Novae Group plc: Annual Financial Report

31 March 2017

NOVAE GROUP PLC

Annual Financial Report and Notice of Annual General Meeting

Novae Group plc ("the Company") confirms that the following documents have today been posted or otherwise made available to shareholders.

Annual Report and Accounts for the year ended 31 December 2016
Notice of Annual General Meeting to be held on 10 May 2017
Proxy form for the Annual General Meeting to be held on 10 May 2017

In accordance with Listing Rule 9.6.1 a copy of each of these documents has been uploaded to the National Storage Mechanism and is available for inspection at: www.Hemscott.com/nsm.do.

The Annual Report and Notice of AGM are also available on the Company's website at www.novae.com.

Compliance with Disclosure and Transparency Rule 6.3.5 ("DTR 6.3.5") - Extracts from the 2016 Annual Report

The information below, which is extracted from the 2016 Annual Report, is included solely for the purpose of complying with DTR 6.3.5 and the additional requirements it imposes on the publication of Annual Financial Reports. It should be read in conjunction with the Company's Preliminary Announcement issued on 9 March 2017 (available on www.novae.com.). Together, these constitute the material required by DTR 6.3.5 to be communicated to the media in unedited full text through a Regulatory Information Service. This material is not a substitute for reading the full 2016 Annual Report. All page numbers and cross-references in the extracted information below refer to page numbers in the 2016 Annual Report.

The information contained in this announcement and in the Preliminary Announcement does not constitute the Company's statutory accounts, but is derived from those statutory accounts. The statutory accounts for the year ended 31 December 2016 have been approved by the Board and will be delivered to the Registrar of Companies following the Company's Annual General Meeting. The auditors have reported on those statutory accounts and their report was unqualified, with no matters by way of emphasis, and did not contain any statements under Section 498(2) of the Companies Act 2006 ("the Act") regarding adequacy of accounting records and returns) or under Section 498(3) of the Act (regarding provision of necessary information and explanations).

Appendix A - Risk Management

The external political and economic environment provided numerous challenges for risk management over the course of 2016. Not least among these was the relatively unexpected outcome of the UK's referendum on European Union membership during the summer, and the outcome of the US elections in November. In the case of the referendum, application of our Enterprise Risk Management framework allowed us to identify potential business opportunities and threats across a variety of scenarios to support business planning.

In the case of the US election, it is still too early to say definitively what the impact on global trade and the economy might be. Given the importance of the US as a source of business for Novae, this is something that we will work with Lloyd's and our key brokers to monitor closely throughout 2017.

Continued soft conditions remained a key driver of risk through 2016 and into 2017. It remains challenging to identify and exploit profitable opportunities - however our continued strategy of expert underwriting and dynamic capital management allows us to deploy capital in those areas with the best risk/reward balance as a way of navigating this market.

2016 was the first year of operating in the live Solvency II regime, although preparations within the Lloyd's market mean that many of the specific requirements for Novae have been 'business as usual' for some time. Our internal model has been approved by Lloyd's, and we continue to use it to calculate Solvency Capital Requirements, and also to support risk analysis and risk-based decision making within the Group.

Enterprise Risk Management ("ERM") Framework
Novae's ERM framework provides a consistent view of risk aligned and integrated with strategic decision making and reflects our defined risk appetite. A number of incremental developments have been made to the ERM Framework in 2016, to further enhance the risk management processes (including a refresh of the Group's granular "Tier 2" risk appetites). This section provides an overview of the core components of our ERM framework.

Novae adopts the three lines of defence model (see diagram on following page) to provide assurance to the Board that appropriate internal controls are in place to manage the company's risks.

Risk Strategy
Novae's risk strategy is an extension of our business strategy. As a specialty (re)insurer, it is central to our strategic goals that we seek to take on underwriting risks, and to a lesser extent investment risks, through the specialty (re)insurance products that we underwrite and the financial investments we make to support those products. Further to this, we recognise our business operation requires the assumption of other non-core risks and that seeking to eliminate these risks is uneconomical.

