Credit Update Presentation - July 2021 - esure Group
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Credit Update Presentation July 2021
Disclaimer
IMPORTANT: You must read the following before continuing. The attached presentation is in summary form and has been prepared solely for information purposes and on the basis of your acceptance of this disclaimer.
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2Table of Contents
1 Overview of esure 4
2 Market Environment 13
3 Financial Overview 17
4 Risk Profile & Balance Sheet 20
5 ESG Strategy 27
3Overview of esure
Overview of esure
Focused UK Personal Lines Insurer Specialists in Digital Distribution Strong Customer Proposition
Distribution Split by Channel (%)(3) Net Promoter Score(6)
88% of new
12% business is
distributed via 54 56
88%
top 4 UK
PCWs(4)
(5)
PCW Direct
% of Group
Total 88% 12%
Income(1)
Operating Under Two Main Brands
Market
5.8% 1.7% 2019 2020
Share(2)
UK’s leading Focussed
direct insurer insurance brand • Strong customer service
Market providing car, offering car, track record
Rank(2) #7 #9 home and travel home and
insurance travel insurance
Notes:
1. FY20 Total Income of £644MM for esure Group. Comprises Net Earned Premium, Investment Income, Instalment Interest Income and Other Income
2. Market share and ranking based on ABI data (2020)
3. FY20 new business split
4. PCW: Price Comparison Website
5. Includes sales via web and telephone
6. Net Promoter Score (“NPS”) is an index that measures the willingness of customers to recommend products or services to others. Out of a theoretical sample of 100 customers, the score represents the number of 5
“promoters” less the number of “detractors”The esure Journey: 2000 to Today
16 Feb 2000 11 Feb 2010 31 Mar 2015 19 Dec 2018 15 July 2019 18 Mar 2020
Founding of the esure completes a esure Group Taken private by Appointment of Appointment of
group management buy-out from completes the Bain Capital for David McMillan as Peter Bole as CFO
the company's previous acquisition of the £1.2Bn CEO
joint venture partner, outstanding 50% of
HBOS/Lloyds Banking Group Gocompare
2000 2006 2010 2013 2015 2016 2018 2019 2020
30 Oct 2006 27 Mar 2013 3 Nov 2016 2018/2019 24 Mar 2020
esure offers its car esure Group GoCompare Reserve Appointment of
insurance via a PCW becomes a publicly demerged from strengthening and Andy Haste as
for the first time, listed company and esure Group and reinsurance actions Chairman
home insurance is enters the FTSE 250 listed separately on
added 29 days later the London Stock
Exchange
6esure is an Established Player in the UK Market
Almost 20m Policies Underwritten Since 2012 Approaching £1Bn of Annual Revenue
In-Force Policies (m) Total Annual Revenue (£m)(1)
911 966 940 949
2.37 2.45 2.38 2.45
2.17 730
1.93 1.95 2.00 619
1.76 0.48 0.51 0.56 0.57 588 605 585
0.57
0.55 0.57 0.57
0.50
1.90 1.94 1.82 1.87
1.39 1.38 1.44 1.61
1.26
2012 2013 2014 2015 2016 2017 2018 2019 2020 2012 2013 2014 2015 2016 2017 2018 2019 2020
Motor Home
• Approaching £1Bn of revenue across underwritten and
• esure has been an at-scale player in the UK personal lines
non-underwritten income streams
market for a number of years
• Disciplined approach to pricing and growth in a
• Scale and experience support efficient, profitable business
competitive market
model
• 2020: GWP broadly flat y-on-y, reflecting lower claims
• 2020: Return to growth in IFPs (+3% YoY)
experience in the context of Covid-19
Notes:
1. “Total Revenue” calculated as Gross Written Premium (2020: £841.0MM) plus Instalment Income (2020: £55.6MM) and Other Income (2020: £51.9MM). The main components of Other Income include: Brokerage &
