Chairman's statement

"It has been a landmark year."

Overview and strategy

I am pleased to introduce the maiden Annual Report and Accounts for Hastings Group Holdings plc for the year ended 31 December 2015. It has been a landmark year for the Company achieving a successful listing on the London Stock Exchange on 15 October 2015 and subsequent admittance to the FTSE 250 index. This report covers the performance of the Group's pre-IPO parent company, Hastings Insurance Group (Holdings) plc from 1 January 2015 until 11 August 2015 and the current Group parent company, Hastings Group Holdings plc from 12 August 2015 to 31 December 2015.

Building on proven, sustainable growth the Group achieved a milestone this year by insuring over 2 million customers. The Group also launched a new system for its Claims platform and is due to launch a new system in Retail in 2016. To meet the needs of a growing business the Group also opened a new site in Leicester to complement its existing offices in Bexhill, Newmarket and Gibraltar.

2015 Review

Performance

The year was one of increasing premiums for the car insurance market which coincided with claims inflation. Against this backdrop, along with increased policy numbers, the Group's operating profit for the year increased to £126.1 million (2014: £105.7 million). This growth was as a result of improved new business and renewal volumes as well as strong growth in home and car telematics products. Live customer policies ("LCPs") exceeded 2 million just prior to the end of the year and the Group is well on its way to achieve its goal of insuring 1 in 10 by 2020.

As the Group continues to grow it is with great pleasure that we welcome colleagues at the new site in Leicester to the Hastings family. Centrally located with excellent transport links across the Midlands, Leicester is a natural fit for the Group's third location in the United Kingdom due to the quality and diversity of talent available.

Technology investment

The Group has made significant investment in two new major systems for its Broking and Claims platforms. These systems will deliver a step change improvement in the Group's ability to interact with customers, improving customer service and providing up to the minute management information. I am very pleased to announce that the implementation of the Claims platform was successfully launched in November last year and the Broking platform is on track to be launched later this year.

Solvency II preparation and capital structure

During the year the Group continued to develop systems and procedures to enable it to comply with Solvency II which came into effect from 1 January 2016. Interactions with the regulator in Gibraltar have been positive and the Group's insurance company, Advantage Insurance Company Limited, is well capitalised.

The Board and governance

As Chairman I am ably supported by a Board of appropriate experience and calibre. Following rigorous and stringent candidate searches Thomas Colraine joined the Board as Senior Independent Non-Executive Director in September 2015 along with fellow independent Non-Executive Directors, Malcolm Le May, Pierre Lefevre and Ian Cormack. 

The appointment of four other Non-Executive Directors was also confirmed in September 2015. Pursuant to a relationship agreement between the major shareholders of the Company, Sumit Rajpal and Michele Titi-Cappelli represent the Goldman Sachs investors and Richard Brewster and Edward Fitzmaurice represent the pre-IPO Founder shareholders. Gary Hoffman continued as Chief Executive Officer and Richard Hoskins was appointed as Chief Financial Officer; both have extensive experience in financial services and the insurance sector. All Directors bring a wealth of strengths, skills and experience to the oversight and governance of the Company and the Group.

At the time of the IPO two Directors who had previously represented our pre-IPO major shareholders stood aside. Along with the other Goldman Sachs and Founder representatives, Andrew Wolff and Neil Utley helped to guide Hastings towards its IPO and I thank them for their contribution over the years. As it currently stands the composition of the Board does not yet fully comply with the UK Corporate Governance Code 2014 (the "Code") in that it stipulates at least half the Directors excluding the Chairman should be independent of the Group. Hastings is intent on becoming fully compliant by the end of 2016.

In compliance with the Code, I chair the Nomination Committee, Malcolm Le May chairs the Remuneration Committee, Tom Colraine the Audit Committee and Pierre Lefevre the Risk Committee.

Optimising shareholder value - dividends

The Board remains confident in the Group's long term prospects and is pleased to propose a final dividend of 2.2p per share, to be paid on 31 May 2016 to shareholders on the register on 22 April 2016 with an ex-dividend date of 21 April 2016. This is the Company's first dividend for the year and is subject to shareholder approval at the Annual General Meeting to be held on 25 May 2016.

Outlook

As I close my first financial year as Chairman, I am able to report that current trading is in line with the Board's expectations and means we begin the current financial year well positioned to continue with sustained growth. The Board remains confident that its strategy to provide refreshingly straightforward insurance, drive sustainable growth underpinned by prudent underwriting, combined with investment in digital and mobile channels will deliver enhanced shareholder returns for the future.