Our risk strategy guides our risk taking with the following principles:

We take risks that are in line with our strategy
We take risks that are rewarded, with returns commensurate to the level of risk assumed
We take risks that we understand and can manage
We take risks within clearly defined limits

Risk Appetite
The risk appetite framework, which was refreshed in 2015, has now bedded in and the Risk Appetite Statements were reviewed and approved by Novae Group Board in October 2016 without significant change.

Novae's risk appetite follows a hierarchical structure:

GECR	Group economic capital requirement: Defines the overall level of risk in reference to an economic capital requirement.
Tier 1: Key risks	Tier 1 risk appetites: Risk level statements of appetites and limits for major risk exposures.
Tier 2: Operational level	Tier 2 risk appetites: Limits, thresholds and indicators applied at an operational level to individual risk and sub-risks.

Following the refresh of Tier 1 risk appetite in 2015, a key project for 2016 was the update of the Tier 2 risk appetites. This has helped to ensure that operational level risk management aligns with the 'bottom-up' business practices and 'top-down' risk appetite.

First line: Risk Ownership
The business is responsible for the identification and assessment of risks and the design and operation of effective internal controls. Reporting to the Executive Committee and its sub-Committees.

Second line: Risk Oversight
Risk Management and Compliance are responsible for the facilitation and monitoring of effective risk management processes in the First Line. Reporting to the Risk Committees and the Board.

Third line: Risk Assurance
Internal Audit provide independent assurance on the effectiveness of the internal control framework and Risk Management and Compliance. Reporting to the Audit Committee and the Board.

Risk Appetites are broadly classified using the following three definitions:

Positive Appetite signifies a strategic desire for a particular risk, within defined limits
Neutral Appetite signifies a measured acceptance of a particular risk
Negative Appetite signifies a general intention to avoid a particular risk, to the extent it is practical and commercial to do so

We group the principal risks to Novae into the following groups, and then further into "Tier 1" risks:

Risk group
Strategic risks Risks that changes to external circumstances impact Novae as a consequence of executing the strategy for core risks.		Core risks Risks where Novae has the expertise and experience to price and manage risks to derive a profit. Our strategy focuses on selecting, pricing and managing these risks to deliver economic returns.		Non-core risks Risks that are not actively sought, but arise as a consequence of executing the strategy for core risks. Our strategy does not seek to generate economic return from these risks but seeks to control exposure that arises in the normal course of business.
Tier 1 Risk Category
Strategic	Reputational	Underwriting catastrophe	Underwriting non-cat	Credit	Liquidity
		Underwriting reserving	Investment	Operational (inc regulatory and legal)

Further detail of our appetite for, and exposure to, these risks is contained in the "Principal Risks" section on pages 32 to 33.

Risk Governance
In January 2016, the Group's risk management governance structure changed to clarify responsibility between Group governance and the governance of Syndicate 2007, as the key regulated insurance entity in the Group. The key change was the establishment of a dedicated Board Risk Committee for Novae Group plc and an Audit and Risk Committee for Novae Syndicates Limited (collectively, the "Risk Committees").

The new Risk Committees continued to have oversight responsibility for the ERM Framework of Novae Group plc and Novae Syndicates Limited under the three lines of defence model. Whilst the broad remit of the Risk Committees remained unchanged, the governance change has provided a sharper focus on strategic and Group-level risk issues and this clarification of responsibilities increased the robustness of the risk oversight and challenge process at both Group and Syndicate level. The role of monitoring risk exposures continued to be delegated by the respective Risk Committees to a number of functional sub-committees, which have responsibility for the management of specific risks. The Risk Committees are supported by the Group Risk Management Function in executing their risk oversight duties.

