Novae Group plc : Final Results 9 March 2017Â

9 March 2017                                                                                                         For immediate release Novae Group plc Preliminary results for the year ended 31 December 2016

Novae Group plc ("Novae" or "the Group"), the specialist insurance group, today announces its preliminary results for the year ended 31 December 2016.

• Gross written premium of £901.0 million (2015: £787.0 million)
• Weighted average rates on renewal premium reduced by 3.5%
• Combined ratio of 98.3% before Ogden rate change¹ ("before Ogden"); 103.6% including Ogden; (2015 restated: 91.3%)
• Net investment income of £32.7 million (2015: £6.8 million)
• Profit before tax of £59.1 million before Ogden; £23.7 million including Ogden; (2015 restated: £52.4 million)
• Return on equity of 15.5% before Ogden; 6.6% including Ogden; (2015 restated: 14.7%)
• Net asset value per share of 512.2p (2015 restated: 534.8p)
• Final dividend of 7.5p per share (2015: 20.0p per share)

Matthew Fosh, Chief Executive Officer, today said:

"Notwithstanding the challenges presented by market conditions, including the recent change in the Ogden discount rate, we continue to pursue our stated strategy of investing in those underwriting classes where we have demonstrable competitive advantage. Irrespective of short-term knocks, this strategy has steadily been transforming this business since 2013 - the journey is not yet complete, but the direction of travel is set."

There will be a presentation for analysts only at 10.30 am today at Novae's head office at 21 Lombard Street, London EC3V 9AH. Invitees are requested to go to the main entrance of 21 Lombard Street where they will be provided with a pre-prepared pass.

For further information: Matthew Fosh/Reeken Patel          :           Novae Group plc             020 7050 9000 David Haggie/Rebecca Young         :            Haggie Partners              020 7562 4444     

            ¹ The announcement on 27 February 2017 by the Lord Chancellor in conclusion to her review of the discount rate for personal injury claims (the "Ogden" rate) resulted in the Ogden rate being revised from 2.5% to minus 0.75%.

Chairman's statement

Novae Group plc ("the Group") has reported profit before tax of £23.7 million for the year. This is after reflecting the significant impact of the announcement from the Lord Chancellor on 27 February 2017 of the change in the discount rate for bodily injury claims (the "Ogden" rate) from 2.5% to minus 0.75%. Before making the adjustment for the Ogden rate we would have reported profit before tax of £59.1 million, a combined ratio of 98.3% and a return on equity of 15.5%. Our result was aided by a strong investment return under our new investment strategy implemented in 2015 and favourable foreign exchange movements following the UK's decision to exit the European Union and the US Presidential election. It also includes the impact of the prior year restatement to deferred acquisition costs.

The Ogden change was considerably more severe than the industry expected leading the Association of British Insurers to describe the outcome as "crazy". This has a one off impact on our reserves and we must focus on returning the comfortable level of surplus that we have carried to date.

Gross written premium rose to £901.0 million in the year, which represents growth of 4.7% at constant rates of exchange. Growth was driven by targeted expansion in core specialty classes and strong relationships with distribution partners, which includes our partnership with Securis Investment Partners LLP ("Securis") to underwrite US Excess & Surplus lines business through an innovative award winning Special Purpose Arrangement ("SPA").

The well understood market headwinds caused by surplus capital and premium rate reductions persisted through 2016. Combined with an increase in global risk and catastrophe losses, this was a challenging year for the Group. Although market conditions remain tough, the Group continued to invest in core classes of business where we see positive returns and future growth opportunities. While taking advantage of profitable growth opportunities, we have also taken steps to withdraw from, or reduce exposure to, classes such as international liability and property per risk reinsurance where returns have become unacceptable.

Market conditions will see us accelerate our concentration on the core classes where we are market leaders, our 'Invest' classes, and away from the classes where we are just market followers. We are confident of the integrity of our strategy. Premium from these invest classes has grown from 25% of total gross written premium in 2013 to 46% in 2016. Over the same period these classes have delivered an average combined ratio below 80%.

Global natural disasters in 2016 combined to cause insurance industry losses of US $54.0 billion and put an end to three years of relatively benign catastrophe activity. In contrast to the increased prevalence of large and catastrophic events during the year, we have benefitted from the continued improvement in our attritional loss ratio.

The timing of the Lord Chancellor's announcement was unfortunate, falling in the middle of the main insurance reporting season, nor was it well sign posted in terms of the size of reduction in rate. It has had a significant impact on our underwriting result, particularly through our motor reinsurance book.

The Board has confidence in the business strategy and outlook for Novae, notwithstanding the impact of the recent Ogden rate change. It is therefore recommending the payment of a final dividend of 7.5p per share while at the same time conserving capital to support growth and protect our shareholders' interest in that growth.  The Board expects to continue paying dividends in respect of the current year, maintaining an appropriate balance between the needs of the business and underlying profitability.

I noted in my Chairman's statement last year that the implications of a vote by the UK to leave the European Union would be extremely complex and events to date support this view. Although the referendum result has no immediate impact on the UK's ability to continue trading with the European Union, the uncertainty for the long term created for the City of London is significant. We welcome the proactive and engaged response by Lloyd's to ensure that the impact on our market is managed. Although the Group only derives approximately 8% of its revenues from the European Union, we will continue to work with Lloyd's of London to position ourselves positively for a post-Brexit world.

Over the last few years the Group has made a number of operational improvements. This includes our enhanced investment strategy, which focuses on maximising long term economic value by managing balance sheet assets and liabilities on a more holistic basis. I am pleased to report an investment return of £32.7 million for the year, which represents a 2.4% return on average invested assets (2015: £6.8 million and 0.6%). In the second half of 2016, we were also able to secure a new expanded bank financing facility which will not only support our future strategy but also reduce the Group's cost of financing from 2017 onwards. The new facility also increases the Group's bank lending group from one to four banks.

In addition to these internal operational improvements, we remain supportive of the progress made by Lloyd's in recent years to reform and modernise the market in which we do business. Several steps have been made to introduce technological and process change but much remains to be done to achieve the transformational change we need to remain competitive on the world market. In this respect, we welcome the appointment of Bruce Carnegie-Brown as the new Chairman of Lloyd's. His wide ranging experience will be invaluable in supporting the delivery of the modernisation agenda.

Your Board has seen two significant director changes during the year. In March 2016 we welcomed Andrew Torrance to the Board. Andrew joins us with over 20 years' experience in the insurance industry, holding a number of senior positions within the Allianz Insurance group. In October 2016, Charles Fry left the Group. Charlie played a key role as part of the senior team in crafting the strategy we believe is crucial to the prosperity of our business in the next five years. He has been replaced by Reeken Patel whose time as interim Chief Financial Officer, and his previous role as the Group's Chief Risk Officer, together with his prior experience as a partner at PricewaterhouseCoopers, provides an ideal skill set to support the delivery of our strategy.