On behalf of the Board I would like to express my thanks to all colleagues who continue to work diligently for the Group. It is the knowledge, skills and professionalism of all our colleagues that make a difference to our customers and enables us to continue to grow the Hastings brand and reputation.

Mike Fairey

Non-Executive Chairman

14 March 2016

CEO Q&A

"It has been another year of strong performance and delivering on promises."

It's been quite a year for the business, what have been your personal highlights?

2015 has been an extraordinary year for Hastings. We've gone through another year of strong performance and delivering on promises. We have delivered profitable growth for shareholders, broken through the 2 million customer milestone, welcomed over 300 colleagues at our new site in Leicester and of course become a listed company following our IPO in October. I'm extremely proud of my 2,300 colleagues who have helped us achieve these successes and believe we're better positioned than ever to ensure the IPO is the beginning of our journey and not the end. As you would expect, this type of transformation didn't come without its challenges and we are as focussed on the long term as we are on our annual performance. We've made significant investment in our infrastructure and colleagues by opening our third UK site and implementing a new system within our Claims operation.

On a personal note my highlight has to be when we were invited to open the London Stock Exchange on our first day of trading. It was a hugely proud moment and I got to share this experience with some of our long serving colleagues who have been with us since Hastings began in 1996. They've witnessed first-hand our transformation into the fast growing and successful company we are today.

It looks like financially the business has continued to go from strength to strength.

It has indeed been another strong year for the business with LCPs showing a 19% increase to 2 million, our share of the UK private car market increasing to 5.8% and driving growth across all key metrics. Gross Written Premiums continued to rise, up 27% to £614.9 million and driving revenues of £481.0 million. Crucially our profitable growth was achieved whilst maintaining our disciplined approach to underwriting with a loss ratio of 75.4%, at the low end of our stated target of between 75% and 79%. We're delighted to achieve such strong results in what remains a competitive marketplace and such performance is testament to the agile, data-driven business model that we've built and the dedication of our colleagues to ensure our proposition is delivered in a refreshingly straightforward way for our customers.

What factors do you think have powered the business' successes in 2015?

Our successes have been driven by a number of factors. Firstly 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 price comparison website ("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 49 changes to pricing strategies per month, giving us a significant advantage over our competitors. Finally we underpin everything with our unique culture built around the principles of the 4Cs; Colleagues, Customers, Company and Community. This approach has ensured we've remained entrepreneurial with a can-do attitude that reflects itself throughout every level of the business on a daily basis.

How is the new site at Leicester progressing?

We opened our third UK site in Leicester in May last year with 25 colleagues in temporary offices and had planned to have around 200 in place by the end of the year.  In January this year we welcomed over 300 colleagues into our permanent city centre site and recruitment continues to support our growth strategy. It's been a hugely successful move and allows us to attract the best talent so we continue to deliver refreshingly straightforward service to our growing customer base.

What plans do you have for further investment in the business?

Continuing to invest in our systems and infrastructure for our colleagues and customers remains our key priority. The implementation of our new Claims platform in November has been a key milestone in this process and our focus for 2016 is on implementing a new platform for our Broking platform and customer self-serve capabilities. We're making good progress and this significant investment is set to deliver further benefits and efficiencies for our colleagues, customers and the company.

What are your plans for the business in 2016?

Whilst the successful listing of the Company in 2015 was a key moment for the business, it was very much the start of the journey and it's important that we continue our current growth trajectory whilst maintaining our strong underwriting discipline and delivering on our loss ratio target. We've stated that our vision is to protect 1 in 10 by 2020 and therefore growth remains a focus, but not at the expense of risk. We're also continuing to enhance customer service and operational efficiency by investing in our infrastructure and systems including a new broking platform within Retail. This will make sure that we continue to provide customers with our straightforward service and maintain our good retention rates. We have a continued focus on profitably expanding our core motor business and of course we are always looking to innovate further. I believe there are some exciting opportunities arising in car, van and bike, for example in our telematics and multi-car proposition. Home is another area of focus for us and I expect to see further growth in our book as customers shop increasingly on price comparison websites and digitally.

You've previously talked a lot about Hastings' expansion into home. How is this progressing?

Our expansion into home is something we've talked about for some time and we've continued to make steady progress in executing this element of our growth strategy with an 87% increase in policy numbers throughout 2015 albeit from a small book. Whilst our approach to market entry is prudent and measured, it is an area that is structurally attractive with consistent profitability and good retention rates. Furthermore we're seeing more customers using PCWs to buy their policies instead of through the traditional mortgage lender or bank route.  This is good news as it's a trend we're well placed to take advantage of.