Commission Income (2020: £12.0MM); Claims and Related Income (2020: £6.4MM), Profit Commission from Reinsurers (2020: £12.3MM) and Policy Administration Fees & Other Income (2020: £21.2MM) 7FY20 Numbers Demonstrate esure’s Strength
FY20 Financial Highlights Financials Reflect the Group’s Scale and Stability
£MM, unless otherwise stated 2020
• Almost 2.5m insured customers at FY20, generating
In-Force Policies (m) 2.45 gross written premium of £841MM
• Improving profit trajectory with further upside from
Gross Written Premium 841.0 delivery of internal strategy
• Strong underlying ROE, driven by:
Trading Profit 82.6
– Focussed business model
– Digital distribution
Adjusted ROE (%)(1) 21.8%
– Significant contribution from non-underwriting
revenues
Total Equity 287.8 – Use of reinsurance to transfer risk and manage
capital
Solvency II Ratio (%) 164%
• Solid Solvency II ratio of 164%, above the target range
of 140-160%
Notes:
1. “Adjusted ROE” calculated as “Adjusted Post-Tax Profit” divided by average of opening and closing shareholders’ equity. “Adjusted Post-Tax Profit” is calculated as statutory post-tax profit (2020: £29.0MM), adjusted
for non-trading expenses (2020: £38.5MM), net of tax at 19%. 8Experienced and Dynamic Management Team
Key Members of Leadership Team
Andy Haste
Non-Executive Chairman >20
Joined esure in March 2020
Currently serves as Senior Independent Deputy Chairman of Lloyd’s of London
Former CEO of RSA Insurance Group plc and Chief Executive of AXA Sun Life PLC
Former Senior Independent Director of ITV PLC
Former Chairman of Wonga Group
David McMillan Peter Bole
>20 >15
Chief Executive Officer Chief Financial Officer
Joined esure as CEO in July 2019 Joined esure in January 2020 and became CFO in March 2020
Former Group COO of QBE Previously Chief Financial Officer of Virgin Money and Tesco Bank
Former CEO of UK General Insurance at Aviva, as well as other senior Former senior financial roles at Direct Line Group, Standard Life and
roles within the group including CEO of Europe, CEO of India and Deloitte
Chairman of Global Health
Darren Boland Andy Burton
>20 -
Chief Risk Officer Chief Technology Officer
Joined esure in March 2013 as Head of Risk and was promoted to Chief Joined esure in January 2021 as CTO, with over 30 years’ experience of
Risk Officer later that year working in and leading technology teams across a range of sectors,
Previous senior roles at Aspen and in both the audit and actuarial teams including financial services
at PwC Former CTO at The Very Group and Sky Betting and Gaming
Elspeth Hackett
Graham Hughes >25 >30
Chief Underwriting Officer
Chief Claims Officer
>25
Joined esure in October 2015 Joined esure in February 2016
Previous roles include Commercial Claims director at RSA and other Over 30 years’ experience within the insurance industry, leading
underwriting and product teams
senior roles at Allianz and Aviva
Former Head of Personal Lines Underwriting at LV= and RBS Insurance
Years of insurance industry experience
9Summary of esure’s Game Changer Strategy
Ambition
• Become the leading scale pure-play digital insurer in the UK
• Provide an easy digital experience and an extremely competitive price
Ambition
• Keep our customers longer
Where to play How to win
1.
1 Pricing leadership
• PCW as the primary channel 2.
2 Improve cost efficiency
Choices • Motor as the primary product 3.
3 Differentiate to build customer lifetime economics
• Mass market (core footprint and beyond) 4.
4 Modern, scalable cloud native tech
Where How
5.
