and is led by the Group Management Board, which is supported by four Executive Risk Management Committees:  The (Non-Life) Insurance Risk Committee which has oversight of the non- life insurance risks of the Group including counterparty risk;  The Investment and Market Risks Committee which has oversight of the investment and market risks of the Group;  The (Non-Broker) Operational Risk Committee which has oversight for the operational risks of the non-broker elements of the Group and also EIM; and  The (Broker) Operational Risk Committee which has oversight for the operational risks of the broker businesses within the Group, including EFAS. It supports accountability, performance measurement and reward, thus promoting operational efﬁciency at all levels. 34 Ecclesiastical Insurance Ofﬁce plcAnnual Report and Accounts 2013 On an annual basis the Group Management Board identiﬁes key strategic risks and allocates responsibility for each of them. Any risk management actions that arise are regularly monitored. We have a continuous and evolving approach to Enterprise Risk Management and use emerging experience to reﬁne our approach. During 2013 this speciﬁcally included improvements in: The key to the success of this process is the deployment of a strong Three Lines of Defence Model whereby:  Qualitative and quantitative risk proﬁling;  Underwriting standards and risk  1st Line (Business Management) is pricing capabilities; responsible for strategy, performance and managing risks arising;  2nd Line (Reporting, Oversight and Guidance) is responsible for establishing minimum standards, appropriate reporting, oversight and challenge of our risk proﬁles and risk management activities within each of our businesses. This includes Executive Risk Management Committees and is subject to oversight and challenge by the Group Risk Committee; and the  3rd Line (Assurance) provides independent and objective assurance of the effectiveness of the Group’s systems of internal control. This activity principally comprises the Internal Audit function which is subject to oversight and challenge by the Group Audit Committee.  Our reinsurance strategy; and  Our group-wide risk appetite. Risk appetite On at least an annual basis, the Board establishes a formal appetite for risk. This sets out the principles, guidance, limits and tolerances within which the Board authorises the Group Management Board to carry out the business plan. Compliance with risk appetite is reported to the Group Risk Committee at each meeting. Amongst other things, our risk appetite sets limits on the type, nature, size and concentration of insurance risks that will be accepted by the Group together with the Board’s requirements for a group- wide reinsurance strategy. We purchase reinsurance cover to protect against property catastrophe events that are predicted to occur once every 250 to 500 years, depending upon the territory. A key objective of our risk appetite is to ensure that we have sufﬁcient capital to meet our liabilities in extreme adverse scenarios. The risk appetite aims to achieve and support a credit rating of at least single A minus from Standard & Poor’s and A.M. Best. Quantitative Risk Measures and Stress Testing framework The primary tool used to measure aggregate risk is an Internal Model which has been calibrated to estimate the resources required to meet the UK regulatory risk-based capital requirements. Over the last year we have improved and further embedded our Internal Model in order to better inform our strategic decision-making within Ecclesiastical. For example, the Internal Model was used extensively in order to support a Reinsurance Strategy Review. We continue to reﬁne a comprehensive scenario and Stress Testing framework to complement our Quantitative Risk Measures and meet regulatory requirements. Principal risks The following table shows the principal risks we face that could have the highest potential to damage our Group both in the short and long term. 35 Ecclesiastical Insurance Ofﬁce plcSection 2/Risk Management Principal Risks RISK TYPE AND DESCRIPTION WHY WE HAVE IT HOW WE MITIGATE IT BUSINESS MIX, UNDERWRITING AND PRICING RISK The risk of failing to price adequately for claims costs, expenses, cost of capital and proﬁt requirements; failure to manage portfolio risk; failure to manage the underwriting cycle; diversiﬁcation and concentration; failure to establish appropriate underwriting disciplines. General insurance is a highly competitive business. The premium required for an insurance policy needs to reflect the cover provided and the risk factors present. Disciplined underwriting and pricing is central to our business and key to the success of the Group. Since 2010 we have established sales, claims and underwriting academies to support these activities and to ensure the correct skill set is maintained and developed. In 2013 we made a signiﬁcant investment to enhance underwriting and pricing techniques across the Group. We have a specialist focus and a strategy of diversiﬁcation within the type of business underwritten and between territories, which helps us to manage the underwriting cycle and reduce the variability of the expected outcome. Concentration risk is a key consideration and limits are established within the risk appetite. The size of this risk has fallen slightly over the year; partly due to our reduction in risk appetite for liability business within the UK and Ireland and partly due to increased premiums. REINSURANCE RISK The risk of failing to access and manage reinsurance capacity at a reasonable price. Reinsurance is a central component of our business model, enabling us to insure a portfolio of large risks in relation to our capital base. The Board has long accepted a high appetite for a strategic exposure to the reinsurance market. This risk is managed by taking a long-term relationship view towards reinsurance purchases to deliver sustainable capacity rather than opportunistic results. The global reinsurance market has undergone a major change over the last two years, driven mainly by record amounts of capital entering the market from various sources. This abundance of new capital, supported by strong balance sheets and low loss experience has driven reinsurance rates down in most territories and lines of business for 2014. In 2013 we conducted a major review of our reinsurance strategy and will maintain improved cover at a lower cost during 2014. The size of this risk has fallen slightly over the year. CLAIMS RESERVING RISK The risk of actual claims payments exceeding the amount we are holding on our statement of ﬁnancial position for these liabilities. Claims reserving risk is a natural consequence of incurring insurance claims. Throughout the lifecycle of a claim the estimated ultimate cost will vary as additional information becomes available. COMPETITION AND DISTRIBUTION RISK The risk of failing to recognise and address changes in a competitive market, particularly competitor actions, distribution channels, an imbalance of bargaining power with distributors, business concentration and resource issues. General insurance is a highly competitive business. A niche and investment strategy is a critical component of our ability to put products in front of customers in a compliant manner which minimises the risk of consumer detriment. Claims development and reserving levels are closely monitored. Claims reserving risk primarily arises from longer tail liability business. For statutory and ﬁnancial reporting purposes margins are added to a best estimate outcome to allow for uncertainties. This approach generally results in a favourable release of previous year’s provisions within the current ﬁnancial year. Claims reserves are reviewed and signed off by the Board acting on the advice and recommendations of the Chief Actuary and the Group Audit Committee. Over the last year an external review of reserving levels was carried out, resulting in a small reserves release. Further information on this risk is given in notes 2, 3 and 26 to the ﬁnancial statements in section 4 of this annual report and accounts. The Group Management Board monitors key competitors on a regular basis, managing their impact on our markets. We have a strategy to deliver excellent customer service through multiple distribution channels. Doing this helps us to diversify our distribution risk as does transacting business with well-diversiﬁed broker panels. The size of this risk is largely unchanged over the year. 36 Ecclesiastical Insurance Ofﬁce plcRISK TYPE AND DESCRIPTION WHY WE HAVE IT HOW WE MITIGATE IT Annual Report and Accounts 2013 MARKET RISK The risk of adverse movements in net asset values arising from a change in interest rates, equity prices and foreign exchange rates. CREDIT RISK The risk of non-payment of their obligations by counterparties and ﬁnancial markets borrowers. BUSINESS INTELLIGENCE RISK The risk of shortfalls in the quality or availability of management information for decision-making. Market risk principally arises from investment of reserves (these are held to pay future claims) and shareholders’ funds. Our investment strategy is focused on ﬁxed income and as a result has exposure to interest rate risk. Some of our ﬁxed income is invested in corporate bonds giving exposure to credit spread risk. Market risk also arises as we have a signiﬁcant equity portfolio. A proportion of our equity portfolio is invested in overseas equities in pursuit of better and/or more diversiﬁed investment returns. Our principal exposure to credit risk arises from reinsurance, which is central to our business model. Additional credit risk arises from our investment in debt securities, cash deposits and amounts owed to us by intermediaries and policyholders. Accessing claims data in relation to the risk offered is a key tool in enabling sufﬁcient and competitive pricing. Other management information can enable a quick response to claims or other market developments. A robust management framework is in place to mitigate the impact of changes in ﬁnancial markets. EIM manages shareholders’ funds in accordance with the investment strategy and guidelines agreed by the Finance and Investment Committee of the Board. We hold a relatively signiﬁcant equity portfolio in order to deliver a real long-term investment return on capital and the Board has long accepted a high appetite for variable investment returns. When appropriate, as was the case in 2013, we use derivatives to reduce equity exposure. As we have exposure to overseas businesses and investments we ensure that currency risk is appropriately monitored and controlled with oversight by our Group Finance function to try and reduce the impact of fluctuating currency rates. Interest rate risk is partly managed through selecting appropriate portfolios to back pools of longer term liabilities and partly through holding a portfolio which has a relatively short average period to maturity. Credit spread risk is managed by limiting exposure to non-rated and lower rated bonds and adherence to limits for exposure to any single issuer. Market risk exposure fell in 2013 due to the sale of around £50m overseas equities which we have reinvested in UK ﬁxed income debt securities. Further information on this risk is given in note 4 to the ﬁnancial statements on page 110. Investment credit risk is controlled through the investment strategy and guidelines agreed by the Finance and Investment Committee of the Board. Reinsurer credit risk is controlled by the Group Reinsurance Security Committee, principally through careful selection and monitoring of reinsurance partners. All reinsurers on the 2013 reinsurance programme had a minimum rating of A minus from Standard & Poor’s or an equivalent agency at the time of purchase with the exception of MAPFRE RE whose rating was adversely impacted by the sovereign rating of Spain. However, MAPFRE RE was upgraded by Standard & Poor’s to A minus with a stable outlook in February 2014. Counterparty risk remained in line with 2012, as there were no material changes in our exposure to counterparties during the year. Further information on this risk is given in note 4 to the ﬁnancial statements on page 110. Over the last four years an extensive programme has focused on accuracy, completeness and appropriateness of data and on the development of a strategic data warehouse. The size of this risk has reduced slightly this year due to continuing deliverables from internal projects. REGULATORY AND LEGAL RISK Regulatory and legal risk is the risk of non-compliance with applicable law and regulations, unenforceable contractual rights and any dispute resolution or other proceedings arising in relation to legal rights. Regulatory and legal risk arises in each territory in which we write business and this can result in signiﬁcant cost and reputational implications if it is not managed appropriately. Legal and regulatory developments are monitored throughout the Group and working parties are established to consider signiﬁcant developments which impact on our business. We have an appropriately resourced regulatory compliance function which is headed up by a Group Compliance Ofﬁcer. That said, during the year, by recognising the increasing importance of regulatory compliance and the continued evolution of regulation following the establishment of the separate and independent PRA and Financial Conduct Authority (FCA) regimes, (commonly referred to as twin peaks) we have strengthened our compliance capability. The size of this risk has increased during the year given the emergence of the twin peaks regulatory regime and increasing regulatory obligations and expectations. OPERATIONAL RISK The risk of unexpected loss or cost arising from the operation of the business or due to external impacts not covered above. We have a relatively complex business operating in a number of specialist markets and territories. Whilst considerable attention to detail is paid, errors and non-controllable external events do occur. Over the last year we have introduced, and nearly completed, the roll-out of a live Operational Risk Proﬁle approach which enables us to capture risks and management actions within each business unit. Risks are managed to comply with the levels set by the Board approved within the risk appetite. Stress and scenario testing is undertaken and the results are taken into capital requirement considerations. Each area of our Group has a Disaster Recovery and Business Continuity Plan in place that is regularly tested and updated. The size of this risk is largely unchanged over the year. REPUTATIONAL RISK The risk of a reduction in trust by customers, brokers, reinsurers and other stakeholders as a result of an event or series of events. We always aim to be fair to our stakeholders. However, if disagreements occur, it could result in negative commentary in many forms of media. Reputational risk is primarily managed through our approach to treating stakeholders fairly, combined with the other actions taken to manage risks to our ﬁnancial position. Reputational risk is overseen by the Group Management Board together with the Group Risk Committee. We will not accept risks that will materially damage our reputation. We work closely with external stakeholders, gathering feedback and encouraging dialogue through a variety of communication channels, to proactively monitor and build our reputation. The size of this risk is largely unchanged over the year. 37 Ecclesiastical Insurance Ofﬁce plcSection 2/Corporate Responsibility Report Corporate Responsibility Report In 2013, we continued our commitment to Corporate Responsibility (CR) as a Group, focusing specifically on delivering our community investment programme, key CR initiatives and building our local charity partnerships across the globe. Continued commitment to making a difference Support for our communities in 2013 was given through a range of initiatives, including company matching for staff giving, the company’s Helping Hands volunteering programme and grant giving through the Ecclesiastical 125 Fund, set up in our 125th anniversary year in 2012. In recognition of our community investment programme activities over the last few years in particular, we were awarded the prestigious CommunityMark by Business in the Community (BITC), an external endorsement of our signiﬁcant community investment and our continuous efforts to exceed industry targets. We were also ranked as the 8th largest corporate donor in the UK for our charitable giving by the Directory of Social Change* and Our Helping Hands volunteering programme received insurance industry recognition by being shortlisted for the 2013 British Insurance Awards in the Corporate Social Responsibility Initiative of the Year category. *Source: UK Guide to Company Giving 2013/2014, published by the Directory of Social Change 38 Ecclesiastical Insurance Ofﬁce plcAnnual Report and Accounts 2013 ▶▶ CORE ISSUES AT THE HEART OF OUR CR PROGRAMME Over the last few years our community investment programme has focused on issues that are important to our customers and the communities we operate in. We have used our understanding of our customers (charity, heritage, faith and education sectors) and the challenges they face to focus on three core issues, which all of our community investment projects aim to tackle in some way:  Protecting our heritage against crime and anti-social behaviour  Supporting vulnerable children and adults in our local communities  Supporting the sustainability of local charities that address the specific needs of our communities. Responsibility for CR in the Group Formal responsibility and accountability for our approach to CR is clear at all levels in our organisation: l i a c i t s a s e c c E t a l y t i l i i b s n o p s e R e t a r o p r o C Group Strategy and Corporate Affairs Director Responsible for reporting on progress and achievements in CR to the Board and Group Management Board Corporate Affairs Team Responsible for developing and implementing the Group CR strategy, monitoring and reporting on CR activities to the UK General Insurance Managing Director Employee Community Panel Responsible for engaging and inspiring employees to get involved in community support activities, championing community activity, and leading relationships with our local charity partners 39 Ecclesiastical Insurance Ofﬁce plc Section 2/Corporate Responsibility Report Highlights of 2013 CR Activities Community We gave 1,600 hours of volunteering support to charities in the UK We raised a total of £78,000 for our charity partners across the UK through employee fundraising We donated £25,000 to the DEC Philippines appeal and provided 100% match-funding of all staff donations to the appeal 1,600 £78,000 £25,000 £3,000 5% £6,300 £40,000 £10,000 We continued our approach to matching employee fundraising and payroll giving and were awarded a Payroll Giving Quality Mark Silver Award for 5% employee participation We gave £6,300 in small grants to local charities through Gloucestershire Community Foundation and the Ecclesiastical 125 Fund Our annual Charity Carol Concert in Gloucester Cathedral raised more than £3,000 for charity partners in Gloucestershire Taking part in the Nightrider cycle challenge through London for Carers Trust raised £10,000 Our employees donated £40,000 in payroll giving 40 Ecclesiastical Insurance Ofﬁce plcAnnual Report and Accounts 2013 Environment Our Billiter Street ofﬁce in London won a Gold Award in the annual Clean City Awards Scheme, which is run by the City of London. Gold Awards are given to those sites that meet and exceed the requirements of the scheme so it is a great recognition of our continued recycling and waste management efforts. Workplace We continued our focus on improving performance and enhancing skills and capabilities across the business. In 2013 we launched MyEcclesiastical which provides all employees with a central resource to support them across all aspects of human resources and learning. We also continued to build on the range of training and development opportunities we offer our people, launching an online learning management system, new regulatory compliance modules, an advanced apprenticeship programme as well as focused development activity to support our higher potential employees. With a strong focus on technical skill, we were also delighted to attain Corporate Chartered Insurer Status with the CII. Suppliers We include standard questions within our procurement process with CR performance as a key consideration. We will continue to question how our suppliers and business partners address their responsibilities. Customers In November, Ecclesiastical ran a two-day Helping Hands initiative in conjunction with insurance brokers D E Ford to provide professional volunteering support to three Yorkshire charities. This is the third year Ecclesiastical has run a similar professional volunteering initiative, which has proved hugely successful over the years. 41 Ecclesiastical Insurance Ofﬁce plcSection 2/Corporate Responsibility Report Overview of CR Programme Achievements by region UK The Ecclesiastical 125 Fund Ecclesiastical’s 125 Fund was set up with the Foundation in 2012 and currently receives 100% government match-funding. It distributes small grants to Gloucestershire charities through the Gloucestershire Community Foundation. The Fund supports local registered charities, social enterprises and voluntary or community groups that:  Support people who care for others  Work with vulnerable children and adults  Focus on preserving our heritage. Seven worthy causes beneﬁted from a total of £6,300 in small grants during the last grant-giving period in 2013. National charity partnership with Carers Trust In 2012 Ecclesiastical chose Carers Trust as the company’s national charity to support in 2012–2013 because it has strong links with a number of our core business areas. In the ﬁrst year, activity as part of the partnership included supporting the charity’s ﬁrst national network conference and ﬁnancing the post of a care adviser. In the second year of our partnership we funded the charity’s national research into dementia care in the UK, resulting in the ﬁrst ever in-depth report into dementia care in the UK titled ‘A Road Less Rocky’. BITC Business Class programme Our support to Gloucestershire-based Millbrook Academy through a number of mentoring and coaching activities marked the launch of the UK-wide BITC Business Class programme in Gloucestershire. As part of the initiative, local schools and businesses are grouped together to meet on a regular basis to share best practice and pool resources. Programme members are also able to share learning and ideas with other Business Class clusters nationwide. In 2013 Ecclesiastical worked closely with Millbrook Academy for the second year and the partnership has already resulted in:  An increase in the year 7 intake  Enhanced marketing material and opportunities for the school  Opportunities for mentoring of students by staff from Ecclesiastical’s talent pool  A collaborative event with two other schools to equip students with employability skills. 42 Ecclesiastical Insurance Ofﬁce plcEcclesiatical Employees taking part in the Nightrider challenge for Carer’s Trust Ecclesiastical Insurance Ofﬁce plc 43 Section 2/Corporate Responsibility Report IRELAND National charity partnership with SOAR In 2013 our Irish business partnered with SOAR – an Irish charity foundation which delivers positive life-skills workshops within and outside the school system for young people aged 10–18. These programmes are high energy, youth relevant and uniquely different with a focus on key transitional stages in young peoples’ lives. In addition to corporate support we undertook fundraising throughout the year and raised over €10,000 in support of the work that SOAR does to make a difference to the lives of local young people. Our support was speciﬁcally used to fund SOAR programmes in 10 schools in the North West Inner City School’s Programme which is local to our Dublin ofﬁce. Fundraising included cake sales, a Christmas jumper day, a table quiz attended by staff and brokers, running the Dublin women’s mini-marathon and Connemara and Wexford half-marathons. One employee even climbed Ben Nevis and another grew a moustache for November (Movember) in support of SOAR. In 2014 we will continue to support SOAR and in addition to fundraising, hope to undertake some volunteering within SOAR. Other community support In December 2013 we lent a hand to the Dublin Simon Community in support of the work they do to help prevent and address homelessness in Dublin, Kildare and Wicklow. As well as making a monetary donation, staff also gave non-perishable foods, gifts and toys to help make a difference at Christmas to those less fortunate. The Irish team also supported other events such as the Dublin Relay in aid of Irish Autism Action and the Dublin Dockland’s 5k in aid of Barnardos. Many employees were additionally involved in and supported initiatives within their local communities. SOAR programme 44 Ecclesiastical Insurance Ofﬁce plcAnnual Report and Accounts 2013 AUSTRALIA Every year in Australia, Ansvar donates a proportion of its proﬁts to its Community Education Programme (CEP), which provides grants for organisations that support disadvantaged Australian youth through education and life-skills programmes. Since 1994, investment in these programmes has exceeded $10 million. Ansvar grants help organisations enrich the lives of young people, so they can develop themselves and give back to their communities. Doxa Youth Foundation One CEP grant recipient was the 2013 Doxa Youth Foundation Cadetship Programme, which provides grants to talented young people from disadvantaged backgrounds to enable them to go to university and make the transition from students to young professionals. The adversity experienced by the students includes homelessness, regional isolation, poverty, family/personal illness, drug and alcohol-affected family members and ﬁnancial hardship. As part of the programme, Ansvar mentors two cadets and provides eight-week work experience opportunities across the three years of their university degrees. Red Dust Programme For the last three years Ansvar has also supported the Red Dust Programme, which promotes health awareness in several remote indigenous communities across Australia. The health programmes aim to raise awareness of the link between lifestyle choices and chronic disease, with a particular focus on Australian youth. In 2013, as part of the ‘Living Longer Programme’ eight volunteers from Ansvar spent a week working in schools in three remote communities across Australia, including the outback and a remote island north of Darwin. The volunteers are role models for the youth and use sport, art, music and dance to educate students in healthy living. Red Dust programme - Australia 45 Ecclesiastical Insurance Ofﬁce plcSection 2/Corporate Responsibility Report CANADA During 2013 Ecclesiastical Canada staff continued to exhibit a strong commitment to giving back and supporting charities, communities, worthy causes and fundraising activities through a variety of philanthropic initiatives. Kids Help Phone (KHP) In 2013 Ecclesiastical Canada became a proud national sponsor of KHP, a counselling, information, and referral service that provides professional support to young people who are experiencing difﬁcult and often overwhelming problems. In addition to our corporate sponsorship which funds specialised programmes, our staff lent their support by raising funds and participating in KHP’s ‘Walk So Kids Can Talk’, Canada’s largest annual charity walk in support of youth mental health and wellbeing. Our staff from across the country also participated in KHP’s national Halloween themed bowling fundraiser ‘Boo-la-thon’ in October. Heart and Stroke Foundation For the second consecutive year our Toronto staff engaged in fundraising activities to support the Heart and Stroke Foundation’s ‘Big Bike’ campaign. Riding a bike built for 30 and pedalling around our local community was a fun way for the team to celebrate achieving its fundraising goal. Monies raised supported heart and stroke research, prevention and education. Other community support Other causes our staff lent their time, support and generosity to during the year included Aboriginal Community Forum, Halifax Clean Sweep and Typhoon Haiyan Philippine Disaster Relief. In total our Canadian staff volunteered 454 hours during 2013. ‘Walk so kids can talk’ Canada STRATEGIC REPORT APPROVAL The Strategic Report, outlined on pages 11 to 47, incorporates the Chief Executive’s Review, the Business Model and Strategy, the Key Performance Indicators, reviews of Financial Performance and Risk Management and the Corporate Social Responsibility Report and when taken as a whole, is considered by the Directors to be fair, balanced and understandable. By order of the Board Mark Hews Group Chief Executive 25 March 2014 46 Ecclesiastical Insurance Ofﬁce plc“We make a real difference to the lives of people in the markets and communities in which we operate, and I believe that our ﬁnancial strength and committed ethical approach give our business strong foundations upon which we can build our charitable giving.” Mark Hews, Group Chief Executive Ecclesiastical Insurance Ofﬁce plc 47 48 Ecclesiastical Insurance Ofﬁce plc Royal Albert Hall N O I T C E S Section 3/Corporate Governance Board of Directors Directors’ Report Corporate Governance - Board Governance - Group Finance and Investment Committee Report - Group Nominations Committee Report - Group Risk Committee Report - Group Audit Committee Report - Group Remuneration Report Independent Auditor’s Report 50 52 56 56 60 62 66 68 74 90 49 Ecclesiastical Insurance Ofﬁce plcSection 3/Board of Directors Board of Directors David Christie BA, BSc (Econ) Dip. Ed.* (a) (b) (e) Deputy Chairman and Senior Independent Director Appointed to the Board in 2001 and was appointed as the Deputy Chairman and Senior Independent Director in February 2013. He retired as Warden of St Edward’s School, Oxford, in 2004. Previously he taught and researched economics in schools and universities in the UK and Europe, and has been a trustee to a number of charities. He was appointed as a Trustee of Allchurches Trust Limited in June 2013. Will Samuel BSc, FCA* (a) (b) Chairman Appointed to the Board in January 2006 and became Chairman in June 2009. He is Chairman of TSB Bank plc and Chairman of Howden Joinery Group plc (formerly Galliform plc). Previously he was a Senior Adviser to Lazard & Co. Limited, Senior Adviser to the PRA, Trustee and Honorary Treasurer of International Alert, a Non-Executive Director of Edinburgh Investment Trust, Director of Schroder plc, Vice Chairman of Investment Banking of Citigroup Europe and Deputy Chairman and Senior Independent Non-Executive Director of Inchcape plc. Mark Hews BSc (Hons), FIA (c) Group Chief Executive S. Jacinta Whyte MC Inst. M, ACII, Chartered Insurer Deputy Group Chief Executive John Hylands FFA* (b) (c) (d) Appointed to the Board in September 2007. Until March 2007 he was an Executive Director of Standard Life plc. He is currently a Director of Alliance Trust PLC, Chairman of the trustees of the BOC and Standard Life pension schemes, a Governor of the Royal Conservatoire of Scotland and a school governor. Appointed Group Chief Executive in May 2013 and was previously the Group Chief Financial Ofﬁcer for the Group. Appointed to the Board in June 2009 and appointed to the Board of MAPFRE RE in December 2013. He was formerly a Director of HSBC Life and Chief Executive of M&S Life. Prior to this he was Finance Director at Norwich Union Healthcare. He started his ﬁnancial career at Deloitte as a consultant and actuary. Appointed Deputy Group Chief Executive and to the Board in July 2013. She is responsible for the Group’s General Insurance business globally, and was also appointed to the Ansvar Australia Board during 2013. She joined Ecclesiastical in 2003 as a General Manager and Chief Agent of the Group’s Canadian business. Starting her career as an Underwriter with RSA in Dublin in 1974, she moved with them to Canada in 1988, holding a number of senior executive positions in both Ireland and Canada. 50 Ecclesiastical Insurance Ofﬁce plcAnnual Report and Accounts 2013 Tony Latham ACII* (a) (c) (d) The Venerable Christine Wilson* (e) Denise Wilson BA (Hons), FCII* (d) (e) Tim Carroll FCII, BA, MBA* (a) (c) (d) Appointed to the Board in March 2008. Until December 2007 he was a member of the Group Executive of RSA Group plc. He is Chairman of Pool Reinsurance Limited and a Director of Codan A/S. * Non-Executive Directors (NEDs) Key to membership of Group Board Committees (a) Finance and Investment (b) Nominations (c) Risk (d) Audit (e) Remuneration Appointed to the Board in June 2012 and has served for 13 years in parochial ministry. She was Chaplain to the High Sheriff of East Sussex in 2008 and has been Archdeacon of Chesterﬁeld in the Diocese of Derby since 2010. She is also a member of the Church of England General Synod. In December 2013 she was elected as the East Midlands female regional representative to the House of Bishops. She has also been chair of a number of charities. Appointed to the Board in December 2010. She is currently CEO for the Lord Davies Review of Women on Boards, Chairman of the Friends Board at the Royal Academy of Arts, Chairman of Lorica International Limited and a Director of Lorica Consulting Group. In a prior Executive capacity, at National Grid until 2011 and previously BG Group and British Gas, she has served in many senior roles including Head of Investor Relations, Global Audit Director, and Commercial and Customer Director, and started her career in insurance with RSA. Appointed to the Board in March 2013, he is an international business leader with signiﬁcant London Market and Lloyd’s experience, including roles as CEO of Swiss Re’s UK holding company, CEO Europe of GE Insurance Solutions, President and CEO of GE Reinsurance Inc in the USA and Active Underwriter of Canopius Syndicate 4444 at Lloyd’s. He has held a number of industry positions including Chairman of the International Underwriting Association and President of the Insurance Institute of London. 51 Ecclesiastical Insurance Ofﬁce plcSection 3/Directors’ Report Directors’ Report The Directors submit their annual report and accounts for Ecclesiastical Insurance Office plc, together with the consolidated financial statements of the Group for the year ended 31 December 2013. The Group Chief Executive’s Review, Strategic Report and Corporate Governance section (this includes Board Governance, the Group Finance and Investment Committee Report, the Group Nominations Committee Report, the Group Risk Committee Report, the Group Audit Committee Report and the Group Remuneration Report) are all incorporated by reference into this Directors’ Report. Principal activities Board of Directors The Group operates principally as a provider of general insurance in addition to offering a range of ﬁnancial services, with ofﬁces in the UK, Ireland, Canada and Australia. A list of the Company’s main subsidiary undertakings are given on page 157 and details of international branches are shown on page 156. Ownership At the date of this report the entire issued Ordinary share capital of the Company and none of the issued 8.625% Non-Cumulative Irredeemable Preference Shares of £1 each (‘Preference shares’) were owned by Ecclesiastical Insurance Group plc. In turn, the entire issued Ordinary share capital of Ecclesiastical Insurance Group plc was owned by Allchurches Trust Limited, the ultimate parent of the Group. The Directors of the Company at the date of this report are stated on page 51. Tim Carroll was appointed as a Director of the Company on 2 April 2013. Mark Hews was appointed as Group Chief Executive on 1 May 2013. Michael Tripp and Steve Wood resigned from the Board on 21 May and 12 June 2013, respectively. S. Jacinta Whyte was appointed as Deputy Group Chief Executive on 16 July 2013. In line with the Financial Reporting Council’s (FRC) UK Corporate Governance Code (the Code) the Board has voluntarily chosen to comply with the recommended annual re-election of Directors. All Directors that have served since the last annual general meeting (AGM) will be proposed for re-election at the forthcoming AGM, and S. Jacinta Whyte will be recommended for election at the forthcoming AGM following recommendation from the Group Nominations Committee. The Group has made qualifying third- party indemnity provisions for the beneﬁt of its Directors. These were in place throughout the year and remain in force at the date of this report. Neither the Directors nor their connected persons held any beneﬁcial interest in any Ordinary shares of the Company during the year ended 31 December 2013. There has been no change in this position since the end of the ﬁnancial year and the date of this report. The following Directors of the Company, and their connected persons, held Preference shares in the capital of the Company at 31 December 2013: 52 Ecclesiastical Insurance Ofﬁce plcAnnual Report and Accounts 2013 DIRECTOR NATURE OF INTEREST NUMBER OF NON-CUMULATIVE IRREDEEMABLE PREFERENCE SHARES HELD David Christie Director Mark Hews Will Samuel Connected person Director 11,079 75,342 151,000 There have been no changes to their holdings between the end of the ﬁnancial year and the date of this report. No contract of signiﬁcance subsisted during or at the end of the ﬁnancial year in which a Director was or is materially interested. Dividends Dividends paid on the Preference shares were £9,181,000 (2012: £9,181,000). The Directors do not recommend a ﬁnal dividend on the Ordinary shares (2012: £nil), and no interim dividends were paid in respect of either the current or prior year. Charitable and political donations Charitable donations paid, and provided for, by the Group in the year amounted to £5.5 million (2012: £5.7 million). During the last 10 years, a total of £95.3 million (2012: £94.3 million) has been provided by Group companies for church and charitable purposes. It is the Group’s policy not to make political donations. Employees Going concern The Group recognises the importance of employee communication and aims to keep employees informed about its affairs through the use of brieﬁng groups, Group newsletters and the publication of ﬁnancial reports. Regular meetings are held between management and other employees and discussion encouraged. It is the Group’s policy to give full consideration to applications for employment by disabled persons. Appropriate adjustments are arranged for disabled persons, including retraining for alternative work of employees who become disabled, to promote their career development within the organisation. Principal risks and uncertainties The principal risks and uncertainties, together with the ﬁnancial risk management objectives and policies of the Group and Company, are included in the Risk Management section of the Strategic Report and can be found starting on page 34. The Financial Performance section on page 30 and Risk Management section of the Strategic Report starting on page 34 provide a review of the Group’s business activities and describe the principal risks and uncertainties, including exposures to insurance and ﬁnancial risk. The Group has considerable ﬁnancial resources: ﬁnancial investments of £946.5m, 97% of which are liquid (2012: ﬁnancial investments of £922.1m, 96% liquid); cash and cash equivalents of £107.2m and no borrowings (2012: cash and cash equivalents of £112.6m and no borrowings); and a regulatory enhanced capital cover of 2.6 (2012: 2.7). As a consequence, the Directors have a reasonable expectation that the Group is well placed to manage its business risks successfully and continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the annual report and accounts. 