The following table summarises the roles of the Risk Committees, sub-committees and the Risk Management Function within the governance structure. It also describes at a high level the linkage with the third line of defence, Internal Audit:

Risk Committee	Sub-Committees
> Provide oversight and have responsibility for the Group Risk Management Framework > Responsible for the continuous review of the risk and control environment > Monitor position against risk appetite > Review ongoing compliance with all regulatory requirements > Review the effectiveness of the Risk Management Function on an ongoing basis	> Have delegated responsibility for oversight of specific risks > Monitor risk exposures and controls for delegated risks > Consider action where specific delegated risks are outside of appetite or where controls are ineffective > Escalate material risk issues to the Executive Committee and Risk Committees
Group Risk Management Function	Internal Audit
> Headed by the Chief Risk Officer > Provides day to day support to the Risk Committees in its role of oversight, monitoring and reporting on risks facing the Group > Supports and challenges business risk owners in the first line of defence > Provides oversight of all risks that could affect Novae's ability to meet its strategic objectives	> Reviews the Enterprise Risk Management Framework and tests the extent of the reliance that can be placed on risk assessments performed by the risk management function > Assesses the effectiveness of specific operational controls in mitigating identified risks > Identifies and escalates control weaknesses, including agreement of remedial action plans > Provides quarterly reporting and monthly action plan status updates to the Audit Committee > Assesses the effectiveness of the Risk Management Function on an annual basis

Internal audit review the effectiveness of the risk management framework on an annual basis. Throughout the year, individual audit engagements, as outlined in the audit plan, assess the design and application of internal controls for managing the principal risks faced by Novae. In addition, a separate review on the effectiveness of the risk management function is performed annually, providing an overall opinion on the effectiveness of all risk management processes throughout a 12 month period and consolidating any observations arising from individual audit engagements. All findings are reported to the Audit Committee.

Risk Culture

Risk management is at the heart of Novae's business culture and is considered a driver of competitive advantage. We therefore foster a risk aware culture so that risks are identified, assessed and managed throughout the business. The Risk Management Function works closely with the business to ensure there is appropriate knowledge and understanding of the ERM Framework throughout Novae, ensuring actions taken reflect Novae's risk culture.

The Board annually commissions the Internal Audit function to review the effectiveness of risk management at Novae. All internal audit reviews include cultural elements, such as the business awareness and execution of the appropriate risk management approach.

In 2016, the Risk Management function undertook a risk culture survey across all Group staff consisting of 50 questions across ten categories (aligning to various aspects of risk culture). The results of this survey helped to give further comfort in the robustness of Novae's risk culture, as respondents provided broadly favourable responses across the range of categories. The survey has also helped us to identify for potential drill-down to ensure our risk culture continues to support the execution of our strategy.

Risk Processes and Controls

The high level and strategic elements of the framework described above sit above a wide-ranging and robust set of Risk Management processes and controls. The most significant of these are highlighted below:

1. The Own Risk & Solvency Assessment ("ORSA") Process
The Quarterly ORSA ("Q-ORSA") process which brings together core risk assessment and response processes has bedded in during 2016. This has helped us to create focussed and effective Management Information for executives and the Board in the Q-ORSA report.

This is a focussed report that summarises key risk information, including:

the as-is and projected position against risk appetite
risk exposure and control performance
emerging risks
material risk events
stress and scenario testing, including reverse stress testing
available capital

This has enhanced risk assessment processes in some areas, and has brought together the output from other existing processes in a consistent fashion.

Continued development of internal risk reporting is planned for 2017 to reflect changes in the Risk Governance structure. This will enhance information received by the Group Risk Committee and the Group Board in respect of our principal risk exposures.

2. Risk response cycle
Risk owners are senior managers within the business responsible for the day to day managing, monitoring and reporting of their allocated risk(s). Similarly control owners are responsible for the operation, monitoring and reporting of their allocated controls.

