Final Results

RNS Number : 4351G

Helios Underwriting Plc

30 May 2017

 

Helios Underwriting plc

("Helios" or the "Company")

Final results for the year ended 31 December 2016

Helios is pleased to announce its final results for the year ended 31 December 2016

Highlights

•    Gross premium written during the period totalled £31.3m (2015: £21.5m)

•    Profits before impairment, goodwill and tax for the year of £1,334,000 (2015: £753,000) 77% increase in profits

•    Earnings per share of 6.22p (restated 2015: 9.67p)

•    Helios retained capacity for 2017 open underwriting year £10.6m (2016: £9.8m)

•    2014 underwriting year of account profit return on capacity of 15.6% (2013 underwriting year: 14.2%)

•    Net proceeds from the issue of new shares - £5.7m

•    Recommended total dividend for this year of 5.5p per share (2015: 5.0p per share)

•    Adjusted net asset value per share - £1.96 per share (2015: £2.01 per share)

Summary Financial Information
	Year to 31st December
	2016 £'000	2015 £'000
Underwriting profits	2,209	2,218
Other Income	904	476
Costs	(1,778)	(1,941)
Profit for the year before impairment and goodwill	1,334	753
Profit before tax	779	798
Earnings per share before impairment and goodwill	11.64p	8.00p
Earnings per share	6.22p	9.67p

For further information please contact:

Helios

Nigel Hanbury - Chief Executive                                                      020 7863 6655 / [e-mail]

Arthur Manners - Chief Financial Officer                                        07754 965 917

Stockdale Securities Limited

Robert Finlay                                                                                        020 7601 6100

David Coaten

Chairman's statement

Positive results

Acquisition strategy continues to build the fund of capacity.

Summary

•    Adjusted net asset value at £1.96 per share (2015: £2.01)

•    Three acquisitions in 2016 added £5.6m of capacity to 2016 underwriting year - 20% increase

•    Two acquisitions agreed in 2017 will add £2.4m of capacity to 2017 underwriting year - an additional 7% increase

•    5.5p per share total dividend payable (2015: 5.0p)

We have continued to implement our strategy of building the portfolio of syndicate capacity.

Your Board is pleased to report a set of encouraging results for 2016 which reflects the continued progress in building the portfolio of capacity on syndicates at Lloyd's to generate profits for shareholders. The profits before goodwill and impairment for the year were £1,334,000 (2015: £753,000), whilst the adjusted net asset value of the Group is £1.96 per share (2015: £2.01).

Underwriting profits from the two older underwriting years, the "off-risk" years, made a good contribution but the 2016 underwriting year in its first 12 months recognised a loss.

Other income arising from fees from reinsurers and investment income has increased this year. Total costs reduced to £1.8m as the expenditure on protecting the portfolio using stop loss reinsurance was rationalised.

Strategy

We have continued to implement our strategy of building the portfolio of syndicate capacity. During 2016 the key developments were the:

·      raising of £5.7m of new capital for the acquisition of further limited liability vehicles ("LLVs") and enabling the broadening of the shareholder base; and

·      £3.9m of the funds raised have been utilised to date.

Capacity acquired

During 2016 a further three corporate members were acquired that increased the capacity for the 2014 to 2016 years of account, and a further two corporate members have been bought since 31 December 2016. These companies have increased the capacity underwritten on the 2014 to 2017 underwriting years as shown below.

	Year of account - £'m
	2014	2015	2016	2017
Capacity at 1 January 2016	29.2	26.8	28.1	-
Acquired during 2016	6.3	5.4	5.6	-
Capacity at 31 December 2016	35.5	32.2	33.7	32.6
Acquired to date in 2017	-	2.2	2.2	2.4
Current total capacity	35.5	34.4	35.9	35.0

These five acquisitions in 2016 and 2017 to date were purchased for a total consideration of £8.7m, of which £3.9m was committed from the funds raised from shareholders.

Underwriting result

The calendar year underwriting profits for 2016 have been generated from results recognised in the portfolio from the 2014 to the 2016 underwriting years as follows:

Underwriting year contribution

Helios retained profits

Underwriting year	2016 £'000	2015 £'000
2013	-	1,274
2014	1,661	939
2015	1,031	5
2016	(484)
2,208		2,218

During 2016, the 2014 underwriting year mid‑point estimate increased from 8.7% return on capacity to a final result of 15.6%. The overall return on capacity for 2014 benefited from the weaker £/US$ exchange rate that weakened by 20% in 2016 and from below average loss activity. The mid-point estimate for the 2015 underwriting year at 31 December 2016 was 8.2%. This mid-point estimate for 2015 has improved to 9.8% with the release of updated estimates.

The level of major claims for the whole of Lloyd's during 2016 at £2.1bn was the fifth highest since the turn of the century and above the long-term average. These losses were incurred mainly as a result of Hurricane Matthew, the earthquake in Japan in April 2016 and the Fort McMurray Wildfire in Canada.

 Consequently, the 2016 underwriting year result in the first 12 months retained by Helios made a negative contribution mainly arising from this claims experience. The underwriting environment remains competitive and pressure to reduce underwriting terms and conditions is prevalent within most classes of business. Nevertheless, we would expect the 2016 underwriting year to be profitable and early indications from the managing agents of the syndicates in the portfolio are currently forecasting a mid-point estimate of profit on capacity of 3.5%.

The underwriting results will remain exposed to movements in £/US$ exchange rate due to significant underlying US$ exposure.

Other income

Helios generates fees from the quota share reinsurers, investment income from the Group funds at Lloyd's and foreign exchange gains.

2016 £'000		2015 £'000
Fees from reinsurers	557	385
Investment income	347	91
Total other income	904	476

Fees and profit commission from reinsurers have increased as the capital committed has risen to £13m and as the 2014/15 years are recognising increased profits. The Group Funds at Lloyd's are invested to produce consistent long-term returns.

Total costs

The costs of the Group comprise the operating expenses and the cost of the stop loss protection bought to mitigate the downside from large underwriting losses.

2016 £'000		2015 £'000
Pre-acquisition	63	200
Stop loss costs	248	407
Operating costs	1,467	1,334
Total costs	1,778	1,941

The reduction in the stop loss costs reflects the rationalisation of the stop loss reinsurance policies acquired in 2016.

Adjusted net asset value per share

The Board views the adjusted net asset value per share ("ANAV") as the key metric to measure the success of the Group. It measures the combination of the net tangible asset value of Helios and the current market value of the portfolio of syndicate capacity. The building of a portfolio of participations on leading Lloyd's syndicates remains the strategic objective of the Group.

