Interim Results

Hastings Group Holdings plc

Interim results announcement for the six months ended 30 June 2017

9 August 2017

Hastings Group Holdings plc (the 'Group', or 'Hastings'), one of the fastest growing general insurance providers to the UK market, today announces its interim results for the six months ended 30 June 2017.

The Group continues to maintain its strong momentum and is on track for another year of profitable growth.

Highlights

· Continued growth, with gross written premiums up 28% to £462.0m (30 June 2016: £360.6m) and net revenue up 22% to £345.2m (30 June 2016: £282.7m).

· Strong trading performance with a 22% increase in adjusted operating profit1 to £86.5m (30 June 2016: £70.8m).

· Sustained increases in customers with live customer policies up by 15% to 2.54 million (30 June 2016: 2.20 million).

· Growing market share to 7.0% of UK private car insurance (30 June 2016: 6.2%).

· Calendar year loss ratio2 of 73.4% for the period ended 30 June 2017, below the target range of between 75% and 79% (30 June 2016: 74.0%).

· Consistent growth in profitability with an increase in profit after tax of 36% to £57.9m (30 June 2016: £42.7m).

· Ongoing cash generation and reduction in net debt leverage multiple3, with free cash generated up 34% to £65.8m (30 June 2016: £49.1m) and net debt leverage multiple reduced to 1.7x (31 December 2016: 1.9x).

· Continued investment in the business, including Guidewire, the Group's next generation claims and broking platform, which will enable future growth opportunities and operational efficiencies.

· A significant improvement in solvency, with a Solvency II coverage ratio of 173% (31 December 2016: 140%), benefiting from the use of Undertaking Specific Parameters in the calculation.

· Interim dividend for 2017 of 4.1 pence per share (30 June 2016: 3.3 pence per share) reflecting increasing earnings and strong cash generation.

Gary Hoffman, Chief Executive Officer of Hastings Group Holdings plc, commented:

"I am delighted that Hastings continues on its profitable growth trajectory. We've delivered another strong financial performance for the first half of 2017 with net revenue increasing by 22% to £345.2m, live customer policies up by 15% and adjusted operating profit 22% higher at £86.5m for the period.

"Our significant presence and strategic focus on price comparison websites, together with our straightforward insurance offering appeals to customers and we continue to grow our market share by both attracting new customers and maintaining strong retention levels.

''We continue to invest in our digital and data-driven model to ensure that we price our business in an agile and responsive manner. This approach allows us to maintain our robust underwriting discipline and has delivered a loss ratio for the period of 73.4%, which is below our target range.

"Our profitable business model is highly cash generative and we have further reduced our net debt in line with our targets whilst improving the solvency coverage ratio to 173%. Our profitability and healthy financial position means we are declaring an interim dividend of 4.1 pence per share, a 24% increase from 2016.

"Supported by our 2,900 colleagues, we are well on course to deliver on our ambitious 2019 targets and continue our strong momentum into the second half.''

The Group will host an update call for investors and analysts at 09:00am GMT on 9 August 2017. Details are available on the Group's website www.hastingsplc.com.

About Hastings

Founded in 1996 in Bexhill-on-Sea on the Sussex coast, the Hastings Group is now one of the fastest growing general insurance providers to the UK market, with over 2.5m live customer policies and employing over 2,900 colleagues at sites in Bexhill, Newmarket, Leicester and Gibraltar.

Hastings provides refreshingly straightforward products and services to UK car, bike, van and home insurance customers with around 90% of policies directly underwritten by its Gibraltar based insurer, Advantage Insurance Company Limited.

Hastings Direct is a trading name of Hastings Insurance Services Limited, the Group's UK broker, which also trades via 'Hastings Premier', 'Hastings Essential', 'Hastings Direct SmartMiles', 'People's Choice' and 'insurePink'.

The Group operates as an integrated insurance provider with two businesses. The Group's Retail business, Hastings Insurance Services Limited, is responsible for the end customer pricing, fraud management, product design, distribution and management of the underlying customer relationships. The Group's Underwriting business, Advantage Insurance Company Limited, engages in risk selection, underlying technical pricing, reserving and claims handling.

Retail is supported by, and benefits from, Underwriting's prudent approach to risk and reserving and also benefits from a panel of insurance partners who provide additional underwriting capacity. The Group's integrated model deliberately separates underlying product manufacturing from its distribution.

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 2016 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  

Richard Hoskins

Chief Financial Officer

T: +44 (0)1424 738366 [email protected]

Louise Underwood

Director of Investor Relations

T: +44 (0)1424 738366 [email protected]

Instinctif Partners  

Giles Stewart \ Lewis Hill

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

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.

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

Business update

Hastings continues to demonstrate the successful growth trend of its business model which is the digital distribution of insurance products through price comparison websites ('PCW'). The results for the six months ended 30 June 2017 show continued profitable growth. Hastings' success since listing allowed the Board to set challenging new targets in March 2017 and progress against these updated targets is shown in the table below:

Gross written premiums were up by 28% and market share of UK private car insurance increased to 7.0%. Market wide increases in average written premiums following the revision of the Ogden rate announced in February 2017 resulted in increased PCW activity, which benefitted the Group and contributed to the increase in new business sales. Net revenue increased by 22% benefitting from a 7% increase in average earned premiums over the period combined with a 15% increase in live customer policies ('LCP').

