SBRE Sabre Insurance Group Plc

Chief Executive Officer's Review

Record premium levels, enhanced margins and strong profit

In our 2022 Report and Accounts we outlined several expectations for 2023:

-  Early, decisive decision to react to emerging claims inflation would protect the financial position of Sabre for the longer term;

-  We would rebound quickly to historical levels of performance;

-  We would take advantage of growth opportunities as many competitors reacted belatedly with high rate increases.

I am pleased that not only did these predictions come through, but that the positive impact on our business exceeded our expectations at the start of 2023.

We saw sustained, strong premium growth through the second half of 2023 with year-on-year premium levels over 100% by the end of the year.   This was delivered while continuing to execute our disciplined growth strategy, applying significant rate increases which resulted in a return to forward-looking expected loss ratios in line with our historical norms faster than anticipated.  We have benefitted from good new customer growth as well as maintaining our normal levels of customer retention.

At the same time, we made excellent progress on getting our emerging Motorcycle account to a sustainable position and further developed our taxi portfolio.  Looking forward, we will now build out our Motorcycle portfolio through partnerships with additional expert brokers.  Whilst the Taxi portfolio remains at an earlier stage of development, and the Taxi market continues to be highly competitive, we will maintain a low footprint until we are confident that this product can grow profitably.

Reflections on 2023  

Despite the significantly improved financial results, 2023 was not a straightforward year, with several unexpected challenges.  This performance was delivered through both dedication to our disciplined growth strategy and the exceptional commitment from my colleagues, for which I and my fellow Board members are greatly appreciative.

The decisive early action we took in response to the well-publicised inflationary pressures at the start of the year, increasing our pricing accordingly, wasn't reflected at the time in the pricing actions from many of our competitors.  Whilst this did negatively impact our premium levels in the first quarter of the year, we continued to focus on margin over volume - believing that the broader market correction would be more dramatic the more time passed.  This proved to be the case with very high levels of rate increases in the second half of the year.  This led to exceptionally high year-on-year premium levels and a return to our long-term target margins.

In mid-2023 our original motorcycle distributor, MCE Insurance, was placed into administration. We worked extensively with the FCA to ensure the best possible customer outcomes from this - including working with potential acquirers, providing limited cash flow funding to the business and ultimately taking the servicing of the policies in-house until renewal.

At the end of the year, we experienced a cyber-attack linked to the worldwide Citrix bleed vulnerability. We had established contingency processes in place and I was pleased with the effectiveness of our response. Critically, I could not be more impressed by the way our people reacted to minimise customer impact. Our distribution and outsourced strategy meant we were able to continue to sell policies throughout the disruption as well as dealing effectively and efficiently with customer claims. Whilst our IT security protocols worked well and prevented the loss of sensitive customer data, there are always lessons that can be learnt and we will continue to invest further in this area.

There were many other positive developments during the year. Our new direct-to-customer policy administration system was launched by our E-Commerce Team on time and to budget. We are now looking forward to enhancing customer service at the same time as reducing costs through the additional functionality the new system possesses. We have also rolled out the initial stages of Insurer Hosted Pricing on schedule. This will allow us to deploy more sophisticated pricing at speed as we move forward.

Board changes

Towards the end of 2023 we were distressed by the sudden death of our Chair, Andy Pomfret. Andy was an excellent Chair of the Group and a great support to me and other members of the Executive Team as we worked through some difficult years. Despite the sad loss I am pleased that our Board succession plan worked effectively and would like to congratulate Rebecca Shelley who has stepped into the role of Company Chair.

Other changes to the Board during the year were the joining of Bryan Joseph as Non-executive Director and Chair of the Risk Committee, the enrolling of Karen Geary as Chair of the Remuneration Committee and the departure of Michael Koller from the Board in December 2023. I welcome Bryan to the Board and would like to thank Michael for his contribution and support. In addition to these changes, we inform the market that Ian Clark is leaving the Board with effect from 22 May 2024, and therefore will not be standing for re-election at the Company's 2024 Annual General Meeting. Ian has served on the Board of Sabre Insurance Company Limited since 2014 and the Board of Sabre Insurance Group plc since its listing in 2017. Ian's market knowledge has been invaluable to the Group, and he leaves with my huge thanks for his contribution to the success of the Group.

Market

The UK motor insurance market remains a sophisticated, efficient, and well-served marketplace. In the latter half of 2023, we saw systemic under-pricing in the market reduce considerably, with insurers switching focus towards improving underwriting profits. There are, as ever, many uncertainties in the market. The key ones are:

-  Uncertainty on small personal injury costs pending the outcome of the related Supreme Court decision

-  Potential change in the critical Ogden discount rate

-  Impact of changes in reinsurance costs

-  Continuing elevated levels of claims inflation

-  Potential change of government and an increased focus from regulators on the affordability of car insurance and instalment rates charged for monthly policies

We will continue to maintain a prudent position balancing the possible positive and negative impacts.