2016 £'000		2015 £'000
Net tangible assets	11,787	7,912
Group letters of credit	1,922	1,447
Weighted average value of capacity	14,918	11,762
28,627		21,121
Shares in issue	14,604	10,495
Adjusted net asset value per share (£)	1.96	2.01

The issue of shares in the year to raise additional funds has restricted the growth in ANAV per share. Previously the Board relied on the Humphrey's valuation that approached the valuation in a very similar way and the ANAV of £1.99 per share was published last year.

Dividend

Following another successful year, the Board is pleased to recommend that the final dividend remains the same as last year at 1.5p per share which, together with a special dividend of 4.0p per share (2015: 3.5p), totals 5.5p per share (2015: 5.0p). The special dividend equates to approximately 20% of the £3m cash released from the 2014 year of account. These dividends will be payable to shareholders on the register on 9 June 2017. If approved, the dividend will be paid in a single payment on 7 July 2017.

	Year ended 31 December
	2016	2015	2014	Final dividend	Special dividend	Change
Dividends (p)	5.5	5.0	5.1	2016: 1.5 2015: 1.5 2014: 1.5	2016: 4.0 2015: 3.5 2014: 3.6	+10%

Outlook

Our strategy of providing access to insurance exposures at Lloyd's continues to develop. We see opportunities to both develop access to syndicates at Lloyd's and to build on the structure for participation by private capital.

Although the 2015 underwriting year is expected to produce a good result, early indications for the 2016 underwriting year show lower returns on capacity. We see lower expected profitability as an opportunity to continue to build the portfolio of capacity by purchasing LLUs at reduced prices.

Board

This is my final set of annual results as Chairman, and in the years since we launched the Company in 2007 we have substantially grown the portfolio of capacity and our financial strength. I am delighted that Michael Cunningham is taking over the role of Chairman.

Sir Michael Oliver

Non-executive Chairman

27 May 2017

Chief Executive's review

Continuing to grow

Maintaining the quality of the portfolio.

Highlights

•    77% of the portfolio managed by leading managing agents at Lloyd's

•    Helios portfolio underwriting results for 2014 underwriting year outperform Lloyd's average return on capacity by 4.7%

•    Helios cedes 70% of portfolio at the start of the underwriting year

•    Helios expects to retain over 50% of overall underwriting result by the close of the underwriting year

Helios return on capacity is on average 3.6% higher than the Lloyd's market over the last three closed years.

Nigel Hanbury

Chief Executive

Growth in capacity through acquisitions

The strategy of building a portfolio of underwriting capacity at Lloyd's has continued through the purchase of further corporate members. There remains a steady flow of vehicles for sale as existing owners wish to cease underwriting due to a change of circumstances. Since 1 January 2016 £7.9m of capacity has been acquired. We remain selective on the purchases and have encountered reticence from potential vendors as the prices offered do not match their expectations. Premiums over the Humphrey's value are no longer paid and as the soft market conditions are reflected in the profits generated and auction values, we would expect discounts on the Humphrey's value to increase.

Following the close of 2014 year of account, another very profitable year, further vehicles are expected to be marketed as the impact of the soft insurance market affects the future returns to be generated by LLVs. We continue to expect resistance from vendors regarding our value expectations. There remains a risk to the implementation of our strategy if suitable vehicles are not available at attractive prices.

	Summary of acquisitions
	Cash Consideration £m	Capacity £m	Humphrey value £m	Premium over Humphrey
Devon Underwriting Limited	1.1	1.2	1.0	115%
Nameco (No 346) Limited	3.7	3.3	3.4	109%
Pre-capital raise	4.8	4.5	0.8	101%
Salviscount LLP	0.8	1.0
Pooks Limited	0.9	0.8	0.9	98%
Charmac Underwriting	2.2	1.6	2.3	96%
Post-capital raise	3.9	3.4
Total since 1 January 2016	8.7	7.9

Quality of portfolio

We continue to focus ruthlessly on the quality syndicates. So, participations on weaker syndicates in acquired portfolios are sold to maintain the overall quality. The six largest participations with the leading managing agents at Lloyd's account for 77% of the portfolio. These participations in syndicates managed by these managing agents represent shares in the better managed businesses at Lloyd's.

The underwriting results of the Helios portfolio have consistently outperformed the Lloyd's market average. Helios' average return on capacity over the last three closed years is 14.3% and is on average 3.69% higher than the average of the Lloyd's market.

The combined ratio of the portfolio (before Helios corporate costs) has been 5.79% lower on average over the last three calendar years. These incremental returns demonstrate the diversity and the breadth of underwriting expertise within the businesses comprising the portfolio of syndicate capacity.

Helios current portfolio

Top six holdings by managing agent

Syndicate	Managing agent	2017 Helios portfolio capacity  £'000	2017 Helios portfolio  % of total	Largest class
510/557	Tokio Marine Kiln Syndicates Ltd	6,400	18	Composite/Non-marine XL
623/6107	Beazley Furlonge Ltd	5,695	16	Composite/Reinsurance
2791/6103	Managing Agency Partners Ltd	4,456	13	Composite/Reinsurance
33/6104	Hiscox Syndicates Ltd	4,457	13	Composite/Reinsurance
609	Atrium Underwriters Ltd	3,395	10	Composite
6117	Argo Managing Agency	2,628	7	Reinsurance
Sub-total		27,031	77
Other		8,010	23
Total 2017 Helios portfolio		35,041	100

Source: 2017 syndicate capacities sourced from Lloyd's.

Reinsurance quota share

The use of quota share reinsurance to provide access to the Lloyd's underwriting exposures for reinsurers and private capital has been expanded. The core of the panel of reinsurers remains XL Group plc and Everest Reinsurance Bermuda Limited.

This reinsurance reduces the exposure of the portfolio and assists in the financing of the underwriting capital. Helios will seek to reinsure a significant proportion of the capacity at the start of the underwriting year to mitigate the open-year underwriting exposures. For corporate members acquired during the year, a proportion of the "on-risk" capacity will be ceded to reinsurers whilst the capacity on older years will be retained 100% by Helios. Therefore, the proportion of the overall capacity that Helios retains is expected to rise as further corporate members are acquired in the future. The profits earned after the company has been acquired will be recognised by Helios.

The table shows that the Helios retained capacity increases significantly in years 2 and 3 as further corporate members are acquired and the older years are not reinsured. Capacity on underwriting years after 18 months of development is substantially "off risk" as the underlying insurance contracts have mostly expired. Therefore, the profits from the capacity on the older years are retained 100% by Helios. The proportion of overall capacity retained by Helios for the 2015 and 2016 underwriting years is expected to increase to approximately 50% as further corporate members are acquired.

