Novae Group plc Annual Report 2014

Transcription

1 LOOKING FORWARD Novae Group plc Annual Report 2014

2 The combination of expert underwiting, consistent performance and dynamic capital management are the cornerstones of Novae s strategy. Novae is a diversified property and casualty (re)insurance business operating through Syndicate 2007 at Lloyd s. The Group is based in London and has been listed on the London Stock Exchange since The development and diversification of Novae s underwriting portfolio, combined with a prudent approach to reserving and disciplined expense management is integral to achieving market leading performance across the Group. Contents 1 OVERVIEW 2 Financial highlights 3 Key performance indicators 4 Chairman s statement 7 STRATEGIC REPORT 8 Chief executive s statement 13 Operating & financial review 17 Trading divisions: 18 Property 24 Casualty 30 Marine, Aviation and Political Risk 37 Risk management 42 Corporate and social responsibility 49 CORPORATE GOVERNANCE 52 Corporate governance report 55 Audit Committee report 59 Risk Committee report 61 Nomination Committee report 62 Remuneration Committee report 77 Directors report 82 Independent auditor s report 85 FINANCIAL STATEMENTS 90 Notes to the financial statements 138 Company balance sheet 142 Glossary of terms 144 Shareholder information

3 Overview 01 Financial statements Overview Corporate governance Strategic report

4 02 Financial highlights > > Gross written premium of million (2013: million) > > 13% growth in gross written premium at constant rates of exchange > > Claims ratio improved to 49.1% (2013: 52.4%) > > Combined ratio of 91.0% (2013: 90.3%) > > Net investment income of 14.3 million (2013: 11.1 million) > > Profit before tax and foreign exchange of 52.4 million (2013: 54.2 million) > > Net asset value per share of 527.6p (2013: 498.1p) > > Final dividend of 18.2p per share (2013: 16.5p per share) > > Special dividend of 20.0p per share (2013: 20.0p per share) Financial highlights Year ended 2014 Year ended 2013 Year ended 2012 Year ended 2011 Year ended 2010 Gross written premium Net earned premium Underwriting contribution (26.9) 13.0 Net investment income Other items (17.2) (13.8) (0.4) (3.3) Profit/(loss) before tax (6.3) 35.1 Net assets Net tangible assets Per share amounts (in pence) Return on equity % 10.4% 9.9% (2.6)% 8.2% Basic earnings/(losses) per share 79.0p 50.2p 44.2p (11.8)p 34.1p Dividends per share 24.8p 22.5p 20.0p 18.0p 15.7p Net asset value per share 527.6p 498.1p 467.7p 422.9p 462.9p Net tangible asset value per share 522.0p 491.1p 458.5p 411.7p 449.7p Claims ratio % 52.4% 57.0% 70.1% 59.8% Expense ratio % 37.9% 37.6% 35.0% 37.1% Combined ratio % 90.3% 94.6% 105.1% 96.9% 1 Other items comprise finance costs, foreign exchange movements and other income 2 Return on equity is calculated as profit after tax over average shareholders funds during the period 3 Claims ratio is net claims incurred divided by net earned premium for the year 4 Expense ratio is acquisition costs and total operating expenses including non-recurring items divided by net earned premium. The expense ratio does not include foreign exchange movements or finance costs 5 Combined ratio is the total of the claims and expense ratios

5 Key performance indicators Overview 03 Gross written premium Combined ratio m m m 0.0m Claims ratio Expense ratio % 41.9% % 37.9% % 37.6% 0.0% 700.0m m 105.0% % m 200.0m 90.0% 30.0% 500.0m 300.0m 75.0% 45.0% 400.0m 60.0% Return on equity Net assets per share % % % 0.0% Tangible Intangible p 5.6p p 7.0p p 9.2p 375.0p 17.5% % 550.0p p % 5.0% 525.0p 425.0p 12.5% 7.5% 500.0p 450.0p 10.0% 475.0p Diluted earnings per share Dividends per share p p p 0.0p Interim Final p 18.2p p 16.5p p 14.5p 0.0p 105.0p p 28.0p p p 30.0p 24.0p 8.0p 75.0p 45.0p 20.0p 12.0p 60.0p 16.0p

6 04 Chairman s statement The business has delivered a strong underwriting performance, strengthened its financial position and has progressed a number of operational and structural initiatives in the year John Hastings-Bass Chairman Novae has reported a good set of results for The business has delivered a strong underwriting performance, strengthened its financial position and has progressed a number of operational and structural initiatives during the year. The management team remains focused on delivering consistent returns to shareholders and for the third consecutive year, I am pleased to find myself writing a Chairman s statement following an excellent performance. Gross written premium of million is the highest in the Group s history. Targeted expansion across a number of key underwriting classes delivered strong organic growth of 13% at constant rates of exchange. Underwriting discipline remains paramount and it is extremely pleasing to report that this growth was delivered alongside an improved net claims ratio of 49.1% and further increasing reserves above actuarial best estimate. Profit before tax and foreign exchange of 52.4 million is the second highest in the Group s history, despite the continued challenging environment for investment returns. Overall pre-tax profits were 62.6 million, including gains on foreign exchange of 10.2 million. This generates earnings per share of 79.0p and a return on equity of 15.5%. The Board continues to pursue a progressive dividend policy and is pleased to propose a final dividend of 18.2p per share taking the total dividend for the year to 24.8p per share, an increase of 10.2%. We continue to manage our surplus capital position and the strong performance in 2014 has led the Board to announce its intention to pay a special dividend of 20.0p for the second consecutive year. Strong operational progress has also been achieved in At the beginning of the year, the business restructured into three operating divisions: Property, Casualty and Marine, Aviation & Political Risk ( MAP ). The main aims of this change were to improve visibility around performance of our major classes of business, assist in the development of new sub classes, facilitate more efficient reinsurance buying and support organic growth. We are pleased with the progress made to date and are already starting to see the benefits of this change, as evidenced by the strong underwriting performance in the year. In September, we also announced our intention to establish a presence in Bermuda. This will not only provide access to new business opportunities, but will also deliver efficiencies through the use of intra-group reinsurance arrangements. I am delighted with the progress made with this initiative and we have now received all necessary regulatory approvals. The Group continues to improve its broader Enterprise Risk Management framework as evidenced by the recruitment of Reeken Patel as Chief Risk Officer and Alexandra Moon as Group General Counsel. The new governance structure introduced in the year has delivered greater efficiency, agility and scalability while maintaining an effective balance between control, communication, risk and compliance. Our industry is faced with a developing regulatory environment. Lloyd s minimum standards, the Solvency II regime and the FCA s conduct risk agenda have all been areas of focus for the business in We are wholly supportive of, and committed to, a regulatory environment that positions Lloyd s and London at the forefront of strong governance and client efficacy.

7 Overview 05 I remain hopeful that an appropriate balance between regulation and innovation will be found. In particular, we hope that all our regulators work together to remove any overlap that may arise in their activities. The trading environment continues to present challenges for insurers. Surplus capital and increased competition are consistent themes and the consolidation of the wholesale broking market provides a further threat. As the market becomes polarised between those with significant capital resources and those able to offer niche products, differentiation combined with expert market knowledge, is key to success. Our continued focus on underwriting expertise and dynamic capital management leaves the Group well positioned and agile enough to respond accordingly. We continue to invest in our people and have made a number of senior underwriting hires during the year in addition to promoting talent from within the Group. I would like to take this opportunity to welcome all those who have joined us and congratulate those taking up new roles. In November 2014, Jeremy Adams announced he would be stepping down from the Board at the end of the year and retiring from the Group in April Jeremy has served as a director since 2004 and on behalf of the Board I would like to thank him for the invaluable contribution he has made to the Group. He has been a key member of the senior team, which has put Novae in its current position of strength. At the end of 2015, two of our Group Board non executives, Sir Bryan Carsberg and David Henderson, will retire. We are progressing with the search for their successors. Last year I concluded my Chairman s statement highlighting the challenges the industry faced going into 2014, citing rating pressures and low investment returns. As we enter 2015, these challenges remain. I also expressed my confidence in our strategy and the ability of the whole team to deliver it. Our strong performance in the year is testament to that confidence. Opportunities for profitable growth remain for those with the agility and fleetness of foot to respond to the needs of brokers and insureds. Novae s relative size is a positive and the business is well placed to develop and thrive. John Hastings-Bass Chairman 4 March 2015

8 06 Strategic report

9 Strategic report 07 Financial statements Overview Corporate governance Strategic report

10 08 Chief executive s statement Our aim is to be an innovative specialty insurer, delivering excellence in product and service Matthew Fosh Group Chief Executive I am delighted to report another strong set of results for the Group. In 2014, we achieved record gross written premium, our lowest loss ratio since 2006, a strengthening of reserves and increased capital headroom. We have also continued to invest in the business, attracting new talent and making significant progress on a number of operational initiatives. Our performance in 2014 is as a result of a significant amount of hard work and dedication. I would like to thank everyone at Novae for their efforts and commitment and our trading partners for their ongoing help and support. Results overview Another year of consistent underwriting performance contributed to a profit before tax and foreign exchange of 52.4 million (2013: 54.2 million). Profit before tax of 62.6 million (2013: 42.8 million) includes a foreign exchange gain of 10.2 million (2013: loss of 11.4 million). Gross written premium of million (2013: million) is the highest reported in the Group s history and is testament to the continued success of our Growth & Efficiency strategy. Headline growth of 8% (13% at constant rates of exchange) reflected targeted expansion in classes of business yielding attractive returns, offset by reductions in a number of poorer performing areas. This active management of the portfolio is a key feature of our strategy and helped contribute to an improved claims ratio of 49.1% (2013: 52.4%), our best performance since The acquisition cost ratio increased to 26.5% (2013: 24.1%), partly as a result of the change in business mix. Overall the underwriting contribution of 43.3 million (2013: 48.9 million) produced a strong combined ratio of 91.0% (2013: 90.3%), the second lowest since I took over as Chief Executive. The environment for investment return remained challenging in 2014, although we increased our return over the previous year. A net return of 14.3 million (2013: 11.1 million) represents a return on average invested assets of 1.2% (2013: 0.9%). Overall, the business delivered strong growth with basic earnings per share increasing by 58 per cent to 79.0p (2013: 50.2p) and tangible net asset value per share increasing by six per cent to 522.0p (2013: 491.1p). Delivering on our strategy Our aim is to be an innovative specialty insurer, delivering excellence in product and service. We seek to achieve this through the combination of expert underwriting, consistent performance and dynamic capital management, which are the three pillars of our strategy. I am extremely pleased with the progress we have made in developing each of these during Expert underwriting is about developing specialty knowledge and capability. Central to the success of this pillar of our strategy is recruitment and retention of the very best underwriters with strong track records and deep rooted trading relationships. It was extremely rewarding to see our underwriting expertise recognised within the industry, with the UK & European Property unit winning Underwriting Team of the Year at the Insurance Day awards, and our Marine Liability unit head Darren Carr being short-listed for Young Underwriter of the Year.

11 Strategic report 09 Consistent performance seeks to ensure that there is a resilience and reliability to the returns which the Group achieves given the stated risk appetite. This involves optimising the diversity of the underwriting portfolio and ensuring that our Enterprise Risk Management ( ERM ) strategy is aligned to and integrated with strategic decision-making. We also seek to take a prudent approach to reserving and expense management. Substantial progress was made on each of these elements during 2014, further diversifying our underwriting portfolio, managing our operating cost base growth to 4%, while growing the business by 13% and increasing our reserve strength. Dynamic capital management seeks to optimise the efficiency of how capital is funded and deployed across the business. Good progress was made in this area in 2014, restructuring our reinsurance buying and redeploying capital within the business to areas where risk adjusted returns were more attractive. We have also strengthened our capital position increasing our surplus over the regulatory capital requirement to 36% (2013: 27%). Proactive management of this surplus capital is another key objective of Dynamic Capital Management and we are proposing a special dividend of 20.0p per ordinary share (2013: 20.0p). This is in addition to a proposed increased final dividend of 18.2p per ordinary share (2013: 16.5p). Investing in talent During 2014, we continued to invest in the business, making a number of senior hires across the organisation. Reeken Patel joined us as Chief Risk Officer bringing significant insight, knowledge and experience to the Group s ERM strategy. We have also made a number of hires across our underwriting divisions. In addition to the new Cyber unit, we increased our international property capabilities, making experienced hires in direct & facultative and delegated underwriting. This investment continued into the beginning of 2015 with two new appointments to our Executive Committee. Robert Patten has joined as Head of our Casualty Division and Alexandra Moon as Group General Counsel. Both Bob and Alex have significant expertise in their respective fields and we are delighted that they have chosen Novae as the next place to further their careers.

12 10 Chief executive s statement continued There remain opportunities for profitable growth for those with agility and expertise, and we believe we have both In addition to bringing in new talent, we also made a number of senior promotions. Jonathan Butcher and Robert Forster have recently been promoted to Chief Executive of Novae Syndicates Limited and Group Chief Underwriting Officer respectively. Stuart Heath has taken up the role of Divisional Head of Property and John Owen was appointed Divisional Head of Marine, Aviation & Political Risk. We have also promoted Darren Carr, John Stonehill and Richard Lamb to unit heads of Marine, UK & European Property Facilities and Credit & Political respectively. It is particularly satisfying to be able to promote from within, demonstrating the strength and depth of talent that we have at Novae. Excited as I am by the number of new and talented faces joining our team, the past year has also seen the retirement of a long standing colleague. Jeremy Adams has been a board member since 2004 and I would like to extend my personal thanks for his hard work, support and insight over that time and for the invaluable contribution he has made to Novae. For his role in helping steer the business towards its position of strength and build the potential it now enjoys, Jeremy deserves particular recognition. Operational and structural enhancements In addition to investing in the team, we have made good progress on a number of initiatives which will improve the business and enhance returns. In September we announced our intention to establish a Bermuda presence, which will provide us with access to new business opportunities and forms a part of our ongoing strategic growth plans. We have subsequently started to build this operation, including opening an office in Hamilton and relocating Philippe Chevereau to the island. All relevant regulatory approvals have now been obtained and HMRC have confirmed in writing that any profits arising in the Bermudan Lloyd s coverholder and on the planned intra-group reinsurance should not be subject to UK corporation tax. During 2014, we also undertook a comprehensive review of our investment strategy. As a consequence, BlackRock has been appointed as the Group s principal investment manager and we are delighted to be working with them to design and implement an optimal asset allocation for the business. It is our expectation that we will be able to increase investment return, while maintaining a similar level of market risk within the portfolio. Looking forward to 2015 At our interim announcement, I talked about headwinds facing the industry. These headwinds continue to manifest themselves in the form of a softening market, low investment returns, increasing regulatory burden and an uncertain outlook for the global economy. However, there remain opportunities for profitable growth for those with agility and expertise, and we believe we have both. I also talked about our own corporate tailwinds, being improvements specific to our business that leave me optimistic about our future, regardless of market conditions. We are already capitalising on these tailwinds and enter 2015 with the confidence that Novae will continue to progress. Matthew Fosh Group Chief Executive 4 March 2015

13 Strategic report 11 Expert underwriting > > Specialty knowledge and capability > > Established track record > > Recruiting and retaining the best talent > > Long standing trading partners Consistent performance > > Diversified underwriting portfolio > > Prudent reserving > > Superior enterprise risk management > > Disciplined expense management Dynamic capital management > > Optimal utilisation and reallocation > > Efficient financing > > Strategic reinsurance purchasing > > Pro-active management of surplus

14 12 Operating & financial review

15 Operating & financial review Strategic report 13 Financial highlights Year ended 2014 Year ended 2013 Gross written premium Net earned premium Underwriting contribution Net investment income Other items 5.0 (17.2) Profit before tax Net assets Net tangible assets Return on equity 15.5% 10.4% Basic earnings per share 79.0p 50.2p Ordinary dividends per share 24.8p 22.5p Special dividends per share 20.0p 20.0p Net asset value per share 527.6p 498.1p Net tangible asset value per share 522.0p 491.1p Claims ratio 49.1% 52.4% Expense ratio 41.9% 37.9% Combined ratio 91.0% 90.3% Note: See Financial highlights on page 2 for the basis of preparation Financial results Group profit after tax of 50.2 million (2013: 31.6 million) generated a return on average shareholders funds of 15.5% (2013: 10.4%) including foreign exchange gains of 10.2 million (2013: losses of 11.4 million). Net investment income increased to 14.3 million (2013: 11.1 million) as the investment environment remained challenging. Net tangible asset value per share increased by 30.9 pence to 522.0p (2013: 491.1p). Premiums Gross written premium for the year ended 2014 was million (2013: million), an increase of 8.2% and 13.5% at constant rates of exchange. Underpinning the strong new business growth was pro-active management of the portfolio as the Group allocated capital to classes of business offering the most attractive returns. This has resulted in particularly strong performance from the Marine, Aviation & Political Risk ( MAP ) Division, which reported growth of 28.1% or 34.9% at constant rates of exchange. Growth was also achieved in the Property Division with strong growth in the facilities units, offset by reductions in a number of classes, most notably agriculture. Overall, Property grew by 3.9% on 2013 or 9.1% at constant rates of exchange. There was a net reduction in premiums in the Casualty division in the year of 6.8% or 2.9% at constant rates of exchange. The majority of this reduction came from international liability, professional indemnity and motor business, in part offset by growth from the new Cyber unit. Net earned premium for the year was million (2013: million). The year on year decrease of 3.8% (an increase of 1.0% at constant rates of exchange) reflects the timing difference between new business being written and earned and increased reinsurance spend. During the year the Group purchased additional outwards protection, most notably for the property reinsurance catastrophe programme. The increase in outwards reinsurance spend also reflects the participation of third party capital, introduced in 2012, on all open years of account. Claims Gross claims incurred were million (2013: million). These were offset by reinsurance recoveries of 47.5 million (2013: 76.9 million). Net claims incurred were million (2013: million) producing a net claims ratio of 49.1% (2013: 52.4%) based on net earned premiums of million (2013: million) % 2013 % Attritional claims Catastrophe claims Reserve releases (6.5) (4.2) Claims ratio Attritional claims Attritional claims totalled million (2013: million), equating to an attritional claims ratio of 53.6% (2013: 54.5%), reflecting positive risk selection and the proactive repositioning of the portfolio. This improved performance, against the backdrop of a more challenging rating environment, is testament to disciplined underwriting that has been employed by the Group. Catastrophe claims Industry estimates of insured losses in respect of natural catastrophes were approximately US $31 billion, which was the lowest in the last four years and significantly below the 10 year average estimated at US $58 billion. Consequently, as with last year, 2014 should be considered a relatively benign year for insured natural catastrophe losses, from which the Group incurred losses of 9.6 million contributing 2.0% to the 2014 claims ratio. The majority of these losses arose from adverse winter weather in the UK and US. This compares to 10.6 million and 2.1% in 2013, which was impacted by weather events in the UK and Europe in addition to flood events in Canada and Australia.