5 Be a customer-driven organisation
to play to win
Priorities
1 Pricing Leadership 2 Improve Cost Efficiency 3 Differentiate to build customer
A. Expand footprint A. Digitise and automate key processes lifetime economics
B. Advanced data capability B. Improve indemnity spend efficiency A. Easy digital journeys
C. High-velocity trading culture C. Achieve lowest IT run cost B. Drive multi-product holdings
Priorities
C. Persistency propositions (e.g. UBI)
4 Modern, scalable cloud native tech: Re-platform onto the most modern, scalable and extensible cloud native
technology in the industry
5 Be a customer-driven organisation: Customer-led culture and DNA across all foundational/ propositional elements
10Redefining the Cost Base
Tech Re-Platforming will allow esure to unlock a
Expense Ratio Expected to Reduce Over Time
Expense ratio, %(1)
number of benefits:
31.6% • Straight through processing of claims and customer
interactions
• Data and data science driving strong and efficient
customer outcomes
• Simplified administrative functions
• Simplified (and growth focussed) IT function
• Open/ cloud-based architecture will allow esure to make
use of the latest technology developments across the
insurance value chain
2020A Medium-Term
Notes:
1. Expense Ratio calculated as Insurance Expenses (excluding Non-Trading Costs) plus Claims Handling Costs, divided by Net Earned Premium
11esure Group Highlights
Experienced player in large and profitable market
• #7 player in Motor, with a growing presence in Home
1 • Significant competitive advantage built up through data and underwriting experience
• Further upside to come from ongoing transformation strategy
2 Balanced revenue mix between underwritten and additional services revenues
• Significant profit contribution from additional revenue streams
• Strong relationships with reinsurance counterparties ensures a sustainable risk
management and capital strategy
3 Business model supports underlying ROE in excess of 20%
• Capital-light model and high margin revenue streams support above-market ROE
• Strong returns underpinned by a highly cash generative business model
4 Strong and stable balance sheet
• Solvency II ratio of 164%, above the top end of the group’s target range
• Conservative approach to reserving and investment management
5
Experienced and high quality management team
• esure is well-equipped to compete in a changing industry
• Backed by an experienced and supportive investor, Bain Capital
12Market Environment
Key Themes in UK Personal Lines Market
• Personal lines have performed well through the COVID pandemic
Mainly due to lower claims frequency in both Motor and Home
COVID & Market • However, the improved claims experience has delayed price hardening in the Motor market
Environment Motor pricing has continued to decline across the market in Q1 and Q2 2021
• Claims inflation is running above long-term levels
Increasing technology and complexity of car design and short-term impacts from COVID pandemic
• FCA policy statement published on 28 May 2021
• From January 2022, various measures will be enacted to end the practice of so-called “price walking”
Insurers will no longer be able to raise prices for existing customers solely based on tenure
FCA Pricing
Practices Review • esure is strongly supportive of the measures announced and is well-placed to respond
& Regulation Significant administrative and compliance burden that will be more demanding for more complex businesses
• PCWs are expected to remain a key distribution channel as new business pricing will still vary across the market
• Incoming Whiplash reforms set to reduce personal injury pay-outs
• Incumbent insurers continue to invest in technology in order to enhance digital capabilities and improve cost efficiency
• A number of insurtechs performed well during the pandemic (e.g. those whose products are well-suited to lower or
irregular driving volumes)
Technology However, still a limited impact on the overall market to date
• Over the longer-term, the trend towards connected cars is expected to continue, although the market
implications are still uncertain
14Overview of the esure Story
Large UK Personal Lines Markets Growing Share of PCW Distribution Higher CORs in Motor Offset
Total Market Premium (2020), £Bn (1) PCW Share of Market Distribution, % (1)
by Greater Ancillary Revenues
Market Combined Operating Ratios, % (1)
12.8
Motor Motor
81% 108%
70% 73% 75% 104%102%101%
59% 64% 66% 66% 68% 98% 100%
6.0 Avg.: 100%
94% 93%
2012 2013 2014 2015 2016 2017 2018 2019 2020 2012 2013 2014 2015 2016 2017 2018 2019
Motor Home Home Home
63% 100%
54% 55% 56% 59%
Market premium per
465 266 37% 43% 47% 94% 93% 94% 96% 92%
policy (£) 31% Avg.: 94%
89% 90%
esure premium per
policy (£)(2) 399 184
2012 2013 2014 2015 2016 2017 2018 2019 2020 2012 2013 2014 2015 2016 2017 2018 2019
Source: ABI
• Combined premium volume of £19Bn • Motor market average COR of 100% over
across Motor and Home • PCWs now account for >80% of personal time
lines Motor sales and >60% for Home – Profitability supported by non-
• esure’s average premium per policy is
below market average in both Motor and underwritten revenue sources
• Share continues to grow across both
Home lines • Home margins more dependent on
– Reflects lower risk customer profile weather/ catastrophe losses
Notes:
1. Sourced from Association of British Insurers (ABI) data
2. Calculated as FY20 GWP for Motor (£737MM) and Home (£104MM) divided by average of FY19 and FY20 In-Force Policies for each line of business (Motor: 1.846MM; Home: 0.565MM) 15Overview of FCA Pricing Practices Review
What is the FCA Review? Industry Implications
Key changes: • Home (rather than motor) more impacted given greater price
walking
• Insurers have to equalise front book and back book pricing
• Expect to see 2 main effects of this regulation play out:
• Auto-renewal made stricter and cancellation made easier
1
1. New business prices increase to offset reduced profitability of
• Enhanced product rules to ensure fair value
the back book
With strict enforcement:
2.