53 Ecclesiastical Insurance Ofﬁce plc Section 3/Directors’ Report Auditor and the disclosure of information to auditor So far as each person who was a Director at the date of approving this report is aware, there is no relevant audit information that the auditor is unaware of, that could be needed by the auditor in order to prepare their report. Having made enquiries of fellow Directors and the Company’s auditor, each Director has taken all the steps that they ought to have taken as a Director, in order to make themselves aware of any relevant audit information, and to establish that the auditor is aware of that information. This conﬁrmation is given and should be interpreted in accordance with the provisions of Section 418 of the Companies Act 2006. The Group Audit Committee reviews the reappointment of the auditor, including the auditor’s effectiveness and independence, and recommends the auditor’s reappointment and remuneration to the Board. Further details are disclosed in the Corporate Governance section on page 56. In accordance with Section 489 of the Companies Act 2006, a resolution proposing that Deloitte LLP be re- appointed as auditor of the Company will be put to the forthcoming AGM. Directors’ responsibilities The Directors are responsible for preparing the annual report and the ﬁnancial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare ﬁnancial statements for each ﬁnancial year. Under that law the Directors are required to prepare the Group ﬁnancial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union and Article 4 of the International Accounting Standards (IAS) Regulation and have also chosen to prepare the parent company ﬁnancial statements under IFRSs as adopted by the European Union. Under company law the Directors must not approve the accounts unless they are satisﬁed that they give a true and fair view of the state of affairs of the Company and of the proﬁt or loss of the Company for that period. In preparing these ﬁnancial statements, IAS 1 requires that Directors:  Properly select and apply accounting policies;  Present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;  Provide additional disclosures when compliance with the speciﬁc requirements in IFRSs are insufﬁcient to enable users to understand the impact of particular transactions, other events and conditions on the Company’s ﬁnancial position and ﬁnancial performance; and  Make an assessment of the Company’s ability to continue as a going concern. The Directors are responsible for keeping adequate accounting records that are sufﬁcient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the ﬁnancial position of the Company and enable them to ensure that the ﬁnancial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for the maintenance and integrity of the corporate and ﬁnancial information included on the Company’s website. Legislation in the United Kingdom governing the preparation and dissemination of ﬁnancial statements may differ from legislation in other jurisdictions. Responsibility statement We conﬁrm that to the best of our knowledge:  The ﬁnancial statements, prepared in accordance with IFRS, give a true and fair view of the assets, liabilities, ﬁnancial position and proﬁt or loss of the Company and the undertakings included in the consolidation taken as a whole;  The Strategic Report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face; and  The annual report and ﬁnancial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company’s performance, business model and strategy. By order of the Board Will Samuel Chairman 25 March 2014 Mark Hews Group Chief Executive 25 March 2014 54 Ecclesiastical Insurance Ofﬁce plc Students at Wycliffe College Ecclesiastical Insurance Ofﬁce plc 55 Section 3/Corporate Governance Corporate Governance The Board of Directors are committed to applying the highest standards of corporate governance and believe that the affairs of the Company should be conducted in accordance with best business practice. Accordingly, the Company has chosen to voluntarily comply with the Code’s Main Principles and Code Provisions, where relevant to the Company. The Code is available from the FRC’s website. The Company does not have any shares with a Premium Listing on the London Stock Exchange and is therefore not legally required to comply with the Code. The corporate governance disclosures include the Board Governance section, Group Nominations Committee Report, Group Risk Committee Report, Group Audit Committee Report and Group Remuneration Report. Board Governance The Board The Chairman and Group Chief Executive The roles of the Chairman and the Group Chief Executive are undertaken by separate individuals. The Chairman, Will Samuel, is responsible for leadership of the Board. The day- to-day management of the business is undertaken by the Group Chief Executive, Mark Hews, assisted by the Group Management Board. Senior Independent Director David Christie, Deputy Chairman, has been appointed as the Senior Independent Director (SID). The SID supports and acts as a sounding board for the Chairman and is responsible for overseeing the governance practices of the Company and leading the Directors in their appraisal of the Chairman. Along with the Chairman, the SID is the primary contact for the shareholder and they meet regularly to share and understand views. Directors’ conflicts A Conflicts Register is maintained by the Group Company Secretary to monitor and manage any potential conflicts of interest. Training on the Companies Act 2006 has been given to all Directors on the provisions and Directors are regularly reminded of their duties. Any conflicts are declared at the ﬁrst Board meeting at which the Director becomes aware of a potential conflict and then recorded in the Conflicts Register. The Board considers all conflicts in line with the provisions set out in the Company’s Articles. The Directors are required to review their interests recorded in the Conflicts Register on a biannual basis. Role of the Board The Board is responsible to the Group’s shareholders for the long-term success of the Group, its strategy, values and its governance. Great importance is placed on a well-informed and decisive Board, and Board meetings are scheduled and held regularly throughout the year. A one-year rolling plan of business for discussion is reviewed and agreed by the Board annually to ensure that the Board is focused on the right issues at the right times and sufﬁcient time is allowed for appropriate consideration and debate. 56 Ecclesiastical Insurance Ofﬁce plcAnnual Report and Accounts 2013 Ecclesiastical Board of Directors Group Finance and Investment Committee Group Nominations Committee Group Risk Committee Group Audit Committee Group Remuneration Committee The Board sets annual objectives for each year in addition to setting the Group’s strategic direction. These are implemented through approval and regular assessment of the business plan and strategy process. At each Board meeting the Directors discuss strategic and business matters, ﬁnancial, operational and governance issues and other relevant business items that arise. Following Committee meetings the Board receives oral reports from the Chairs of each Committee at the next Board meeting. Details of all the Board Committees are contained within their respective reports that follow: the Group Finance and Investment Committee Report on page 60; the Group Nominations Committee Report on page 62; the Group Risk Committee Report on page 66; the Group Audit Committee Report on page 68; and the Group Remuneration Report on page 74. The terms of reference for all ﬁve Board Committees can be obtained from either the Company’s registered ofﬁce address or the website at: Board Committees The Group has ﬁve Board Committees which are shown above. www.ecclesiastical.com/general/ investorrelations/corporategovernance/ termsofreferenceofcommittees Attendance at meetings Directors are required to attend all Board meetings and strategy days as well as Committee meetings where they are members. In 2013, six scheduled Board meetings, two additional Board meetings and two off-site strategy days were held. In addition, three scheduled training sessions took place. All Directors receive papers and minutes for all meetings, unless restricted due to conflict or sensitivity. Papers are circulated electronically, generally one week in advance of all scheduled meetings. All Directors have access to the Group Company Secretary and to independent professional advice at the Company’s expense as required. 57 Ecclesiastical Insurance Ofﬁce plcSection 3/Corporate Governance Below is a record of the Directors’ attendance for the Board meetings during 2013: Board attendance table EXECUTIVE DIRECTORS DIRECTOR SINCE MEETINGS ELIGIBLE TO ATTEND MEETINGS ATTENDED Mark Hews S. Jacinta Whyte Michael Tripp Steve Wood June 2009 July 2013 January 2007 (resigned May 2013) January 2006 (resigned June 2013) 10 3 4 5 9 2 3 4 NON-EXECUTIVE DIRECTORS DIRECTOR SINCE MEETINGS ELIGIBLE TO ATTEND MEETINGS ATTENDED Will Samuel (Chairman) January 2006 David Christie (SID) Tim Carroll Sir Philip Mawer John Hylands Denise Wilson Tony Latham Christine Wilson January 2001 March 2013 February 2008 (resigned February 2013) September 2007 December 2010 March 2008 June 2012 10 10 7 2 10 10 10 10 10 10 6 2 9 10 8 8 During 2013, the Board made decisions on the following business issues and routine matters: Routine matters Operational matters Board’s annual objectives Financial performance and statements Risk management, appetite, and registers Overview of compliance and audit work undertaken for the Group Audit Committee Dividends, charitable donations and Gift Aid Setting and reviewing budgets Committee reports and recommendations Performance, strategic and business plans for Group businesses Group reinsurance arrangements General insurance claims reserves Sales and claims Treating Customers Fairly and complaints handling Review of staff pension arrangements Determining NEDs’ fees for recommendation at a general meeting Stakeholder relationships Review of UK General Insurance business including niches Review of overseas businesses Projects Exiting motor insurance Review of capital structure Restructure of the underwriting business Review of Group structure Review of Governance arrangements Governance and regulatory matters Changes to Executive Directors Taxation matters Evaluation of the Board 58 Ecclesiastical Insurance Ofﬁce plcAssurance on the adequacy and effectiveness of internal control systems is obtained through management reviews, control self-assessment and internal audits. Systems of internal control are designed to manage rather than eliminate the risk of failure to achieve business objectives, and can provide reasonable, but not absolute assurance as to the prevention and detection of ﬁnancial misstatements, errors, fraud or violation of law or regulations. By order of the Board Mrs. R. J. Hall Group Company Secretary 25 March 2014 Internal controls The Board is ultimately responsible for the systems of risk management and internal control maintained by the Group and reviews their appropriateness and effectiveness annually. The Board views the management of risk as a key accountability and is the responsibility of all management and believes that, for the period in question, the Company has maintained an adequate and effective system of risk management and internal control that complies with the Code. Further details are set out in the Risk Management section on page 34. The Company embeds risk management into its strategic and business planning activities whereby major risks that could affect the business in the short and long term are identiﬁed by the relevant management together with an assessment of the effectiveness of the processes and controls in place to manage and mitigate these risks. The Chartered Institute of Internal Auditors (CIIA) issued guidance during 2013, and as a result of this guidance the Internal Audit and Compliance functions now have separate reporting lines. The Compliance function is now clearly operating in the second line of defence. More detail on how these functions operate can be found in the Group Audit Committee Report which starts on page 68. The Group’s internal control framework is vital in setting the tone for the Group and in creating a high degree of control consciousness in all employees. A Code of Conduct and a Code of Ethics is embedded into the culture of the Group and is accessible to all staff via the intranet. Annual Report and Accounts 2013 59 Ecclesiastical Insurance Ofﬁce plcSection 3/Group Finance and Investment Committee Report Group Finance and Investment Committee Report Chairman’s introduction I am pleased to present the Group Finance and Investment Committee’s report describing the work we have undertaken during the past year. I have handed the Chairmanship of the Committee over to Tim Carroll from 1 January 2014 and he will report on the Committee’s activities in future years. Our main purpose is to ensure that the management of the Group’s financial assets, including its investment portfolio, is properly governed, controlled and performing as expected. We also review and advise on any major financial decisions on behalf of the Board. This report gives more information on how we performed our duties during 2013. David Christie Chairman of the Group Finance and Investment Committee Membership The members of the Group Finance and Investment Committee are shown in the table below: COMMITTEE MEMBER MEMBER SINCE MEETINGS ELIGIBLE TO ATTEND MEETINGS ATTENDED David Christie (Chairman)* September 2010 Tim Carroll* Will Samuel Tony Latham Michael Tripp August 2013 March 2006 February 2009 June 2008 (resigned May 2013) 5 4 5 5 2 5 3 5 5 1 *Tim Carroll was appointed Chairman of the Committee with effect from 1 January 2014. 60 Ecclesiastical Insurance Ofﬁce plcThe Committee reviews its terms of reference annually and during the year held four scheduled meetings and an additional meeting. The remit of the Committee, in line with its terms of reference and designated ﬁnancial limits, is to:  Provide broad Group strategy and set investment parameters for Group portfolio investment matters including derivative instruments within the context of overall risk to the business and monitor adherence to parameters;  Consider and review Group treasury management and Group tax strategies;  Consider monthly investment reports and review investment performance against benchmark levels; and  Consider and review Group  Oversee and review performance of capital management, taking into consideration the Individual Capital Assessment (ICA) and risk appetite;  Consider and review major capital projects and contracts; delegated funds. During 2013, the remit of the Committee was extended to be on a ‘Group basis’. Its main activities were in line with its remit above and included:  Consider and review major  Review of the annual investment investments of the Group including the acquisition or disposal of interests of more than 5% in the voting shares of any listed company;  Consider and review acquisitions and disposal of investment property or businesses by the Group, and enter into formal discussions with the intention of making a takeover offer;  Consider and review borrowing monies, committing any Group Company to a guarantee or indemnity for the performance of a subsidiary, or authorising a mortgage or a charge over the whole or any part of the Group’s undertaking;  Consider and review circulars to shareholders and listing particulars;  Provide broad strategy and set speciﬁc investment parameters for portfolio investment matters within the context of the Board’s assessment of overall risk to the business; strategy;  Setting investment parameters for Group portfolio investment and review of derivative instruments;  Review of quarterly investment reports and investment performance against benchmark levels;  Review of investment property;  Consideration of a potential acquisition by a subsidiary;  Review of tax strategy;  Review of treasury management; and  Review of the evaluation results of the Committee undertaken in 2012. By order of the Board David Christie Chairman of the Group Finance and Investment Committee 25 March 2014 Annual Report and Accounts 2013 61 Ecclesiastical Insurance Ofﬁce plcSection 3/Group Nominations Committee Report Group Nominations Committee Report Chairman’s introduction I am pleased to present the Group Nominations Committee’s report describing the work we have carried out in 2013. Our main purpose is to ensure that there is an appropriate balance of skills, knowledge and experience on the Board, its Committees and within the Group’s subsidiary companies. This report gives more detailed information on how we performed our duties during the year. Will Samuel Chairman of the Group Nominations Committee Membership The Group Nominations Committee comprises the NEDs shown below and are appointed by the Board: COMMITTEE MEMBER MEMBER SINCE MEETINGS ELIGIBLE TO ATTEND MEETINGS ATTENDED Will Samuel (Chairman) June 2008 David Christie John Hylands Sir Philip Mawer January 2001 May 2013 November 2009 (resigned February 2013) 4 4 3 1 4 4 3 1 The Committee held three scheduled meetings and one additional meeting during the year. The remit of the Committee, in line with its terms of reference, is to:  Review the structure, size and composition of the Board, its Committees and subsidiary companies;  Conduct evaluations of the Board and Committees and make recommendations to the Board;  Oversee and approve the Board composition and ofﬁcer changes in Group subsidiaries and senior management changes within the Group; 62 Ecclesiastical Insurance Ofﬁce plcAnnual Report and Accounts 2013  Consider Board and senior executive succession planning for the Group;  Assess and review Directors’ skills, knowledge and experience;  Review the Group’s leadership needs in order to compete effectively in the target markets;  Undertake recruitment of new Directors and Executives to the Board, utilising external search consultancy as appropriate; and  Oversee the content and operation of the induction programme, annual training programme, and continuous professional development (CPD) of Directors. The principal activities of the Committee during 2013 included:  Review of the Board’s composition;  Review and agreement of the matrix of the Board’s leadership skills and technical skills to identify gaps;  Review of the Succession Plans for the Board and Senior Management;  Selection and recommendation of the appointment of Tim Carroll as a new NED to the Board;  Commencement of a selection process for a new NED;  Utilisation of an external search consultancy, to select and recommend the appointment of Mark Hews as Group Chief Executive;  Recommendation of S. Jacinta Whyte as Deputy Group Chief Executive;  Review of diversity trends across the Group;  Monitoring the implementation of recommendations arising from the external evaluation of the Board’s strategy approach undertaken in 2012;  Assessing the outcomes of the evaluation of Internal Board Committees which was undertaken at the end of 2012;  Internal Board evaluation at the end of 2013;  Review of the Directors’ annual appraisal and development needs;  Review of the CPD programme for Directors; and  Review of the Board training programme. Board composition and independence The Board comprises a Non-Executive Chairman, six other NEDs and two Executive Directors. The Company believes the size and composition of the Board gives it sufﬁcient independence, balance and broad experience to consider the issues of strategy, performance, resources and standards of conduct. The strong representation of NEDs on the Board demonstrates its independence, provides a greater depth of experience and facilitates challenge. Board appointments All NEDs are provided with a Letter of Appointment on acceptance of the appointment, which includes the terms and conditions of their role. Letters of Appointment are available on request from the Group Company Secretary. Board diversity Ecclesiastical recognises the beneﬁts of having a diverse Board. It is committed to improving diversity on the Board, including gender diversity and acknowledges diversity both improves performance of the Board and strengthens the business. Currently the representation of women on the Board stands at 33%, with three women members in a current membership of nine. The Board will take the opportunity, as and when appropriate, to improve further its gender balance. An external search consultancy has been used in the appointment of NEDs during the year to ensure best practice is adhered to. The Board also recognises the importance of improving gender balance at senior levels within the organisation and is actively reviewing diversity across the Group. Board performance and evaluation Induction All Directors are required to undertake a formal and comprehensive induction to the Group upon joining the Board. The induction is a three-stage process and is undertaken by the Legal and Secretarial Department. On acceptance of a position on the Board, all Directors receive an induction pack, which includes their appointment letter and terms; latest audited report and accounts; constitutional documents; protocols on conflicts of interest, price-sensitive information, Directors’ duties, share dealing, data protection and Board procedures; the Code; Board minutes for the current and past year; and Board dates and contact details. After appointment, a two-day induction programme is provided where presentations are given by Legal and Secretarial, Group Compliance, Finance, Group Risk, Actuarial, Group Strategy, and Heads of the businesses. The programme is also offered to other Directors as a refresher every two years and when a programme is being run. New Directors also meet individually with the Chairman of the ultimate parent company (Allchurches Trust Limited), 63 Ecclesiastical Insurance Ofﬁce plcSection 3/Group Nominations Committee Report the Group Chairman, the Deputy Chairman and the SID, and each of the Executive Directors. The third stage of the induction is participation in the Board’s CPD programme. Training Throughout the year, Directors participate in the CPD programme, which includes internal training on topical issues (including business familiarisation) relevant to the Company’s commercial and regulatory environment and attendance on relevant external CPD opportunities, funded by the Company. In 2013, three internal training sessions took place and covered Underwriting, Risk Framework, Treating Customers Fairly, and Human Resources. The Group Company Secretary maintains annual CPD records for all Directors, which the Chairman reviews as part of their annual appraisal. Training and development needs of Board members are also reviewed in the Committee. Performance evaluations At the end of 2012 the Committee led an internal evaluation of the ﬁve Board Committees, assisted by the Company Secretariat. All Committee members were required to complete bespoke Committee assessments. The outcome of the evaluations was considered by the Group Nominations Committee in February 2013 and recommendations were agreed and implemented. In October 2013, an internal evaluation of the Board was undertaken, assisted by the Company Secretariat. The outcome of the evaluation was considered by the Board at its December Meeting and recommendations were agreed. The Group Nominations Committee will monitor their implementation. The Committee intends to keep the need for a full external evaluation of the Board under regular review, with the expectation that it will be undertaken every two years as recommended by the Code. A company called Independent Audit Limited carried out the previous external evaluation of the Board and is not connected to Ecclesiastical Insurance Ofﬁce plc. The next external evaluation is expected to take place at the end of 2014 and we have not yet decided which company will carry this out on our behalf. All Directors receive an annual appraisal from the Chairman. The Chairman is appraised by the Board, in his absence, led by the SID. Re-election of Directors In line with the Code, the Board has voluntarily chosen to comply with the annual re-election of Directors. NEDs are appointed for a period of three years, and are expected to serve a minimum of two consecutive terms, subject to satisfactory performance. Where NEDs have served for more than six years the Committee has undertaken a rigorous annual review before their recommendation for annual re-election. The report and accounts accompany the AGM notice and therefore provide the biographical information for the Board members seeking election and re-election. In 2013, three NEDs, Will Samuel, David Christie and John Hylands, have all served for more than six years on the Board. The Committee has considered, in their absence, each NED’s respective contribution and attributes, the Board composition and succession planning when making their decision. Following rigorous review, the Committee was satisﬁed that their length of service has not affected their independence and has proposed them for re-election at the forthcoming AGM. The Chairman is satisﬁed that the performance of each NED is effective and sufﬁcient time has been spent on the Company’s affairs. The Board believes that all the NEDs were independent throughout 2013. Independence is reviewed as part of each Director’s annual appraisal, considered by the Committee, and agreed by the Board annually. The Board has determined that, even though David Christie has served as a Director for more than nine years, he should be regarded as an independent NED as he remains independent in character and judgement and there are no circumstances or relationships likely to affect his judgement as a Director. Executive Directors’ other commitments External directorships are considered to be valuable in terms of broadening the experience and knowledge of Executive Directors, provided there is no actual or potential conflict of interest, and the commitment required is not excessive. All appointments are subject to approval by the Board, and the Conflicts Register maintained by the Group Company Secretary is used to monitor external interests. Any monetary payments received by Executive Directors from outside directorships are paid over to and retained by the Company. Non-Executive Directors’ commitments The Committee evaluates the time NEDs spend on the Company’s business annually and is satisﬁed that in 2013 the NEDs continued to be effective and fulﬁlled their time commitment as stated in their letters of appointment. Accordingly, all NEDs at the date of this report are recommended for re-election at the AGM. By order of the Board Will Samuel Chairman of Group Nominations Committee 25 March 2014 64 Ecclesiastical Insurance Ofﬁce plcPhotograph by Claire Niewiarowski Ecclesiastical Insurance Ofﬁce plc 65 Section 3/Group Risk Committee Report Group Risk Committee Report Chairman’s introduction I am pleased to present the Group Risk Committee’s report describing the work we have done during the past year. The Group has voluntarily chosen to include a Group Risk Committee Report in the Annual Report of the Company in addition to the disclosures in the Risk Management section on page 34. Tony Latham Chairman of the Group Risk Committee Membership The Group Risk Committee members and their attendance at meetings during the year are shown below: COMMITTEE MEMBER MEMBER SINCE MEETINGS ELIGIBLE TO ATTEND MEETINGS ATTENDED Tony Latham (Chairman) June 2010 Mark Hews Tim Carroll John Hylands June 2010 (resigned 12 February 2014)* August 2013 September 2010 4 4 2 4 4 4 2 4 * S. Jacinta Whyte has been appointed to replace Mark Hews with effect from 12 February 2014 66 Ecclesiastical Insurance Ofﬁce plcAnnual Report and Accounts 2013 The Group Risk Committee was created in June 2010 and comprises the Directors shown in the table opposite who were appointed by the Board. In addition, Will Samuel (Chairman of the Board) is normally in attendance at the meetings. The Chief Risk Ofﬁcer reports to the Committee and has direct access to the Chairman of the Committee and the NEDs. The Committee ensure that they meet with the Chief Risk Ofﬁcer at least once a year without the Executives present. The remit of the Committee is to:  Recommend and monitor the Group’s overall risk appetite, tolerance and strategy in the context of the current and prospective macroeconomic and ﬁnancial environment;  Recommend and monitor the Group’s strategy, policy and processes for risk management;  Monitor the effectiveness of the Group’s Enterprise Risk Management Framework, risk policies and systems;  Receive and review risk-based management reports and other information, making recommendations for change as appropriate;  Ensure that material risks facing the Group have been identiﬁed and addressed appropriately;  Consider the effect on the risks of the Group of material ﬁndings of Compliance and Internal Audit reports carried out for the Group Audit Committee;  Recommend the Individual Capital Assessment (ICA);  A ‘dry run’ Own Risk and Solvency Assessment (ORSA) at Group level;  The risk impact of remuneration proposals and approval of the report to the Group Remuneration Committee;  The risks arising from writing liability business;  Property concentrations by business unit;  The approval of Reverse Stress Test results and recommendations arising;  The approval of Insurance Risk and Operational Risk Policy; and  The capital requirements across the Group, and recommendation of the Group’s ICA as at the end of 2012. By order of the Board Tony Latham Chairman of the Group Risk Committee 25 March 2014  Approve the appointment or removal of the Chief Risk Ofﬁcer;  Ensure that the Board receives adequate training on risk matters; and  Ensure appropriate liaison with other Board Committees, e.g. the Group Remuneration Committee and the Group Audit Committee. During 2013, the Committee held four meetings. In addition to the routine matters highlighted above, it also speciﬁcally considered:  The Group’s strategic risk proﬁle, ensuring that this provided an accurate reflection of the Group’s key risks;  The annual review and recommendation of the Group’s risk appetite (including catastrophe risk appetite);  Reporting against the risk appetite from each of the Executive Risk Committees at each ordinary meeting and where appropriate challenging appetite breaches or potential breaches;  Proposed changes to risk appetite and proposed exceptional transactions on an as required basis to conﬁrm that these were appropriately authorised and did not expose the Group to undue risks;  Stress and scenario testing carried out across the Group including Reverse Stress Testing; 67 Ecclesiastical Insurance Ofﬁce plcSection 3/Group Audit Committee Report Group Audit Committee Report Chairman’s introduction I am pleased to present the Group Audit Committee’s report describing the work we have done during the past year. We have considered the provisions of the new Code and the FRC Guidance on audit committees and modified our terms of reference to take account of them. These changes have reinforced the role of the Committee, on behalf of the Board, in ensuring that the Annual Report, taken as a whole, is fair, balanced and understandable. We have also expanded our report to provide more detail on the significant issues considered by the Committee in relation to the financial statements and how these issues were addressed. John Hylands Chairman of the Group Audit Committee Membership The Committee members have been selected with the aim of providing the wide range of ﬁnancial and commercial expertise necessary to fulﬁl the Committee’s duties. The Board considers that John Hylands has recent and relevant ﬁnancial experience, as required by the Code. The Group Audit Committee members and their attendance at meetings during the year are shown below: COMMITTEE MEMBER MEMBER SINCE MEETINGS ELIGIBLE TO ATTEND MEETINGS ATTENDED John Hylands (Chairman) March 2008 Tim Carroll Tony Latham Denise Wilson April 2013 December 2008 August 2011 6 2 6 6 6 2 5 6 68 Ecclesiastical Insurance Ofﬁce plcCommittee meetings During the year, the Committee had six scheduled meetings. In addition to the members of the Committee the Chairman of the Board, the Group Chief Executive, the Group Finance Director, the Group Internal Audit Director and the Group Compliance Director attend meetings by invitation. Other relevant people from the business are also invited to attend certain meetings in order to provide a deeper level of insight into certain key issues and developments. We also invite our external auditor, Deloitte LLP, to attend most meetings, and during 2013 they attended ﬁve out of the six meetings held. The Committee also meets with the Group Internal Audit Director on an annual basis, without management present, to discuss the Group Internal Audit (GIA) function and any issues arising from its activity. In addition, the Committee also meets with the external auditor on an annual basis, without management present, to discuss the external audit and any issues arising from it. Key objectives The Committee’s key objectives are the provision of effective governance over the appropriateness of the Group’s ﬁnancial reporting (including the appropriateness of the judgements made in respect of the ﬁnancial results and the adequacy of related disclosures), the performance of both the GIA function and the external auditor, and the management of the Group’s systems of internal control and related compliance activities. Main activities of the Committee during the year At its six meetings during the year, the Committee focused on: Financial reporting The primary role of the Committee in relation to ﬁnancial reporting is to review, challenge and agree the appropriateness of the half-year and annual ﬁnancial statements concentrating on, amongst other matters:  The quality and acceptability of the Group’s accounting policies and practices;  The clarity of the disclosures and compliance with ﬁnancial reporting standards and relevant ﬁnancial and governance reporting requirements;  Material areas in which signiﬁcant judgements have been made by the Group or there has been discussion with the external auditor;  Whether the Group’s annual report and accounts, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Group’s performance, business model and strategy; and  Any correspondence from regulators in relation to our ﬁnancial reporting. To aid this review, the Committee considered reports from the Group Management Board, the Group Finance Director and also reports from the external auditor on the outcomes of their half-year review and annual audit. As a Committee we support Deloitte LLP in displaying the necessary professional scepticism their role requires. Annual Report and Accounts 2013 Audit planning The Committee oversees the plans for the audit to ensure it is comprehensive, risk based and cost effective. Deloitte and each component auditor draft an initial audit plan in conjunction with executive management and present them for review by the Committee. The plans describe the proposed scope of the work and the approach to be taken. They also propose the materiality levels to be used. In order to focus the audit work on the right areas the auditors identify particular risk issues based on their knowledge of the business and operating environment, discussions with management and the half-year review. The fee for the audit is also proposed as part of this discussion. Review of financial statements and audit findings The Committee reviewed the full and half-year ﬁnancial statements and the reports of the external auditor on these statements. The Deloitte partner responsible for the Group’s audit attends the Audit Committee meetings to present the reports and answer questions from Committee members. Senior Deloitte staff who have had day- to-day involvement in the conduct of the audit also attend. 