16 14 Operating & financial review continued Reserve releases In its assessment of the valuation of insurance liabilities, the Board targets a probability of sufficiency of net reserves of 70 to 80 per cent and a margin over actuarial best estimate of 5 to 10 per cent. Reserve releases contributed 6.5% to the overall claims ratio in the year (2013: 4.2%) and the margin held over actuarial best estimate increased to 9.3% or 73.4 million (2013: 8.9%, 71.0 million). Acquisition costs Acquisition costs for the year were million (2013: million) with an acquisition cost ratio of 26.5% (2013: 24.1%). The increase is as a result of a change in business mix, with a higher proportion of business now arising from delegated underwriting arrangements and a reduction in the level of reinsurance underwritten. Operating expenses Total operating expenses were 74.6 million (2013: 69.5 million) including costs unallocated by segment of 26.8 million (2013: 23.0 million). The increase in operating expenses includes 2.0 million of professional fees incurred in respect of a potential acquisition at the beginning of A strong underwriting performance has also led to a related increase in performance related benefits and an increase in the charge for share based compensation as a result of the Group s improved share price. The Group will continue to invest in both staff and infrastructure to support profitable growth, whilst maintaining a prudent approach to expense management. The operating expense ratio of 15.4% (2013: 13.8%) is significantly impacted by the effects of foreign currency on net earned premium against a predominantly sterling expense base. On a constant currency basis the underlying increase in the operating expense ratio was 0.5 percentage points. Investment performance The environment for investment return remained challenging with ongoing macroeconomic factors once again contributing to a weak performance for fixed income investment portfolios. Investment income for the year was 14.3 million (2013: 11.1 million), equivalent to a total return, net of investment management fees, of 1.2% (2013: 0.9%) on average invested assets of 1,206.1 million (2013: 1,220.3 million). The Group held investment assets and cash of 1,250.4 million at 2014 (2013: 1,210.3 million) primarily in government and high grade corporate bonds. Novae has a modest exposure to high yield and emerging market debt through pooled strategic bond fund arrangements. Exposure to sub investment grade debt, being those assets rated BB and lower, was 0.8% (2013: 1.1%) of investment assets. Novae continues to review its appetite to investment risk and has recently undertaken a comprehensive review of its investment strategy, evaluating opportunities to enhance yield on the portfolio without introducing undue risk or volatility. It is anticipated that the Group will be able to increase investment return while maintaining a similar level of risk within the portfolio. The profile of the Group s investment portfolio is as follows: Corporate Government Government agencies Certificate of deposits/floating rate notes Securitised RMBS/ABS Covered bonds Supranational Investment cash Other Financial assets 1, ,064.0 The investment portfolio can be analysed by rating as follows: Government/AAA rated AA rated A rated BBB+ or below Unrated Financial assets 1, ,064.0 At 2014 the average duration across the Group s investment portfolio was 0.9 years (2013: 1.0 years). Foreign exchange Novae reported a gain on foreign exchange of 10.2 million (2013: loss of 11.4 million) including gains on non-monetary items of 11.6 million (2013: loss of 4.9 million). At the end of 2014, regulatory funding requirements, principally in respect of the Canadian dollar, contributed to a reported loss on monetary items of 1.4 million (2013: loss of 6.5 million) as sterling weakened at the end of the year. The Group does not speculate on foreign currency movements and where practical seeks to maintain a broadly neutral foreign currency position.

17 Strategic report 15 The diagram below illustrates the Group s key entities, excluding its Zurich and Bermudan operations and any dormant or non-trading entities. Novae Management Limited (Infrastructure company) Novae Group plc (Ultimate holding company) Novae Holdings Limited (Intermediate holding company) Novae Corporate Underwriting Limited (Participation on Syndicate 2007) Novae Underwriting Limited (Lloyd s service company) Novae Syndicates Limited (Lloyd s managing agency manages Syndicate 2007)

18 16 Operating & financial review continued The Group s principal trading exposure is to the US dollar with a significant amount of dollar denominated new business written during the year. US dollar business now accounts for 55% of gross written premium (2013: 44%). Other significant trading exposures are the euro (12%), Australian dollar (6%) and Canadian dollar (3%). Tax Novae s tax charge for the year was 12.4 million (2013: 11.2 million). The Group continues to hold tax losses to utilise against future taxable profits. The carrying value of the Group s deferred tax asset is 9.2 million (2013: 18.7 million) valued at the enacted rate of 20% included in the Finance Act The Group has established operations in Bermuda during the year, with one consequence of this being an anticipated reduction in the Group s effective tax rate from Capital structure Novae s operating structure consists of a single underwriting platform at Lloyd s. The majority of regulatory capital is required to support the Group s corporate member with a small requirement relating to the managing agency and service company. Novae determines its regulatory capital requirement by reference to the Individual Capital Assessment ( ICA ) regime applicable to all (re)insurers in accordance with Lloyd s and Prudential Regulation Authority ( PRA ) regulations. Although the ICA regime is still in place, Lloyd s, in anticipation of the forthcoming implementation of the European-wide Solvency II regime, has required Novae to develop its own Internal Model to determine the regulatory solvency capital of its underwriting corporate member. Novae has used its Internal Model to calculate the ultimate Solvency Capital Requirement ( uscr ) necessary to support its underwriting business plans since The uscr is intended to provide equivalent policyholder protection to the ICA. In turn the uscr assessment is increased to meet Lloyd s higher financial strength rating objectives to produce a member level Economic Capital Assessment ( ECA ). The corporate member is then required to satisfy the capital test at coming into line dates in June and November each year. Novae is also required to maintain continuous capital assessment and advise both 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: Cash and investments at Lloyd s Free cash and investments at Group Pipeline profits Uncollateralised letter of credit Quota share reinsurer letters of credit Revolving credit facility (undrawn) Lloyd s economic capital assessment ( ECA ) (402.5) (399.3) Headroom Headroom % 35.8% 26.8% 1 Pipeline profits represent the Group s share of undistributed syndicate profits available for Funds at Lloyd s provision 2 Headroom stated is exclusive of any distributions subsequent to the balance sheet date The Group s available capital for 2015 includes letters of credit held as collateral under quota share reinsurance arrangements underwritten by two large international reinsurers. Debt structure As at 2014 the Group had gross debt of million (2013: million) senior notes subordinated notes US $ 2034 Dekania notes US $ letter of credit Gross debt During the year the Group renewed and increased the letter of credit facility with Lloyds Banking Group to US $76.0 million (2013: US $60.0 million) until December The facility is uncollateralised and in addition to an undrawn revolving credit facility of 30.0 million (2013: 30.0 million), which is available until December Third party capital Novae s participation on Syndicate 2007 is shown below. For the 2013 and 2014 years of account additional capital was provided by two direct corporate member participants on a limited tenure basis. The Group s participation for the 2015 year of account is 100%. Underwriting year Syndicate 2007 stamp capacity Novae s aligned capacity Novae s participation %

19 Three stories from our agile teams Strategic report 17 Left foot Right hand Left hand Right foot

20 18 Property Property Novae s Property division insures a diverse mix of insurance and reinsurance risks worldwide, with a particular focus on the UK, Europe and the US.

21

22

23 Strategic report 21 Knowledge and agility enable our UK & European Property team to achieve profitable growth and ensure they deliver an enterprising approach to address our clients needs Novae continues to achieve profitable growth through a keenly focused and enterprising approach to addressing clients needs. When faced with one of the most challenging markets in recent years, achieving this result requires courage on the part of underwriters and the support of the broader organisation to operate flexibly and effectively. Delivering profitable growth also requires market-leading expertise, model wordings and outstanding customer service, all of which we have consistently delivered despite the tough economic climate. We are empowered to use the full extent of our capabilities to provide a solution for risks facing our clients businesses. Alongside knowledge and agility, our success is underpinned by a claims team that also embodies this ethos and Novae provides a first class claims service. Agility is at the heart of our approach. It enables our team to be as effective as possible and this is clearly demonstrated by the strong underwriting contribution made by the UK & European Property unit to the 2014 results and the Group s overall result. Novae s leading position as a niche property specialist is further substantiated by the UK & European Property team being awarded the accolade of Underwriting Team of the Year at the Insurance Day Awards Left to right: John Stonehill, Unit Head Jackie Clench, Class Underwriter Linda Johnson, Class Underwriter Stuart Heath, Property Divisional Head Scott McEwen, Class Underwriter

24 22 Property continued During the year the division increased its capabilities and market presence in property insurance with the establishment of two new underwriting units to write international open market and binding authority business Gross written premium Net earned premium Net claims incurred (93.0) (107.9) Acquisition costs (59.7) (55.0) Operating expenses (18.3) (18.2) Underwriting contribution Claims ratio 45.4% 47.0% Acquisition cost ratio 29.1% 24.0% Operating expense ratio 8.9% 8.0% Combined ratio 83.4% 79.0% Novae s Property division insures a diverse mix of insurance and reinsurance risks worldwide, with a particular focus on the UK, Europe and the US. The division accounted for 40.6% of gross written premium in 2014 (2013: 42.3%) and comprises of ten units, grouped into three sub divisions: Property Insurance, Property Reinsurance and Agriculture & Livestock. Within Property Reinsurance there are three units, writing international property per risk, US property catastrophe and international property catastrophe. The combined property reinsurance portfolio accounts for 26.7% (2013: 29.6%) of the division and 10.8% (2013: 12.5%) of the Group s gross written premium for Novae has a significant presence in Lloyd s writing agriculture reinsurance, which accounts for 16.5% (2013: 22.6%) of the division and 6.7% (2013: 9.5%) of the Group. The Agriculture RI unit writes a worldwide book of reinsurance covering all insurance classes and product types including crop, livestock, forestry and aquaculture. The property insurance portfolio has strong expertise in UK non-standard residential and the US excess & surplus lines market. This portfolio represents 53.5% (2013: 43.1%) of the division and 21.7% (2013: 18.2%) of the Group s gross written premium for The division s success was recognised in the year with the UK & European unit named Underwriting Team of the Year at the 2014 Insurance Day awards. During the year the division increased its capabilities and market presence in property insurance with the establishment of two new underwriting units to write international open market and binding authority business. Both underwriting units will be led by new senior underwriting hires who bring a significant amount of industry knowledge and whose experience will benefit the division and wider Group as a whole. Gross written premium grew by 3.9% during the year to million (2013: million) representing growth of 9.1% at constant rates of exchange. Growth in the US Property Facilities and UK & European Property units was particularly strong at 52.8% and 37.6% respectively at constant rates of exchange. Well established trading relationships within existing markets allowed both units to increase participation on selected risks and pursue new business opportunities where market conditions remained favourable. Increased competition and a soft rate environment for international property treaty business led the division to reduce its exposure in this class. Growth of 10.7% in the US property treaty unit offset some of this reduction as capital was redeployed to support a significant new facility arrangement complementary to its existing portfolio. The agriculture reinsurance portfolio was repositioned during the year with the team electing not to renew a number of significant quota share arrangements. On a constant currency basis gross written premium reduced by 17.1%.

25 Strategic report 23 Claims experience was favourable, in particular given the absence of any significant catastrophe events, and the net claims ratio improved to 45.4% (2013: 47.0%). Increased acquisition cost ratio to 29.1% (2013: 24.0%) contributed to an overall combined ratio of 83.4% (2013: 79.0%). The increased acquisition costs were as a result of the changing business mix in the division, principally the reduction in agriculture reinsurance and the increases in the UK & European and US Facilities insurance units. On a risk adjusted basis, rates on property renewals were down 3% in Experience across the division varied, with rate increases averaging 2% on US excess and surplus lines business in the first half of the year before returning to a flat position towards the end of Rates remained unchanged overall for UK & European property insurance business and for most international territories, supported in certain classes by increases on a number of specific accounts. Rates on property reinsurance lines were down, with US Property catastrophe renewals in June and July falling 18% and 10% respectively. This followed reductions of 14% at the beginning of the year. Novae s international catastrophe reinsurance book fared better as the Group was able to adjust the portfolio to avoid the worst of the market reductions with the overall adverse rate movement on renewals of 5%. Gross written premium 2014: 259.2m +3.9% 2013: 249.4m Bloodstock Agriculture RI UK & European property facilities US property facilities International binders International D&F International open market International property cat. RI US property cat. RI Property per risk RI Combined ratio 0% Claims ratio Acquisition cost ratio Operating expense ratio 105% % % 30% 75% 45% 60%

26 24 Casualty Casualty Novae s Casualty division is made up of nine underwriting units grouped into three sub-divisions insuring a range of specialty liability, general liability and motor and casualty reinsurance risks.

27

28

29 Strategic report 27 Combining entrepreneurialism with agility allows our Cyber team to partner with clients and deliver bespoke insurance products that respond effectively to the constantly evolving and dynamic cyber environment Cyber risks are pervasive in all aspects of our life. For businesses they are creating real risks that need to be prevented, managed and transferred. To partner with clients to provide effective insurance products for this requires us to listen to concerns, understand a constantly evolving and dynamic environment and respond effectively. To do this requires agility; we must be agile to respond quickly and we must be agile to respond effectively. Our agile approach has been developed with the benefit of a dynamic and flexible team, who have a very strong track record in this class having pioneered its development. There is a view that fraudsters and hackers are always two steps ahead of insureds and insurers. However at Novae we look to work together with clients to constantly refine and improve our collective approach to mitigating these threats by implementing not just best practice but better practice. Underwriting in this niche class requires an entrepreneurial outlook, which cannot happen without top quality people, proper resourcing, the structure to facilitate that and the full support of the Group. Getting that balance right requires its own form of agility and, as this year s results show, Novae does this extremely well. Left to right: Dan Trueman, Unit Head Julia Whiting, Assistant Underwriter James Creasy, Class Underwriter

30 28 Casualty continued Pro-active portfolio management enabled the division to deploy capital to units experiencing more favourable underwriting conditions, demonstrating a pro-active approach to capital management Gross written premium Net earned premium Net claims incurred (79.3) (109.1) Acquisition costs (29.1) (35.7) Operating expenses (14.2) (14.6) Underwriting contribution 0.6 (11.4) Claims ratio 64.3% 73.7% Acquisition cost ratio 23.7% 24.1% Operating expense ratio 11.5% 9.9% Combined ratio 99.5% 107.7% The Group s Casualty division is made up of nine underwriting units grouped into three sub-divisions insuring a range of specialty liability, general liability and motor and casualty reinsurance risks. The division accounted for 24.0% (2013: 27.8%) of the Group s gross written premium for the year. Within specialty liability Novae has a strong market presence in financial institutions business, which represented 19.3% (2013: 19.8%) of the division s gross written premium for the year. The unit has built up a globally diversified portfolio over a number of years with a specific focus on the UK, US, Australia and Canada and covers a range of risks including private banks, wealth managers and central institutions. During 2014, the division improved its offering in specialty classes with the establishment of a Cyber unit. This unit has grown during the year with new hires made to support the existing unit head and leaves Novae well positioned in this growing class of business. The unit underwrites a range of risks including business interruption, cyber terrorism, identity theft and reputational risk. The division s general liability units represented 36.5% (2013: 38.8%) of the division and 8.7% (2013: 10.8%) of the Group s gross written premium in The units write a number of risks on a primary and excess of loss basis encompassing a range of industries worldwide including hotels, manufacturing utilities and telecommunications. Novae s offering in Casualty reinsurance covers non proportional treaty reinsurance across a number of classes and territories and also includes a book of motor reinsurance business centred on the UK market. The two units within this sub-division combined represent 10.3% (2013: 8.4%) of the division s gross written premium for Gross written premium in the division was million (2013: million) a reduction of 6.8% or 2.9% at constant rates of exchange. Responding to increased competition and a soft rating environment, the division reduced its exposure across a number of classes. The most significant reductions were experienced in the International Liability and Motor Insurance units with reductions of 28.2% and 21.2% respectively. This pro-active portfolio management enabled the division to deploy capital to units experiencing more favourable underwriting conditions with growth in the General Liability RI and UK Liability units of 13.2% and 12.2%. The net claims ratio of 64.3% (2013: 73.7%) was an improvement on last year although this also reflects some adverse claims experience during the year. The division strengthened reserves in professional indemnity and international liability classes in line with management s prudent approach to reserving. This strengthening offset some of the favourable reserve development in the Financial Institutions unit. The division produced a combined ratio of 99.5% (2013: 107.7%) with a small reduction in the acquisition cost ratio offset by the currency mismatch between net earned premium and operating expenses.

31 Strategic report 29 Casualty renewal rates were down one per cent on a risk-adjusted basis. General liability reinsurance rates declined by 13% and Novae s motor excess of loss reinsurance book experienced a declining rate environment ( 2%) having experienced increases in Professional indemnity and financial institutions insurance business continued to be broadly unchanged overall, with rate decreases balanced out by increases on loss-affected business. UK liability insurance remained positive with an overall risk-adjusted increase of 2% following on from last year s gains. International liability rates did not keep pace ( 4%) with expected claims inflation. Novae s UK medical malpractice book achieved rate increases on a number of individual accounts, leading to a 2% improvement overall. Gross written premium 2014: 153.0m (6.8%) 2013: 164.2m Financial institutions Professional indemnity Medical malpractice Cyber liability International liability UK liability Motor premier General liability RI Motor RI Combined ratio 0% Claims ratio Acquisition cost ratio Operating expense ratio 140% % % 40% 100% 60% 80%

32 30 Marine, Aviation & Political Risk Marine, Aviation & Political Risk Novae s Marine, Aviation & Political Risk ( MAP ) division has significant expertise and capability across both insurance and reinsurance classes. The division consists of eleven underwriting units which make up three sub divisions: Marine & Energy, Credit and Political and Aviation RI.