	Year of account - £m
	2014	2015	2016	2017
Helios capacity at outset	5.4	6.1	8.4	9.8
Retained capacity in year 1	2.5	4.6	2.4	0.7
Retained capacity in years 2 and 3	12.7	7.2	1.9	-
Helios retained capacity	20.6	17.9	12.7	10.5
% of off-risk capacity	62%	31%	15%	-
Ceded capacity at outset	12.7	14.3	19.7	22.8
Further capacity ceded to QS	2.2	2.2	3.5	1.7
Total capacity ceded	14.9	16.5	23.2	24.5
Current total capacity	35.5	34.4	35.9	35.0
Helios share of total capacity	58%	52%	35%	30%

Development of profit estimates

As Helios has no active involvement in the underwriting or management of the syndicates on which it participates, it relies on information on forecast profitability of the portfolio that is released on a quarterly basis by the managing agents of the syndicates. The managing agents have traditionally been conservative in the estimation of the profitability of a year of account, waiting until the development of the underlying reserves for the claims can be assessed with greater certainty.

The capacity acquired on the "off-risk" years that is retained 100% by Helios contributes a significant part of the profits of the Group. The chart below indicates that a significant proportion of the improvement in the estimates of profitability of syndicates are declared by the managing agents in the last 12 months to the close of an underwriting year. Helios benefits from the conservative nature of the managing agents.

Risk management

Helios continues to ensure that the portfolio is well diversified across classes of businesses and managing agents at Lloyd's.

The purchase of quota share reinsurance cedes 70% of the risk on the younger or "on-risk" years, which have remained consistent for the last three years. The market conditions continue to soften even as the incidence of insured natural disasters and large loss events have been above normal expectations in 2016. This has allowed the insurance industry to generate adequate returns on capital and thereby attract new capital to the industry.

There is today a strong consensus in the insurance industry that the continued pressure on rates will have to slow shortly. It might take a catastrophe, or series of catastrophes, on a very large scale to materially turn the market for short‑tail lines of business. The high aggregation of coastal exposures in the US and other developed markets is one reason why such massive dislocations cannot be ruled out.

The biggest single risk faced by insurers arises from the possibility of mispricing insurance on a large scale. This is mitigated by the diversification of the syndicate portfolio and by the depth of management experience within the syndicates that Helios supports. These management teams have weathered multiple market cycles and the risk management skills employed should reduce the possibility of substantial under-reserving of previous-year underwriting.

We assess the downside risk in the event of a major loss through the monitoring of the aggregate net losses estimated by managing agents to the catastrophe risk scenarios ("CRS") prescribed by Lloyd's.

The individual syndicate net exposures will depend on the business underwritten during the year and the reinsurance protections purchased at syndicate level.

The aggregate exceedance probability ("AEPs") assess the potential impact across the portfolio from either single or multiple large losses with a probability of occurring greater than once in a 30-year period.

In addition, Helios buys stop loss reinsurance that will mitigate the impact of a significant loss to the portfolio.

For 2017, the scope of the stop loss cover has been rationalised and terms have been included which will assist in funding a large loss.

Capacity value

The value of the portfolio of the syndicate capacity remains the major asset of the Group and an important factor in delivering overall returns to shareholders. The adjusted net asset value ("ANAV"), being the value of the net tangible assets of the Group, together with the current value of the portfolio capacity, is a key management metric in determining growth in value to shareholders.

The Board recognises that the average prices derived from the annual capacity auctions managed by the Corporation at Lloyd's could be subject to material change if the level of demand for syndicate capacity reduces. Notwithstanding the average prices derived from the auction process, each of the syndicates will have a track record of trading profitability and generating cash.

The 2016 auctions valued the Helios portfolio at 31 December 2016 at £14.9m. Applying the 2015 auction average prices to the same portfolio, the overall value was very similar at £14.9m. There were variations in the prices achieved by individual syndicates between the years.

The accounting policy requires an assessment of the carrying value of each syndicate participation against the latest average auction prices. The impairment charge for this year of £555,000 (2015: £63,000) results in a reduction in the fair value of the syndicate capacity held on the balance sheet. The two syndicates that mainly contributed to this impairment charge were Syndicate 2010 (Cathedral) and Syndicate 386 (QBE Liability). The excess supply of capacity over demand for these participations at the last auction, the Board believes, was due to circumstances peculiar to each syndicate. Should the average auction prices for these two syndicates exceed the current carrying value in the future; the impairment charge could be reversed.

These movements in the carrying value of capacity have no impact on cash flow.

For calculation of the ANAV, the carrying value of the capacity in the balance sheet is replaced by the total current portfolio value. Therefore, this impairment charge does not impact the ANAV of the Group.

Capital position

The underwriting capital for the Helios portfolio is supplied as follows:

Underwriting capital as at 31 December	2016 £m	2015 £m
Reinsurance panel	13.6	10.8
Helios own funds	4.1	3.9
Group letters of credit	1.9	1.4
Total	19.6	16.1

Helios has generated free cash of £3m in 2016 (2015: £1.8m) from the distribution of its share of the final underwriting profits of the 2014 underwriting year. These profits have assisted in funding the recent acquisitions and will provide working capital for the next 12 months.

Corporate, social and environmental responsibility

Helios aims to meet its expectations of its shareholders and other stakeholders in recognising, measuring and managing the impacts of its business activities.

As Helios manages a portfolio of Lloyd's syndicate capacity, it has no direct responsibility for the management of those businesses. Each managing agent has responsibility for the management of those businesses, their staff and employment policies and the environmental impact.

Therefore, the Board does not consider it appropriate to monitor or report any performance indicators in relation to corporate, social or environmental matters.

Sir Michael Oliver has been our Chairman since the Company was created in 2007. Sadly he has decided that it is time to stand down at this year's AGM in June. His experience and wise counsel was invaluable when the Company was launched as a new spread underwriting vehicle and has continued to be through all stages of its development. I would like to take this opportunity to extend our heartfelt gratitude to him and wish him well for the future.

Nigel Hanbury

Chief Executive

26 May 2017

Lloyd's Advisers' report - Hampden Agencies

Outperformance by syndicates continues to be expected

Market conditions remain competitive despite early signs of capacity withdrawals from some lines of business.

The underwriting results of the Helios portfolio of syndicates have consistently outperformed the Lloyd's market average both on an annually accounted basis measured by combined ratio and on a three-year account basis, measured by return on underwriting capacity.