As we move into 2017, there are no signs that the challenges affecting the market will abate, but rather will likely be added to once the implications of political events during 2016 work their way through. Although profitable growth will remain challenging to achieve, opportunities exist for those insurers who keep ahead of the curve in meeting the changing needs of customers and are first to the market with creative and innovative products. At some stage the decline in rates below profitable levels will be halted as the providers of excess capital find other fields to play in. It is a very brave person who calls when precisely that will happen. In the meantime it is our job to ready Novae to be able to take advantage of the turn in rates whenever that should happen.

We remain focussed on our goal to be a leading specialty underwriting franchise which delivers excellence in products and service. Although 2016 was a challenging year for the Group I remain confident that we have the right strategy and people in place to achieve our goal and deliver sustainable returns for our shareholders.

John Hastings-Bass Chairman 8 March 2017

DIVIDEND AND FINANCIAL TIMETABLE

Ex-dividend date: 20 April 2017 Record date: 21 April 2017 Annual General Meeting: 10 May 2017 Final dividend of 7.5p per ordinary share payable: 19 May 2017

Chief executive's statement

The Lord Chancellor's Ogden rate announcement, both in terms of timing and severity, has overshadowed our 2016 results. The resultant increases in reserves within our motor reinsurance and general liability classes have significantly eroded profits this year such that the Group reports a profit before tax of £23.7 million and a headline return on equity of 6.6%. If we exclude the impact of the change in Ogden rate then the Group delivered a much more respectable profit before tax of £59.1 million representing a return on equity of 15.5%. We are pleased, in particular, with our investment result, which was delivered against a volatile backdrop. Our underwriting result, however, was disappointing and delivered a combined ratio of 98.3%.

On 27 February 2017, the Ministry of Justice announced the long awaited outcome of its review of the discount rate used to settle personal injury claims. In preparation for this we had undertaken a detailed assessment of the impact of different Ogden rates on the Group's net reserves. The revised Ogden rate of minus 0.75% has contributed an additional 5.3 percentage points to our combined ratio taking it from 98.3% to 103.6%. The Ogden change, while significant, has a one-off impact on the 2016 results and has no significant impact on the profitability of our ongoing business.

Looking at our underlying result in 2016, the main driver of our increased combined ratio in 2016 compared to recent years was the increased prevalence of global natural disasters. I am not referring here to major hurricanes and earthquakes such as Hurricane Katrina in 2005, or the earthquake in Japan in 2011 - mercifully there were no disasters on that scale during the year. Rather, I am referring to natural catastrophes which, although tragic and often fatal events in their own right, are not so large as to trigger reinsurance recoveries for the Group, and hence we absorb a larger proportion of the loss ourselves. During 2016, there was a high incidence of these 'smaller scale' natural catastrophes, and even Hurricane Matthew, terrible and hugely damaging though it was, did not cause the level of damage and destruction in the US that was at one time forecast.

The cumulative effect of the increased prevalence of relatively small natural disasters was to dent severely our ability to deliver you a strong underwriting return for the year. When one adds to that a very competitive pricing environment, which served to force down premiums across the board, the Group produced a combined ratio of 98.3% for the year, compared to 91.3% the previous year. 

Despite these challenges, there are strong reasons for us to be optimistic for the Group's prospects in the coming years. The reasons for this optimism lie in the way the Group has fundamentally changed over the past few years, adapting proactively to a market environment that is itself changing. As margins in the industry as a whole, and particularly in wholesale Property and Casualty insurance, have come under increasing pressure, it has been ever more critical to move deliberately away from areas where one is not a 'lead' market, and to focus on those areas where one can exhibit a demonstrable competitive advantage. We call these classes within our underwriting portfolio "Invest" classes. This is precisely what we have been doing at Novae Group since 2013, investing heavily in those areas where we have specialist expertise, and reducing exposure in more generalist areas where we do not offer any great differentiation.

Tellingly, the painful losses we experienced in 2016 did not come from those areas where we are investing and growing, but from those classes where we are a 'follow market' as opposed to a lead, and from classes where we have been seeking actively to cut back or exit. If anything, the lesson learned was that we needed to be more rigorous in managing down our follow classes, even though the path we have been taking remains the right one.

Notwithstanding the lower underwriting returns during 2016, I remain confident that our strategic focus within the business on building an underwriting franchise with market leading capabilities and expertise, growing in areas with high barriers to entry for competitors, will enable us to adapt to the challenges ahead. I remain grateful to our shareholders and trading partners for their continued support in helping us to execute this strategy.

Results overview

The Group reported profit before tax of £23.7 million (2015 restated: £52.4 million), aided by a strong investment return of £32.7 million (2015: £6.8 million) and foreign exchange gains of £43.0 million (2015: gain of £0.5 million). This produced a return on average shareholders' funds of 6.6%.

Gross written premium of £901.0 million (2015: £787.0 million) represented growth of 14.5%, or 4.7% at constant rates of exchange. As mentioned above, our growth was focussed on those areas where we have market leading expertise and where we are delivering consistent profitability. It is these classes that are at the forefront of the Group's growth plans for 2017 and beyond. 

Those units where we feel we do not hold a commanding market position, or where rates remain under persistent pressure, and where consequently the Group does not expect to make adequate returns over the cycle, have been cut back or exited. As part of this approach we discontinued writing property per risk reinsurance business during the year, and in the final quarter of 2016 we closed our International Liability unit. Active management of the portfolio remained our focus throughout the year and we reduced premium levels in 14 of 32 underwriting units to reflect challenging market conditions.

Although the Group's combined ratio pre-Ogden at 98.3% was disappointing, particularly by our more recent standards, our underlying attritional loss ratio improved to 47.4% (2015: 49.8%). This improvement reflects in part the changes we have made to the quality of the underwriting portfolio, as well as changes to our portfolio mix, and increasing use of quota share reinsurance. The use of quota shares allows us to retain a presence in classes which may be under pricing pressure but which we nevertheless believe will deliver returns for shareholders in the long term. The pre-Ogden net loss ratio of 51.7% (2015: 48.3%) includes 5.7% from catastrophe events (2015: 2.0%) in a year that is estimated to have cost the insurance industry US $54.0 billion, the highest insured loss total since 2012.

The expense ratio increased to 46.6% (2015 restated: 43.0%). This is a reflection of our trend in recent years, of moving away from writing reinsurance classes, where many of our larger competitors have an advantage, towards writing more delegated underwriting business coupled with increasing use of quota share reinsurance.

Our investment return of £32.7 million (2015: £6.8 million) was a strong result in what was a turbulent year for bond and equity markets. Pleasingly, our change in investment strategy, explained to shareholders in 2015 and implemented in July of that year, served us well. It delivered a return on average invested assets of 2.4% (2015: 0.6%) at a lower average level of risk than our target risk appetite.

