Half-year Report

Hastings Group Holdings plc

Interim results announcement for the six months ended 30 June 2018

8 August 2018

Hastings Group Holdings plc (the 'Group', or 'Hastings'), the technology driven insurance provider, today announces its interim results for the six months ended 30 June 2018.

Hastings' strong results and continued profitable growth in a competitive market demonstrates the agility, digital focus and underwriting discipline that has driven the growth of the Group from a market disruptor in 2011 into the successful listed group that it is today.

Financial highlights

· Sustained growth of live customer policies to 2.70 million as at 30 June 2018, a 6% year on year increase (30 June 2017: 2.54 million).

· Increased share of the UK private car insurance market to 7.5% as at 30 June 2018 (30 June 2017: 7.0%).

· Continued growth in gross written premiums of 5% to £485.6m for the six months ended 30 June 2018 (30 June 2017: £462.0m).

· A 9% increase in net revenue to £376.3m for the six months ended 30 June 2018 (30 June 2017: £345.2m).

· Strong growth in adjusted operating profit1 up 22% to £105.1m (30 June 2017: £86.5m) after including £14.6m of prior year VAT recovery and £7.0m impact from adverse weather in the first quarter, or up 13% to £97.5m before the adverse weather and prior year VAT.

· Underwriting discipline maintained during a period of market price reductions, with the Group's average written premiums 2% above the six months ended 30 June 2017.

· Calendar year loss ratio2 for the period ended 30 June 2018 of 73.8% (30 June 2017: 73.4%), better than the target range of between 75% and 79%, despite the claims impact from adverse weather experienced in the first quarter.

· Continued reduction in net debt leverage multiple3 to 1.1x adjusted operating profit at 30 June 2018 (31 December 2017: 1.4x) and achieved target level of around 1.0x during the six months to 30 June 2018.

· Diversification of debt structure with a successful 7 year £250m investment grade senior bond issue, replacing funds drawn under the Revolving Credit Facility and providing longer term financing and protection from interest rate increases.

· Strong solvency position, with a Solvency II coverage ratio of 171% (31 December 2017: 167%).

· Significant increase in free cash generated, up £42.0m to £107.8m for the six months to 30 June 2018 (30 June 2017: £65.8m).

· Interim dividend for 2018 of 4.5p per share (30 June 2017: 4.1p per share), 10% higher than last year. Achieving the leverage target in the period allows a move towards a policy of increasing distributions to shareholders over time.

Operational highlights

· Continuing phased rollout of the next generation Guidewire platform, with home policies now live on selected price comparison websites and car renewals migration underway. Guidewire will enable continued delivery of operational efficiencies.

· Market leading anti-fraud programme enhanced with Iovation digital fraud tracking and action taken against over 30 ghost broking rings so far this year.

· Introduction of a new mobile app and enhanced functionality on customer portal enabling 80% of policy changes to be made online and as of May 2018, digital customer contacts now exceed telephone contacts.

· Additional digital capability for total loss claims processing rolled out as the customer journey continues to be simplified and electronic claims notification currently in testing.

· Joined a partnership with the UK Smart Mobility Living Lab, a working group of select brands focusing on research and development in vehicle technology and the future of personal mobility solutions.

· RAC strategic partnership now live, providing market leading breakdown service to customers and to be included as standard cover for the Hastings Premier product.

Notes1,2&3 refer to the end of the Business highlights section for definitions and explanations.

Toby van der Meer, Chief Executive Officer, commented:

"I am pleased to announce a strong set of results for the first half of 2018 that has seen us grow our customer numbers to 2.7 million and adjusted operating profit by 22% to £105.1m. This has been in an environment where we have seen market prices come down from the highs of 2017, driven by lower claims frequencies, the prospect of regulatory reform, and competition. We have also seen adverse weather, continued fraud activity across the market, and some increase in the cost of repairs and mid-range bodily injury claims, resulting in a claims inflation outlook for the full year towards the upper end of a 3% to 5% range.