In 2023 we also witnessed withdrawals from the motor insurance market, few new entrants and expect very poor industry-level profitability. This gives some degree of greater certainty that pricing discipline will be maintained for some time to come. 

Capital and dividend

Our strong capital generation has allowed us to declare an ordinary dividend in line with our policy and distribute excess capital by way of a meaningful special dividend. We anticipate being able to benefit from potential further profitable growth whilst also being able to pay an attractive dividend.

People

I am delighted by the ongoing commitment of our people across the organisation, evidenced in 2023 and in the performance of the Company and the low levels of employee turnover. We reflected this commitment during the year by paying inflation linked pay rises, paying annual performance and Christmas bonuses, providing a cost-of-living bonus, running two employee share plans, while rolling out further employee benefits such as free breakfasts. We continue to support our employees with training and development, and it was great to see many promotions and career moves in the year.

In line with good governance, during 2023 the Company consulted its major shareholders regarding the changes to the Company's Remuneration Policy for Executive Directors (the 'Policy'). The updated Policy will be put to vote at the Company's Annual General Meeting on 23 May 2024.

Customers

We kept customers at the forefront of our decision making this year, especially as we dealt with some of the implications of the MCE administration and the cyber incident. Going forward we are fully aligned to the emerging consumer duty requirements, as well as enhancing service to our direct customers through new system capability.

Environmental, Social and Governance ("ESG")

We continue to view consideration of ESG issues as an important aspect of our corporate decision making and remain committed to our key environmental targets and values, which encompass fairness to our employees, customers, partners and the planet. We have made steady progress against our net-zero ambitions, which have included a full office refurbishment and re-launch of our employee Sustainability Forum.

Outlook for 2024

We anticipate that the business we wrote in 2023 will earn through at attractive margins delivering an increase in profitability in 2024. I also expect that market pricing discipline will hold allowing us to grow further. Our Insurer-Hosted Pricing will continue to be rolled out, allowing more sophisticated pricing to be delivered to the market and we expect to add new Motorcycle distribution partners. Beyond this, much of our focus in 2024 will be on 'below the radar' developments as we continue to invest in our pricing and claims capabilities to maintain our position as a leading motor insurer.

Geoff Carter

Chief Executive Officer

18 March 2024

Chief Financial Officer's review

Strong gross written premium growth and capital generation

HIGHLIGHTS

(1)    All relevant 2022 numbers are restated under IFRS 17

*Alternative Performance Metrics are reconciled to IFRS in the Financial Reconciliation section

2023 has been an exciting year in the motor insurance market, in which a long-awaited correction to pricing across the market was delivered rapidly as insurers dealt with the twin impacts of high inflation and sustained under-pricing. Sabre was well-placed to benefit from these market conditions, having taken timely and necessary pricing action throughout 2022 and 2023.

In some respects, the numbers speak for themselves in 2023, with the performance of the Group improving significantly since 2022. In the first half of the year, Sabre continued to increase prices in order to meet elevated levels of inflation and return margins towards historical norms. Market pricing, however, remained low until mid-March, at which point it appears other insurers started to increase their own prices having suffered underwriting losses in 2022. As had been anticipated since the start of the downturn in market pricing, once this happened Sabre's competitiveness on its core Motor Vehicle policies increased significantly, allowing the Group to grow its gross written premium. This rapid growth had a minimal impact on the first half of 2023, as all premium written by the Group is recognised in profit through insurance revenue evenly over a period of one year. This growth started to impact on profits in H2, as did the improved loss ratio resulting from decisive pricing action in 2022 and 2023.

This rapid growth and the on-target profitability of business written during the year allowed the Group to generate significant organic capital. The Directors have chosen to distribute this capital by way of a special and ordinary dividend, bringing the total dividend in respect of 2023, including the interim already paid, to 9.0 pence per share.

REVENUE

(1)    Al relevant 2022 numbers are restated under IFRS 17

The move to reporting under IFRS 17 has brought some changes to the presentation of the Profit or Loss Account and Statement of Financial Position, although I continue to stress that the economic reality of the business and capital position of the Group remain unaffected by the change. We will continue to report numbers in sufficient detail such that we believe readers of this Report and Accounts will be able to understand the Group's performance in historic terms. For example, whilst 'Insurance Revenue' is the top-line in the Profit or Loss Account (it represents 'earned premium' plus 'customer instalment income'), we continue to report gross written premium on the same basis as under the previous accounting regime.