What is your outlook for the wider market?

Looking more broadly, the market remains very competitive and we're delighted that the business model and proposition we've built has performed so well in a difficult environment where pricing pressure and claims inflation have been ever present threats. Looking ahead into 2016, the pricing cycle has undoubtedly turned. With further rate rises likely to encourage consumers to shop around through PCWs, our business model is well positioned to take advantage of this trend. Whilst claims inflation remains an issue for the sector we're confident that we have initiatives in place to mitigate the effect for our customers and with growing regulatory pressure on claims management firms, both the industry and consumers look set to benefit from this tougher stance.

Gary Hoffman

Chief Executive Officer

14 March 2016

Business review

Hastings Insurance Services Limited - Retail

Overview

The Group's product offerings include private car insurance as well as bike, van and home insurance in the UK. In 2014, the Group increased its strategic focus on home insurance in order to increase the Group's offerings to customers and expand its footprint. The Group also offers optional add-on products to customers alongside its primary insurance products, which are underwritten separately from the primary policy. Key add-on products include legal expenses cover, breakdown cover, substitute vehicle cover and home emergency and replacement key cover.

Retail offers a range of brands and products to the UK market that appeal to different customer groups. Brand awareness of the flagship Hastings Direct brand has grown through continued targeted investment in TV advertising and digital media in 2015. TV advertising is optimised carefully using disciplined testing and analysis of performance. The Group's core product offering; private car insurance, constituted 86% of the Group's LCP as at 31 December 2015 with home, bike and van policies constituting the remainder. Within this market, the business has chosen to focus primarily on digital distribution through PCWs and direct distribution through the Hastings Direct website. Retail supports PCW and direct distribution through brand advertising and online direct marketing.

The Group's focus on digital channels has allowed it to benefit from the ongoing growth in consumer adoption of PCWs. Retail has built up a range of capabilities to support success on PCWs. These include sophisticated market pricing, the ability to implement price changes rapidly, large scale data processing and a 5-star rated, quality product range. The business has grown its market share of PCWs consistently since 2010, with an increasing number of consumers choosing to switch to the Group's brands.

Of the policies sold by Retail in the year 90% were placed within the Group's insurer, Advantage Insurance Company Limited. Retail also operates a full broker capability utilising a panel of insurer partners which enable the Group to increase its distribution potential on a risk free basis. Home insurance is a growing part of the Group's offering and a product where Retail mainly uses external insurers, but retains full customer ownership and broking income streams. Retail benefits from diverse income streams including ancillary product revenues, premium finance, fees and commissions and other income.

Performance and progress

Net revenue in the period increased by 19% to £243.6 million (2014: £205.5 million).This performance was as a result of year-on-year LCP and PCW market volume growth driven by market wide price rises and subsequent increased customer shopping activity. LCP at the end of the year were just over 2 million; 19% ahead of last year. New business volumes were also ahead of the prior year driven by strong growth in all products including car telematics and home volumes.

The Group had 2.04 million LCP as at 31 December 2015 compared to 1.71 million LCP as at 31 December 2014. The Group's continued growth in its number of LCP is a result of a number of factors, including the Group's ability to attract new customers through its PCW focussed strategy complemented by the Group's competitive risk-based pricing, its ability to retain existing customers on renewal, and its ability to reduce cancellation rates among the Group's existing customers.

During the year as part of the Group's growth strategy, Retail opened a fourth operational site in Leicester. Centrally located with excellent transport links across the Midlands, Leicester was a natural fit for a third location in the United Kingdom due to the quality and diversity of talent available. Working closely with Leicester and De Montfort universities and Leicester College the Group plans to help identify a broad range of career opportunities. The new Leicester customer service centre will play a significant role in the Group's plans for growth and expansion and already accommodates over 300 colleagues.

The Group's telematics offering as part of its car product grew by 58% in the period. This performance is primarily being driven by new business due to the products popularity with new drivers and helping inexperienced drivers to effectively manage their insurance costs. Telematics provides the Group with up-to-date driver information to enable it to intervene where a driver is not driving as expected. By communicating with the driver concerned, the Group is able to educate its policyholders on the merits of better and safer driving and enables the Group as a whole to enhance its loss ratio performance.

Retail's home product has also gained good momentum during the period increasing policy count. In recent years there has been an increased penetration of PCWs for home insurance in a market that has traditionally been static, dominated by traditional players with customers predominantly not changing provider; the Group is well positioned to benefit from these changes to customer behaviours.