Overall, the business delivered basic earnings per share of 34.3p and tangible net assets per share of 507.9p. This is after adjusting for the restatement of deferred acquisition cost communicated in the final quarter of 2016, and allowing for the impact of the change in Ogden rate.

Strategy & focus

Our strategic aim is to be a leading underwriter of specialist classes of insurance, where the knowledge and experience of our underwriters, combined with flexibility and innovation, deliver us a competitive advantage. Current market conditions require insurers to adapt and innovate, and this is precisely what we have been doing in recent years in the way we have changed and repositioned our business. The journey is not yet complete, but the direction of travel is set. We remain focussed on our strategy of 'Expert Underwriting', 'Consistent Performance' and 'Dynamic Capital Management'. 

In order successfully to execute the first element of this strategy, 'Expert Underwriting', investment in underwriting talent is critical, and over the last 18 months the Group has made several senior underwriting appointments in our 'Invest' classes. In December 2015, Caroline Koczerzat joined the Group as deputy divisional head of Marine, Aviation and Political Risk ("MAP"). Caroline's breadth of experience across specialty classes, particularly cargo and specie, will complement the existing marine team, already leaders in their specialist marine fields. Other hires in the MAP division include Kieron Russell in crisis management, and Valeria del Villano in renewable energy, further strengthening these areas of specialist expertise.

The Casualty division welcomed Jo Chadha, Michael Shen and Sharif Gardner to the Cyber unit as the division looks to continue its profitable growth in this rapidly developing class. The Property division welcomed a new Accident & Health team in January 2016 and also hired Steve Cross to lead the Group's newly-formed Construction unit. As the wider insurance industry is itself being forced to adjust to new circumstances we believe our continuing investments in ever more specialist fields of underwriting, through attracting leading underwriters in their fields, are central to the Group's strategy and will serve us well as we head into 2017 and beyond.

The other component within this active portfolio management is cutting back on business in classes which we do not feel can deliver sustainable returns for shareholders, typically where we do not have a competitive advantage. Following the action taken in 2015 to transfer the Group's Agriculture Reinsurance and Credit and Surety Reinsurance units to Ironshore International and Liberty Specialty Markets respectively, we also exited property per risk reinsurance and international liability business during 2016.

Our second strategic goal of 'Consistent Performance' is a high bar to set in a volatile industry such as Property & Casualty (re)insurance, where both the rewards and the risks can be high. A focus on 'consistency' forces us to balance resilience and reliability in our business decisions alongside our search for the best possible returns within our stated risk appetite. Pursuing this goal requires companies to adapt and to embrace change. In 2016 we established 'Special Purpose Arrangement' 6129 ("SPA 6129") with Securis, which leverages our agility and underwriting expertise within the 'Excess & Surplus Lines' market in the US. The innovative structure of SPA 6129 enables us to broaden the scope of business we write, allowing us to bring more business to the London market, while at the same time offering exciting new opportunities to forward thinking industry investors such as Securis. I am delighted that this has been recognised by the wider industry, with the naming of SPA 6129 as Innovation of the Year at the London Market Reactions Magazine awards.

The Group's prudent approach to reserving is also important in our drive for consistency. At 31 December 2016, the Group held £54.3 million (2015: £73.8 million) in excess of the actuarial best estimate of reserves, representing a sufficiency of net reserves of 81%.

Our third strategic goal, "Dynamic Capital Management" seeks to optimise the efficiency of how capital is funded and deployed across the business, while at the same time defending the resilience of the balance sheet. In addition to partnering with third party capital, the Group also seeks to maximise the potential of existing available capital in delivering returns for shareholders. Our enhanced investment strategy is part of this approach because at its heart lies the primary aim of managing risk. This means that we do not target a particular level of investment return but manage the portfolio within defined risk limits. We achieve this aim by utilising an experienced external manager and observing rigorous investment risk management procedures.

Proactive management of capital surplus is also a key focus for the Group, seeking to strike an appropriate balance between delivering returns to shareholders while ensuring our balance sheet is robust. At the end of 2016, our surplus over our regulatory capital requirement was 41.2% (2015: 34.0%). The increase, in part, reflects the fact that we completed our two-year refinancing package in 2016. This can be expected to trend down in 2017 as we move towards our stated target of 20% headroom on a prospective basis.  

In March 2017, we announced that Reeken Patel would be appointed to the Board as Chief Financial Officer. Reeken brings a wealth of experience from his time as a partner at PricewaterhouseCoopers LLP and in his previous role as Chief Risk Officer at Novae Group. Reeken replaces Charlie Fry who left the Group in October 2016. I would like to record my gratitude for Charlie's contribution to the Group during his time with us. In addition to carrying out his CFO responsibilities he was a key architect in helping fashion the Group's strategy, working tirelessly towards its development and execution.

Outlook

In my Chief Executive's statement last year I commented that these were difficult times for the industry, with an abundance of capital, a soft rating environment and low interest rates being recurring themes in 2016. Nothing in the past 12 months has prompted me to change that view, and indeed the political events in the UK and US have served only to increase global uncertainty. Novae is not immune to these difficulties, as seen in particular with the Ogden rate change, but we believe the direction in which we are steering the business is the right one. The significant improvements we have made to your business in recent years, and that we will continue to make in 2017, mean we are better placed than ever before to deal with the undoubted challenges ahead.

In insurance, as in other industries, opportunities will always exist for those who are first to market with innovative products or for those who have niche specialisms requiring high levels of expert knowledge in areas with high barriers to entry. Our focus remains on disciplined underwriting in precisely these areas, and we will continue to reshape and adapt our portfolio to exploit the opportunities that emerge. Whilst 2017 is unlikely to see a change in the significant challenges facing the industry, Novae is in a strong position to navigate its way through them.

Matthew Fosh Chief Executive Officer 8 March 2017

Operating & financial review

Financial results

Group profit after tax of £21.6 million generated a return on average shareholders' funds of 6.6%. In December 2016, the Group announced it would write down a portion of its deferred acquisition cost asset on the Balance Sheet following a review of key accounting judgements. All relevant financial information presented throughout this report has been restated where indicated to reflect the changes made. The restatement resulted in a reduction of £13.5 million in prior year net assets and consequently a restated 2015 profit after tax of £48.8 million and return on shareholders' funds of 14.7% compared to £51.5 million and 15.0% as previously reported. Further information on the restatement is provided in the accounting policies section of this release.

Net investment income of £32.7 million (2015: £6.8 million) benefitted from the Group's enhanced investment strategy implemented in the second half of 2015. This was achieved despite the volatility created by the UK's vote to leave the European Union and US Presidential Election. Net tangible asset value per share was 507.9p (2015 restated: 529.8p).

