Half Yearly Report

NEWS RELEASE

5 August 2014 For immediate release

Novae Group plc

Interim results for the six months ended 30 June 2014

Novae Group plc ("Novae" or "the Group"), the specialist insurance group, today announces its interim results for the six months ended 30 June 2014.

· Underwriting contribution increased by 89% to £19.7 million (H1 2013: £10.4 million)

· Gross written premium of £362.6 million (H1 2013: £361.8 million)

· 6% growth in gross written premium at constant rates of exchange

· Claims ratio improved to 49% (H1 2013: 58%)

· Combined ratio improved to 91% (H1 2013: 96%)

· Net investment income of £7.4 million (H1 2013: £4.4 million)

· Profit before tax and foreign exchange of £22.6 million (H1 2013: £11.8 million)

· Interim dividend up 10% to 6.6p per share (H1 2013: 6.0p per share)

Matthew Fosh, Group Chief Executive, today said:

"The Group produced an impressive performance in the first half of the year, delivering 6% organic growth and an improved claims ratio. Novae continues to deliver an improving performance despite a more challenging rating environment, low interest rates and a strong sterling. We continue to invest in the business, attracting talented people and developing new opportunities, leaving us well placed to build on the good progress we have made."

There will be a presentation for analysts only at 10.00 am today in the Auditorium, Lloyd's Register of Shipping, 71 Fenchurch Street, London EC3M 4HH. Invitees are requested to go to the Main Entrance of 71 Fenchurch Street where they will be provided with a pre-prepared pass.

For further information:

Matthew Fosh/Charles Fry : Novae Group plc 020 7903 7300

David Haggie/Rebecca Young : Haggie Partners 020 7562 4444

Results overview

Novae continued the good progress made in recent years, delivering a strong set of results for the first half of 2014. This is despite the headwinds of the challenging rating environment and a weakened US dollar against sterling.

Reported gross written premium of £362.6 million was comparable with last year (H1 2013: £361.8 million), representing 6.0% growth at constant rates of exchange. Positive claims experience contributed to an improved combined ratio of 90.8% (H1 2013: 95.8%), resulting in an 89.4% increase in underwriting contribution.

Net investment income was £7.4 million (H1 2013: £4.4 million) generating a yield on average invested assets of 0.6% (H1 2013: 0.4%). Group profit before tax was £21.3 million (H1 2013: £21.1 million) including foreign exchange losses of £1.3 million (H1 2013: gains of £9.3 million).

Pre tax return on average shareholders' funds for the six months period was 6.9% (13.8% annualised). Net tangible asset value per share was 468.3p (December 2013: 491.1p), reflecting profits in the period and the impact of paying final and special dividends of 16.5p and 20.0p per share respectively in May this year.

Dividend

The Board is pleased to declare an interim dividend of 6.6p, an increase of 10.0% on the 2013 interim dividend. The dividend will be paid on 1 October 2014 to shareholders on the register at the close of business on 5 September 2014.

Underwriting performance overview

Premiums

Gross written premium for the first half of the year was £362.6 million (H1 2013: £361.8 million). At constant rates of exchange the underlying portfolio grew by 6.0%; a reflection of sterling's strengthening against the Group's major operating currencies since H1 2013.

The strong underlying growth in premium has been achieved in conjunction with continual management of the portfolio, which is central to Novae's underwriting philosophy. New business opportunities were capitalised upon in several areas including marine and energy classes and property insurance facilities in the UK, US and internationally. This growth was in part offset in a number of classes where exposures were reduced, notably agriculture reinsurance, international property treaty and certain casualty classes.

Net earned premium reduced to £217.0 million (H1 2013: £249.7 million), equating to approximately 45% of anticipated full year net earned premium. This reduction of 8.2%, at constant rates of exchange, reflects an increase in premiums ceded to reinsurers and a changing business mix.

Reinsurance ceded of £75.6 million (H1 2013: £65.9 million) reflects an increased spend on outwards protections, notably the property reinsurance programme, capitalising on the favourable rating environment. Furthermore, the increase reflects that third party capital participation on the syndicate, introduced in 2012, now extends to all open years of account.