The below table shows how the familiar measures used to calculate our KPIs build up into the income entries in the IFRS 17 Profit or Loss Account.

(1)    All relevant 2022 numbers are restated under IFRS 17

Our gross written premium has increased by 31.4% vs 2022, with the increase being almost entirely driven by the Group's core (and most profitable) line of business - Motor Vehicle. The increase in gross written premium is even more sizeable when compared to the second half of 2022, being 58.1% up for H2 2023 vs H2 2022. This has been slightly offset by a reduction in Motorcycle business, which was expected as the relationship with one of the Group's distributors was terminated during the year. Premium from the Taxi business has grown marginally, although that market remains challenging and therefore the Group remains cautious as pricing in the Taxi market remains relatively low.

Customer instalment income, which is 'earned' in the same way as premium, has increased in line with premium earned on the direct business. As has always been the case, the Group only earns instalment income on its Direct book from the provision of premium financing to those customers who choose to pay monthly, and as such this remains a very small element of the Group's insurance revenue.

Investment return has started to reflect the reinvestment of maturing assets, as well as increase in total assets invested in the Group's portfolio. The Group's investment strategy remains unchanged, being invested in a low-risk mix of UK government bonds, other government-backed securities and diversified investment-grade corporate bonds. Fair value gains and losses on the investment portfolio are taken through other comprehensive income and largely reflect market movements in yields of risk-free and low-risk assets. We do not expect to realise any of these market value movements within profit as we continue to hold invested assets to maturity.

OPERATING EXPENDITURE

(1)    All relevant 2022 numbers are restated under IFRS 17

The year-on-year improvement in profitability is evident from the loss and combined ratios reported above. The inflation shock in 2022 clearly had a very significant impact on 2022's result, and this had a knock-on impact into 2023, particularly in the first half of the year, as the rating action taken during 2022 took some time to earn through.  The numbers reported above are on an IFRS 17 basis, therefore are 'discounted' loss ratios. Undiscounted figures are shown below, along with other elements which make up the 'insurance service expense', which effectively equals discounted claims expense, plus an allocation of operating expenses directly attributable to handling claims and the amortisation of insurance acquisition costs, which in Sabre's case is analogous to commission expense under the previous standard.

(1)    All 2022 numbers are restated under IFRS 17 where applicable

(2)    Includes discounting on Period Payment Orders ("PPOs")

(3)    Calculation of undiscounted net loss ratio allows for the impact of  discounting on long-term non-life annuities,  Periodic Payment Orders ("PPOs"), consistent with presentation under IFRS 4

Whether on a discounted or undiscounted basis, the improvement in loss ratio across the business as a whole is clear, with a significant improvement in Motor Vehicle and Motorcycle, whilst the small Taxi business remains challenging. Whilst the full-year net loss ratio is not sufficiently low across the whole business to return the Group to historical levels of profitability in 2023, the loss ratio for H2 is far closer, being 51.5% on an IFRS 17 basis and 57.5% on an undiscounted basis. It is also very pleasing to note that profitability on the core Motor Vehicle product has returned towards our historical norms and has improved throughout 2023. Given the significant growth in this product relative to Motorcycle and Taxi, this should have a much greater impact in 2024.

The Group's expense ratio has increased slightly from 2022, a result primarily of earned premium remaining at similar levels, with the rapid growth later in the year not reflected fully in the earned position, set against normal inflation in the cost base and some one-off expenditure, including the building refurbishment (£0.4m) and a write-down in the valuation of the Group's headquarters office estate (£0.3m) which was impacted by the higher inflation environment and a general slow down in demand for office buildings. We have seen this increase reverse in H2 however, with the expense ratio falling from 31.8% in H1 to 28.3% in H2.

NET INSURANCE FINANCIAL RESULT

The net insurance financial result is a new concept under IFRS 17 and represents the 'run-off' of discounting applied to claims reserves. When a claim is recorded, the claim cost is discounted to reflect the time value of money at the prevailing rate. This reduces the overall claims cost and is why the claims expense is lower on a discounted basis. The 'other side' of this is the run-off of discounting, which reflects the increase in the real-world value of the claim as payment becomes closer. The reduction in claims liabilities and reinsurance assets resulting from applying discounting to those balances is recorded within insurance contract liabilities and reinsurance assets respectively in the Statement of Financial Position.

(1)    All relevant 2022 numbers are restated under IFRS 17

The cost associated with the discounting run-off has increased in 2023 due to claims which were recorded at high discount rates having run-off during the year. During 2022, much of the claims reserve would have been discounted at lower rates, and hence a lower discounting run-off.