¹Â Â Â Â Â Â Â  The claims ratio is calculated as net claims incurred divided by net earned premium for the year. The claims ratio excludes the foreign exchange effect of the non-retranslation of non-monetary items ²Â Â Â Â Â Â Â  The expense ratio is calculated as acquisition costs and total operating expenses divided by net earned premium. The expense ratio excludes the foreign exchange effect of the non-retranslation of non-monetary items ³        The combined ratio is the total of the claims and expense ratios ⁴     The announcement on 27 February 2017 by the Lord Chancellor in conclusion to her review of the discount rate for personal injury claims (the "Ogden" rate) resulted in the Ogden rate being revised from 2.5% to minus 0.75%. This change had a material one-off impact on the results of the Group and therefore, to assess performance profit before tax, combined ratio and return on equity are also presented before the impact of the Ogden rate change ^{5      Â}  Return on equity is calculated as profit after tax over average shareholders' funds during the period

*     In December 2016 the Group announced it would write down a portion of its deferred acquisition costs asset on the Balance Sheet following a review of key accounting judgements. This has resulted in a prior year restatement to net assets of £13.5 million. The comparative financial information presented throughout this report has been restated to reflect this change. Further information on the restatement is provided in the accounting policies section of this release.

Premiums

Gross written premium for the year ended 31 December 2016 was £901.0 million (2015: £787.0 million), an increase of 14.5% or 4.7% at constant rates of exchange. The Group continues to actively manage its underwriting portfolio and allocate capital to classes of business offering the most attractive returns for shareholders. The Property division achieved strong growth of 21.1% to £439.0 million (2015: £362.5 million), or 12.0% at constant rates of exchange. This was concentrated in core classes within the property insurance portfolio and particularly in the US Property Facilities unit which benefitted from the SPA in partnership with Securis.

Premium in the Casualty division increased by 6.8% to £195.7 million (2015: £183.3 million), a reduction of 0.9% on a constant currency basis. Significant growth was achieved in the Cyber unit reflecting the Group's continued investment in innovative and market leading thought leadership in this area. Reductions in other classes in the division, including the closure of the Group's International Liability unit in the last quarter of 2016, offset the Cyber growth.

The MAP division experienced premium growth of 10.4% to £266.3 million (2015: £241.2 million), equivalent to a reduction of 1.8% at constant rates of exchange. The core classes within this division continue to grow profitably while the Group has cut back business written in energy and aviation reinsurance where rates remain under the most severe rating pressure.

In aggregate across the Group, rates were down by 3.5%. The Property division experienced rate reductions of just under 4% for the full year. The more severe rating pressures were in catastrophe reinsurance units during the first half of 2016 although a slowing in the pace of rate reduction in the US was seen in the latter half of the year. Across the Casualty division, increases in Cyber rates balanced out a modest level of decrease across other Specialty classes. The MAP division experienced the most severe rate reductions with rates on average down by 6%.

Outwards reinsurance spend during the year was £237.0 million (2015: £148.9 million) producing a reinsurance spend ratio of 26.3% (2015: 18.9%). Premium ceded as part of the SPA arrangement was a significant contributor to the year on year increase in addition to an increased use of proportional reinsurance in lines such as cyber. The Group also took advantage of favourable market conditions to manage its net exposures in peak catastrophe zones. Net earned premium for the year was £644.8 million (2015: £582.6 million).

Claims

Gross claims incurred were £494.4 million (2015: £326.4 million). These were offset by reinsurance recoveries of £112.1 million (2015: £44.9 million). Net claims incurred were £382.3 million (2015: £281.5 million) producing a net claims ratio of 57.0% (2015: 48.3%).

Attritional claims

Attritional claims were £318.6 million (2015: £290.2 million), equating to an attritional loss ratio of 47.4% (2015: 49.8%), which includes 0.8% relating to the change in the Ogden rate. The favourable movement in the attritional loss ratio reflects disciplined underwriting in a softening rating environment and a shift in the mix of business. Novae's diverse range of portfolios provide exposure to different pricing cycles, enabling the Group to reduce exposure where pricing is inadequate and to take advantage of profitable growth opportunities elsewhere.

Catastrophe and large loss claims

Global natural disasters in 2016 combined to cause insurance industry losses of US $54.0 billion and are back in the mid-range experience compared with a relatively benign period between 2013 and 2015. Notable losses for the Group in 2016 included Hurricane Matthew, major wildfires in Canada and earthquakes in Japan, New Zealand and Taiwan. The Group was also impacted by a number of large losses in the current accident year including the Jubilee oil field loss, the SpaceX Amos 6 satellite loss, and two product recall events. Total incurred losses from catastrophe events and large losses were £69.2 million (2015: £39.2 million), which contributed 10.4% (2015: 6.7%) to the claims ratio.

Reserve releases

In its assessment of the valuation of insurance liabilities, the Group targets a probability of sufficiency of net reserves of 70 to 80 per cent. Favourable reserve experience contributed 5.3% to the overall claims ratio in the year (2015: 8.2%). Following the change in the Ogden discount rate, this favourable experience reduced to 0.8%. The margin held over actuarial best estimate decreased to £54.3 million (2015: £73.8 million), representing a sufficiency of net reserves of 81%.

Acquisition costs & Operating expenses

Acquisition costs for the year were £242.3 million (2015 restated: £194.9 million) producing an acquisition cost ratio of 36.9% (2015 restated: 33.5%). The increase is consistent with changes to the portfolio over the past two years, with a higher proportion of business now arising from delegated underwriting arrangements and a reduction in the level of reinsurance business underwritten.

Total operating expenses were £64.8 million (2015 restated: £55.5 million) including costs unallocated by division of £22.9 million (2015: £25.9 million). The operating expense ratio of 9.7% (2015 restated: 9.5%) is in line with the previous year and reflects the Group's continued commitment to investing in the business whilst maintaining expense discipline.

Acquisition costs and operating expenses have been updated to reflect the re-presentation of operating expenses as acquisition costs following the accounting changes reported by the Group. This change increased total acquisition costs by £39.7 million in 2016 (2015: £37.4 million increase), and reduced operating expenses by a corresponding amount. The combined expense and acquisition cost ratio following the changes was 46.6% (2015: 43.0%). Further detail on the changes made are included in the accounting policies section of this release.

Investment performance

Investment income for the year was £32.7 million (2015: £6.8 million), equivalent to a total return net of investment management fees, of 2.4% (2015: 0.6%) on average invested assets of £1,361.1 million (2015: £1,219.5 million).

The Group's investment portfolio is structured to allow risk to be managed proactively. The portfolio remained close to target risk appetite for much of the first half of the year but for most of the second half it was positioned below target risk due to volatility caused by political instability. This reduced the Group's exposure to some of the volatility seen in markets over the second half of the year. Overall the portfolio outperformed the liability benchmark, while running less risk.