Rating environment

Across the syndicate, rates on renewal business declined 2.7% on a risk-adjusted basis in the first half of 2014, which includes most of the key property reinsurance renewal periods. Rate decreases were felt most heavily on reinsurance business across all divisions, but these were balanced by continued improvements in areas of property and liability insurance business.

Claims

Positive attritional claims experience, favourable reserve developments and a comparable level of catastrophe claims contributed to the significant improvement in the total claims ratio to 48.9% (H1 2013: 58.2%). Net claims incurred were £106.1 million (H1 2013: £145.4 million).

Targeted risk selection and a disciplined approach to underwriting are fundamental to the Group's strategy. The strong attritional claims performance in the first half is testament to this.

Catastrophe experience remained relatively benign in the period. The majority of claims arose from adverse weather events in the UK and Europe.

Favourable claims experience on previous years contributed to the improved claims ratio and demonstrates Novae's prudent approach to reserving. Reserve strength was increased in the period, with the margin held of £72.2 million at 30 June 2014 equivalent to 9.4% of best estimate net reserves (December 2013: £71.0 million, 8.9%).

The Group historically defined reserve movements as reserve strengthening or releases in respect of Lloyd's closed years of account. This definition was redefined in 2013, in line with many of its peers, to include reserve movements emerging on all but the youngest underwriting year. The H1 2014 claims ratio and comparatives are shown on this new basis.

Acquisition costs

Acquisition costs for the half year were £55.0 million (H1 2013: £60.2 million) with an acquisition cost ratio of 25.3% (H1 2013: 24.1%). The increase is as a result of a change in business mix, with a higher proportion of business now arising from delegated underwriting arrangements and a reduction in the level of reinsurance underwritten.

Operating expenses

Total operating expenses were £38.2 million (H1 2013: £33.7 million). This increase was driven by increased employment costs as a result of the improved underwriting performance in the year to date and non-recurring professional fees of £2.0 million incurred in respect of a potential acquisition at the beginning of 2014.

Excluding non-recurring items, the operating expense ratio was 16.6% (H1 2013: 13.5%). This ratio is significantly impacted by the effect of the changing business mix and foreign currency impact on net earned premium. The underlying increase in the operating expense ratio was 0.7%.

Divisional Performance

In December 2013, the Group announced a change to its operating structure and the creation of three new trading divisions as set out below.

(1) Marine, Aviation and Political Risk

Property division

Gross written premium in the property division of £163.8 million (H1 2013: £172.4 million) was level with last year at constant rates of exchange.

The US Property Facilities and UK & European Property Facilities units experienced strong growth of 47% and 32% respectively. Both units continued to build on existing relationships, increasing participation on selected risks and pursuing new business opportunities where market conditions remained attractive. In addition, the division participated on two significant new facility agreements, complementary to the existing portfolio.

The agriculture reinsurance unit is now fully established, with additional hires focussed on the North American and Asia Pacific regions. The team has continued to reposition the portfolio, resulting in reduced premium income of 37%, electing not to renew a number of significant quota share arrangements. In response to increasing competition and a softening rating environment the division also reduced its exposure to international property catastrophe business. Reported revenues were also reduced as a result of the run-off of discontinued classes of business.

Rates on Property renewals were down 3% in the six months to 30 June 2014 on a risk-adjusted basis across the division. The rate decrease was driven by reinsurance lines as US catastrophe rates continued to soften (-14%), with June Florida renewals particularly affected (-17%). The Group's international catastrophe business reductions (-5%) were less pronounced as the portfolio was repositioned to avoid the worst of the reductions. The decreases were offset to some extent by increases for direct US property business (+2%); renewal rates on UK and European property insurance remained flat.

Claims experience was broadly favourable delivering an H1 loss ratio of 53.1% (H1 2013: 50.1%). Adverse development on a loss in the International Direct & Facultative unit contributed to a modest deterioration on prior year. The underlying book continues to perform strongly across the division. Catastrophe claims experience from UK and European weather events is in line with expectations.

The expense ratio increased as a result of a higher proportion of the overall business being generated from insurance facilities, resulting in increased acquisition costs. The ratio was also impacted by the currency mismatch between net earned premium and operating expenses.