"We remain excited about the future - a fast moving and increasingly digital landscape plays to our strengths. Our capabilities in agile pricing, analytics and anti-fraud combined with our disciplined underwriting and strong capital position means we are well positioned to continue to identify and grow in profitable parts of the market. These core attributes have transformed our business from a small disruptor in 2011 into the household name we are today and will continue to drive our strategy in a large market with over 50 million car and home policies.

"Looking forward, we will continue to invest in technology. Alongside the continued rollout and enhancements to our core Guidewire platform, we have developed new digital capabilities over the last few months and very recently, launched our new Hastings mobile app. Our pricing and anti-fraud platforms also continue to develop and we have identified and taken action against over 30 different fraud rings so far this year. Today we are also announcing our participation in a mobility and vehicle technology research programme alongside a range of other partners from the automotive and mobility sectors.

"Our strong financial position and continuing cash generation means we are declaring an interim dividend of 4.5p per share, a 10% increase over last year and allows us to move towards a policy of increasing distributions to shareholders over time now our leverage target has been achieved.

We remain on track to meet all our 2019 targets and I would like to thank my 3,400 colleagues for what they do for our customers and each other, every day. It is their hard work, passion and commitment that has achieved a set of results that we can all be proud of."

Outlook statement

The Group has continued to deliver profitable growth over the six months to 30 June 2018 and the Board is pleased to confirm that Hastings is well positioned to deliver in line with all of its targets during 2019 despite the competitive market and expected claims inflation.

Webcast

The Group will host an update webcast for investors and analysts at 9:00am BST on 8 August 2018. Details are available on the Group's website www.hastingsplc.com. 

Forward looking statements

This results announcement, and associated presentation and conference calls, may contain forward looking statements, including statements about market trends and our strategy, investments, future operations, industry forecasts, regulatory framework and levels of leverage and indebtedness. Forward looking statements provide our current expectations, intentions or forecasts of future events. Forward looking statements include statements about expectations, beliefs, plans, objectives, intentions, assumptions and other statements that are not statements of historical fact. Words or phrases such as "anticipate", "believe", "continue", "ongoing", "estimate", "expect", "intend", "may", "plan", "potential", "predict", "project", "target", "seek" or similar words or phrases, or the negatives of those words or phrases, may identify forward looking statements, but the absence of these words does not necessarily mean that a statement is not forward looking.

Forward looking statements are subject to known and unknown risks and uncertainties and are based on potentially inaccurate assumptions that could cause actual results to differ materially from those expected or implied by the forward looking statements. Our actual results could differ materially from those anticipated in our forward looking statements for many reasons, including the factors described in the section entitled "Managing our risks" in our 2017 Annual Report. In addition, even if our actual results are consistent with the forward looking statements, those results or developments may not be indicative of results or developments in subsequent periods.

For more information, please contact:

Hastings Group  

Instinctif Partners  

Giles Stewart

T: +44 (0)207 457 2020 [email protected]

Business review

Hastings has demonstrated the continued success of its digital business model and agile pricing as the Group reports another period of profitable growth in an environment of reducing premiums. Hastings has grown gross written premiums by 5% over a very strong 2017, and increased its market share of UK private car insurance to 7.5% by continuing to find value in a competitive market without compromising its underwriting discipline or loss ratio target. As a result, the Group has grown adjusted operating profit by 22% to £105.1m, or 13% to £97.5m before adverse weather and additional input VAT recoverable on prior years.

Since Autumn 2017, there have been announcements of regulatory reform including proposed revisions to the compensation tariff intended to reduce whiplash claims and a proposed change to the method for calculating the Ogden discount rate used to determine large bodily injury claims payments. These changes are expected to reduce claims costs and as a result, have put downward pressure on average motor premiums in the market. The competitive nature of the market, combined with these expectations, have led to reductions in market average motor premiums during the 6 months to 30 June 2018, after a period of significant growth.