33

34

35 Strategic report 33 Being able to adapt to survive and differentiate to thrive empowers our Marine Liability team to explore new paths and remain relevant in a challenging market The insurance market divides risks up neatly into boxes, but clients needs do not always fit this prescriptive, compartmentalised approach. We believe clients want an insurer that is agile enough to tailor its products to their needs and develop bespoke solutions. As such, we seek to innovate or add value wherever appropriate; otherwise we focus purely on diligent and efficient service levels. Our underwriters are empowered to make sound decisions quickly and in everything we do we exhibit sensitivity to the clients needs as well as an underlying sense of commercial realism. It is this mental and behavioural agility that ensures we remain relevant in a challenging market. Within the Marine units we re blessed with a combination of youthful exuberance and old-fashioned experience; we re not afraid to push boundaries, challenge convention and explore new paths, but likewise we maintain a healthy respect for the industry s mantra that the past is a guide to the future. Yet the market and its distribution channels are evolving, and so we choose to move with it. Success yesterday does not necessarily translate into success tomorrow. In a Darwinian sense, those who respond the quickest to a changing environment will prosper: we will adapt to survive and differentiate to thrive. Left to right: Daniel Clark, Underwriting Assistant James King, Assistant Underwriter Selina Lu, Class Underwriter Paul Hartley, Class Underwriter Darren Carr, Unit Head Lee Gammon, Class Underwriter

36 34 Marine, Aviation & Political Risk continued The division continues to display significant expertise and capability, enabling it to attract profitable growth opportunities despite heightened competition Gross written premium Net earned premium Net claims incurred (65.0) (46.0) Acquisition costs (39.2) (30.1) Operating expenses (15.3) (13.7) Underwriting contribution Claims ratio 41.9% 36.8% Acquisition cost ratio 25.3% 24.0% Operating expense ratio 9.9% 11.0% Combined ratio 77.1% 71.8% Novae s MAP division has significant expertise and capability across both insurance and reinsurance classes. The division consists of 11 underwriting units which make up three sub-divisions: Marine & Energy, Credit and Political and Aviation RI. Gross written premium accounted for 35.4% (2013: 29.9%) of the Group s total and has shown the strongest growth of all trading divisions in The marine and energy portfolio represents 60.4% (2013: 58.6%) of the division s gross written premium. Novae is a recognised Lloyd s leader in the field of marine liability insuring a range of risks including ship owners, port authorities, and marine contractors. The division also has a significant energy account covering amongst others offshore and onshore energy risks, construction, seepage and pollution and offshore war and terrorism. The division has significant expertise in political and credit risks which makes up 28.6% (2013: 29.7%) of the division and 10.1% (2013: 8.9%) of the Group s gross written premium. The units within this sub division underwrite all types of political risk and trade credit business including protection for a variety of clients including banks, commodity traders, miners, construction companies and general manufacturers. In addition, Novae has a wealth of experience in the aviation reinsurance sector. It leads or plays a major supporting role in the provision of non-proportional and proportional protections to the principal underwriters operating in the direct aviation market, and represents 9.9% (2013: 10.6%) of the division s gross written premium for Gross written premium in the MAP division was million (2013: million) representing growth of 28.1% or 34.9% at constant rates of exchange. The division continues to harness and demonstrate market leading capabilities across a number of classes with growth achieved in all units across the division. Despite the competitive trading environment the marine liability unit continues to perform strongly achieving growth of 42.5% at constant rates of exchange. New hires in the division have supported this growth and enabled the unit to develop. The Energy unit also performed strongly achieving growth of 42.8% at constant rates of exchange. The division continues to display significant expertise and capability in credit and political risks, which has enabled the division to attract profitable growth opportunities despite heightened competition in the market. Significant growth was seen in the Political Risk and Political Violence units of 30.7% and 28.6% respectively with all other political and credit units achieving growth of at least 10% on a constant currency basis. In line with experience across other divisions, the net claims ratio of 41.9% (2013: 36.8%) benefited from a low level of catastrophe claims. The loss ratio in 2013 included favourable reserve development on aviation business, which was not repeated in 2014 and belies the overall improvement in the attritional loss ratio. The division did experience some losses from the tragic

37 Strategic report 35 Malaysian Airline flights MH370 and MH17 and SEWOL Korean Ferry Accident. The division s exposure to these losses remains in line with expectations. Pressure on rates was felt across the board in marine, aviation and political risk lines, with a decrease of 5% for the division as a whole. Offshore energy rates suffered falls under the burden of abundant capacity and competition from market facilities with decreases of 10% early in the year gathering pace in the second half to leave the book down 12% overall. Aviation rates finished the year down 8% despite a brief improvement following the industry-wide losses in the first half of the year. Marine War rates were also down 8%, with Liability rates falling 5% on a risk-adjusted basis and Hull rates down 2% following last year s increases. Rates on political risks business were down 10% overall on a risk-adjusted basis as competitive pressures weighed on rates and international tensions escalated. Credit insurance fared better finishing the year unchanged overall, and credit & surety reinsurance rate decreases were contained at 3%. Widespread market softening in political violence rates was countered by restructuring a number of key programmes to leave the political violence book down 5% overall, but rates on kidnap & ransom business suffered decreases in the region of 20%. Gross written premium 2014: 226.3m +28.1% 2013: 176.7m Marine hull Marine liability Marine war Specie & cargo Marine RI Energy Political risk Political violence Crisis management Credit insurance Credit & surety RI Aviation RI Combined ratio 0% Claims ratio Acquisition cost ratio Operating expense ratio 105% % % 30% 75% 45% 60%

38 36 Marine, Aviation & Political Risk

39 Risk management Strategic report 37 Risk management is at the heart of Novae s business and is seen as a driver of competitive advantage Risk Management Strategy & Objectives The Risk Management function covers the management of all risks that could affect Novae s ability to meet its strategic objectives of expert underwriting, consistent performance and dynamic capital management. To deliver against its strategy, Novae has developed the following risk management objectives: > > Align risk appetite with strategic objectives > > Promote effective risk based decision making > > Manage loss volatility > > Identify and manage multiple and cross-enterprise risks > > Seek out and capitalise on business opportunities > > Ensure effective deployment of capital > > Ensure overall efficiency, security and continuity of operations Risk management is at the heart of Novae s business and is seen as a driver of competitive advantage. Enterprise Risk Management Framework Novae has developed an Enterprise Risk Management ( ERM ) framework with the objective of providing a consistent view of risk that is aligned and integrated with strategic decision making, and reflecting a defined risk appetite. As part of this Novae adopts a three lines of defence model, summarised below: First Line: Business Management Primary responsibility for risk identification, assessment, mitigation and monitoring Second Line: Risk Management Responsibility for risk oversight, challenge of business management and reporting to the Risk Committee and Boards Third Line: Internal Audit Provides risk assurance through independently testing the design and operation of controls

40 38 Risk management continued Risk appetites Governance Strategy Business planning Solvency assessment Stochastic risk modelling Capital requirements Monitoring, mitigation and management of risks The ERM Framework is integral to the way in which the Group manages its business.

41 Strategic report 39 > > High Level Risk Appetite Statements have been developed to serve as an articulation of the Group s appetite for risk on a basis consistent with the Group s strategy. These are framed initially in terms of high level outcomes e.g. earnings risk, capital risk but also include statements at a more granular level where the Board wishes to express a view about specific risk types e.g. catastrophe risk. A risk appetite, consistent with the High Level Risk Appetite Statements, is set for each individual principal risk by the relevant risk owner and recommended by the Risk Committee to the Board for approval. > > Business planning is an annual process. The Group prepares an annual business plan and a medium term business forecast as a basis for capital and operational planning. Both the annual business plan and the medium term forecast are prepared in accordance with the Group s strategy and risk appetites. > > The Internal Model is a set of processes and tools, including a stochastic risk model, used by the business to quantify and manage risk against appetite, and to calculate the Solvency Capital Requirement ( SCR ). The Risk Committee has oversight of the Internal Model, for which day to day responsibility is delegated to the Chief Risk Officer. The Internal Model is built and operated by the Actuarial Function, led by the Group Actuary. The review of parameterisation, model results and model changes in accordance with the model change policy is performed by the Risk Committee. > > A solvency assessment is performed on a continuous basis to review the composition of the capital available to meet the regulatory capital requirement. > > The risk management function has developed a number of tools to assist the monitoring, mitigation and management of risks. The risk matrix records the principal risks to the business, and documents the key controls applied to mitigate those risks. Compliance with risk appetite is monitored on a forward looking basis through the use of risk indicators set out in a risk dashboard, presented to the Risk Committee. Action is taken when breaches are identified. Stress and scenario analyses are performed periodically, to understand further the risks facing the business, test compliance with risk appetite and support the development of mitigation strategies. A separate Emerging Risks Working Group is charged with identifying, investigating and reporting any new or developing insurance risks to which Novae might be exposed. This is chaired by the Chief Risk Officer and its findings are reported to the Risk Committee. > > The role of monitoring risk exposures is delegated by the Board to the Risk Committee. Further detail on the Group governance structure is provided in the Corporate governance report. The Own Risk and Solvency Assessment ( ORSA ) report is produced annually as a consolidated analysis of the strategy, risk profile, capital and solvency of the business, on a retrospective and forward looking basis.

42 40 Risk management continued Risk category Description of the risk Trend Key mitigations Insurance risk Underwriting catastrophe Underwriting non-catastrophe Underwriting systemic mis-pricing Reserving Claims Credit risk Market risk Liquidity risk Capital risk The potential for losses to arise from catastrophic events The risk of adverse attritional loss experience The risk that price is not adequate to cover the risk The risk that claims reserves will be materially different from the ultimate cost of settlement The risk of uncertainty in the outcome of the claim settlement process The risk of loss if a reinsurance, intermediary or investment counterparty fails to meet its obligations The risk of loss arising from fluctuations in the value of investments driven by interest rate or currency fluctuations The risk of not being able to meet our liabilities as they fall due, or incurring excessive costs to do so The risk that capital resources are inadequate to support regulatory capital requirements Increased use of catastrophe reinsurance has resulted in reduced net exposures relative to gross exposures although net exposures have increased in monetary terms for some perils No major change Recognition of increased downward pressure on rates No major change. The margin held over the actuarial best estimate reserves remains stable No major change No major change. Continue to follow our reinsurance, intermediary and investment guidelines for the careful selection and monitoring of counterparties Macro-economic uncertainty continues and the prolonged low interest rate environment prevails No major change The possibility remains that either the Syndicate or Lloyd s fails to meet the required standards for the Internal Model under Solvency II Monitoring of aggregates and disaster scenarios; reinsurance purchase Robust business planning process, including reinsurance purchase; use of pricing models Rate adequacy monitoring and reporting; use of pricing models Use of proprietary and standard reserving models; internal and external reserve benchmarking; claims development review Segregation of claims function from underwriting; processes and procedures to ensure appropriate claims handling Counter-party credit assessment; concentration limits; monitoring of aged receivables Duration monitoring and hedging; currency monitoring and hedging Asset/liability monitoring; liquidity monitoring Capital planning and modelling; stress and scenario testing Monitoring of regulatory developments; ongoing dialogue with regulators The successful delivery of our 2014 Solvency II programme has reduced the former risk

43 Strategic report 41 Risk category Description of the risk Trend Key mitigations Regulatory and operational risk Operational risk The risk arising from inadequate or failed processes/systems, people, or external events No major change Business continuity planning; scenario planning and rehearsals Appropriate employment contracts and compensation policy; wide share ownership Service level agreements and contract monitoring Monitoring of regulatory and legislative developments; ongoing dialogue with regulators Compliance with the FCA s conduct risk requirements and against Lloyd s minimum standards, product controls through the establishment of the Product Oversight Group; root cause analysis of customer complaints, training and awareness programmes for relevant staff Annual review of strategy by Board; major strategic opportunities assessed by reference to Group strategy Regulatory risk Conduct risk Strategy and reputational risk The risk arising from failing to discharge regulatory and legal obligations The reputational, business and regulatory risk arising from Novae or its distribution partners failing to pay due regard to the interest of its customers The risk that the strategy is not delivered against, not clearly communicated, or not appropriate No major change Regulatory and reputational risks arising from the poor treatment of customers contines to increase as the level of Conduct regulation rises No major change The risk of loss from reputational damage through underwriting or non-underwriting activities Established policy for interacting with the media, analysts, shareholders and regulators Risk Management Oversight During 2014 the Boards of Novae Group plc and Novae Syndicates Limited operated a Risk Committee which has oversight responsibility for the Risk Management Framework of the Group. The role of monitoring risk exposures is delegated by the Risk Committee to a number of functional committees which have responsibility for the management of the specific risks (with the exception of strategy and group risk, which remain the responsibility of the Board of Novae Group plc). A centralised Risk Management Function, headed by the Chief Risk Officer, provides day-to-day support to the Risk Committee in its role of oversight, monitoring and reporting on the risks facing the Group. The risk and control environment is subject to continuous internal review by the Risk Committee. It ensures ongoing compliance with the latest requirements of Lloyd s, the PRA and the FCA, and other overseas regulators as appropriate. Further assurance is provided by Group Internal Audit. This overall assurance includes a review of the Enterprise Risk Management Framework to determine the extent to which reliance can be placed on risk assessments performed by the Risk Management function. This review forms part of the process for generation of an internal audit plan. The planning process reviews the risks involved in each area of operation by reference to the risk matrix as well as discussions with senior management and Non-Executive Directors and, based on the review and discussions, determines the inclusion of a particular area in the plan and also how often the particular area should be considered. The plan is subject to amendment if a risk changes significantly during the year with any material changes to the audit plan being agreed with the Audit Committee. The internal audit process takes the risks relating to an area of operation and ensures the controls designed to mitigate those risks are in place and working effectively. Each audit completed is the subject of a formal written report, which includes an action plan agreed by management. The final reports are then circulated to senior management. A separate quarterly report is circulated to the Audit Committee, which provides a summary of the various audits and findings, together with agreed actions. Actions are tracked through to completion, with action plan status being reported on a monthly basis to Audit Committee members.

44 42 Corporate and social responsibility Novae recognises that its present and future success is critically dependent on its ability to recruit, motivate, effectively manage and retain appropriately qualified staff As a risk-taking insurance business operating at Lloyd s, Novae is particularly conscious of the importance of adopting policies and practices to ensure responsible behaviour to all stakeholders. Its policies and practices reflect Novae s awareness of its responsibilities in four key areas: people, transparency, environment and community. Significant work is under way to consolidate these key areas into an overarching corporate responsibility programme involving a continuous programme of audit, benchmarking and improvement. People Novae recognises that its present and future success is critically dependent on its ability to recruit, motivate, effectively manage and retain appropriately qualified staff. The Group s commitment to the corporate values of courtesy, initiative and teamwork as well as an explicit determination to drive Group performance sets the context for Novae s approach to human capital management. These values provide the foundation on which employee policy is built and are included within the Group s employee handbook which is reviewed annually and as commercial or regulatory need arises. Recruiting the right people Novae understands that recruiting and retaining suitably qualified professionals is key to our success. The Group s Human Resources Director sets out a talent, succession and people plan for the Board annually. Within this plan, priorities for people related activities are agreed with the belief that ongoing investment in talent will deliver profitable growth for shareholders. Learning and development Novae offers a number of different learning opportunities to ensure adequate skill levels throughout the entire workforce. This approach encompasses professional, technical and skills based training, with an average training and development budget equivalent to over 2,000 per employee. To ensure that this investment is both targeted and delivers tangible results, the Group s approach to professional skills is driven by learning and development plans which form a key part of its twice yearly individual performance reviews. In addition, the Group has designed specific training to raise levels of awareness of compliance regulations and diversity issues and this forms part of new employees induction. Effective management and reward Novae seeks to encourage excellence throughout the business through effective people management. We believe a key element in creating a performance-driven culture is transparency around employee communication, reward, and clarity in setting professional standards. Novae has had in place, for some time, an employee consultation forum which seeks to both inform and consult through representatives from every area and level of the business. Novae s approach to reward has four components: base salary including benefits, pension, annual bonus and long-term incentives. Salaries are set by reference to established salary surveys which are specific to the insurance sector as well as wider financial services businesses. In setting salaries, Novae needs to be competitive in the market for labour and requires a reward strategy which enables the company to reward and drive up performance. Benefits which are awarded to all employees include health care, income protection and life assurance. Novae operates a group personal pension scheme for its UK employees and a fully insured combined pension, life and health plan for its Swiss employees. All employees are eligible to be considered for an annual bonus. The size of any award is driven by levels of profitability at underwriting class and Group level,

45 Strategic report 43 as well as an assessment of individual performance, determined through half-yearly and annual appraisals. UK employees are eligible to join Novae s Share Incentive Plan under which they may contribute up to 125 per month from their gross salary to acquire shares in the Group. This is matched by an employer contribution of up to 250 per month. People and the working environment Novae facilitates flexible and remote working by the provision of information technology resource to ensure that the Group s employees represent the best available resource. The Group s working environment and equipment is monitored to ensure compliance with good health and safety practice and legislation. Novae s employees are protected by medical screening programmes and comprehensive health insurance and a range of positive health initiatives, designed to minimise the detrimental effect of illness and to maximise the benefits for the business of good health in the Group s workforce. The Group s activities are substantially carried out in developed countries that have strong human rights legislation which Novae fully adheres to. Novae does not encounter human rights issues as part of the Group s day to day business, however their principles are embedded in the Group s corporate values. Diversity in the workplace As an equal opportunities employer Novae recognises the benefit of a diverse workforce from a range of backgrounds, cultures and religions. It also recognises the importance of how people behave in the work place and reinforces both respect and awareness through mandatory diversity awareness training, which is a module within Novae s employee induction programme. In keeping with others in the insurance sector Novae is working to improve diversity across all disciplines within the business. We are currently seeing an improvement in the gender balance within Novae, having made a number of senior female appointments in underwriting, as function heads and to the Board. Around 37% of Novae s employees are female, amounting to approximately 108. There are 14 women employed at senior management level, representing 17% and one of the eight members of the Board is female. Diversity and inclusion has a wider agenda than the achievement of a better gender balance and we are currently working through a number of outreach initiatives to ensure that Novae attracts talent from the entire community. Transparency Novae is committed to upholding the highest standards of integrity, financial reporting, risk management and internal control. The Audit Committee, Risk Committee, Nomination Committee and Remuneration Committee together ensure that Novae operates ethically, making full disclosures where appropriate. Full reports on each committee can be found from page 55 to page 76. Novae strives for transparency in its communications with shareholders, analysts and the media, and makes regular presentations and statements to keep the market apprised of its performance. Group financial information, including historical announcements and releases, is readily available on the Group s website at Environment The Group concentrates on managing environmental impact over which it can exercise control. Novae is committed to a rigorous recycling and waste policy. All paper, glass, cans and plastics are recycled where possible. Paper is purchased from ecologically sensitive sources and employees are encouraged to print double-sided. The Group s paper archive is under continuous review with the intention of reducing its size. Improved workflow and document management systems are utilised in order to reduce both the circulation of hard copy documents and the subsequent need for paper archive. Human Resources management, including salary, benefit statements, and holidays are conducted on-line. Novae uses an on-line invoice approvals system, and an electronic system for the distribution of Board and Committee papers which keeps paper usage to a minimum. In addition to having a beneficial environmental impact, such innovations have improved data security and business process efficiency. Novae continues to work at reducing energy consumption, within the constraints of a multitenanted building. The internal environment of Novae s head office building is controlled by an energy efficient system. Its heating and air-conditioning system is controlled and operates on a timer system and, where possible, lighting systems are programmed. Novae s landlords were successful in gaining Phase 2 recognition with the Carbon Trust which demonstrated three years of continual improvement in energy reduction. Our landlords were re-certified for the ISO Environmental Management System after being re-audited in September They have also registered for the Carbon Reduction Commitment Phase which commenced in April Energy savings have been made on site with changes from fluorescent lighting to LED and energy saving light bulbs.

