Preliminary results for the year ended 31.12.16

Hastings Group Holdings plc

Preliminary results announcement for the year ended 31 December 2016

2 March 2017

Hastings Group Holdings plc (the 'Group', or 'Hastings'), one of the fastest growing general insurance providers to the UK market, today announces its preliminary results for the year ended 31 December 2016.

2016 has been another record-breaking year for Hastings. The Group has maintained its strong momentum as it continues to deliver on all the promises made when it listed on the London Stock Exchange.

Highlights

· Strong, profitable growth, with gross written premiums up by 25% to £769.0m (2015: £614.9m) and net revenue up by 23% to £590.3m (2015: £481.0m).

· Sustained increase in adjusted operating profit1 up 21% to £152.1m before the impact of the Ogden rate change2, or 5% to £132.1m (2015: £126.1m), after allowing for the £20.0m impact of the Ogden rate change.

· Continuing increase in customers and market share, with live customer policies up by 15% to 2.35 million (2015: 2.04 million) and market share of UK private car insurance increased to 6.5% (2015: 5.8%).

· Calendar year loss ratio3 for the year ended 31 December 2016 of 73.7%, before the impact of the Ogden rate change, or 77.7% after allowing for the impact of the Ogden rate change, within the target range of between 75% and 79% (2015: 75.4%).

· Strong operational performance and lower financing costs increased net income4 by 27% to £96.9m (31 December 2015: £76.2m).

· Significant increase in profit after tax of £76.1m to £78.4m (2015: £2.3m).

· Ongoing cash generation and reduction in net debt leverage multiple5, with retail cash generation up 21% to £98.1m (2015: £81.2m) and net debt leverage multiple reduced to 1.9x (2015: 2.1x) after the reduction in the Ogden rate.

· Strong financial position, with Solvency II coverage ratio of 140% (2015: 156%) after the reduction in the Ogden rate.

· Ongoing investment for growth, with Guidewire now handling all new claims, the Guidewire broking platform commencing roll-out and approaching 700 colleagues in Leicester providing significant capacity for further growth.

· Strengthened Board, with Dr Teresa Robson-Capps and Alison Burns joining in July as independent Non-Executive Directors.

· Final dividend proposed for 2016 of 6.6 pence per share (2015: 2.2 pence per share). Together with the interim dividend, this equates to 65.6% (2015: 56.5%) of adjusted profit after tax6, above the target range set by the Board at IPO.

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

"2016 was another year of profitable growth and delivering on our IPO promises. Our straightforward proposition continues to appeal to customers as we grew our share of the UK car insurance market to 6.5%, with live policy numbers increasing 15% to over 2.3 million.

"We have continued to invest in our future, expanding our site in Leicester, welcoming 340 new colleagues this year, and rolling out our new operating platform, Guidewire. These investments will provide the bedrock for the next stage of the Company's growth, supporting our ability to deliver high standards of customer contact and service.

"Built for the way customers buy insurance, our agile, data-driven pricing approach together with our continued underwriting discipline continues to deliver profitable growth. In 2016, we grew GWP by 25%, reduced our loss ratio to 73.7%, before the impact of the Ogden rate change, and grew adjusted operating profit by 21% to £152.1m, before the impact of the Ogden rate change.

"Our consistently profitable and highly cash generative model has enabled us to further reduce our leverage to 1.9x and ensure a robust solvency position. We are pleased to announce our proposed final dividend of 6.6 pence per share.

"When we floated in 2015 we set ourselves four ambitious targets and I'm pleased to say that through the hard work, expertise, dedication and support of our 2,680 colleagues, we are on track to meet or beat each of them. As a result, we have set ourselves updated targets through to 2019 which are equally ambitious, and which emphasise the confidence we have in the further potential of the business to continue to deliver superior returns. I am very proud to be part of the team that has delivered another successful year for Hastings."

The Group will host an update call for investors and analysts at 09:00am GMT on 2 March 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 2.3m live customer policies and employing over 2,600 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 2015 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 738244 [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) On 27 February 2017, the UK Government's Lord Chancellor announced a change to the personal injury discount rate (the 'Ogden rate') from 2.5% to minus 0.75%. The reduction in the Ogden rate will have the effect of increasing the cost of settling personal injury damages awards. The annual results for the financial year ended 31 December 2016 includes a one-off pre-tax charge of £20.0m (2015: £Nil) to reflect the impact of the Ogden rate change on the Group.