OTHER COMPREHENSIVE INCOME

The introduction of IFRS 17 has added a 'net insurance financial result' to other comprehensive income. This reflects the impact of changes in discount rate on the value of claims liabilities. This is therefore recorded alongside the change in market value of debt securities at fair value. Where there is a true movement in risk-free rates, these amounts should be similar but opposite. The inclusion of the impact of discount rate movements within other comprehensive income, as opposed to the Profit or Loss Account, is a policy decision designed to match the impact of movements in discount rate to fair-value movements in investments already recorded within other comprehensive income under IFRS 9.

(1)    All relevant 2022 numbers are restated under IFRS 17

Given that asset-liability matching is imperfect with regard to levels of risk and duration, these two figures do not perfectly offset, however these have been particularly large in 2022 and 2023 due to the volatile economic environment.

TAXATION

In 2023 the Group recorded a corporation tax expense of £5.5m (2022: £2.9m), an effective tax rate of 23.5%, as compared to an effective tax rate of 21.0% in 2022. The effective tax rate is similar to the prevailing UK corporation tax rate. The Group has not entered into any complex or unusual tax arrangements during the year.

EARNINGS PER SHARE

(1)    All relevant 2022 numbers are restated under IFRS 17

Basic earnings per share for 2022 of 7.27p per share is proportionate to profit after tax. Diluted earnings per share is similarly proportionate to profit after tax, taking into account the potentially dilutive effect of the Group's share schemes.

CASH AND INVESTMENTS

The Group continues to hold a low-risk investment portfolio and cash reserves sufficient to meet its future claims liabilities. This has resulted in a stable yield across the portfolio. As most assets are held to maturity, the yield achieved by the portfolio lags changes in market yield, with funds generally being reinvested on maturity.

INSURANCE LIABILITIES

(1)    All 2022 numbers are restated under IFRS 17 where applicable

The Group's net insurance liabilities continue to reflect the underlying profitability and volume of business written. Generally, the gross insurance liabilities are more volatile and impacted by the recording and settlement of individually large claims. The level of net insurance liabilities held remains broadly proportionate to the volume of business written, and reflects inflationary increases in the cost of claims.

LEVERAGE

The Group continues to hold no external debt. All of the Group's capital is considered 'Tier 1' under Solvency II. The Directors continue to hold the view that this currently allows the greatest operational flexibility for the Group.

DIVIDENDS AND SOLVENCY

The dividend proposed is in line with the Group's policy to pay an ordinary dividend of 70% of profit after tax, and to consider passing excess capital to shareholders by way of a special dividend.

Excluding the capital required to pay this dividend, the Group's SCR coverage ratio at 31 December 2023 would be 170.9%.

ADAM WESTWOOD

Chief Financial Officer

18 March 2024

3. Insurance liabilities and reinsurance assets

ACCOUNTING POLICY

For the purpose of this accounting policy, the term 'motor insurance' covers all the Group's products, which includes Motor Vehicle, Motorcycle and Taxi insurance.

A. Insurance and reinsurance contracts classification

The Group issues insurance contracts in the normal course of business, under which it accepts significant insurance risk from a policyholder by agreeing to compensate the policyholder if a specified uncertain future insured event adversely affects the policyholder.

As a general guideline, the Group determines whether it has significant insurance risk, by comparing benefits payable after an insured event with benefits payable if the insured event did not occur.

The Group issues only non-life insurance to individuals and businesses. Non-life insurance products offered by the Group are Motor Vehicle, Motorcycle and Taxi insurance. These products offer protection of a policyholder's assets and indemnification of other parties that have suffered damage as a result of a policyholder's accident.

In the normal course of business, the Group uses reinsurance to mitigate its risk exposures. A reinsurance contract transfers significant risks if it transfers substantially all of the insurance risk resulting from the insured portion of the underlying insurance contacts, even if it does not expose the reinsurer to the possibility of a significant loss.

B. Insurance and reinsurance contracts accounting treatment

(i)   Separating components from insurance and reinsurance contracts

The Group assesses its non-life insurance and reinsurance products to determine whether they contain distinct components which must be accounted for under another IFRS instead of under IFRS 17. After separating any distinct components, the Group applies IFRS 17 to all remaining components of the (host) insurance contract. Currently, the Group's products do not include any distinct components that require separation.

(ii)  Aggregation and recognition of insurance and reinsurance contracts

Insurance contracts

Insurance contracts are aggregated into groups for measurement purposes. Groups of insurance contracts are determined by identifying portfolios of insurance contracts, each comprising contracts subject to similar risks and managed together, and dividing each portfolio into annual cohorts (i.e. by year of issue) and each annual cohort into three groups based on the expected profitability of contracts:

-   Any contracts that are onerous on initial recognition

-   Any contracts that, on initial recognition, have no significant possibility of becoming onerous subsequently

-   Any remaining contracts in the annual cohort

The Group recognises groups of insurance contracts it issues from the earliest of:

-   The beginning of the coverage period of the group of contracts

-   When the first payment from a policyholder in the group becomes due or when the first payment is received if there is no due date

-   When facts and circumstances indicate that the contract is onerous

The Group adds new contracts to the group in the reporting period in which that contract meets one of the criteria set out above.