Hastings' track record of profitable growth shows that the Group is able to sustain growth throughout the insurance pricing cycle. The average written premium inflation Hastings achieved of 2% over the 6 months to 30 June 2017 is a positive given the current pricing pressures across the market, but this is behind the claims inflation the Group continues to experience. The current expectation is that claims inflation will be towards the high end of the 3% to 5% range for the full year given the adverse weather in the first quarter and general trend of frequencies stabilising but severities of accidental damage and mid-range bodily injury cost increasing. Hastings continues to prioritise underwriting discipline, and the loss ratio is expected to be just below, or at the lower end of, the target range of 75% to 79% for the full year.

The Group has seen slightly higher growth in live customer policies ('LCP') in the second quarter of 2018, with a 0.8% increase from 2.64 million at 31 December 2017 in the 3 months to 31 March 2018, and a 1.3% increase in the 3 months to 30 June 2018. Hastings continues to benefit from the growing Price Comparison Websites ('PCW') market with the Group's share of PCW new business remaining broadly stable. This digital focus combined with sophisticated and agile pricing, investment in new initiatives, the continued but cautious roll out of home underwriting and the addition of new home panel underwriters, means the Group remains well placed to deliver all of its targets during 2019. Current progress towards these targets is as follows:

The Board has declared an interim dividend of 4.5p, an increase of 10%, reflecting confidence in the strength of the business and the outlook for 2018. Importantly, during the 6 months to 30 June 2018 the Group achieved its target of a net debt leverage multiple of around 1.0x. Following the successful issue of the investment grade Bond in May 2018, the Group has stable and secure debt funding and expects to maintain its net debt leverage multiple around this number going forward. This allows a move towards a policy of increasing distributions to shareholders over time.

Hastings products have again been recognised by customers, with the Group's Hastings Direct, Hastings Premier, Hastings Direct SmartMiles, InsurePink and People's Choice car insurance products all being awarded Moneyfacts five star ratings as voted for by customers.

Hastings continues to invest in digital, and during 2018, the Group enhanced the functionality of the online portal, launched a new online chat service and released the new Hastings mobile app. Customers are now able to make 80% of policy changes digitally, resulting in digital contacts from customers exceeding traditional telephone contacts for the first time in May 2018. The Group also rolled out its digital total loss tool which provides customers with a quick and easy online claims settlement journey, and set a new internal record for settling a total loss claim in around 23 minutes from notification.

These successes, which will benefit customers and generate efficiencies, have all been achieved through the continuing investment in the new Guidewire platform and supporting technologies, and the commitment and diligence of all of the colleagues involved.

The Group continues to enhance 'Insight', its market leading fraud detection programme designed to combat fraud at the point of quote, point of sale and point of claim. During 2018, the programme has been instrumental in identifying and taking action against over 30 ghost broking rings trying to set up fake policies to defraud genuine customers. This has resulted in the conviction and custodial sentencing of one prolific ghost broker and provides a serious deterrent to other fraudsters. This effective fraud prevention guards against paying erroneous claims and therefore protects customers from unnecessarily high premiums.

Hastings increased its headcount, which grew from 2,900 in June 2017 to 3,400, with over 1,400 in Leicester, and aims to be an employer of choice in each of the areas it operates. Colleagues are encouraged to work as flexibly as their role allows and the Group is currently in the process of establishing a long term outsourcing partnership with OUTsurance, to provide additional support and help fill less popular shifts.

The Group's successful profitable growth for the period is reflected in its KPIs which are defined on pages 24 to 26 of the Hastings Group Holdings plc 2017 Annual Report and summarised below:

Financial review

Summary consolidated statement of profit or loss

Continued growth in live customer policies ('LCP') combined with the earn through of average written premium increases and a VAT refund in respect of prior periods, have driven the 26% growth in profit after tax from £57.9m to £72.9m for the six months ended 30 June 2018 and a 22% growth in adjusted operating profit to £105.1m for the six months to 30 June 2018 (30 June 2017: £86.5m).