2 Greater persistency over time as price differential and incentive
• Strong anti-avoidance measures and reporting requirements
to switch decreases
• Hard rules that insurers must follow
Pricing measures come into force from January 2022
What Does This Mean for esure?
• Although market dynamics are uncertain, FCA changes present an opportunity for esure:
Higher churn in non-digital back-books from more established players
Low cost insurers with lower equalisation point between front and back book are most able to take opportunity of market dislocation
• This validates the direction of esure’s blueprint strategy to provide consumers with competitive products, easy to use digital customer
experience achieved through a low cost operating model
16Financial Overview
FY20 Financial Performance: Headlines
Improving Underlying Trajectory • Following a reset in FY19, FY20
£MM
demonstrated esure’s renewed strategy
Summary Financials FY19 FY20 Change (%)
and ability to attract customers in a
difficult pricing environment
In-Force Policies (MM) 2.38 2.45 3.0% • Business model and revenue mix reduce
Gross Written Premium 834.5 841.0 0.8% the gearing to underwriting profitability
High proportion of additional income
streams
Underwriting Profit inc. Instalment Income(1) 12.6 32.7 159.5%
• Reinsurance structures transfer risk and
Net Investment Income 22.0 14.6 (33.6)%
optimise capital
Net Other Income(2) 23.1 35.3 52.8%
• As a result, ROE can exceed the levels
Trading Profit(3) 57.7 82.6 43.2% generated by traditional P&C business
models
Adjusted Post-Tax Profit(4) 41.7 60.2 44.2%
Adjusted ROE of 21.8% in FY20
Adjusted ROE (%)(5) 16.1 21.8 5.7%
• Solvency II ratio above the top end of
the target range (140%-160%)
Combined Operating Ratio (%) 106.3 104.4 (1.9)ppt
• Underlying performance of the
Solvency II Ratio (%) 149 164 15ppt group continues to improve
Notes:
1. “Underwriting Profit inc. Instalment Income” is calculated as the sum of: Net earned premium, net incurred claims, claims handling costs,
insurance expenses and instalment income
2. “Net Other Income” is calculated as the sum of: Other income and other operating expenses
3. “Trading Profit” is defined as earnings before interest, tax, non-trading expenses and amortisation of acquired intangible assets
4. “Adjusted Post-Tax Profit” is calculated as statutory post-tax profit, adjusted for non-trading expenses (FY20: £38.5MM; FY19: £44.6MM),
net of tax at 19% 18
5. “Adjusted ROE” calculated as “Adjusted Post-Tax Profit” divided by average of opening and closing shareholders’ equityFurther Analysis of the Business Model
Non-Underwritten Revenue Sources Drive Strong Overall Economics
FY20 Trading Profit Bridge, £MM FY20 GWP to NEP bridge, £MM
• Underwriting profitability is only one
841
part of the overall customer economics
522 522
in the UK personal lines market
(222)
(92) (6)
Illustrated by an industry-wide
Motor COR of ~100% over the long-
(1)
term
Gross Ceded Under Ceded Under Other Net Earned
Written LPT & Q/S Excess Premium
Premium of Loss • Non-underwritten revenue streams
supplement core underwriting profit
• Non-underwritten revenue streams
52
15
83
contributed £106MM in FY20
(410)
56 (17)
33
Equivalent to ~20% impact on the
COR
(135) (23)
Net Earned Net Incurred Insurance Underwriting Instalment Underwriting Other Investment Non-Insurance Trading
Premium Claims (2) Expenses Profit Income Profit Income (3) Income Expenses Profit
(inc.