46 44 Corporate and social responsibility continued According to the Energy Performance certificate provided by the landlord, Novae s head office building has an excellent Energy Performance Asset Rating and operates at an energy efficiency rating of a newly built building. Novae does not provide company cars to staff, and public transport is used for the Group s business wherever possible. Novae also subsidises UK staff in the Cycle to Work Scheme. Communication with Novae s Zurich and Bermuda offices is managed so far as is possible by telephone and video-conferencing. Greenhouse gas emissions This section includes our mandatory reporting of greenhouse gas emissions pursuant to the Companies Act 2006 (Strategic Report and Directors Report) Regulations 2013 ( the Regulations ). Novae Group s Greenhouse Gas ( GHG ) emissions for the 12 months ending 2014 are outlined on this page. Using an operational control approach, Novae assessed its boundaries to identify all of the activities and facilities for which it is responsible and reported on all of the material GHG emissions. Relevant activity data was identified and collected and provided to independent consultant, Carbon Clear. The validity and completeness of the data were checked by Carbon Clear and used to calculate the greenhouse gas emissions for the Novae Group. The calculations performed follow the ISO :2006 standard and give absolute and intensity factors for the Group s emissions. Scope of reported emissions Emissions data has been reported for all of our operations in London, Zurich and Bermuda. Intensity ratio In order to express our annual emissions in relation to a quantifiable factor associated with our activities, we have used full time equivalent staff as our intensity ratio, which provides the best comparative measure over time. Results The results show that total gross GHG emissions in the period were 382 tonnes of carbon dioxide equivalent ( CO 2 e ), comprised of the following; > > Direct Emissions (Scope 1) amounted to 101 tonnes of CO 2 e or 27% of the total The results are presented in the following tables. Type of emissions Activity Units Direct (Scope 1) Indirect (Scope 2) Total gross emissions (tco 2 e) Table 1: Emissions data Tonnes of CO 2 e % of total Natural gas (kwh) 532, % Refrigerants (kg) % Subtotal % Purchased 658, % electricity (kwh) Subtotal % % Intensity matrix 2014 Total gross GHG emissions (tco 2 e) 382 Average number of Full Time 281 Employees during the year (FTE) tco 2 e per FTE 1.4 Table 2: Intensity ratio We have reported on all material emission sources which we deem ourselves to be responsible for. These sources align with our operational and financial control boundaries. We do not have responsibility for any emission sources that are beyond the boundary of our operational control. Community Conscious of its role in the wider society, Novae s community activity centres on the Investing in the next generation programme and our partnership with The Prince s Trust, both of which focus on supporting the education of children and young people. Alongside this we also participate in the Lloyd s Community Programme and have a charity committee which supports smaller charities as chosen by staff. Investing in the next generation 2014 was the final year of a three-year programme aimed at improving numeracy levels among 10,000 young people across the UK. 1,000 primary schools were chosen to receive a mathematical game called What s the point? which improves children s familiarity with decimals, percentages and fractions. The response was overwhelmingly positive: A fun game, which helped children to visually see the connectives between fractions, decimals and percentages. The children really enjoyed it! Key Stage 2 maths teacher. > > Indirect Emissions (Scope 2) amounted to 281 tonnes of CO 2 e or 73% of the total

47 Strategic report 45 The programme started in 2012, when 3,500 BrainBox maths games were distributed to 1,750 state junior schools. In 2013, 4,500 packs of maths snap games were sent to 1,500 schools. Teacher feedback has been an integral part of the process throughout the programme; the games were chosen in order to meet the particular needs the teachers identified. Novae s principal charity is The Prince s Trust Around one in five young people in the UK are not in work, education or training. The Prince s Trust addresses this by giving practical and financial support to the young people who need it most. The Trust helps develop key skills, confidence and motivation, enabling young people to move into work, education and training. The Trust runs programmes that encourage young people to take responsibility for themselves, helping them build the life they choose rather than the one they have ended up with. Novae has been a Patron of The Prince s Trust since 2007 and focuses its support on one of these programmes, The Prince s Trust xl clubs. This programme gives year olds, who are at risk of truancy, exclusion and underachievement, a say in their education and aims to improve attendance, motivation and school skills. The xl clubs operate in schools, pupil referral units, community youth centres, young offender institutions and other centres. Alongside this Novae provides practical assistance to young people supported by The Prince s Trust by offering vital two-week work placements for participants on The Team programme. This is a twelve week personal development course, offering work experience, qualifications, practical skills, community projects and a residential week. The Prince s Trust Celebrate Success award ceremony is an annual event to celebrate the achievements of the hard-working individuals who have transformed their lives through the help of The Trust. Novae sponsors one of the seven award presentations, the Novae Educational Achiever of the Year award. This award recognises young people who have overcome barriers and developed new skills to improve their future prospects through re-engagement with education. The 2014 winner of this award was Victoria Hudson, you can read her story on page 47. Charity and volunteering During 2014 staff participated in a number of sponsored events raising funds which, subject to a cap, Novae has matched. Listed below are some of the charities Novae supported last year: > > Lennox Children s Cancer Fund making a positive difference to the lives of children suffering from cancer or leukaemia. This is done by offering practical, financial and emotional support to the whole family through a range of projects > > Help for Heroes their mission is to deliver an enduring national network of support for our wounded and their families > > Macmillan Cancer Support are a source of support, helping with all the things that people affected by cancer want and need > > United Response support people with learning disabilities, mental health needs and physical disabilities Community Novae participates in the Lloyd s Community Programme, which supports pupils at schools in Tower Hamlets. There are four different areas and Novae s employees get involved in the Word and Numbers programme to help children improve their literacy and numeracy skills. The Strategic Report on pages 7 to 45 has been reviewed and approved by the Board of directors on 4 March Matthew Fosh Group Chief Executive 4 March 2015

48

49 The Prince s Trust 47 Novae is a Silver Patron of The Prince s Trust. We sponsor the Novae Educational Achiever of the Year award, which recognises young people who have overcome barriers and developed new skills to improve their future prospects through re-engagement with education Victoria, 15, grew up taking care of her mum and would change schools as they moved home. At the age of nine she was put into foster care and became unhappy and increasingly disruptive at school. Leaving my mum and family was really tough. I d cry my eyes out and started getting into arguments at school, I acted badly and would confront my teachers. Vulnerable and bullied, Victoria fell out with her friends and skipped school. She was excluded and lost all interest in her future. I was in a bad place, I couldn t see the point in anything. Her school referred her to The Prince s Trust Fairbridge programme which helps disadvantaged young people develop skills and self-belief. The experience of meeting new people and working in a team built her confidence. Soon she had made friends and was ready to give anything a go. She learned to trust people, has moved in with a new foster family and feels settled. I realised I didn t have to get into arguments to sort out my problems and I stopped mixing with the wrong crowd. I felt settled and happy. Victoria has taken nine GCSEs a year early, has joined the army cadets and is loving every minute. Her sights are firmly set on further education and a career as an army physiotherapist. I feel much happier and I m excited about the future. If I hadn t got involved with The Prince s Trust, I d still be unhappy with my life and would never have realised how much I have to look forward to. Left: Victoria Hudson, winner of the 2014 Novae Educational Achiever of the Year award

50 48 Corporate governance

51 Corporate governance 49 Financial statements Overview Corporate governance Strategic report

52 50 Board of directors Matthew Fosh (57) Group Chief Executive Matthew joined the Group as Chief Executive Officer in November In 1989, he had co-founded Seagray Fosh Futures Limited, a company involved in the sale and execution of equity and fixed income derivatives. The company grew to become one of the largest derivative brokers on LIFFE before its sale to ICAP plc in He has sat on the Council of Lloyd s as a representative of Novae Corporate Underwriting Limited with effect from February 2010 and is a non-executive director of Ariscom, Compagnia di Assicurazioni s.p.a. He is a member of the Nomination Committee. Charles Fry (42) Chief Financial Officer Charles joined the Group as Chief Financial Officer in April He began his career at PwC where he qualified as a Chartered Accountant in From 1999 to 2006 he worked at Benfield Group, in a number of senior finance roles, including Chief Financial Officer of the company s largest operating division. He left to work with Apax Partners on their investment in Travelex Group and subsequently joined Guy Carpenter in New York in 2007 as Global Chief Operating Officer. From 2011 to 2013 he worked on a number of initiatives raising capital for insurance related projects in London. John Hastings-Bass* (60) Non-Executive Chairman John was appointed to the Board in May 2007 and became Chairman in May He began his career with Jardine Matheson in Hong Kong and later Singapore and Beijing. He was a director of Jardine Lloyd Thompson from 1997 to 2006 and was Chief Executive of its International Business Group. He was Chairman, International Development at Arthur J Gallagher (UK) Ltd from July 2007 to December He was appointed non-executive Chairman of BMS Group in He is Chairman of the Nomination Committee and a member of the Risk and Remuneration Committees. Laurie Adams* (58) Non-Executive Director Laurie was appointed to the Board in July He qualified as a solicitor at Allen & Overy and subsequently spent over 20 years in senior legal and compliance roles in the investment banking industry, including Citigroup and ABN Amro. He was a non-executive director of Northern Rock until He is a member of the Supervisory Council of Citadele Bank, Latvia as a nominee for the EBRD, a non executive director of Exane Limited and Chairman of Principality Building Society. He is Chairman of the Risk Committee and a member of the Group s Audit, Remuneration and Nomination Committees.

53 Corporate governance 51 Sir Bryan Carsberg* (75) Non-Executive Director Sir Bryan joined the Board in September He was both Director General of Telecommunications (1984 to 1992) and of the Office of Fair Trading (1992 to 1995). He was Deputy Chairman of the UK Accounting Standards Board (1992 to 1994) and Secretary General of the International Standards Committee (1995 to 2001). He is a non-executive director of Inmarsat plc and Actual Experience Plc. He is a member of the Remuneration and Nomination Committees. He is the Senior Independent Non-Executive Director. David Henderson* (66) Non-Executive Director David was appointed to the Board in September He began his career specialising in personal tax and UK trusts. From 1974 to 1984 he was a banker at Morgan Grenfell, and from 1984 to 1995, he was in financial services executive recruitment with Russell Reynolds Associates. He joined the Board of Kleinwort Benson Group plc as Personnel Director in 1995 and was appointed Chief Executive of its private banking business in 1997, and Chairman in David is currently a non-executive director at a number of quoted and private companies including Majedie Investments plc, Alder Investment Management, TClarke plc, COIF Charity Funds and MM & K Limited. David is Chairman of the Remuneration Committee and a member of the Audit and Nomination Committees. Mary Phibbs* (57) Non-Executive Director Mary joined the Board in November She is a Chartered Accountant with over 30 years experience in financial services. Mary is a non-executive director of the Nottingham Building Society, Morgan Stanley International Group, Newday Limited and Newday Group Limited. She has previously held senior positions at Standard Chartered Bank plc, ANZ, National Australia Bank, Commonwealth Bank of Australia and Allied Irish Banks plc. Previously, Mary was a nonexecutive director at Friends Life Group plc, Stewart Title Limited, The Charity Bank Limited and Northern Rock plc from January 2010 to January 2012, during its period of public ownership. She is Chair of the Audit Committee and a member of the Nomination and Remuneration Committees. David Pye* (67) Non-Executive Director David was appointed to the Board in March He has 40 years experience as both an underwriter and a director in the London Company and Lloyd s markets. He is a non-executive director of Independent Services Group Limited and Chairman of Independent London Market Services Limited. He was previously Chairman of Equity Syndicate Management Limited, the managing agency of Equity Red Star Syndicate 218, the largest Lloyd s motor syndicate, and Chief Executive of Creechurch Underwriting Limited, now part of Canopius. He is a member of the Audit and Risk Committees. * Independent Non-Executive Director

54 52 Corporate governance report Application of the UK Corporate Governance Code Novae Group plc has adopted the provisions of the UK Corporate Governance Code published in September 2012 ( the Code ) by the Financial Reporting Council. A copy of the Code is publicly available at Throughout the year, and at the date of this report, Novae applied the main principles and is in compliance with the provisions of the Code and its predecessor versions except where the directors consider that, in particular limited circumstances, departure may be justified and explained. The reasons why the Board considers Sir Bryan Carsberg to continue to be independent for Code purposes are explained in this report. The Board As at 4 March 2015, the Board is made up of a non executive Chairman, five non-executive directors and two executive directors. Jeremy Adams stepped down as an executive director on The Board plans to meet at least six times a year and additionally as and when necessary. During 2014 the Board met ten times. At each scheduled Board meeting directors are apprised of the Group s underwriting performance, investment performance and financial position, together with relevant strategic issues in the context of the overall strategic plan. Sir Bryan Carsberg is the Senior Independent Non Executive Director. He is available to shareholders who wish to contact him. The Board has a schedule of matters reserved for its consideration. These matters include, amongst others, approval of the Group s strategy, approval of the annual budget, a change in the nature of the Group s business, material acquisitions and disposals of assets, partnership or joint ventures involving the Group, certain capital expenditure, dividend policy, changes in the Group s capital structure, approval of the Group s financial statements and approval of all circulars and listing particulars required by the UK Listing Authority. The directors bring to the Board a wide range of experience and skills and participate fully in decisions on key issues facing the Group. The non-executive directors have individual and collective access to the Chairman when required. The Group maintains appropriate insurance cover in respect of legal action which may be brought against the directors. The attendance of directors at Board meetings during the calendar year 2014 is shown in the table on this page. Attendance at Board committee meetings during the year is shown in the respective reports of the committees. In addition, the Non-Executive Directors met with the Chairman at regular intervals throughout the year without the Executive Directors present. Board meetings Position Held Possible Attended Jeremy Adams* Executive director Laurie Adams Non-executive director Sir Bryan Carsberg Non-executive director Matthew Fosh Group Chief Executive Charles Fry Chief Financial Officer John Hastings-Bass Chairman David Henderson Non-executive director Mary Phibbs Non-executive director 10 9 David Pye Non-executive director * Resigned 2014 Chairman and Group Chief Executive The roles of the Chairman and Group Chief Executive are separate and clearly differentiated. The Chairman is responsible for the running of the Board and its meetings and ensuring that effective communications are maintained with shareholders. The Chairman ensures that directors receive accurate, timely and clear information regarding the Group. The Board is responsible to shareholders for the overall direction and control of the Group. The Group Chief Executive is responsible to the Board for the running of the Group and for the management of its senior executives within parameters set by the Board. The Group Chief Executive is also responsible for the development, recommendation and implementation of the Group s strategic plans. Board balance and independence The Non-Executive Directors are of sufficient calibre that their views carry significant weight in the Board s decision-making process. Independent directors are appointed on the basis of merit after a process involving external search consultants, irrespective of their age, gender, religion or other characteristics. The Board regards four of the Non-Executive Directors, Laurie Adams, David Henderson, Mary Phibbs and David Pye, as independent for Code purposes as at None of them are affected by the circumstances listed in section B1.1 of the Code. The Chairman, John Hastings-Bass, was independent on appointment. The Board is made up of a majority of independent Non Executive Directors. They are considered to be free from any relationship with the executive management of the Group which would materially interfere with the exercise of their independent judgement.

55 Corporate governance 53 Sir Bryan Carsberg was appointed to the Board in September 2003 and has accordingly served for a little over eleven years. It had been intended that Sir Bryan would retire from the Board at the 2014 Annual General Meeting. However, the Board was delighted that Sir Bryan agreed to remain on the Group Board and to take over chairmanship of the Group s managing agency, Novae Syndicates Limited, in Sir Bryan s robust challenge to management and scrutiny of management proposals continues to be a notable feature of his attendance at Board, Risk Committee and Remuneration Committee meetings and is highly valued by his Board and Committee colleagues. The Board continues to regard Sir Bryan as independent for Code purposes. A number of non executive appointments outside the Group lend external and independent perspective to Sir Bryan s contributions to Novae s Board and he does not hold shares in Novae Group plc. Sir Bryan intends to step down from the Board and its committees at the end of Re-election Novae has elected to comply with the requirements of the Code for FTSE 350 companies on the annual re election of directors, and accordingly, all of the directors will offer themselves for re-election at the 2015 Annual General Meeting. Having considered the performance and contribution made by each of the directors standing for re-election, the Board is satisfied that the performance of each director continues to be effective and to demonstrate commitment to the role and, as such, recommends each of their re-election. Sir Bryan Carsberg and David Henderson will step down from the Board and its committees on Induction, training and evaluation Induction and training On appointment, directors are provided with a structured induction programme and are introduced to senior managers below Board level. Directors are able and encouraged to attend relevant training courses upon joining the Board and thereafter. Supply of information The Board is satisfied that it is provided with information in an appropriate form and of sufficient quality to enable it to discharge its duties. The efficiency of the circulation of Board and Board committee papers has been improved during the last three years by the introduction of an electronic distribution system and the use of tablet computers in Board and committee meetings. The Company Secretary is responsible for ensuring that Board procedures are followed and all directors have access to her advice and services. Directors may, in the furtherance of their duties, seek independent professional advice at the Group s expense. Board evaluation Board performance, as well as that of the Board committees and the Chairs of the Board and its committees, is formally evaluated annually. Board performance is evaluated by a detailed on-line questionnaire, which also encompasses evaluation of the Chairman s and Board committees performance. Novae has elected that evaluation of the Board should be externally facilitated by independent advisors every year and uses Lintstock Limited for this process, who has no other connection with the Company. The evaluation in 2014 was led by the Chairman and followed the implementation of the Corporate Governance Review, commissioned in The main areas of focus for 2015, arising from the evaluation, can be summarised as: the addition of greater international and underwriting experience; enhanced diversity to the Board; and continued evaluation of the Corporate Governance Review and corporate governance structure. Meetings held in Chairman Other members 2014 Committee report Audit Committee Risk Committee Nomination Committee Remuneration Committee Mary Phibbs Laurie Adams John Hastings-Bass David Henderson Laurie Adams David Henderson David Pye John Hastings-Bass David Pye Sir Bryan Carsberg Matthew Fosh David Henderson Laurie Adams Sir Bryan Carsberg John Hastings-Bass 5 Pages Pages Page 61 5 Pages Corporate Governance Review During 2014 a new committee structure was implemented, following a review of the Group s corporate governance arrangements in 2013, disclosed in the 2013 annual report and accounts. The implementation of the new structure was reviewed by directors as part of the Board evaluation in 2014 and its appropriateness and effectiveness was rated highly. The implementation of the Group s governance arrangements and readiness for regulatory changes continue to be monitored and assessed by the Group s Internal Auditor. A review of the implemented changes after a full year will be presented to the Group Audit Committee in May 2015.