69 Ecclesiastical Insurance Ofﬁce plcSection 3/Group Audit Committee Report The Committee considered the following signiﬁcant issues: ISSUE ASSESSMENT General insurance claims reserves Life insurance reserves Carrying value of goodwill Valuation of deﬁned beneﬁt pension scheme liability Carrying value of tax liabilities The estimation of the ultimate liability arising from claims made under general business insurance contracts is a critical accounting estimate. There is uncertainty as to the total number of claims made on each class of business, the amounts that such claims will be settled for and the timings of any payments. The Committee considered detailed reports provided by the Group’s senior actuary on the adequacy of the Group’s general insurance reserves at both the half year and the full year. During 2013 an independent review of liability claims reserves for our UK business was carried out by Towers Watson. Following challenge and debate the Committee concluded that the assumptions made and judgements applied were reasonable and appropriate. The calculation of the Group’s life insurance reserves requires management to make signiﬁcant judgements about bond yields, discount rates, credit risk, mortality rates and current expectations of future expense levels. The Actuarial Function Holder’s proposed assumptions are reviewed, challenged and agreed by the Ecclesiastical Life Limited Board. Any one-off or unusual items are referred to the Committee for further approval. During 2013 the Committee speciﬁcally considered the run-off expense provision set up once ELL closed to new business and concluded that it was reasonable. All other assumptions were reviewed by the Committee at a high level and, following this review and consideration of the report of the external auditor, the Committee was satisﬁed that the judgements made were reasonable and appropriate. The judgements in relation to asset impairment largely relate to the assumptions underlying the calculation of the value in use of the business being tested for impairment, primarily the achievability of the long-term business plan and macroeconomic assumptions underlying the valuation process. The Committee addresses these matters by receiving reports from management outlining the basis for the assumptions used. Business plans are reviewed, challenged and signed off by the Board. After review, the Committee agreed with management’s conclusions that no material impairment was required for any of the businesses under review. Although the Group’s deﬁned beneﬁt pension schemes remain in surplus, the liabilities of the schemes are material in comparison to the Group’s net assets and the valuation requires many actuarial assumptions, including judgements in relation to long-term interest rates, inflation, longevity and investment returns. The actuarial assumptions used are based on advice from the Group’s pension adviser, who also performs the calculations in respect of the schemes. The Committee considered the assumptions used, and also compared them to benchmark data. In addition, the Committee considered whether it was appropriate to recognise the pension fund surplus as an asset of the Group. After review of the assumptions used, the external advice provided, benchmark data and careful consideration of the requirements of IAS 19(R) and International Financial Reporting Interpretations Committee (IFRIC) 14, the Committee concluded that reasonable assumptions had been used and recognition of the surplus as an asset of the Group was appropriate. The calculation of tax liabilities requires management to make judgements in respect of the expected tax payable for the current and prior periods based on the interpretation of applicable tax legislation. In particular, the Group has a material liability for deferred tax which primarily relates to future tax due on unrealised gains in respect of equities held prior to 2002. The Committee reviewed the material judgements management had applied in respect of tax calculations in 2013 and concluded that they were appropriate. 70 Ecclesiastical Insurance Ofﬁce plcAnnual Report and Accounts 2013 Assessment of the external auditor The Committee is required to assess the qualiﬁcations, expertise, resources and independence of the external auditor and the objectivity and effectiveness of the audit process. At the conclusion of each audit the Committee performs a speciﬁc evaluation of the performance of the external auditor. This assessment was carried out during the year on the basis of the Committee’s own appraisal of the performance of the auditor and the views of the senior management team as well as consideration of materials provided by the auditor. The criteria used for this assessment remained unchanged from last year and were as follows:  Delivery of a thorough and efﬁcient global audit in compliance with agreed plan and timescales;  Provision of accurate, robust and perceptive advice on key accounting and audit judgements, technical issues and best practice;  A high level of professionalism and technical expertise consistently demonstrated by all audit staff and maintenance of continuity within the core audit team; and  Strict adherence to independence policies and other regulatory requirements. There were no signiﬁcant ﬁndings from the evaluation this year, although where appropriate, actions were agreed against any points raised. Independence of the external auditor Deloitte LLP has been the external auditor of the Company since 1998 and there has been no tender held for audit services during that time. The Committee monitors arrangements to ensure that the partner in charge of the audit is changed every ﬁve years and that the relationship between the auditor and management does not affect the auditor’s independence. The Committee also keeps under review whether the external audit should be tendered. Due to the rotation of the audit partner for the 2013 ﬁnancial period, the Committee did not consider a tender of the external audit was required. However, the Committee intends to comply fully with the FRC Audit Committees Guidance regarding the frequency of audit tender and we will consider each year whether to tender the audit. The Committee is responsible for the development, implementation and monitoring of the Group’s policy on the provision of non-audit services by the external auditor. The policy is reviewed annually by the Committee to ensure alignment with the latest standards on auditor objectivity and independence, and compliance with the policy. The policy covers a number of areas including:  The Group’s restrictions, procedures and safeguards, relative to the engagement of the external auditor on non-audit services;  The Group’s requirements for the pre-approval and reporting of fees for non-audit services;  Policy on the appointment of former audit employees of the external auditor; and  The requirement to keep a register of all former employees of the current external auditor employed by the Group. The Company determines non-audit services which are prohibited and those which are permitted ‘subject to safeguards’. The Group’s aim is to identify appropriate service providers and ensure that any non-audit work is carried out by the most appropriate provider in a manner that affords fullest value for money. The policy is shared with the external auditor of the Group. Adherences to the policy and non-audit fees incurred are regularly reviewed by the Committee. For the year ended 31 December 2013, the Group was charged £340,000 (exc VAT) by Deloitte LLP and its associates for audit services. The fees for other services amounted to £103,000, making total fees from Deloitte LLP of £443,000. None of the non-audit services provided during the year was in respect of signiﬁcant engagements. More detail can be found in note 11 to the ﬁnancial statements on page 123. There are no contractual obligations to restrict the choice of external auditor. Following the assessment of the external auditor’s effectiveness and their remuneration, the Committee recommended to the Board that Deloitte LLP be reappointed as the auditor of the Company at the forthcoming AGM. Effectiveness of internal control and risk management The Group’s approach to internal control and risk management is set out in the Corporate Governance report on page 59. In reviewing the effectiveness of the system of internal control and risk management during 2013 the Committee has:  Reviewed internal audit reports;  Monitored management’s responsiveness to the ﬁndings and recommendations of the Head of Internal Audit;  Met with the Head of Internal Audit once during the year, without management being present, to discuss any issues arising from internal audits carried out; 71 Ecclesiastical Insurance Ofﬁce plcSection 3/Group Audit Committee Report  Decided to undertake a formal evaluation and independent assessment of the GIA function in the forthcoming year;  Received update reports from the Group Risk Committee;  Reviewed regular reports from the Head of Group Compliance;  Reviewed the Group’s anti-bribery and corruption code of conduct; and  Reviewed the Group’s Whistleblowing policy. As explained in the Corporate Governance report on page 59, Internal Audit and Compliance now have separate reporting lines. The change took place with effect from 1 January 2014; during 2013 both areas reported to the same individual, the Director of Group Internal Audit and Group Compliance, who reported to the Committee in respect of both areas. Internal control over financial reporting Internal control over ﬁnancial reporting is a process designed to provide reasonable, but not absolute, assurance regarding the reliability of management and ﬁnancial reporting in accordance with generally accepted accounting principles. Controls over ﬁnancial reporting policies and procedures include controls to ensure that:  Through clearly deﬁned role proﬁles and ﬁnancial mandates, there is effective delegation of authority;  There is adequate segregation of duties in respect of all ﬁnancial transactions;  Commitments and expenditure are appropriately authorised by management;  Records are maintained which accurately and fairly reflect transactions;  Any unauthorised acquisition, use or disposal of the Company’s assets that could have a material effect on the ﬁnancial statements should be detected on a timely basis;  Transactions are recorded as required to permit the preparation of ﬁnancial statements; and  The Company is able to report its ﬁnancial statements in compliance with IFRS. Due to inherent limitations, internal control over ﬁnancial reporting may not prevent or detect misstatements. Risk management and control systems provide reasonable assurance that the ﬁnancial reporting does not contain any material inaccuracies. Through its review of reports received from management, along with those from internal and external auditors, the Committee did not identify any material weaknesses in internal controls over ﬁnancial reporting during the year. The ﬁnancial systems are deemed to have functioned properly during the year under review, and there are no current indications they will not continue to do so in the forthcoming period. GIA GIA is guided by the Committee and provides independent, objective assurance to the Board that the governance processes, management of risk and systems of internal control are adequate and effective to mitigate the most signiﬁcant risks to the Group. The Committee has oversight responsibilities for the Internal Audit Department and the Group Internal Audit Director is accountable to the Committee Chairman, reports administratively to the Group Chief Executive Ofﬁcer and has access to the Chairman of the Board. GIA’s annual programme of work is risk based and designed to cover areas of higher risk or speciﬁc focus across the Group. The plan is approved annually by the Committee and during 2013 it was reviewed regularly to accommodate changes required as a consequence of the Group’s changing risk proﬁle. All proposed changes to the plan were reviewed, challenged and approved by the Committee during the year. Throughout the year, the GIA submitted quarterly reports to the Committee summarising ﬁndings from their work, and the responses from and action plans established by management. During 2013, the Committee monitored the progress of the most signiﬁcant action plans to ensure that these were completed in a timely manner and to a satisfactory standard. Group Compliance Group Compliance provides assurance to the Board that the Group is compliant with its regulatory obligations and for mitigating any risk that the ﬁrm might be used to further ﬁnancial crime. In addition, it also ensures that appropriate mechanisms exist to identify, assess and address new and emerging regulatory obligations and compliance risks that may impact the Group. The Committee has received and considered regular reports from the Group Compliance Director at each of its meetings and discussed the speciﬁc management actions identiﬁed to address or mitigate issues which arose during the year. The Committee also considered the impact of the changes in the UK and European regulatory 72 Ecclesiastical Insurance Ofﬁce plclandscape, particularly in light of the shift in UK regulatory focus following the split of the Financial Services Authority into the Prudential Regulation Authority and the Financial Conduct Authority during the year. Legal and regulatory developments The Committee receives regular reports and considers the impact of legal and regulatory developments on the UK Group to control legal and regulatory risk. They monitor the application and impact of any actions required by the business or organisation through to completion. Reports are shared with relevant business areas, and with relevant subsidiary Boards and Board Committees. By order of the Board John Hylands Chairman of the Group Audit Committee 25 March 2014 © Richard Proctor Ecclesiastical Insurance Ofﬁce plc 73 Section 3/Group Remuneration Report Group Remuneration Report The information contained in the Group Remuneration Committee Chairman’s Statement and the Directors Remuneration Policy is not subject to audit. Dear Shareholder, As Chair of the Group Remuneration Committee (the Committee), I am pleased to introduce the Group Remuneration Report for the year ending 31 December 2013 and to highlight some of the key aspects of the Committee’s work during the ﬁnancial year. In addition to me, the Committee during the year comprised two Non-Executive Directors (NEDs), Christine Wilson and David Christie, who were appointed by the Board in April, following the resignation of John Hylands in March. There were six meetings in total, three scheduled meetings and three additional meetings. Membership The Group Remuneration Committee members and their attendance at meetings during the year are shown below: COMMITTEE MEMBER MEMBER SINCE MEETINGS ELIGIBLE TO ATTEND MEETINGS ATTENDED Denise Wilson (Chair) December 2011 David Christie John Hylands April 2013 November 2012 (resigned March 2013) Christine Wilson April 2013 6 5 1 5 6 5 1 5 74 Ecclesiastical Insurance Ofﬁce plcAnnual Report and Accounts 2013 Group Remuneration Committee Chairman’s Statement This year we have improved the structure and content of the Group Remuneration Report, following the ﬁnal publication of the new reporting regulations by the government in June 2013. Albeit our Group structure does not require us to comply with the listed companies regulations, as in previous years, we have chosen to largely adopt current reporting requirements, in order to provide greater transparency and follow best practice. Following on from this statement, there is a distinct Directors Remuneration Policy, which sets out the structure and elements of pay and how they interact. This can be found starting on page 76, and in addition, an Annual Report on Remuneration, starting on page 82 which describes how our policies have been implemented and provides retrospective disclosures on Directors remuneration for 2013. As announced on 1 May 2013, Mark Hews, previously Chief Financial Ofﬁcer, succeeded Michael Tripp as Group Chief Executive. The Committee carefully considered transition arrangements for the outgoing Group Chief Executive, as well as the remuneration package for the new Group Chief Executive. These were discussed with our ultimate parent company Allchurches Trust Limited (ATL), and details of these arrangements can be found starting on page 77 in this remuneration report. We also saw the appointment of S. Jacinta Whyte to the Board in July 2013, as she succeeded Steve Wood as Managing Director of UK General Insurance and assumed additional Group responsibilities under a new position of Deputy Group Chief Executive. Consideration was given to the remuneration package of the Deputy Group Chief Executive, as well as the contractual entitlements of the departing Managing Director of UK General Insurance. Appointing two new Executive Directors to the Board clearly presented some challenges. It was important to balance the immediate demands of the role, given the poor underwriting performance across the Group, to the experience of those appointed. Engaging specialist advice from Hewitt New Bridge Street, we were able to benchmark appropriate remuneration packages, including the design of a new three-year incentive plan, beginning in the 2014 ﬁnancial year. This is intended to focus efforts on speciﬁc deliverables deemed critical to the required turnaround in underwriting performance and proﬁtability of the Group. As described in the Strategic Report starting on page 11, the Group continues to operate in challenging times with efforts focused in the second half of the year on improving underwriting proﬁtability and transforming business processes, whilst maintaining good service to customers. This work will continue throughout 2014. We know that these are difﬁcult economic times, bringing challenges for the industry and for Ecclesiastical, and therefore our approach to remuneration remains restrained. On the basis of 2012’s performance, a decision was taken to forgo the usual annual pay increase for all UK and Ireland employees, though we were able to give a degree of recognition for individual performance through our annual bonus scheme. However during 2013, we have delivered a strong investment return with mixed underwriting results, improving our Proﬁt Before Tax (PBT) to £67m (2012: £38m) and it is important that we reward employees at all levels for good performance, in a year which has seen many challenges for Ecclesiastical. In this context, the Committee are satisﬁed that an annual bonus payment of around 45% of the maximum potential value for the Group Chief Executive is reflective of performance. This year we have also reviewed the structure of our incentive schemes and the Committee are satisﬁed that the current arrangements are appropriate. However, we will be undertaking a strategic review of our Remuneration Policy during the coming year, including incentive schemes, to ensure we are able to attract and retain talented individuals for the Group. Finally, I value continued support from our charitable owner ATL, and remain mindful of our responsibilities to drive sustained and improved performance over the long term and ensure our remuneration strategy, policy and principles deliver our objective of giving £50m to charity over three years. Denise Wilson Chair of the Group Remuneration Committee 75 Ecclesiastical Insurance Ofﬁce plcSection 3/Group Remuneration Report Directors Remuneration Policy The Directors Remuneration Policy (the Policy) described in this part of the report is intended to apply for the year from January to December 2014, and describes the structure and elements of pay and how they interact. The Policy differs very little from the one that was applied for the 2013 financial year. The principles underlying the Policy are the recruitment, incentivisation and retention of talented individuals for the Group. We aim to do this without encouraging unnecessary risk-taking, and by developing remuneration practices consistent with the wider workforce. A key objective of the Policy is to align the Executive Director’s pay to the Group’s strategy and we shall be undertaking a root and branch review of our remuneration strategy this year to further strengthen those links. Key measures of Group performance are embedded as performance measures in the annual and long-term bonus plans. The Group aims to provide competitive remuneration packages, reflective of the markets in which it operates, in order to attract and retain high calibre employees and to encourage and reward superior performance. The Policy places strong emphasis on the importance of delivering long-term value to our shareholder, by not only continuing to focus on the Combined Operating Ratio (COR) as a measure of the quality of the insurance business we write, but also on the overall PBT that ensures the sustainability of the charitable grants we deliver to our charitable owner ATL. It also recognises the importance of continuing to drive for ever higher standards of service and good value for our customers. This Policy is also fundamental to delivering our objective of giving £50m to charity over three years. The Committee considers the Policy annually to ensure that it remains aligned with the needs of Ecclesiastical and its longer term strategy and that it remains appropriately aligned with the external market. We use target performance measures to estimate the total potential reward and benchmark this against reward packages paid by our competitors. We use a comparator group of companies within the insurance industry as well as the wider ﬁnancial services sector. The group that we measure our performance against consists of insurance plcs, Mutuals and other organisations. Companies within the comparator group may be similar in size and complexity to Ecclesiastical. However we also include other companies which may be larger and more complex, as they are potential competitors for talent. For completeness, we measure our reward arrangements against the whole of the UK ﬁnancial services market. This broader review is a risk management exercise to ensure that we do not inadvertently lose talent as a result of falling behind the broader marketplace. The main aim of the Policy, however, remains the incentivisation and reward of the level of performance we judge is necessary to achieve the successful implementation of our business strategy. Balancing short and long-term remuneration We have established the remuneration elements set out in this report based on our view of current market practice. Fixed annual elements including salary, pension and beneﬁts, are to recognise the responsibility and experience of our Executive Directors and to ensure current and future market competitiveness. The annual and long-term incentives are to incentivise and reward our Executive Directors for making Ecclesiastical successful on a sustainable basis. The balance between these elements is an aspect of our reward strategy which will require particular focus as we pursue our strategic review. 76 Ecclesiastical Insurance Ofﬁce plcAnnual Report and Accounts 2013 Future policy table ELEMENT AND PURPOSE OPERATION OPPORTUNITY SALARY To provide a core reward for doing the job, at a level needed to recruit and retain talented individuals. Salaries are paid in 12 equal monthly instalments during the year, and are reviewed annually with changes taking effect from 1 April each year. When the annual review is conducted various factors are taken into account, including Company and individual performance, relevant market information and levels of pay increases in the wider UK population. PERFORMANCE MEASURES CHANGE FROM 2013 Individual contribution and Group performance None BENEFITS To provide a market competitive reward package and promote the wellbeing of employees. PENSION To aid retention and provide a market competitive provision for post-retirement income. Beneﬁts normally comprise a car allowance or company car and a private healthcare scheme. Executive Directors also receive life assurance cover on the same basis as the wider employee population. Defined Benefit Scheme: the Staff Retirement Beneﬁt Fund was provided by Ecclesiastical but has now been closed to new employees. Neither of the current Executive Directors are members of this scheme. Defined Contribution Scheme: this is the Group Personal Pension plan where contributions are made by the employee and employer. GROUP BONUS SCHEME To incentivise the Executive Directors to achieve key ﬁnancial and strategic goals and targets that have been set for the ﬁnancial year. This cash bonus is paid annually, normally three months after the end of the ﬁnancial year to which it relates. LONG-TERM INCENTIVE PLAN (LTIP) To focus the Executives and incentivise the achievement of the Group’s long-term objectives. This also helps to align the Executive Directors interests with those of the shareholder. The LTIP aims to attract and retain talented individuals. The outcome of this award is subject to the Committee’s assessment of underlying performance. When agreeing targets, the Committee also receives advice from the Chief Risk Ofﬁcer on the extent to which the scheme meets the Group’s risk appetite. There is no deferral, but there is scope for clawback within the rules of the scheme. Relevant pay data including market practice among a chosen set of comparator organisations in the ﬁnancial services sector is also considered. Not applicable Not applicable None Any contributions that are above the Annual or Lifetime Earnings Limit may be paid in cash, net of National Insurance contributions charge. Not applicable None Maximum opportunity of 100% of salary with 25% payable for on-target performance. The annual bonus structure is based upon: None Maximum opportunity of 30% of salary. On-target opportunity of 15% of salary. For the Group Chief Executive the maximum opportunity is 100% of salary, with an on- target opportunity of 50% of salary.  Group PBT  Group COR  UK & Ireland COR  Top 5 Group priorities  Personal performance rating. There are two underlying performance conditions which are weighted equally: 1. 50% of award dependent on average Group COR 2. 50% of award dependent on Group PBT performance There is a 36 month performance period from the date of grant. The Group Chief Executive’s maximum opportunity has changed to 100% of salary. 77 Ecclesiastical Insurance Ofﬁce plc Section 3/Group Remuneration Report ELEMENT AND PURPOSE OPERATION OPPORTUNITY PERFORMANCE MEASURES CHANGE FROM 2013 EXCEPTIONAL BONUS ARRANGEMENTS The Committee may decide, from time to time, to incentivise speciﬁc Executive Directors on either a multi- year or single year basis to achieve speciﬁc objectives. These arrangements will either be in place of or in addition to existing bonus arrangements. GROUP CHIEF EXECUTIVE’S 3-YEAR INCENTIVE PLAN To incentivise the Group Chief Executive and Deputy Group Chief Executive to achieve speciﬁc goals that have been set for the period 2014-2016. See the elements below Maximum opportunity of 100% of salary over the 2014-2016 performance period. No mandatory deferral provision. Staged payments: Year 1 up to 25% of salary Year 2 up to 50% of salary, less payments made in the previous year Year 3 up to 100% of salary, less payments made in Year 1 and Year 2 above FORMER GROUP CHIEF EXECUTIVE INCENTIVE AWARD 2013 This incentive replaced Michael Tripp’s participation in both the annual bonus scheme and the LTIP with effect from 1 January 2013. This incentive was agreed in January 2013 to focus the Group Chief Executive to deliver certain objectives and was subject to the Committee’s assessment of the Group Chief Executive’s performance. The maximum opportunity was capped at three months’ salary. New element for 2014 There are three areas of performance conditions that apply to this award: 1. 50% dependent upon ﬁnancial performance 2. 25% dependent on achievement of measurable, non- ﬁnancial results 3. 25% dependent upon achievement of qualitative achievements Performance period 2014- 2016 The delivery of a smooth transition of the management to a successor in the role of Group Chief Executive. New element for 2013 Notes to the policy table The Committee selected these performance conditions because they are central to the Group’s overall strategy and are key metrics used by the Executive Directors in measuring the performance of the Group. The performance conditions are reviewed and set annually by the Committee, following consultation with the Chief Risk Ofﬁcer. The Committee are of the opinion that the performance targets are commercially sensitive to the Group and that disclosure at the beginning of the ﬁnancial year would be detrimental to its interests. The targets will therefore be disclosed at the end of the relevant ﬁnancial year in that year’s Remuneration Report. 78 Ecclesiastical Insurance Ofﬁce plc Annual Report and Accounts 2013 Differences in Remuneration Policy for all employees All employees of Ecclesiastical are entitled to a salary, beneﬁts, pension and annual bonus. The maximum bonus opportunity is based on differing levels of seniority and responsibility. For example, there is an increased emphasis on performance-related pay for the Executive Directors through a higher bonus opportunity and participation in the LTIP. This aligns the interests of Directors in the long-term performance of the Group with those of the shareholders. Statement of consideration of employment conditions elsewhere in the Group The Committee invites the HR Director to present at its meeting (normally in March) on proposals for salary increases for the general employee population and on any other changes to the Remuneration Policy within the Group. The HR Director consults with the Committee on the performance measures for Executive Directors’ bonuses and the extent to which these should be cascaded to other employees. The Committee approves the overall bonus cost to the Group each year and has oversight of the grant of all LTIP awards across the Group. The Committee is provided with data on the remuneration structure for designated senior management below the Executive Directors and use this information to work with the HR function to ensure consistency of approach throughout the Group. The discretion available to the Committee has been identiﬁed against the separate elements of the future policy table shown above. It exists and is only to be relied upon to address extreme circumstances. Approach to recruitment remuneration Ecclesiastical Insurance Ofﬁce plc is a specialist insurer competing for talent across a variety of markets and often with organisations which are much larger than we are. The Committee’s approach is to pay a fair market value to attract appropriate candidates to the role, taking into consideration their individual skills and experience and the ethos of the organisation. Where it is thought necessary to compensate an individual’s awards from previous employment, the Committee will, as far as practicable, seek to match the expected value of such awards by granting awards that vest over a similar timeframe as that of the original awards. There would be a proportionate reduction in the amount vesting, should the new awards not be subject to performance conditions as stretching as those on the awards foregone. Any new Executive Director’s package would include the same elements and generally be subject to the same constraints as existing Executive Directors. ELEMENT OF REMUNERATION MAXIMUM PERCENTAGE OF SALARY Salary Beneﬁts Annual bonus LTIP Pension contribution/allowance - Dependent upon position 100% 30% / 100%1 15% 1 The higher percentage is the maximum payable for the position of Group Chief Executive The Committee has discretionary authority over matters within its remit, and may from time to time exercise discretion according to exceptional or speciﬁc circumstances, albeit the Committee will not do so in a frivolous manner. 79 Ecclesiastical Insurance Ofﬁce plcSection 3/Group Remuneration Report Policy on termination payments for Executive Directors STANDARD PROVISION POLICY DETAILS Notice periods in Executive Directors’ service contracts2 12 months by Company or Executive Director. Executive Directors may be required to work through their notice period, or may be paid in lieu of notice if they are not required to work the full notice period. Summary termination – payment in lieu of notice Mitigation The Company may decide if it wishes to make a payment in lieu of notice of an amount prescribed under the contract. This is salary and beneﬁts for the balance of the notice period, excluding bonus and accrued holiday entitlement. The Executive Directors’ service contracts do not expressly provide for mitigation on termination. Payable as a lump sum, within 14 days of termination date. The Committee will take account of the circumstances of the termination and the Director’s performance during the period of qualifying service to determine whether the exercise of any discretion is appropriate. Treatment of annual bonus on termination or change of control under plan rules No payment unless employed on date of bonus payment except for ‘good leavers’ as deﬁned in the plan rules and other circumstances at the Committee’s discretion. If there is a change of control event, then an early payment can be calculated and made. Good leavers are entitled to a bonus payment subject to the achievement of bonus criteria which is pro-rated down to reflect their service during the performance year unless the Committee determines that a higher amount is justiﬁed. A similar provision would apply if there were a change of control event. Good leavers include those who cease to be employed by reason of death, ill health or disability, redundancy, retirement by agreement or any other reason, at discretion of the Committee (which would not be exercised where the Executive Director is at fault). Treatment of long-term incentive awards on termination or change of control under plan rules All awards lapse except for ‘good leavers’ as deﬁned in the plan rules and other reason at the discretion of the Committee. If there is a change of control event, then an early payment can be calculated as stated in the rules of the scheme. For good leavers vesting is determined based on the application of the performance conditions and any award is then pro-rated down based on the proportion of the 36-month performance period that the employee has served since the grant date unless the Committee determines that a higher amount is justiﬁed. A similar provision would apply if there were a change of control event. Exercise of discretion Intended to be relied upon only in exceptional or speciﬁc circumstances. The Committee’s determination will take into account the circumstances of the Executive Director’s departure and the recent performance of the Company when using discretion in relation to short or long-term bonus payments. Group Chief Executive’s 3-year incentive plan If the Group Chief Executive ceases to be employed in this capacity, the award will lapse unless they are a good leaver. If the Group Chief Executive is a good leaver the Committee may decide to make an immediate pro-rata payment based on the Executive’s performance up to the termination date. Other matters There is an express provision for clawback if the ﬁnancial information or factual reports on which a judgement to pay an award has been made was materially misstated and the Committee so determines. The Company’s policy is to honour commitments made to contractual arrangements that may have been entered into with an employee prior to their becoming a Director. There are no other provisions for termination payments or payments for loss of ofﬁce in standard directors’ service contracts. 2 Steve Wood had a nine-month contract with Ecclesiastical Insurance Ofﬁce plc. Copies of the relevant service contracts and letters of appointment are available for inspection at the Company’s registered ofﬁce, details of which can be found on page 154. 80 Ecclesiastical Insurance Ofﬁce plcAnnual Report and Accounts 2013 Total remuneration opportunity The total remuneration for each of the Executive Directors that could result from the application of this policy in 2014 under the three different performance levels is shown below. Mark Hews: Effect of the application of this policy in financial year 2014 Percentages/Amounts (£000s) Fixed pay 100% On-target 60% Maximum 39% Total £446k 12% 28% Total £742k 33% 28% Total £1,130 ■ Fixed elements ■ Annual variable ■ Multiple period variable Fixed elements of pay comprises of salary, beneﬁts and pension. S. Jacinta Whyte: The details of the Deputy Group Chief Executive’s package is still subject to negotiation and will be included in future remuneration reports. NEDs’ fees policy HOW THE ELEMENT SUPPORTS OUR STRATEGIC OBJECTIVES OPERATION To attract NEDs who have a range of experience and skills to oversee the implementation of our strategy. NEDs’ fees, including the Committee Chairman’s fees are approved by the Board at a General meeting, following recommendation by the Chairman and Executive Directors. The Committee Chair takes no part in the discussion relating to their fees. Fees are paid in 12 equal monthly instalments during the year. Fees are reviewed every two years against those for NEDs in companies of a similar scale and complexity. NEDs are not eligible to receive beneﬁts and do not participate in incentive or pension plans. OPPORTUNITY Current fee levels are shown in the section on implementation of policy. PERFORMANCE MEASURES NEDs are not eligible to participate in any performance-related arrangements. Statement of consideration of shareholder views The Committee, through the Board, consults with the shareholder on any changes to this policy in order to understand expectations with regard to Executive Directors remuneration and any changes in shareholder views. Any views expressed by the shareholder are then considered and taken into account at the annual review of the policy. 