The calendar year combined ratio of the portfolio (before Helios corporate costs) was 94.6% in 2016 (2015: 83.4%). The Helios portfolio continues to outperform the Lloyd's combined ratio, which was 97.9% in 2016. The increase in the calendar year combined ratio was driven in large part by a series of major losses. These losses included Hurricane Matthew and wildfires at Fort McMurray in Canada. Despite the major losses suffered during 2016, the 2016 three-year account is expected to remain profitable, although property reinsurance remains on risk until 30 June 2017, while other classes of business can be on risk until 31 December 2017.

Over the last three calendar years, the average combined ratio of the Helios portfolio was 86.4%, outperforming Lloyd's by 5.7 percentage points a year. These incremental returns compared with the Lloyd's market average demonstrate the quality of the syndicates in the Helios portfolio. The chart below shows the combined ratio of the Helios portfolio compared with Lloyd's for the last three calendar years from 2014 to 2016.

With the closure of the 2014 account at 31 December 2016 the Helios portfolio has outperformed Lloyd's for the sixth successive three-year account result, reporting a profit of 15.6% on capacity compared with the Lloyd's market average of 10.9% of capacity, an outperformance of 4.7% of capacity. The chart below shows the return on capacity of the Helios portfolio compared with Lloyd's for the last two closed years from 2013 to 2014 and includes the mid-point estimated results for the 2015 account at Q8.

Underwriting profitability is set to continue for the 2015 account with the mid-point estimate for the Helios portfolio at Q8 in 2015 being 8.1% of capacity compared with the Lloyd's market average of 3.8% of capacity.

Global insured major losses, according to Swiss Re Sigma, were the highest since 2012 at $54bn in 2016, up from $38bn in 2015 and in line with the inflation adjusted annual average for the last ten years of $53bn a year.

The largest insured loss in 2016 was the earthquake in Japan in April, with claims of $4.9bn. The second costliest event was Hurricane Matthew, which resulted in insured losses of $4bn in the US and the Caribbean. Hurricane Matthew, made landfall in Haiti as a Category 4 storm on 4 October 2016, before following the US coastline for hundreds of miles until it made landfall again in South Carolina on 8 October 2016 after causing storm surge, wind and flood damage, beach erosion and infrastructure damage in Florida through to North Carolina.

Hurricane Matthew was a reminder of the potential insurance and reinsurance exposures from a major hurricane. Research by insurance company Validus calculated that had Matthew tracked just 30 miles to the west the insured loss could have been nearly ten times greater than the actual loss at $38bn, while Lloyd's itself models a Florida windstorm landing in Miami-Dade County with total insured losses of $131bn. Insured losses of either magnitude would likely have had a significant impact on catastrophe reinsurance rates.

Financial year results for 2016 reported by Lloyd's and its competitors highlight the challenge in an average year for major losses of producing an underwriting profit with limited support from investment yields and declining prior year releases.

The insurance market in 2017

Market conditions remain the most competitive in Lloyd's since the late 1990s when Lloyd's reported four consecutive years of underwriting losses on a three-year account basis. So far in 2017, the trend of rate reductions has continued in most classes of business other than motor. There are signs that the level of rate reductions is beginning to moderate both in insurance and reinsurance classes, prompted in some cases by withdrawals of capacity.

For 2017, Hampden has a target profit, excluding prior year loss reserve development, of 0% to 5% of capacity assuming a long-term average for catastrophe losses. Pure year profitability is becoming increasingly dependent on major loss experience. The balance of power continues to shift from net sellers of reinsurance to net buyers of reinsurance, with the traditional reinsurance market facing increasing competition from alternative capital. Guy Carpenter calculates that alternative capital's market share of global reinsurance capital has grown from 8% in 2008 to 19% in 2016.

The return expectations from many alternative capital investors are modest. In a 2016 survey, Clear Path Analysis spoke to 108 institutional asset managers in Europe and the United States asking what returns they looked for in Insurance Linked Securities. The most frequent target return expected by over 30% of those surveyed was in the range of 3% to 5%. Despite these modest return expectations institutional investors continue to be attracted by the low correlation of insurance returns to other financial assets.

Syndicates in the Helios portfolio are adapting to current market conditions by buying more reinsurance or retrocession protection. The reinsurance cession ratio of the Helios portfolio increased from 17.9% in 2015 to 20.2% in 2016. Part of the reason for this increase was due to portfolio composition - on a like-for-like basis the increase in the reinsurance cession ratio was from 17.6% to 18.9%.

"Investment returns no longer provide a cushion to sub par underwriting."

The rating environment

Property catastrophe reinsurance rates at 1 January 2017 have now declined for five years in succession. Guy Carpenter's Global Rate on Line Index reduced by 3.7% at 1 January 2017, compared with reductions of 8.8% a year earlier.

Property and casualty insurance rates in the United States began to decline during the first quarter of 2015. Rates have continued to reduce for nine successive quarters with the Council of Insurance Agents and Brokers reporting rate reductions averaging 2.5% in Q1 2017, although the quantum of rate reductions is showing signs of moderating from reductions reported of 3.3% in Q4 2016.

The economy drives the property casualty insurance industry with net written premiums, a proxy for demand, tracking nominal GDP fairly well other than in "hard markets". For the full year 2016, US nominal GDP grew by 2.9%, down from 3.7% in 2015. Net written premium growth for all property/casualty insurers in the US was 2.8% for the first three quarters of 2016. Since the recession ended in Q2 2009 the economic recovery measured by real GDP growth has been muted compared with previous post-recession recoveries, only growing faster than 3% (at an annual rate) in a calendar quarter eight times out of 31 quarters and once in the last ten.

Supply of capital at all-time highs

Good underwriting results continue to attract capital to both the insurance industry and, in particular, the reinsurance industry searching for yield. Much of this is "alternative capital" and focused on reinsurance business through short-term structures such as catastrophe bonds and collateralised reinsurance. During 2016 global reinsurer capital again reached a record high, according to Aon Benfield, of $595bn, increasing by 5% at the 2015 year end. Alternative capital grew by 13% to $81bn principally reflecting additional deployment into collateralised reinsurance structure.

The insurance cycle is a classic supply-led cycle where pricing is driven more by changes in the supply of capital to the market than changes in demand for insurance and reinsurance. The growth in alternative capital has had a dramatic impact on pricing with Guy Carpenter assessing rate decreases on reinsurance cover bought through insurance-linked securities as high as 30% in the fourth quarter of 2016, which compares with much more modest rate reductions for global reinsurance at 1 January 2017 of 3.7%.