The profile of the Group's investment portfolio is as follows:

The investment portfolio can be analysed by rating as follows:

The Group held investment assets and cash of £1,448.2 million at 31 December 2016 (2015: £1,259.0 million) primarily in government and high grade corporate bonds with a modest exposure to equity and emerging market debt.

The Group's investment portfolio has been constructed with flexibility to manage the duration of the portfolio and exposure to growth assets during periods of market stress with the aim of improving investment outcomes without increasing overall risk appetite. At 31 December 2016 the average duration across the Group's investment portfolio was 2.6 years (2015: 2.4 years).

The investment outlook for 2017 remains challenging with a number of political events on the horizon and, as seen in 2016, the outcomes of these cannot be predicted with any degree of confidence. As such, we remain confident our risk based investment strategy will continue to serve us well.

Foreign exchange

Novae reported a gain on foreign exchange of £43.0 million (2015: gain of £0.5 million). The Group has benefitted from the weakening of Sterling against all major currencies following the UK's vote to leave the European Union. The Group does not speculate on foreign currency movements and where practical seeks to maintain a broadly neutral foreign currency position.

The Group wrote a significant amount of US dollar denominated business during the year. US dollar business now accounts for 62.3% of gross written premium (2015: 58.7%). Other trading exposures include the euro (6.9%), Australian dollar (4.1%) and Canadian dollar (3.1%) (2015: 8.7%, 4.1% and 3.1% respectively).

Tax

Novae's tax charge for the year was £2.1 million (2015 restated: £3.6 million), which produced an effective tax rate for 2016 of 8.9% (2015 restated: 6.9%).

In 2015, changes to the UK corporation tax rates were announced in the Budget, including a reduction in the main rate of corporation tax to 19% from 1 April 2017 and 18% from 1 April 2020. At the March 2016 Budget, the government announced a further reduction to the corporation tax main rate for the year starting 1 April 2020, setting the rate at 17%. These changes were substantively enacted on 15 September 2016 and have been reflected in the Group's calculation of current and deferred tax. The carrying value of the Group's deferred tax asset is now £6.2 million (2015 restated: £9.5 million).  

Capital structure

The majority of regulatory capital, held in the UK and in Bermuda, is required to support the Group's underwriting platform at Lloyd's, with a small requirement relating to the Group's Lloyd's managing agency, service company and Bermudian class 3A reinsurer.

Novae determines its capital requirements in line with Lloyd's requirements for Syndicate 2007. Since 2012, Novae has used its Solvency II internal model for the purpose of assessing its solvency capital requirement. Lloyd's reviews and agrees these capital assessments in their market oversight role, before applying an economic capital uplift in excess of the regulatory requirement to set the total capital requirement for the Group's managed syndicate (Syndicate 2007), known as the Economic Capital Assessment ("ECA"). This process is unchanged under the Solvency II regime which came into force on 1 January 2016.

The Group is required, through its corporate member, to satisfy this capital test at coming into line dates in June and November each year and is required to maintain a continuous capital assessment, advising the PRA and Lloyd's should its capital position deteriorate.

Regulatory capital

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

¹Â Â Â Â  Pipeline profits represent the Group's share of undistributed profits available for Lloyd's capital provision at the most recent coming into line. Consequently these are based on the 30 June balance sheet. As such they do not reflect the impact of the change in Ogden discount rate which we expect to reduce pipeline profits by c.£55m ²      Headroom stated is exclusive of any distributions subsequent to the balance sheet date

The Group's available capital for 2017 includes letters of credit held as collateral under quota share reinsurance arrangements.

Debt structure

As at 31 December 2016, the Group had gross debt and banking facilities of £251.4 million (2015: £192.4 million).

During the year the Group renegotiated its bank financing facility, increasing the number of banks supporting the facility to four.

The new facility provides a multi-option letter of credit ("LoC") and revolving credit facility ("RCF") of £170.0 million (2015: LoC US $126.0 million and RCF £30.0 million), available until December 2018. This can be fully drawn as LoC or up to £50.0 million as RCF. In addition, the facility includes a £50.0 million term-loan, to be drawn in 2017 for the repayment of senior and subordinated notes due to mature. The facility is multi-currency and uncollateralised.

At 31 December 2016 total drawings under the facility amounted to LoCs of US $55.0 million and €45.0 million (2015: $76.0 million drawn).

Third party capital

Novae's participation on Syndicate 2007 is shown below. For the 2014 year of account additional capital was provided by two direct corporate member participants on a limited tenure basis as detailed below:

Property

Novae's Property division represents 48.7% of the Group's gross written premium (2015: 46.1%) and underwrites a diverse mix of risks worldwide with a focus on the US, UK and Europe. Over the past 12 months the division has invested in underwriting talent, which has enabled the establishment of new classes of business and new product lines and supported organic growth within the portfolio.

During 2016, gross written premium grew by 21.1% to £439.0 million (2015: £362.5 million) representing growth of 12.0% at constant rates of exchange. This was concentrated in the property insurance portfolio, which now represents 38.8% of the Group's gross written premium (2015: 33.3%).

Growth was particularly strong in US Excess and Surplus lines business, which benefitted from the launch of a Special Purpose Arrangement in partnership with Securis Investment Partners LLP ("SPA 6129"). The division is an established market leader of delegated authority business across North America which achieved growth of 75.9% at constant rates of exchange.

The UK & European Property Facilities unit progressed well by developing a number of niche specialisms within the non-standard residential property sector. The unit continues to respond to the changing needs of a fast moving market and grew by 11.1% at constant rates of exchange.

Organic growth within the division was complemented by the establishment of new underwriting units writing construction and accident & health risks. The Construction unit was established in the first quarter of 2016 and underwrites a range of risks globally, with an emphasis on infrastructure development and power construction. The Accident & Health team was strengthened in late 2015 and identified as a separate underwriting unit. The team offers bespoke occupational and trade coverage in addition to expertise in the professional and amateur sports markets in the US, UK & Europe. Combined these two new units contributed 4.9% of the division's 2016 gross written premium.

The division continues to actively manage its portfolio and cut back in a number of areas. The most significant reductions were in agricultural reinsurance, following the transfer of the unit to Ironshore International in the second half of 2015 and in property per risk reinsurance following the closure of the Group's Zurich office in the final quarter of 2016. Combined these units represented 12.4% of the division's gross written premium in 2015. The division also elected not to renew its participation on a significant direct and facultative arrangement, reallocating capital to support other opportunities.

Claims experience was less favourable compared with the previous year and the division produced a net claims ratio of 52.3% (2015: 43.8%). Although the attritional loss ratio continues to perform well, the division was impacted by a number of catastrophic loss events in the year most notably Hurricane Matthew, the Alberta Wildfires and the Kaikoura and Kumatomo earthquakes. Catastrophe claims contributed 11.6% to the division's reported net loss ratio for the year (2015: 4.4%). The 2015 reported loss ratio also includes the benefit of reserve releases from property reinsurance classes. The increase in the expense ratio includes both the impact of investment in new underwriting hires and the change in business mix towards direct, rather than reinsurance classes.