56 54 Corporate governance report continued The composition of the Boards of both Novae Group plc and its main subsidiary, Novae Syndicates Limited, are being reviewed in 2015 to ensure that the Boards are aligned with the Group s strategic goals. Current experience and skills of the Board will be enhanced by recruiting directors with a range and depth of international insurance and reinsurance experience as well as diversity of experience. Sir Bryan Carsberg and David Henderson will be stepping down from both Boards at the end of Board Committees The Board has four standing committees: the Audit Committee, the Risk Committee, the Nomination Committee and the Remuneration Committee. Their terms of reference are available on the Group s website or on request from the Company Secretary. The membership of the Board s committees has been reviewed in February 2015 and Mary Phibbs and Laurie Adams have been appointed to the Nomination Committee. In addition, Mary Phibbs has been appointed to the Remuneration Committee. Relations with shareholders The Group Chief Executive and Chief Financial Officer hold regular meetings with institutional shareholders to discuss the Group s strategy and financial performance. In 2014, 49 meetings were held with current or prospective investors and analysts (2013: 72). Investor and analyst presentations were given when Novae s interim and preliminary results were published and these presentations are posted on the Group s website. Novae intends to hold an institutional investor day in May This will be similar to the Capital Markets Day held in London for institutional investors in November 2013, to showcase Novae s underwriting. The Chairman also speaks to or meets leading institutional shareholders annually and the Senior Independent Non-Executive Director is available to shareholders if required. The Group receives anonymous feedback following investor meetings to discuss its interim and preliminary results as well as the feedback provided by the Chairman, Group Chief Executive and Chief Financial Officer on their meetings. Specific issues raised at investor meetings are reviewed by the Board and, where relevant, addressed in subsequent periods. Novae s annual report remains central to maintaining good communication with shareholders and is designed to present a fair, balanced and understandable view of the Group s activities and prospects, together with an assessment of the Group s affairs and position. The annual and interim reports are subject to formal review by the Audit Committee and the Board to ensure that they are relevant and clear. Annual and interim reports are mailed (or, if they prefer, are available electronically) to shareholders and, on request, to other interested parties. The Group responds to letters and s it receives from investors. The Chairman of each of the Audit, Risk, Nomination and Remuneration Committees are ordinarily available to shareholders at the Annual General Meeting, along with all other directors, and the Chairman of the Board ensures that investor participation in the meeting is encouraged. The Group s website ( includes significant operating and financial information on the business. As well as downloadable copies of annual and interim reports and investor and analyst presentations, it also contains copies of press releases and information on corporate governance, the operational structure of the Group, its key products and its employees and gives access to the Group s current and historic share price. Directors conflicts of interests The Group has in place procedures for managing conflicts of interests. Novae Group plc s Articles of Association contain provisions to allow the Board to authorise potential conflicts of interest so that a Director is not in breach of their duty under company law. The Board s power to authorise conflicts of interest is operating effectively and the procedures are being followed. Internal control and risk management systems Details of the Group s internal control and risk management systems are set out in the Strategic Report on pages 7 to 45 and in the Audit Committee and Risk Committee Reports on pages 55 to 58 and 59 and 60. Compliance with the Code s provisions Novae Group plc s compliance with the Code s provisions and the statement relating to the going concern basis adopted in preparing the financial statements, has been reviewed by the Group s auditors, KPMG LLP, in accordance with the guidelines published by the Auditing Practices Board. By order of the Board, John Hastings-Bass Chairman 4 March 2015

57 Audit Committee report Corporate governance 55 Committee meetings Years served Possible Attended Laurie Adams David Henderson Mary Phibbs David Pye Key responsibilities of the Audit Committee > > To encourage and safeguard the highest standards of integrity, financial reporting, risk management and internal control > > To review and challenge the actions and judgements of management, in relation to the company s financial statements and regulatory announcements and advise the Board accordingly > > To monitor and assess the role and effectiveness of the internal audit function in the overall context of the company s risk management framework > > To assess the effectiveness and independence of the external auditor and consider appointment or re-appointment of the external auditor Key items discussed in 2014 > > Review and discussion of reserving and the technical result and other key accounting judgements > > Review of 2013 Annual Report and Accounts for Novae Group plc and draft results announcements > > Review of interim management statements > > Review of internal audit policy and audit plan > > Discussion of internal audit quarterly reports > > Consideration of the internal audit effectiveness review > > Consideration of reports from the external auditors > > Review of non-assurance work carried out by the external audit firm > > Consideration of the external auditor effectiveness review > > Consideration of committee effectiveness Overview The overriding responsibility of the Audit Committee is to assist the Board to review, take certain decisions relating to, and make recommendations regarding the financial reporting, external auditor, systems of internal control, internal audit, and certain regulatory and compliance matters. The Audit Committee met five times during the year. Membership The Audit Committee is comprised solely of independent Non-Executive Directors. The members are considered to have the necessary skills to fulfil the Audit Committee s responsibilities effectively. They all have financial services experience. Mary Phibbs is a Chartered Accountant with over thirty years experience in financial services across the UK, Australia and Asia Pacific. The Board has determined that she has recent and relevant financial experience as required by the Code. See page 51 for details of experience. To assist the Audit Committee in fulfilling its role, a number of senior executives are invited to attend its meetings. These include the Group Chief Executive, the Chief Financial Officer, the Director of Finance and Operations, the Head of Internal Audit, the Chief Risk Officer and the Group Actuary. The Group s external auditor is also invited to attend each meeting of the Audit Committee. Two members of the Audit Committee represent a quorum. Role and responsibilities The Board has delegated to the Audit Committee responsibility for overseeing the financial reporting and systems of internal control of the Group and for maintaining an appropriate relationship with external auditors. In carrying out these responsibilities, the principal activities of the Audit Committee include: > > Reviewing the form and content of, and monitoring the integrity of, the Company s and the Group s financial statements and financial results announcements > > Reviewing the adequacy and effectiveness of the Group s internal controls and risk management systems > > Recommending to the Board the appointment, re-appointment or removal of the external auditors and reviewing the audit plan > > Monitoring and reviewing the arrangements for ensuring the objectivity and effectiveness of the external audit function > > Recommending to the Board the appointment or removal of the Head of Internal Audit and assessing the effectiveness of the internal audit function > > Approving the internal audit plan and monitoring activity against the plan > > Reviewing and monitoring the Group s ethical standards, procedures for ensuring compliance with regulatory and financial reporting requirements and its relationship with the relevant regulatory authorities A copy of the current terms of reference are available on the Group s website at

58 56 Audit Committee report continued Significant issues in relation to the financial statements The Audit Committee reviews all the financial based information published by the Group and considers accounting policies adopted together with presentation and disclosure of the financial information. The key judgements made by management in preparing the financial statements continue to be a primary focus. The significant issues considered by the Audit Committee in relation to the financial statements and how those issues were addressed are set out below: Significant issues considered Claims reserving The gross claims reserves amount to 1,185.9 million and are further explained in note 25. This includes the significant areas of judgement exercised by management in arriving at the overall reserving figure and the challenges and discussions provided by the Audit Committee. This includes discussions around various changes in approach during the year. Investment valuation The carrying value of financial assets at 2014 amount to 1,048.2 million and are shown in more detail in note 22. The investment portfolio represents a significant proportion of the Group s asset base and is valued in accordance with the accounting policies on page 95. External sources are utilised to value the investment portfolio. How the issues were addressed Reports are received on a regular basis from the Group Actuary and these are reviewed and discussed by the Audit Committee. In particular, in 2014 the Group Actuary presented various improvements to the reserving process to the Committee. These improvements were considered by the Committee and implementation considered through the year. The Audit Committee also considers the output of the external actuarial review performed by KPMG and takes accounts of issues (if any) raised in that review. The various discussions held did not identify any material errors or inconsistencies in the reserving process Audit Committee members also have access to members of the Reserving Committee to acquire additional input where necessary. The Audit Committee considers the approach to valuation of the portfolio and reviews and takes into consideration reports from management and also the external auditors. In addition Internal Audit conducted a review of investments in 2014 and the Committee discussed the findings in their November meeting. Reinsurance recoveries as shown in note 20 the amount recoverable is million. Calculation of amounts recoverable from reinsurers involves significant judgements due to the complex nature of reinsurance coverage and also the estimation of known and unknown losses. The Audit Committee received and considered reports from management and the actuarial function and received confirmation of the ability of reinsurers to respond to losses. Compliance with relevant accounting standards, judgemental accounting areas and legislative changes The Audit Committee considers the format and content of the financial statements, along with updates to accounting standards and legislative changes enacted during the year. In addition, the Audit Committee considers the appropriateness of judgements and estimates made by management providing independent challenge as appropriate. Reports on accounting and legislative changes were received and discussed by the Audit Committee. Following changes to the Companies Act 2006 and UK Corporate Governance Code, the Audit Committee recommended the 2013 Annual Report be approved as fair, balanced and understandable to the Board. These discussions took place with both management and the external auditors. In addition, the Audit Committee considered reports from management outlining key judgements made and the rationale supporting these.

59 Corporate governance 57 Significant issues considered Accounting framework adoption the Financial Reporting Council has been conducting a review of UK GAAP with the intention of updating and rationalising the approach. These changes will impact Novae s subsidiary companies but will not have a direct impact on the Group. External audit The Audit Committee has reviewed and discussed the external auditors engagement, audit plans, identification of risk areas, independence, effectiveness and the extent of, and reasons for, them providing non audit services. One of the primary responsibilities of the Audit Committee is to monitor and review the independence and effectiveness of the external auditor. A formal review of the effectiveness of the external auditor was performed in 2014 in respect of the 2013 audit taking into account the views of relevant stakeholders. The review was carried out by the Internal Audit team on behalf of the Audit Committee. Audit quality reviews conducted on KPMG by the Financial Reporting Council were also reviewed. The result of this review was considered by the Audit Committee with the overall conclusion that the external auditors provide an effective and independent service. The last full tendering process took place in The current lead partner took on the role following rotation after the completion of the 2013 audit. The Audit Committee monitored the transition to ensure it was implemented efficiently. In the Annual Report for the year ended 2013, the Audit Committee reported that it was keeping the desirability of conducting an audit tender process under review. The Committee has been monitoring the evolving position relating to external audit rotation and tendering. The changes introduced in the 2012 UK Corporate Governance Code require that the external audit contract is put out to tender at least every ten years with transitional guidance around deferral of tender until after the next partner s rotation. Rules published by the European Union have been reflected in the final order published by the Competition and Market Authority, which came into force on 1 January As a result of rule changes on the audit tender process, the Audit Committee decided in 2014 to conduct a formal audit tender process. A number of firms were approached to tender for the audit including the incumbent auditor, KPMG. How the issues were addressed The Audit Committee considered and discussed management recommendations in respect of the adoption of the new framework and recommended to the Group Board that management s proposal be adopted. The process involved provision of a data room to provide standard information to all parties, meetings between the audit firms and key stakeholders in the business, written submissions from all audit firms as well as oral presentations from the audit firms shortlisted. Key selection criteria included sector expertise, geographical spread, the experience and depth of the audit team proposed for Novae s account as well as cultural fit and the added value that each firm was judged to be likely to be able to provide to the organisation as its auditors. The process was concluded in February 2015 and the Audit Committee recommended to the Board, and the Board concurred, that PricewaterhouseCoopers LLP be appointed as the Group s auditor. Accordingly, a resolution proposing the appointment of PricewaterhouseCoopers LLP as auditor will be put to the shareholders at the 2015 AGM on 13 May The Committee was grateful to all four firms for responding so positively to the selection process, and particularly to KPMG who have served the Group with professionalism and skill since their appointment. In recommending the appointment, the Committee are confident that the PricewaterhouseCoopers LLP team is well placed to assist the Group as it meets the challenges of its next period of development. The Group has adopted a policy relating to the provision of non-assurance services by the external auditors and the Audit Committee monitors adherence to this policy. The overall amount of fees paid or due to external auditors for both assurance and non-assurance services is subject to formal review at least annually by the Audit Committee. The Committee remained satisfied that the provision of such non-audit services by KPMG has not compromised their independence. The split of assurance/non-assurance fees paid to KPMG is shown in note 9 on page 115. Private meetings are held between the Audit Committee Chairman and the external auditors on a regular basis giving the opportunity to raise any issues without management present. The external auditors also meet privately with the Audit Committee without management present at least annually.

60 58 Audit Committee report continued Internal Audit The primary role of the Internal Audit function is to assist the Board and Executive Management to protect the assets, reputation and sustainability of the organisation. The Audit Committee reviews reports from the Head of Internal Audit at each meeting. The reports include the results of audit work performed together with management actions agreed as well as updates on the progress of the audit plan. The Audit Committee also monitors completion of agreed actions by management. During 2013, the Audit Committee commissioned an external review of the effectiveness of the Internal Audit function. This review was carried out in 2014 and was subsequently reported to the Audit Committee. The conclusion of the report was that the Internal Audit function was effective. It identified areas of strength and also made recommendations for improvements. The Head of Internal Audit has compiled a development plan with target timescales to adopt the recommendations made and progress is reported to the Audit Committee on a quarterly basis. The Head of Internal Audit has direct access to the Chairman of the Audit Committee and Chairman of the Board and all members of the Audit Committee. One-toone meetings are held with the Chairman of the Audit Committee, the Group Chief Executive and the Chief Financial Officer on a regular basis outside the Audit Committee process. The Head of Internal Audit also meets with the Audit Committee without management present allowing any issues to be raised as necessary. Internal control The Board, although retaining ultimate responsibility for its operation, has delegated the review of the effectiveness of the systems of internal control to the Audit Committee. Such a system, however, is designed to manage rather than eliminate the risk of failure to achieve business objectives and can only provide reasonable assurance against material misstatement or loss, and of the safeguarding of assets, the maintenance of proper accounting records, the reliability of financial information, compliance with appropriate legislation, Lloyd s and Prudential Regulation Authority/Financial Conduct Authority regulation, best practice and the identification and management of business risk. The Group Internal Audit function, reporting to the Audit Committee, operates independently of the other aspects of the Group s management structure. It continually reviews the Group s systems of internal control and reports to the Audit Committee on the results. Detailed implementation of the system of internal financial control throughout the Group has been delegated to Executive Management by the Board. These controls include financial controls that assist the Board in meeting its responsibilities for the integrity and accuracy of the Group s accounting records. The Group s financial statements, prepared from these records, comply with IFRS for the Group and UK GAAP for the parent company. The Board exercises control over appropriate strategic, financial, operational and compliance issues. There is a clearly defined organisational structure with established lines of reporting and decision-making authority. Performance is monitored against pre-established targets contained in budgets and annual plans. Details concerning risk management are provided on pages 37 to 41. The Board considers the information it receives to be sufficient to enable it to review the effectiveness of the Company s systems of internal control in accordance with Turnbull guidance. During 2014 the Audit Committee received various reports relating to the effectiveness of the Group s internal controls. Risk management function The Audit Committee and Risk Committee work closely together and certain of the members are common to both committees. Additionally the internal audit team and risk management team meet regularly to discuss various aspects of the risk and control framework. The Internal Audit function carries out an annual review of the effectiveness of the risk management function. For 2014, this review again indicates that the risk management function operates satisfactorily. An update on Risk Committee matters is provided at each meeting of the Audit Committee. Plans for 2015 In addition to the review and challenge of regular reports from management and internal audit the Audit Committee will also consider the following in 2015: > > Oversight of implementation of the recommendations arising out of the effectiveness review of the Internal Audit function > > Monitoring of the transition of the external auditor from KPMG to PricewaterhouseCoopers LLP Committee effectiveness review A formal review of the effectiveness of the Audit Committee was carried out by Lintstock and published in July The review concluded that the Audit Committee carries out its duties effectively. By order of the Board, Mary Phibbs Audit Committee Chairman 4 March 2015

61 Risk Committee report Corporate governance 59 Committee meetings Years served Possible Attended Laurie Adams John Hastings-Bass David Pye Key responsibilities of the Committee > > Oversee the operation of the Group s enterprise risk management framework > > Review and monitor the management of the risks to which Novae is exposed Key items discussed in 2014 > > Conduct risk > > The Own Risk and Solvency Assessment ( ORSA ) > > Oversight and validation of the Internal Model > > Foreign exchange risk > > Controls framework review > > Emerging risks framework > > Request for the continued authorisation of the Internal Model > > Impact of declining oil prices > > Ukraine-Russia conflict Overview The Risk Committee s role is to oversee the operation of the Group s risk management framework and in particular to review and monitor the management of the risks to which Novae is exposed. Other Non Executive Directors are free to attend meetings of the Risk Committee and the Executive Directors and other senior managers attend meetings of the Committee by invitation. The Risk Committee Terms of Reference are available on the Group s website at The Risk Committee has met seven times during the year and reports to the Group Board and the Board of its principal subsidiary, Novae Syndicates Limited ( NSL ). The Risk Committee receives a report from the Chief Risk Officer ( CRO ) that provides an assessment of the key risks facing the business and an overview of the response to these. The enterprise risk management framework operated effectively in 2014 and provided timely and relevant risk information to the Risk Committee and the Board. Novae has continued to invest in strengthening the risk management function, appointing Reeken Patel as Chief Risk Officer in July Reeken joined from PricewaterhouseCoopers LLP where he was a partner in the General Insurance Division. He reports to the Group Chief Executive and is a member of the Executive Committee. It is anticipated that this appointment will allow Novae to continue to develop risk management as a source of competitive advantage and ensure that the function supports the Group in the pursuit of its strategic objectives. Key items discussed in 2014: > > Conduct risk; responsibilities to customers and how Novae will develop and embed its conduct risk framework in line with Lloyd s new Conduct minimum standard, introduced with effect from 1 January 2015 During 2014 Novae enhanced the conduct risk framework through the establishment of the Product Oversight Group. The Product Oversight Group has ongoing responsibility for reviewing the performance of the product portfolio and developing the Conduct Risk approach to ensure that products, and the way that they are distributed, meet conduct requirements > > ORSA; ongoing development of the ORSA report as a key document for risk and capital management and strategic decision making > > Oversight of the Group s Internal Model; including consideration of the model validation conclusions, and challenging the business on the appropriate use of the model. The Internal Model was used extensively in Key uses included calculating the 2015 Solvency Capital Requirement, considering new business opportunities and reinsurance structures, monitoring risks against appetite and to aid strategic decision-making related to the establishment of a presence in Bermuda