The significant cash generated by the business means that Hastings has continued to pay dividends whilst strengthening the balance sheet, reducing net debt and being on track to deliver the updated targets.

Key performance indicators ('KPIs')

The Group's successful growth strategy is reflected in the KPIs for the period which are summarised below:

Full definitions for the above KPIs are provided on pages 22 to 24 of the Hastings Group Holdings plc 2016 Annual Report.

Solvency II and undertaking specific parameters

The Gibraltar Financial Services Commission has granted the Group's Underwriter, Advantage Insurance Company Limited ('AICL') the right to apply undertaking specific parameters ('USPs') when calculating its solvency coverage requirement. The use of USPs better reflects AICL's business model by allowing the company to use its own data and experience for premium and reserve risk, rather than the prescribed universal standard risk factors. The coverage benefit realised from the application of USPs, combined with the continued capital growth of the Underwriting business, improved AICL's Solvency Coverage Ratio from 140% to 173%.

Refinancing

On 28 April 2017, the Group completed the amendment and extension of its existing loan facilities. Upon completion, the fixed loan of £290.0m and revolving credit facility of £20m were replaced with a £310m revolving credit facility. As well as providing additional flexibility over repayment, the amendment extends the term of the facility by 6 months to April 2021 and reduces the margin payable. Following a £5.0m repayment in June 2017, the total gross debt drawn under the revised facility had been reduced to £285.0m at 30 June 2017.

 Summary Condensed Consolidated Statement of Profit or Loss

Strong growth in LCP combined with average written premium increases have driven growth in profit after tax to £57.9m for the six months ended 30 June 2017 (30 June 2016: £42.7m).

Gross written premiums have increased by 28%, driven primarily by private car as Hastings continued to grow market share. Through agile pricing and data enrichment, the Group has continued to make targeted rate increases resulting in average written premiums per policy increasing by 8% whilst maintaining its above market average retention rate.

Furthermore, the Group's digitally focused business model has allowed it to benefit as customers shop around for the best deal available in the face of market-wide inflation in car premiums, with the Group increasing its market share to 7.0%. Hastings has also continued to grow its bike and van books, with the Group's share of the UK market now 8.4% and 3.9% respectively.

The Group has continued to apply its retail optimisation techniques to the home insurance market and now has 175,000 home LCP, up 11% on 30 June 2016. These continue to be under a coinsurance arrangement, or through panel insurers, whilst the Underwriting business builds home underwriting capabilities.

Net revenue has grown by 22% to £345.2m for the period (30 June 2016: £282.7m) through growth in earned premium and non-risk based revenue streams.

Net earned premiums increased by 25% to £195.1m over the prior period (30 June 2016: £156.1m) due to sustained LCP growth and the earn through of higher average written premiums.

The growth in policies sold has increased fees and commission on the sale of insurance contracts and ancillary product income. Premium finance interest income benefitted from the combination of premium rate increases and an increase in the number of customers paying in monthly instalments.

Reinsurance commissions recognised have grown as a result of an increase in underlying earned premiums, and the reduction in accident year and calendar year loss ratios compared to the prior period.

The Group's combined operating ratio reduced slightly as the reduction in the calendar year loss ratio offset the slight increase in the expense ratio.

The accident year loss ratio for the 6 months to 30 June 2017 improved compared to the prior period due to the earn through of premium rate increases applied over the last 12 months outweighing claims inflation for the period. Average earned premiums have increased 7% year on year compared to claims inflation of 5%, reducing the Group's calendar year loss ratio to 73.4%.

The expense ratio for the period increased slightly as the Group continued to invest in the business to support growth.

The 22% increase in adjusted operating profit to £86.5m (30 June 2016: £70.8m) primarily reflects the growth in LCP and the earn through of higher average premiums.

Profit after tax increased 36% due to the higher adjusted operating profit, lower underlying finance costs and a reduction in non-trading expenses.

The interim dividend declared for the six months ended 30 June 2017 is £26.9m (30 June 2016: £21.7m), a payout of 4.1 pence per share (30 June 2016: 3.3 pence per share). This takes into account the strong trading results in the first six months and the Board's confidence in the ongoing cash generative nature of the business.

The Group's net asset position has further strengthened, increasing from £553.6m as at 31 December 2016 to £569.1m as at 30 June 2017. This has been driven by the increase in profits retained within the business, after a dividend payment of £43.4m.

In addition to increasing retained earnings, the growth in LCP has driven the increase in working capital, insurance contract liabilities, reinsurance assets and insurance and other receivables.

The Group's return on capital employed increased reflecting the 29.0% 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, thereby maintaining its strong solvency position.

Adjusted operating profit growth, combined with the Group's strong cash generation has resulted in a fall in the net debt leverage multiple to 1.7x (30 June 2016: 1.9x), compared with a multiple of 1.9x for the year ended 31 December 2016.