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

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

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

(6) Adjusted profit after tax for the purposes of dividend payout ratio is net income adjusted to exclude the impact of share scheme costs. For the purposes of calculating the 2015 dividend payout ratio, dividend was paid out at one third of adjusted profit after tax to reflect the shorter period from the IPO to the year end.

Chairman's statement

"We continued to deliver on promises made to shareholders."

Overview and strategy

It is with great pleasure that I introduce the Annual Report for Hastings Group Holdings plc for the first complete year as a listed entity. The Group continued to deliver on its promises made to shareholders at the IPO in October 2015. Live customer policies ('LCP') grew to 2.35 million, well on our way to beat our target of 2.5 million at the end of 2017. This strong growth has meant that the Group has delivered on its strategy and increased profitability. The Board is aware that the Group is on track to either meet or beat the targets set out at the IPO last year; as a result, the Board has reviewed and approved updated targets. Further details are provided by the CEO in his update.

2016 Review

Performance

Similar to last year, the year was one of increasing premiums for the car insurance market with premium inflation ahead of claims inflation. Along with increased policy numbers, the Group's profit after tax increased to £78.4m (2015: £2.3m) and adjusted operating profit for the year increased to £132.1m (2015: £126.1m). Adjusted operating profit was £152.1m before the impact of a £20.0m one off charge due to the reduction in the personal injury discount rate (the 'Ogden rate') announced by the Lord Chancellor on 27 February 2017.

The Group's continued growth has also led to the expansion of the Group's operations. The quality and diversity of talent available in Leicester means we now employ nearly 700 colleagues in the city, which has helped to enhance the Group's operational resilience and capability. Our operational capabilities at locations in Bexhill and Gibraltar have also been further strengthened as a result of our focus on talent and development.

The Board and Governance

As explained last year, the composition of the Board was not fully compliant with the UK Corporate Governance Code 2016 (the 'Code') as at least half the Directors excluding the Chairman did not meet the independence criteria. I am pleased to report that the Board has delivered on its intention to be Code compliant with the appointment of two new independent Non-Executive Directors in July 2016. Teresa Robson-Capps and Alison Burns bring a breadth of knowledge and experience from across the financial services industry.

The Board recognises that the Company does not currently fully comply with the Code in relation to the composition of the Remuneration Committee in that not all members of this Committee are independent Non-Executive Directors. The Board continues to believe that the independence of the Remuneration Committee is not compromised as it has an independent Chairman and a majority of independent Non-Executive Directors.

The Company announced on 14 December 2016 that it was notified by its majority shareholder, Hastings Investco Limited, that along with certain individual shareholders it had reached an agreement to sell a proportion of its shareholding in the Company ('the Transaction') to Rand Merchant Investment Holdings Limited ('RMI'), a South African investment holding company, of up to 29.9% of the Company's issued share capital. The Transaction completed on 1 March. Under the terms of a Relationship Agreement between RMI and the Company, as long as RMI holds at least 15% of the Company's issued share capital RMI is entitled to appoint one Director to the Company's Board and have an observer attend, but not vote at, meetings of the Board and the Board Audit, Remuneration and Risk Committees. As a consequence of this transaction the Founder Shareholders have agreed that one of its appointees would step down as a Director of the Company once RMI's shareholding reached at least 19.9% and the Goldman Sachs Shareholders have agreed that one of its appointees would step down once that shareholding reached 29.9%. Details of these Board changes will be announced once confirmed.

Optimising shareholder value - dividends

The Board remains confident in the Group's long term prospects and is pleased to propose a final dividend of 6.6 pence per share. This dividend will be paid on 31 May 2017 to shareholders on the register on 5 May 2017 with an ex-dividend date of 4 May 2017. This is the Company's second dividend for the year having paid 3.3 pence per share in November, taking the full year dividend to 9.9 pence per share. This final dividend is subject to shareholder approval at the Annual General Meeting to be held on 25 May 2017

Mike Fairey

Chairman

1 March 2017

CEO Q&A

"It's been a year of expansion and continued investment for the benefit of our 4Cs. We've welcomed 340 more colleagues to our new site in Leicester, and made a difference to our local communities through our 'Be the Change' local education initiative. We continue to deliver on our promises and I am delighted to share updated targets for our future growth plans."