Instalment
Income)
Non-underwritten revenue streams
of £106MM =
>20% of Net Earned Premium
Notes:
1. Sum of net written-to-earned adjustment (£(4.5)MM) and FY20 LPT adjustment (£(1.8)MM)
2. Net Incurred Claims plus Claims Handling Costs
3. Other Income includes: Brokerage & Commission Income (2020: £12.0MM); Claims and Related Income (2020: £6.4MM), Profit Commission from Reinsurers (2020: £12.3MM) and Policy Administration Fees & 19
Other Income (2020: £21.2MM)Risk Profile & Balance Sheet
Strong Balance Sheet with Low Risk Exposure
1 2
Low risk and highly liquid Conservative reserving methodology,
investment portfolio generating positive run-off over time
3 4
Significant reinsurance protection, Strong Solvency II position with low
resulting in lower back-book risk and sensitivity to market movements
higher capital efficiency
211 Low Risk Investment Portfolio
Conservative Approach to Asset Allocation… …Supplemented by Well-Managed Credit Risk
% %
Investments Bearing Credit Risk and
Total Investments: £1.2 Bn
Cash and Cash equivalents: £1.1 Bn
Deposits Below BBB or Not
with credit Government BBB Rated
institutions bonds 8% 7%
22% 34%
A AAA
13% 45%
Equities
7%
Derivatives
0.4% AA
27%
Cash Corporate
4% bonds
(1)
33%
• Conservative asset allocation, with majority of portfolio allocated to high quality fixed income asset classes
• Significant allocation to liquid asset classes – more than sufficient to meet the group’s requirements, even in a stress scenario
Source: Annual Report, SFCR Report
Notes:
1. “Corporate bonds” allocation also includes corporate bonds included within the “Collective Investment Undertakings” category shown in the group SFCR 222 Conservative Reserving Approach
Accident Year Ultimate Net Loss Ratio Development Over Time(1)
% of Ultimate Accident Year Net Earned Premium
86% 85% 84%
84% 83% 81%
78% 78% 76%
75%
69% 72%
67% 65%
61% 62%
2011 2012 2013 2014 2015 2016 2017 2018
End of Reporting Year +1 year +2 years +3 years +4 years +5 years +6 years +7 years +8 years +9 years
• Ultimate loss ratios have reduced over time, demonstrating conservative initial reserve estimates
Notes:
1. Excluding 2019 given effect of LPT on ultimate NEP 233 Supported by Prudent Reinsurance Programme
3 Pillars of Reinsurance Protection:
1
• Reduces capital intensity through risk-sharing with Significant Risk-Sharing via Quota-Share
reinsurance partner Quota-Share as % of Earned Premium(5)
• Supportive for ROE as esure retains 100% of higher
margin non-underwritten revenue streams 30%
Quota 40%
Share(1) • Quota Share agreement also results in Profit Commission
70% 60%
income based on profitability of business ceded to
Ongoing
reinsurance counterparty
– Profit Commission receivable stood at £15.8MM as at 2020 2021
FY20 (FY19: £1.8MM)(3) Retained Reinsured via Q/S
2
Key Terms of Excess of Loss Programmes(6)
• “Business as usual” excess of loss (XoL) programme
protects against downside risk Home Motor
Excess of
Type Per Event Type Per Risk
Loss • Supplements prudent underwriting approach
Deductible 10% of Home GWP Deductible £1MM
Programme • Home programme protects against the equivalent of a 1- Limit 200% of Home GWP Limit Unlimited
in-5 year event(4)
100% placed (i.e. no gaps in cover) 100% placed (i.e. no gaps in cover)
3 • Provides protection against deterioration on older accident
years • 85% reduction in net reserves held against business earned
LPT(2) up to H1 2019
• Significantly reduced the group’s overall capital
requirement
Notes:
1. Quota Share is a pro-rata reinsurance contract in which the insurer and reinsurer share premiums and losses according to a fixed percentage
2. The LPT (Loss Portfolio Transfer), and the related Adverse Development Cover (ADC), is a reinsurance contract in which an insurer cedes claims from a defined accident period to a reinsurer and includes
reinsurance should any deterioration be seen in the amounts ceded
3. Profit Commission receivables are shown on a Solvency II valuation basis
4. Based on internal analysis using climate variability modelling approach
5. Quota-Share percentage reflects original cession to reinsurance counterparty. Subsequently, esure has the ability to commute (re-assume) a portion of the risk over time