62 60 Risk Committee report continued > > Foreign exchange risk; the sources of exposure to foreign exchange risk and the approach to monitoring and management of the risk in conjunction with other treasury risks including inflation and interest rate risk > > Controls framework review; a deep dive review of how the internal risk and control framework had operated in respect of the losses originating from the Malaysia Airlines MH17 tragedy > > Emerging risks framework; the establishment of an enhanced framework for identifying, assessing and monitoring new and emerging risks. Individual sub committees now have responsibility for assessing relevant emerging risks, identified during an annual horizon scanning meeting > > Internal Model authorisation; providing assurance to the NSL Board that the Internal Model meets Solvency II requirements ahead of its formal request to Lloyd s for authorisation > > Declining oil prices; considering the impact of a rapid fall in oil prices on Novae > > Ukraine-Russia conflict; an assessment of potential exposures that could arise and the need for any additional pro-active measures Plans for 2015 In addition to reviewing regular reports on the management of risks and issues in the business, and providing oversight to the activities of the risk management function, it is anticipated that the Risk Committee will also consider the following in 2015: > > Continued development of the risk framework including review and enhancement of the risk appetite framework > > Ongoing Solvency II preparation; oversight of the Group s preparation for the implementation of Solvency II in January 2016 > > Internal Model Operation; including the use of the model and review of model changes in line with the Model Change Policy > > Reviewing Novae s compliance with the provisions of the revised UK Corporate Governance Code By order of the Board, Laurie Adams Risk Committee Chairman 4 March 2015

63 Nomination Committee report Corporate governance 61 Committee meetings Years served Possible Attended Sir Bryan Carsberg Matthew Fosh John Hastings-Bass David Henderson Key responsibilities of the Committee > > To review the structure, size and composition of the Board and to make recommendations to the Board with regard to any changes > > To consider succession planning for directors, Non- Executive Directors and other senior executives > > To be responsible for identifying and nominating for the approval of the Board, candidates to fill Board vacancies as and when they arise Key items discussed in 2014 > > Discussion and approval of the Group s succession plan and capability audit > > Appointments to the Boards of the Bermudian subsidiaries > > Appointments to the Board of Novae Syndicates Limited Overview The Board has delegated to the Nomination Committee responsibility for reviewing and proposing members for appointment to the Board and for recommending any other changes to the composition of the Board or Board Committees. The Committee selects candidates for appointment to the Board to meet its desired composition and sets the procedure for the appointment of new directors. It ensures that succession plans are in place for key Board members. During 2014 the Committee reviewed in detail the Group s succession plan and a capability audit of the underwriting units to determine the development potential within them. The capability audit will be extended to other business areas during The Committee ensures that the future changes in the Board s membership are anticipated and properly managed, and that in the event of unforeseen changes, the management and oversight of the Group s strategy will not be disrupted. The Committee also reviewed the continuity in, and development of, the management team below Board level. A copy of the current terms of reference are available on the Group s website at Gender diversity The Board is aware of the requirement within the UK Corporate Governance Code to report annually on their boardroom diversity policy, including gender, and on any measurable objectives set for implementing such a policy and the progress in meeting these. The diversity of the Board, including gender, was one of the factors considered when evaluating board effectiveness in Greater diversity in gender, race and background was identified as a priority for future candidates, provided selection was primarily on the basis of ability and background. The composition of the Non-Executive Directors sitting on the Novae Group plc Board and the Board of the Group s managing agency, Novae Syndicates Limited, will be reviewed in 2015; the identification of candidates to bring greater diversity is considered a priority. The Board discussed Novae s diversity and inclusion policy at its meeting on 2 March 2015 and will address any actions arising from this during All Novae staff received training during 2012 on the Group s diversity policy, which is set out in the Employee Handbook and mandatory diversity awareness training is a module within the employee induction programme for all new employees. Further information on the Group s gender diversity is included within the Strategic Report on page 43. Plans for 2015 The composition of the Committee has been reviewed in 2015 and Laurie Adams and Mary Phibbs have been appointed to the Committee. By order of the Board, John Hastings-Bass Nomination Committee Chairman 4 March 2015

64 62 Remuneration Committee chairman s statement Dear Shareholder, In the following pages, we set out the Directors remuneration report for The report meets the requirements of both the Department of Business, Innovation and Skills (BIS) and the Large and Medium Sized Companies and Groups (Accounts and Reports) (amendment) Regulations Against the backdrop of a challenging rating environment, the Group has delivered another year of strong underwriting performance, with profit before tax and foreign exchange of 52.4 million. The underlying performance is, in no small part, due to the continued focus of the Directors on strategy implementation and the creation of a performance driven culture. As well as meeting both the financial and non-financial objectives in 2014, the Directors have been focussed on the changes required in the business to deliver consistent performance and increased shareholder value. In my report last year, I wrote that there would be a review of our remuneration strategy. The strategic review of reward was carried out to assess the extent to which our existing approach was, in light of our business strategy, still fit for purpose. In particular, the Committee was keen to ensure that the targets associated with variable pay were commensurate with our strategy. Equally, our approach to reward must attract and retain the best people. As well as annual targets, the Committee was also keen to ensure that the balance between base salaries and variable pay was appropriate for the Group. A working group, comprising senior management from all disciplines within the business, with external advice provided by PricewaterhouseCoopers LLP, has conducted a review of our approach to reward covering all employees. As part of that review, the Committee has considered a number of changes to our existing approach. As well as considering the approach to reward, during 2014 the Remuneration Committee conducted a tendering exercise for advisors to the Committee. I am pleased to announce that following this review, Kepler Associates have now been retained as our advisors. As a function of the review of our reward approach, a number of key changes in respect of remuneration have been made: > > Toughen the performance levels at which the annual bonus pays out; there are no changes to the maximum bonus opportunity (300% of salary for Executive Directors), and the main performance measures will continue to be profit before tax (75% weighting) and non-financial objectives (25%); > > Following the review of our annual bonus arrangements, raise the salaries by 10% for the Group Chief Executive and Chief Financial Officer, in line with the salary increases to a number of senior people below Board level and to bring these salaries more in line with the market; > > For LTIP awards granted from 2015, introduce a postvesting two-year holding requirement for any vested LTIP awards, to reflect recent trends in investor guidance in this area; > > Introduce malus provisions alongside the current clawback provisions in both the annual bonus scheme and LTIP; > > Double the minimum shareholding requirement so that our Executive Directors are expected to build up a holding equal to 200% of salary; and > > Amend the bonus scheme in line with market practice for Executive Directors such that 50% of the bonus is payable in cash, the remaining 50% paid in shares and delivered in three equal tranches over three years. During the early part of 2015, we consulted with our major shareholders on our proposals for a new Directors Remuneration Policy. We will accordingly be seeking approval for our revised remuneration policy at the forthcoming Annual General Meeting, and the policy will operate with effect from the date of the AGM. During the course of 2015, we will be reviewing our existing LTIP. In the event that changes are proposed, we will consult with shareholders at the appropriate time and present to shareholders a resolution to approve a new scheme at our AGM in David Henderson Remuneration Committee Chairman 4 March 2015

65 Directors Remuneration Policy Corporate governance 63 As required by legislation, the Directors Remuneration Policy will be put to a binding shareholder vote and, subject to shareholder approval, will become effective from the 2015 Annual General Meeting. Policy overview Executive Directors should be rewarded, in line with the market, for the delivery of stretching goals consistent with a performance-driven culture and shareholder value. Where targets have not been met, the converse must also be true and awards reduced accordingly. As well as a description of all the various reward components in tabular form, set out below is some additional detail: > > The levels of variable pay are subject to the principle of affordability and are determined by reference to both financial and non-financial performance targets > > Risk is managed by approving, amongst other things, various capital and liquidity and other risk limits. Breach of any of these limits would be taken into account in deciding variable pay awards > > Risk is further managed within the performancelinked elements through the application of caps for rewards, a two-year holding period on vested LTIP awards and the application of bonus deferrals and clawback and malus provisions on all incentives > > The Remuneration Committee involves the Chief Risk Officer when considering both the structure and practice of our reward approach Consideration of shareholder views The Remuneration Committee considers shareholder feedback received in relation to the Annual General Meeting each year at a meeting immediately following the Annual General Meeting ( AGM ). This feedback, plus any additional feedback received during any meetings from time to time, is then considered as part of the Company s annual review of its Directors Remuneration Policy. The Remuneration Committee will seek in advance the views of major shareholders should any major changes be proposed to the Directors Remuneration Policy. Details of votes cast for and against the resolution to approve last year s Directors Remuneration Report and any matters discussed with shareholders during the year are set out in the Annual Report on Remuneration. Consideration of employment conditions elsewhere in the Company When determining salaries and other elements of remuneration for our Executive Directors, we consider the general pay movement and employment conditions elsewhere in the Group, as well as the relevant general markets. We have one annual performance plan in which all employees (including Executive Directors) participate, which is driven by annual Group financial and nonfinancial targets. Within underwriting areas the awards are further affected by business unit results. A small group of senior employees (excluding Executive Directors) will participate in a long-term share plan. The level of award will be determined by taking into account prior individual performance. Awards will vest at the end of a three-year period and be subject to recipients still being employed and not under contractual notice. All UK employees are eligible to participate in the Share Incentive Plan ( SIP ) on the same terms. The Group has an Employee Consultation Forum ( ECF ) chaired by the Group Chief Executive. The Group consults with the ECF on significant business issues, including changes to the general employee remuneration approach. The ECF is actively encouraged to submit requests for information and for details of anything pertaining to Novae.

66 64 Directors Remuneration Policy table The table below provides detail of each element of Novae Group s reward structure for Executive Directors from 13 May 2015 onwards (subject to approval at the Annual General Meeting), along with a brief overview of how these contribute to the achievement of strategic and business objectives. Purpose and link to strategy Operation Opportunity Performance metrics Base Salary Essential to recruit and retain Executive Directors. Reviewed annually and fixed for 12 months, commencing 1 January. Decision influenced by: > Average change in broader workforce salary > Total organisational salary budgets > Positioning against similar businesses, adjusted to reflect scale > Individual s role and responsibility > Market competitiveness There is no prescribed maximum annual increase. The Remuneration Committee is cognisant of the general increase for the employee population and movements in the external market, but on occasions may need to recognise, for example, development in a role and/or change in level of responsibility. None, although salary levels reflect expertise, experience and market worth. Benefits Helps recruit and retain Executive Directors (as well as absence management). Executive Directors are entitled, in common with all other employees, to a range of benefits including healthcare, life and permanent health insurance. The value of other benefits is based on the cost to the Company and is not pre-determined. The Committee retains the discretion to approve a higher cost in exceptional circumstances (e.g. relocation) or in circumstances driven by factors outside the Company s control (e.g. material increases in insurance premiums). None. Annual Bonus Rewards the achievement of annual financial and strategic business targets and delivery of personal objectives. Performance objectives are reviewed at the beginning of each year to ensure that the bonus opportunity, performance measures, targets and weightings are appropriate and continue to support the strategy. The targets are set by reference to stretching financial objectives to ensure not only a strong financial performance but also affordability. Executive Directors are required to defer 50% of their bonus in shares, delivered in three equal tranches over three years. Malus and clawback provisions may be applied in exceptional circumstances, including but not limited to misstatement, misconduct or error. Maximum award capped at 300% of salary For entry level and target performance, the bonus earned is up to 25% and 75% of maximum, respectively Profit before tax ( PBT ) targets are set annually by reference to shareholder funds, cost of capital and growth projections. Nonfinancial measures are contained within a corporate scorecard through which up to 25% of the potential bonus can be awarded within the overall cap. Details of the measures applicable for the financial year under review are provided in the Annual Report on Remuneration. Notes to table 1. The annual bonus is based on performance against a mix of financial and non-financial performance measures. The performance measures are aligned to the Group s strategic objectives and will be reviewed each year and throughout the year by the Remuneration Committee to ensure that they remain appropriate to reflect the priorities for the business in the year ahead. A sliding scale of targets is set to encourage continuous improvement and to encourage the delivery of stretch performance. In addition to the achievement of strategy-driven performance objectives, regulation, compliance and risk management also feature as key elements when considering eligibility and quantum with regard to bonus awards. The Remuneration Committee has discretion to pay part of the bonus based on financial measures where all of the following apply: (a) the outcome is below the threshold level; (b) in exceptional circumstances where the outcome was impacted by sector wide events, the Group outperformed in the market and all non-financial objectives were met; and (c) the Remuneration Committee believes that the underlying performance merits such a bonus. In such a case no more than 25% of the potential bonus payable would be paid.

67 Corporate governance 65 Purpose and link to strategy Operation Opportunity Performance metrics Long Term Incentive Plan ( LTIP ) Incentivises Executive Directors to achieve superior returns for shareholders over a longer time frame and to generate sustained improvement in financial performance. Awards of conditional shares are made annually with vesting dependent on the achievement of performance conditions measured over a minimum of three years. The Remuneration Committee reviews the quantum of awards annually, taking account of market rates. Clawback and malus provisions may be applied in exceptional circumstances, including but not limited to misstatement, misconduct or error. A two-year holding period will apply to vested LTIP awards made in 2015 and subsequent years. The Committee retains discretion to allow dividends to be accrued over the vesting period in respect of the awards that vest. Maximum of 200% of salary. In exceptional circumstances, the Remuneration Committee may exceed this limit, up to 300% of salary. Awards vest at the end of a three year performance period based on a mix of internal and marketbased measures. The performance measures and respective weightings may vary year on year to reflect strategic priorities. Details of the measures, weightings and performance targets used for specific LTIP grants are included in the Annual Report on Remuneration. Share Incentive Plan ( SIP ) Encourage employee share ownership and therefore increased alignment with shareholders. HMRC approved plan that provides all employees with a tax-efficient way of purchasing shares and allows the grant of matching shares. Executive Directors are entitled to participate in the SIP on the same terms as other employees. Net Asset Value per share. The maximum will not exceed the statutory maximums as applied to all employees. None. Pension Contributes towards post-retirement living. A company contribution to a defined contribution scheme or provision of cash allowance in lieu of pension at the request of the individual. Up to 18.5% of salary. None. Share ownership guidelines Improve alignment of interest with shareholders. Executive Directors are expected to hold no less than 50% of any award (after tax) that vests under the LTIP or any other share-based plan to be retained until a holding of 200% of base salary has been achieved. None. None. Non-Executive Directors fees Essential to recruit and retain high calibre Non-Executive Directors Fees are paid in cash. Fees are determined based on the responsibility and time committed to the Group s affairs and appropriate market comparisons. The maximum annual aggregate fee for all Group NEDs is 600,000, as set out in the Company s Articles of Association. None, as the Non Executive Directors do not participate in the Group s variable pay arrangements. 2. The current LTIP measures are NAV per share and absolute TSR. NAV is a key measure of the Group s financial success and also aligns the rewards received by Executive Directors with the returns received by shareholders. Absolute TSR has been selected as it reflects the absolute value creation for shareholders. The Remuneration Committee will review the choice of performance measures prior to each LTIP grant but will consult shareholders if it determines that any changes to the performance measures are required. The Remuneration Committee will also review the appropriateness of the performance target prior to each LTIP grant and reserves the discretion to set different targets for future awards, without consulting with shareholders, providing that in the opinion of the Remuneration Committee the new target is no less challenging in light of the circumstances at the time than those used previously. The targets for awards granted under this Remuneration Policy are set out in the Annual Report on Remuneration.