The division experienced overall rate reductions of 3.9% across insurance and catastrophe reinsurance lines of business. Direct property business included decreases of up to 3.3%, with the direct & facultative market under greater pressure than our property facility units writing delegated authority business. Catastrophe reinsurance classes were down by 5.8% overall with rates in the US performing better than internationally, assisted by a slowing pace of reductions seen during the latter half of 2016.

Casualty

Novae's Casualty division underwrites a broad range of specialty and general liability insurance risks in addition to motor and casualty reinsurance. The division contributed 21.7% of the Group's gross written premium (2015: 23.3%) and grew by 6.8% in the year, a decrease of 0.9% at constant rates of exchange.

The specialty liability portfolio continues to be the largest overall component in the division and includes cyber, financial institutions and medical malpractice classes. Recent investment in underwriting talent has strengthened the division's cyber capabilities with the unit achieving growth of 44.6% at constant rates of exchange. The cyber team are a recognised thought leader in the class. They work closely with leading technology firms and a globally recognised leading academic institution to model and validate cyber risk. This has enabled the unit to adapt to the changing needs of clients and develop long term and mutually beneficial partnerships across the industry.

The division is also a recognised market leader in financial institutions business at Lloyd's, underwriting a diversified account which ranges from global household names to local risks. The unit maintained its market position with growth of 0.2% at constant rates of exchange. Combined, the Cyber and Financial Institutions units represent 8.7% of the Group's gross written premium (2015: 7.7%).

The division's specialty liability offering was increased further with the establishment of the US Excess Casualty unit, which provides technically backed underwriting solutions for US domiciled or US exposed international clients. The new senior underwriting hires bring significant industry experience to the wider team and in its first full year of underwriting the unit contributed 7.1% of the division's gross written premium (2015: 3.5%).

Growth in these classes offset reductions in the Professional Indemnity unit, as the division reduced its exposure to poorer performing business in this class. In addition, the division withdrew from writing international liability business in the final quarter of the year, which accounted for 5.6% of the division's gross written premium in 2016 (2015: 7.5%).

The division's reinsurance units write general liability and motor business, which combined represents 3.3% of the Group's gross written premium (2015: 3.8%). The units provide specialist underwriting solutions for UK and international risks, developing long term relationships and providing innovative solutions to meet insureds' needs. Although some growth was achieved in the UK-centred Motor Reinsurance unit, rating pressure in general liability business led to a small year on year reduction in the unit's gross written premium. These were the units that felt the impact from the change in Ogden rate.

The division reported a net claims ratio of 76.9% (2015: 58.4%), which when adjusted for the impact of the change in the Ogden discount rate was 52.9%. Over the last two years the division has repositioned its portfolio towards more profitable lines of business and, combined with the use of quota share reinsurance, has improved its underlying attritional loss ratio. This benefit has been offset by an increase in the expense ratio given the change in business mix and investment made in new underwriting teams, which the division expects to benefit from in the future.

Rates in the Casualty division were flat in aggregate. The Cyber unit experienced positive rate movements of c.5% across the portfolio with industries such as retail and healthcare seeing strong rating as pricing continues to evolve and adjust to developments within the risk environment. In the absence of any major loss activity, rates across Financial Institutions and Professional Indemnity were down by 4%. Medical Malpractice saw little overall rate movement. 

Rates in UK general liability business continued a more positive year on year rate trend, up by around 1-2%.  In casualty reinsurance lines, general liability rates were down by 3%, though motor increased to respond to market-wide concerns around rising claims frequency and severity trends and we anticipate that this trend will continue following the Ogden rate change. The Group continues to maintain a renewal-heavy position in these latter lines of business.

Marine, Aviation & Political Risk

Novae's MAP division accounts for 29.6% of the Group's gross written premium in the year (2015: 30.6%) and offers significant expertise across marine, energy, aviation and political risks globally. The division achieved growth of 10.4% on prior year which represented a small reduction of 1.8% at constant rates of exchange. Over the last 12 months the division has invested heavily across all classes, hiring lead underwriters in marine hull, war and cargo and establishing a new Renewable Energy unit. The division also hired Caroline Koczerzat as deputy divisional head, whose wealth of experience across all classes within the division will add further depth and knowledge to the existing team.

The marine portfolio remains the largest component of the division and represents 16.2% of the Group's gross written premium for the year (2015: 14.1%). Constant currency growth was achieved across all direct marine classes as the division capitalised on its position as a recognised Lloyd's leader in the field of marine liability and the expertise and market relationships brought by new underwriting hires in marine hull, cargo and renewable energy.

The division's energy account continued to experience some of the most significant rating pressures, given depressed oil prices, increased competition and the relative paucity of major loss activity over the last few years. Despite this Novae's Energy unit remained agile and responsive to the changing needs of the market and contributed 11.5% of the division's gross written premium in the year (2015: 13.7%).

The division also achieved growth across all political and credit units, which incorporates political and credit risk insurance, political violence and crisis management. Novae has the expertise and a market leading presence in political and credit risk insurance which enabled constant currency growth in this class of 23.2%. The Political Violence and Crisis Management units achieved growth of 45.7% and 9.7% respectively with both units focussed on being adaptable and innovative in delivering new products and solutions to a diverse client base.

The most significant premium reductions were experienced in aviation reinsurance, where cedant retentions increased following consolidation within the direct market and the failure of the rating environment to respond to loss activity in recent years. In addition, the division transferred its Credit & Surety reinsurance portfolio to Liberty Specialty Market in the second half of 2015, which contributed 5.7% of the division's gross written premium in 2015.

The division produced a net claims ratio of 49.9% (2015: 46.9%) which included a small improvement in the attritional loss ratio compared with 2015. The division's performance was impacted by a number of large loss notifications on current and prior accident years, the most significant of which included the Jubilee oil field loss, the SpaceX Amos 6 satellite loss, a Latin American political risk loss and two product recall events. Combined these events contributed 8.8% to the reported net loss ratio. In line with other divisions, the increase in the expense ratio includes the investment in the new underwriting hires and a change in business mix towards insurance classes.

In common with the wider market environment, some of the most significant rate reductions in 2016 were in Marine and Energy business, consistent with the continued market trend of heightened softening in classes that have benefitted from recent benign claims experience. The MAP division as a whole saw rates reduce by around 6%. Marine lines suffered average rate decreases of around 3%. 

Energy rates have fallen by nearly 15%, driven by relatively low levels of large loss experience in recent years, increased capacity and carrier appetite, and reduced product demand resulting from suppressed oil prices. Aviation reinsurance rates fell by just over 8% as the industry continues to see a lower frequency of major losses. Rates in Political Risk and Credit lines of business declined by an average 5%; Terrorism, Kidnap & Ransom and Product Recall rates also down by around 7% in aggregate.