The profitability of groups of contracts is assessed by actuarial valuation models that take into consideration existing and new business. The Company assumes that no contracts in the portfolio are onerous at initial recognition unless facts and circumstances indicate otherwise. For contracts that are not onerous, the Company assesses, at initial recognition, that there is no significant possibility of becoming onerous subsequently by assessing the likelihood of changes in applicable facts and circumstances. The Company considers facts and circumstances to identify whether a group of contracts are onerous based on:

-   Pricing information

-   Results of similar contracts it has recognised

-   Environmental factors, e.g. a change in market experience or regulations

Reinsurance contracts

Some reinsurance contracts provide cover for underlying contracts that are included in different groups. However, the Group concludes that the reinsurance contract's legal form of a single contract reflects the substance of the Group's contractual rights and obligations, considering that the different covers lapse together and are not sold separately. As a result, the reinsurance contract is not separated into multiple insurance components that relate to different underlying groups.

The Group recognises a group of reinsurance contracts held at the earlier of the following:

-   The beginning of the coverage period of the group of reinsurance contracts held

-   The date the Group recognises an onerous group of underlying insurance contracts if the Group entered into the related reinsurance contract held in the group of reinsurance contracts held at or before that date

The Group adds new contracts to the group in the reporting period in which that contract meets one of the criteria set out above.

(iii)  Measurement

Summary of measurement approaches

The Group uses the following measurement approaches to its insurance and reinsurance contacts.

The Group applies the premium allocation approach to all the insurance contracts that it issues and reinsurance contracts that it holds, as the coverage period of each contract in the group is one year or less, including insurance contract services arising from all premiums within the contract boundary. The Group does not expect significant variability in the fulfilment cash flows that would affect the measurement of the liability for remaining coverage during the period before a claim is incurred.

All the Group's insurance contracts have a coverage period of one year or less. The Group's reinsurance contracts held are excess of loss contracts and are loss occurring. The Group does not issue any reinsurance contracts.

Insurance contracts issued

On initial recognition of each group of contracts, the carrying amount of the liability for remaining coverage ("LRC") is measured at:

-   The premiums received on initial recognition

-   Minus any insurance acquisition cash flows allocated to the group at that date

-   Adjusted for any amount arising from the derecognition of any assets or liabilities previously recognised for cash flows related to the group (including assets for insurance acquisition cash flows)

The Group has chosen not to expense insurance acquisition cash flows when they are incurred.

Subsequently, the Group measures the carrying amount of the LRC at the end of each reporting period as the LRC at the beginning of the period:

-   Plus premiums received in the period

-   Minus insurance acquisition cash flows

-   Plus any amounts relating to the amortisation of insurance acquisition cash flows recognised as an expense in the reporting period

-   Minus the amount recognised as insurance revenue for the services provided in the period

On initial recognition of each group of contracts, the Group expects that the time between providing each part of the services and the related premium due date is no more than a year. Accordingly, the Group has chosen not to adjust the liability for remaining coverage to reflect the time value of money and the effect of financial risk.

If at any time during the coverage period, facts and circumstances indicate that a group of contracts is onerous, then the Group recognises a loss in Profit or Loss and increases the liability for remaining coverage to the extent that the current estimates of the fulfilment cash flows that relate to remaining coverage exceed the carrying amount of the liability for remaining coverage. The fulfilment cash flows are discounted (at current rates) if the liability for incurred claims is also discounted.

The Group recognises the liability for incurred claims ("LIC") of a group of insurance contracts at the amount of the fulfilment cash flows ("FCF") relating to incurred claims. The fulfilment cash flows are discounted (at current rates) unless they are expected to be paid in one year or less from the date the claims are incurred.

The carrying amount of a group of insurance contracts issued at the end of each reporting period is the sum of:

-   The LRC

-   The LIC

Risk adjustment for non-financial risk

An explicit risk adjustment for non-financial risk is estimated separate from the other estimates. Unless contracts are onerous, the explicit risk adjustment for non-financial risk is only estimated for the measurement of the LIC.

This risk adjustment represents the compensation that the Group requires for bearing the uncertainty about the amount and timing of cash flows that arise from non-financial risk. Non-financial risk is risk arising from insurance contracts other than financial risk, which is included in the estimates of future cash flows or the discount rate used to adjust the cash flows. The risks covered by the risk adjustment for non-financial risk are insurance risk and other non-financial risks such as lapse risk and expense risk.