Retail's award winning anti-fraud team, Insight, provides quote validation based on customer inputs as part of their PCW journey to ensure that customers are not manipulating data inputs to achieve a better quote. Insight validated over 27.5 million quotes last year (2014: 20.3 million), an increase of 35%.

With the ever increasing use of mobile devices across all age groups, the Group has recognised the need to diversify the way it interacts with its customers. Transitioning away from over-reliance on traditional modes of communication such as computers and landline phones and embracing greater accessibility via mobiles and tablets allows Retail's customers to buy insurance the way they chose to. Retail is currently in the development stage of a new system to provide richer and more expansive digital self service capabilities. The new Retail platform is expected to be launched later this year.

As part of the Group's continued improvement Retail enhanced its customer experience with the following initiatives during the period under review:

·      Live webchat rolled out to provide customers with more ways to communicate

·      Social media response team operating 24/7

·      Mobile friendly website

·      Online document retrieval

·      New complaints system implemented enabling complaints to be handled and responded to quicker and enabling   Management to improve root cause analysis

Advantage Insurance Company Limited - Underwriting

Overview

The Underwriting business is a Gibraltar-based insurer which underwrites car, bike, van and home insurance. It currently underwrites most of Retail's private car, bike and van policies and from the beginning of 2015 also co-insured home insurance with AXA, one of Retail's panel insurers.

Underwriting is managed from Gibraltar and oversees a dedicated outsourced, insurer services team at the Group's office in Bexhill which includes claims operations. The Underwriting business utilises a data intensive process specifically designed to provide superior underwriting results in the highly competitive PCW market. The underwriting process consists of fraud detection, market analysis, risk pricing, portfolio investment, reinsurance, claims handling and reserving. Claims handling has two core objectives; the first is delivering excellent, straightforward quality service to the Group's customers in their time of need following an incident, and secondly to control payments to third parties through efficient pro-active case management.

Performance and progress

Net revenue for Underwriting increased by 23% to £307.6 million (2014: £251.1 million) as a result of the Underwriting business being well positioned at the beginning of the year to take full benefit of a hardening market. Following a strong track record in a soft market, Underwriting implemented strategic price rises where necessary due to market claims inflation during 2015. Combined with controlled LCP growth, further price increases during the year provided Underwriting with an improved base position for 2016.

As an agile and straightforward general insurance provider, the Group recognises that customers wish to communicate with the Group through a number of channels, both inside and outside usual business hours. Having made significant investment in its systems for claims handling, a new Claims platform was successfully launched in November 2015. This investment has created an integrated claims handling platform to enable the Group to interact with customers when and how they wish to communicate by making the claims journey simpler and smoother. This will help reduce call lengths and waiting times by enabling claims handlers to be more responsive to customer requests and enquiries and improve the overall claims experience. Internally the new Claims platform will enhance the Group's decision making and response times deriving cost saving benefits.

As part of the benefits of the new claims system, the Group is well positioned to increase its underwriting sophistication through a more timely and granular use of data and experience. Better use of data, continuous monitoring of results, advanced analytic capabilities and rapid execution provide the Group with the ability to respond within the marketplace to identify risks and exploit opportunities.

The period under review saw an increase in claims inflation across the market driven in part by the re-emergence of claims farming and continued increases in the incidence of soft tissue bodily injuries such as whiplash. As a result and recognising a hardening car insurance market early in the year, Underwriting introduced a number of strategic price rises which enabled the Group to protect its loss ratio while enhancing its already strong competitive position.

During the year the Group strengthened its anti-fraud capabilities tackling serious and complex insurance fraud crimes even further with the establishment of a Specialist Investigation team that incorporates intelligence and analyst teams. This team is led by the former head of the City of London Police's Insurance Fraud Enforcement Department. Fraud is an increasing risk for insurers and brokers alike whether at point of quote or claim; the Group is at the forefront of identifying and repudiating fraudulent claims, bringing fraudsters to justice and lowering prices for customers.

Sophisticated risk pricing is achieved by the Underwriting business employing significant analytic capabilities bolstered by data enrichment. The Group's underwriting capabilities are enhanced by enriching data for a selective footprint to significantly reduce risk that the general market is under-pricing. This entails harnessing data collected from customers who use PCWs, overlaying other external data points and creating new variables and pieces of information that translate into rating variables. The combination of enrichment and fraud prevention enables Underwriting to price appropriately to achieve very competitive rates while achieving target loss ratio.