Global reinsurance capital has increased by 75% since 2008 while insurance capital measured by the United States property and casualty policyholders' surplus also reached a record high at the end of 2016 of $701bn, an increase of 54% on 2008.

In current market conditions profit-orientated organic growth is difficult and is the reason why many listed companies favour capital management with excess capital being repaid to shareholders through share buy-backs or special dividends. Capital repatriation is a reflection of underwriting discipline with Beazley, Lancashire and Hiscox ranked in the top four for capital repatriation out of 23 major reinsurers in the Aon Benfield Aggregate Report for 2016 measured by dividends and share buy-backs as a percentage of opening equity. It is no coincidence that syndicates managed by Beazley (Syndicate 623), Hiscox (Syndicate 33) and Lancashire (Syndicate 2010) comprise in total 27.5% of the Helios syndicate portfolio for 2017.

The investment environment

Declining bond yields in 2016 boosted investment returns with the US ten-year treasury yield declining from 2.2% on average in 2015 to 1.8% in 2016. The yield on the US ten-year treasury has been below 3% for over five years. As long as new money yields are below the embedded yield (purchase price) of maturing bonds, portfolio yields of insurers will continue to fall, putting upward pressure on premium rates. Research from the Insurance Information Institute suggests that US insurers at year-end 2016 were earning a pre-tax new money yield of 1.6% compared with a pre-tax embedded yield of 3.0% using the US-five year treasury note as a proxy for new money yield.

The importance of conservative reserving

Bottom-line results in the current rating environment continue to be reliant on conservative reserving, given Hampden's modest forecast for pure year underwriting return on the 2017 account in a range of 0% to 5% of capacity. We consider the Helios portfolio of syndicates to be conservatively reserved overall with the last three-year account closed result for 2014 including a prior release of 4.0% of capacity from the 2013 and prior years. Going forward, however, we see some moderation of reserve releases given that the "hard market" years of 2002-2006 reserves on liability business have now largely been distributed whilst market conditions have been more competitive since 2007.

A continued focus on quality

Our focus in this market is to focus syndicate portfolios on quality syndicates with key success characteristics, being conservative reserving and a focus on profit rather than growth.

The Helios portfolio for 2017 continues to provide a good spread of business across managing agents and classes of business. The two largest classes of business remain reinsurance at 26.0% (2016: 28.6%) and US dollar property insurance at 16.9% (2016: 17.7%) shown in the first "doughnut" chart below.

The measure of quality assessed by Hampden is the grading we assign each year to syndicates. Syndicates graded "D" are not recommended for support while the four positive gradings range from "AA" (excellent), "A" (very good), "B" (good), "C" (market average).

Helios continues to focus its portfolio on the quality syndicates which have traditionally outperformed the Lloyd's market result to a greater degree in "soft market" conditions compared with "hard market" conditions. The Helios portfolio split by Hampden grading for 2017 contains 56% (2016: 55.6%) underwriting capacity in syndicates graded "AA" and "A" by Hampden, as shown in the second "doughnut" chart below.

Hampden Agencies

26 May 2017

Summary financial information

The information set out below is a summary of the key items that the Board assesses in estimating the financial position of the Group. Given the Board has no active role in the management of the syndicates within the portfolio, the following approach is taken.

A) It relies on the quarterly syndicate forecasts to assess its share of the underlying profitability of the syndicates within the portfolio.

B) It calculates the amounts due to/from the quota share reinsurers in respect of their share of the profits/losses as well as fees and commissions due.

C) An adjustment is made to exclude pre-acquisition profits on companies bought in the year.

D) Costs relating to stop loss reinsurance and operating costs are deducted.

	Year to 31 December
	2016 £'000	2015 £'000
Underwriting profit	2,208	2,218
Other Income:
- fees from reinsurers	557	385
- investment income	347	91
Total other income	904	476
Costs:
- pre-acquisition	(63)	(200)
- stop loss costs	(248)	(407)
- operating costs	(1,467)	(1,334)
Total costs	(1,778)	(1,941)
Operating profit before goodwill and  impairment	1,334	753
Goodwill on bargain purchase	-	244
Impairment charge	(555)	(199)
Tax	(66)	112
Profit for the year	713	910

Year to 31 December 2016

Underwriting year	Helios retained  capacity at  31 December 2016 £m	Portfolio mid-point forecasts	Total profit currently estimated £'000	% earned in the 2016 calendar year	Helios profits £'000
2014	20.6	15.5%	3,193	52%	1,661
2015	16.1	8.2%	1,314	79%	1,031
2016	10.8	N/A	(484)
2,208

Year to 31 December 2015

Underwriting year	Helios retained  capacity at  31 December 2015 £m	Portfolio mid-point forecasts	Total profit currently estimated £'000	% earned in the 2015 calendar year	Helios profits £'000
2013	20.6	14.2%	2,925	44%	1,274
2014	14.3	8.9%	1,273	74%	939
2015	10.6	N/A	5
2,218

Summary balance sheet

See Note 26 for further information.

	2016 £'000	2015 £'000
Intangible assets	10,732	8,511
Funds at Lloyd's	4,083	3,894
Other cash	7,229	2,973
Other assets	3,480	1,231
Total assets	25,524	16,609
Deferred tax	3,581	3,172
Other liabilities	4,618	3,163
Total liabilities	8,199	6,335
Total syndicate equity	5,194	6,149
Total equity	22,519	16,423

Cash flow

Helios has generated £3.4m of cash in 2016 from the distribution of the profits from the 2013 underwriting year.