81 Ecclesiastical Insurance Ofﬁce plcSection 3/Group Remuneration Report Annual Report on Remuneration The following information contained in this report is auditable unless otherwise stated: Statement of implementation of Remuneration Policy in 2014 (not auditable) Differences between the Remuneration Policy for 2013 and the policy for 2014 are set out in the table below: ELEMENT SALARY OPERATION No difference OPPORTUNITY No difference BENEFITS No difference No difference PERFORMANCE MEASURES N/A N/A ANNUAL BONUS No mandatory deferral provision Clawback at the discretion of the Committee No difference In 2013, the annual bonus was based upon:  Group PBT  Group COR  UK & Ireland COR  Top 5 Group priorities  Personal performance rating LTIP No mandatory deferral provision Clawback at discretion of Committee Maximum grant is 100% of salary for the Group Chief Executive. There are two underlying performance conditions which are weighted equally: Normal grant policy is either 20% or 30% of salary dependent on the position for all other Executive Directors. 1. 50% of award dependent on average Group COR 2. 50% of award dependent on Group PBT performance There is a 36-month performance period from the date of grant. GROUP CHIEF EXECUTIVE’S 3-YEAR INCENTIVE PLAN No mandatory deferral provision Maximum bonus is 100% of salary over the 2014-2016 performance period. There are three areas of performance conditions that apply to this award: This operates through staged payments:  Year 1 up to 25% of salary  Year 2 up to 50% of salary, less payments made in the previous year  Year 3 up to 100% of salary, less payments made in Year 1 and Year 2 above 1. 50% dependent upon ﬁnancial performance 2. 25% dependent on achievement of measurable, non-ﬁnancial results 3. 25% dependent upon achievement of qualitative achievements Performance period is 2014-2016. FORMER GROUP CHIEF EXECUTIVE INCENTIVE AWARD 2013. This incentive replaced Michael Tripp’s participation in both the annual bonus scheme and the LTIP. This incentive was agreed in January 2013 to focus the Group Chief Executive to deliver certain objectives and was subject to the Committee’s assessment of the Group Chief Executive’s performance. The maximum opportunity was capped at three months’ salary. The delivery of a smooth transition of the management to the successor in the role of Group Chief Executive. 82 Ecclesiastical Insurance Ofﬁce plcAnnual Report and Accounts 2013 None of the Executive Directors received an increase in salary last year, except those that changed their role within the Group. Details are shown in the table below: Salary at the annual review date NAME Mark Hews Michael Tripp Steve Wood SALARY £000s3 1 April 2013 260 335 257 SALARY £000s3 1 July 2012 260 335 257 PERCENTAGE INCREASE 0.0% 0.0% 0.0% 3 The change in period dates results from a change to annual pay review dates in 2013. Mark Hews became Group Chief Executive on 1 May 2013 and therefore his salary was increased to £350k with effect from this date. Single total figure of remuneration For Executive Directors The table below shows a single total ﬁgure of remuneration received in respect of qualifying services for the 2013 ﬁnancial year for each Executive Director, together with comparative ﬁgures for 2012, where applicable. Aggregate Executive Directors’ emoluments are shown on page 87. Details of NEDs’ fees are set out in a separate table on page 86. SINGLE TOTAL FIGURE FOR EXECUTIVE DIRECTORS Mark Hews6 S. Jacinta Whyte7 Michael Tripp8 Steve Wood9 Total SALARY £000s BENEFITS4 £000s ANNUAL BONUS £000s LTIP5 £000s TOTAL £000s 2013 320 162 196 244 922 2012 253 N/A 332 254 839 2013 37 10 44 32 2012 19 N/A 58 32 2013 157 33 84 0 123 109 274 2012 83 N/A 0 0 83 2013 2012 5 15 2 3 25 0 N/A 0 0 0 2013 519 220 326 279 2012 355 N/A 390 286 1,344 1,031 4 Beneﬁts include items such as a car allowance and private medical insurance which are valued at their taxable value 5 LTIP represents the amount payable in respect of the three-year performance period 2011-2013 for 2013 and 2010-2012 for 2012. All Executive Directors hold unvested LTIP awards in accordance with the rules of the plan 6 Mark Hews was appointed Group Chief Executive on 1 May 2013 7 S. Jacinta Whyte was appointed Deputy Group Chief Executive on 16 July 2013 and did not participate in the Executive Director’s annual bonus and LTIP scheme during 2013. The annual bonus for 2013 and the LTIP payment shown in table above only relates to her appointment as a General Manager in Canada 8 Michael Tripp resigned from the Board on 21 May 2013. He received no payment under the annual bonus or the Executive Director’s LTIP for performance in 2013. He did, however, receive a payment under the terms of his special bonus scheme, outlined in the policy table on page 77. The LTIP payment is in respect of performance in the years 2011 and 2012. 9 Steve Wood resigned from the Board on 12 June 2013 Mark Hews is also a NED for MAPFRE RE and was appointed to their Board in December. The fees that Mark earns in respect of this role are paid directly to the Group by MAPFRE RE. 83 Ecclesiastical Insurance Ofﬁce plc Section 3/Group Remuneration Report Additional requirements in respect of the single total figure table The annual bonus payable to Executive Directors is assessed taking into account both Group and individual performance, both of which are assessed in a range of 0-2. The two results are multiplied together and applied to the on-target bonus opportunity of 25%. For example, if Group performance was assessed at 1.2 and individual performance at 1.1, the bonus payable would be 1.2 x 1.1 x 25% = 33%. Performance targets are set in respect of the Group multiplier, and these are shown in the table below. Actual results are assessed against these targets to calculate the Group multiplier as shown in the second table below. The proposed personal performance multiplier is reviewed and agreed by the Committee. Bonuses are earned in respect of the ﬁnancial year and are paid in March following the end of the ﬁnancial year. The bonuses accruing to the Executive Directors in respect of 2013 are shown in the single total ﬁgure for Executive Directors table above. None of the 2013 annual bonuses are subject to deferral. Annual bonus table Original targets: MEASURE Group COR UK & Ireland COR Group PBT Group Top 5 Priorities THRESHOLD ON-TARGET MAXIMUM WEIGHTING 101% 100% £29.8m 0% 100% 98% £37.0m 75% 97% 96% £51.8m 100% 25% 25% 35% 15% Actual results giving the Group multiplier: MEASURE Group COR UK & Ireland COR Group PBT Group Top 5 Priorities Overall multiplier RESULT 102.9% 99.7% £67m 83% RANGE WEIGHTING MULTIPLE - 0.58 2.00 1.32 25% 25% 35% 15% - 0.1 0.7 0.2 1.0 84 Ecclesiastical Insurance Ofﬁce plcAnnual Report and Accounts 2013 Performance against conditions for LTIP payment The LTIP amount included in the single total ﬁgure of remuneration is the cash award resulting from the LTIP grant in 2011 for the period 2011-2013. Vesting was dependent on performance over the three ﬁnancial years ending on 31 December 2013 and continued service until March 2014. The performance achieved against the performance targets is shown below: PERFORMANCE MEASURE THRESHOLD – 20% VESTING TARGET – 50 % VESTING MAXIMUM – 100% VESTING COR Group PBT 101.0% £95m 95.5% £170m 90.0% £260m ACTUAL 105.6% £97m PERCENTAGE OF SALARY PAID 0.0% 1.6% Total pension entitlement Below is a table which shows the pension beneﬁts for the Executive Directors that are in the Deﬁned Beneﬁt Scheme. The Deﬁned Beneﬁt Scheme was closed to new members during 2006. Pension table DIRECTOR ALL FIGURES ARE SHOWN IN £000s INCREASE IN ACCRUED PENSION DURING 2013 (PER ANNUM) INCREASE IN ACCRUED LUMP SUM DURING 2013 (PER ANNUM) TOTAL ACCRUED ANNUAL PENSION AT 31 DECEMBER 2013 TOTAL ACCRUED LUMP SUM AT 31 DECEMBER 2013 PENSION INPUT AMOUNT DURING THE ACCOUNTING PERIOD ENDING 31 DECEMBER 2013 PENSION INPUT AMOUNT DURING THE ACCOUNTING PERIOD ENDING 31 DECEMBER 2012 Steve Wood 2 6 14 43 36 33 The table below shows the employer contributions that have been made by the Group in respect of the following Executive Directors participating in the Deﬁned Contribution Scheme. DIRECTOR Mark Hews S. Jacinta Whyte Michael Tripp10 2013 £000s 48 19 0 2012 £000s 38 N/A 0 10 A cash allowance of 15% of salary (net of NIC) is paid to Executive Directors where continued Company contributions would result in a breach of the HMRC annual allowance. Single total figure of remuneration for NEDs NEDs do not participate in any of the Company’s incentive arrangements nor do they receive any beneﬁts. NED fees were last reviewed in 2012, at which time they were found to be lagging behind the market. An increase is due to be put to the general meeting which will become effective from 1 January 2014. We believe that it is appropriate to reflect the level of fees paid by organisations of similar size and complexity and this will enable us to attract NEDs of the calibre we require to help us to implement our future strategy. 85 Ecclesiastical Insurance Ofﬁce plcSection 3/Group Remuneration Report NEDs’ fees for the current and prior year DIRECTOR Will Samuel David Christie John Hylands Tony Latham Denise Wilson The Venerable Christine Wilson11 Tim Carroll12 Sir Philip Mawer13 Nigel Peyton15 Mervyn Couve14 Total 2013 £000s 68 42 40 40 36 32 24 4 0 0 286 2012 £000s 68 38 40 40 32 16 0 43 14 18 309 11 The Venerable Christine Wilson was appointed to the Board on 21 June 2012 and her fees are paid directly to charity at her request 12 Tim Carroll was appointed to the Board on 2 April 2013 13 Sir Philip Mawer resigned on 6 February 2013 14 Nigel Peyton resigned on 21 June 2012 15 Mervyn Couve resigned on 21 June 2012 Executive Directors’ termination payments Michael Tripp resigned as Group Chief Executive on 1 May 2013 and resigned from the Board on 21 May 2013. Steve Wood resigned as an Executive Director and from the Board on 12 June 2013. The following table shows the payments made in accordance with their contractual entitlements: DIRECTOR Michael Tripp Steve Wood TOTAL PAID IN CASH £000s 167 134 Early vesting of LTIP award There is no early vesting of the Executive Directors’ LTIP. For good leavers grants will vest on the original anniversary date. Any payment is then pro-rated to reflect employment during the 36-month performance period. Payments to past Directors No payments were made to past Directors other than the compensatory payments shown in the table above and bonus payments included in the single ﬁgure table on page 83. LTIP grant policy (not auditable) Grants of participation in the LTIP are made annually following the publication of the Company’s accounts. In 2013 awards were made to Executive Directors and other designated senior managers in accordance with our normal grant policy. This is included in the single ﬁgure table. During the year, the maximum opportunity for the Group Chief Executive was raised to 100% of salary with effect from 1 January 2013 as a result of the benchmarking information which was considered before determining the package. 86 Ecclesiastical Insurance Ofﬁce plcAnnual Report and Accounts 2013 Performance graph (not auditable) As Ecclesiastical Insurance Ofﬁce plc does not have equity shares traded on a regulated market, total equity shareholder’s funds growth over time as reported each year (plus the grant to ATL) has been used in the performance graph compared with the FTSE 250. Total equity excludes Preference shareholders’ capital since this is not attributable to ATL. Ecclesiastical Insurance Office plc 8-year to 2013 TSR performance against the FTSE 250 i l g n d o h 0 0 1 £ l a c i t e h t o p y h f o e u a V l 250 200 150 100 50 0 Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11 Dec 12 Dec 13 Ecclesiastical Total Shareholder Return FTSE 250 Total return Total emoluments of Executive Directors For the purposes of the disclosure required by Schedule 5 to the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations, the total aggregate remuneration of the Executive Directors in respect of qualifying services during 2013 was £1,605,000 (2012: £1,336,000). After inclusion of amounts receivable under long-term incentive schemes and pension beneﬁts, the total aggregate emoluments of the Executive Directors was £1,705,000 (2012: £1,381,000) Ecclesiastical Investment Management (EIM) (not auditable) EIM is a limited licence Investment management ﬁrm under IFPRU, at proportionality level 3 for reporting purposes. EIM has been subject to the FCA Remuneration Code since 1 January 2011. EIM operates a remuneration policy which is compliant with the Remuneration Code, details of which can be found in the EIM pillar 3 statement on Ecclesiastical’s website. CODE STAFF NUMBER OF EMPLOYEES AGGREGATE TOTAL REMUNERATION PAID IN 2013 EIM staff EIO staff 5 4 £000s 1,162 1,262 87 Ecclesiastical Insurance Ofﬁce plc Section 3/Group Remuneration Report Consideration by the Committee of matters relating to Directors’ remuneration (not auditable) Advisers to the Committee Hewitt New Bridge Street (HNBS) were the appointed advisers to the Committee for 2013. During the year external professional advice was sourced from HNBS when determining appropriate remuneration packages for Executive Directors and those holding Signiﬁcant Influence Functions. HNBS have no other advisory function within the Group. The Committee also has access to benchmarking reports from Towers Watson and McLagan, which provide data for determining pay and conditions throughout the Group. The Committee is content that advice received from Hewitt New Bridge Street was impartial. The Committee is responsible for recommending to the Board the Remuneration Policy for Executive Directors and for setting the remuneration packages for each Executive Director, members of the Group Management Board, Remuneration Code Staff and Heads of strategic business units. The Committee also has overarching responsibility for the group-wide Remuneration Policy. 88 Ecclesiastical Insurance Ofﬁce plcCastle Howard, the South Front. Credit: Mike Kipling. Ecclesiastical Insurance Ofﬁce plc 89 Section 3/Independent Auditor’s Report Independent Auditor’s Report to the Members of Ecclesiastical Insurance Office plc  we have not identiﬁed any material uncertainties that may cast signiﬁcant doubt on the Group’s ability to continue as a going concern. However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the Group’s ability to continue as a going concern. Our assessment of risks of material misstatement The assessed risks of material misstatement described below are those that had the greatest effect on our audit strategy, the allocation of resources in the audit and directing the efforts of the engagement team: Opinion on financial statements of Ecclesiastical Insurance Office plc In our opinion:  the ﬁnancial statements give a true and fair view of the state of the Group’s and of the parent company’s affairs as at 31 December 2013 and of the Group’s proﬁt for the year then ended;  the Group ﬁnancial statements have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union;  the parent company ﬁnancial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and  the ﬁnancial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group ﬁnancial statements, Article 4 of the IAS Regulation. The ﬁnancial statements comprise the Consolidated Statement Of Proﬁt Or Loss, the Consolidated and Parent Statement of Comprehensive Income, the Consolidated and Parent Statement of Changes in Equity, the Consolidated and Parent Statement Of Financial Position and the Consolidated and Parent Statement Of Cash Flows, and the related notes 1 to 32. The ﬁnancial reporting framework that has been applied in their preparation is applicable law and IFRSs as adopted by the European Union and, as regards the parent company ﬁnancial statements, as applied in accordance with the provisions of the Companies Act 2006. Going concern We have reviewed the directors’ statement contained within the Directors Report on page 54 that the Group is a going concern. We conﬁrm that:  we have concluded that the Directors’ use of the going concern basis of accounting in the preparation of the ﬁnancial statements is appropriate; and 90 Ecclesiastical Insurance Ofﬁce plcAnnual Report and Accounts 2013 RISK HOW THE SCOPE OF OUR AUDIT RESPONDED TO THE RISK GENERAL INSURANCE TECHNICAL RESERVES The assessment of the calculation of the general insurance technical reserves requires management to make signiﬁcant judgements about the quantum of the reported losses and the estimated incurred but not reported losses based on past experience and current expectations of future cost levels. CARRYING VALUE OF GOODWILL The Group’s assessment of impairment of goodwill is a judgemental process which requires estimates concerning the estimated future cash flows and associated discount rates and growth rates based on management’s view of future business prospects at the time of the assessment. LIFE INSURANCE RESERVES The assessment of the calculation of the life insurance reserves requires management to make signiﬁcant judgements about bond yields, discount rates, credit risk, mortality rates and current expectations of future expense levels. ASSUMPTIONS UNDERPINNING THE CALCULATION AND RECOGNITION OF RETIREMENT BENEFIT OBLIGATIONS The assessment of the carrying value of the pension surplus relating to the Group’s deﬁned beneﬁt pension schemes and retirement beneﬁt liability relating to post employment medical beneﬁts are based on assumptions which require signiﬁcant management judgement. We challenged the key judgements within the calculation of the general insurance reserves as set out in note 26 to the ﬁnancial statements by working with our general insurance actuarial specialists to speciﬁcally assess the movements in prior year reserves, material changes in methodology and assumptions and the impact of claims experience in the year. We also tested the completeness and accuracy of underlying data used in the reserving. We challenged management’s key assumptions used in the impairment model for goodwill and intangible assets, described in note 16 to the ﬁnancial statements, relating to estimated future cash flows, growth rates and the discount rate applied through comparing this against benchmarks on similar assets, comparison against the prevailing group cost of capital at the year-end and our understanding of management’s past forecasting accuracy and future prospects of the business. We evaluated the key judgements underpinning the calculation of the life insurance reserves as set out in note 26 to the ﬁnancial statements by involving our internal life actuarial specialists to benchmark the valuation and expense assumptions to those used in the market. We also tested the completeness and accuracy of underlying data used in the reserving. We assessed management’s assumptions used in the calculations of the deﬁned beneﬁt pension asset and retirement beneﬁt obligations as set out in note 18 to the ﬁnancial statements by involving our internal pensions actuarial specialists to benchmark the assumptions in respect of the discount rate, inflation and mortality assumptions to those used in the market. We tested the completeness and accuracy of underlying data used in the calculation of the retirement beneﬁt obligations. We assessed management’s valuation of pension assets, held at fair value, by comparison to observable market prices. We also evaluated the accessibility of the surplus on the main scheme by reference to applicable accounting standards and advice received by management from external parties. CARRYING VALUE OF TAX LIABILITIES The calculation of tax liabilities requires management to make judgements in respect of the expected tax payable for the current and prior periods based on the interpretation of applicable tax legislation. We worked with our internal tax specialists to evaluate the appropriateness of management’s assumptions in deriving the tax liabilities described in notes 13, 27 and 28 to the ﬁnancial statements, by reviewing relevant correspondence with HMRC. 91 Ecclesiastical Insurance Ofﬁce plc Section3/Independent Auditor’s Report The Audit Committee’s consideration of these risks is set out on page 70. Our audit procedures relating to these matters were designed in the context of our audit of the ﬁnancial statements as a whole, and not to express an opinion on individual accounts or disclosures. Our opinion on the ﬁnancial statements is not modiﬁed with respect to any of the risks described above, and we do not express an opinion on these individual matters. Our application of materiality We deﬁne materiality as the magnitude of misstatement in the ﬁnancial statements that makes it probable that the economic decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and in evaluating the results of our work. We determined materiality for the Group to be £3.7m, which is below 1% of both Gross Written Premiums and Equity. We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £77,000, as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the Audit Committee on disclosure matters that we identiﬁed when assessing the overall presentation of the ﬁnancial statements. An overview of the scope of our audit Our Group audit was scoped by obtaining an understanding of the Group and its environment, including group-wide controls, and assessing the risks of material misstatement at the Group level. Based on that assessment, we focused our Group audit scope primarily on the audit work for the general and life insurance businesses in the UK, Ireland, Australia and Canada. Together, these represent the principal business units and account for 96% of the Group’s net assets, 93% of the Group’s revenue and 85% of the Group’s proﬁt before tax. All signiﬁcant components were subject to full scope audits which were executed at levels of materiality applicable to each individual entity and which were lower than Group materiality. We completed the majority of our audit work in the UK. The group audit team continued to follow a programme of planned visits that has been designed so that a senior member of the group audit team visits each of the components where the group audit scope is focused at least once every three years. In years when we do not visit a signiﬁcant component we discuss the risk assessment with the component auditor, and review documentation of the ﬁndings from their work. At the parent entity level we also tested the consolidation process and carried out analytical procedures to conﬁrm our conclusion that there were no signiﬁcant risks of material misstatement of the aggregated ﬁnancial information of the remaining components not subject to audit or audit of speciﬁed account balances. Opinion on other matter prescribed by the Companies Act 2006 In our opinion the information given in the Strategic Report and the Directors’ Report for the ﬁnancial year for which the ﬁnancial statements are prepared is consistent with the ﬁnancial statements. Matters on which we are required to report by exception Adequacy of explanations received and accounting records Under the Companies Act 2006 we are required to report to you if, in our opinion:  we have not received all the information and explanations we require for our audit; or  adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or  the parent company ﬁnancial statements are not in agreement with the accounting records and returns. We have nothing to report in respect of these matters. Directors’ remuneration Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of directors’ remuneration have not been made. We have nothing to report arising from this matter. Our duty to read other information in the Annual Report Under International Standards on Auditing (UK and Ireland), we are required to report to you if, in our opinion, information in the annual report is:  materially inconsistent with the information in the audited ﬁnancial statements; or  apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Group acquired in the course of performing our audit; or  otherwise misleading. 92 Ecclesiastical Insurance Ofﬁce plcIn particular, we are required to consider whether we have identiﬁed any inconsistencies between our knowledge acquired during the audit and the directors’ statement that they consider the annual report is fair, balanced and understandable and whether the annual report appropriately discloses those matters that we communicated to the audit committee which we consider should have been disclosed. We conﬁrm that we have not identiﬁed any such inconsistencies or misleading statements. Other matters Directors’ remuneration report In our opinion the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the provisions of the Companies Act 2006 that would have applied were the company a quoted company. Corporate Governance Statement Although not required to do so, the directors have voluntarily chosen to make a corporate governance statement detailing the extent of their compliance with the UK Corporate Governance Code. At the request of the directors, we have reviewed the part of the Corporate Governance Statement relating to the company’s compliance with the nine provisions of the UK Corporate Governance Code. We have nothing to report arising from our review. Respective responsibilities of directors and auditor As explained more fully in the Directors’ Responsibilities Statement, the directors are responsible for the preparation of the ﬁnancial statements and for being satisﬁed that they give a true and fair view. Our responsibility is to audit and express an opinion on the ﬁnancial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. We also comply with International Standard on Quality Control 1 (UK and Ireland). Our audit methodology and tools aim to ensure that our quality control procedures are effective, understood and applied. Our quality controls and systems include our dedicated professional standards review team and independent partner reviews. This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and/or those further matters we have expressly agreed to report to them on in our engagement letter and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the ﬁnancial statements sufﬁcient to give reasonable assurance that the ﬁnancial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group’s and the parent company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of signiﬁcant accounting estimates Annual Report and Accounts 2013 made by the directors; and the overall presentation of the ﬁnancial statements. In addition, we read all the ﬁnancial and non-ﬁnancial information in the annual report to identify material inconsistencies with the audited ﬁnancial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Mark McQueen ACA (Senior statutory auditor) for and on behalf of Deloitte LLP Chartered Accountants and Statutory Auditor London, United Kingdom 25 March 2014 93 Ecclesiastical Insurance Ofﬁce plcN O I T C E S Section 4/Financial Statements Consolidated Statement of Profit or Loss Consolidated and Parent Statement of Comprehensive Income 95 96 Consolidated and Parent Statement of Changes in Equity 97 Consolidated and Parent Statement of Financial Position 98 Consolidated and Parent Statement of Cash Flows Notes to the Financial Statements 99 100 94 Ecclesiastical Insurance Ofﬁce plc CONSOLIDATED STATEMENT OF PROFIT OR LOSS for the year ended 31 December 2013 Revenue Gross written premiums Outward reinsurance premiums Net change in provision for unearned premiums Net earned premiums Fee and commission income Net investment return Total revenue Expenses Claims and change in insurance liabilities Reinsurance recoveries Fees, commissions and other acquisition costs Other operating and administrative expenses Total operating expenses Operating profit Finance costs Profit before tax Tax expense Profit for the year from continuing operations Net loss attributable to discontinued operations Profit for the year (attributable to equity holders of the Parent) Notes 5, 6 6 6 7 8 8 9 5 13 14 10 2013 £000 2012 £000 399,345 (131,274) 24,592 292,663 58,088 77,243 427,994 (234,789) 36,545 (80,285) (82,411) (360,940) 67,054 (117) 66,937 (4,819) 62,118 - 62,118 481,334 (157,843) (12,846) 310,645 53,657 64,991 429,293 (256,057) 41,447 (97,454) (79,311) (391,375) 37,918 (115) 37,803 (4,448) 33,355 (5,737) 27,618 On 15 May 2012, the Group disposed of its wholly-owned subsidiary, ACS (NZ) Limited. The results of the disposed business are presented within discontinued operations in the prior year. 95 Ecclesiastical Insurance Ofﬁce plcCONSOLIDATED AND PARENT STATEMENT OF COMPREHENSIVE INCOME for the year ended 31 December 2013 Profit for the year Other comprehensive income Items that will not be reclassified to profit or loss: Fair value losses on property Actuarial losses on retirement benefit plans Attributable tax Items that may be reclassified subsequently to profit or loss: Losses on currency translation differences Net other comprehensive income Total comprehensive income attributable to equity holders of the Parent 2013 Group £000 Parent £000 2012 Group £000 62,118 52,494 27,618 (104) (1,526) 484 (1,146) (10,071) (11,217) - (1,526) 453 (1,073) (2,727) (3,800) (313) (1,331) 511 (1,133) (3,784) (4,917) Parent £000 16,162 (313) (1,331) 511 (1,133) (904) (2,037) 50,901 48,694 22,701 14,125 96 Ecclesiastical Insurance Ofﬁce plcCONSOLIDATED AND PARENT STATEMENT OF CHANGES IN EQUITY for the year ended 31 December 2013 Share premium £000 Equalisation Revaluation reserve £000 reserve £000 Translation reserve £000 Group At 1 January 2013 Profit for the year Other net expense Total comprehensive income Dividends Net charitable grant to ultimate parent Group tax relief in excess of standard rate Reserve transfers At 31 December 2013 At 1 January 2012 Profit for the year Other net expense Total comprehensive income Dividends Net charitable grant to ultimate parent Group tax relief in excess of standard rate Reserve transfers At 31 December 2012 Parent At 1 January 2013 Profit for the year Other net income/(expense) Total comprehensive income Dividends Net charitable grant to ultimate parent Group tax relief in excess of standard rate Reserve transfers At 31 December 2013 At 1 January 2012 Profit for the year Other net expense Total comprehensive income Dividends Net charitable grant to ultimate parent Group tax relief in excess of standard rate Reserve transfers At 31 December 2012 Share capital £000 120,477 - - - - 4,632 - - - - 25,590 - - - - - - - - - 120,477 120,477 - - - - - - 4,632 4,632 - - - - - 247 25,837 22,719 - - - - - - - - - 120,477 120,477 - - - - - - 4,632 4,632 - - - - - 2,871 25,590 25,590 - - - - - - - - - 120,477 120,477 - - - - - - 4,632 4,632 - - - - - 247 25,837 22,719 - - - - - - - - - 120,477 - - 4,632 - 2,871 25,590 Retained earnings £000 279,795 62,118 (1,094) 61,024 (9,181) Total £000 455,657 62,118 (11,217) 50,901 (9,181) 24,411 - (10,071) (10,071) - - (3,070) (3,070) - - 14,340 28,195 - (3,784) (3,784) - (164) (247) 328,157 268,267 27,618 (914) 26,704 (9,181) (164) - 494,143 445,261 27,618 (4,917) 22,701 (9,181) - (3,020) (3,020) - - 24,411 (104) (2,871) 279,795 (104) - 455,657 9,185 - (2,727) (2,727) - 232,176 52,494 (1,094) 51,400 (9,181) 392,602 52,494 (3,800) 48,694 (9,181) - (3,070) (3,070) - - 6,458 10,089 - (904) (904) - (751) (247) 270,327 232,202 16,162 (914) 15,248 (9,181) (751) - 428,294 390,880 16,162 (2,037) 14,125 (9,181) - (3,020) (3,020) - - 9,185 (202) (2,871) 232,176 (202) - 392,602 752 - (52) (52) - - - - 700 971 - (219) (219) - - - - 752 542 - 21 21 - - - - 563 761 - (219) (219) - - - - 542 The equalisation reserve is not distributable and must be kept in compliance with the insurance companies' reserves regulations. The revaluation reserve represents cumulative net fair value gains on owner-occupied property. The translation reserve arises on consolidation of the Group's and Parent's foreign operations. 97 Ecclesiastical Insurance Ofﬁce plcCONSOLIDATED AND PARENT STATEMENT OF FINANCIAL POSITION for the year ended 31 December 2013 Assets Goodwill and other intangible assets Deferred acquisition costs Deferred tax assets Pension assets Property, plant and equipment Investment property Financial investments Reinsurers' share of contract liabilities Current tax recoverable Other assets Cash and cash equivalents Total assets Equity Share capital Share premium account Retained earnings and other reserves Total shareholders' equity Liabilities Insurance contract liabilities Finance lease obligations Provisions for other liabilities Retirement benefit obligations Deferred tax liabilities Current tax liabilities Deferred income Other liabilities Total liabilities Notes 2013 Group £000 Parent £000 2012 Group £000 Parent £000 16 17 28 18 19 20 21 26 23 24 25 26 27 18 28 29 23,684 34,757 3,261 32,288 7,292 45,099 946,452 132,593 135 124,464 107,241 1,457,266 120,477 4,632 369,034 494,143 848,267 1,624 6,710 11,744 40,116 2,463 14,231 37,968 963,123 3,795 30,542 37 32,288 6,084 45,099 763,926 121,490 135 108,271 80,430 1,192,097 120,477 4,632 303,185 428,294 663,188 1,624 6,566 11,744 39,548 2,171 13,950 25,012 763,803 24,349 34,626 3,202 36,521 8,414 27,315 922,109 141,011 316 145,714 112,584 1,456,161 120,477 4,632 330,548 455,657 878,691 1,812 7,273 14,810 38,653 290 14,782 44,193 1,000,504 3,811 35,886 - 36,521 6,623 27,315 726,652 127,472 316 124,525 88,963 1,178,084 120,477 4,632 267,493 392,602 675,787 1,812 6,939 14,810 38,024 99 14,238 33,773 785,482 Total shareholders' equity and liabilities 1,457,266 1,192,097 1,456,161 1,178,084 The financial statements of Ecclesiastical Insurance Office plc, registered number 24869, on pages 95 to 152 were approved and authorised for issue by the Board of Directors on 25 March 2014 and signed on its behalf by: Will Samuel Chairman Mark Hews Group Chief Executive 98 Ecclesiastical Insurance Ofﬁce plcCONSOLIDATED AND PARENT STATEMENT OF CASH FLOWS for the year ended 31 December 2013 Profit before tax Adjustments for: Loss before tax on discontinued operations Depreciation of property, plant and equipment Loss/(profit) on disposal of property, plant and equipment Amortisation and impairment of intangible assets Loss on disposal of intangible assets Net fair value gains on financial instruments and investment property Dividend and interest income Finance costs Changes in operating assets and liabilities: Net (decrease)/increase in insurance contract liabilities Net decrease in reinsurers' share of contract liabilities Net (increase)/decrease in deferred acquisition costs Net decrease/(increase) in other assets Net decrease in operating liabilities Net increase/(decrease) in other liabilities Cash generated by operations Dividends received Interest received Interest paid Tax (paid)/recovered Net cash from operating activities Cash flows from investing activities Purchases of property, plant and equipment Proceeds from the sale of property, plant and equipment Purchases of intangible assets Investment in subsidiaries, net of cash acquired Disposal of businesses, net of cash transferred Purchases of financial instruments and investment property Sale of financial instruments and investment property Net cash used by investing activities Cash flows from financing activities Payment of finance lease liabilities Payment of group tax relief in excess of standard rate Dividends paid to Company's shareholders Donations paid to ultimate parent undertaking Net cash used by financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at beginning of year Exchange (losses)/gains on cash and cash equivalents Cash and cash equivalents at end of year 2013 Group £000 Parent £000 2012 Group £000 66,937 57,394 37,803 - 1,930 112 2,770 7 (36,072) (38,364) 117 (8,689) 5,275 (1,075) 16,385 (777) 48 8,604 9,923 27,388 (117) (225) 45,573 (1,017) 54 (2,232) - - (269,766) 242,082 (30,879) (418) (163) (9,181) (8,000) (17,762) (3,068) 112,584 (2,275) 107,241 - 1,673 (30) 2,017 - (32,603) (28,453) 114 (7,941) 5,056 4,902 12,792 (4,766) 214 10,369 9,228 18,350 (114) 1,117 38,950 (941) 54 (2,096) - - (209,153) 182,040 (30,096) (418) 524 (9,181) (8,000) (17,075) (8,221) 88,963 (312) 80,430 (834) 2,132 79 2,125 83 (23,498) (38,867) 115 (23,201) 71,872 1,037 1,404 (8,971) (877) 20,402 9,358 28,967 (115) 303 58,915 (1,633) 51 (1,237) - (12,734) (256,467) 180,742 (91,278) (527) (463) (9,181) - (10,171) (42,534) 155,024 94 112,584 Parent £000 17,658 - 1,656 57 1,405 83 (15,606) (28,541) 115 29,112 14,767 (1,545) (8,159) (314) (746) 9,942 8,947 19,116 (115) 1,949 39,839 (1,477) 41 (1,217) (1,589) - (182,299) 130,468 (56,073) (527) (1,910) (9,181) - (11,618) (27,852) 116,239 576 88,963 99 Ecclesiastical Insurance Ofﬁce plcNOTES TO THE FINANCIAL STATEMENTS 1 Accounting policies Ecclesiastical Insurance Office plc (hereafter referred to as the ‘Company’, or ‘Parent’), a public limited company incorporated and domiciled in England, together with its subsidiaries (collectively, the ‘Group’) operates principally as a provider of general insurance in addition to offering a range of financial services, with offices in the UK, Australia, Canada and Ireland. The principal accounting policies adopted in preparing the Group's International Financial Reporting Standards (IFRS) financial statements are set out below. Basis of preparation The Group’s consolidated financial statements have been prepared using the following accounting policies, which are in accordance with IFRS applicable at 31 December 2013 issued by the International Accounting Standards Board and endorsed by the European Union (EU). The financial statements have been prepared on the historical cost basis, except for the revaluation of properties and certain financial instruments. The Financial Performance and Risk Management sections of the Strategic Report provide a review of the Group’s business activities and describe the principal risks and uncertainties, including exposures to insurance and financial risk. The Group has considerable financial