Consolidated income statement for the year ended 31 December 2016

Consolidated statement of comprehensive income for the year ended 31 December 2016

The attached notes form an integral part of these consolidated financial statements. Consolidated balance sheet as at 31 December 2016  

The attached notes form an integral part of these consolidated financial statements.

The financial statements were approved by the Board of Directors and authorised for issue on 8 March 2017 and were signed on its behalf by:

M K Fosh                                                R Patel Chief Executive Officer                             Chief Financial Officer

Consolidated statement of changes in equity for the year ended 31 December 2016

The attached notes form an integral part of these consolidated financial statements.

Consolidated cash flow statement for the year ended 31 December 2016

The attached notes form an integral part of these consolidated financial statements.

Notes to the financial statements

1.  Significant accounting policies

Novae Group plc (the "Company") is a company registered in England and Wales. The address of the registered office is 21 Lombard Street, London, EC3V 9AH.

The consolidated financial statements include the results of the Company and all its subsidiary undertakings (together referred to as the "Group") made up to the same accounting date.

The consolidated financial statements have been prepared and approved by the directors in accordance with International Financial Reporting Standards as adopted by the EU ("Adopted IFRS") on a going concern basis.

The accounting policies set out below have been applied to the Group consistently for all periods presented in these consolidated financial statements unless otherwise stated.

1.1 Revised and new reporting standards

The Group has adopted, where relevant, the following amendments to standards, including any consequential amendments to other standards, with a date of initial application of 1 January 2016.

•     IFRS 11: Amendment Accounting for Acquisitions of Interests in Joint Operations
•     IAS 27: Amendment: Equity Method in Separate Financial Statements
•     IFRS 10, 12 and IAS 28: Amendments: Investment Entities: Applying the Consolidation Exception
•     IAS 16 and 38: Amendment: Clarification of acceptable methods of depreciation and amortisation
•     Annual improvements to IFRSs - 2012-2014 cycle

The Group financial statements were not impacted by any of the amendments or improvements to the standards above.

•     IAS 1: Amendment: Disclosure initiative. This initiative clarified certain disclosures relating to materiality, the primary statements, and notes to the financial statements. The Group considered the items clarified in this amendment in preparing its financial statements, however no significant changes were made as a result.

There are a number of new standards, amendments to standards and interpretations that are effective for annual periods beginning on or after 1 January 2017, and have not been applied in preparing these financial statements. The Group does not plan to adopt these standards early; instead it will apply them from their effective dates as determined by their dates of EU endorsement.

•     IAS 12: Amendment: Recognition of Deferred Tax Assets for Unrealised Losses (1 January 2017)*

Clarifies how to account for deferred tax assets related to debt instruments measured at fair value.

•  IAS 7: Amendment: Disclosure initiative (1 January 2017)*

Requires companies to disclose information about changes in their financing liabilities.

•  IFRS 2: Amendment: Classification and measurement of Share based payment transactions (1 January 2018)*

Sets out the principles for the recognition, derecognition, classification and measurement of financial assets and liabilities.

•    IFRS 9: Financial instruments (1 January 2018)*

Sets out the principles for the recognition, derecognition, classification and measurement of financial assets and liabilities, deferral of application is possible in line with IFRS 17, see below for more details.

•    IFRS 15: Revenue from contracts with customers (1 January 2018)*

IFRS 15 replaces existing guidance on revenue recognition, measurement and disclosure. It establishes a comprehensive framework for determining when revenue should be recognised and how it should be measured. The Group does not currently anticipate any impact on its financial statements from the revised standard.

•    IFRS 16: Leases (1 January 2019)*

IFRS 16 replaces the existing guidance in IAS 17 regarding leases, and seeks to remove the long-standing distinction between 'finance' and 'operating' leases. The Group is still reviewing the potential impact of the standard on its financial statements.

•    IFRS 17: Insurance contracts (1 January 2021)*

In November 2016 the IASB confirmed the effective date for IFRS 17 will be 1 January 2021. IFRS 17 was previously referred to as IFRS 4 phase II and is the new accounting standard in respect of insurance contracts. In September 2016, the IASB announced that application of IFRS 9 can be deferred under the 'deferral approach' until IFRS 17 comes into effect. Application of the deferral approach is for entities/groups whose predominant activity is issuing contracts within the scope of IFRS 4. The Group expects to be eligible for the deferral approach, and is still reviewing the potential impact of the standard on its financial statements.

* Standards that have not yet been endorsed by the EU.

1.2 Basis of preparation

These consolidated financial statements are prepared in accordance with International Financial Reporting Standards ("IFRSs") and interpretations issued by the IFRS Interpretation Committee ("IFRICs"), as adopted for use in the European Union ("EU"). The consolidated financial statements comply with Article 4 of the EU IAS regulation and Companies Act 2006.

All figures included in the consolidated financial statements are presented in millions of pounds sterling, rounded to the nearest £100,000 unless otherwise stated. The financial statements have been prepared under the historical cost convention, as modified by the revaluation of financial assets at fair value through the income statement.

1.3 Prior year restatement

In 2016, the Group reviewed its accounting policy relating to the treatment of deferred acquisition costs and the associated recognition of acquisition costs in the income statement. As a result of this review, it was identified that there were certain operating expenses that were previously deferred that should have been charged directly to the income statement as incurred. In addition it was identified that the method by which deferred acquisition costs were released to the income statement did not appropriately match the related premium earnings pattern.

This review resulted in a number of corrections by restating each of the affected financial statement line items for prior periods. This includes an adjustment to the income tax charge and deferred tax asset of £0.3 million and £2.5 million respectively and an adjustment to insurance and other payables of £1.0 million to adjust the Group's obligations to third party providers. The tables below summarise the impact on the Group consolidated financial statements.

1. Consolidated Balance Sheet

 b. Consolidated income statement

 c. Consolidated cash flow statement

There was no impact on the total operating, investing or financing cash flows for the years ended 31 December 2016 and 2015.

d. Key performance Indicators

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.

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

2a. Segmental income statement

¹The announcement on 27 February 2017 by the Lord Chancellor in conclusion to her review of the discount rate for personal injury claims (the "Ogden" rate) resulted in the Ogden rate being revised from 2.5% to minus 0.75%. This change had a material one-off impact on the claims incurred for 2016 and therefore the combined ratio is also presented before the impact of the Ogden rate change.

The combined ratio is made up of the aggregation of the claims ratio and the expense ratio. The claims ratio is calculated as claims and claim adjustment expenses, net of reinsurance, as a proportion of net earned premiums. The expense ratio is calculated as expenses for the acquisition of insurance contracts, and operational expenses, as a proportion of net earned premium.