Analysis of free working capital	Year to 31 December 2016 £'000	Year to 31 December 2015 £'000
Opening balance (free cash)	2,973	2,704
Income
Cash acquired on acquisition	413	977
Distribution of profits (net of tax retentions)	3,378	2,510
Transfers from Funds at Lloyd's	3,775	1,167
Other income	271	437
Proceeds from the issue of shares	5,722	-
Transfers from PTF accounts (early release)	-	221
Expenditure
Operating costs	(815)	(775)
Reinsurance cost	(237)	(275)
Payments to QS reinsurers	(741)	-
Acquisition of LLVs	(5,592)	(2,316)
Transfers to Funds at Lloyd's	(1,524)	(1,351)
Tax	(95)	(5)
Dividends paid	(299)	(321)
Closing balance	7,229	2,973

Consolidated statement of comprehensive income

- Year ended 31 December 2016

Note		Year ended 31 December 2016 £'000	Restated* year ended 31 December 2015 £'000
Gross premium written	6	31,307	21,511
Reinsurance premium ceded	6	(7,772)	(5,582)
Net premium written	6	23,535	15,929
Change in unearned gross premium provision	7	(826)	(162)
Change in unearned reinsurance premium provision	7	199	93
Net change in unearned premium provision	7	(627)	(69)
Net earned premium	5,6	22,908	15,860
Net investment income	8	885	255
Other income		2,134	536
Revenue		25,927	16,651
Gross claims paid		(13,355)	(9,349)
Reinsurers' share of gross claims paid		2,472	1,650
Claims paid, net of reinsurance		(10,883)	(7,699)
Change in provision for gross claims	7	(3,826)	615
Reinsurers' share of change in provision for gross claims	7	1,904	(431)
Net change in provision for claims	7	(1,922)	184
Net insurance claims incurred and loss adjustment expenses	6	(12,805)	(7,515)
Expenses incurred in insurance activities		(10,819)	(7,571)
Other operating expenses		(969)	(812)
Operating expenses	9	(11,788)	(8,383)
Operating profit before goodwill and impairment	6	1,334	753
Goodwill on bargain purchase	21	-	244
Impairment of goodwill	13,21	-	(136)
Impairment of syndicate capacity	13	(555)	(63)
Profit before tax		779	798
Income tax (charge)/credit	10	(66)	112
Profit for the year		713	910
Other comprehensive income
Foreign currency translation differences		-	-
Income tax relating to the components of other comprehensive income		-	-
Other comprehensive income for the year, net of tax		-	-
Total comprehensive income for the year		713	910
Profit for the year attributable to owners of the Parent		713	910
Total comprehensive income for the year attributable to owners of the Parent		713	910
Earnings per share attributable to owners of the Parent
Basic and diluted	11	6.22p	9.67p

*     Refer to Note 27 for details regarding the restatement of the profit for the year 2015 as a result of a reclassification.

The profit attributable to owners of the Parent, the total comprehensive income and earnings per share set out above are in respect of continuing operations.

The notes are an integral part of these Financial Statements.

Consolidated statement of financial position

- At 31 December 2016

Note		31 December 2016 £'000	Restated* 31 December 2015 £'000
Assets
Intangible assets	13	10,732	8,511
Financial assets at fair value through profit or loss	15	45,580	31,797
Reinsurance assets:
- reinsurers' share of claims outstanding	7	9,674	5,657
- reinsurers' share of unearned premium	7	2,548	1,501
Other receivables, including insurance and reinsurance receivables	16	30,243	20,427
Deferred acquisition costs	17	4,255	2,926
Prepayments and accrued income		187	144
Cash and cash equivalents		6,212	3,634
Total assets		109,431	74,597
Liabilities
Insurance liabilities:
- claims outstanding	7	50,087	32,985
- unearned premium	7	16,821	11,169
Deferred income tax liabilities	18	3,581	3,172
Other payables, including insurance and reinsurance payables	19	14,708	9,360
Accruals and deferred income		1,715	1,488
Total liabilities		86,912	58,174
Equity
Equity attributable to owners of the Parent:
Share capital	20	1,460	1,050
Share premium	20	15,399	9,901
Other reserves		-	-
Retained earnings		5,660	5,472
Total equity		22,519	16,423
Total liabilities and equity		109,431	74,597

*     Refer to Note 27 for details regarding the restatement of the profit for the year 2015 and the other reserves, as a result of a reclassification.

The Financial Statements were approved and authorised for issue by the Board of Directors on 26 May 2017, and were signed on its behalf by:

Nigel Hanbury

Chief Executive

The notes are an integral part of these Financial Statements.

Consolidated statement of changes in equity

- Year ended 31 December 2016

Consolidated	Note	Attributable to owners of the Parent
		Share  capital £'000	Share  premium £'000	Other reserves £'000	Retained earnings £'000	Total equity £'000
At 1 January 2015 as originally reported	22	853	6,996	-	2,636	10,485
Effect of change in accounting policy (see note (i) below)	22	-	-	-	2,383	2,383
At 1 January 2015 as restated	22	853	6,996	-	5,019	12,868
Total comprehensive income for the year:
Profit for the year - as restated (see note (ii) below)		-	-	-	910	910
Other comprehensive income, net of tax - as restated		-	-	-	-	-
Total comprehensive income for the year		-	-	-	910	910
Transactions with owners:
Dividends paid	12	-	-	-	(457)	(457)
Share issue	20	197	2,905	-	-	3,102
Total transactions with owners		197	2,905	-	(457)	2,645
At 31 December 2015 - as restated		1,050	9,901	-	5,472	16,423
At 1 January 2016 as originally reported		1,050	9,901	121	5,351	16,423
Effect of reclassification (see note (ii) below)		-	-	(121)	121	-
At 1 January 2016 as restated		1,050	9,901	-	5,472	16,423
Total comprehensive income for the year:
Profit for the year		-	-	-	713	713
Other comprehensive income, net of tax		-	-	-	-	-
Total comprehensive income for the year		-	-	-	713	713
Transactions with owners:
Dividends paid	12	-	-	-	(525)	(525)
Share issue, net of transaction costs	20	410	5,498	-	-	5,908
Total transactions with owners		410	5,498	-	(525)	5,383
At 31 December 2016		1,460	15,399	-	5,660	22,519

(i)    The retained earnings as at 1 January 2015 have been restated to reflect the effects of the change in the Group's accounting policy in accounting for intangible asset, syndicate capacity (refer to Note 22).

(ii)   The profit for the year 2015, the other comprehensive income 2015 and the retained earnings as at 31 December 2015 have been restated to reflect the effects of the reclassification of foreign exchanges gains and losses, which were originally recognised within the other comprehensive income, to be reclassified and recognised in the underwriting profits in the income statement (refer to Note 27).

The notes are an integral part of these Financial Statements.