resources: financial investments of £946.5m, 97% of which are liquid (2012: financial investments of £922.1m, 96% liquid); cash and cash equivalents of £107.2m and no borrowings (2012: cash and cash equivalents of £112.6m and no borrowings); and a regulatory enhanced capital cover of 2.6 (2012: 2.7). As a consequence, the Directors have a reasonable expectation that the Group is well placed to manage its business risks successfully and continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the annual report and accounts. In accordance with IFRS 4, Insurance Contracts , on adoption of IFRS the Group applied existing accounting practices for insurance and participating investment contracts, modified as appropriate to comply with the IFRS framework and applicable standards, introducing changes only where they provide more reliable and relevant information. Items included in the financial statements of each of the Group’s entities are measured in the currency of the primary economic environment in which that entity operates (the 'functional currency'). The consolidated financial statements are stated in sterling, which is the Company’s functional and presentation currency. As permitted by Section 408 of the Companies Act 2006, a separate profit and loss account for the Company is not presented. New and revised Standards In the current year the Group has adopted the following Standards and Amendments: - IAS 27 (Revised), Separate Financial Statements; - IAS 28 (Revised), Investments in Associates and Joint Ventures; - IFRS 10, Consolidated Financial Statements; - IFRS 11, Joint Arrangements; - IFRS 12, Disclosure of Interests in Other Entities; - IFRS 13, Fair Value Measurement; 100 - Amendment to IAS 1 (Revised), Presentation of Items of Other Comprehensive Income; - Amendment to IFRS 7, Disclosures: Offsetting Financial Assets and Financial Liabilities; - Amendments to IFRS 10, IFRS 11 and IFRS 12, Transition Guidance; and - Annual Improvements to IFRSs 2009 - 2011 Cycle. IFRS 13 clarifies the definition of fair value and provides related guidance and enhanced disclosures about fair value measurements. The adoption has had no material impact on the measurement of fair value of financial assets and financial liabilities in the Group, and the disclosures required are shown in note 4. The amendment to IAS 1 requires items of other comprehensive income to be grouped by those items that will be reclassified subsequently to profit or loss and those that will never be reclassified, along with their associated tax. The amendments have been applied retrospectively and hence the presentation of items of other comprehensive income has been modified to reflect the changes. The amendment also introduces new terminology, whose use is not mandatory, for the statement of comprehensive income and the income statement. As such, the 'income statement' has been renamed as the 'statement of profit or loss'. The amendment to IFRS 7 requires disclosure of the gross amounts of recognised financial assets and liabilities where they are offset and the net amount presented in the statement of financial position. Disclosure of amounts offset within pension assets, other assets and other liabilities are shown in notes 18, 23 and 29, respectively. The other Standards, Interpretation and Amendments adopted in the year have not had a significant impact on the financial statements. At the date of authorisation of these financial statements, the following Standard and Amendments which have not been applied in these financial statements were in issue but not yet effective (and in some cases had not yet been adopted by the EU): - IFRS 9 (Revised), Financial Instruments; - IFRIC 21, Levies; - Amendment to IAS 19 (Revised), Defined Benefit Plans: Employee Contributions; - Amendment to IAS 32, Offsetting Financial Assets and Financial Liabilities; - Amendment to IAS 36, Recoverable Amount Disclosures for Non- Financial Assets; - Amendment to IAS 39, Novation of Derivatives and Continuation of Hedge Accounting; - Amendments to IFRS 10, IFRS 12 and IAS 27 (Revised), Investment Entities; - Annual Improvements to IFRSs 2010 - 2012 Cycle; and - Annual Improvements to IFRSs 2011 - 2013 Cycle. On adoption of the amendment to IAS 19 (R) (effective for annual periods beginning on or after 1 July 2014), there will be a presentational change in the pension asset and retirement benefit obligations note. The adoption of the other Standard, Interpretation and Amendments is not expected to significantly impact the Group. Ecclesiastical Insurance Ofﬁce plcThe Group has no transactions within the scope of other new or revised Standards or Interpretations which are effective in the year or in issue but not yet effective. Use of estimates The preparation of financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements. Although these estimates are based on management’s best knowledge of current events and actions, actual results ultimately may differ from those estimates. Operating profit or loss Operating profit or loss is stated before finance costs. Basis of consolidation Subsidiaries Subsidiaries are those entities in which the Group, directly or indirectly, has the power to govern the financial and operating policies in order to gain economic benefits. The results and cash flows relating to subsidiaries acquired or disposed of in the year are included in the consolidated statement of profit or loss and the consolidated statement of cash flows from the date of acquisition or up to the date of disposal. All inter-company transactions, balances and profits are eliminated. In the Parent statement of financial position subsidiaries are accounted for within financial investments at cost, in accordance with IAS 27 (Revised), Separate Financial Statements. The Group uses the acquisition method of accounting to account for business combinations. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the acquisition date. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. Non-controlling interests are measured either at fair value or at a proportionate share of the identifiable net assets of the acquiree. Goodwill is measured as the excess of the aggregate of the consideration transferred, the non-controlling interests and for an acquisition achieved in stages, the fair value of previously held equity interest, over the fair value of the identifiable net assets acquired. If the cost of acquisition is less than the fair value of the net assets acquired, the difference is recognised directly through profit or loss. For business combinations involving entities or businesses under common control, the cost of the acquisition equals the value of net assets transferred, as recognised by the transferor at the date of the transaction. No goodwill arises on such transactions. Investment vehicles Investment vehicles such as mutual funds are consolidated when the Group has a controlling interest. Foreign currency translation The assets and liabilities of foreign operations are translated from their functional currencies into the Group's presentation currency using year end exchange rates, and their income and expenses using average exchange rates for the year. Exchange differences arising from the translation of the net investment in foreign operations are taken to the currency translation reserve within equity. On disposal of a foreign operation, such exchange differences are transferred out of this reserve and are recognised in the statement of profit or loss as part of the gain or loss on sale. Foreign currency transactions are translated into the functional currency using exchange rates prevailing at the date of the transactions. Exchange gains and losses resulting from the settlement of such transactions, and from the translation of monetary assets and liabilities denominated in foreign currencies, are recognised through profit or loss. Product classification Contracts under which the Group accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder or other beneficiary if a specified uncertain future event (the insured event) adversely affects the policyholder, are classified as insurance contracts. Contracts that do not transfer significant insurance risk are classified as investment or service contracts. All of the Group's long-term business contracts are classified as insurance contracts. Both insurance and investment contracts may contain a discretionary participating feature, which is defined as a contractual right to receive additional benefits as a supplement to guaranteed benefits. The Group does not have any such participating contracts (referred to as with-profit contracts). The Company's long-term business contracts are referred to as non-profit contracts in the financial statements. Premium income General insurance business Premiums are shown gross of commission paid to intermediaries and accounted for in the period in which the risk commences. Estimates are included for premiums not notified by the year end and provision is made for the anticipated lapse of renewals not yet confirmed. Those proportions of premiums written in a year which relate to periods of risk extending beyond the end of the year are carried forward as unearned premiums. Premiums written include adjustments to premiums written in prior periods and estimates for pipeline premiums and are shown net of insurance premium taxes. Outward reinsurance premiums are accounted for in the same accounting period as the premiums for the related direct insurance or inwards reinsurance business. Long-term business Insurance contract premiums are recognised as income when receivable, at which date the liabilities arising from them are also recognised. Fee and commission income Fee and commission income consists primarily of reinsurance commissions receivable in addition to income from the Group's insurance broking activities, investment fund management fees, distribution fees from mutual funds and commission revenue from the sale of mutual fund shares. Reinsurance commissions receivable and other commission income are recognised on the trade date. Income generated from insurance placements is recognised at the inception date of the cover. 101 Ecclesiastical Insurance Ofﬁce plcNOTES TO THE FINANCIAL STATEMENTS 1 Accounting policies (continued) Fees charged for investment management services are recognised as revenue when the services are provided. Initial fees which exceed the level of recurring fees and relate to the future provision of services are deferred and amortised over the anticipated period in which services will be provided. Fees charged for investment management services for institutional and retail fund management are also recognised on this basis. Net investment return Net investment return consists of dividends, interest and rents receivable for the year, realised gains and losses, and unrealised gains and losses on financial instruments and investment properties. Dividends on equity securities are recorded as revenue on the ex- dividend date. Interest and rental income is recognised as it accrues. Unrealised gains and losses are calculated as the difference between carrying value and original cost, and the movement during the year is recognised through profit or loss. The value of realised gains and losses includes an adjustment for previously recognised unrealised gains or losses on investments disposed of in the accounting period. Claims General insurance claims incurred include all losses occurring during the year, whether reported or not, related handling costs, a reduction for the value of salvage and other recoveries, and any adjustments to claims outstanding from previous years. Claims handling costs include all internal and external costs incurred in connection with the negotiation and settlement of claims. Long-term insurance business claims and death claims are accounted for when notified. Insurance contract liabilities General insurance provisions (i) Outstanding claims provisions General insurance outstanding claims provisions are based on the estimated ultimate cost of all claims incurred but not settled at the year end date, whether reported or not, together with related claims handling costs. Significant delays are experienced in the notification and settlement of certain types of general insurance claims, particularly in respect of liability business, the ultimate cost of which cannot be known with certainty at the year end date. An estimate is made representing the best estimate plus a risk margin within a range of possible outcomes. Designated insurance liabilities are remeasured to reflect current market interest rates. (ii) Provision for unearned premiums The proportion of written premiums, gross of commission payable to intermediaries, attributable to subsequent periods is deferred as a provision for unearned premiums. The change in this provision is taken to profit or loss in order that revenue is recognised over the period of risk. (iii) Liability adequacy At each reporting date, the Group reviews its unexpired risks and carries out a liability adequacy test for any overall excess of expected claims and deferred acquisition costs over unearned premiums, using the current estimates of future cash flows under its contracts. Unexpired risks are assessed separately for each class of 102 business. Surpluses and deficits are offset where business classes are considered to be managed together. Long-term business provisions Under current IFRS requirements, insurance contract liabilities are measured using accounting policies consistent with those adopted previously. Accounting for such contracts is determined in accordance with the Statement of Recommended Practice issued by the Association of British Insurers in December 2005, and amended in December 2006. The long-term business provision is determined using methods and assumptions approved by the Directors based on advice from the Actuarial Function Holder. Initially it is calculated to comply with the reporting requirements under the Prudential Sourcebook for Insurers. This statutory solvency basis of valuation is then adjusted by eliminating or adjusting certain reserves advised under insurance companies' regulations and general contingency reserves. This adjusted basis is referred to as the modified statutory solvency basis. Reinsurance The Group assumes and cedes reinsurance in the normal course of business, with retention limits varying by line of business. Premiums on reinsurance assumed are recognised as revenue in the same manner as direct business. Outwards reinsurance premiums are accounted for in the same accounting period as the related premiums for the direct or inwards reinsurance business being reinsured. The Group does not reinsure its long-term business. Reinsurance assets primarily include balances due from both insurance and reinsurance companies for ceded insurance liabilities. Amounts recoverable from reinsurers are estimated in a manner consistent with the outstanding claims provisions or settled claims associated with the reinsured policies and in accordance with the relevant reinsurance contract. Intangible assets Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the identifiable assets and liabilities of the acquired subsidiary at the date of acquisition. Goodwill on acquisitions prior to 1 January 2004 (the date of transition to IFRS) is carried at book value (original cost less amortisation) on that date, less any subsequent impairment. Where it is considered more relevant, the Group uses the option to measure goodwill initially at fair value, less any subsequent impairment. Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Computer software Computer software is carried at historical cost less accumulated amortisation, and amortised over a useful life of between three and five years, using the straight-line method. The amortisation charge for the period is included in the statement of profit or loss within other operating and administrative expenses. Ecclesiastical Insurance Ofﬁce plcOther intangible assets Other intangible assets consist of acquired customer and distribution relationships, and are carried at cost at acquisition less accumulated amortisation after acquisition. Amortisation is on a straight-line basis over the weighted average estimated useful life of intangible assets acquired. The amortisation charge for the period is included in the statement of profit or loss within other operating and administrative expenses. Property, plant and equipment Owner-occupied properties are stated at open market value and movements are taken to the revaluation reserve within equity, net of deferred tax. When such properties are sold, the accumulated revaluation surpluses are transferred from this reserve to retained earnings. Where the market value of an individual property is below original cost, any revaluation movement arising during the year is recognised within net investment return in the statement of profit or loss. Valuations are carried out at least every three years by external qualified surveyors. All other items classed as property, plant and equipment within the statement of financial position are carried at historical cost less accumulated depreciation. Land is not depreciated. No depreciation is provided on owner- occupied properties since such depreciation would be immaterial. Depreciation is calculated on the straight-line method to write down the cost of other assets to their residual values over their estimated useful lives as follows: Computer equipment 3 - 5 years Motor vehicles 27% reducing balance or length of lease Fixtures, fittings and office equipment 3 - 15 years Where the carrying amount of an item carried at historical cost less accumulated depreciation is greater than its estimated recoverable amount, it is written down to its recoverable amount by way of an impairment charge to profit or loss. Repairs and maintenance are charged to profit or loss during the financial period in which they are incurred. Investment property Investment property comprises land and buildings which are held for long-term rental yields. It is carried at fair value with changes in fair value recognised in the statement of profit or loss within net investment return. Investment property is valued annually by external qualified surveyors at open market value. Financial instruments IAS 39, Financial Instruments: Recognition and Measurement requires the classification of certain financial assets and liabilities into separate categories for which the accounting requirements differ. The classification depends on the nature and purpose of the financial assets and liabilities, and is determined at the time of initial recognition. Financial instruments are initially measured at fair value. Their subsequent measurement depends on their classification: - Financial instruments designated as at fair value through profit or loss and those held for trading are subsequently carried at fair value. Changes in fair value are recognised through profit or loss in the period in which they arise. - All other financial assets and liabilities are held at amortised cost, using the effective interest method (except for short-term receivables and payables when the recognition of interest would be immaterial). The Directors consider that the carrying value of those financial assets and liabilities not carried at fair value in the financial statements approximates to their fair value. Offset of financial assets and financial liabilities Financial assets and liabilities are offset, and the net amount reported in the statement of financial position, when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously. Financial investments The Group classifies its financial investments as either financial assets at fair value through profit or loss (designated as such or held for trading) or loans and receivables. Financial assets at fair value through profit or loss Financial investments are classified into this category if they are managed, and their performance evaluated, on a fair value basis. Purchases and sales of these investments are recognised on the trade date, which is the date that the Group commits to purchase or sell the assets, at their fair value adjusted for transaction costs. Financial investments within this category are classified as held for trading if they are derivatives or acquired principally for the purpose of selling in the near-term. The fair values of investments are based on quoted bid prices. Where there is no active market, fair value is established using a valuation technique based on observable market data where available. There is no current intention to dispose of these investments. Loans and receivables Loans and receivables, comprising mortgages and other loans, are recognised when cash is advanced to borrowers. These are carried at amortised cost using the effective interest method. To the extent that a loan is uncollectable, it is written off as impaired. Subsequent recoveries are credited to profit or loss. Derivative financial instruments Derivative financial instruments include financial instruments that derive their value from underlying equity instruments or foreign exchange rates. Group derivative transactions, while providing effective economic hedges under the Group’s risk management positions, do not qualify for hedge accounting under the specific IFRS rules and are therefore treated as derivatives held for trading. All derivatives are initially recognised in the statement of financial position at their fair value, which usually represents their cost, including any premium paid. They are subsequently remeasured at their fair value with changes in the fair value recognised 103 Ecclesiastical Insurance Ofﬁce plcNOTES TO THE FINANCIAL STATEMENTS 1 Accounting policies (continued) immediately in net investment return. All derivatives are carried as assets when the fair values are positive and as liabilities when the fair values are negative. The notional or contractual amounts associated with derivative financial instruments are not recorded as assets or liabilities on the statement of financial position as they do not represent the fair value of these transactions. Collateral pledged by way of cash margins on futures contracts is recognised as an asset on the statement of financial position within cash and cash equivalents. Deferred acquisition costs General insurance business For general insurance business, a proportion of commission and other acquisition costs relating to unearned premiums is carried forward as deferred acquisition costs or, with regard to reinsurance outwards, as deferred income. Deferred acquisition costs are amortised over the period in which the related revenues are earned. The reinsurers’ share of deferred acquisition costs is amortised in the same manner as the underlying asset. Long-term business For insurance contracts, acquisition costs comprise direct costs such as initial commission and the indirect costs of obtaining and processing new business. Acquisition costs which are incurred during a financial year are deferred and amortised over the period during which the costs are expected to be recoverable, if applicable. Cash and cash equivalents Cash and cash equivalents include cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less and bank overdrafts. Insurance broking debtors and creditors Where the Group acts as agent in placing the insurable risks of clients with insurers, debtors arising from such transactions are not included within the Group's assets. When the Group receives cash in respect of resultant premiums or claims, a corresponding liability is established in other creditors in favour of the insurer or client. Where the Group provides premium finance facilities to clients, amounts due are included within other debtors, with the amount owing for onward transmission included in other creditors. Leases Leases, where a significant portion of the risks and rewards of ownership is retained by the lessor, are classified as operating leases. Payments made as lessees under operating leases are charged to profit or loss on a straight-line basis over the period of the lease. Rental income received as lessor under operating leases is credited to profit or loss on a straight-line basis over the period of the lease. Leases, where a significant portion of the risks and rewards of ownership is transferred to the Group, are classified as finance leases. Assets obtained under finance lease contracts are capitalised as property, plant and equipment and are depreciated over the period of the lease. Obligations under such agreements are included within liabilities net of finance charges allocated to future periods. The interest element of the lease payments is charged to profit or loss over the period of the lease. Assets held under finance leases are not significant to these financial statements. 104 Provisions and contingent liabilities Provisions are recognised when the Group has a present legal or constructive obligation, as a result of past events, and it is probable that an outflow of resources, embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made. Where the Group expects a provision to be reimbursed, the reimbursement is recognised as a separate asset, but only when the reimbursement is more probable than not. The Group recognises a provision for onerous contracts when the expected benefits to be derived from a contract are less than the unavoidable costs of meeting the obligations under the contract. Contingent liabilities are disclosed if there is a possible future obligation as a result of a past event, or if there is a present obligation but either an outflow of resources is not probable or the amount cannot be reliably estimated. Employee benefits Pension obligations The Group operates a number of defined benefit and defined contribution plans, the assets of which are held in separate trustee administered funds. For defined benefit plans, the pension costs are assessed using the projected unit credit method. Under this method, the cost of providing pensions is charged to profit or loss so as to spread the regular cost over the service lives of employees, in accordance with the advice of qualified actuaries. The pension obligation is measured as the present value of the estimated future cash outflows using a discount rate based on market yields for high quality corporate bonds. The resulting pension plan surplus or deficit appears as an asset or obligation in the statement of financial position. Any asset resulting from this calculation is limited to past service cost, plus the present value of available refunds and reductions in future employer contributions to the plan. In accordance with IAS 19 (Revised), Employee Benefits , current and past service costs, gains and losses on curtailments and settlements and net interest expense or income (calculated by applying a discount rate to the net defined benefit liability or asset), are recognised through profit or loss. Actuarial gains or losses are recognised in full in the period in which they occur in other comprehensive income. Contributions in respect of defined contribution plans are recognised as a charge to profit or loss as incurred. Other post-employment obligations Some Group companies provide post-employment medical benefits to their retirees. The expected costs of these benefits are accrued over the period of employment using an accounting methodology similar to that for defined benefit pension plans. Actuarial gains and losses are recognised immediately in other comprehensive income. Independent qualified actuaries value these obligations annually. Other benefits Employee entitlements to annual leave and long service leave are recognised when they accrue to employees. A provision is made for the estimated liability for annual leave and long service leave as a result of services rendered by employees up to the year end date. Ecclesiastical Insurance Ofﬁce plcTaxation Income tax comprises current and deferred tax. Income tax is recognised in the statement of profit or loss except to the extent that it relates to items recognised in other comprehensive income, in which case it is recognised in the statement of comprehensive income. Current tax is the expected tax payable on the taxable result for the period and any adjustment to the tax payable in respect of previous periods. Deferred tax is provided in full on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. Deferred tax is measured using tax rates expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled based on tax rates and laws which have been enacted or substantively enacted at the year end date. Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred tax assets and liabilities are not discounted. Appropriations Dividends Dividends on Ordinary shares are recognised in equity in the period in which they are declared and, for the final dividend, approved by shareholders. Dividends on Irredeemable Preference shares are recognised in the period in which they are declared and appropriately approved. Charitable grant to ultimate parent undertaking Payments are made via Gift Aid to the ultimate parent company, Allchurches Trust Limited, a registered charity. The Group does not regard these payments as being expenses of the business and, as such, recognises them net of tax in equity in the period in which they are approved. 105 Ecclesiastical Insurance Ofﬁce plcNOTES TO THE FINANCIAL STATEMENTS 2 Critical accounting estimates and judgements in applying accounting policies The Group makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial year. Estimates and judgements are regularly reviewed and based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. (a) The ultimate liability arising from claims made under general business insurance contracts The estimation of the ultimate liability arising from claims made under general business insurance contracts is a critical accounting estimate. There is uncertainty as to the total number of claims made on each class of business, the amounts that such claims will be settled for and the timings of any payments. There are various sources of uncertainty as to how much the Group will ultimately pay with respect to such contracts. Such uncertainty includes: - whether a claim event has occurred or not and how much it will ultimately settle for; - variability in the speed with which claims are notified and in the time taken to settle them, especially complex cases resolved through the courts; - changes in the business portfolio affecting factors such as the number of claims and their typical settlement costs, which may differ significantly from past patterns; - new types of claim, including latent claims, which arise from time to time; - changes in legislation and court attitudes to compensation, which may apply retrospectively; - the way in which certain reinsurance contracts (principally liability) will be interpreted in relation to unusual/latent claims where aggregation of claimants and exposure over time are issues; and - whether all such reinsurances will remain in force over the long term. The uncertainties surrounding the estimates of claims payments for the various classes of business are discussed further in note 3, and where discount rates have been applied these are disclosed in note 26. General business insurance liabilities include a margin for risk and uncertainty in addition to the best estimates for future claims. The sensitivity of profit or loss to changes in the ultimate settlement cost of claims reserves is presented in note 26. (b) Estimate of future benefit payments arising from long- term insurance contracts The determination of the liabilities under long-term insurance contracts is dependent on estimates made by the Group. Estimates are made as to the expected number of deaths for each of the years in which the Group is exposed to risk. The Group bases these estimates on standard industry and national mortality tables that reflect recent historical mortality experience, with allowance also being made for expected future mortality improvements where prudent. The estimated mortality rates profile provisions for forecast benefit payments net of forecast premium receipts. 106 Estimates are also made as to future investment income arising from the assets backing long-term insurance contracts. These estimates are based on current market returns as well as expectations about future economic and financial developments. In addition to the best estimates of future deaths, inflation, investment returns and administration expenses, a margin for risk and uncertainty is added to these assumptions in calculating the liabilities of long-term insurance contracts. The sensitivity of profit or loss to changes in the key assumptions is presented in note 26. (c) Pension and other post-employment benefits The cost of these benefits and the present value of the pension and other post-employment benefit liabilities depend on factors that are determined on an actuarial basis using a number of assumptions. The assumptions used in determining the charge to profit or loss for these benefits include the discount rate and, in the case of the post- employment medical benefits, expected medical costs inflation. Any changes in these assumptions will impact profit or loss and may affect planned funding of the pension plans. The Group determines an appropriate discount rate at the end of each year, to be used to determine the present value of estimated future cash outflows expected to be required to settle the pension and other post- employment benefit obligations. In determining the appropriate discount rate, the Group considered interest rates of high quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating the terms of the related pension liability. The expected rate of medical cost inflation has been determined by comparing the historical relationship of the actual medical cost increases with the rate of inflation. Other key assumptions for the pension and post-employment benefit costs and credits are based in part on current market conditions. Additional information including the sensitivity of pension and post- employment medical benefit scheme liabilities to changes in the key assumptions is disclosed in note 18. (d) Goodwill Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. An impairment loss is recognised to the extent that the carrying value of goodwill exceeds the recoverable amount. The recoverable amount is determined by estimating the value in use of the business units to which the goodwill has been allocated. The value in use calculation requires the Group to make an estimation of the future cash flows expected to arise from the business unit and a suitable discount rate to calculate present value. Details of the carrying value of goodwill at the balance sheet date are shown in note 16. (e) Carrying value of tax liabilities Calculating tax liabilities requires management to make judgements in respect of the tax payable for current and prior periods based on the interpretation of applicable tax legislation. In particular, the material deferred tax liability held by the Group primarily relates to future tax due on unrealised gains in respect to equities held prior to 2002. Gains on these assets are only recognised for tax purposes when sold and an estimate has to be made of the tax rate that would be applicable at the point of sale in order to determine the tax liability relating to the gain, applying tax rates substantively enacted at the balance sheet date. Ecclesiastical Insurance Ofﬁce plc3 Insurance risk Through its general and life insurance operations, the Group is exposed to a number of risks, as summarised in the Risk Management section of the Strategic Report. The risk under any one insurance contract is the possibility that the insured event occurs and the uncertainty of the amount and timing of the resulting claim. Factors such as the business and product mix, the external environment including market competition and reinsurance capacity all may vary from year to year, along with the actual frequency, severity and ultimate cost of claims and benefits. This subjects the Group to Underwriting and Pricing risk (risk selection and required premium), Claims Reserving Risk (the risk that the cost to settle claims exceeds the carrying amount of the related insurance liabilities) and Reinsurance Risk (the risk of failing to access and manage reinsurance capacity at a reasonable price). (a) Risk mitigation Experience shows that the larger and more diversified the portfolio of insurance contracts, the smaller the relative variability about the expected outcome will be. The Group’s underwriting strategy is designed to ensure that the underwritten risks are well diversified in terms of type and amount of risk and geographical spread. In all operations pricing controls are in place, underpinned by sound statistical analysis, market expertise and appropriate external consultant advice. Gross underwriting exposure is protected through the use of a comprehensive programme of reinsurance and proactive claims handling. Net retention limits are in place and the Group arranges catastrophe reinsurance cover to protect against aggregations of losses. (b) Concentrations of risk The core business of the Group is general insurance, with the principal classes of business written being property and liability. The Group also underwrites a small portfolio of motor policies, but this class is in run-off following the decision in November 2012 to focus on the principal classes. The accident class of business covers injury, death or incapacity as a result of an unforeseen event. The Group's whole-of-life insurance policies support funeral planning products. With reference to written premiums, the concentration of insurance risk for the financial year before and after reinsurance by territory in relation to the type of risk accepted is summarised below. 