The risk adjustment for non-financial risk for insurance contracts measures the compensation that the Group would require to make it indifferent between:

-   Fulfilling a liability that has a range of possible outcomes arising from non-financial risk

-   Fulfilling a liability that will generate fixed cash flows with the same expected present value as the insurance contracts

Reinsurance contracts held

The excess of loss reinsurance contracts held provide coverage on the motor insurance contracts originated for claims incurred during an accident year and are accounted for under the PAA. The Group measures its reinsurance assets for a group of reinsurance contracts that it holds on the same basis as insurance contracts that it issues. For reinsurance contracts held, on initial recognition, the Group measures the remaining coverage at the amount of ceding premiums paid. For reinsurance contracts held, at each of the subsequent reporting dates, the remaining coverage is:

-   Increased for ceding premiums paid in the period

-   Decreased for the amounts of ceding premiums recognised as reinsurance expenses for the services received in the period

Assets for reinsurance contracts consist of the asset for remaining coverage ("ARC") and the asset for incurred claims ("AIC") being the reinsurers' share of claims that have already been incurred.

For reinsurance contracts held, the risk adjustment for non-financial risk presents the amount of risk being transferred by the Group to the reinsurer.

Asset for insurance acquisition cash flows

The Group includes the following acquisition cash flows within the insurance contract boundary that arise from selling, underwriting and starting a group of insurance contracts and that are:

a.   Costs directly attributable to individual contracts and groups of contracts

b.   Costs directly attributable to the portfolio of insurance contracts to which the group belongs, which are allocated on a reasonable and consistent basis to measure the group of insurance contracts

Insurance acquisition cash flows arising before the recognition of the related group of contracts are recognised as an asset. Insurance acquisition cash flows arise when they are paid or when a liability is required to be recognised under a standard other than IFRS 17. Such an asset is recognised for each group of contracts to which the insurance acquisition cash flows are allocated. The asset is derecognised, fully or partially, when the insurance acquisition cash flows are included in the measurement of the group of contracts.

Recoverability assessment

At each reporting date, if facts and circumstances indicate that an asset for insurance acquisition cash flows may be impaired, then the Group:

a.   Recognises an impairment loss in Profit or Loss so that the carrying amount of the asset does not exceed the expected net cash inflow for the related group

b.   If the asset relates to future renewals, recognises an impairment loss in Profit or Loss to the extent that it expects those insurance acquisition cash flows to exceed the net cash inflow for the expected renewals and this excess has not already been recognised as an impairment loss under (a)

The Group reverses any impairment losses in Profit or Loss and increases the carrying amount of the asset to the extent that the impairment conditions have improved.

Modification and derecognition

The Group derecognises insurance contracts when:

-   The contract is extinguished (i.e. when the obligation specified in the insurance contract expires or is discharged or cancelled)

-   The contract is modified and certain additional criteria are met

When an insurance contract is modified by the Group as a result of an agreement with the counterparties or due to a change in regulations, the Group treats changes in cash flows caused by the modification as changes in estimates of the FCF, unless the conditions for the derecognition of the original contract are met. The Group derecognises the original contract and recognises the modified contract as a new contract if any of the following conditions are present:

a.   If the modified terms had been included at contract inception and the Group would have concluded that the modified contract:

i. Is not in scope of IFRS 17

ii. Results in different separable components

iii. Results in a different contract boundary

iv. Belongs to a different group of contracts

b.   The original contract was accounted for under the PAA, but the modification means that the contract no longer meets the eligibility criteria for that approach

When an insurance contract accounted for under the PAA is derecognised, adjustments to the FCF to remove relating rights and obligations and account for the effect of the derecognition result in the following amounts being charged immediately to Profit or Loss:

a.   If the contract is extinguished, any net difference between the derecognised part of the LRC of the original contract and any other cash flows arising from extinguishment

b.   If the contract is transferred to the third party, any net difference between the derecognised part of the LRC of the original contract and the premium charged by the third party

c.   If the original contract is modified resulting in its derecognition, any net difference between the derecognised part of the LRC and the hypothetical premium the entity would have charged had it entered into a contract with equivalent terms as the new contract at the date of the contract modification, less any additional premium charged for the modification

(iv)  Presentation

The Group has presented separately, in the Statement of Financial Position, the carrying amount of portfolios of insurance contracts issued and portfolios of reinsurance contracts held.

The Group has elected to disaggregate part of the movement in LIC resulting from the changes in discount rates and present this in the Statement of Comprehensive Income. The Group disaggregates the total amount recognised in the Profit or Loss Account and the Statement of Comprehensive Income into an insurance service result, comprising insurance revenue and insurance service expense, and insurance finance income or expenses.