Coming into effect at the start of January 2016, Underwriting was well-prepared for the introduction of Solvency II that replaced Solvency I. Interactions with the Gibraltar regulator, the Financial Services Commission, have been positive and transparent throughout the programme of planning, design and implementation. The Underwriting business is well capitalised above the levels required under Solvency II. As at 31 December 2015, under Solvency I, Underwriting had a coverage ratio of 373% (2014: 268%).

CFO statement

"2015 was another very successful year for Hastings; we completed our IPO and are on track to deliver on our promises and meet the targets we have set ourselves."

Introduction

I am pleased to present a strong set of results in our maiden Annual Report as a public company. We have successfully grown our top line and our market share. Gross written premiums are up 27% on a full year basis⁽¹⁾ and our market share of UK private car insurance is now 5.8%. We have maintained our rigorous focus on underwriting discipline with a calendar year loss ratio of 75.4% and we delivered a 19%⁽¹⁾ increase in Group operating profit ⁽²⁾ to £126.1 million. We also significantly strengthened our balance sheet in the year, reflecting both the cash generative nature of our operations and cash raised at the IPO.

During the period we successfully refinanced the business. As a result, we will have a materially lower interest charge going forward, with a proforma interest coverage ratio of approximately 12x, when comparing Group operating profit for 2015 with the Group's future expected interest cost. Net debt leverage is now down to 2.1x, the profile is trending downwards and we have a sound capital structure to support our growth. Our proposed maiden dividend as a public company demonstrates the confidence we have looking forward, and is in line with guidance at the time of our IPO, and we intend to make a £10.0 million early repayment of our Term Loan during the first half of 2016.

We also achieved several significant milestones for the business during the year, including the 2 million customer milestone, going live with Guidewire ClaimCenter and listing on the London Stock Exchange.

During the IPO process we set four key targets which we are well on track to meet within our target date.

Our investment in the future includes implementing the Guidewire Claims and Broker platforms to support claims handling and process improvement and commencing operations in Leicester in May 2015. We have invested £29.1 million in capital expenditure this year along with ongoing operating investment. We expect this investment to improve customer experience and increase customer retention, and it affords us a robust foundation for growth.

We have improved the Group's solvency and ensured a smooth transition to Solvency II requirements. Solvency I coverage increased to 373% (31 December 2014: 268%) and unaudited draft Solvency II coverage is 156% at the year end.

Overall, I am pleased that the profitable growth of the business has allowed us to reduce our leverage, increase our solvency coverage ratio and propose a final dividend of 2.2p per share (£14.5 million).

Richard Hoskins

Chief Financial Officer

14 March 2016

Summary Consolidated Profit or Loss

The 2014 underlying trading figures include the full calendar year of trading and are presented in order to provide more meaningful comparative data.

Gross written premiums

Gross written premiums increased by 27% year on year⁽¹⁾ to £614.9 million due to the increase in live customer policies and premium rate increases applied by the business.

Live customer policies increased by 19% principally through continuing to grow the Group's sales on price comparison websites (PCWs), increasing market share of sales made through PCWs and maintaining a strong retention rate. The Group started applying premium rate increases during the second half of 2014 and during 2015 increased motor average written premium by 9.6%. This increase in average written premium will continue to benefit earned premiums throughout 2016. The Group has a strong track record of growth through the recent period of declining average premium in the market and is well positioned to benefit now that the insurance market cycle has turned and prices in the market are increasing.

The Group started to underwrite home insurance policies under a co-insurance agreement with AXA from 1 January 2015, having not previously underwritten any of the home policies sold by the Group. The 2014 IFRS results exclude the seven days of trading prior to 8 January 2014 as a result of acquisition accounting, and on this basis, gross written premiums increased by 29%. The 2014 underlying trading figures include the full calendar year of trading and are presented in order to provide more meaningful comparative data.

Net revenue

The Group benefits from a wide range of risk and non-risk based revenue streams. Alongside the insurance premiums and reinsurance commissions earned in the Underwriting business, the Retail business generates a diverse and sustainable range of retail revenues including fees and commission on insurance products sold, income from the sale of ancillary products and premium finance interest income.

Net earned premiums increased by 26% over the full prior year⁽¹⁾ principally due to increases in the number of live customer policies and average premium, and due to changes in the structure of the Group's reinsurance contracts. The Group now retains a higher proportion of premiums written but in return receives lower profit commission from its reinsurance partners. The net economic impact of these changes to operating profit is broadly neutral; net earned premiums increased as a result and reinsurance commissions reduced to £28.6 million, from £34.5 million in the prior year⁽¹⁾.