Consolidated statement of cash flows

- Year ended 31 December 2016

Note		Year ended 31 December 2016 £'000	Restated* Year ended 31 December 2015 £'000
Cash flows from operating activities
Profit before tax		779	798
Adjustments for:
- interest received	8	(113)	(60)
- investment income	8	(594)	(926)
- goodwill on bargain purchase	21	-	(244)
- impairment of goodwill	21	-	136
- profit on sale of intangible assets		(94)	(120)
- impairment of intangible assets	13	555	63
Changes in working capital:
- change in fair value of financial assets held at fair value through profit or loss	8	(256)	360
- (increase)/decrease in financial assets at fair value through profit or loss		(6,825)	1,020
- (increase)/decrease in other receivables		(3,848)	709
- increase in other payables		3,090	11
- net increase/(decrease) in technical provisions		8,361	(50)
Cash generated from operations		1,055	1,697
Income tax paid		(15)	166
Net cash inflow from operating activities		1,040	1,863
Cash flows from investing activities
Interest received		113	60
Investment income		594	926
Purchase of intangible assets	13	(6)	(2)
Proceeds from disposal of intangible assets		137	24
Acquisition of subsidiaries, net of cash acquired		(4,723)	(2,521)
Net cash outflow from investing activities		(3,885)	(1,513)
Cash flows from financing activities
Net proceeds from issue of ordinary share capital (i)		5,722	-
Dividends paid to owners of the Parent	12	(299)	(321)
Net cash inflow/(outflow) from financing activities		5,423	(321)
Net increase in cash and cash equivalents		2,578	29
Cash and cash equivalents at beginning of year		3,634	3,605
Cash and cash equivalents at end of year		6,212	3,634

*     Refer to Note 27 for details regarding the restatement of the profit for the year as a result of a reclassification.

(i)    Net proceeds from issue of ordinary share capital excludes shares issued via a script dividend of £226,000 and accrued expenses incurred of £40,000.

Cash held within the syndicates' accounts is £2,163,000 (2015: £1,411,000) of the total cash and cash equivalents held at the year end of £6,212,000 (2015: £3,634,000). The cash held within the syndicates' accounts is not available to the Group to meet its day-to-day working capital requirements.

Cash and cash equivalents comprise cash at bank and in hand.

The notes are an integral part of these Financial Statements.

Notes to the financial statements

- Year ended 31 December 2016

1. General information

The Company is a public limited company listed on AIM. The Company was incorporated in England, is domiciled in the UK and its registered office is 40 Gracechurch Street, London EC3V 0BT. The Company participates in insurance business as an underwriting member at Lloyd's through its subsidiary undertakings.

2. Accounting policies

The principal accounting policies adopted in the preparation of the Group and Parent Company Financial Statements (the "Financial Statements") are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.

Change in accounting policy effected in the comparative year

As of 1 January 2015 the Group changed its accounting policy for the accounting for intangible assets, syndicate capacity. The new accounting policy has been applied retrospectively and first reflected in the Financial Statements of the year ended 31 December 2015. For details of this change, refer to this accounting policy as disclosed further below and Note 22.

Basis of preparation

The Financial Statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") as endorsed by the European Union ("EU"), IFRS Interpretations Committee ("IFRIC") interpretations and those parts of the Companies Act 2006 applicable to companies reporting under IFRS.

No statement of comprehensive income is presented for Helios Underwriting plc, as a Parent Company, as permitted by Section 408 of the Companies Act 2006.

The Financial Statements have been prepared under the historical cost convention as modified by the revaluation of financial assets at fair value through profit or loss. A summary of the principal Group accounting policies is set out below.

The preparation of Financial Statements in conformity with IFRS requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the Financial Statements and the reported amounts of revenues and expenses during the reporting year. Although these estimates are based on management's best knowledge of the amounts, events or actions, actual results may ultimately differ from these estimates.

The Group participates in insurance business through its Lloyd's member subsidiaries. Accounting information in respect of syndicate participations is provided by the syndicate managing agents and is reported upon by the syndicate auditors.

Going concern

The Group and the Company have net assets at the end of the reporting period of £22,519,000 and £29,888,000 respectively.

The Company's subsidiaries participate as underwriting members at Lloyd's on the 2014, 2015 and 2016 years of account and they have continued this participation since the year end on the 2017 year of account. This underwriting is supported by Funds at Lloyd's totalling £6,006,000 (2015: £5,341,000), letters of credit provided through the Group's quota share reinsurance agreements totalling £13,642,000 (2015: £9,378,000) and solvency credits issued by Lloyd's totalling £837,000 (2015: £3,645,000).

The Directors have a reasonable expectation that the Group and the Company have adequate resources to meet their underwriting and other operational obligations for the foreseeable future. Accordingly, they continue to adopt the going concern basis of accounting in preparing the annual Financial Statements.

International Financial Reporting Standards

Adoption of new and revised standards

During the current year the Group and the Company adopted all the new and revised IFRS, amendments and interpretations that are relevant to its operations and are effective for accounting periods beginning on 1 January 2016. These are set out below and did not have a material impact on the accounting policies of the Group and the Company:

•     Amendments to IAS 27: Equity Method in Separate Financial Statements, issued on 12 August 2014 (effective 1 January 2016).

•     Amendments to IFRS 10, IFRS 12 and IAS 28: Investment Entities - Applying the Consolidation Exception, issued on 18 December 2014 (effective 1 January 2016).

•     Amendments to IAS 1: Disclosure Initiative, issued on 18 December 2014 (effective 1 January 2016).

•     Annual improvements to IFRSs 2012-2014 Cycle, issued on 25 September 2014 (effective 1 January 2016).

•     Amendments to IAS 16 and IAS 38: Clarification of Acceptable Methods of Depreciation and Amortisation, issued on 12 May 2014 (effective 1 January 2016).

•     Amendments to IFRS 11: Accounting for Acquisitions of Interests in Joint Operations, issued on 6 May 2014 (effective 1 January 2016).

•     Amendments to IAS 16 and IAS 41: Bearer Plants, issued on 30 June 2014 (effective 1 January 2016).

•     Amendments to IAS 19: Defined Benefit Plans Employee Contributions, issued on 21 November 2013 (effective 1 February 2015).

•     Annual Improvements to IFRSs 2010-2012 Cycle, issued on 12 December 2013 (effective 1 February 2015).

New standards, amendments and interpretations not yet adopted

At the date of authorisation of these Financial Statements, the following standards, amendments and interpretations were in issue but not yet effective:

(i) Adopted by the EU

•     IFRS 9 "Financial Instruments", issued on 24 July 2014 (effective 1 January 2018).

•     IFRS 15 "Revenue from Contracts with Customers", issued on 27 May 2014, including amendments to IFRS 15, issued on 11 September 2015 (effective 1 January 2018).

(ii) Not adopted by the EU

Standards:

•    IFRS 14 "Regulatory Deferral Accounts", issued on 30 January 2014 (effective 1 January 2016).

•    IFRS 16 "Leases", issued on 13 January 2016 (effective 1 January 2019).

Amendments:

•     Amendments to IFRS 10 and IAS 28: Sale or Contribution of Assets between an Investor and its Associate or Joint Venture, issued on 11 September 2014 (effective date postponed indefinitely).