The Group does not disaggregate the change in risk adjustment for non-financial risk between a financial and non-financial portion and includes the entire change as part of the insurance service result.

The Group separately presents income or expenses from reinsurance contracts held from the expenses or income from insurance contracts issued.

AMOUNTS RECOGNISED IN THE STATEMENT OF PROFIT OR LOSS

Insurance service result from insurance contracts issued

Insurance revenue

As the Group provides insurance contract services under the group of insurance contracts, it reduces the LRC and recognises insurance revenue. The amount of insurance revenue recognised in the reporting period depicts the transfer of promised services at an amount that reflects the portion of consideration that the Group expects to be entitled to in exchange for those services.

The Group measures all insurance contracts under the PAA and recognises insurance revenue based on the passage of time over the coverage period of a group of contracts.

Insurance service expenses

Insurance service expenses include the following:

-   Incurred claims and benefits

-   Other incurred directly attributable expenses

-   Amortisation of insurance acquisition cash flows

-   Changes that relate to past service - changes in the FCF relating to the LIC

-   Changes that relate to future service - changes in the FCF that result in onerous contract losses or reversals of those losses

Amortisation of insurance acquisition cash flows is based on the passage of time.

Other expenses not meeting the above categories are included in other operating expenses in the Profit or Loss Account.

Insurance service result from reinsurance contracts held

Net income/(expense) from reinsurance contracts held

The Group presents separately on the face of the Profit or Loss Account and the Statement of Comprehensive Income, the amounts expected to be recovered from reinsurers, and an allocation of the reinsurance premiums paid. The net income/(expense) from reinsurance contract held comprise:

-   Reinsurance expenses

-   For groups of reinsurance contracts measured under the PAA, broker fees are included within reinsurance expenses

-   Incurred claims recovery

-   Other incurred directly attributable expenses

-   Changes that relate to past service - changes in the FCF relating to incurred claims recovery

-   Effect of changes in the risk of reinsurers' non-performance

-   Amounts relating to accounting for onerous groups of underlying insurance contracts issued

Reinsurance expenses are recognised similarly to insurance revenue. The amount of reinsurance expenses recognised in the reporting period depicts the transfer of received insurance contract services at an amount that reflects the portion of ceding premiums that the Group expects to pay in exchange for those services. Broker fees are included in reinsurance expenses.

All groups of reinsurance contracts held are measured under the PAA and reinsurance expenses are recognised based on the passage of time over the coverage period of a group of contracts.

AMOUNTS RECOGNISED IN THE STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

Insurance finance income or expenses

Insurance finance income or expenses comprise the change in the carrying amount of the group of insurance contracts arising from:

-   The effect of the time value of money and changes in the time value of money

-   The effect of financial risk and changes in financial risk

For contracts measured under the PAA, the main amounts within insurance finance income or expenses are:

a.   Interest accreted on the LIC

b.   The effect of changes in interest rates and other financial assumptions

The Group disaggregates insurance finance income or expenses on motor insurance contracts issued between Profit or Loss and OCI. The impact of changes in market interest rates on the value of the insurance assets and liabilities are reflected in OCI in order to minimise accounting mismatches between the accounting for financial assets and insurance assets and liabilities. The Group's financial assets backing the motor insurance portfolios are predominantly measured at FVOCI.

Risk management

Refer to Notes 3.6 and 3.7 for detail on risks relating to insurance liabilities and reinsurance assets, and the management thereof.

critical accounting estimates and judgements

Management considers that their use of estimates, assumptions and judgements in application of the Group's accounting policies are inter-related and therefore discuss them together with the major sources of estimation uncertainty and critical judgements separately identified.

The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. The Group based its assumptions and estimates on parameters available when the financial statements were prepared. Existing circumstances and assumptions about future developments, however, may change due to market changes or circumstances arising that are beyond the control of the Group. Such changes are reflected in the assumptions when they occur. The Group disaggregates information to disclose major product lines namely, Motor Vehicle, Motorcycle and Taxi.

The Group applies the PAA to simplify the measurement of insurance contracts. When measuring liabilities for remaining coverage, the PAA is broadly similar to the Group's previous accounting treatment under IFRS 4. However, when measuring liabilities for incurred claims, the Group now discounts cash flows that are expected to occur more than one year after the date on which the claims are incurred and includes an explicit risk adjustment for non-financial risk.

A. Liability for remaining coverage ("LRC")

Insurance acquisition cash flows

The Group applies judgement in determining the inputs used in the methodology to systematically and rationally allocate insurance acquisition cash flows to groups of insurance contracts. This includes judgements about the amounts allocated to insurance contracts expected to arise from renewals of existing insurance contracts in a group and the volume of expected renewals from new contracts issued in the period.