Fees and commissions on the sale of insurance contracts and ancillary products have increased in line with the growth in live customer policies. Premium finance interest benefitted from an increased proportion of our customers choosing to pay in monthly instalments during the year, as well as the general premium rate increases applied by the business. 

Investment income grew in line with the growth of the Underwriting business's investment portfolio and the conservative investment strategy delivered a relatively stable investment return. Overall net revenue has increased by 20% year on year⁽¹⁾.

On an IFRS basis, which excludes trading in the seven days prior to 8 January 2014, the increase in net revenue was 26%, with net earned premium having increased by 29% and other revenue, investment and interest income by 22%.

Loss ratio

The Group's calendar year loss ratio of 75.4% is at the lower end of the Group's target loss ratio range demonstrating the business' continued focus on underwriting discipline. The increase on the Group's prior year calendar year loss ratio of 72.4%, which is after normalising for the impact of the changes to quota share contracts as described above⁽³⁾, is a result of the impact of claims inflation and the flood events at the end of the year on the accident year loss ratio. This increase has been offset to some degree by the earn-through of higher premiums which accelerated during the second half of the year.

The positive prior year development included in the net loss ratio for 2015 of 1.3%, or £3.4 million, reflects a consistent reduction in the net ultimate loss expectations for the 2011, 2012 and 2013 accident years as those years have developed, offset by a strengthening of reserves for the 2014 accident year predominantly to recognise an increase in frequency on small bodily injury claims. These developments have been recognised while maintaining the Group's prudent claims reserving policy and a consistent risk margin over the internal actuarial best estimate of ultimate claims liabilities.

Expense ratio

The Group's expense ratio has continued to reduce year on year as the Group benefits from economies of scale as a result of the increasing number of live customer policies and also benefits from a maturing book. The Group now services more live customer policies per full time equivalent employee than ever before.

Operating profit and profit/(loss) after tax

Group operating profit increased by 19% to £126.1 million (2014: £105.7 million), which primarily reflects the growth in live customer policies, the current and prior year premium rate increases earning through and operating expense efficiencies driven by economies of scale, partly offset by the increase in loss ratio and continued investment in the business. The increase in the Group's operating profit has been mainly contributed by the Retail business, whose operating profit increased by 29% to £89.9 million. The growth in premiums earned in the Underwriting business was largely offset by the increase in loss ratio, resulting in a consistent Underwriting operating profit of £37.9 million in 2015.

The following table sets out a reconciliation from profit/(loss) after tax to Group operating profit:

The profit after tax of £2.3 million (2014: £8.4 million loss) includes the significant non-trading costs of the IPO and refinancing, the effects of accounting for the Goldman Sachs investment and associated reorganisation in 2014 and accrued dividends on preference shares, which were part of the capital structure prior to the IPO.

Interest expense includes £27.1 million of interest relating to the Senior Secured Notes (which have now been redeemed) together with the accrual of preference share dividends of £23.7 million (2014: £33.7 million) which were treated as debt interest in accordance with IFRS. The preference shares and accrued dividends thereon were converted into equity in August 2015 and therefore no further accrual of preference share dividends will be required.

The redemption of all of the Group's £416.5 million Senior Secured Notes in 2015 resulted in early repayment costs, which together with the costs of arranging the new £300.0 million Term Loan amounted to £36.5 million. The restructuring and transaction costs relating to the IPO in 2015 recognised in the Consolidated Statement of Profit or Loss amounted to £2.4 million.

In 2014, the £9.7 million restructuring costs comprised non-trading costs relating to the Goldman Sachs investment on 8 January 2014.

The accounting adjustments for business combinations primarily comprise the non-cash amortisation of acquired intangibles amounting to £23.0 million (2014: £24.2 million) together with other non-cash adjustments arising as a result of applying fair value acquisition accounting in 2014.

Dividends

The final dividend proposed for 2015 is 2.2p per share. This is equal to 56.5% of one third of adjusted Group profit after tax⁽⁴⁾ in line with the target set by the Board at the time of the IPO. For the future, it is intended that the dividend pay-out ratio will be between 50% and 60% of adjusted Group profit after tax, of which the interim and final dividends will represent approximately one third and two thirds of the total annual dividend respectively.