The division continues to attract new underwriting talent and made a number of senior hires during the period. In May 2014, Mervyn Albon joined the UK & European property unit to assist with the unit's expansion and development. In September 2014, Anne Plumb will join to lead the new International Open Market unit and William Alderton will join the division later in the year to develop an International Property Binders unit. These individuals bring a significant amount of industry experience to complement the existing team and will support the division's future growth.

Casualty division

Gross written premium in the casualty division was £78.5 million (H1 2013: £84.6 million), a reduction of 3% at constant rates of exchange.

The division reduced its exposures across a number of classes in response to the soft rate environment. This was most pronounced in the International Liability, Direct Motor and Professional Indemnity units with reductions in gross written premium of 39%, 28% and 24% respectively.

The division actively redeployed capital to areas with more favourable underwriting opportunities and in part these decreases were offset by growth in the UK Liability and Financial Institutions units of 18% and 6% respectively. Although modest in absolute terms, good growth opportunities were also identified in the Medical Malpractice unit.

Casualty renewal rates were down 1% on a risk-adjusted basis across the division. Professional indemnity and financial institutions insurance business remained broadly unchanged with marginal increases experienced in UK liability insurance (+2%) and medical malpractice (+2%). The most pronounced rate reductions were in the general liability (-12%) and motor excess of loss accounts (-3%).

Overall the claims experience was more favourable than in 2013, where a strengthening of reserves for specific sub-prime claims impacted the overall loss ratio, which improved to 48.8% (H1 2013: 68.5%). The division also benefitted from favourable reserve development following the positive resolution of a financial institutions claim dating back to 2002.

The division's underlying expense ratio is broadly stable with the reported increase largely a result of the currency mismatch between net earned premium and operating expenses.

Dan Trueman joined the division in 2014 to establish a Cyber unit. His significant experience and expertise position Novae well in this expanding class of business and the unit is already performing ahead of expectations.

Marine, Aviation and Political Risk division ("MAP")

Gross written premium in the MAP division was £120.3 million (H1 2013: £104.8 million), achieving growth of 23% at constant rates of exchange.  The division has had an outstanding start to the year and continues to demonstrate market leading capabilities across a range of classes.

Despite the increasingly competitive market, the division was able to capitalise on its specialist expertise in a number of core classes and achieved growth in eight of the eleven units. Marine Liability achieved 25% growth, which was the largest in the division in absolute terms. This growth was supported in part by the introduction of new hires to the division as a result of the continuing success of new business development initiatives.

The Energy unit also performed well, achieving 33% growth as a result of active portfolio management and the participation in a new energy facility. The unit also benefited from the expansion of underwriting expertise in construction risks.

The division's significant capabilities in credit & political risks continue to attract opportunities for growth, despite increased competition in these markets. Novae's longstanding commitment and expertise in these niche specialist classes has generated growth in every unit, with Political Risk and Political Violence achieving 40% and 31% increases respectively.

MAP renewal rates came under pressure across most classes, with a decrease of 5% on a risk adjusted basis across the division. Rate reductions were most apparent in aviation reinsurance (-11%). Reductions were also experienced in marine and energy classes (-5%) and political and credit exposures (-3%).

The division benefitted from favourable claims experience during the period, with the claims ratio improving to 43.9% (H1 2013: 58.7%). This was driven by an improved attritional loss ratio and favourable reserve development, most significantly from the marine liability unit.

The division was impacted by number of high profile and tragic events during the period, including the disappearance of Malaysian Airlines flight MH370 in March and the SEWOL Korean Ferry accident in April. Net loss estimates remain within normal risk appetite for both these events. The Aviation Reinsurance unit also has exposure to the loss of Malaysian Airlines flight MH17 over Ukraine on 17 July. Based on the initial market estimates for this loss, Novae's net exposures to large risk losses remain within expectations.

The division's underlying expense ratio at 34.9% is improved over the same period last year (H1 2013: 36.3%). A reduction in acquisition cost ratio due to business mix changes is offset by an increase in the operating expense ratio as a result of the currency mismatch between net earned premium and operating expenses.

In 2013 the division recruited Darren Carr, Cliff Payne and Liz Heslip into the Marine Liability, Energy and Political Violence units respectively. The ongoing commitment to investing in underwriting talent continues to yield benefits as evidenced by the division's result in the first half of 2014.