2013 Group Territory United Kingdom Australia Canada Ireland Total Parent Territory United Kingdom Canada Ireland Total Gross Net Gross Net Gross Net Gross Net Gross Net Gross Net Gross Net Gross Net Gross Net Property £000 195,720 105,832 27,126 10,784 29,521 19,835 7,876 4,610 260,243 141,061 199,673 105,832 29,521 19,835 7,876 4,610 237,070 130,277 General insurance Liability £000 Motor £000 Accident £000 Life insurance Funeral plans £000 64,578 58,753 16,477 13,869 11,651 10,772 5,691 5,241 98,397 88,635 64,578 58,753 11,651 10,772 5,691 5,241 81,920 74,766 14,467 13,138 861 761 - - 1 1 15,329 13,900 14,467 13,138 - - 1 1 14,468 13,139 17,380 16,519 1,205 1,163 - - 38 40 18,623 17,722 17,380 16,519 - - 38 40 17,418 16,559 6,753 6,753 - - - - - - 6,753 6,753 - - - - - - - - Total £000 298,898 200,995 45,669 26,577 41,172 30,607 13,606 9,892 399,345 268,071 296,098 194,242 41,172 30,607 13,606 9,892 350,876 234,741 107 Ecclesiastical Insurance Ofﬁce plcNOTES TO THE FINANCIAL STATEMENTS 3 Insurance risk (continued) 2012 Group Territory United Kingdom Australia Canada Ireland Total Parent Territory United Kingdom Canada Ireland Total Gross Net Gross Net Gross Net Gross Net Gross Net Gross Net Gross Net Gross Net Gross Net Property £000 210,913 111,748 41,483 11,495 27,122 18,748 8,032 4,704 287,550 146,695 218,889 111,749 27,122 18,748 8,032 4,704 254,043 135,201 General insurance Liability £000 Motor £000 Accident £000 Life insurance Funeral plans £000 72,705 68,629 19,585 13,915 9,873 8,921 5,762 5,296 107,925 96,761 75,260 68,574 9,873 8,921 5,762 5,296 90,895 82,791 40,937 38,261 2,658 710 - - 7 7 43,602 38,978 40,937 38,261 - - 7 7 40,944 38,268 20,404 19,308 1,400 1,319 - - 245 222 22,049 20,849 20,404 19,308 - - 245 222 20,649 19,530 20,208 20,208 - - - - - - 20,208 20,208 - - - - - - - - Total £000 365,167 258,154 65,126 27,439 36,995 27,669 14,046 10,229 481,334 323,491 355,490 237,892 36,995 27,669 14,046 10,229 406,531 275,790 (c) General insurance risks Property classes Property cover mainly compensates the policyholder for damage suffered to their properties or for the value of property lost. Property insurance may also include cover for pecuniary loss through the inability to use damaged insured commercial properties. For property insurance contracts, including the property element of motor contracts, there can be variability in the nature, number and size of claims made in each period. The nature of claims may include fire, business interruption, weather damage, subsidence, accidental damage to insured vehicles and theft. Subsidence claims are difficult to predict because the damage is often not apparent for some time. Changes in soil moisture conditions can give rise to changes in claim volumes over time. The ultimate settlements can be small or large with a greater risk of a settled claim being re- opened at a later date. The number of claims made can be affected by weather events, changes in climate and crime rates. Climate change may give rise to more frequent and severe extreme weather events, such as river flooding, hurricanes and drought, and their consequences, for example, subsidence claims. If a weather event happens near the end of the financial year then the uncertainty about ultimate claims cost in the financial statements is much higher because there is insufficient time for adequate data to be received to assess the final cost of claims. Individual claims can vary in amount since the risks insured are diverse in both size and nature. The cost of repairing property varies according to the extent of damage, cost of materials and labour charges. The maximum claim payable is limited to the sum insured. These contracts are underwritten on a reinstatement basis or repair and renovation basis as appropriate. Costs of rebuilding properties, of replacement or indemnity for contents and time taken to restart operations for business interruption are the key factors that influence the level of claims. Individual large claims are more likely to arise from fire, storm or flood damage. The greatest likelihood of an aggregation of claims arises from weather or recession-related events. Claims payment, on average, occurs within a year of the event that gives rise to the claim. However, there is variability around this average with larger claims typically taking longer to settle. 108 Ecclesiastical Insurance Ofﬁce plcLiability classes Liability insurance contracts protect policyholders from the liability to compensate injured employees (employers' liability) and third parties (public liability) and motor injuries. Claims that may arise from the liability portfolios include damage to property, physical injury, disease and psychological trauma. The Group has a different exposure profile to most other commercial lines insurance companies as it has lower exposure to industrial risks, where uncertainty is higher. Therefore, claims for industrial diseases are less common for the Group than injury claims such as slips, trips and back injuries. The frequency and severity of claims arising on liability insurance contracts, including the liability element of motor contracts, can be affected by several factors. Most significant are the increasing level of awards for damages suffered, the courts’ move to periodic payments awards and the increase in the number of cases that have been latent for a long period of time. The severity of bodily injury claims is highly influenced by the value of loss of earnings and the future cost of care. The settlement value of claims arising under public and employers' liability and the liability element of motor contracts is particularly difficult to predict. There is uncertainty as to whether any payments will be made and, if they are, the amount and timing of the payments. Key factors driving the high levels of uncertainty include the late notification of possible claim events and the legal process. Late notification of possible claims necessitates the holding of provisions for incurred claims that may only emerge some years into the future. In particular the effect of inflation over such a long period can be considerable and is uncertain. A lack of comparable past experience makes it difficult to quantify the number of claims and, for certain types of claims, the amounts for which they will ultimately settle. The legal and legislative framework continues to develop which has a consequent impact on the uncertainty as to the length of the claims settlement process and the ultimate settlement amounts. Claims payment, on average, occurs about three to four years after the event that gives rise to the claim. However, there is significant variability around this average. Provisions for latent claims The public and employers’ liability classes can give rise to very late reported claims, which are often referred to as latent claims. These can vary in nature and are difficult to predict. They typically emerge slowly over many years. The Group has reflected this uncertainty and believes that it holds adequate reserves for latent claims that may result from exposure periods up to the reporting date. Note 26 presents the development of the estimate of ultimate claim cost for public and employers' liability claims occurring in a given year. This gives an indication of the accuracy of the estimation technique for incurred claims. (d) Life insurance risks The Group provides whole-of-life insurance policies to support funeral planning products, for most of which the future benefits are linked to inflation and backed by index-linked assets. The risk that actual claims payments exceed the carrying amount of the insurance liabilities may occur if the timing of claims is different from assumed. Uncertainty in the estimation of the timing of future claims arises from the unpredictability of long-term changes in overall levels of mortality. The Group bases these estimates on standard industry and national mortality tables. The most significant factors that could alter the expected mortality rates profile are epidemics, widespread changes in lifestyle and continued improvement in medical science and social conditions. The primary risk on these contracts is the level of future investment returns on the assets backing the liabilities over the life of the policyholders. The investment risk within this has been largely mitigated by holding fixed interest assets of a similar term to the expected liabilities profile. The mortality risk is retained by the Group and directly impacts shareholders' equity. 109 Ecclesiastical Insurance Ofﬁce plcNOTES TO THE FINANCIAL STATEMENTS 4 Financial risk and capital management The Group is exposed to financial risk through its financial assets, financial liabilities, reinsurance assets and insurance liabilities. In particular the key financial risk is that the proceeds from its financial assets are not sufficient to fund the obligations arising from its insurance contracts. The most important components of financial risk are interest rate risk, credit risk, currency risk and equity price risk. There has been no change from the prior period in the nature of financial risks that the Group is exposed to. Financial risk exposure fell in 2013 due to the sale of around £50m overseas equities which we have reinvested in UK fixed income debt securities. The Group's management and measurement of financial risks is informed by either stochastic modelling or stress testing techniques. (a) Categories of financial instruments Group At 31 December 2013 Financial investments Other assets Cash and cash equivalents Other liabilities Net other Total At 31 December 2012 Financial investments Other assets Cash and cash equivalents Other liabilities Net other Total Parent At 31 December 2013 Financial investments Other assets Cash and cash equivalents Other liabilities Net other Total At 31 December 2012 Financial investments Other assets Cash and cash equivalents Other liabilities Net other Total Financial assets Designated at fair value £000 Held for Loans and trading receivables* £000 £000 Financial liabilities** £000 Other assets and liabilities £000 Total £000 938,383 - - - - 938,383 910,785 - - - - 910,785 713,989 - - - - 713,989 675,027 - - - - 675,027 158 - - - - 158 1,846 - - - - 1,846 158 - - - - 158 1,846 - - - - 1,846 7,911 121,411 107,241 - - 236,563 9,478 142,667 112,584 - - 264,729 14 105,606 80,430 - - 186,050 14 121,621 88,963 - - 210,598 - - - (31,571) - (31,571) - - - (37,796) - (37,796) - - - (19,646) - (19,646) - - - (28,407) - (28,407) - 3,053 - (6,397) (646,046) (649,390) 946,452 124,464 107,241 (37,968) (646,046) 494,143 - 3,047 - (6,397) (680,557) (683,907) 922,109 145,714 112,584 (44,193) (680,557) 455,657 49,765 2,665 - (5,366) (499,321) (452,257) 763,926 108,271 80,430 (25,012) (499,321) 428,294 49,765 2,904 - (5,366) (513,765) (466,462) 726,652 124,525 88,963 (33,773) (513,765) 392,602 * Cash and cash equivalents have been presented with loans and receivables. ** Financial liabilities are held at amortised cost. 110 Ecclesiastical Insurance Ofﬁce plc(b) Fair value hierarchy The fair value measurement basis used to value those financial assets and financial liabilities held at fair value is categorised into a fair value hierarchy as follows: Level 1: fair values measured using quoted bid prices (unadjusted) in active markets for identical assets or liabilities. This category includes listed equities in active markets, listed debt securities in active markets and exchange-traded derivatives. Level 2: fair values measured using inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). This category includes listed debt or equity securities in a market that is not active and derivatives that are not exchange-traded. Level 3: fair values measured using inputs for the asset or liability that are not based on observable market data (unobservable inputs). This category includes unlisted debt and equities, including investments in venture capital, and suspended securities. Where a look-through valuation approach is applied, underlying net asset values are sourced from the investee and adjusted to reflect illiquidity where appropriate, with the fair values disclosed being directly sensitive to this input. There have been no transfers between investment categories in the current year. Analysis of fair value measurement bases Group At 31 December 2013 Financial assets at fair value through profit or loss Financial investments Equity securities Debt securities Derivatives Total financial assets at fair value through profit or loss At 31 December 2012 Financial assets at fair value through profit or loss Financial investments Equity securities Debt securities Derivatives Total financial assets at fair value through profit or loss Parent At 31 December 2013 Financial assets at fair value through profit or loss Financial investments Equity securities Debt securities Derivatives Total financial assets at fair value through profit or loss At 31 December 2012 Financial assets at fair value through profit or loss Financial investments Equity securities Debt securities Derivatives Total financial assets at fair value through profit or loss Fair value measurement at the end of the reporting period based on Level 1 £000 Level 2 £000 Level 3 £000 Total £000 276,660 636,330 - 912,990 263,968 619,557 - 883,525 246,756 446,067 - 692,823 240,922 408,049 - 648,971 270 5,416 158 5,844 50 2,476 1,846 4,372 270 1,193 158 1,621 50 1,789 1,846 3,685 19,390 317 - 19,707 296,320 642,063 158 938,541 18,558 6,176 - 24,734 282,576 628,209 1,846 912,631 19,386 317 - 19,703 266,412 447,577 158 714,147 18,514 5,703 - 24,217 259,486 415,541 1,846 676,873 111 Ecclesiastical Insurance Ofﬁce plcNOTES TO THE FINANCIAL STATEMENTS 4 Financial risk and capital management (continued) Fair value measurements based on level 3 Fair value measurements in level 3 for both the Group and Parent consist of financial assets, analysed as follows: Group At 31 December 2013 Opening balance Total gains/(losses) recognised in profit or loss Disposal proceeds Closing balance Total gains/(losses) for the period included in profit or loss for assets held at the end of the reporting period At 31 December 2012 Opening balance Total gains/(losses) recognised in profit or loss Purchases Disposal proceeds Closing balance Total gains/(losses) for the period included in profit or loss for assets held at the end of the reporting period Parent At 31 December 2013 Opening balance Total gains/(losses) recognised in profit or loss Disposal proceeds Closing balance Total gains/(losses) for the period included in profit or loss for assets held at the end of the reporting period At 31 December 2012 Opening balance Total gains/(losses) recognised in profit or loss Purchases Disposal proceeds Closing balance Total gains/(losses) for the period included in profit or loss for assets held at the end of the reporting period Financial assets at fair value through profit and loss Equity securities £000 Debt securities £000 18,558 832 - 19,390 6,176 (5,782) (77) 317 Total £000 24,734 (4,950) (77) 19,707 832 (5,782) (4,950) 17,215 1,343 - - 18,558 226 (5,179) 11,130 (1) 6,176 17,441 (3,836) 11,130 (1) 24,734 1,343 (5,179) (3,836) 18,514 872 - 19,386 5,703 (5,309) (77) 317 24,217 (4,437) (77) 19,703 872 (5,309) (4,437) 17,171 1,343 - - 18,514 226 (4,115) 9,593 (1) 5,703 17,397 (2,772) 9,593 (1) 24,217 1,343 (4,115) (2,772) All the above gains or losses included in profit or loss for the period (for both the Group and Parent) are presented in net investment return within the statement of profit or loss. 112 Ecclesiastical Insurance Ofﬁce plcThe valuation techniques used for instruments categorised in Levels 2 and 3 are described below. Listed debt and equity securities not in active market (Level 2) These financial assets are valued using third party pricing information that management's knowledge of the markets. Where material, these valuations are reviewed by the Group Audit Committee. is regularly reviewed and internally calibrated based on Non exchange-traded derivative contracts (Level 2) The Group's derivative contracts are not traded in active markets. Foreign currency forward contracts are valued using observable forward exchange rates and interest rates corresponding to the maturity of the contract. Over-the-counter equity or index options and futures are valued by reference to observable index prices. Unlisted equity securities (Level 3) These financial assets are valued using observable net asset data, adjusted for unobservable inputs including comparable price-to-book ratios based on similar listed companies, and management's consideration of constituents as to what exit price might be obtainable. Where material, these valuations are reviewed by the Group Audit Committee. The valuation is most sensitive to the level of underlying net assets, the euro exchange rate, the price-to-book ratio chosen and an illiquidity discount applied to the valuation to account for the risks associated with holding the asset. If the price-to-book ratio and illiquidity discount applied changed by +/- 10% the value of unlisted equity securities could move by +/- £3m. The increase in value during the year is the result of an increase in underlying net assets, the movement in the euro exchange rate and an increase in the price-to-book ratio from the previous year end. Unlisted debt (Level 3) Unlisted debt is valued using an adjusted net asset method whereby management uses a look-through approach to the underlying assets supporting the loan, discounted using observable market interest rates of similar loans with similar risk, and allowing for unobservable future transaction costs. Where material, these valuations are reviewed by the Group Audit Committee. The valuation is most sensitive to the level of underlying net assets but it is also sensitive to the interest rate used for discounting and the projected date of disposal of the asset, with the exit costs sensitive to an expected return on capital of any purchaser and estimated transaction costs. Reasonably likely changes in unobservable inputs used in the valuation would not have a significant impact on shareholders' equity or the net result. The decrease in value during the year is primarily the result of a decrease in underlying net assets. 113 Ecclesiastical Insurance Ofﬁce plcNOTES TO THE FINANCIAL STATEMENTS 4 Financial risk and capital management (continued) (c) Interest rate risk The Group’s exposure to interest rate risk arises primarily from movements on financial investments that are measured at fair value and have fixed interest rates, which represent a significant proportion of the Group’s assets, and from those insurance liabilities for which discounting is applied at a market interest rate. Investment strategy is set in order to control the impact of interest rate risk on anticipated Group cash flows and asset and liability values. The fair value of the Group's investment portfolio of fixed income securities reduces as market interest rates rise as does the present value of discounted insurance liabilities, and vice versa. Interest rate risk concentration is reduced by adopting asset-liability duration matching principles where appropriate. Excluding assets held to back the long-term business, the average duration of the Group’s fixed income portfolio is two years (2012: three years), reflecting the relatively short-term average duration of its general insurance liabilities. The mean-term of discounted general insurance liabilities is disclosed in note 26 (a) part (iv). For the Group’s long-term insurance funeral plan business, benefits payable to policyholders are independent of the returns generated by interest-bearing assets. Therefore the interest rate risk on the invested assets supporting these liabilities is borne by the Group. This risk can be mitigated by purchasing fixed interest investments with durations that precisely match the profile of the liabilities. For funeral plan policies, benefits are linked to the Retail Prices Index (RPI). Assets backing these liabilities are also linked to the RPI, and include index-linked gilts and corporate bonds. For practical purposes it is not possible to exactly match the durations due to the uncertain profile of liabilities (e.g. mortality risk) and the availability of suitable assets, therefore some interest rate risk will persist. The Group monitors its exposure by comparing projected cash flows for these assets and liabilities and making appropriate adjustments to its investment portfolio. The table below summarises the maturities of long-term business assets and liabilities that are exposed to interest rate risk. Group long-term business At 31 December 2013 Assets Debt securities Cash and cash equivalents Liabilities Long-term business provision At 31 December 2012 Assets Debt securities Cash and cash equivalents Liabilities Long-term business provision Within 1 year £000 1,104 2,214 3,318 Maturity Between 1 & 5 years £000 After 5 years £000 Total £000 27,024 - 27,024 73,075 - 73,075 101,203 2,214 103,417 6,125 22,200 64,121 92,446 8,498 441 8,939 19,218 - 19,218 74,584 - 74,584 102,300 441 102,741 5,951 21,985 65,020 92,956 Group financial investments with variable interest rates, including cash and cash equivalents, insurance instalment receivables and mortgage loans are subject to cash flow interest rate risk. This risk is not significant to the Group. 114 Ecclesiastical Insurance Ofﬁce plc(d) Credit risk The Group has exposure to credit risk, which is the risk that a counterparty will be unable to pay amounts in full when due. Areas where the Group is exposed to credit risk are: - - - - reinsurers’ share of insurance liabilities (excluding provision for unearned premiums) and amounts due from reinsurers in respect of claims already paid; deposits held with banks; amounts due from insurance intermediaries and policyholders; and counterparty default on loans and debt securities. The carrying amount of financial and reinsurance assets represents the Group's maximum exposure to credit risk. The Group structures the levels of credit risk it accepts by placing limits on its exposure to a single counterparty. Limits on the level of credit risk are regularly reviewed. Reinsurance is used to manage insurance risk. This does not, however, discharge the Group's liability as primary insurer. If a reinsurer fails to pay a claim for any reason, the Group remains liable for the payment to the policyholder. The creditworthiness of reinsurers is considered on a regular basis through the year by reviewing their financial strength. The Group Reinsurance Security Committee assesses, monitors and approves the creditworthiness of all reinsurers, reviewing relevant credit ratings provided by the recognised credit rating agencies, as well as other publicly available data and market information. The Committee also monitors the balances outstanding from reinsurers and maintains an approved list of reinsurers. There has been no significant change in the recoverability of the Group’s reinsurance balances during the year with all reinsurers on the 2013 reinsurance programme having a minimum rating of 'A-' from Standard & Poor’s or an equivalent agency at the time of purchase, with the exception of MAPFRE RE whose rating was adversely impacted by the sovereign rating of Spain. However, MAPFRE RE was upgraded by Standard & Poor’s to 'A-' with a stable outlook in February 2014. Group cash balances are regularly reviewed to identify the quality of the counterparty bank and to monitor and limit concentrations of risk. The Group's credit risk policy details prescriptive methods for the collection of premiums and control of intermediary and policyholder debtor balances. The level and age of debtor balances are regularly assessed via monthly credit management reports. These reports are scrutinised to assess exposure in more than one region in respect of aged or outstanding balances. Any such balances are likely to be major international brokers who are in turn monitored via credit reference agencies and considered to pose minimal risk of default. The Group has no material concentration of credit risk in respect of amounts due from insurance intermediaries and policyholders due to the well diversified spread of such debtors. is held over loans secured by mortgages. The debt securities portfolio consists of a range of mainly fixed interest instruments Collateral local authority issues, corporate loans and bonds, overseas bonds, preference shares and other interest including government securities, bearing securities. Limits are imposed on the credit ratings of the corporate bond portfolio and exposures regularly monitored. Group investments in unlisted securities represent less than 1% of this category in the current and prior year. The Group’s exposure to counterparty default on debt securities is spread across a variety of geographical and economic territories, as follows: 2013 2012 Group £000 463,879 93,283 58,629 26,272 - 642,063 Parent £000 362,676 - 58,629 26,272 - 447,577 UK Australia Canada Europe Other Total Group £000 428,760 108,761 61,113 23,773 5,802 628,209 Parent £000 325,326 - 61,113 23,773 5,329 415,541 UK Australia Canada Europe Other Total 115 Ecclesiastical Insurance Ofﬁce plcNOTES TO THE FINANCIAL STATEMENTS 4 Financial risk and capital management (continued) (e) Liquidity risk Liquidity risk is the risk that funds may not be available to pay obligations when due. The Group is exposed to daily calls on its available cash resources mainly from claims arising from insurance contracts. An estimate of the timing of the net cash outflows resulting from insurance contracts is provided in note 26. The Group has robust processes in place to manage liquidity risk and has available cash balances, other readily marketable assets and access to funding in case of exceptional need. This is not considered to be a significant risk to the Group. Non-derivative financial liabilities consist of finance leases, which are not material to the Group, and other liabilities for which a maturity analysis is included in note 29. (f) Currency risk The Group operates internationally and its main exposures to foreign exchange risk are noted below. The Group's foreign operations generally invest in assets and purchase reinsurance denominated in the same currencies as their insurance liabilities, which mitigates the foreign currency exchange rate risk for these operations. As a result, foreign exchange risk arises from recognised assets and liabilities denominated in other currencies and net investments in foreign operations. The Group mitigates this risk through the use of derivatives from time to time. The Group exposure to foreign currency risk within the investment portfolios arises from purchased investments that are denominated in currencies other than sterling. The Group foreign operations create two sources of foreign currency risk: - the operating results of the Group foreign branches and subsidiaries in the Group financial statements are translated at the average exchange rates prevailing during the period; and - the equity investment in foreign branches and subsidiaries is translated into sterling using the exchange rate at the year end date. The largest currency exposures with reference to net assets/liabilities are shown below, before the mitigating effect of derivatives, representing effective diversification of resources. 2013 2012 Aus $ Can $ Euro US $ Japanese Yen Group £000 43,053 33,044 12,828 1,479 1,130 Parent £000 2,747 33,044 12,819 1,479 1,130 Aus $ Can $ Euro Hong Kong $ Singapore $ Group £000 54,459 36,651 28,093 8,180 7,207 Parent £000 6,618 36,651 28,083 8,180 7,207 (g) Equity price risk The Group is exposed to equity price risk because of financial investments held by the Group and stated at fair value through profit or loss. The Group mitigates this risk by holding a diversified portfolio across geographical regions and market sectors, and through the use of derivative contracts from time to time which would limit losses in the event of a fall in equity markets. The concentration of equity price risk by geographical listing, before the mitigating effect of derivatives, to which the Group and Parent are exposed is as follows: 2013 2012 Group £000 273,650 19,393 1,909 979 389 296,320 Parent £000 243,742 19,393 1,909 979 389 266,412 UK Europe Canada US Other Total Group £000 236,972 20,775 8,032 6,128 10,669 282,576 Parent £000 213,882 20,775 8,032 6,128 10,669 259,486 UK Europe Hong Kong Singapore Other Total 116 Ecclesiastical Insurance Ofﬁce plc(h) Market risk sensitivity analysis The sensitivity of profit and other equity reserves to movements on market risk variables (comprising interest rate, currency and equity price risk), each considered in isolation, is shown in the following table: Group Variable Interest rate risk Currency risk Equity price risk Parent Variable Interest rate risk Currency risk Equity price risk Change in variable -100 basis points +100 basis points -5% +5% +/- 5% Change in variable -100 basis points +100 basis points -5% +5% +/- 5% Potential increase/ (decrease) in profit 2013 £000 (254) (4,769) 811 (770) 11,371 2012 £000 1,725 (4,212) 2,042 (1,940) 10,667 Potential increase/ (decrease) in profit 2013 £000 1,269 (2,174) 811 (770) 10,224 2012 £000 2,185 (3,935) 1,820 (1,729) 9,796 Potential increase/ (decrease) in other equity reserves 2013 £000 (121) 131 3,513 (3,337) - 2012 £000 (24) 17 4,419 (4,198) - Potential increase/ (decrease) in other equity reserves 2013 £000 (88) 85 1,391 (1,321) - 2012 £000 (15) 15 1,922 (1,826) - The following assumptions have been made in preparing the above sensitivity analysis: - the value of fixed income investments will vary inversely with changes in interest rates, and all territories experience the same interest rate movement; - currency gains and losses will arise from a change in the value of sterling against all other currencies moving in parallel; - equity prices will move by the same percentage across all territories; and - change in profit is stated net of tax at the standard rate applicable in each of the Group's territories. (i) Capital management The Group's primary objectives when managing capital include: - - to comply with the regulators' capital requirements of the markets in which the Group operates; and to safeguard the Group's ability to continue to meet stakeholders' expectations, in accordance with its corporate mission, vision and values. The Group is subject to insurance solvency regulations in all the territories in which it issues insurance and investment contracts, and capital is managed and evaluated on the basis of regulatory capital. In the UK, the Group and its UK regulated entities are required to comply with rules issued by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA), and submit PRA returns detailing levels of regulatory capital held. Regulatory capital should be in excess of the higher of two amounts. The first is an amount which is calculated by applying fixed percentages to premiums and claims (general insurance business) or by applying fixed percentages to insurance liabilities and applying stress testing (long-term business). The second is an economic capital assessment by the regulated entity, which the PRA reviews and may amend by issuing Individual Capital Guidance. The Group sets internal capital standards above the PRA's minimum requirement. For overseas business the relevant capital requirement is the minimum requirement under the local regulatory regime. Both the Group and the regulated entities within it have complied with all externally imposed capital requirements throughout the current and prior year. Regulated subsidiaries are restricted in the amount of cash dividends they transfer to the parent entity, in order for them to meet their individual minimum capital requirements. The Group's total available capital resources are disclosed in note 26 (b). 117 Ecclesiastical Insurance Ofﬁce plcNOTES TO THE FINANCIAL STATEMENTS 5 Segment information (a) Operating segments The Group segments its business activities on the basis of differences in the products and services offered and, for general insurance, the underwriting territory. This reflects the management and internal Group reporting structure. Group activities that are not reportable operating segments on the basis of size are included within an 'Other activities' category. A change has been made to segments during 2013 as follows: - The 'Broking' segment has been renamed 'Broking and Advisory' and includes Ecclesiastical Financial Advisory Services Limited, which had previously been included in 'Other activities'. The prior period has been restated to the revised basis. The activities of each operating segment are described below. - General business United Kingdom The Group's principal general insurance business operation is in the UK, where it operates under the Ecclesiastical and Ansvar brands. Australia The Group has a wholly-owned subsidiary in Australia underwriting general insurance business under the Ansvar brand. Canada The Group operates a general insurance Ecclesiastical branch in Canada. Ireland The Group operates an Ecclesiastical branch in the Republic of Ireland underwriting general business across the whole of Ireland. Central operations This includes the Group's internal reinsurance function, corporate underwriting costs, adverse development cover sold to ACS (NZ) Limited and operations that are in run-off or not reportable due to their immateriality. - Investment management The Group provides investment management services both internally and to third parties through Ecclesiastical Investment Management Limited. - Broking and Advisory The Group provides insurance broking through South Essex Insurance Brokers Limited and financial advisory services through Ecclesiastical Financial Advisory Services Limited. - Life business Ecclesiastical Life Limited provides long-term insurance policies to support funeral planning products. - Other activities This includes corporate costs relating to acquisition and disposal of businesses. Inter-segment and inter-territory transfers or transactions are entered into under normal commercial terms and conditions that would also be available to unrelated third parties. 118 Ecclesiastical Insurance Ofﬁce plcSegment revenue The Group uses gross written premiums as the measure for turnover of the general and life insurance business segments. Turnover of the non- insurance segments comprises fees and commissions earned in relation to services provided by the Group to third parties. Segment revenues do not include net investment return or general business fee and commission income, which are reported within revenue in the consolidated statement of profit or loss. Continuing operations General business United Kingdom Australia Canada Ireland Central operations Total Life business Investment management Broking and Advisory Group revenue from continuing operations Gross written premiums £000 291,338 45,669 41,172 13,606 807 392,592 6,753 - - 2013 Non- insurance services £000 - - - - - - - 10,535 8,031 Total £000 291,338 45,669 41,172 13,606 807 392,592 6,753 10,535 8,031 Gross written premiums £000 336,579 65,126 36,995 14,046 8,380 461,126 20,208 - - 2012 Non- insurance services £000 - - - - - - - 8,396 7,979 Total £000 336,579 65,126 36,995 14,046 8,380 461,126 20,208 8,396 7,979 399,345 18,566 417,911 481,334 16,375 497,709 Group revenues are not materially concentrated on any single external customer. Segment result General business segment results comprise the insurance underwriting profit or loss, investment activities and other expenses of each underwriting territory. The Group uses the industry standard net combined operating ratio (COR) as a measure of underwriting efficiency. The COR expresses the total of net claims costs, commission and underwriting expenses as a percentage of net earned premiums. The life business segment result comprises the profit or loss on insurance contracts (including return on assets backing liabilities in the long- term fund), shareholder investment return and other expenses. All other segment results consist of the profit or loss before tax measured in accordance with IFRS. 2013 General business United Kingdom Australia Canada Ireland Central operations Life business Investment management Broking and Advisory Other activities Profit before tax Combined operating ratio 95.3% 114.8% 104.0% 186.4% 102.9% Insurance £000 Investments £000 9,815 (4,182) (1,142) (9,068) (3,666) (8,243) 367 - - - (7,876) 59,726 3,913 1,459 385 - 65,483 6,627 1,728 - - 73,838 Other £000 (114) (2) - - - (116) (5) - 1,689 (593) 975 Total £000 69,427 (271) 317 (8,683) (3,666) 57,124 6,989 1,728 1,689 (593) 66,937 119 Ecclesiastical Insurance Ofﬁce plcNOTES TO THE FINANCIAL STATEMENTS 5 Segment information (continued) 2012 Continuing operations General business United Kingdom Australia Canada Ireland Central operations Life business Investment management Broking and Advisory Other activities Profit before tax Combined operating ratio 105.5% 122.1% 101.1% 162.8% 108.5% Insurance £000 Investments £000 Other £000 (12,333) (5,194) (297) (6,213) (559) (24,596) 5,947 - - - 41,255 8,663 1,257 1,130 12 52,317 3,113 1,194 - - (18,649) 56,624 (113) - (2) - - (115) (5) - 596 (648) (172) Total £000 28,809 3,469 958 (5,083) (547) 27,606 9,055 1,194 596 (648) 37,803 (b) Geographical information Gross written premiums from external customers and non-current assets, as attributed to individual countries in which the Group operates, are as follows: United Kingdom Australia Canada Ireland 2013 2012 Gross written premiums £000 298,898 45,669 41,172 13,606 399,345 Non-current assets £000 73,329 918 1,338 74 75,659 Gross written premiums £000 365,167 65,126 36,995 14,046 481,334 Non-current assets £000 74,902 1,453 734 241 77,330 Gross written premiums are allocated based on the country in which the insurance contracts are issued. Non-current assets exclude rights arising under insurance contracts, deferred tax assets, pension assets and financial instruments and are allocated based on where the assets are located. 