Q. It's been over a year since IPO, looking back, what are your personal highlights? 

I am very proud to be part of the team that has delivered another successful year for Hastings. We continue to deliver on the promises we set out at the time of the IPO and I am delighted to be sharing updated targets with you following our strong performance to date. We have delivered profitable growth for shareholders, increased live customer policies by 15% to over 2.3 million and our share of the UK private car market has increased to 6.5% driving growth across all key metrics. Gross Written Premiums continued to rise, up 25% to £769 million, driving revenues of £590 million. It's important to note that our profitable growth has been achieved whilst maintaining our disciplined approach to underwriting with a pre-Ogden calendar year loss ratio of 73.7%, below our stated target of between 75% and 79%. We also continue to make significant investment in our colleagues and infrastructure through the rollout of Guidewire, the state of the art, integrated end to end platform for claims, broking and billing, and through the expansion of our third UK site in Leicester which has seen 340 colleagues join us in 2016. As you would expect, the recruitment of such a large number of new colleagues and the size and scale of the Guidewire implementation have not been without their challenges. It is our agility and the hard work, expertise, dedication and support of my 2,680 colleagues that have ensured that we continue to deliver for our colleagues, customers and the Company, and we are as focused on the long term as we are on our annual performance.

Tell us more about how you will achieve your new targets?

Our planned growth will come from two key areas. Firstly, growth of our core motor book with continued momentum from an increasing share of price comparison new business sales, a profitable maturing book and the launch of a new multicar proposition in 2017. Secondly, via expansion into home where we are seeing more customers using price comparison websites ('PCW') to buy their policies instead of through the traditional mortgage lender or bank route. We are also able to apply our successful approach in motor insurance to home insurance. We now have over 168,000 customers and we plan to start underwriting home insurance as lead insurer in 2017.

We've continued to make steady progress in executing our growth strategy with a 15% increase in policy numbers throughout 2016.

What factors do you think have powered the business' successes in 2016? 

As I've always said, our achievements reflect the refreshingly straightforward business model we've built. The way in which customers buy insurance has changed. The world is now digitally led and we've created a model that is built to take advantage of this shift throughout the entire customer journey, whether that's through the PCW distribution of our products (which account for around 90% of our new business sales), our innovative use of data or through our advanced risk selection and fraud detection capabilities. Every element of our business is optimised for a digital world. Secondly we've remained agile as we've grown in size and our model, in particular our innovative use of data, enables us to respond quickly to changing market conditions, averaging 35 changes to pricing per month, giving us a significant advantage over our competitors. Finally we underpin everything with our culture built around the principles of the 4Cs; Colleagues, Customers, Company and Community. This defines 'how' we do things and ensures we remain entrepreneurial with a can do attitude that reflects itself throughout every level of the business on a daily basis.

Q. What is the impact of Brexit on Hastings?

Hastings is a general insurance provider writing only UK business so it's very much business as usual for us. Whilst commentators expect some slowing of the UK economy, motor insurance is a compulsory purchase for motorists and it's not cyclical. We may just see more customers shopping around. Our business model is well positioned to take advantage of this so we just need to continue to provide refreshingly straightforward products that are competitively priced. We also find that when economic growth slows, miles driven also decreases which is a positive for our claims experience. Furthermore Hastings is not exposed to undue risk, either in terms of the constitution or size of its investment portfolio.

Q. Will there be any change to your strategic focus following RMI's acquisition of up to 29.9% in the company?

I can confirm there will be no change. We will continue to grow the core motor book and plan to grow our home and telematics propositions. We believe RMI's breadth of experience and capabilities could provide opportunities over time to help us further deliver our growth strategy.

Can you tell me more about Guidewire and its implementation?

Guidewire is a state of the art, integrated end to end platform for claims, broking and billing. It will greatly enhance our customer experience, including improved communications via a 24/7 online self-service portal and the development of mobile apps. It will also deliver significant benefits to our colleagues and Company, including reducing the claims lifecycle through improved workflow and activity management and more informed pricing, and supporting our future growth plans. We have also built our own digital and mobile components to add to the core platform provided by Guidewire.

The claims module was delivered in November 2015 and is already handling all of our new claims and around 80% of our overall claims. During 2016 we started to roll Guidewire out to broking and billing, and we went live with four price comparison websites by the end of the year.