68 66 Directors Remuneration Policy table continued Legacy arrangements It is part of the Group s remuneration policy to comply with any provisions entered into with current or former Executive Directors (such as the vesting of past share awards) or Non-Executive Directors ( NEDs ) where those commitments have been disclosed to and approved by shareholders in previous Directors Remuneration Reports. Details of any payments to former executive or NEDs will be set out in the Annual Report on Remuneration as they arise. Approach to recruitment and promotions The remuneration package for a new Executive Director would be set in accordance with the terms of the Group s prevailing approved Directors Remuneration Policy at the time of the appointment. Salary level would be set by our existing ranges for the role, taking into consideration the size, scale, scope and seniority of the role, as well as individual experience. Annual bonus will be limited to 300% of salary and long term incentives will be no more than the exceptional maximum limit under the LTIP of 300% of salary. In addition, the Remuneration Committee may offer additional cash and/or share-based elements to an incoming Executive Director when it considers these to be in the best interests of the Group (and therefore shareholders), to take account of remuneration relinquished when leaving the former employer. This would reflect, as far as practicable, the nature, time horizons and performance requirements attaching to that remuneration. This may be awarded in addition to ongoing participation in the bonus and LTIP under the approved policy. The level of LTIP awards may be in excess of current plan limits, as permitted in the Listing Rules (chapter 9.4.2). Shareholders will be informed of any such payments at the time of appointment. The Group reserves the right to pay relocation expenses, which may be offered if necessary. Executive Director service contracts and leaver/change of control provisions It is the Group s policy that Executive Directors should have service agreements with an indefinite term and which are terminable by either the Group or the Director on 12 months notice and make provision, at the Board s discretion, for early termination involving payment of salary and benefits, in lieu of 12 months notice. Incidental expenses may also be payable where appropriate. In calculating the amount payable to a Director on termination of employment, the Board would take into account the commercial interests of the Group. The Remuneration Committee reviews the contractual terms for new Executive Directors to ensure these reflect best practice. In summary, the contractual provisions are: Provision Notice Period Termination Payment Remuneration entitlements Change of control Detailed Terms 12 months Up to 12 months salary and benefits A bonus may be payable (pro-rated where relevant) and outstanding share awards may vest (see below) No Executive Director s contract contains additional provisions in respect of change of control Matthew Fosh Start date 11 November 2002 Charles Fry Start date 1 April 2013 Bonuses, subject to the annual bonus policy and subject to meeting the required targets, may be payable in relation to the proportion of the financial year worked. Any share based entitlements granted to an Executive Director under the Group s share plans will be determined based on the relevant plan rules. The default treatment under the LTIP is that any outstanding awards lapse on cessation of employment. However, in certain prescribed circumstances, such as death, ill-health, disability, retirement or other circumstances at the discretion of the Remuneration Committee, good leaver status may be applied. For good leavers, awards will normally vest on cessation, subject to the satisfaction of the relevant performance

69 Corporate governance 67 conditions at that time and reduced pro-rata to reflect the proportion of the performance period actually served. However, the Remuneration Committee has discretion to determine that awards vest on the normal vesting date and/or to disapply time pro-rating. Illustrations of application of remuneration policy 000 2,800 Maximum On-target 20% 26% 400 The default treatment for deferred bonus awards is that any outstanding awards lapse on cessation of employment. However, in certain good leaver circumstances (as described on page 66), awards will normally vest in full on the date of cessation. The Remuneration Committee has discretion to determine that awards vest on the normal vesting date. 2,400 2,000 Minimum 100% 32% 24% 50% 48% 1, Non-Executive Directors fees The Non-Executive Directors, including the Chairman, do not have service contracts. The Group s policy is that NEDs are appointed for specific terms of three years unless otherwise terminated earlier in accordance with the Articles of Association or by, and at the discretion of, either party upon three months written notice. NEDs appointments are reviewed at the end of each three year term. Summary details of terms and notice periods for NEDs are included below: 1,600 Matthew Fosh, Group Chief Executive 000 Maximum 20% 2, On-target 26% Minimum 100% 2,400 50% 48% 24% 800 Non-Executive Director Original date of appointment End of unexpired term 2,000 32% 1,200 John Hastings-Bass 24 May May 2016 Laurie Adams 31 July July 2017 Sir Bryan Carsberg 12 September David Henderson 17 September David Pye 4 March March 2016 Mary Phibbs 8 November November 2015 NEDs do not receive benefits from the Group and they are not eligible to join the Group s pension scheme. Any reasonable expenses that they incur in the furtherance of their duties are reimbursed by the Group. All NEDs have contracts for services and their remuneration is determined by the Group Board based on recommendations made by the Executive Directors, subject to the relevant provisions in the Company s Articles of Association. Non-Executive Directors do not participate in any of the Group s variable pay arrangements. Non-Executive Directors have a notice period of three months. 1,600 Charles Fry, Chief Financial Officer Basic salary, benefits and pension Bonus LTIP The chart above illustrates how the Executive Directors remuneration packages vary at different levels of performance under the ongoing Directors Remuneration Policy. Notes 1. Salary levels are those applying on 1 January The value of benefits receivable in 2015 is taken to be the value of benefits received in 2014 (as calculated under the Single Total Figure of Remuneration, set out on page 70). 3. The value of pension receivable (or cash payment in lieu of pension) is taken to be 18.5% of salary for the Group Chief Executive and 16.5% of salary for the Chief Financial Officer. 4. The on-target level of bonus is taken to be 75% of the maximum bonus opportunity. 5. The on-target level of LTIP is taken to be c.53% of the face value of award at grant. Share price movement has not been incorporated into the values shown above.

70 68 Remuneration Committee Report Committee meetings Years served Possible Attended Laurie Adams Sir Bryan Carsberg John Hastings-Bass David Henderson Key responsibilities of the Committee > > To determine the remuneration and other incentives and benefits of certain employees including the Executive Directors > > To determine the Directors Remuneration Policy > > To approve the design of and determine targets for any bonus or performance related pay schemes > > To design and monitor the operation of long term incentive plans Key items discussed in 2014 > > Approval of Directors Remuneration Report 2014 > > Review of Company targets for 2014 > > Approval of Directors objectives > > Review of Executive Directors salaries and bonuses > > Review of general approach and levels to employees salaries and benefits > > Selection of new advisors to the committee > > Review of reward strategy including revisions to LTIP Attendees To assist the Remuneration Committee in fulfilling its role, a number of senior executives were invited to attend its meetings. These included a number of directors and the Group Company Secretary. When these individuals attend meetings of the Remuneration Committee, they play no part in the discussion or determination of their own remuneration arrangements. External advisors Kepler Associates, an independent firm of remuneration consultants, was appointed advisors to the Committee during the year after a competitive tendering process. Kepler attends Committee meetings and provides advice on remuneration for executives, analysis on all elements of the remuneration policy and market and best practice updates. Kepler reports directly to the Committee Chairman and is a signatory to the Code of Conduct for Remuneration Consultants of UK-listed companies (which can be found at www. remunerationconsultantsgroup. com). Kepler provides no other services to the Company and is therefore considered independent. Kepler s fees for the year were charged on a time and materials basis and totalled 17,375. PricewaterhouseCoopers LLP provided advice to management during the year, as part of the comprehensive review of the Company s approach to reward.

71 Annual Report on Remuneration Corporate governance 69 Implementation of the Directors Remuneration Policy for the year ending 2015 A summary of how the Directors Remuneration Policy for Executive Directors and Non-Executive Directors will be applied for the year ending 2015 is set out below. Base salaries The Remuneration Committee agreed to award an increase to base salary to both Matthew Fosh and Charles Fry to bring these salaries more in line with the market. These increases reflect our review of annual bonus arrangements and base salary. To ensure the Company maintains an appropriate balance between fixed and variable remuneration. The targets associated with the trigger points in respect of any bonus payable are driven off both our significantly revised budgeting process as well as detailed non-financial objectives and thereby reflective of our ambitious strategy % increase Matthew Fosh 418, , Charles Fry 330, , Note: Jeremy Adams stepped down from the Board with effect from 2014 but remains an employee of the Company. The Group s general employee population is receiving base salary increases in the range of 0% to 5% excluding promotional increases. Non-Executive Directors fees The Non-Executive Chairman s and Non-Executive Directors fees are determined by the Group Board based on recommendations made by the Executive Directors, subject to the relevant provisions in the Company s Articles of Association. A summary of the current fees is as follows: % increase Chairman s Fees 100, ,000 Base Fee 37,000 37,000 Senior Independent Director Fee 73,000 73,000 Remuneration, Risk and Audit 7,500 7,500 Committee Chairman Fee Committee membership fee (not payable to Board Chairman and SID) 3,000 3,000 Pension Executive Directors will continue to receive contributions into a defined contribution pension scheme of up to 18.5% of salary. Where contributions exceed the annual pension allowance, the lifetime allowance, or at the election of the Executive Director a salary supplement will be provided. Annual bonus The maximum bonus potential for 2015 will remain at 300% of salary for all Executive Directors, paid half in cash and half in shares, vesting over three years. The bonus outturn will continue to be based on Group profit before tax targets, set by reference to shareholder funds and cost of capital for 75% of the bonus potential. The remaining 25% of the bonus potential will be based on non-financial measures contained within a corporate scorecard. At this point, the performance targets are considered by the Remuneration Committee to be commercially sensitive and have therefore not been disclosed in advance. Full retrospective disclosure of the targets and performance against them will be provided in next year s Annual Report on Remuneration. Malus and clawback provisions will apply to the annual bonus from LTIP Matthew Fosh and Charles Fry will be granted LTIP awards over shares, subject to the Scheme rules and to a maximum of 200% of salary. These awards are subject to the following performance conditions: Average annual NAV growth in excess of the risk-free rate (75% of the award) Absolute TSR growth p.a. in excess of the risk-free rate (25% of the award) Threshold Target 7% (0% vesting) 7% (25% vesting) Stretch Target (100% vesting) 14% (100% vesting) 14% (100% vesting) End Measurement Point Three financial years ended Malus and clawback provisions will apply to LTIP awards from In addition, a two-year holding period will apply to all vested LTIP awards, during which time Executive Directors may not sell any shares save to cover tax liabilities.

72 70 Annual Report on Remuneration continued Audited section The following section of this report, which has been subject to audit, sets out the interests and remuneration of the Directors during the year ended Remuneration received by Directors for the year ending 2014 This section of the report sets out the remuneration that was paid to the Directors who served during the year ended Single figure of total remuneration 000 Salary & Fees (1) Taxable Benefits (2) Pension Annual Bonus (3) Long-Term Incentives (4) Other (5) Total Matthew Fosh , , , ,267 Charles Fry , ,070 Jeremy Adams , ,635 John Hastings-Bass Laurie Adams Sir Bryan Carsberg David Henderson David Pye Mary Phibbs Notes to single figure of total remuneration 1. Salary and fees The salary and fees relate to the amounts paid out during 2013 and Taxable benefits The taxable benefits for Executive Directors include private healthcare, life and permanent health insurance.

73 Corporate governance Annual bonus payments The annual bonus payments presented in the table below were based on performance against profit before tax targets (up to 75% of the maximum) and specific individual targets (up to 25% of the maximum) as measured over the 2014 (and 2013) financial year. Details of actual performance against the targets are as follows: Executive Director Maximum (% of salary) Required for threshold bonus Profit before tax Required for maximum bonus Actual Actual (% of salary) Non-Financial Performance Measures Total Awarded Cash/Deferred shares Maximum (% of salary) Actual (% of salary) Maximum (% of salary) Actual (% of base salary) Payable in cash (% of salary) Payable in shares (% of salary) Matthew Fosh m 43m 62.6m Charles Fry m 43m 62.6m Jeremy Adams m 43m 62.6m In respect of 2014, the annual bonus is paid entirely in shares. 50% of the bonus is paid immediately, and the remaining 50% is deferred and delivered in equal tranches over three years. The bonus is reduced by 50% if and to the extent that the Executive Director elects to take bonus as cash. Non-financial performance measures 25% of the maximum annual bonus opportunity is linked to non-financial measures contained within a Corporate Scorecard. The scorecard comprises a set of core, regulatory and function and role specific objectives for each Executive Director, with clear and specific links to the implementation of the Group strategy, namely expert underwriting, consistent performance and dynamic capital management. Additionally, Executive Directors share a common set of objectives on matters such as strategy development and implementation, conducting business within our risk appetite and ensuring all regulatory and legal requirements and duties are met. During the 2014 annual performance reviews, a performance rating was assigned to each Executive Director based on performance during the year against the objectives, to determine the level of bonus pay-out under the non financial element. 4. Vesting of LTIP awards The LTIP award granted on 8 April 2012 was based on performance to the year ended The performance targets for this award, and actual performance against these targets was as follows: Metric Performance Condition Threshold Target Stretch Target Actual performance % Vesting NAV Average annual net asset value 5% 10% 13% 100% (75% of total award) growth in excess of the risk-free rate of 5% p.a. (0% vesting) to 10% p.a. (100% vesting) over three financial years.* Relative TSR (25% of TSR against a bespoke group of Median Upper Above 100% total award) six UK-listed non-life insurance companies. 25% vests for median performance, increasing on a straight line basis to 100% for upper quartile performance. TSR Quartile TSR Upper Quartile Total vesting: 100% * The calculation performed takes post-tax actual NAV accretion and compares this to the post-tax risk-free rate of return on opening equity. The Remuneration Committee has not applied the methodology as described in the schedule attached to our LTIP rules which recorded incorrectly that post-tax accretion should be compared to pre-tax accretion rather than compared to post-tax accretion.

74 72 Annual Report on Remuneration continued The LTIP vesting details for the Executive Directors are therefore as follows: Executive Director Number of shares at grant Number of shares to vest Number of shares to lapse Dividends on shares to vest Total Estimated value 1 ( 000) Matthew Fosh 168, , , Jeremy Adams 128, , , Based on the 3 month average share price to 2014 of 5.49 The above award will vest on 9 March The LTIP figures in respect of 2013 have been updated to reflect the share price on the date of vesting of Other remuneration These amounts relate to the annual value of matching shares awarded under the Share Incentive Plan ( SIP ). LTIP awards granted in the year On 8 April 2014 the following LTIP awards were granted to the Executive Directors: Executive Director Matthew Fosh Charles Fry Type of award Nil cost Option Nil cost Option Basis of award granted 2 x annual basic salary 2 x annual basic salary Share price at date of grant Number of shares granted Face value of award ( 000) % of face value that would vest at threshold performance Vesting determined by performance over , % Three financial , % years to 2016 The 2014 LTIP awards are subject to two independent performance conditions, with 75% of awards based on growth in average annual NAV and 25% of awards based on absolute TSR. 75% of awards are subject to the following NAV targets: Average annual net asset value growth over three years in excess of the risk-free rate Percentage vesting Up to 7% 0% 7% 0% Between 7% and 14% Between 0% and 100% on a straight-line basis 14% or more 100% 25% of awards are subject to the following absolute total shareholder return targets: Absolute total shareholder return per annum Percentage vesting Up to 7% 0% 7% 25% Between 7% and 14% Between 25% and 100% on a straight-line basis 14% or more 100%

75 Corporate governance 73 Outstanding share awards Executive Director Scheme Grant date Exercise price No. of shares at 1 Jan 2014 Granted during the year Vested during the year Lapsed during the year No. of shares at 31 Dec 2014 End of performance period Vesting date Matthew Fosh LTIP 8/4/11 Nil 187,800 (112,116) (75,684) 31/12/13 12/3/14 LTIP 28/3/12 Nil 168, ,100 31/12/14 9/3/15 LTIP 15/3/13 Nil 163, ,000 31/12/15 15/3/16 LTIP 8/4/14 Nil 127, ,917 31/12/16 8/4/17 Deferred Bonus* Deferred Bonus* Deferred Bonus* 8/4/11 Nil 43,714 (43,714) n/a 1/4/12 1/4/13 1/4/14 28/3/12 Nil 5,572 (2,786) 2,786 n/a 1/4/13 1/4/14 1/4/15 28/3/13 Nil 129,024 (43,008) 86,016 n/a 1/4/14 1/4/15 1/4/16 Deferred Bonus* 28/3/14 Nil 99,530 99,530 n/a 1/4/15 1/4/16 1/4/17 Charles Fry LTIP 1/4/13 Nil 50,000 50,000 31/12/15 15/3/16 LTIP 8/4/14 Nil 100, ,418 31/12/16 8/4/17 Deferred Bonus* 28/3/14 Nil 72,028 72,028 n/a 1/4/15 1/4/16 1/4/17 Jeremy Adams LTIP 8/4/11 Nil 143,600 (85,729) (57,871) 31/12/13 12/3/14 LTIP 28/3/12 Nil 128, ,600 31/12/14 28/3/15 LTIP 15/3/13 Nil 114, ,500 31/12/15 15/3/16 Deferred Bonus* Deferred Bonus* Deferred Bonus* Deferred Bonus* * Deferred bonus shares vest in three equal tranches over three years. 8/4/11 Nil 33,429 (33,429) n/a 1/4/12 1/4/13 1/4/14 28/3/12 Nil 4,642 (2,321) 2,321 n/a 1/4/13 1/4/14 1/4/15 28/3/13 Nil 90,655 (30,219) 60,436 n/a 1/4/14 1/4/15 1/4/16 28/3/14 Nil 69,933 69,933 n/a 1/4/15 1/4/16 1/4/17 Payments to past directors There have been no payments to past Directors during the year. Payments for loss of office There have been no payments to past Directors during the year.

76 74 Annual Report on Remuneration continued External directorships The table below sets out details of the external directorships held by the Executive Directors and any fees that they received in respect of their services during the year. Executive Director Matthew Fosh External Positions Held Non-Executive Director, Ariscom Compagnia di Assicurazioni S.p.A Fees Fees Statement of directors shareholdings Director Beneficially owned at year start Beneficially owned at year end Outstanding share awards under all employee share plans Shareholding as a % of salary at year end* Matthew Fosh 816, ,184 7,156 1,106% Charles Fry 25,000 63, % Jeremy Adams 669, ,096 8,065 1,538% John Hastings-Bass 36,666 41,666 Laurie Adams 23,952 23,952 Sir Bryan Carsberg David Henderson 35,555 35,555 David Pye 9,175 9,175 Mary Phibbs * Based on the three month average share price to 2014 of Executive Directors are subject to a guideline under which they retain no less than 50% of any award (after tax) that vests under the LTIP or any other share-based plan until a holding of 200% of base salary is achieved.

77 Corporate governance 75 TSR performance graph This graph shows the value, by 2014, of 100 invested in Novae Group plc on 2008 compared with the value of 100 invested in the FTSE All Share Non-Life Insurance Index. The other points plotted are the values at intervening financial year ends Dec 08 Dec 09 Dec 10 Dec 11 Dec 12 Dec 13 Dec 14 Novae Group plc FTSE All-Share Non-Life Insurance Index Total remuneration for the Group Chief Executive The table below shows the total remuneration for the Group Chief Executive during each of the five financial years. The total remuneration figure includes the annual bonus and LTIP awards which vested based on performance in those years. The annual bonus and LTIP percentages show the payout for each year as a percentage of the maximum Total remuneration ( 000) 2,493 2,267 1, ,390 Annual bonus (%) LTIP vesting (%) Change in the remuneration of the Group Chief Executive and all employees The table below shows the change in the salary, benefits (including pension and SIP) and annual bonus for the Group Chief Executive between 2013 and 2014 compared to that for the average employee % change Group Chief Executive ( 000) Salary Benefits Bonus 1,112 1,140 (2.5) Average per employee ( 000) Salary (9.9) Benefits Bonus Number of employees at end of Number of employees at end of

78 76 Annual Report on Remuneration continued Relative importance of spend on pay The table below shows the movement in the spend on staff costs compared to that in dividends % change Staff costs Dividends Statement of shareholder voting At the 2014 AGM, the Directors Remuneration Report received the following votes from shareholders: 2014 AGM Votes Percentage Directors Remuneration Policy Votes cast in favour* 52,223, % Votes cast against 783, % Total votes cast 53,007, % Abstentions 573,210 Directors Remuneration Report Votes cast in favour* 45,087, % Votes cast against 4,741, % Total votes cast 49,828, % Abstentions 3,751,570 * Includes discretionary votes of 4,742.