120 Ecclesiastical Insurance Ofﬁce plc6 Net insurance premium revenue For the year ended 31 December 2013 Gross written premiums Outward reinsurance premiums Net written premiums Change in the gross provision for unearned premiums Change in the provision for unearned premiums, reinsurers' share Change in the net provision for unearned premiums General business £000 Long-term business £000 392,592 (131,274) 261,318 27,205 (2,613) 24,592 6,753 - 6,753 - - - Total £000 399,345 (131,274) 268,071 27,205 (2,613) 24,592 Earned premiums, net of reinsurance 285,910 6,753 292,663 For the year ended 31 December 2012 Gross written premiums Outward reinsurance premiums Net written premiums Change in the gross provision for unearned premiums Change in the provision for unearned premiums, reinsurers' share Change in the net provision for unearned premiums 461,126 (157,843) 303,283 (404) (12,442) (12,846) 20,208 - 20,208 - - - 481,334 (157,843) 323,491 (404) (12,442) (12,846) Earned premiums, net of reinsurance 290,437 20,208 310,645 7 Net investment return Income from financial assets at fair value through profit or loss: - equity income - debt income Income from financial assets not at fair value through profit or loss: - interest income on mortgages and other loans - cash and cash equivalents income, net of exchange movements - other income received Other income - rental income Investment income Fair value movements on financial instruments at fair value through profit or loss Fair value movements on investment property Net investment return Less: discontinued operations Net investment return of continuing operations 2013 £000 9,948 25,118 414 1,933 1,754 2,004 41,171 34,729 1,343 77,243 - 77,243 2012 £000 9,274 24,450 477 3,504 2,011 1,783 41,499 24,677 (1,179) 64,997 (6) 64,991 Included within cash and cash equivalents income are exchange gains of £865,000 (2012: £1,494,000 gains). Included within fair value movements on financial instruments at fair value through profit or loss are £7,813,000 losses (2012: £9,919,000 losses) in respect of derivatives classified as held for trading. 121 Ecclesiastical Insurance Ofﬁce plcNOTES TO THE FINANCIAL STATEMENTS 8 Claims and change in insurance liabilities and reinsurance recoveries Continuing operations For the year ended 31 December 2013 Gross claims paid Gross change in the provision for claims Gross change in long-term business provisions Claims and change in insurance liabilities Reinsurers' share of claims paid Reinsurers' share of change in the provision for claims Reinsurance recoveries General business £000 Long-term business £000 206,963 20,526 - 227,489 (38,888) 2,343 (36,545) 7,854 (44) (510) 7,300 - - - Total £000 214,817 20,482 (510) 234,789 (38,888) 2,343 (36,545) Claims and change in insurance liabilities, net of reinsurance 190,944 7,300 198,244 For the year ended 31 December 2012 Gross claims paid Gross change in the provision for claims Gross change in long-term business provisions Claims and change in insurance liabilities Reinsurers' share of claims paid Reinsurers' share of change in the provision for claims Reinsurance recoveries 244,444 (6,559) - 237,885 (75,228) 33,781 (41,447) 6,930 - 11,242 18,172 - - - 251,374 (6,559) 11,242 256,057 (75,228) 33,781 (41,447) Claims and change in insurance liabilities, net of reinsurance 196,438 18,172 214,610 Discontinued operations Prior year discontinued general business gross claims and change in insurance liabilities, and related reinsurance recoveries are disclosed in note 14. 9 Fees, commissions and other acquisition costs Fees paid Commission paid Change in deferred acquisition costs Other acquisition costs Fees, commissions and other acquisition costs 2013 £000 404 62,744 (1,075) 18,212 80,285 2012 £000 484 70,436 1,034 25,500 97,454 122 Ecclesiastical Insurance Ofﬁce plc10 Profit for the year Profit for the year has been arrived at after (crediting)/charging Net foreign exchange gains Depreciation of property, plant and equipment Loss on disposal of property, plant and equipment Amortisation of intangible assets (Increase)/decrease in fair value of investment property Employee benefits expense Operating lease rentals 11 Auditor's remuneration Fees payable to the Company's auditor for the audit of the Company's annual accounts Fees payable to the Company’s auditor and its associates for other services: - The audit of the Company's subsidiaries Total audit fees - Audit-related assurance services - Taxation compliance services - Taxation advisory services Total non-audit fees Total auditor's remuneration 2013 £000 (865) 1,930 112 2,706 (1,343) 64,271 3,671 2013 £000 242 113 355 94 - 9 103 458 2012 £000 (1,494) 2,131 79 2,117 1,179 60,515 3,723 2012 £000 219 144 363 92 18 8 118 481 Amounts disclosed are net of services taxes, where applicable. Audit-related assurance services include Prudential Regulatory Authority and other regulatory audit work. Fees payable to the Company's auditor in respect of the audit of the Group's associated pension plans amounted to £15,000 (2012: £15,000). 123 Ecclesiastical Insurance Ofﬁce plcNOTES TO THE FINANCIAL STATEMENTS 12 Employee information The average monthly number of employees of the Group, including Executive Directors, during the year by geographical location was: United Kingdom Australia Canada Ireland General business No. 2013 Long-term business No. 732 110 60 22 924 9 - - - 9 Other No. 101 - - - 101 General business No. 758 132 59 33 982 Wages and salaries Social security costs Pension costs - defined contribution plans Pension costs - defined benefit plans Other post-employment benefits 2012 Long-term business No. 10 - - - 10 2013 £000 55,071 4,192 2,577 1,648 783 64,271 Other No. 116 - - - 116 2012 £000 51,588 3,878 2,485 1,804 760 60,515 The above figures include termination benefits of £4,257,000 (2012: £2,223,000). The remuneration of the Directors (including Non-Executive Directors), who are the key management personnel of the Group, is set out both individually and in aggregate within the Group Remuneration Report in the Corporate Governance section of this report. 124 Ecclesiastical Insurance Ofﬁce plc13 Tax expense Current tax Deferred tax - current year - prior years - temporary differences - prior years - reduction in tax rate Total tax expense Less: tax expense of discontinued operations Tax expense of continuing operations 2013 £000 5,192 (1,696) 6,466 (254) (4,889) 4,819 - 4,819 2012 £000 932 (798) 7,497 - (2,867) 4,764 (316) 4,448 Tax on the Group’s result before tax differs from the United Kingdom standard rate of corporation tax for the reasons set out in the following reconciliation: Profit before tax (continuing operations) Loss before tax (discontinued operations) Total pre-tax profit Tax calculated at the UK standard rate of tax of 23.25% (2012: 24.5%) Factors affecting charge for the year: Expenses not deductible for tax purposes Non-taxable income Life insurance and other tax paid at non-standard rates (Utilisation)/generation of tax losses for which no deferred tax asset has been recognised Impact of reduction in deferred tax rate Adjustments to tax charge in respect of prior periods Total tax expense 2013 £000 66,937 - 66,937 15,563 101 (3,340) (389) (277) (4,889) (1,950) 4,819 2012 £000 37,803 (6,053) 31,750 7,779 4,663 (3,462) (1,799) 1,248 (2,867) (798) 4,764 A deferred tax credit on fair value movements on owner-occupied property of £52,000 (2012: £94,000 credit) and tax relief on charitable grants of £930,000 (2012: £980,000) are taken directly to equity. A change in the UK standard rate of corporation tax from 24% to 23% became effective from 1 April 2013. Where appropriate, current tax has been provided at the blended rate of 23.25%. Further reductions in the rate of corporation tax to 21% from April 2014, and to 20% from April 2015, were substantively enacted on 2 July 2013. Deferred tax has been provided at the rate of 20%. 125 Ecclesiastical Insurance Ofﬁce plcNOTES TO THE FINANCIAL STATEMENTS 14 Prior year discontinued operations During the prior year, the Group disposed of its wholly-owned subsidiary, ACS (NZ) Limited, transferring its holdings of Ordinary shares in ACS (NZ) Limited to the Canterbury Earthquake Church and Heritage Trust, an independent trust constituted in New Zealand, with objectives similar to those of the Group. The loss on disposal includes a contribution made to the Trust of NZ$10.0m. The disposal was effected in order to reduce the insurance and financial risks associated with the run-off of claims in relation to the series of earthquakes in Canterbury, New Zealand. The results and cash flows of the discontinued operations, which have been included in the consolidated statement of profit or loss and consolidated statement of cash flows, respectively, were as follows: Total revenue Claims and change in insurance liabilities Reinsurance recoveries Other expenses Total expenses Loss before tax Loss on disposal, net of selling costs Attributable tax Net loss attributable to discontinued operations Net cash used by operating activities Net cash from financing activities* Period to 15 May 2012 £000 246 (41,226) 40,751 (605) (1,080) (834) (5,219) 316 (5,737) (2,466) 5,863 * Net cash from financing activities relates to loans provided by Group companies which are eliminated on consolidation. The full balance was repaid prior to the 2012 year end. 15 Appropriations Amounts recognised as distributions to equity holders in the period: Dividends Non-Cumulative Irredeemable Preference share dividend Charitable grants Gross charitable grants to the ultimate parent company, Allchurches Trust Limited Tax relief Net appropriation for the year 2013 £000 2012 £000 9,181 9,181 4,000 (930) 3,070 4,000 (980) 3,020 126 Ecclesiastical Insurance Ofﬁce plc16 Goodwill and other intangible assets Group Cost At 1 January 2013 Additions Disposals Exchange differences At 31 December 2013 Accumulated impairment losses and amortisation At 1 January 2013 Amortisation charge for the year Impairment losses for the year Disposals Exchange differences At 31 December 2013 Net book value at 31 December 2013 Cost At 1 January 2012 Additions Disposals Exchange differences At 31 December 2012 Accumulated impairment losses and amortisation At 1 January 2012 Amortisation charge for the year Impairment losses for the year Disposals Exchange differences At 31 December 2012 Goodwill £000 19,387 - - - 19,387 8 - 64 - - 72 19,315 19,387 - - - 19,387 - - 8 - - 8 Net book value at 31 December 2012 19,379 Computer software £000 Other intangible assets £000 21,629 2,232 (1,206) (515) 22,140 17,668 2,113 - (1,198) (396) 18,187 3,953 21,841 1,237 (1,349) (100) 21,629 17,495 1,524 - (1,266) (85) 17,668 3,961 3,918 - - - 3,918 2,909 593 - - - 3,502 416 3,918 - - - 3,918 2,316 593 - - - 2,909 1,009 Total £000 44,934 2,232 (1,206) (515) 45,445 20,585 2,706 64 (1,198) (396) 21,761 23,684 45,146 1,237 (1,349) (100) 44,934 19,811 2,117 8 (1,266) (85) 20,585 24,349 £16,885,000 of the goodwill balance in the current and prior year relates to the acquisition of South Essex Insurance Holdings Limited during 2008. The recoverable amount, determined on a value in use basis indicates no impairment has arisen. The calculation uses discounted cash flow projections based on management approved business plans, with forecast annual cash flows at the end of the planning period continuing thereafter at a constant growth rate in perpetuity. Assumptions used are consistent with historical experience within the business acquired and external sources of information, and discounting is at the Group's long-term targeted return on capital. Other intangible assets consist of acquired customer and distribution relationships, which have an overall remaining useful life of one year on a weighted average basis. 127 Ecclesiastical Insurance Ofﬁce plcComputer software £000 18,699 2,096 (199) (723) 19,873 14,888 2,017 (104) (723) 16,078 3,795 17,944 1,217 (34) (428) 18,699 13,854 1,405 (26) (345) 14,888 3,811 2013 2012 Group £000 34,626 35,795 (34,720) (944) 34,757 Parent £000 35,886 31,023 (35,925) (442) 30,542 Group £000 35,788 34,690 (35,724) (128) 34,626 Parent £000 34,476 35,973 (34,428) (135) 35,886 NOTES TO THE FINANCIAL STATEMENTS 16 Goodwill and other intangible assets (continued) Parent Cost At 1 January 2013 Additions Exchange differences Disposals At 31 December 2013 Amortisation At 1 January 2013 Charge for the year Exchange differences Disposals At 31 December 2013 Net book value at 31 December 2013 Cost At 1 January 2012 Additions Exchange differences Disposals At 31 December 2012 Amortisation At 1 January 2012 Charge for the year Exchange differences Disposals At 31 December 2012 Net book value at 31 December 2012 17 Deferred acquisition costs At 1 January Increase in the period Release in the period Exchange differences At 31 December All balances are current. 128 Ecclesiastical Insurance Ofﬁce plc18 Pension asset and retirement benefit obligations Defined benefit pension plans The Group's main plan is a defined benefit plan operated by the Parent for UK employees, which includes two discrete sections, the EIO Section and Ansvar Section. The assets of the plan are held separately from those of the Group by the Trustee of the Ecclesiastical Insurance Office plc Staff Retirement Benefit Fund (the 'Fund'). The Fund is subject to the Statutory Funding Objective under the Pensions Act 2004. An independent qualified actuary appointed by the Trustee is responsible for undertaking triennial valuations to determine whether the Statutory Funding Objective is met. Pension costs for the plan are determined by the Trustee, having considered the advice of the actuary and having consulted with the Employer. The most recent triennial valuation was at 31 December 2010. Pension liabilities for the Ireland branch were dealt with by payment to an Irish life office. It was announced prior to the year end that the Irish plan would close on 31 March 2014, in agreement with the Trustees. Actuarial valuations have been reviewed and updated by the actuary at 31 December 2013 for IAS 19 (R) purposes. The plan typically exposes the Group to risks such as: - Investment risk: The Fund holds some of its investments in asset classes, such as equities, which have volatile market values and, while these assets are expected to provide the best returns over the long term, any short-term volatility could cause additional funding to be required if a deficit emerges. Derivative contracts are used from time to time which would limit losses in the event of a fall in equity markets. - Interest rate risk: The Fund's liabilities are assessed using market rates of interest to discount the liabilities and are therefore subject to any volatility in the movement of the market rate of interest. The net interest income or expense recognised in profit or loss is also calculated using the market rate of interest. - Inflation risk: A significant proportion of the benefits under the Fund are linked to inflation. Although the Fund's assets are expected to provide a good hedge against inflation over the long term, movements over the short term could lead to a deficit emerging. - Mortality risk: In the event that members live longer than assumed the liabilities may be understated originally, and a deficit may emerge if funding has not adequately provided for the increased life expectancy. During the year, the Trustee and Employer completed a revision of the Fund’s Statement of Investment Principles, to align with the Trustee’s strategic objectives. The Trustees continue to work closely with the Plan Actuary and Fund Manager to deliver the optimal implementation of these objectives. The Trustees of the Irish plan chose to insure certain benefit payments using an annuity contract purchased with Irish Life Assurance plc. The payments made under the terms of the annuity contract exactly matched the benefits. The announced closure of the Irish plan will result in the Group relinquishing all obligations via settlement with the Trustees. The closure will not have a material impact on the Group accounts. Pension assets and liabilities of entities within the Group have been offset where there is a legal right of offset or where the gross effect of offsetting is immaterial to the financial statements. The amount by which the pension asset has been offset in the current year is £638,000 (2012: £844,000). All Group defined benefit plans are now closed to new entrants. The Group operates a number of defined contribution pension plans, for which contributions by the Group are disclosed in note 12. 129 Ecclesiastical Insurance Ofﬁce plcNOTES TO THE FINANCIAL STATEMENTS 18 Pension asset and retirement benefit obligations (continued) Group and Parent The amounts recognised in the statement of financial position are determined as follows: Present value of funded obligations Fair value of plan assets Net asset in the statement of financial position Movements in the net asset recognised in the statement of financial position are as follows: At 1 January Exchange differences Expense charged to profit or loss* Amounts recognised in other comprehensive income Contributions paid At 31 December The amounts recognised through profit or loss are as follows: Current service cost Administration cost Interest expense on liabilities Interest income on plan assets Total, included in employee benefits expense The amounts recognised in the statement of other comprehensive income are as follows: Return on plan assets, excluding interest income Experience gains on liabilities Losses from changes in financial assumptions Total included in other comprehensive income 2013 £000 2012 £000 (255,604) 287,892 32,288 (225,164) 261,685 36,521 36,521 (24) (1,961) (5,180) 2,932 32,288 3,441 221 9,971 (11,672) 1,961 16,921 127 (22,228) (5,180) 35,227 18 (1,967) 203 3,040 36,521 3,305 405 9,846 (11,589) 1,967 18,602 45 (18,444) 203 * Charge to profit or loss includes £313,000 (2012: £163,000) in respect of member salary sacrifice contributions and costs ultimately borne by related parties. 130 Ecclesiastical Insurance Ofﬁce plcThe principal actuarial assumptions (expressed as weighted averages) were as follows: Discount rate Inflation (RPI) Inflation (CPI) Future salary increases Future increase in pensions in deferment Future pension increases (linked to RPI) Future pension increases (linked to CPI) 2013 % 4.60 3.50 2.70 5.00 2.70 3.50 2.70 2012 % 4.50 3.00 2.20 4.50 2.20 3.00 2.20 Mortality rate 2013 2012 The average life expectancy in years of a pensioner retiring at age 65, at the year end date, is as follows: Male Female The average life expectancy in years of a pensioner retiring at age 65, 20 years after the year end date, is as follows: Male Female Plan assets are weighted as follows: Cash and cash equivalents Equity instruments UK quoted Overseas quoted Debt instruments UK public sector quoted - fixed interest UK non-public sector quoted - fixed interest UK quoted - index-linked Other The actual return on plan assets was a gain of £28,593,000 (2012: gain of £30,191,000). 24.2 26.3 26.5 28.7 24.0 26.2 26.3 28.6 2013 % 2012 % 4 30 29 59 3 15 12 30 7 6 28 26 54 5 12 18 35 5 100 100 131 Ecclesiastical Insurance Ofﬁce plcNOTES TO THE FINANCIAL STATEMENTS 18 Pension asset and retirement benefit obligations (continued) The movements in the fair value of plan assets and the present value of the defined benefit obligation over the year are as follows: Plan assets At 1 January Interest income Return on plan assets, excluding interest income Pension benefits paid and payable Contributions paid Exchange differences At 31 December Defined benefit obligation At 1 January Current service cost Administration cost Interest cost Pension benefits paid and payable Experience gains on liabilities Losses from changes in financial assumptions Exchange differences At 31 December History of plan assets and liabilities Present value of defined benefit obligations Fair value of plan assets Surplus 2013 £000 (255,604) 287,892 32,288 2012 £000 (225,164) 261,685 36,521 2011 £000 (199,087) 234,314 35,227 2013 £000 2012 £000 261,685 11,672 16,921 (5,406) 2,932 88 287,892 225,164 3,441 221 9,971 (5,406) (127) 22,228 112 255,604 2010 £000 (213,740) 237,440 23,700 234,314 11,589 18,602 (5,762) 3,040 (98) 261,685 199,087 3,305 405 9,846 (5,762) (45) 18,444 (116) 225,164 2009 £000 (190,985) 205,628 14,643 The weighted average duration of the defined benefit obligation at the end of the reporting period is 21 years (2012: 21years). The contribution expected to be paid by the Group during the year ending 31 December 2014 is £3.1 million. Significant actuarial assumptions for the determination of the defined benefit obligation are discount rate, inflation, expected salary increases and mortality. The sensitivity analysis below has been determined on reasonably possible changes of the assumptions occurring at the end of the reporting period assuming that all other assumptions are held constant. Assumption Change in assumption Impact on plan liabilities 2013 2012 Discount rate Inflation Salary increase Life expectancy Increase/decrease by 0.5% Increase/decrease by 0.5% Increase/decrease by 0.5% Increase/decrease by 1 year Decrease/increase by 10%/12% Increase/decrease by 10%/10% Increase/decrease by 3% Increase/decrease by 3% Decrease/increase by 10%/12% Increase/decrease by 11%/10% Increase/decrease by 3% Increase/decrease by 3% 132 Ecclesiastical Insurance Ofﬁce plcPost-employment medical benefits The Parent operates a post-employment medical benefit plan, for which it chooses to self-insure. The method of accounting, assumptions and the frequency of valuation are similar to those used for the defined benefit pension plans. The provision of the plan leads to a number of risks as follows: - Interest rate risk: The reserves are assessed using market rates of interest to discount the liabilities and are therefore subject to volatility in the movement of the market rates of interest. A reduction in the market rate of interest would lead to an increase in the reserves required to be held. - Medical expense assumption: Claims experience can be volatile, exposing the Company to the risk of being required to pay over and above the assumed reserve. If future claims experience differs significantly from that experienced in previous years this will increase the risk to the Company. - Spouse and widows' contributions: The self-insured benefit includes a potential liability for members who pay contributions in respect of their spouse and for widows who pay contributions. There is the possibility that the contributions charged may not be sufficient to cover the medical costs that fall due. - Mortality risk: If members live longer than expected the Company is exposed to the expense of medical claims for a longer period, with increased likelihood of needing to pay claims. The amounts recognised in the statement of financial position are determined as follows: Group and Parent 2013 £000 2012 £000 Present value of unfunded obligations and net obligations in the statement of financial position 11,744 14,810 Movements in the net obligations recognised in the statement of financial position are as follows: At 1 January Total expense charged to profit or loss Net actuarial (gains)/losses during the year, recognised in other comprehensive income Benefits paid At 31 December The amounts recognised through profit or loss are as follows: Current service cost Interest cost Total, included in employee benefits expense 14,810 783 (3,654) (195) 11,744 116 667 783 12,760 760 1,534 (244) 14,810 122 638 760 The weighted average duration of the net obligations at the end of the reporting period is 22 years (2012: 22 years). The main actuarial assumptions for the plan are a long-term increase in medical costs of 12.0% (2012: 12.0%) and a discount rate of 4.6% (2012: 4.5%). The sensitivity analysis below has been determined on reasonably possible changes of the assumptions occurring at the end of the accounting period assuming that all other assumptions are held constant. Assumption Change in assumption Impact on plan liabilities 2013 2012 Discount rate Medical expense inflation Life expectancy Increase/decrease by 0.5% Increase/decrease by 1.0% Increase/decrease by 1 year Decrease/increase by 10%/11% Increase/decrease by 23%/18% Increase/decrease by 11%/8% Decrease/increase by 10%/12% Increase/decrease by 24%/18% Increase/decrease by 11%/8% 133 Ecclesiastical Insurance Ofﬁce plcNOTES TO THE FINANCIAL STATEMENTS 19 Property, plant and equipment Group Cost or valuation At 1 January 2013 Additions Disposals Revaluation Exchange differences At 31 December 2013 Depreciation At 1 January 2013 Charge for the year Disposals Exchange differences At 31 December 2013 Net book value at 31 December 2013 3,065 Cost or valuation At 1 January 2012 Additions Disposals Revaluation Exchange differences At 31 December 2012 Depreciation At 1 January 2012 Charge for the year Disposals Exchange differences At 31 December 2012 3,679 - - (412) (19) 3,248 - - - - - Net book value at 31 December 2012 3,248 Land and buildings £000 Motor vehicles £000 Furniture, fittings and equipment £000 Computer equipment £000 3,248 - - (104) (79) 3,065 - - - - - 3,190 621 (971) - - 2,840 1,259 507 (635) - 1,131 1,709 3,045 659 (514) - - 3,190 1,055 537 (333) - 1,259 1,931 6,830 58 (612) - (119) 6,157 5,296 518 (548) (89) 5,177 980 6,452 809 (388) - (43) 6,830 5,045 667 (388) (28) 5,296 1,534 7,621 867 (604) - (354) 7,530 5,920 905 (540) (293) 5,992 1,538 8,079 697 (1,076) - (79) 7,621 6,122 927 (1,071) (58) 5,920 1,701 Total £000 20,889 1,546 (2,187) (104) (552) 19,592 12,475 1,930 (1,723) (382) 12,300 7,292 21,255 2,165 (1,978) (412) (141) 20,889 12,222 2,131 (1,792) (86) 12,475 8,414 A certain property, held as an investment property by a subsidiary undertaking but occupied by the Group, was revalued at 31 December 2013. All others were revalued at 31 December 2012. Valuations were carried out by Cluttons, an external firm of Chartered Surveyors, using standard industry methodology to determine a fair market value. All properties are classified as level 2 assets. The value of land and buildings on a historical cost basis is £3,019,000 (2012: £3,049,000). Depreciation expense has been charged in other operating and administrative expenses. Included within net book value of motor vehicles is £1,530,000 (2012: £1,719,000) in respect of assets held under finance leases. 134 Ecclesiastical Insurance Ofﬁce plcParent Cost or valuation At 1 January 2013 Additions Disposals Exchange differences At 31 December 2013 Depreciation At 1 January 2013 Charge for the year Disposals Exchange differences At 31 December 2013 Net book value at 31 December 2013 2,360 Cost or valuation At 1 January 2012 Additions Disposals Revaluation Exchange differences At 31 December 2012 Depreciation At 1 January 2012 Charge for the year Disposals Exchange differences At 31 December 2012 2,747 - - (387) - 2,360 - - - - - Net book value at 31 December 2012 2,360 Land and buildings £000 Motor vehicles £000 Furniture, fittings and equipment £000 Computer equipment £000 2,360 - - - 2,360 - - - - - 3,051 621 (971) - 2,701 1,195 487 (635) - 1,047 1,654 2,913 631 (493) - - 3,051 1,003 510 (318) - 1,195 1,856 5,762 29 (23) (37) 5,731 4,532 464 (36) (38) 4,922 809 5,125 789 (137) - (15) 5,762 4,225 456 (137) (12) 4,532 1,230 5,239 820 (389) (42) 5,628 4,062 722 (389) (28) 4,367 1,261 5,628 591 (969) - (11) 5,239 4,341 691 (964) (6) 4,062 1,177 Total £000 16,412 1,470 (1,383) (79) 16,420 9,789 1,673 (1,060) (66) 10,336 6,084 16,413 2,011 (1,599) (387) (26) 16,412 9,569 1,657 (1,419) (18) 9,789 6,623 The Company’s land and buildings were revalued at 31 December 2012 by Cluttons, an external firm of Chartered Surveyors, using standard industry methodology to determine a fair market value. All properties are classified as level 2 assets. The value of land and buildings on a historical cost basis is £2,484,000 (2012: £2,484,000). Depreciation expense has been charged in other operating and administrative expenses. Included within net book value of motor vehicles is £1,530,000 (2012: £1,719,000) in respect of assets held under finance leases. 135 Ecclesiastical Insurance Ofﬁce plcNOTES TO THE FINANCIAL STATEMENTS 20 Investment property Group and Parent Net book value at 1 January Additions Disposals Fair value gains/(losses) Net book value at 31 December 2013 £000 27,315 17,894 (1,453) 1,343 45,099 2012 £000 27,473 1,982 (961) (1,179) 27,315 The Group’s investment properties were last revalued at 31 December 2013 by Cluttons, an external firm of Chartered Surveyors. Valuations were carried out using standard industry methodology to determine a fair market value. All properties are classified as level 2 assets. Investment properties are held for long-term capital appreciation rather than short-term sale. Rental income arising from the investment properties owned by both the Group and Parent amounted to £2,004,000 (2012: £1,783,000) and is included in net investment return. Other operating and administrative expenses include £350,000 (2012: £337,000) relating to investment property. 21 Financial investments Financial investments summarised by measurement category are as follows: Financial investments at fair value through profit or loss Equity securities - listed - unlisted Debt securities - government bonds - listed - unlisted Derivative financial instruments - futures - options Loans and receivables Loans secured by mortgages Other loans 2013 Group £000 Parent £000 2012 Group £000 Parent £000 276,930 19,390 225,413 416,445 205 - 158 938,541 7,892 19 7,911 247,026 19,386 147,418 299,954 205 - 158 714,147 - 14 14 264,018 18,558 266,300 355,733 6,176 443 1,403 912,631 9,455 23 9,478 240,972 18,514 172,700 237,138 5,703 443 1,403 676,873 - 14 14 Parent investments in subsidiary undertakings Shares in subsidiary undertakings - 49,765 - 49,765 Total financial investments 946,452 763,926 922,109 726,652 Current Non-current 391,205 555,247 357,674 406,252 384,080 538,029 339,423 387,229 All investments in subsidiary undertakings are unlisted. 136 Ecclesiastical Insurance Ofﬁce plc22 Derivative financial instruments The Group utilises non-hedge derivatives to mitigate equity price risk arising from investments held at fair value and foreign exchange risk arising from insurance liabilities denominated in foreign currencies. Group and Parent Equity/Index contracts Futures Options Foreign exchange contracts Options All balances are current. Contract/ notional amount £000 - 30,000 - 30,000 2013 Fair value asset £000 - 158 - 158 Fair value liability £000 - - - - Contract/ notional amount £000 53,075 30,000 25,000 108,075 2012 Fair value asset £000 443 846 557 1,846 Fair value liability £000 - - - - The notional amounts above reflect the aggregate of individual derivative positions on a gross basis and so give an indication of the overall scale of the derivative transaction. They do not reflect current market values of the open positions. The derivative fair value assets are recognised within financial investments (note 21). Amounts pledged as collateral in respect of derivative contracts are disclosed in note 24. 137 Ecclesiastical Insurance Ofﬁce plcNOTES TO THE FINANCIAL STATEMENTS 23 Other assets Receivables arising from insurance and reinsurance contracts - due from contract holders - due from agents, brokers and intermediaries - due from reinsurers Other receivables - accrued interest and rent - other prepayments and accrued income - amounts owed by related parties - other debtors Current Non-current 2013 2012 Group £000 25,474 43,287 8,808 7,876 3,268 17,566 18,185 124,464 107,206 17,258 Parent £000 25,456 31,727 8,051 5,821 2,868 31,006 3,342 108,271 78,015 30,256 Group £000 31,027 53,695 13,356 7,251 3,236 17,241 19,908 145,714 128,462 17,252 Parent £000 30,792 38,080 7,820 5,123 3,086 35,327 4,297 124,525 97,973 26,552 The Group has recognised a credit of £77,000 (2012: charge of £47,000) in other operating and administrative expenses in the statement of profit or loss for the impairment of its trade and other receivables during the year. The Parent has recognised a charge of £17,000 (2012: credit of £18,000). The Group balance due from reinsurers comprises £11,728,000 (2012: £15,121,000) receivable net of £2,920,000 (2012: £1,765,000) payable. The Parent balance comprises £10,971,000 (2012: £9,585,000) receivable net of £2,920,000 (2012: £1,765,000) payable. The Group balance owed by related parties comprises £17,584,000 (2012: £17,549,000) receivable net of £18,000 (2012: £308,000) payable. The Parent balance comprises £31,610,000 (2012: £36,401,000) receivable net of £604,000 (2012: £1,074,000) payable. There has been no significant change in the recoverability of the Group's trade receivables, for which no collateral is held. The Directors consider that the amounts are recoverable at their carrying values, which are stated net of an allowance for doubtful debts for those debtors that are individually determined to be impaired. Movement in the allowance for doubtful debts Balance at 1 January Movement in the year Balance at 31 December 2013 2012 Group £000 882 (559) 323 Parent £000 553 (364) 189 Group £000 666 216 882 Parent £000 384 169 553 Included within trade receivables of the Group is £2,964,000 (2012: £4,165,000) overdue but not impaired, of which £2,558,000 (2012: £3,665,000) is not more than three months overdue at the reporting date. Included within trade receivables of the Parent is £2,115,000 (2012: £3,579,000) overdue but not impaired, of which £1,887,000 (2012: £3,079,000) is not more than three months overdue at the reporting date. 138 Ecclesiastical Insurance Ofﬁce plc24 Cash and cash equivalents Cash at bank and in hand Short-term bank deposits 2013 2012 Group £000 48,298 58,943 107,241 Parent £000 30,715 49,715 80,430 Group £000 60,154 52,430 112,584 Parent £000 42,576 46,387 88,963 Included within cash at bank and in hand of the Group is £4,948,000 (2012: £nil) pledged as collateral in respect of an insurance liability. Included within short-term bank deposits of the Group and Parent are cash deposits of £nil (2012: £2,257,000) pledged as collateral by way of cash margins on open derivative contracts and cash to cover derivative liabilities. 25 Called up share capital Ordinary shares of 4p each 8.625% Non-Cumulative Irredeemable Preference shares of £1 each Movements in the number of shares in issue during the year were as follows: Ordinary shares At 1 January Sub-division of shares At 31 December 8.625% Non-Cumulative Irredeemable Preference shares of £1 each At 1 January and 31 December Issued, allotted and fully paid 2013 £000 14,027 106,450 120,477 2012 £000 14,027 106,450 120,477 350,678 - 350,678 140,270 210,408 350,678 106,450 106,450 During the prior year each of the issued Ordinary shares of 10 pence in the capital of the Company was sub-divided into 2.5 Ordinary shares of 4 pence with each sub-divided share having the rights and being subject to the restrictions attaching to Ordinary shares under the Articles of Association. On winding up, the assets of the Company remaining after payment of its liabilities are to be applied to holders of the Irredeemable Preference shares in repaying the nominal capital sum paid up on the shares and an amount equal to all arrears of accrued and unpaid dividends up to the date of the commencement of the winding up. The residual interest in the assets of the Company after deducting all liabilities belongs to the Ordinary shareholders. Holders of the Irredeemable Preference shares are not entitled to receive notice of, or to attend, or vote at any general meeting of the Company unless at the time of the notice convening such meeting, the dividend on such shares which is most recently payable on such shares shall not have been paid in full, or where a resolution is proposed varying any of the rights of such shares, or for the winding up of the Company. 139 Ecclesiastical Insurance Ofﬁce plcNOTES TO THE FINANCIAL STATEMENTS 26 Insurance liabilities and reinsurance assets Gross Claims outstanding Unearned premiums Long-term business provision Total gross insurance liabilities Recoverable from reinsurers Claims outstanding Unearned premiums Total reinsurers’ share of insurance liabilities Net Claims outstanding Unearned premiums Long-term business provision Total net insurance liabilities Gross insurance liabilities Current Non-current Reinsurance assets Current Non-current 2013 Group £000 569,179 186,642 92,446 848,267 89,472 43,121 132,593 479,707 143,521 92,446 715,674 Parent £000 498,705 164,483 - 663,188 78,610 42,880 121,490 420,095 121,603 - 541,698 2012 Group £000 565,937 219,798 92,956 878,691 94,902 46,109 141,011 471,035 173,689 92,956 737,680 Parent £000 485,778 190,009 - 675,787 83,551 43,921 127,472 402,227 146,088 - 548,315 372,878 475,389 328,088 335,100 421,048 457,643 358,929 316,858 105,451 27,142 97,058 24,432 100,035 40,976 89,323 38,149 (a) General business insurance contracts (i) Reserving methodology Reserving for non-life insurance claims is a complex process and the Group adopts recognised actuarial methods, and, where appropriate, other calculations and statistical analysis. Actuarial methods used include chain ladder, the Bornhuetter-Ferguson and average cost methods. Chain ladder methods extrapolate paid amounts, incurred amounts (paid claims plus case estimates), the number of claims or average cost of claims, to ultimate claims based on the development of previous years. This method assumes that previous patterns are a reasonable guide to future developments. Where this assumption is felt to be unreasonable, adjustments are made or other methods such as Bornhuetter-Ferguson or average cost are used. The Bornhuetter-Ferguson method places more credibility on expected loss ratios for the most recent loss years. For smaller portfolios the materiality of the business and data available may also shape the methods used in reviewing reserve adequacy. The selection of results for each accident year and for each portfolio depends on an assessment of the most appropriate method. Sometimes a combination of techniques is used. The average weighted term to payment is calculated separately by class of business and is based on historic settlement patterns. (ii) Calculation of uncertainty margins To reflect the uncertain nature of the outcome of the ultimate settlement cost of claims an uncertainty margin is added to the best estimate. The addition for uncertainty is assessed primarily by the Thomas Mack actuarial method, based on at least the 75th percentile confidence level for each portfolio. For smaller portfolios where the Thomas Mack method cannot be applied, provisions have been calculated at a level intended to provide an equivalent probability of sufficiency. Where the standard methods cannot allow for changing circumstances then additional uncertainty margins are added and are typically expressed as a percentage of outstanding claims. This approach generally results in a favourable release of provisions in the current financial year, arising from the settlement of claims relating to previous financial years, as shown in part (c) of the note. (iii) Calculation of provisions for latent claims The Group adopts commonly used industry methods including those based on claims frequency and severity and benchmarking. 