The Risk Management Function facilitates a risk and control self-assessment ("RCSA") every quarter to monitor the ongoing exposure to risks and the effectiveness of controls. Risk owners confirm that risks are being managed within agreed tolerances, and identify any areas where remedial control action is required. The assessment includes consideration of risk indicators that are updated to monitor compliance with the risk appetite. Findings of the RCSA exercise are reported to the sub-committees via risk dashboards, and to the Risk Committees and Board through the ORSA Report. This is complemented, on a rolling annual basis, by detailed control reviews ("DCR"), which ensure that controls are appropriately designed and effective.

An Emerging Risks Working Group is charged with identifying, investigating and reporting new or developing insurance risks and trends Novae may be exposed to. Membership includes stakeholders across the business, and an annual meeting is conducted to identify emerging risks for escalation to the relevant sub-committees. Outputs from this process are reported throughout the year in the Q-ORSA.

3. Capital management and the internal model
The internal model is a set of processes and tools, including a stochastic risk model, used to quantify risk to calculate regulatory and economic capital requirements, and to provide insight to a wide range of other business decisions.

Incremental improvements were made in the Internal Model in 2016 as the use of the Internal Model was embedded in a number of decision making processes in the business. Our Internal Model was used to provide important insights in many areas, including the following:

Capital setting - assessment of the regulatory and economic capital requirements of the Group and of subsidiary entities
Capital planning - forward-looking assessment of the capital required to support our strategic growth plans
Risk profile measurement and risk appetite analysis - analysis of material risk exposures and comparison to appetite
Reinsurance purchasing - analysis of the outwards reinsurance programme to support an effective and efficient purchase
Strategic assessment - consideration of the impact of strategic decisions on risk profile and capital requirements

Given the importance of the internal model both in terms of setting capital and the assessment of risk exposures, Novae has a robust, independent model validation process that reports into the NSL Audit & Risk Committee. This ensures that model outputs are fit for purpose, and that any assumptions and limitations in the modelling are discussed and understood by model users, management and the NSL Board. This validation process is overseen by the Risk Management function, led by the Head of ERM and involving specialist input from a variety of internal and external experts.

Analysis from the internal model is supported by stress and scenario testing, including reverse stress testing. Outcomes of this analysis provide further insight to the risks facing the business and assist in the development of mitigation strategies. Reverse stress testing, which assumes a starting point of the business model being unviable, further supports the formulation of recovery plans by identifying management actions to be undertaken in stressed situations to return the Group to a stable position.

Viability Statement

The Directors have completed a robust assessment of the risks facing the Group, including those which threaten its viability over a three year period.

A period of three future years has been selected as it is considered long enough to reflect the key drivers of the Group's risk profile, but short enough to be reasonably assessable given the nature of the business. This period also aligns with the length of time over which business at Lloyd's is managed and is consistent with the average duration of the Group's assessment of its economic liabilities.

The Board annually reassesses the Group's strategy, which includes a longer-term five year rolling forecast. The assessment of the three year period has been made with reference to this.

Principal risks to the Group are summarised on pages 32 to 33. The impact of these risks on the Group's viability has been assessed and in doing so, a number of key assumptions have been made, principally that market conditions will be in line with expectations and availability of capital remains stable.

The Board has then examined the robustness of the Group's strategic plan considering severe but plausible scenarios including changes to the assumed level of growth, variations in market pricing, a change in funding and the impact of a major catastrophic loss. The Directors have concluded that there is reasonable expectation that the Group with be able to continue in operation and meet its liabilities as they fall due over the period of assessment.

Principal risks

The Board has made an assessment of the principal risks facing Novae, including those that would threaten its business model, future performance, solvency or liquidity. The table on the following page defines our principal risks, sets out our appetite for these, provides our view on observable trends and relevant risk mitigation strategies.

Group risk appetite

The overall level of risk that the Group is willing to take on is a function of the amount of capital at our disposal. Novae expresses an overall risk appetite as a target surplus above the Lloyd's regulatory capital requirement for Syndicate 2007:

Novae seeks to maintain around 20% surplus capital over the regulatory requirement on a prospective basis.