During the period, the First-tier Tribunal found in favour of the Group in proceedings brought by Hastings Insurance Services Limited ('HISL') as to whether insurance intermediary supplies provided by HISL and received by Advantage Insurance Company Limited ('AICL') should be treated as outside the scope of VAT. This decision resulted in £14.6m of input VAT incurred in prior periods becoming recoverable and a corresponding reduction in other operating expenses. The current year results have also been impacted by the unusually severe weather experienced in the UK during February and March, reducing the Group's adjusted operating profit by £7.0m. Before the VAT refund in respect of prior periods and the impact of the severe weather, adjusted operating profit was £97.5m, a 13% increase on the six months ended 30 June 2017.

Gross written premiums have increased by 5%, principally driven by private car policy count as Hastings continued to grow market share to 7.5% through new business and above market retention. The Group's agile pricing and digital distribution model combined with the continued penetration of PCW provides plenty of opportunity for additional growth in private car market.

Home LCP remain broadly in line with the prior period at 168,000 (30 June 2017: 175,000) as the Group rolls out its digital business model to the home insurance market. During the second half of 2017, AICL began underwriting business as the lead insurer on a small number of home policies and this proposition continues to be cautiously rolled out to customers to ensure that a disciplined underwriting approach is applied. The Group expects to benefit from the continued rollout of Guidewire to home customers and 3 new underwriters are ready to join the home panel during the second half of 2018 to provide further capacity for growth.

Net revenue has grown by 9% to £376.3m for the period (30 June 2017: £345.2m) through growth in earned premium and broking revenue streams.

Sustained growth in LCP and the earn through of higher average written premiums increased net earned premiums by 12% to £219.2m over the prior period (30 June 2017: £195.1m).

The growth in policies sold has also led to increased fees on the sale of insurance contracts. Premium finance interest income benefitted from the combination of higher average premiums and a continued increase in the number of customers paying in monthly instalments.

Reinsurance commissions reflect the growth in ceded premiums, on which commission is paid, offset by the higher loss ratio experienced following the adverse weather in February and March.

As a result of 'Storm Emma' and the 'Beast from the East', the Group has incurred an additional £7.0m weather-related claims costs in Q1 2018 relative to Q1 2017. This has contributed to an accident year loss ratio of 75.2% compared with 74.1% for the six months ended 30 June 2017. The Group is experiencing claims inflation of around 5% per annum and anticipates claims inflation for the full year at the higher end of the 3%-5% range previously advised.

Positive prior year development of £3.1m (30 June 2017: £1.4m) reduced the reported calendar year loss ratio to 73.8% (30 June 2017: 73.4%), which remains better than the Group's target range of 75-79%.

Before the impact of the 'Beast from the East' and 'Storm Emma', the Group experienced an accident year loss ratio and calendar year loss ratio of 73.6% and 72.2% respectively.

The expense ratio for the period remained flat as the Group continued to invest in the business, including Guidewire and claims management capabilities to support future growth and efficiencies and the combined operating ratio increased in line with the increase in the calendar year loss ratio.

Adjusted operating profit increased 22% to £105.1m (30 June 2017: £86.5m) reflecting LCP growth and earn through of higher average premiums, partially offset by £7.0m of additional claims costs as a result of the adverse weather events experienced in February and March 2018. In addition, the Group recognised £14.6m of additional input VAT recoverable on prior years, reducing other operating expenses for the period.

The interim dividend for the six months ended 30 June 2018 is £29.6m (30 June 2017: £26.9m), a payout of 4.5 pence per share (30 June 2017: 4.1p per share). This dividend is in line with the Group's target of paying between 50% and 60% of adjusted profit after tax in dividends.

The Group's net asset position has continued to strengthen, increasing from £612.9m as at 31 December 2017 to £626.2m as at 30 June 2018. This has been driven through profits retained within the business, after dividend payments of £55.9m.

In addition to increasing retained earnings, the sustained growth of the business has driven the increase in working capital, insurance contract liabilities and related reinsurance assets.

The Group's return on capital employed increased reflecting the 22% growth in net income. Capital employed in the Underwriting business increased as capital generated from the profitable growth in LCP was retained in the business further strengthening its strong solvency position.

Continued growth of adjusted operating profit, combined with the Group's strong cash generation has resulted in a fall in the net debt leverage multiple to 1.1x, compared with 1.4x as at 31 December 2017 (30 June 2017: 1.7x).