140 Ecclesiastical Insurance Ofﬁce plc(iv) Discounting General discounted provisions are held in the following territories: insurance outstanding claims provisions are undiscounted, except for certain designated long-tail classes of business for which Discount rate Mean term of discounted liabilities Geographical territory 2013 2012 2013 2012 UK and Ireland Canada Australia 0.4% to 3.8% 1.1% to 3.2% 3.3% 0.3% to 3.4% 1.1% to 2.5% 2.8% 15 14 5 15 9 5 Parent consists of UK, Ireland and Canada. Group also includes Australia. The applied rates of interest are based on government bond yield curves of the relevant currency and term at the reporting date, adjusted where appropriate to reflect portfolio assets held and to allow for future investment expenses. At the year end the undiscounted gross outstanding claims provision was £626,418,000 for the Group (2012: £582,674,000), and £540,739,000 for the Parent (2012: £496,255,000). At 31 December 2013, it is estimated that a fall of 1% in the discount rates used would increase the Group's net outstanding claims provisions by £12,402,000 (2012: £11,541,000). Financial investments backing these liabilities are not hypothecated across general insurance classes of business. The sensitivity of Group profit or loss and other equity reserves to interest rate risk, taking into account the mitigating effect on asset values is provided in note 4 (h). (v) Unexpired risks liability In the prior year, the unearned premium of the Group’s Australia business was found to have a deficiency of £6,464,000. This deficiency was reflected in the Group statement of financial position as a write-down against deferred acquisition costs. In the current year this has been released as a credit against deferred acquisition costs. (vi) Assumptions The Group follows a process of reviewing its reserves for outstanding claims on a quarterly basis. This involves an appraisal of each portfolio with respect to ultimate claims liability for the recent exposure period as well as for earlier periods, together with a review of the factors that have the most significant impact on the assumptions used to determine the reserving methodology. The work conducted on each portfolio is subject to an internal peer review and management sign-off process. insurance reserves are the anticipated number and ultimate The most significant assumptions in determining the undiscounted general settlement cost of claims, and the extent to which reinsurers will share in the cost. Factors which influence decisions on assumptions include legal and judicial changes, significant weather events, other catastrophes, subsidence events, exceptional claims or substantial changes in claims experience and developments in older or latent claims. Significant factors influencing assumptions about reinsurance are terms of the reinsurance treaties, the anticipated time taken to settle a claim and the incidence of large individual and aggregated claims. (vii) Changes in assumptions There are no significant changes in assumptions. (viii) Sensitivity of results The ultimate amount of claims settlement is uncertain and the Group's aim is to reserve to at least the 75th percentile confidence level. If final settlement of insurance claims reserved for at the year end turns out to be 10% higher or lower than the reserves included in these financial statements, the following pre-tax Group loss or profit will be realised: Liability Property Motor - UK - Overseas - UK - Overseas - UK - Overseas 2013 2012 Gross £000 28,300 12,000 6,900 5,200 2,900 - Net £000 25,500 9,900 4,100 3,200 2,500 - Gross £000 24,800 11,600 6,700 5,900 3,100 100 Net £000 22,600 5,700 4,000 3,000 2,500 100 141 Ecclesiastical Insurance Ofﬁce plcNOTES TO THE FINANCIAL STATEMENTS 26 Insurance liabilities and reinsurance assets (continued) (ix) Claims development tables The nature of liability classes of business is that claims may take a number of years to settle and before the final liability is known. The tables below show the development of the undiscounted estimate of ultimate gross and net claims cost for these classes across all territories. Estimate of gross ultimate claims 2004 £000 2005 £000 2006 £000 2007 £000 2008 £000 2009 £000 2010 £000 2011 £000 2012 £000 2013 £000 Total £000 42,503 40,075 35,645 33,431 31,870 25,912 25,713 25,685 25,112 24,814 46,155 32,998 35,001 30,365 26,835 25,860 25,893 25,312 25,753 45,688 45,900 40,092 36,168 30,791 28,470 27,154 27,377 50,840 56,420 74,742 47,307 53,552 59,807 43,270 47,643 55,250 35,510 44,658 57,134 35,556 40,433 55,695 34,925 37,546 34,036 84,476 82,095 100,612 88,046 75,550 76,371 62,239 71,543 66,422 81,725 24,814 25,753 27,377 34,036 37,546 55,695 66,422 71,543 88,046 81,725 512,957 (21,360) 3,454 (21,696) 4,057 (22,262) (26,119) 7,917 5,115 (28,621) (33,097) (28,259) (17,008) 8,925 22,598 38,163 54,535 Outstanding liability Effect of discounting Present value Discounted liability in respect of earlier years Total discounted gross liability (for liability classes) included in insurance liabilities in the statement of financial position (208,334) (8,193) (1,719) 79,853 80,006 304,623 (21,899) 282,724 88,932 371,656 2004 £000 2005 £000 2006 £000 2007 £000 2008 £000 2009 £000 2010 £000 2011 £000 2012 £000 2013 £000 Total £000 36,590 39,338 38,332 41,927 46,882 60,810 69,230 66,864 34,683 27,128 37,518 38,967 43,344 46,660 60,202 63,770 62,587 30,998 28,917 33,711 33,464 37,204 43,853 50,834 24,960 30,329 28,093 37,669 49,444 53,390 28,394 26,669 21,643 24,731 28,569 34,514 47,970 21,919 21,095 24,821 28,679 33,384 21,166 20,919 24,450 29,217 21,047 20,348 24,710 20,898 21,434 21,341 84,511 71,798 77,629 21,341 21,434 24,710 29,217 33,384 47,970 53,390 62,587 77,629 71,798 443,460 3,238 (18,103) (17,694) (20,281) (22,850) (25,795) (30,354) (24,999) (15,301) 7,589 17,616 28,391 47,286 Outstanding liability Effect of discounting Present value Discounted liability in respect of earlier years Total discounted gross liability (for liability classes) included in insurance liabilities in the statement of financial position (1,502) (184,279) 259,181 (15,094) 244,087 75,176 319,263 (7,400) 70,229 70,296 6,367 4,429 3,740 Group At end of year One year later Two years later Three years later Four years later Five years later Six years later Seven years later Eight years later Nine years later Current estimate of ultimate claims Cumulative payments to date Parent At end of year One year later Two years later Three years later Four years later Five years later Six years later Seven years later Eight years later Nine years later Current estimate of ultimate claims Cumulative payments to date 142 Ecclesiastical Insurance Ofﬁce plcEstimate of net ultimate claims Group At end of year One year later Two years later Three years later Four years later Five years later Six years later Seven years later Eight years later Nine years later Current estimate of ultimate claims Cumulative payments to date 2004 £000 2005 £000 2006 £000 2007 £000 2008 £000 2009 £000 2010 £000 2011 £000 2012 £000 2013 £000 Total £000 35,349 39,528 41,007 46,235 51,795 64,476 73,218 75,302 88,247 34,867 32,780 40,976 43,107 48,432 53,700 64,796 72,336 79,272 29,447 31,287 35,783 38,979 44,498 50,805 57,758 68,057 28,486 28,641 33,145 34,180 42,524 50,168 59,353 27,840 25,665 30,283 35,004 39,321 24,560 25,391 28,230 34,688 37,208 24,482 25,150 26,926 33,702 24,435 24,024 27,150 23,892 24,534 23,697 50,062 76,729 23,697 24,534 27,150 33,702 37,208 50,062 59,353 68,057 79,272 76,729 479,764 3,365 (20,332) (20,714) (22,116) (25,939) (28,424) 5,034 Outstanding liability Effect of discounting Present value Discounted liability in respect of earlier years Total discounted net liability (for liability classes) included in insurance liabilities in the statement of financial position (1,712) (202,910) 8,784 18,604 32,193 51,160 71,114 75,017 276,854 (19,094) 257,760 72,832 330,592 (31,458) (27,160) (16,897) (8,158) 7,763 3,820 2004 £000 2005 £000 2006 £000 2007 £000 2008 £000 2009 £000 2010 £000 2011 £000 2012 £000 2013 £000 Total £000 51,226 57,135 59,011 74,361 67,690 49,060 59,873 69,805 25,279 29,284 29,650 33,814 40,198 48,250 59,997 29,839 32,394 33,318 36,959 41,631 29,328 26,772 32,547 34,656 38,270 39,841 24,552 24,061 23,304 27,449 26,905 34,983 43,879 51,827 23,622 20,929 24,103 28,322 34,458 44,064 21,399 20,551 24,707 28,670 20,828 20,811 24,407 29,203 20,877 20,100 24,696 20,744 21,119 21,131 33,366 21,131 21,119 24,696 29,203 33,366 44,064 51,827 59,997 69,805 67,690 422,898 Parent At end of year One year later Two years later Three years later Four years later Five years later Six years later Seven years later Eight years later Nine years later Current estimate of ultimate claims Cumulative payments to date (17,951) (17,583) (20,281) 4,415 3,536 3,180 (22,850) 6,353 (25,795) (28,846) (24,444) (15,288) 7,571 15,218 27,383 44,709 Outstanding liability Effect of discounting Present value Discounted liability in respect of earlier years Total discounted net liability (for liability classes) included in insurance liabilities in the statement of financial position (7,399) 62,406 (1,501) 66,189 (181,938) 240,960 (15,093) 225,867 63,867 289,734 143 Ecclesiastical Insurance Ofﬁce plcNOTES TO THE FINANCIAL STATEMENTS 26 Insurance liabilities and reinsurance assets (continued) (b) Long-term insurance contracts (i) Assumptions The most significant assumptions in determining long-term business reserves are as follows: Mortality An appropriate base table of standard mortality is chosen depending on the type of contract. Where prudent, an allowance is made for future mortality improvements based on trends identified in population data. Investment returns Projected investment returns are based on actual yields for each asset class less an allowance for credit risk, where appropriate. The risk adjusted yields after allowance for tax and investment expenses for the current valuation are as follows: UK government bonds: non-linked UK government bonds: index-linked Corporate debt instruments: index-linked 2013 2.76% -0.31% 0.42% 2012 2.13% -0.50% 0.29% The investment return assumption is determined by calculating an overall yield on all cash flows projected to occur from the portfolio of financial assets which are assumed to back the relevant class of liabilities. This is in accordance with a modification to PRA Rule INSPRU 3.1.35R, which was granted in September 2011. For index-linked assets, the real yield is shown. Funeral plans renewal expense level and inflation Numbers of policies in force and both projected and actual expenses have been considered when setting the base renewal expense level. The unit renewal expense assumption for this business is £2.70 per annum (2012: £13.20 per annum). Expense inflation is set with reference to the index-linked UK government bond rates of return, and published figures for earnings inflation, and is assumed to be 4.05% per annum (2012: 3.39%). Tax It has been assumed that tax legislation and rates applicable at 1 January 2014 will continue to apply. All in-force business is classed as protection business and is expected to be taxed on a profits basis. (ii) Changes in assumptions Projected investment returns have been revised in line with the changes in the actual yields of the underlying assets. As a result, liabilities have decreased by £1.9 million (2012: £0.7 million increase). The effect on insurance liabilities of the changes to unit renewal expense assumptions (described in (i) above), was a £0.4 million increase (2012: £1.3 million decrease). (iii) Sensitivity analysis The sensitivity of profit or loss before tax to changes in the key assumptions used to calculate the long-term business insurance liabilities is shown in the following table. No account has been taken of any correlation between the assumptions. Variable Deterioration in annuitant mortality Improvement in annuitant mortality Increase in fixed interest/cash yields Decrease in fixed interest/cash yields Worsening of base renewal expense level Improvement in base renewal expense level Increase in expense inflation Decrease in expense inflation 144 Change in variable Potential increase/ (decrease) in the result 2013 £000 100 (100) (1,400) (1,100) (500) 500 (700) 600 2012 £000 400 (500) - (1,300) (500) 500 (600) 500 -10% +10% +1% pa -1% pa +10% -10% +1% pa -1% pa Ecclesiastical Insurance Ofﬁce plc(iv) Available capital resources 2013 Shareholders' equity Adjustments to assets/liabilities Total available capital resources Policyholder liabilities - life insurance business Net actuarial liabilities on statement of financial position 2012 Shareholders' equity Adjustments to assets/liabilities Adjustments to actuarial liabilities Total available capital resources Policyholder liabilities - life insurance business Net actuarial liabilities on statement of financial position Non-profit life fund £000 (1,136) 7,500 6,364 92,446 92,446 (1,814) 10,500 (1,188) 7,498 92,956 92,956 Share- holders' fund £000 41,515 (7,500) 34,015 - - 35,770 (10,500) - 25,270 - - Total life business £000 40,379 - 40,379 92,446 92,446 33,956 - (1,188) 32,768 92,956 92,956 Other activities £000 Group total £000 413,385 (123,040) 290,345 494,143 (123,040) 371,103 421,701 (92,508) - 329,193 455,657 (92,508) (1,188) 361,961 Shareholders' equity/(deficit) in the non-profit fund represents the net profit or loss generated by this fund not transferred, to date, to the shareholders' fund. The life shareholders' fund is the balance of shareholder equity in the life business. Available capital resources of the life business include an allowance for solvency reserves which do not meet the recognition criteria in the accounts. Other activities include the general insurance business of the Parent and its subsidiaries, and consequently all Group capital not required to meet the solvency requirements of the general business is available to meet the solvency requirements of the life business. The available capital resources in the non-profit life fund, subject to the regulatory capital requirements of the fund itself, are available to meet requirements elsewhere in the Group. The capital requirements of the life business are based on the PRA capital requirements. The Group uses both its Individual Capital Assessment and its Individual Capital Guidance as a tool for determining capital requirements and their sensitivity to various risks. The Group manages these risks by means of its underwriting strategy, reinsurance strategy, investment strategy, and management control framework. (v) Movements in life capital Published capital resources as at 31 December 2012 Effect of new business Variance between actual and expected experience Change in methodology Effect of changes to valuation interest rates Effect of change to expense assumption Effect of change in inflation assumption Transfers between funds Other movements Capital resources as at 31 December 2013 Non-profit life fund £000 7,498 (734) 388 20 724 (365) 4 (3,000) 1,829 6,364 Share- holders' fund £000 25,270 - - - - - - 3,000 5,745 34,015 Total life business £000 32,768 (734) 388 20 724 (365) 4 - 7,574 40,379 145 Ecclesiastical Insurance Ofﬁce plcNOTES TO THE FINANCIAL STATEMENTS 26 Insurance liabilities and reinsurance assets (continued) (c) Movements in insurance liabilities and reinsurance assets Group Claims outstanding At 1 January 2013 Cash (paid)/received for claims settled in the year Change in liabilities/reinsurance assets - arising from current year claims - arising from prior year claims Exchange differences At 31 December 2013 Provision for unearned premiums At 1 January 2013 Increase in the period Release in the period Exchange differences At 31 December 2013 Long-term business provision At 1 January 2013 Effect of new business during the year Effect of claims during the year Changes in assumptions Change in methodology Other movements At 31 December 2013 Claims outstanding At 1 January 2012 Cash (paid)/received for claims settled in the year Change in liabilities/reinsurance assets - arising from current year claims - arising from prior year claims Disposal of business Exchange differences At 31 December 2012 Provision for unearned premiums At 1 January 2012 Increase in the period Release in the period Exchange differences At 31 December 2012 Long-term business provision At 1 January 2012 Effect of new business during the year Effect of claims during the year Changes in assumptions Change in methodology Other movements At 31 December 2012 146 Gross £000 Reinsurance £000 Net £000 565,937 (214,817) (94,902) 38,888 471,035 (175,929) 238,818 (3,519) (17,240) 569,179 219,798 191,426 (218,631) (5,951) 186,642 92,956 6,291 (7,569) (1,335) (21) 2,124 92,446 (37,309) 764 3,087 (89,472) (46,109) (43,370) 45,983 375 (43,121) - - - - - - - 201,509 (2,755) (14,153) 479,707 173,689 148,056 (172,648) (5,576) 143,521 92,956 6,291 (7,569) (1,335) (21) 2,124 92,446 935,253 (318,749) (481,889) 140,988 453,364 (177,761) 302,155 (16,114) (337,489) 881 565,937 221,087 220,820 (220,416) (1,693) 219,798 81,714 20,857 (6,151) (5,455) 199 1,792 92,956 (67,933) (14,265) 333,745 (5,548) (94,902) (58,884) (46,231) 58,673 333 (46,109) - - - - - - - 234,222 (30,379) (3,744) (4,667) 471,035 162,203 174,589 (161,743) (1,360) 173,689 81,714 20,857 (6,151) (5,455) 199 1,792 92,956 Ecclesiastical Insurance Ofﬁce plcParent Claims outstanding At 1 January 2013 Cash (paid)/received for claims settled in the year Change in liabilities/reinsurance assets - arising from current year claims - arising from prior year claims Exchange differences At 31 December 2013 Provision for unearned premiums At 1 January 2013 Increase in the period Release in the period Exchange differences At 31 December 2013 Claims outstanding At 1 January 2012 Cash (paid)/received for claims settled in the year Change in liabilities/reinsurance assets - arising from current year claims - arising from prior year claims Exchange differences At 31 December 2012 Provision for unearned premiums At 1 January 2012 Increase in the period Release in the period Exchange differences At 31 December 2012 Gross Reinsurance £000 £000 Net £000 485,778 (185,169) (83,551) 34,935 402,227 (150,234) 208,488 (5,964) (4,428) 498,705 190,009 166,342 (190,182) (1,686) 164,483 (37,164) 6,105 1,065 (78,610) (43,921) (43,097) 43,957 181 (42,880) 171,324 141 (3,363) 420,095 146,088 123,245 (146,225) (1,505) 121,603 467,588 (197,830) (99,420) 44,595 368,168 (153,235) 258,345 (38,901) (3,424) 485,778 180,746 190,367 (180,533) (571) 190,009 (51,619) 21,812 1,081 (83,551) (43,081) (43,963) 43,049 74 (43,921) 206,726 (17,089) (2,343) 402,227 137,665 146,404 (137,484) (497) 146,088 147 Ecclesiastical Insurance Ofﬁce plcNOTES TO THE FINANCIAL STATEMENTS 27 Provisions for other liabilities and contingent liabilities (a) Provisions Group At 1 January 2013 Additional provisions Used during year Not utilised Exchange differences At 31 December 2013 Current Non-current Parent At 1 January 2013 Additional provisions Used during year Not utilised At 31 December 2013 Current Non-current Regulatory and legal provisions £000 Restructuring and other provisions £000 6,569 329 (1,344) (2,092) - 3,462 3,462 - 6,364 329 (1,344) (1,887) 3,462 3,462 - 704 2,767 (97) (102) (24) 3,248 3,090 158 575 2,722 (97) (96) 3,104 3,044 60 Total £000 7,273 3,096 (1,441) (2,194) (24) 6,710 6,552 158 6,939 3,051 (1,441) (1,983) 6,566 6,506 60 Regulatory and legal provisions The Group operates in the financial services industry and is subject to regulatory requirements in the normal course of business, including contributing towards any levies raised on UK general and life business. The provisions reflect an assessment by the Group of its share of the total potential levies. In addition, from time to time the Group receives complaints from customers and, whilst the majority relate to cases where there has been no customer detriment, we recognise that we have provided, and continue to provide, advice and services across a wide spectrum of regulated activities. We therefore believe that it is prudent to hold a provision for costs of customer complaints relating to services provided. The Group continues to re-assess the ultimate level of complaints expected and the appropriateness of the provision, which reflects the potential redress and associated administration costs that would be payable in relation to any complaints we may uphold. Further administration costs in relation to invalid claims are also included in the provision. Restructuring and other provisions The provision for restructuring and other costs relates to costs in respect of redundancies, onerous leases and dilapidations. (b) Contingent liabilities The Company is in correspondence with HM Revenue and Customs regarding the treatment of its preference share capital for group tax purposes. Whilst it is possible that this will lead to an additional tax cost to the Group, we do not consider it probable that a further charge will arise and so have not made any provision in respect of this issue. In the unlikely event the issue is not settled as expected, the Group's best estimate is that the additional tax cost would be in the range of £0.3m to £7.6m. 148 Ecclesiastical Insurance Ofﬁce plc28 Deferred tax An analysis and reconciliation of the movement of the key components of the net deferred tax liability during the current and prior reporting period is as follows: Unrealised gains on investments £000 Net retirement benefit assets £000 Equalisation reserve £000 Other differences £000 Group At 1 January 2012 Charged to profit or loss (Credited)/charged to profit or loss - resulting from reduction in tax rate Credited to other comprehensive income Credited to other comprehensive income - resulting from reduction in tax rate Exchange differences At 31 December 2012 Charged/(credited) to profit or loss (Credited)/charged to profit or loss - resulting from reduction in tax rate Credited to other comprehensive income Credited to other comprehensive income - resulting from reduction in tax rate Exchange differences At 31 December 2013 Parent At 1 January 2012 Charged to profit or loss (Credited)/charged to profit or loss - resulting from reduction in tax rate Credited to other comprehensive income Credited to other comprehensive income - resulting from reduction in tax rate Exchange differences At 31 December 2012 Charged/(credited) to profit or loss (Credited)/charged to profit or loss - resulting from reduction in tax rate Credited to other comprehensive income Credited to other comprehensive income - resulting from reduction in tax rate Exchange differences At 31 December 2013 26,525 5,053 (2,095) - - 2 29,485 6,721 (3,795) - - (60) 32,351 25,888 4,652 (2,071) - - 1 28,470 6,701 (3,713) - - - 31,458 5,694 128 (407) (306) (111) (5) 4,993 5,680 660 (454) - - - 5,886 (6,637) 1,656 89 (87) (7) 73 (4,913) Total £000 31,262 7,497 (2,867) (393) (118) 70 35,451 72 49 (630) 6,212 (525) (305) (126) - 4,109 5,694 128 (407) (306) (111) (5) 4,993 72 (525) (305) (126) - 4,109 (768) - - - 5,167 5,680 660 (454) - - - 5,886 49 (768) - - - 5,167 199 (31) (22) 625 (4,772) (1,718) 395 89 (87) (7) 3 (1,325) (4,889) (336) (148) 565 36,855 35,544 5,835 (2,843) (393) (118) (1) 38,024 (77) 6,745 198 - (22) 3 (1,223) (4,808) (305) (148) 3 39,511 149 Ecclesiastical Insurance Ofﬁce plcNOTES TO THE FINANCIAL STATEMENTS 28 Deferred tax (continued) Certain deferred tax assets and liabilities have been offset. The following is the analysis of the deferred tax balances for financial reporting purposes: Deferred tax liabilities Deferred tax assets 2013 2012 Group £000 40,116 (3,261) 36,855 Parent £000 39,548 (37) 39,511 Group £000 38,653 (3,202) 35,451 Parent £000 38,024 - 38,024 The Group has unused tax losses of £22,138,000 (2012: £27,686,000) arising from life business and capital transactions, which are available for offset against future profits. No deferred tax asset has been recognised due to the unpredictability of future profit streams. 29 Other liabilities Creditors arising out of direct insurance operations Creditors arising out of reinsurance operations Other creditors Amounts owed to related parties Accruals Current Non-current 2013 2012 Group £000 656 13,578 11,801 117 11,816 37,968 37,682 286 Parent £000 323 10,015 6,008 218 8,448 25,012 25,012 - Group £000 929 15,999 12,693 3,988 10,584 44,193 43,725 468 Parent £000 32 14,878 7,460 4,876 6,527 33,773 33,773 - The Group creditors arising out of reinsurance operations comprises £39,745,000 (2012: £43,346,000) payable net of £26,167,000 (2012: £27,347,000) receivable. The Parent balance comprises £36,182,000 (2012: £42,225,000) payable net of £26,167,000 (2012: £27,347,000) receivable. The Group amounts owed to related parties comprises £117,000 (2012: £4,002,000) payable net of £nil (2012: £14,000) receivable. The Parent balance comprises £398,000 (2012: £5,020,000) payable net of £180,000 (2012: £144,000) receivable. 150 Ecclesiastical Insurance Ofﬁce plc30 Commitments Capital commitments At the year end, the Group and Parent had capital commitments of £1,685,000, relating to computer software (2012: £nil). Operating lease commitments The Group leases premises and equipment under non-cancellable operating lease agreements. The future aggregate minimum lease rentals receivable under non-cancellable operating leases are as follows: Within 1 year Between 1 & 5 years After 5 years 2013 2012 Group £000 2,780 9,241 19,044 31,065 Parent £000 2,780 9,241 19,044 31,065 Group £000 1,711 5,458 9,554 16,723 The future aggregate minimum lease payments under non-cancellable operating leases are as follows: Within 1 year Between 1 & 5 years After 5 years 2013 2012 Group £000 2,901 5,181 1,072 9,154 Parent £000 1,623 3,550 1,065 6,238 Group £000 2,839 5,226 1,573 9,638 Parent £000 1,711 5,458 9,554 16,723 Parent £000 1,861 3,695 1,557 7,113 Operating lease rentals charged to profit or loss during the year Total future minimum sublease payments expected to be received under non-cancellable subleases 3,671 1,969 3,723 2,209 68 68 107 107 31 Parent and subsidiary undertakings Ultimate parent company and controlling party The Company is a wholly-owned subsidiary of Ecclesiastical Insurance Group plc. Its ultimate parent and controlling company is Allchurches Trust Limited. Both companies are incorporated and operate in Great Britain and copies of their financial statements are available from the registered office as shown on page 153. The parent companies of the smallest and largest groups for which group financial statements are drawn up are Ecclesiastical Insurance Office plc and Allchurches Trust Limited, respectively. All the subsidiaries listed are included within the consolidated financial statements. Voting rights are in line with the holdings of Ordinary shares. The Company's interest in Group undertakings at 31 December 2013 is as follows: Subsidiary undertakings Incorporated and operating in Great Britain, engaged in investment, insurance and financial services or other insurance-related business Ecclesiastical Financial Advisory Services Limited Ecclesiastical Investment Management Limited Ecclesiastical Life Limited South Essex Insurance Brokers Limited Share capital Holding of shares by Parent Subsidiary Ordinary shares Ordinary shares Ordinary shares Ordinary shares 100% 100% 100% - - - - 100% Incorporated and operating in Australia, engaged in insurance business Ansvar Insurance Limited Ordinary shares 100% - Additionally, at the year end there were three other wholly-owned subsidiary undertakings of which the assets and contributions to Group income are not significant. 151 Ecclesiastical Insurance Ofﬁce plcNOTES TO THE FINANCIAL STATEMENTS 32 Related party transactions Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not included in the Group analysis, but are included within the Parent analysis below. The Parent related party transactions below relate to Ecclesiastical Insurance Group plc, the Group and Parent's immediate parent company. Group and Parent other related parties include the Group's pension plans, fellow subsidiary undertakings and the ultimate parent undertaking. 2013 Group Trading, investment and other income, including recharges Trading, investment and other expenditure, including recharges Amounts owed by related parties Amounts owed to related parties Parent Trading, investment and other income, including recharges Trading, investment and other expenditure, including recharges Amounts owed by related parties Amounts owed to related parties 2012 Group Trading, investment and other income, including recharges Trading, investment and other expenditure, including recharges Amounts owed by related parties Amounts owed to related parties Parent Trading, investment and other income, including recharges Trading, investment and other expenditure, including recharges Amounts owed by related parties Amounts owed to related parties Parent £000 Subsidiaries £000 191 113 15,539 106 191 113 15,539 106 7,596 6,348 15,260 - 7,596 6,348 15,260 - - - - - 9,270 8,423 13,445 101 - - - - 16,441 9,657 18,096 888 Other related parties £000 1,732 3,616 2,027 11 803 3,616 2,022 11 2,372 6,587 1,981 3,988 1,502 6,269 1,971 3,988 During the year, the Company received premiums, commission and reinsurance recoveries via a related party insurance agency amounting to £7,096,000 (2012: £11,158,000) and paid reinsurance protection, commission and claims amounting to £11,608,000 (2012: £16,877,000). Transactions and services within the Group are made on commercial terms. Amounts outstanding between Group companies are unsecured, are not subject to guarantees, and will be settled in cash. No provisions have been made in respect of these balances. The remuneration of the Directors, who are the key management personnel of the Group, is disclosed in the Group Remuneration Report in the Corporate Governance section of this report. 152 Ecclesiastical Insurance Ofﬁce plcN O I T C E S Section 5/Other Information Directors and Executive Management United Kingdom Regional Centres United Kingdom Business Division and International Branches Insurance Subsidiaries and Agencies Notice of Meeting 154 155 156 157 158 153 Ecclesiastical Insurance Ofﬁce plcDIRECTORS AND EXECUTIVE MANAGEMENT Directors Group Management Board * * * * * * * W. M. Samuel BSc, FCA Chairman D. Christie BA, BSc (Econ) Dip. Ed. Deputy Chairman and Senior Independent Director T. J. Carroll FCII, BA, MBA M. C. J. Hews BSc (Hons), FIA Group Chief Executive J. F. Hylands FFA A. P. Latham ACII S. J. Whyte MC Inst. M, ACII, Chartered Insurer Deputy Group Chief Executive The Venerable C. L. Wilson D. P. Wilson BA (Hons), FCII M. C. J. Hews BSc (Hons), FIA Group Chief Executive S. J. Whyte MC Inst. M, ACII, Chartered Insurer Deputy Group Chief Executive I. Campbell BSc (Econ) (Hons), ACA R. Cox FCII, DMS K.S. Jones MA (Oxon), MSc, MBA J. Schofield CFIIA C. M. Taplin BSc (Hons), MSc, MBA Company Secretary Mrs R. J. Hall FCIS Registered and Head Office Beaufort House, Brunswick Road, Gloucester GL1 1JZ Tel: 0845 777 3322 Company Registration Number 24869 19-21 Billiter Street, London EC3M 2RY Tel: 0845 604 4840 Deloitte LLP, London Addleshaw Goddard LLP, Leeds DAC Beachcrofts LLP, Leeds Matheson, Dublin McDowell Purcell Solicitors, Dublin Harrison Clark Rickerbys LLP, Cheltenham Speechly Bircham LLP, London Computershare Investor Services PLC, The Pavilions, Bridgwater Road, Bristol BS13 8AE * Non-Executive Directors Investment Management Office Auditor Legal advisors Registrar 154 Ecclesiastical Insurance Ofﬁce plcUNITED KINGDOM REGIONAL CENTRES Central and South West Office: London and South East Office: Tel: North Tel: Office: Tel: 7th Floor, 9 Colmore Row, Birmingham B3 2BJ 0845 605 0209 19-21 Billiter Street, London EC3M 2RY 0845 608 0069 St Ann's House, St Ann's Place, Manchester M2 7LP 0845 603 7554 155 Ecclesiastical Insurance Ofﬁce plcUNITED KINGDOM BUSINESS DIVISION AND INTERNATIONAL BRANCHES Ansvar Insurance Business Division Managing Director: Office: Canada branch Tel: Deputy Group Chief Executive, Ecclesiastical Insurance and General Manager and Chief Agent: Chief Office: - Eastern Region: Regional Vice President: - Western Region: Regional Vice President: - Pacific Region: Regional Vice President: - Central Region: Acting Regional Vice President: - Risk Managed and National Accounts: Vice President: Ireland branch Managing Director: Office: R. Lane TD, BA, FCII, MCMI, MCGI Ansvar House, St Leonards Road, Eastbourne, East Sussex BN21 3UR 01323 737541 S. J. Whyte MC Inst M, ACII 20 Eglinton Avenue West, Suite 2200, P.O. Box 2004, Toronto, Ontario M4R 1K8 M. Thornhill BA, CRM, FCIP 1969 Upper Water Street, Suite 2106, Purdy's Wharf, Tower 2, Halifax, Nova Scotia B3J 3R7 K. Webster CRM, FCIP Suite 630, Box 20, Bow Valley Square 1, 202-6th Avenue S.W., Calgary, Alberta T2P 2R9 E. M. Mak BA, BSc, FCIP Suite 1795, Two Bentall Centre, 555 Burrard Street, Box 239, Vancouver, British Columbia V7X 1M9 C. Robertson, ACII 20 Eglinton Avenue West, Suite 2200, P.O. Box 2004, Toronto, Ontario M4R 1K8 J. Wleugel BA, CRM 20 Eglinton Avenue West, Suite 2200, P.O. Box 2004, Toronto, Ontario M4R 1K8 D. G. Lane B.Comm (Hons) 1st Floor, Kilmore House, Spencer Dock, Northwall Quay, Dublin 1 156 Ecclesiastical Insurance Ofﬁce plc INSURANCE SUBSIDIARIES AND AGENCIES Ansvar Insurance Limited Acting Chief Executive Officer: Head Office: Ecclesiastical Life Limited Head Office: Ecclesiastical Underwriting Management Limited South Essex Insurance Brokers Limited Office: Tel: Director: Office: Tel: D. F. Blythe BSc, FCA, FAICD Ansvar House, Level 12, 432 St Kilda Road, Melbourne VIC 3004 Beaufort House, Brunswick Road, Gloucester GL1 1JZ 19-21 Billiter Street, London EC3M 2RY 020 7283 0666 B. W. Fehler South Essex House, North Road, South Ockendon, Essex RM15 5BE 01708 850000 157 Ecclesiastical Insurance Ofﬁce plcNOTICE OF MEETING NOTICE is hereby given that the annual general meeting of Ecclesiastical Insurance Office plc will be held at Beaufort House, Brunswick Road, Gloucester, GL1 1JZ on Tuesday, 24 June 2014 at 12:15pm for the following purposes: Ordinary business 1. To receive the report of the Directors and accounts for the year ended 31 December 2013 and the report of the auditor thereon. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. To re-elect Mr W. M. Samuel as a Director.* To re-elect Mr D. Christie as a Director.* To re-elect Mr T. J. Carroll as a Director.* To re-elect Mr M. C. J. Hews as a Director.* To re-elect Mr J. F. Hylands as a Director.* To re-elect Mr. A. P. Latham as a Director.* To re-elect Ms D. P. Wilson as a Director.* To re-elect The Venerable C. L. Wilson as a Director.* To elect Ms. S. J. Whyte as a Director.* To consider the declaration of a dividend. To re-appoint Deloitte LLP as auditors and authorise the Directors to fix their remuneration. By order of the Board Mrs R. J. Hall, Secretary 25 March 2014 * Brief biographies of the Directors seeking election or re-election are shown on pages 50 to 51 of the 2013 Annual Report. All Non-Executive Directors seeking re- election have been subject to formal performance evaluation by the Chairman who is satisfied that the performance of each Non-Executive Director is effective and sufficient time has been spent on the Company’s affairs. Only a member holding Ordinary shares, or their duly appointed representative(s), is entitled to attend, vote and speak at the annual general meeting. A member holding Ordinary shares is entitled to appoint a proxy or proxies (who need not be a member of the Company) to exercise all or any of their rights to attend, speak and vote on their behalf at the annual general meeting. Such a member may appoint more than one proxy in relation to the annual general meeting provided that each proxy is appointed to exercise the rights attached to a different share or shares held by that member. Any corporation which is a member holding Ordinary shares can appoint one or more corporate representatives who may exercise, on its behalf, all of the same powers as that corporation could exercise if it were an individual member, provided that they do not do so in relation to the same share or shares and that they act within the powers of their appointment. This notice is sent purely for information to the holders of 8.625% Non-Cumulative Irredeemable Preference shares who are not entitled to attend and vote at the annual general meeting. 158 Ecclesiastical Insurance Ofﬁce plcAnnual Report & Accounts 2013 Ecclesiastical Insurance Group plc. Beaufort House, Brunswick Road, Gloucester, GL1 1JZ Ecclesiastical Insurance Office plc (EIO) Reg. No. 24869. Registered in England at Beaufort House, Brunswick Road, Gloucester, GL1 1JZ, UK. EIO is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.

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