Investments

Investment return for the period was £7.4 million (H1 2013: £4.4 million), equivalent to a total return net of management fees of 0.6% (H1 2013: 0.4%) on average invested assets of £1,195.5 million (H1 2013: £1,231.5 million).

The Group continues to review its appetite to investment risk, evaluating opportunities to enhance the yield on the portfolio without introducing undue risk or volatility. There were no major changes in investment approach during the period.

At 30 June 2014 the average duration across the Group's portfolio was 1.0 year (H1 2013: 1.1 years). The Board targets a return for the full year of 1-1.25%.

The profile of the Group's investment portfolio at 30 June 2014 was as follows:

The investment portfolio can be analysed by rating as follows:

Foreign exchange

Novae reported a loss on foreign exchange of £1.3 million (H1 2013: gain of £9.3 million), including gains on non-monetary items of £0.5 million (H1 2013: gains of £7.3 million). This followed a continued strengthening of sterling against the Group's principal trading currencies during the period.

US dollar denominated business accounted for approximately 47% of gross written premium (H1 2013: 41%). Other significant sources of non-sterling gross written premium were the euro 12% (H1 2013: 13%) and Australian dollar 5% (H1 2013: 6%).

Tax

Novae's tax charge for the period is £3.9 million (H1 2013: £3.9 million). The Group continues to utilise tax losses against future taxable profits. The carrying value of the Group's deferred tax asset is £15.1 million (H1 2013: £22.3 million), valued at the enacted rate of 20% included in the Finance Bill 2013.

The Group is actively exploring opportunities to reduce its effective rate of taxation.

Capital structure

Regulatory capital

The table below sets out the Group's sources and uses of capital:

The Group's available capital for 2014 includes letters of credit held as collateral under quota share reinsurance arrangements underwritten by three large international reinsurers.

Debt structure

As at 30 June 2014 the Group had gross debt of £108.1 million (H1 2013: £105.2 million).

In 2013 the Group renewed and increased the letter of credit facility with Lloyds Banking Group to US $60.0 million (H1 2013: US $45.0 million) until December 2015. The facility is uncollateralised and is in addition to an undrawn revolving credit facility of £30.0 million (H1 2013: £15.0 million), which is also available until December 2015 and is currently undrawn.

Financing costs for the period were £3.0 million (H1 2013: £3.2 million).

Outlook

Novae has delivered a strong performance in the year to date. Good organic growth, a significantly improved claims ratio and further reserve strengthening have been achieved against a backdrop of challenging market conditions.

Absent any significant market event in the second half of the year, these challenges are expected to remain. Nonetheless, Novae is well positioned to continue to deliver an enhanced performance.

The Growth & Efficiency Strategy established in 2013 focuses on Expert Underwriting, Consistent Performance and Dynamic Capital Management. These remain cornerstones of Novae's strategy and the long-term prospects for the Group remain positive.

RESPONSIBILITY STATEMENT OF THE DIRECTORS IN RESPECT OF THE HALF YEARLY FINANCIAL REPORT

We confirm that to the best of our knowledge:

• the condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU

• the interim management report includes a fair review of the information required by:

a) DTR 4.2.7 of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year

b) DTR 4.2.8 of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so

By order of the Board

T J FurmstonGroup Company Secretary5 August 2014

CONDENSED CONSOLIDATED INCOME STATEMENT

for the six months ended 30 June 2014

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

for the six months ended 30 June 2014

CONDENSED CONSOLIDATED BALANCE SHEET

as at 30 June 2014

These financial statements were approved by the Board of Directors on 5 August 2014 and were signed on its behalf by:

J P Hastings-Bass C A Fry

Chairman Chief Financial Officer

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

for the six months ended 30 June 2014

CONDENSED CONSOLIDATED CASH FLOW STATEMENT

for the six months ended 30 June 2014

NOTES TO THE INTERIM FINANCIAL INFORMATION

1. Significant accounting policies

The unaudited interim financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU, and on the basis of the accounting policies set out in the annual report of Novae Group plc for the year ended 31 December 2013. The amounts presented for the 30 June 2014 and 30 June 2013 periods are unaudited.