The following table shows the net debt movement for the period:

The Group's activities have been highly cash generative over the period with £107.8m of Group free cash generated (30 June 2017: £65.8m). Group free cash generated comprises Retail free cash generated of £67.8m, which includes £10.3m of cash received in respect of the historic VAT refund, (30 June 2017: £61.8m) and record dividends declared by the Underwriting business of £40.0m (30 June 2017: £4.0m). These significant cash inflows were partially offset by dividend payments, interest and loan repayments and capital expenditure, principally on the development of the Guidewire system.

The Group successfully issued £250m of investment grade 7 year senior bonds (the 'Bond') with a fixed interest rate of 3% to provide committed, longer term financing and reduce exposure to interest rate movements. Together with free cash generated by the business, the Bond proceeds were used to fully repay the balance outstanding under the Revolving Credit Facility ('RCF'). Consequently, the RCF commitment was reduced to £110m and the term extended to May 2023.

The Group's conservative investment strategy primarily focuses on capital preservation and seeks to align the duration of the assets with the underlying insurance liabilities. As at 30 June 2018, the Group's percentage of the total portfolio of investments rated A or equivalent and above was 74% (31 December 2017: 75%). The weighted average credit rating of the investment portfolio continued to be A+ (31 December 2017: A+).

The Group's cash and cash equivalents and investment portfolio primarily comprises investment grade fixed income debt securities, money market funds and investment funds managed by third parties.

Total insurance contract liabilities of £1,791.8m at 30 June 2018 (31 December 2017: £1,665.6m) comprise £490.7m (31 December 2017: £472.3m) of unearned premiums, which are deferred and recognised in the statement of profit or loss in subsequent periods, and outstanding claims liabilities of £1,301.1m (31 December 2017: £1,193.3m). Gross outstanding claims liabilities have increased due to the greater exposure from the increase in LCP and the impact of claims inflation.

The Group applies a consistent reserving methodology to calculate an internal actuarial best estimate and an additional risk margin.

The Group's reinsurance programme, described below, manages insurance risk and protects against volatile movements typically caused by large bodily injury claims.

Reinsurance assets, comprising reinsurers' share of outstanding claims liabilities and unearned premiums, increased to £1,199.6m as at 30 June 2018 (30 June 2017: £952.1m) due to greater exposure from the increase in LCP and the increase in costs of bodily injury claims.

The Group uses excess of loss and quota share reinsurance arrangements to limit its exposure to claims. The excess of loss programme limits the Group's exposure on any individual event to £1.0m and the quota share arrangement provides 50% cover on motor claims incurred, after the excess of loss recoveries. The combination of these arrangements reduces volatility that could otherwise be caused by individual large claims.

The Group carefully manages risk within the portfolio by working with a range of high quality, highly regarded and stable reinsurers. The Group's 2018 reinsurance programme has maintained the same level of coverage as in previous periods.

The table below presents the Underwriting business' unaudited Solvency II coverage ratio, calculated for Advantage Insurance Company Limited (AICL), the regulated entity on a standard formula basis with undertaking specific parameters applied:

The solvency ratio at 31 December 2017 was after taking into account the £40.0m anticipated dividend by AICL, which was proposed in February 2018 and paid during April 2018.

Notes

1 Adjusted operating profit is defined as profit before taxation expense, finance costs, amortisation and depreciation and non-trading costs.

2 Calendar year loss ratio is a measure of underwriting performance, representing net claims incurred divided by net earned premiums. Expense ratio is a measure of underwriting operational efficiency, representing incurred operational and acquisition expenses, net of certain reinsurance commissions, over net earned premiums. The combined operating ratio is a measure of the Group's overall underwriting performance and is the sum of the calendar year loss ratio and the expense ratio. See page 35 for a reconciliation of the calendar year loss ratio, expense ratio and combined operating ratio.

3 Net debt leverage multiple represents the Group's net debt expressed relative to 12 months trailing adjusted operating profit.