Summary Consolidated Balance Sheet

Net assets and working capital

The Group's net assets at 31 December 2015 were £503.2 million (2014: net liabilities of £13.9 million). The growth in net assets is driven by the combined effect of the growth in live customer policies on total assets and of the net proceeds from the Group's IPO and conversion of debt to equity on total liabilities.

The growth in the total number of live customer policies has driven an increase in reinsurance assets, insurance receivables and cash generated by the business, which is held both as cash and invested in financial assets. This growth has also driven the increase in insurance contract liabilities.

The Group completed its IPO by issuing 107,217,645 new shares priced at 170p per share. This raised proceeds of approximately £169.6 million (net of fees, commissions and expenses), which has been used to reduce external borrowing and to contribute capital to the Underwriting business, as discussed in more detail below. The reduction in loans and borrowings combined with the conversion of preference shares and accrued dividends thereon into equity as part of restructuring the Group in August 2015, has resulted in a significant reduction in total liabilities.

Overall, the IPO, the conversion of preference shares and accrued dividends thereon to equity and cash generated by the business has significantly increased the net assets and working capital of the Group.

Return on capital employed

The Group has maintained a consistent return on capital employed for 2015. This reflects the Group's 33% growth in net income, while the capital employed has been increased as we have allocated additional capital to our Underwriting business in anticipation of Solvency II.

AICL and HISL deployed capital represent the average of AICL's net assets and the average of HISL's total capital resources as stipulated by FCA regulations respectively during each year. The corporate free cash represents the average cash held during each year in the Group's unregulated corporate entities.

Refinancing

During the year, the Group used IPO proceeds and a subsequent refinancing to repay the £416.5 million outstanding Senior Secured Notes. The refinancing was provided by a new facility consisting of a £300.0 million five year committed Term Loan and a £20.0 million Revolving Loan Facility which has not been drawn down. The Term Loan incurs interest at LIBOR plus a variable margin linked to net debt leverage multiple, initially set at 2.75%.

The Term Loan has a much lower interest rate than the Senior Secured Notes which will result in a significant reduction in annual interest payments, from approximately £31 million to around £10 million per year (assuming current LIBOR rates remain in effect).  This gives a proforma interest coverage ratio of approximately 12x, when comparing Group operating profit for 2015 with the Group's future expected interest cost.

The Term Loan is unsecured and the Group is subject to certain financial covenants relating to net debt leverage multiple and interest coverage.

Cash and deleverage

The Group's operating activities continue to be highly cash generative and during 2015 cash inflow from operating activities was £155.6 million, of which £81.2 million was free cash from our Retail business. This free cash was offset by the refinancing costs described above, IPO costs and ongoing investment in infrastructure and systems. The capital expenditure during the year primarily related to investment in the continued development of Guidewire, the Group's next generation claims and broking platform.  

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

Overall, the increase in Group operating profit and reduction in net debt has resulted in a continued reduction in the Group's net debt leverage multiple from 4.9x when the Senior Secured Notes were issued in October 2013 to 2.1x at 31 December 2015. Furthermore, the Group is currently intending to make a £10.0 million repayment of its Term Loan ahead of schedule in order to accelerate deleveraging the business.

Investments

The Group has a conservative investment strategy with a primary focus on capital preservation. During the year the proportion of investments that are high grade has been increased to reduce risk further. Year on year investments rated AAA and AA increased by £142.6 million to 58% of the total portfolio (2014: 38%) and the weighted average credit rating on our portfolio increased from A- to A+.

Investments are made to correspond with the expected insurance contract liability payment profiles. The Group's investment portfolio primarily comprises investment grade quality fixed income debt securities and a small proportion of investment funds managed by third parties as follows:

Reserves and insurance contract liabilities

Total insurance contract liabilities as at 31 December 2015 of £912.1 million comprises £320.4 million of unearned premiums, which are deferred to be recognised in subsequent periods (31 December 2014: £248.8 million), and outstanding claims liabilities of £591.7 million (31 December 2014: £455.9 million). These have increased by 30% year on year due to the greater exposure from the increase in total live customer policies, and the impact of claims inflation.

The provision for outstanding claims liabilities is an area of significant judgment as it estimates the cost required to settle all unpaid claims, both reported and incurred but not reported, at the balance sheet date. The Group manages this risk by applying a consistent reserving methodology to calculate an actuarial best estimate and then reserving an additional risk margin over and above this. 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"). The combination of the prudent reserving policy and effective reinsurance means the Group has experienced favourable net development of ultimate claims liabilities during 2015 for four of the last five accident years. The reserves in respect of the 2014 accident year were strengthened by £2.1 million, or 1.2%, in the year to reflect an increase in frequency on small bodily injury claims.