This allows efficient deployment of capital to optimise returns, whilst maintaining sufficient balance sheet strength for flexibility in our response to risk events and the changing risk and business environment. The Group has remained within appetite throughout 2016, and we expect to continue to do so going into 2017. Note that the Group's current regulatory capital requirement is defined by the Lloyd's requirement for Syndicate 2007. This is set to allow Lloyd's to maintain a target rating, and therefore includes a material uplift relative to the Solvency II minimum.

Risk category	Description of risk	Appetite	Trend	Key mitigations
Core risks - we have the expertise and experience to price and manage core risks to derive a profit. Our strategy therefore focuses on selecting, pricing and managing these risks to deliver economic returns.
Underwriting risk
Catastrophe	The potential for aggregated losses to arise from catastrophic events.	Novae has a positive appetite for catastrophe risk. We seek to diversify our exposures across our core (re)insurance book, but recognise the potential for aggregate losses arising from natural or man-made catastrophic events.	Some continuing growth of exposures from underwriting opportunities in niche areas is partially offset by reductions in business in other areas and the increased use of reinsurance to cover peak exposures.	Underlying strategy and geographical diversification. Monitoring and controls of aggregate exposures and disaster scenarios across multiple return periods. Strategic reinsurance purchase.
Non-catastrophe	The risk of adverse loss experience arising from small or large individual insurance claims (including the risk of mispricing underlying insurance contracts).	Novae has a positive appetite for non-catastrophe underwriting risk. Our residual appetite for underwriting risk - non-catastrophe is determined by our available capital and the adequacy of returns available in the market.	Broad pressure on premium rates continues to drive an upwards trend in this risk. This is offset to a degree by strategic diversification and dynamic allocation of capital away from underperforming units.	Niche book of specialist insurance business. Focus on underwriting profitability, with regular monitoring of underwriting performance. Proprietary pricing models and regular rate adequacy monitoring including the effect of changes in terms & conditions. Underwriting protocols limit exposure to individual large losses. Strategic reinsurance purchase.
Reserving	The risk that claims reserves will be materially different from the ultimate cost of settlement.	Novae has a neutral appetite for reserving risk. We recognise the uncertainty in estimating claim amounts in advance of final settlement. Our appetite for reserving risk is set in our reserving policy, which requires that reserves are set prudently, with target margin ranges in excess of the actuarial "best estimate".	The margin held over the actuarial best estimate reserves remains stable in line with our target ranges.	Use of proprietary and standard reserving models. Internal and external reserve benchmarking. Claims development review.
Investment risk	The risk of economic losses arising from fluctuations in the value of our asset and liability portfolio driven by economic variables.	Novae has a positive appetite for investment risk. A measured level of investment risk is sought as it offers the potential for enhanced returns, and diversifies from core underwriting risk exposures. This risk is measured on an "asset - liability" basis.	Investment risk exposure has remained broadly stable over 2016, reflecting a long-term strategic asset allocation and our investment risk appetite. Short-term market volatility has increased, following uncertainties in the political and economic environment.	Asset-Liability modelling techniques to ensure all sources of investment risk are considered. Strategic asset allocation process to optimise the risk and reward balance. Investment modelling and stress testing to ensure within appetite. Investment guidelines monitoring.
Risk category	Description of risk	Appetite	Trend	Key mitigations
Non-core risks arise as a consequence of executing the strategy for core risks. We do not actively seek to generate economic return from these risks, but to control exposure that arises in the course of business.
Credit	The risk arising from the potential failure of business counterparties to fulfil financial obligations to Novae Group. Reinsurance protection is a key tool for managing our underwriting exposures, and this requires a measured acceptance of credit risk. This excludes investment counterparties, which are considered as investment risk.	Novae has a neutral appetite towards credit risk. Credit risk arises through Novae's normal commercial operations, the most material of which is ceded reinsurance. We generally seek to reduce this risk via controls over counterparty exposures. We do not seek to generate economic returns through the assumption of counterparty credit risks.	Increased exposure to some reinsurance counterparties has risen as reinsurance usage has increased in some areas. Exposures remain with well-rated counterparties.	Specific risk controls are operated at a counterparty level, to ensure appropriate security for all reinsurance. Guidelines support careful selection and monitoring of counterparties, including limits to individual exposures. Purchase of collateralised reinsurances.
Liquidity	The risk of not being able to meet our liabilities as they fall due, or incurring excessive costs to do so.	Novae has a negative appetite for liquidity risk. We generally seek to reduce the potential that there might be insufficient funds available to meet claims.	We continue to maintain a high allocation to cash and liquid assets, and monitor against minimum liquidity targets on a regular basis.	Strategic liquidity target. Stress testing of available liquidity against requirements in catastrophe situations. Strategic asset allocation considers duration match between assets and liabilities. Limits on allocation to assets that may become illiquid in times of stress.
Operational	The risk arising from inadequate or failed processes/systems, people, or external events.	Novae has a negative appetite towards operational risk. We seek to reduce exposures subject to cost and practical considerations, recognising that operational risks arise in all business systems and processes, and to eliminate these risks entirely would entail excessive costs.	Growth in the business and changes in structure over recent years have increased operational complexity; this has been offset by ongoing improvements in systems, processes and controls to enhance operational capabilities.	Operational controls that cover all material business processes keeping the likelihood and impact of operational failures within acceptable bounds. Change management controls, including a project methodology. Detailed Business continuity planning. Succession planning, talent management and effective remuneration controls.
Strategic risks arise from changes to external circumstances and impact Novae's ability to generate adequate returns from its strategy.
Strategic risk	The risk that the strategy is not delivered against, not clearly communicated, or not appropriate for the changing business environment. This includes reputational risk.	Novae has a positive appetite for strategic risk. We continually seek ways to build shareholder value as an underwriter of specialty (re)insurance products, recognising that strategic risks arise from constant change in the business environment as well as risks in the implementation of our strategy.	Long term strategies continue to deliver positive outcomes, in an increasingly challenging external environment. These strategies are subject to regular review and refresh to ensure ongoing relevance.	Annual review of strategy by Board. Major strategic opportunities assessed by reference to Group strategy. Established policy for interacting with the media, analysts, shareholders and regulators.