4 Adjusted profit after tax for the purposes of the dividend payout ratio is profit after tax adjusted to exclude the post-tax impact of non-trading items and share scheme costs.

5 Non-trading items are defined as expenses or earnings that are not representative of the operating activities of the Group and include Group reorganisation, refinancing and transaction costs and the impact of accounting for business combinations.

6 Net income is defined as profit after tax excluding the post-tax impact of non-trading items.

7 Hastings Insurance Services Limited ('HISL') and Advantage Insurance Company Limited ('AICL') deployed capital represents respectively the average of HISL's total capital resources as defined by Financial Conduct Authority ('FCA') regulations and the average of AICL's net assets during each year.

8 Retail free cash comprises cash held by the Retail business in excess of the regulatory capital required, which is not held on behalf of insurers. Corporate free cash comprises cash held in entities which are not subject to FCA or Solvency regulations. See page 36 for reconciliation of cash and cash equivalents to free cash and Group free cash generated.

9 Following a review of the management information prepared and reviewed on a monthly basis, LCP per FTE was no longer considered an insightful metric and therefore was removed from regular information provided to management with effect from 1 January 2018. This was therefore no longer considered a KPI and has not been provided.

Managing our risks

The Directors continue to review, assess and manage the principal risks facing the Group, including those that would threaten its business model, future performance, solvency or liquidity.

The Group continues to consider its material risks to be as follows:

1. Commercial performance risk (includes reinsurance risk, market risk, pricing risk and reserving risk): The risk of loss resulting from failure to meet the Group's strategic objectives and deliver the Three Year Plan.

2. Liquidity risk: The risk of loss resulting from an inability to meet financial commitments as they fall due.

3. Operational risk: The risk of loss resulting from inadequate or failed internal processes, people or systems and external events.

A full description of these risks, including the potential impact, monitoring and mitigations are set out on pages 43 - 50 of the Hastings Group Holdings plc 2017 Annual Report.

Condensed Consolidated Financial Statements

Condensed Consolidated Statement of Profit or Loss

for the six months ended 30 June 2018

All results arose from continuing operations.

The accompanying Notes form an integral part of these Condensed Consolidated Financial Statements.

1 Adjusted operating profit represents profit before taxation expense, finance costs, amortisation and depreciation and non-trading costs. This is a non-IFRS measure used by management to measure the underlying trading of the business and is provided for information.

Condensed Consolidated Statement of Comprehensive Income

for the six months ended 30 June 2018

The accompanying Notes form an integral part of these Condensed Consolidated Financial Statements.

Condensed Consolidated Balance Sheet

as at 30 June 2018

The accompanying Notes form an integral part of these Condensed Consolidated Financial Statements.

Condensed Consolidated Statement of Changes in Equity

for the six months ended 30 June 2018

The accompanying Notes form an integral part of these Condensed Consolidated Financial Statements.

Condensed Consolidated Statement of Cash Flows

for the six months ended 30 June 2018

The accompanying Notes form an integral part of these Condensed Consolidated Financial Statements.

Notes to the Condensed consolidated financial statements

1. Basis of preparation

Hastings Group Holdings plc's (the 'Company', 'Hastings', 'HGH') registered office and principal place of business is at Conquest House, Collington Avenue, Bexhill-on-Sea, TN39 3LW, United Kingdom. The Company's registered number is 09635183.

The Condensed Consolidated Financial Statements have been approved by the Directors and comprise the consolidated results of the Company and its subsidiaries (together referred to as the 'Group') for the six months ended 30 June 2018 and comparative figures for the six months ended 30 June 2017 and for the year ended 31 December 2017.

The Condensed Consolidated Financial Statements have been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU.

These Condensed Consolidated Financial Statements are not statutory accounts. The statutory accounts for the year ended 31 December 2017 were prepared in accordance with International Financial Reporting Standards as adopted by the EU ('IFRS'), have been audited and reported on by the Company's auditors and have been delivered to the Registrar of Companies. The auditors' report was:

(i) unqualified;

(ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report; and

(iii) did not contain a statement under section 498(2) or (3) of the Companies Act 2006.