We have invested significant capital expenditure in the implementation of Guidewire and expect to see the platform deliver operating cost efficiencies from 2018 onwards to support our continued growth.

Q. Tell us more about your local corporate social responsibility strategy and why it's important to you?

We have a very local approach to CSR so rather than sponsor or fundraise for large (and you can say equally deserving) global initiatives we have decided to focus on the communities where we work and live so we can see the difference we make, first hand. Last year, working with the team from social enterprise, Humanutopia and local recruiters, LoveLocal Jobs, we launched a new local education three year programme called 'Be the Change' in Bexhill and Leicester. The aim of the programme is to help disengaged students, aged 13-14 years, remove barriers that stop them getting on at school and to provide them with life skills to shape their future. The programme is delivered through workshops, one to one sessions and workplace visits. It has been a humbling and hugely gratifying experience for me and a number of my colleagues who have been involved as business mentors and I'm delighted that the schools are already beginning to see a difference through the reduction of truancy and bullying reported. I really enjoy talking to investors and the media about our strong performance, profit and what makes Hastings different. How we conduct ourselves in our financial and local communities are equally important to me. I am very proud of 'Be the Change' and the difference we can make to younger members of our local communities.

Q. You've been at Hastings for over four years now, what's next?

I've been asked that question quite a lot recently! To be clear, I have no ambition to be a CEO anywhere else. Hastings is a great place to work and still retains its family feel which is testament to our 4Cs culture. I'm proud to be part of this successful company that has grown profitably and in size. Colleague and customer numbers have doubled since I joined in 2012 and our stretching targets show that there is more growth planned. We do things differently at Hastings. We're an agile, data and digitally focused business that is built for the way customers buy insurance and we have a strong and dedicated team that deliver on their promises. I am proud to lead a great team of colleagues.

CFO statement

"2016 has been another record breaking year for Hastings. We continue to deliver on all our promises and look set to meet or beat every target set when we listed on the London Stock Exchange."

I am pleased to present another strong set of results. Our continued momentum means another record year of customer numbers and premiums, whilst we continue to deliver on all of the promises made when we listed on the London Stock Exchange. LCP increased by 15% to 2.35 million through continued strong retention rates and by attracting new customers with our refreshingly straightforward approach. This increase in policies combined with sustained rate increases has driven gross written premiums up 25% to £769.0m. The earn through of higher average premiums combined with a rigorous focus on underwriting discipline has maintained our calendar year loss ratio1 within the target range of between 75% and 79% set at IPO, after strengthening reserves following the reduction in the discount rate for personal injury damages awards (the 'Ogden rate').

The Group's sustained growth continues to be profitable and cash generative, with adjusted operating profit2 up 21% to £152.1m before the reduction in the Ogden rate, or, 5% to £132.1m after the reduction in the Ogden rate, and cash generated from operations of £172.5m. This has enabled us to reduce our net debt leverage multiple3, strengthen the balance sheet and pay healthy dividends. The Board has proposed a final dividend of 6.6 pence per share, in addition to the interim dividend of 3.3 pence per share that was paid in November. Overall, this means the total return to shareholders in respect of the year ended 31 December 2016 will be £65.1m, a payout ratio of 65.6% of adjusted profit after tax4.

We've continued to invest in the future, with around 700 Colleagues now based in Leicester, and have begun the phased roll out of our Guidewire broking platform, which will provide end to end capability to service customers. These investments will allow Hastings to continue to grow profitably through improving the customer experience, providing scale and delivering new home and motor products. The Group's underwriter, Advantage Insurance Company Limited ('AICL'), has made a smooth transition to the new Solvency II regime ('SII'), which came into effect on 1 January 2016, and remains well capitalised with a SII coverage ratio of 140% after the impact of the Ogden rate change.

Overall, I am proud of Hastings' achievements as we continue to meet or beat the promises made, strengthen our financial position and propose a final dividend of 6.6 pence per share. Recognising the Group's momentum, the Board has released an updated set of targets as we continue to focus on further growth from expanding our core motor book, building our home underwriting capabilities and scaling up our multicar offering.

Richard Hoskins

Chief Financial Officer

1 March 2017

Strong operational performance and significantly lower finance costs as a result of refinancing in 2015, have increased profit after tax by £76.1m for the year ended 31 December 2016 to £78.4m (2015: £2.3m).