79 Directors report Corporate governance 77 The directors present their Report and the audited Financial Statements for the year ended Principal activities and business review Novae Group plc is the holding company of a group which carries on insurance and reinsurance business and associated financial activities. The Strategic Report on pages 7 to 45 and the Corporate Governance Report on pages 52 to 54 and the Audit, Risk, Nomination and Remuneration Committee Reports on pages 55 to 76 form part of this Report. Results and dividend The profit before tax was 62.6 million. The results for the period ended 2014 are set out in full in the Operating and Financial Review of the Strategic Report. The directors recommend the payment of a final dividend of 18.2p per ordinary share (2013: 16.5p). In addition, the directors recommend the payment of a special dividend of 20.0p per ordinary share (2013: 20.0p). An interim dividend of 6.6p per ordinary share was paid in October 2014 (2013: 6.0p per share). Going concern See page 91. Share capital There have been no changes in share capital during the period ended As at 2014, the Company s issued share capital consisted of 64,425,640 ordinary shares, carrying one vote each. The total voting rights in the Company as at 2014 were 64,425,640. There have been no changes in share capital from 2014 to 4 March Substantial shareholdings An analysis of the share register is set out in the shareholder information section of the annual report on page 145. At 4 March 2015 Novae Group plc was aware of the following beneficial interests of 3.0% or more in the Company s issued ordinary share capital. No of Ordinary shares % The Prudential Assurance Company 8,776, Aberforth Partners 5,266, AXA Investment Managers 3,364, Schroder Investment Management 3,157, Legal & General Investment 2,524, Management Fidelity Investments 2,278, Sanlam Four Investments UK 2,155, Polar Capital 2,077, Own shares At 2014, shares held by trustees of the Group s various share incentive and deferred bonus schemes were as follows: the trustees of the Group s SIP/AESOP, Novae Group SIP Trustee Company Limited, held 881,134 ordinary shares (2013: 803,298); and the trustees of the Group s Employee Benefit Trust, Sanne Trust Company Limited (which holds shares in order to meet expected future liabilities arising from the Group s long-term incentive plans and deferred bonus awards), held 677,723 ordinary shares (2013: 1,522,178). During the year, the trustees of the Group s SIP/AESOP acquired 186,394 ordinary shares (0.3% of issued share capital) at a cost of 1.1 million to maintain the Group s SIP/AESOP. The trustees of the Group s Employee Benefit Trust acquired 928,305 ordinary shares at a cost of 5.7 million to provide for future incentive plans and bonus awards. During 2014, 1,772,760 ordinary shares (2.8% of issued ordinary share capital) vested under long-term incentive plans and deferred bonus awards, at a value of 10.7 million. The maximum number of own shares held by the trustees of the Group s SIP/AESOP during the year was 881,134 ordinary shares (1.4% of issued share capital) and by the trustees of the Group s Employee Benefit Trust was 1,522,178 ordinary shares (2.4% of issued share capital). At 4 March 2015, the trustees of the Group s SIP/AESOP, Novae Group SIP Trustee Company Limited, held 922,835 ordinary shares and the trustees of the Group s Employee Benefit Trust, Sanne Trust Company Limited, held 927,723 ordinary shares. Authority to issue shares At the last Annual General Meeting held on 14 May 2014, authority was given to the directors to allot unissued ordinary shares in the Company up to a maximum of an amount equivalent to two-thirds of the shares in issue (of which one-third must be offered by way of a rights issue). This authority expires on the date of this year s Annual General Meeting to be held on 13 May No such shares have been issued. The directors propose to renew this authority at the 2015 Annual General Meeting for the following year. A further special resolution passed at that meeting granted authority to the directors to allot ordinary shares in the Company for cash, without regard to the pre-emption provisions of the Companies Act This authority also expires on the date of the 2015 Annual General Meeting and the directors will seek to renew this authority for the following year.

80 78 Directors report continued Authority to purchase own shares The Company did not repurchase any of its ordinary shares during As at 4 March 2015 (the latest practicable date for inclusion in this report) the Company had an unexpired authority to repurchase ordinary shares up to a maximum of 6,442,564 ordinary shares. Directors The names of the current directors and their biographical details are set out on pages 50 and 51. All of the directors served throughout the year. Jeremy Adams resigned as an executive director on Appointment and retirement of directors Novae s articles of association, the Code, the Companies Act 2006 and related legislation govern the appointment and retirement of directors. The articles of association may only be amended by a special resolution of shareholders. The Board has the power to appoint additional directors to fill a casual vacancy on the Board. Any such director holds office until the next annual General Meeting and may offer himself or herself for re-election. The Code recommends that all directors of FTSE 350 companies should be subject to annual re-election, and all directors will stand for re election at the 2015 Annual General Meeting. However, Sir Bryan Carsberg and David Henderson will step down from the Board on Directors interests The directors total interests in the ordinary shares at 2014, excluding shares held as part of the AESOP and SIP scheme which are disclosed on page 74, are shown below. Ordinary shares of Jeremy Adams 740, ,665 Laurie Adams 23,952 23,952 Sir Bryan Carsberg Matthew Fosh 758, ,350 Charles Fry 63,174 25,000 John Hastings-Bass 41,666 36,666 David Henderson 35,555 35,555 Mary Phibbs David Pye 9,175 9,175 The movement between 2013 and 2014 reflects all the movements in share interests during The 2014 annual bonus payable in shares and the deferred tranches of the 2011, 2012 and 2013 annual bonus (see page 73) have not yet been transferred to the executive directors and are excluded from the directors interests stated above. No director held any shares non-beneficially, either at 2014 or Details of directors interests in the SIP/AESOP and long term incentive plan awards are set out in the report on directors remuneration on pages 74 and 73 respectively. There have been no changes to the beneficial and other interests of the directors in the ordinary shares of Novae Group plc as shown on this page from 2014 to 4 March Employees Working relationships at Novae Group plc are based on mutual trust and respect. The executive management team is accessible to all staff and the Group Chief Executive holds regular informal briefings for all staff to discuss financial, strategic and other issues affecting the Group and its performance. These briefings are supplemented by team and unit meetings held by line managers, and communication via the intranet. Novae has an Employee Consultation Forum which seeks to both inform and consult through representatives from every area and level of the business. The Group strives for equal opportunities for all present and potential staff, and its employment practices meet all legislative requirements, in particular those relating to discrimination, whether on grounds of race, religion, gender, sexuality or disability. Further information on the Group s employment and training policies and compliance with health and safety legislation is contained in the Corporate Responsibility section of the Strategic Report on pages 42 and 43. The Group has a Whistleblowing Policy which is set out in the Employee Handbook. All new Novae employees are made aware of the Whistleblowing Policy as part of the compliance presentation made to all new starters through the Company s induction process. In addition, all staff are formally reminded of the policy and provided with a copy annually via from the Group Compliance Officer. Social, environmental and ethical matters The Board, through the Risk Committee, reviews the Group s processes to ensure that significant risks to short and long-term value arising from social, environmental and ethical matters are identified and assessed, as well as opportunities to enhance value that may arise from an appropriate response. Further information about the Group s Risk Committee and all of the risk types to which Novae is exposed is contained in the Report of the Risk Committee within the Corporate Governance Report and in the Strategic Report.

81 Corporate governance 79 Greenhouse Gas Emissions In 2013, The Companies Act 2006 (Strategic Report and Directors Report) Regulations 2013 introduced the requirement that UK listed companies should report their global levels of Greenhouse Gas ( GHG ) emissions in their Annual Report and Accounts. The mandatory requirement is for disclosure of scope 1 and scope 2 emissions only, and only to the extent that such emissions are the responsibility of the Group. This disclosure is contained within the Corporate Responsibility section of the Strategic Report on page 44. Community involvement Details of the Group s community involvement can be found in the Corporate Responsibility section of the Strategic Report on pages 44 and 45. Political contributions The Group made no political contributions during the year (2013: nil). Overseas subsidiaries and branches During the year the Group established an underwriting presence in Bermuda. The Bermudan group consists of Novae Bermuda Holdings Limited ( NBHL ), which is wholly owned by Novae Group plc and acts as an intermediate holding company. In turn NBHL wholly owns two subsidiary companies; Novae Bermuda Underwriting Limited, a Bermuda Monetary Authority ( BMA ) approved insurance agent and Lloyd s approved cover holder; and Novae Bermuda Limited which, at the date of this report, is seeking license to operate as a BMA approved Class 3A reinsurance company. The Group has one overseas branch in Zurich which is a branch of Novae Underwriting Limited. Disclosure required under Listing Rule 9.8.4R The following information is included to meet the requirements of Listing Rule section R, where applicable to the Company. Information required Disclosure 9.8.4(12) During the year, the trustees of the Employee Benefit Trust which operates in connection with the Company s long term incentive plan and deferred bonus arrangements waived their rights to receive dividends on any shares held by them. The amount of dividends waived during the year ended 2014 was 292,099 (2013: 296,711) (13) See above Annual General Meeting The Notice of Annual General Meeting is enclosed with this document. Copies of the letters of appointment of the non-executive directors and the directors service contracts are available for inspection at the registered office of the Company during working hours on any business day from the date of this Report up to and including the date of the Annual General Meeting (or any adjournment thereof). Auditor The external audit for the financial year ending 2015 was tendered during the early part of 2015, as detailed in the Audit Committee Report on page 57. Following the tender, and on the recommendation of the Audit Committee, the Board has recommended resolutions at the Annual General Meeting to be held on 13 May 2015 to appoint PricewaterhouseCoopers LLP as the Company s auditor with effect from 13 May 2015 and to authorise the directors to agree the auditor s remuneration. Disclosure of information to auditors Each of the directors who is a director at the date of approval of this report confirms that: (1) So far as the director is aware, there is no relevant audit information of which the auditors of Novae Group plc are unaware; and (2) The director has taken all the steps that he or she ought to have taken as a director in order to make himself or herself aware of any relevant audit information and to establish that the auditors of Novae Group plc are aware of that information. This confirmation is given and should be interpreted in accordance with the provisions of Section 418(2) of the Companies Act By order of the Board, Teresa Furmston Group Company Secretary 4 March 2015

82

83 Statement of directors responsibilities in respect of the annual report and the financial statements Corporate governance 81 The directors are responsible for preparing the Annual Report and the Group and parent company financial statements in accordance with applicable law and regulations. Company law requires the directors to prepare Group and parent company financial statements for each financial year. Under that law they are required to prepare the group financial statements in accordance with IFRSs as adopted by the EU and applicable law and have elected to prepare the parent company financial statements in accordance with UK Accounting Standards and applicable law (UK Generally Accepted Accounting Practice). Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and parent company and of their profit or loss for that period. In preparing each of the Group and parent company financial statements, the directors are required to: > > select suitable accounting policies and then apply them consistently; > > make judgements and estimates that are reasonable and prudent; > > for the group financial statements, state whether they have been prepared in accordance with IFRSs as adopted by the EU; > > for the parent company financial statements, state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the parent company financial statements; and > > prepare the financial statements on a going concern basis unless it is inappropriate to presume that the Company and the Group will continue in business. The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the parent company s transactions and disclose with reasonable accuracy at any time the financial position of the parent company and enable them to ensure that its financial statements comply with the Companies Act They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities. Under applicable law and regulations, the directors are also responsible for preparing a Directors Report, Annual Report on Directors Remuneration and Remuneration Policy Report and Corporate Governance Statement that complies with that law and those regulations. The directors are responsible for the maintenance and integrity of the corporate and financial information included on the company s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Responsibility statement of the directors in respect of the annual financial report We confirm that to the best of our knowledge: > > the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the company and the undertakings included in the consolidation taken as a whole; > > the Strategic Report contained in this report (on pages 7 to 45) includes a fair review of the development and performance of the business and the position of the Group. In addition, the risk disclosures (on pages 96 to 111) describe the principal risks and uncertainties faced by the Group; and > > in addition, each of the directors considers that the Annual Report, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group s performance, business model and strategy. Approved and signed on behalf of the Board, John Hastings-Bass Chairman 4 March 2015

84 82 Independent auditor s report to the members of Novae Group plc only Opinions and conclusions arising from our audit 1 Our opinion on the financial statements is unmodified We have audited the financial statements of Novae Group plc for the year ended 2014 set out on pages 85 to 141. In our opinion: > > the financial statements give a true and fair view of the state of the Group s and of the parent company s affairs as at 2014 and of the Group s and parent company s profit for the year then ended; > > the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs as adopted by the EU); > > the parent company financial statements have been properly prepared in accordance with UK Accounting standards; and > > the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. 2 Our assessment of risks of material misstatement In arriving at our audit opinion above on the financial statements the risks of material misstatement that had the greatest effect on our audit were as follows: > > Claims Reserves (Gross of reinsurance reserves 1,185.9m and net of reinsurance reserves 865.9m). (Refer to page 56 (Audit Committee Report), page 93 (accounting policies) and pages 127 to 129 (financial disclosures)). The risk Claims reserves make up 72% of the total liabilities. The provision for claims reserves comprise the estimated cost of settling all claims incurred but unpaid at the balance sheet date whether reported or not. This is a judgmental and complex area due to the inherent uncertainty of estimating claims not yet reported and also the future costs of settling all claims. The most subjective estimate included within the claims reserves is the estimate for incurred but not reported insurance losses (IBNR) for which the gross estimate is 524.8m and the net estimate is 414.9m as at Further, for new and less mature classes of business the reserving is largely based upon market benchmarks due to the lack of entity specific historical data on which standard actuarial projections can be completed leading to greater uncertainty when establishing reserves for these classes. Our response We engaged our own actuarial specialists to assist us in understanding and challenging the Group s methodologies and assumptions used. Our audit procedures on the claim reserves included: > > Testing the governance process over the claims reserve estimation process adopted by the Group. This included meeting with underwriters, the claims team and the reserving actuaries. We have tested the controls over the historical data used in the estimation process in order to check for completeness and accuracy of data. > > Assessing the methodologies used across the various classes of business by carrying out benchmarking of key assumptions such as initial expected loss ratios, premium rates and loss ratios against KPMG sourced market data. > > Performing re-projections of the claims reserves using our own assumptions and patterns and compared with the claims reserves estimated by the Group. > > Assessing the rationale and reasonableness of the additional margin held over and above the best estimate of claims reserves. We have carried out benchmarking of the margin percentage with KPMG sourced market data. > > Assessing the adequacy of the group s disclosures with respect to claims reserves. > > Valuation of investments ( 1,048.2m). (Refer to page 56 (Audit Committee Report), page 95 (accounting policy) and pages 124 to 126 (financial disclosures)). The risk The Group s portfolio of investments make up 53% of the total assets. We do not consider the valuation of investments to be at high risk of significant misstatement, or to be subject to a significant level of judgement, because they comprise of liquid investments. However, due to the materiality in the context of the financial statements as a whole, it is considered to be a significant part of our audit strategy.

85 Corporate governance 83 Our response We engaged our own valuation specialists to assist us in performing certain procedures over the investment portfolio. Our audit procedures on the valuation of investment included: > > Performing independent price checks for each security against KPMG sourced benchmark prices. > > Obtaining external confirmations from custodians to support the existence of the investment portfolio. > > Testing the Group s reconciliation controls between the ledgers and the investment reports. > > Assessing the fair value hierarchy disclosures which demonstrates the subjectivity involved in valuing the investment securities. > > Reinsurance recoveries ( 320.0m): (Refer to page 56 (Audit Committee Report), page 93 (accounting policies) and pages 123 and 127 to 129 (financial disclosures)). The risk The calculation of reinsurance recoveries is complex in the Group due to the presence of a number of reinsurance arrangements across various classes of business in the group and the subjectivity involved in estimating recoveries from reinsurers on the IBNR claims. Additionally the recoverability of such recoveries due to credit risk from counterparties requires specific assessment. Our response Our audit procedures included: 3 Our application of materiality and an overview of the scope of our audit The materiality for the financial statements as a whole was set at 19.8m. This has been determined with reference to a benchmark of total assets (of which it represents 1%). In addition we applied a materiality of 4.1m to the non-insurance balances such as share based payments and external loans for which we believe misstatements of lesser amounts than materiality as a whole, could be reasonably expected to influence the economic decisions of the members of the Group. The audits for the 6 components were performed at component materiality for their statutory reporting which ranged from 0.1m to 16.4m. The audits covered 100% of total group revenue, profit before tax and group assets. All the audits of the components have been carried out at the Group s headquarters. 4 Our opinion on other matters prescribed by the Companies Act 2006 is unmodified In our opinion: > > the part of the Directors Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006; and > > the information given in the Strategic Report and Directors Report for the financial year for which the financial statements are prepared is consistent with the financial statements. > > Testing and evaluating the key controls around the purchase and subsequent monitoring of the reinsurance cover and credit control procedures. > > Understanding the reinsurance programs in place and testing on a sample basis to verify that reinsurance recoveries have been generated for relevant claims. > > Engaging our IT specialists to test the automated element where reinsurance recoveries are system calculated. > > Assessing the recoverability of the recoveries by checking the bad debt provision against reinsurers with large exposures and checking credit ratings of the counterparties.

86 84 Independent auditor s report to the members of Novae Group plc only continued 5 We have nothing to report in respect of the matters on which we are required to report by exception Under ISAs (UK and Ireland) we are required to report to you if, based on the knowledge we acquired during our audit, we have identified other information in the annual report that contains a material inconsistency with either that knowledge or the financial statements, a material misstatement of fact, or that is otherwise misleading. In particular, we are required to report to you if: > > we have identified material inconsistencies between the knowledge we acquired during our audit and the directors statement that they consider that the annual report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the group s performance, business model and strategy; or > > the Audit Committee Report does not appropriately address matters communicated by us to the audit committee. Under the Companies Act 2006 we are required to report to you if, in our opinion: > > adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or > > the parent company financial statements and the part of the Directors Remuneration Report to be audited are not in agreement with the accounting records and returns; or > > certain disclosures of directors remuneration specified by law are not made; or > > we have not received all the information and explanations we require for our audit. Under the Listing Rules we are required to review: > > the directors statement, set out on page 77, in relation to going concern. > > the part of the Corporate Governance Statement on page 54 relating to the company s compliance with the ten provisions of the 2012 UK Corporate Governance Code specified for our review. We have nothing to report in respect of the above responsibilities. Scope and responsibilities As explained more fully in the Directors Responsibilities Statement set out on page 81, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. A description of the scope of an audit of financial statements is provided on the Financial Reporting Council s website at This report is made solely to the company s members as a body and is subject to important explanations and disclaimers regarding our responsibilities, published on our website at which are incorporated into this report as if set out in full and should be read to provide an understanding of the purpose of this report, the work we have undertaken and the basis of our opinions. Daniel Cazeaux (Senior Statutory Auditor) for and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants 15 Canada Square London E14 5GL 4 March 2015

87 Financial statements 85 Financial statements Overview Corporate governance Strategic report