The external auditors have reviewed the Condensed Consolidated Financial Statements in accordance with their report included on page 38. The Consolidated Financial Statements for the year ended 31 December 2017 are available on the Company website.

Principal activities

The principal activities of the Group are the broking and underwriting of UK private car, van, bike and home insurance.

Going concern

The financial performance and position of the Group, its cash flows, liquidity position and borrowing facilities are set out in the primary statements and the subsequent notes. Further analysis of the Group's operations, capital management strategy, risk management practices and growth strategy may be found in the Hastings Group Holdings plc 2017 Annual Report.

Having considered the foregoing items, the Group's approved budget and cash flow forecasts for the next 12 months and beyond, and after making enquiries, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the Condensed Consolidated Financial Statements.

Basis of measurement

The Condensed Consolidated Financial Statements are presented in Pounds Sterling. Amounts are rounded to the nearest million with one decimal place (ie £0.1m) except where otherwise indicated.

The Condensed Consolidated Financial Statements are prepared on the historical cost basis, except for certain financial assets and property which are measured at their fair value or revalued amounts.

Basis of consolidation

The Condensed Consolidated Financial Statements incorporate the financial statements of the Company and all of its subsidiary undertakings. Accounting policies have been consistently applied throughout the Group.

Subsidiaries are investees controlled by the Group. The Group controls an investee if it is exposed to, or has rights to, variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. The Group reassesses whether it has control if there are changes to one or more of the elements of control. Subsidiaries are consolidated from the date on which control commences until the date when control ceases. Intercompany balances and transactions are eliminated in the Condensed Consolidated Financial Statements.

d) IFRS developments

Amendments to IFRS 4 Insurance Contracts ('IFRS 4')

On 3 November 2017, the EU endorsed Amendments to IFRS 4: Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts, permitting entities with a predominance of insurance activities to defer the implementation of IFRS 9 from 1 January 2018 to 1 January 2021. The Group has applied this exemption as it allows the Group to align IFRS 9 implementation with IFRS 17 Insurance Contracts.

IFRS 15 Revenue from Contracts with Customers ('IFRS 15')

The Group implemented IFRS 15, which replaced IAS 18 Revenue, from 1 January 2018 and applied to insurance broking activities recognised from this date. Income from underwriting activities continues to be recognised in accordance with IFRS 4 Insurance Contracts.

IFRS 15 provides a five step framework for the recognition of revenue from contracts with customers and has resulted in broking income being allocated amongst performance obligations as defined by the standard.

The Group has used the cumulative effect method whereby comparatives are not restated and the cumulative impact of adjustments is recognised in the balance sheet at the date of initial application. The Group's revised accounting policy for revenue from insurance broking activities has been provided in Note 2 and transition disclosures are provided in Note 24.

IFRS 16 Leases ('IFRS 16')

The Group implemented IFRS 16 from 1 January 2018 and applied this to all leases and contracts containing leases entered into from 1 January 2018. For contracts entered into before 1 January 2018, the Group applied IFRS 16 accounting provisions to contracts that had already been recognised as operating leases under IAS 17 Leases ('IAS 17') and IFRIC 4 Determining whether an Arrangement contains a Lease ('IFRIC 4'), in accordance with the transition provisions.

IFRS 16 implements a single comprehensive lease accounting model for lessees, whereby lessees recognise leases on balance sheet. At the commencement of a lease, or contract containing a lease, the Group recognises a right of use asset and a lease liability on balance sheet. Subsequently, the asset is depreciated and interest is recognised on the liability.

The Group's lease contracts are primarily for the use of property and computer hardware. On transition, the Group used a modified retrospective method whereby comparatives have not been restated and the cumulative impact of opening balance adjustments is recognised in retained earnings at the date of initial application. The Group's revised accounting policy for leases has been provided in Note 2 and transition disclosures are provided in Note 24.