The consolidated financial statements include the results of Novae Group plc and all its subsidiary undertakings made up to the same accounting date.

The financial information contained in these interim results does not constitute statutory accounts of Novae Group plc within the meaning of Section 435 of the Companies Act 2006. Statutory accounts for Novae Group plc for the year ended 31 December 2013 have been delivered to the Registrar of Companies. The auditors have reported on the accounts, their report was unqualified and did not constitute a statement under Section 498 (2) or (3) of the Companies Act 2006.

Basis of preparation 

The financial statements are presented in pounds sterling unless otherwise stated. They have been prepared under the historical cost convention, as modified by the revaluation of financial assets at fair value through the income statement.

The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances. The results of these factors allow judgements to be made regarding the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. Uncertainties exist where current valuations are dependent on estimates of future cash flows. This applies to the share-based payment charge and financial assets and liabilities held at fair value. The accounting policies have been applied consistently to all periods presented in this report.

The Group's greatest area of uncertainty relates to insurance contract liabilities (see note 16). The estimates and assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision only affects that period or in the period of the revision and future periods if the revision affects both current and future periods.

Revised and new reporting standards

The accounting policies applied in the consolidated interim financial statements are the same as those applied in the Group's consolidated financial statements as at, and for, the year ended 31 December 2013. Any changes in the policies will be reflected in the financial statements as at, and for, the year ending 31 December 2014.

The following is a list of standards effective from 1 January 2014 in the EU;

· IFRS 10: Consolidated financial statements

· IFRS 11: Joint arrangements

· IFRS 12: Disclosure of interests in other entities

· IAS 19: Amendment: Defined benefit plans: Employee Contributions

· IAS 27: Amendment: Separate financial statements

· IAS 28: Amendment: Investments in associates and joint ventures

· IAS 32: Amendment: Offsetting financial assets and financial liabilities

· IAS 36: Amendment: Recoverable amount disclosures for non-financial assets

· IAS 39: Amendment: Novation of derivatives and continuation of hedge accounting

The adoption of these standards has had no material impact on the Group's accounting policies.

2. Segmental information

Segmental information is presented in respect of reportable segments. This is based on the Group's management and internal reporting structure and represents the level at which financial information is reported to the Executive Committee, being the chief operating decision maker as defined by IFRS 8.

Segment results, assets and liabilities include items that can be allocated on a reasonable basis. Unallocated items comprise certain employee incentive costs, foreign exchange movements, insurance working capital and the deferred tax asset.

As reported in the 2013 Report and Accounts, from 2014 the Group's underwriting has been managed in three trading divisions: Property, Casualty and Marine, Aviation & Political Risk. In accordance with IFRS 8, Operating Segments, the Group now considers the three divisions to be the reportable segments of the Group.

As a consequence of the change in reportable segments, the corresponding operating results and ratios for 2013 have been re-presented on a comparable basis. There is no impact to the overall profit before tax or the net asset value of the Group for prior periods.

a) Segmental statement of comprehensive income

b) Segmental balance sheet

3. Seasonality of operations

Gross written premium is recognised on the inception of insurance contracts. For many classes of business this has historically been weighted towards the first half of the year. Premium revenue is earned separately for each insurance contract in line with the risk exposure profile. Consequently for some catastrophe exposed contracts, for example those exposed to the US hurricane season, the majority of income is recognised in the second half of the year. There may also be a similar seasonal pattern to the incidence of claims, with the Group more likely to experience large catastrophe losses from the US hurricane season, which runs from June to November. This may materially affect the Group's result for the second half of the year.

Movements in foreign exchange rates may also affect seasonality. This may be accentuated as the Group's catastrophe exposed units transact business primarily in US dollars.

This seasonality can be assessed by reviewing the following performance measures:

4. Net investment income

5. Net claims incurred

6. Operating expenses

Non-recurring items relate to professional fees incurred in respect of a potential acquisition at the beginning of 2014. 

7. Foreign exchange

Profit for the period includes a foreign exchange loss of £1.8million (H1 2013: gain of £2.0 million; year to 31 December 2013: loss of £6.5 million) arising on the conversion of monetary assets and liabilities to sterling.

Principal exchange rates applied are as follows:

8. Financing costs

9. Income taxes