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

The Group's activities continue to be highly cash generative and net cash inflow from operating activities during 2017 was £121.9m (30 June 2016: £65.8m), of which £61.8m was free cash generated from the Retail business (30 June 2016: £49.1m). This was partially offset by dividend payments, interest and loan repayments and capital expenditure, principally on the development of the Guidewire system.

The Group has a conservative investment strategy that primarily focuses on capital preservation and ensuring the duration of the assets is closely aligned to the underlying insurance liabilities. As at 30 June 2017, the Group's percentage of investments rated A or equivalent and above of the total portfolio was 76% (31 December 2016: 77%). The weighted average credit rating of the investment portfolio continued to be A+ (31 December 2016: A+).

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

Total insurance contract liabilities of £1,485.1m at 30 June 2017 (31 December 2016: £1,299.5m) comprise £456.4m (31 December 2016: £397.6m) of unearned premiums, which are deferred and recognised in the statement of profit or loss in subsequent periods, and outstanding claims liabilities of £1,028.7m (31 December 2016: £901.9m). Gross outstanding liabilities have increased due to the greater exposure from the increase in LCP and the impact of claims inflation.

The Group manages insurance risk by applying a consistent reserving methodology to calculate an internal actuarial best estimate and then reserving an additional risk margin. The risk margin has been maintained at a consistent confidence level year on year.

The Group's reinsurance programme, described below, protects against the more volatile movements that can typically be caused by large claims and periodical payment orders ('PPOs').

Reinsurance assets, comprising reinsurers' share of outstanding claims liabilities, increased by 16% to £952.1m as at 30 June 2017 (31 December 2016: £822.0m) due to the greater exposure from increasing policy volumes.

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, including PPOs, 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 the accumulation of losses and 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 table below presents the Underwriting business' unaudited Solvency II coverage ratio, calculated for AICL, the regulated entity, as at 30 June 2017 on a standard formula basis with undertaking specific parameters and as at 31 December 2016 on a standard formula basis only.

Notes

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

Adjusted operating profit margin is defined as adjusted operating profit divided by net revenue.

2 Calendar year loss ratio is a measure of underwriting performance, representing net claims incurred divided by net earned premiums.

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 dividend payout ratio is net income adjusted to exclude the impact of 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, preference share dividends 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 Advantage Insurance Company Limited ('AICL') and Hastings Insurance Services Limited ('HISL') deployed capital represents respectively the average of AICL's net assets and the average of HISL's total capital resources as stipulated by FCA regulations during each year. The corporate free cash represents the average cash held during each year in the Group's other corporate entities.

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 includes cash held in entities which are not subject to FCA or Solvency regulations.

Free cash includes both of the above and dividends to the Company approved, but not yet paid, by AICL.

Condensed Consolidated Statement of Profit or Loss

for the six months ended 30 June 2017

All results arose from continuing operations.

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

Condensed Consolidated Statement of Comprehensive Income

for the six months ended 30 June 2017

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

Condensed Consolidated Balance Sheet

as at 30 June 2017

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 2017

Condensed Consolidated Statement of Cash Flows

for the six months ended 30 June 2017

The accompanying notes form an integral part of these 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 principal activities of the Group are the broking and underwriting of UK private car, van, bike and home insurance.

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 2017 and comparative figures for the six months ended 30 June 2016 and for the year ended 31 December 2016.

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 2016 were prepared in accordance with IFRS 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 33.

a) 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 2016 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.

b) 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.

c) Basis of consolidation

The Condensed Consolidated Financial Statements incorporate the financial statements of the Company and all of its subsidiary undertakings for the six month periods ended 30 June 2017 and 30 June 2016.

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.

2. Accounting policies

The Group's accounting policies as disclosed on pages 98 to 106 of the Hastings Group Holdings plc 2016 Annual Report, have been applied consistently to all periods presented in these Condensed Consolidated Financial Statements. There have been no changes to accounting policies during the period.

No new IFRS or interpretations have been endorsed by the EU during the period. In addition to the accounting standards issued by the IASB but not yet effective in the EU listed on page 97 of the Hastings Group Holdings plc 2016 Annual Report, the IASB issued IFRS 17 Insurance Contracts ('IFRS 17') on 18 May 2017. IFRS 17 replaces IFRS 4 Insurance Contracts and has not yet been endorsed by the EU but is expected to be applicable for accounting periods beginning on or after 1 January 2021. The Group is currently assessing the impact that the adoption of the standard will have on the Group's Consolidated Financial Statements.

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 106 to 108 of the Hastings Group Holdings plc 2016 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 108 to 109 of the Hastings Group Holdings plc 2016 Annual Report and there have been no changes to this during the period.

5. Segmental reporting

a) Segment performance

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

Included within other revenue is £54.8m recognised by the Retail segment and £0.2m recognised by the Corporate segment, arising from transactions with the Underwriting segment. Other revenue recognised by the Underwriting segment includes £0.2m arising from transactions with the Retail segment.

Included within other revenue recognised by the Retail segment is £46.4m arising from transactions with the Underwriting segment. Other revenue recognised by the Underwriting segment includes £0.2m arising from transactions with the Retail segment.