Appendix B - Directors' Responsibility Statement pursuant to Disclosure and Transparency Rule 4

The following statement is extracted from page 77 of the 2016 Annual Report and is repeated here for the purposes of compliance with DTR 6.3.5. This statement relates solely to the 2016 Annual Report and is not connected to the extracted information set out elsewhere in this announcement or the Preliminary Announcement.

The Directors, whose names and functions are set out on pages 42 and 43 confirm that to the best of our knowledge:

> the financial statements, prepared in accordance with IFRSs as adopted by the EU, 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 40) 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 98 to 113) describe the principal risks and uncertainties faced by the Group; and

> in addition, each of the Directors considers that the Annual Report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group's position and performance, business model and strategy.

Appendix C - Related Party Transactions

Certain Directors of the Group are also directors of other companies, as set out in the biographies of the Board of Directors in the Corporate Governance report on pages 42 and 43. Some of these companies conduct business with the Group, including Morgan Stanley International plc (of which Mary Phibbs is a non-executive director). All transactions between such companies and the Group are carried out at arms-length and on normal commercial terms.

During the period 1 January 2017 to 31 March 2017, there were no transactions, loans or proposed transactions between the Company and any related parties which were material to either the Company or the related party, or which were unusual in their nature or conditions (see also Note 30 to the Annual Report on page 136).

Enquiries:

Alex Moon
Group Company Secretary
31 March 2017

020 7050 9500