On 7 December 2016, the Lord Chancellor announced a review into the discount rate for personal injury damages awards (the 'Ogden rate'), which is used by UK courts in the calculation of personal injury lump sum settlements. On 27 February 2017, it was announced that there will be a reduction in the Ogden rate from 2.5% to minus 0.75% with effect from 20 March 2017. The Group has therefore adopted a discount rate of minus 0.75% in estimating claims liabilities in existence at 31 December 2016, which has reduced adjusted operating profit by £20.0m for the year.

The reduction in the Ogden rate is not expected to have a material impact on the Group's financial outlook for 2017.

Gross written premiums have increased by 25% due to LCP growth and increases in average premiums.

Continued year on year market wide premium rate increases contributed to the growth in customers using PCW to buy insurance. Hastings' digitally focused business model positions the Group to benefit from increased PCW usage which, combined with a strong retention rate, has led to a 15% increase in LCP.

Through Hastings' agile pricing and data enrichment, the Group has continued to make targeted rate increases during the year resulting in average written premiums increasing by 9% whilst increasing market share in motor to 6.5%.

The Group continues to expand into home and telematics, with both benefitting from continued PCW market penetration. As at 31 December 2016, home LCP were 168,000 and telematics LCP were 45,000, a 25% and 45% increase from 31 December 2015 respectively.

The Group benefits from a wide range of risk and non-risk based revenue streams and overall, net revenue increased by 23% to £590.3m for the year (2015: £481.0m).

Net earned premiums increased by 31% to £334.8m over the prior period due to growth in LCP and earn through of higher average written premiums (2015: £255.9m).

Fees and commission on the sale of insurance contracts and ancillary product income increased due to growth in policies sold. Premium finance interest income benefitted from the premium rate increases applied by the business and an increase in the number of customers paying in monthly instalments.

Reinsurance commission volume increases were offset by the reduction in profit commission earned as a result of lower prior year releases than in the previous year and the impact of strengthening reserves for the reduction in the Ogden rate.

The accident year loss ratio before the impact of the reduction in the Ogden rate improved compared to prior period due to the earning through of premium rate increases applied over the last 12 months outweighing claims inflation for the year. Average earned premiums have increased 11% year on year compared to claims inflation of 6% before the impact of the Ogden rate change, reducing the Group's calendar year loss ratio to 73.7% before the impact of the reduction in the Ogden rate. After adjusting for the change in the Ogden rate, the calendar year loss ratio increased to 77.7%, within the Group's target range of between 75% and 79%.

The Group has maintained a combined operating ratio of 91.3% (2015: 91.3%), as the increase in the loss ratio following the reduction in the Ogden rate has been offset by the fall in the expense ratio.

The expense ratio for the period reduced due to premiums increasing at a faster rate than underwriting expenses.

The 21% increase in adjusted operating profit to £152.1m, before the impact of the reduction in the Ogden rate, primarily reflects the growth in LCP and the earning through of higher average premiums over the past year. Allowing for the £20.0m impact of the Ogden rate reduction, adjusted operating profit has grown by 5% to £132.1m (2015: £126.1m). The adjusted operating profit margin of 22.4% (2015: 26.2%) has declined due to the impact of strengthening reserves for the reduction in the Ogden rate and the investments made by the Group in the Guidewire system, the Leicester office and the wider business as Hastings positions itself to continue the strong growth achieved since IPO.

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

Taxation

The tax charge for the year was £15.9m (2015: £2.7m), an increase on the prior year relating primarily to the growth in taxable profits and the reduction in finance costs. The Group's effective tax rate ('ETR') of 16.9% (2015: 54.0%) has reduced from prior year due to non-deductible Preference Share dividends included in the year ended 31 December 2015. The Group's ETR reflects the mix between Underwriting and Retail profits arising from the difference in the enacted tax rates in Gibraltar and the UK respectively. It is anticipated that the mix of the Group's profits will remain stable over the medium term, resulting in a slight reduction in the Group's ETR as the UK corporation tax rate will reduce to 19% from April 2017 and further to 17% from April 2020.