Issued accounting standards not yet adopted

Accounting standards or amendments to IFRS issued by the IASB that are not yet effective that could be expected to have a material impact on the Condensed Consolidated Financial Statements are included on page 112 and 113 of the Hastings Group Holdings plc 2017 Annual Report with the exclusion of, as noted above, IFRS 15 and IFRS 16 which were adopted from 1 January 2018 and the IFRS 9 deferral option under IFRS 4 which the Group adopted.

2. Accounting policies

The Group's accounting policies as disclosed on pages 114 to 121 of the Hastings Group Holdings plc 2017 Annual Report, have been applied consistently to all periods presented in these Condensed Consolidated Financial Statements except for the following new accounting policies applied from 1 January 2018 on adopting IFRS 15 and IFRS 16:

Revenue from contracts with customers arises primarily from insurance broking activities and consists principally of fees and commissions relating to the arrangement of third party underwritten insurance contracts and ancillary products. The Group's performance obligation under such contracts is to broker contracts between customers and third party underwriters or service providers.

The Group satisfies its performance obligations for these contracts at a point in time; revenue from brokerage of ancillary products is recognised at the point of sale to the customer and revenue from other retail income is recognised when the ad hoc service has been completed. Revenue arising from insurance broking activities is measured on an agency basis, net of cost, at the fair value of the income receivable after adjusting for any allowance for expected future cancellation refunds.

The Group may also provide contracts are for the provision of other ad hoc, point in time services to customers which fall within scope of IFRS 15. Such income is recognised when the performance obligation has been satisfied at the expected value of consideration.

A contract is, or contains, a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration. At the commencement of a lease or contract containing a lease, the Group recognises a right of use asset and a lease liability on the balance sheet.

The Group initially measures a right of use asset at cost comprising the corresponding lease liability adjusted for any payments made at or before the commencement date plus any initial direct costs incurred and any dismantling costs, if applicable. Subsequently, from commencement date, a right of use asset is depreciated using the straight-line method to profit or loss over the lease term or usage term. Right of use assets are reported in the balance sheet within property and equipment.

A lease liability is initially measured and recognised at the present value of outstanding lease payments at the lease commencement date, using the Group's incremental borrowing rate in most instances; unless the interest rate implicit in the lease can be readily determined, in which case this is used instead. Lease liabilities are reported in insurance and other payables in the balance sheet.

3. Critical accounting estimates and judgements in applying accounting policies

The preparation of financial statements in accordance with IFRS requires the Directors to make judgements and assumptions that affect the assets and liabilities recognised as at the reporting date and the income and expense recognised during the reporting period as well as the content of any disclosures. Although these judgements and assumptions are based on the Directors' best knowledge of the amounts, events and actions, actual results may differ from these judgements and assumptions.

The judgements that the Directors have made in applying the Group's accounting policies and the major sources of estimation uncertainty that have a significant risk on the amounts recognised in the Condensed Consolidated Financial Statements are provided on pages 121 to 123 of the Hastings Group Holdings plc 2017 Annual Report.

There have been no significant changes to these judgements, assumptions and estimations during the period.

4. Insurance contracts risk management

A key risk from operating in the general insurance industry is the exposure to insurance risk arising from underwriting insurance contracts. Insurance contracts transfer risk to the insurer by indemnifying the customers against adverse effects arising from the occurrence of specified uncertain future events. The risk is that the actual amount of claims to be paid in relation to contracts will be different from the amount estimated at the time the contract was designed and priced, which is before the losses relating to it are known. Hence the insurance business involves inherent uncertainty.

A fundamental part of the Group's overall risk management strategy is the effective governance and management of risks that impact the amount, timing and uncertainty of cash flows arising from insurance contracts. The Group's risk management objectives and policies for mitigating insurance risk are provided on pages 123 to 124 of the Hastings Group Holdings plc 2017 Annual Report and there have been no changes to this during the period.

5. Segmental reporting

Segment performance

The tables below present the Group's results by reportable segment:

Included within other revenue is £63.4m recognised by the Retail segment arising from transactions with the Underwriting segment.

Included within other revenue is £54.8m recognised by the Retail segment arising from transactions with the Underwriting segment.