6. Home: Excess of Loss programme covers losses occurring during the 12-month period from July 2021 to June 2022. Motor: Excess of Loss programme covers risks attaching during the 12-month period from 24
January to December 2021Reserving & Reinsurance Actions Have De-Risked
3
Balance Sheet
Underwriting Risk Has Declined in LPT Has Reduced Risk of Back-Book Deterioration
Absolute and Relative Terms Split of Net Reserves by Accident Year (£MM, %)
SCR Breakdown (£MM)
2018 Net Reserves: 2020 Net Reserves :
£528MM(1) £376MM(1)
330
233
290
283
173
248
108 % of
106 reserves % of
87 61
~25% 87 reserves
(40) (46) 69 19 23 ~12%
2018 2020 2018 2020
Non-Life U/W Risk Diversification Other Risks Prior 2016 2017 2018 Prior 2018 2019 2020
• Introduction of the LPT has materially de-risked the back-book and transformed the group’s capital intensity
• This complements the group’s conservative underlying reserving approach
Notes:
1. Net Reserves as per statutory financials were £415MM (2020) and £602MM (2018) respectively. Analysis above excludes Provision for Claims Handling Costs, Salvage & Subrogation and Recoverables Due to Reinsurer
as these items are not allocated to specific accident years
25Solid Solvency II Position, with Low Sensitivity
4
to Market Movements
Capital Position Marginally Above Target Range Low Sensitivity to Market Risks
Group Solvency II Ratio, % Group Solvency II Ratio Sensitivities, %
Solvency II Motor loss ratio 5ppts worse (12%)
149% 164%
Ratio:
1987 Hurricane (7%)
383
361 Target Real estate values -25% (4%)
Range:
140- Credit spreads of corporate bonds +50bps (1%)
117 160%
121 Interest rates -50bps 0%
Equity markets -25% 0%
Ogden discount rate of -1% 0%
267
242 240 233
Capital Management
• Solvency Capital Requirement determined using Standard Formula
• Regular assessment by the Group of the appropriateness of the Standard
Formula for the business and its risk exposures
2019 2019 2020 2020 – Regular communication with the PRA, including current dialogue on
potential modification to the Standard Formula in respect of
Solvency Capital Unrestricted Tier 1 Tier 2
reinsurance structures and Profit Commission receivables
Requirement
26ESG Strategy
ESG Strategy
We continuously strive to be a responsible and sustainable business in everything we do.
It is, put simply, the right thing to do and will also help us deliver long-term value.
Our recent progress on Environmental, Social and Governance matters is summarised below:
• Board approved an ESG Policy in 2020 with the following priorities:
Ensure that ESG is central to all strategic decisions
Address the impact of ESG factors on customers, colleagues and wider communities
ESG
Link remuneration to ESG factors to ensure accountability
Framework
• Also established an Inclusion and Diversity working group consisting of representatives from across the organisation
• Further initiatives to be launched during 2021
COVID • In Q1 2020, the Group quickly prioritised investment in resources to ensure our colleagues could transition to working from home
Response • Launched a number of initiatives to support customers and colleagues during the pandemic
• Invested in a new colleague engagement tool to enable “continual listening”
Employee
• Strong results seen so far:
Engagement
First survey received a 92% response rate with an engagement score of 7.7
• Continuing to develop the metrics and targets to guide our approach on carbon footprint
Environment • Several actions taken to date, including transitioning to renewable energy sources throughout the office network, pilot scheme to use
recycled auto parts to repair our customers’ vehicles and considering the installation of electric car charging points across the group’s offices
• During 2021, we will formalise our ESG monitoring metrics, targets and limits in relation to our asset management function
Investment • Our current investment portfolio is already well-positioned from an ESG perspective
Management Low levels of exposure to high carbon emission industries
Investments managed by funds with good ESG credentials
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