The proposed final dividend for the year ended 31 December 2016 is £43.4m (2015: £14.5m), a payout of 6.6 pence per share (2015: 2.2 pence per share). This, combined with the interim dividend of 3.3 pence per share paid in November 2016, will bring total dividends to £65.1m for the year ended 31 December 2016 (2015: £14.5m). The final dividend has not been reduced for the impact of the reduction in the Ogden rate, which means that the dividend payout ratio of 65.6% is above the target of between 50% and 60% of adjusted profit after tax. Dividends in subsequent periods are expected to be within the target range and the interim and final dividends are intended to represent approximately one third and two thirds of the total annual dividend respectively. This reflects the strong trading results for the year 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 £503.2m as at 31 December 2015 to £553.6m as at 31 December 2016. This has been driven by the increase in profits retained within the business, after dividend payments of £36.1m.

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 27% 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 1.9x, compared with a multiple of 2.1x for 2015. Before the £20.0m impact of the reduction in the Ogden rate, the Group's net debt leverage multiple was 1.7x.

The following table sets out a reconciliation of free cash flow from the Retail business to the Group's closing free cash:

The Group's activities continue to be highly cash generative and cash net inflow from operating activities during 2016 was £172.5m, of which £98.1m was free cash from the Retail business (2015: £81.2m). This free cash was partially offset by dividend payments, interest and loan repayments and capital expenditure, principally on the development of the Guidewire system, the costs of which are expected to reduce in future periods as the system is brought online.

The Group has a conservative investment strategy with a primary focus on capital preservation. As at 31 December 2016, the Group's percentage of investments rated A or equivalent and above of the total portfolio was 77% (2015: 80%). The weighted average credit rating of the investment portfolio continued to be A+ (2015: A+).

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

Total insurance contract liabilities as at 31 December 2016 of £1,299.5m (2015: £912.1m) comprise £397.6m (2015: £320.4m) of unearned premiums, which are deferred and recognised in the statement of profit or loss in subsequent periods, and outstanding claims liabilities of £901.9m (2015: £591.7m). Gross outstanding liabilities have increased due to the greater exposure from the increase in LCP, the impact of claims inflation and the gross impact of £160.1m of the Ogden rate reduction to minus 0.75%.

The Group manages this risk by applying a consistent reserving methodology to calculate an internal actuarial best estimate and then reserving an additional risk margin. This margin has been maintained at a consistent 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 50% to £822.0m as at 31 December 2016 (2015: £547.5m) due to the greater exposure from increasing policy volumes and the reduction in the Ogden rate.

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 motor 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, and has limited the impact of the reduction in the Ogden rate on net claims liabilities.

The terms of the quota share reinsurance contracts are such that whilst the Group cedes approximately 50% of motor premiums written, in return for which the reinsurance partners contribute 50% of the claims cost for motor insurance policies that the Group incurs, the Group expects to retain the majority of profit generated on these policies through commissions receivable. The final reinsurance commissions receivable are dependent upon achieving certain performance criteria, including target loss ratios. The majority of quota share contracts are now on a rolling renewal basis, with 77% by proportion of the total 2017 programme value on two year minimum term arrangements. These contracts provide additional security and certainty regarding the availability of the Group's reinsurance arrangements.

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 as at 31 December 2016 calculated using the results of AICL, the regulated entity, on a standard formula basis.

The Underwriting business remains well capitalised under the Solvency II capital requirements which came into effect on 1 January 2016, replacing the Solvency I regime.

The Solvency II coverage ratio has reduced against 2015, reflecting the reserves strengthening to allow for the reduction in the Ogden rate and an anticipated £4.0m dividend to the Company which is included in the forward looking Solvency II coverage ratio. The Solvency II coverage ratio before the impact of the Ogden rate change and anticipated dividend was 158%.

Notes

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

The calculations of prior year development and accident year loss ratio have been amended so that prior period adjustments to risk margin are now recorded and presented within prior year development. This change has been reflected in the comparative accident year loss ratio and prior year development figures. This change does not impact on the reported calendar year loss ratio for any period, and does not reflect a change in reserving approach.

2 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.

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. For the 2015 dividend payout ratio, the dividend was calculated and paid at one third of adjusted profit after tax to reflect the shorter period from the IPO to the year end.

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 by AICL.

Consolidated Statement of Profit or Lossfor the year ended 31 December 2016

All results arose from continuing operations.[1]

Consolidated Statement of Comprehensive Incomefor the year ended 31 December 2016

Consolidated Balance Sheetas at 31 December 2016

Consolidated Statement of Changes in Equityfor the year ended 31 December 2016