At the end of each reporting period, the Group revisits the assumptions made to allocate insurance acquisition cash flows to groups and where necessary revises the amounts of assets for insurance acquisition cash flows accordingly.

Critical estimates

In determining the liability for remaining coverage, the Group considers the term over which insurance policies apply, the distribution of expected claims occurrence during the life of those policies and, in determining whether or not a group of contracts is onerous, the expected profitability of each group of contracts written. The profitability of each group of contracts is estimated with reference to:

- Underwriting performance to date for each group of contracts

- The strategic goals assigned to each group of contracts, including target underwriting performance

- Projections of changes to underwriting performance resulting from pricing decisions taken during the life of each group of contracts

B. Liability for incurred claims ("LIC")

The ultimate cost of outstanding claims is estimated by using a range of standard actuarial claims projection techniques, such as Chain Ladder and Bornheutter-Ferguson methods.

The main assumption underlying these techniques is that a Group's past claims development experience can be used to project future claims development and hence ultimate claims costs. These methods extrapolate the development of paid and incurred losses, average costs per claim (including claims handling costs), and claim numbers based on the observed development of earlier years and expected loss ratios. Historical claims development is mainly analysed by accident years, but can also be further analysed by geographical area, as well as by significant business lines and claim types. Large claims are usually separately addressed, either by being reserved at the face value of loss adjuster estimates or separately projected in order to reflect their future development. In most cases, no explicit assumptions are made regarding future rates of claims inflation or loss ratios. Instead, the assumptions used are those implicit in the historical claims development data on which the projections are based. Additional qualitative judgement is used to assess the extent to which past trends may not apply in future, (e.g., to reflect one-off occurrences, changes in external or market factors such as public attitudes to claiming, economic conditions, levels of claims inflation, judicial decisions and legislation, as well as internal factors such as portfolio mix, policy features and claims handling procedures) in order to arrive at the estimated ultimate cost of claims that present the probability weighted expected value outcome from the range of possible outcomes, taking account of all the uncertainties involved.

The Group has the right to pursue third parties for payment of some or all costs. Estimates of salvage recoveries and subrogation reimbursements are considered as an allowance in the measurement of ultimate claims costs. Other key circumstances affecting the reliability of assumptions include variation in interest rates and delays in settlement.

Critical estimates

The critical estimates in calculating the LIC are the amount and timing of future claims payments in relation to claims already incurred. This is primarily assessed with reference to past performance, including past settlement patterns, as per the actuarial methodology outlined above. This includes estimating the likely changes in inflation as relates to claims already incurred, as well as the expected frequency of claims which have occurred but which have not yet been reported. The ongoing cost of handling claims already incurred is estimated with reference to the historical cost-per-claim calculated over the past 12 months.

C. Discount rates

Insurance contract liabilities are calculated by discounting expected future cash flows at a risk-free rate, plus an illiquidity premium where applicable. Risk-free rates are determined by reference to the yields of highly liquid AAA-rated sovereign securities in the currency of the insurance contract liabilities. The illiquidity premium is determined by reference to observable market rates.

Discount rates applied for discounting of future cash flows are listed below:

Critical estimates

The discount rate is determined as the risk-free rate adjusted for an illiquidity premium. The risk-free rate is determined using the Solvency II risk-free rate sourced from the Bank of England. The illiquidity premium represents the differences in liquidity characteristics between the financial assets used to derive the risk-free rate and the relevant liability cash flows.

D. Risk adjustment for non-financial risk

The risk adjustment for non-financial risk is the compensation that the Group requires for bearing the uncertainty about the amount and timing of the cash flows of groups of insurance contracts. The risk adjustment reflects an amount that an insurer would rationally pay to remove the uncertainty that future cash flows could vary from the expected value amount.

Critical estimates

The Company has estimated the risk adjustment using a methodology which targets a confidence level (probability of sufficiency) approach between the 80th and 85th percentile. At 31 December 2023, the risk margin applied equates to an approximate confidence interval of 81.3% (31 December 2022: 82.0%) That is, the Company has assessed its indifference to uncertainty for all product lines (as an indication of the compensation that it requires for bearing non-financial risk) as being equivalent to the 80th to 85th percentile confidence level less the mean of an estimated probability distribution of the future cash flows. The Company has estimated the probability distribution of the future cash flows, and the additional amount above the expected present value of future cash flows required to meet the target percentiles.

3.1.  Composition of the Statement of Financial Position

An analysis of the amounts presented on the Statement of Financial Position for insurance contacts is included in the table below.

(1) See Note 1.3.1 IFRS 17 "Insurance Contracts"