Reinsurance contracts

The Group uses non-proportional excess of loss and quota share reinsurance arrangements to limit its exposure to claims, and therefore protect its solvency and underwriting capability. The excess of loss programme limits the Group's exposure on any individual motor claim, including PPOs, to £1.0 million (£0.5 million for the 2014 accident year and prior), and the quota share arrangement provides 50% cover on motor claims incurred, after the excess of loss recoveries. The combination of these arrangements reduces volatility that could otherwise be caused by the accumulation of losses and individual large claims.

The 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 for achieving certain performance criteria, including target loss ratios. Since the year end the Group has agreed new contracts with its quota share reinsurers at improved rates compared to the 2015 contracts, which reflects the Group's stable loss ratio and established track record. The majority of quota share contracts are now on a rolling renewal basis, with approaching 50% by value now on two year minimum term arrangements. These contracts provide additional security and certainty regarding the availability of the Group's reinsurance arrangements.

Reinsurance assets, comprising reinsurers' share of outstanding claims liabilities, increased 28% year on year to £547.5 million at 31 December 2015 (31 December 2014: £426.5 million) due to the greater exposure from increasing policy volumes. The Group carefully manages risk within the portfolio by working with a range of high quality, highly regarded and stable reinsurers. The 31 December 2015 asset is recoverable from over 30 reinsurers, all of whom are rated A- or above.

Solvency

The Underwriting business remains well capitalised, following the allocation of £50.0 million of net proceeds from the IPO to further strengthen its capital base, with a Solvency I coverage ratio as at 31 December 2015 of 373%, compared to 268% as at 31 December 2014. 

The new Solvency II capital requirements came into effect on 1 January 2016, replacing Solvency I. The Group had fully prepared for this implementation and the table above presents the Underwriting business's unaudited draft Solvency II coverage ratio as at 31 December 2015 calculated using the regulated entity's results.

Footnotes:

(1)        To facilitate year on year comparison, the financial information for the "full year ended" 31 December 2014 is presented on an underlying basis, excluding the effects of accounting for business combinations and therefore including the effect of the seven days of trading prior to the acquisition on 8 January 2014.

(2)      Group operating profit is profit before taxation expense, interest expense, amortisation and depreciation, certain non-trading costs and the effects of accounting for business combinations.

(3)        The Group's calendar year loss ratio and accident year loss ratio for the year ended 31 December 2014 have been calculated on a full year basis (see footnote 1) normalised for the impact of changes to quota share contracts, whereby the Group now retains a higher proportion of premiums written but in return receives lower profit commission from its reinsurance partners. The impact of this normalisation on premiums reduces the accident year loss ratio from 77.6% as previously reported by 3 percentage points to 74.6%, while the calendar year loss ratio reduces from 75.3% to 72.4% for the year ended 31 December 2014. Prior year development is unaffected.

(4)        Group profit after tax adjusted to exclude the impact of non-operational amortisation, share scheme costs and other non-recurring items.

(5)        IFRS results have been adjusted to present underlying trading figures, to reflect the underlying performance of the business, by excluding:

a.   the effects of acquisition accounting and non-trading items (see footnote 5b), and by including the effect of the seven days of trading prior to the acquisition on 8 January 2014. The presented underlying trading figures in both years therefore enable a 365 day, like for like comparison of the Group's performance.

b.   non-trading items, representing significant costs incurred as a result of the IPO and refinancing in 2015, the effects of accounting for the Goldman Sachs investment and associated reorganisation in 2014 and accrued dividends on preference shares, which were part of the capital structure prior to the IPO.

(6)        Gross debt as at 31 December 2014 comprises £266.5 million of 8% Senior Secured Fixed Rate Notes due 21 October 2020 and £150.0 million of LIBOR + 6% Senior Secured Floating Rate Notes due 21 October 2019 issued by a subsidiary.  Gross debt as at 31 December 2015 comprises the new £300.0 million Term Loan. All figures exclude IFRS adjustments.

(7)        This comprises cash held by the Retail business in excess of the regulatory capital required, which is not held on behalf of other insurers.

(8)        Corporate free cash includes cash held in the Group's unregulated head office entities.

(9)        Represents the Group's net debt at each year end divided by Group operating profit for the year.

(10)       As stipulated by Underwriting's regulator, the Financial Services Commission ("FSC") in Gibraltar, it is defined as net admissible assets divided by the required minimum margin ("RMM"), both as at the end of the year.