*Net unearned premiums and deferred acquisition costs are treated as non-monetary items in accordance with IFRS. As a result, a foreign exchange mismatch arises caused by these items being earned at historical rates of exchange prevailing at the original transaction date, whereas resulting claims are earned at the average rate for the period. The impact of this mismatch on the income statement is shown in the column titled "Impact of non-translation of non-monetary items" above. The 2015 comparatives have not been restated for the impact of non-translation of non-monetary items as the impact was not significant to the Group.

2b. Segmental balance sheet

2c. Geographical information

The following table shows the distribution of the Group's consolidated gross written premium by area of risk:

2d. Other information

No customer represents more than 10% of the Group's gross written premium.

3. Earnings and net assets per share

a)       Basic earnings per share

1. Net of shares held in the employee benefit trust ("EBT") which are earmarked for the Group's LTIP, SESP and deferred bonuses payable in shares.

b)       Diluted earnings per share Diluted earnings per share are calculated adjusting the weighted average number of shares outstanding to assume conversion of all potentially dilutive shares. Novae's potentially dilutive shares relate to LTIP awards, SESP awards and deferred bonuses payable in shares. The number of potential shares is calculated with reference to the current date as though it were the vesting date, excluding shares held by the employee benefit trust earmarked for these awards.

c)       Net assets and net tangible assets per share

Net assets and net tangible assets per share are calculated on the number of shares in issue (excluding shares held by the employee benefit trust and earmarked for the Group's LTIPs and deferred bonuses payable in shares) at 31 December 2016.

4.      Net investment income

5.      Income taxes

The standard rate of corporation tax in the UK is 20%. The effective tax rate for the year ended December 2016 is 8.9% (2015 restated: 6.9%).

In addition to the above, tax of £0.9 million (2015: £0.4 million credit) has been charged directly to other comprehensive income as follows:

6. Dividends per share

A final dividend of 7.5p per ordinary share is payable on 19 May 2017 to shareholders on the register on 21 April 2017. The ex-dividend date is 20 April 2017.

7.      Financial assets

With the exception of unlisted preference shares, all financial assets are held at fair value through the income statement and are measured using quoted prices in active markets or direct/indirect inputs based on observable market data.

The unlisted preference shares held by the Group at 31 December 2016 are held at fair value through the income statement. The fair value of this asset is assessed using a discounted cash flow forecast and reviewed for impairment at least annually.

8.      Financial instruments The table below analyses recurring fair value measurement for financial assets and liabilities. The fair value measurements are categorised into different levels in the fair value hierarchy based on the inputs to the valuation techniques used. The different levels are defined as follows:

Level 1 - fair values measured using quoted prices (unadjusted) in active markets for identical instruments

Level 2 - fair values measured using directly or indirectly observable inputs or other similar valuation techniques for which all significant inputs are based on observable market data

Level 3 - fair values measured using valuation techniques for which all significant inputs are not based on observable market data

The fair value of the Group's financial assets is based on prices provided by investment managers who obtain market data from numerous independent pricing services. The pricing services used by the investment manager obtain actual transaction prices for securities that have quoted prices in active markets.

During the year there were no significant transfers in either direction between Level 1 and Level 2 of the fair value hierarchy, or Level 2 and Level 3 of the fair value hierarchy.

Level 3 valuation techniques and significant unobservable inputs

In August 2013, the Group invested in an unlisted insurance agency. Equity in the entity is not traded in an active market and as such there is no observable market data. The fair value of this asset is assessed using a discounted cash flow forecast and reviewed for impairment at least annually.

There are several variables on which the forecast is reliant, which include but are not limited to, discount factor and terminal value of the investment.

In addition, periodic management accounts are reviewed to mitigate any credit risk in the investment and ensure its ability to pay the coupon rate on the preference shares included in the aforementioned discounted cash flow forecast.

The table below shows a reconciliation between the opening and closing balance of level 3 investments during the year:

There were no transfers in either direction between levels 1&2 and level 3 during the financial year ended 31 December 2016 (2015: none).

 9. Insurance and reinsurance contracts  

a) Components of insurance liabilities

 b) Movement in insurance contract liabilities

This table includes the effects of the third party quota share and foreign exchange movements for claims reserves, which are presented separately in the consolidated income statement.

Claims development tables are shown on an underwriting year basis; these set out the development of claims over time on a gross and net of reinsurance basis (without any adjustment for any impact from changes to projected premiums). These claims are shown on an ultimate basis for each successive development year at the 100% ownership level. Balances have been translated at exchange rates prevailing at 31 December 2016 in all cases.

10. Financial liabilities

Financial liabilities are initially recognised at fair value and thereafter stated at amortised cost. Transaction costs are amortised on an effective interest rate basis over the expected life of the instrument at initial recognition. At 31 December 2016 the Group had the following loan notes in issue:

Senior and subordinated notes The senior and subordinated notes are listed on the London Stock Exchange with issue costs of £0.8 million and £0.1 million respectively.

Dekania loan notes The notes are listed on the Irish Stock Exchange and are denominated in US dollars with the interest payable linked to the US dollar base rate. Issue costs of £0.6 million are fully amortised.

Swaps are used to match exposure to fluctuations in interest rates. The swaps, which mature on the same dates as the interest falls due for payment on the loans, have the effect of fixing the interest rate at 6.18% until 15 August 2024. The gains on the hedging instruments, being the interest rate swaps, were £0.1 million in the year (2015: gains of £0.1 million), which are recognised within other comprehensive income.

11. Capital and reserves

Reconciliation of movement in capital and reserves

During 2015 and 2016, the Group had 64,425,640 ordinary shares of £1.125 each in issue.

Other reserves A merger reserve of £69.6 million was created on 18 May 2006 following the scheme of arrangement whereby Novae Group plc was interposed as the new holding company of the Novae Group, and relates to the valuation of the new shares issued in excess of their nominal value.

A capital redemption reserve of £32.1 million was created in January 2011 following return of capital elections. This was reduced to £26.3 million in 2012 following a reclassification from the capital redemption reserve to retained earnings to reflect the transfer from distributable to non-distributable reserves on redemption at the correct nominal value of 1.0p.

12. Post balance sheet events

On 27 February 2017, the Ministry of Justice announced the long awaited outcome of its review of the discount rate used to settle personal injury claims ("the Ogden rate"). In preparation for this the Group had undertaken a detailed assessment of the impact of different Ogden rates on the Group's net reserves. The revised Ogden rate of minus 0.75% has resulted in an additional 5.3 percentage points on the combined ratio and is disclosed within this release.

13. Status of the financial information

The financial information set out above does not constitute the Company's statutory accounts for the years ended 31 December 2016 or 2015.

Statutory accounts for 2015 have been delivered to the registrar of companies, and those for 2016 will be delivered in due course.