•     Amendments to IAS 12: Recognition of Deferred Tax Assets for Unrealised Losses, issued on 19 January 2016 (effective 1 January 2017).

•     Amendments to IAS 7: Disclosure Initiative, issued on 29 January 2016 (effective 1 January 2017).

•     Clarifications to IFRS 15 "Revenue from Contracts with Customers", issued on 12 April 2014 (effective 1 January 2018).

•     Amendments to IFRS 12: Classification and Measurement of Share-based Payment Transactions, issued on 20 June 2016 (effective 1 January 2018).

•     Amendments to IFRS 4: Applying IFRS 9 "Financial Instruments" with IFRS 4 "Insurance Contracts", issued on 12 September 2016 (effective 1 January 2018).

•     Annual Improvements to IFRS Standards 2014-2016 Cycle, issued on 8 December 2016 (effective 1 January 2018).

•     IFRIC Interpretation 22 Foreign Currency Transactions and Advance Consideration, issued on 8 December 2016 (effective 1 January 2018).

•     Amendments to IAS 40: Transfers of Investment Property, issued on 8 December 2016 (effective 1 January 2018).

Principles of consolidation, business combinations and goodwill

(a) Consolidation and investments in subsidiaries

The Group Financial Statements incorporate the Financial Statements of Helios Underwriting plc, the Parent Company, and its directly and indirectly held subsidiaries being Hampden Corporate Member Limited, Nameco (No. 365) Limited, Nameco (No. 605) Limited, Nameco (No. 321) Limited, Nameco (No. 917) Limited, Nameco (No. 229) Limited, Nameco (No. 518) Limited, Nameco (No. 804) Limited, Halperin Underwriting Limited, Bernul Limited, Dumasco Limited, Nameco (No. 311) Limited, Nameco (No. 402) Limited, Updown Underwriting Limited, Nameco (No. 507) Limited, Nameco (No. 76) Limited, Kempton Underwriting Limited, Devon Underwriting Limited, Nameco (No. 346) Limited,  Helios UTG Partner Limited, Nomina No 035 LLP, Nomina No 342 LLP, Nomina No 380 LLP, Nomina No 372 LLP and Salviscount LLP (Note 4).

The Financial Statements for all of the above subsidiaries are prepared for the year ended 31 December 2016 under UK GAAP. Consolidation adjustments are made to convert the subsidiary Financial Statements prepared under UK GAAP to IFRS so as to align accounting policies and treatments.

No income statement is presented for Helios Underwriting plc as permitted by Section 408 of the Companies Act 2006. The profit after tax for the year of the Parent Company was £2,539,000 (2015: £7,819,000).

Subsidiaries are entities over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding or partnership participation of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity.

Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases.

Intra-group transactions, balances and unrealised gains on intra-group transactions are eliminated.

In the Parent Company's Financial Statements, investments in subsidiaries are stated at cost and are reviewed for impairment annually or when events or changes in circumstances indicate the carrying value to be impaired.

(b) Business combinations and goodwill

The Group uses the acquisition method of accounting to account for the acquisition of subsidiaries. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange. Acquisition costs are expensed as incurred.

The excess of the cost of acquisition over the fair value of the Group's share of the identifiable net assets acquired is capitalised and recorded as goodwill. Following initial recognition, goodwill is measured at cost less accumulated impairment losses. Goodwill is tested for impairment annually or if events or changes in circumstances indicate that the carrying value may be impaired and recognised directly in the consolidated income statement. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the consolidated income statement as a bargain purchase.

Segmental reporting

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as Nigel Hanbury.

Foreign currency translation

Items included in the Financial Statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates (the "functional currency"). The Financial Statements are presented in thousands of Pounds Sterling, which is the Group's functional and presentational currency.

Foreign currency transactions and non-monetary assets and liabilities, including deferred acquisition costs and unearned premiums, are translated into the functional currency using annual average rates of exchange prevailing at the time of the transaction as a proxy for the transactional rates. The translation difference arising on non-monetary asset items is recognised in the consolidated income statement.

Certain supported syndicates have non-Sterling functional currencies, any exchange movement that they would have reflected in other comprehensive income as a result of this has been included within profit before tax to be consistent with the Group's policy of using Sterling as the functional currency.

Monetary items are translated at period-end rates; any exchange differences arising from the change in rates of exchange are recognised in the consolidated income statement of the year.

Underwriting

Premiums

Gross premium written comprises the total premiums receivable in respect of business incepted during the year, together with any differences between booked premiums for prior years and those previously accrued, and includes estimates of premiums due but not yet receivable or notified to the syndicates on which the Group participates, less an allowance for cancellations. All premiums are shown gross of commission payable to intermediaries and exclude taxes and duties levied on them.

Unearned premiums

Gross premium written is earned according to the risk profile of the policy. Unearned premiums represent the proportion of gross premium written in the year that relates to unexpired terms of policies in force at the end of the reporting period calculated on a time apportionment basis having regard, where appropriate, to the incidence of risk. The specific basis adopted by each syndicate is determined by the relevant managing agent.

Deferred acquisition costs

Acquisition costs, which represent commission and other related expenses, are deferred over the period in which the related premiums are earned.

Reinsurance premiums

Reinsurance premium costs are allocated by the managing agent of each syndicate to reflect the protection arranged in respect of the business written and earned.

Reinsurance premium costs in respect of reinsurance purchased directly by the Group are charged or credited based on the annual accounting result for each year of account protected by the reinsurance.

Claims incurred and reinsurers' share

Claims incurred comprise claims and settlement expenses (both internal and external) occurring in the year and changes in the provisions for outstanding claims, including provisions for claims incurred but not reported ("IBNR") and settlement expenses, together with any other adjustments to claims from previous years. Where applicable, deductions are made for salvage and other recoveries.

The provision for claims outstanding comprises amounts set aside for claims notified and IBNR. The amount included in respect of IBNR is based on statistical techniques of estimation applied by each syndicate's in-house reserving team and reviewed, in certain cases, by external consulting actuaries. These techniques generally involve projecting from past experience the development of claims over time to form a view of the likely ultimate claims to be experienced for more recent underwriting, having regard to variations in the business accepted and the underlying terms and conditions. The provision for claims also includes amounts in respect of internal and external claims' handling costs. For the most recent years, where a high degree of volatility arises from projections, estimates may be based in part on output from the rating and other models of the business accepted, and assessments of underwriting conditions.

The reinsurers' share of provisions for claims is based on calculated amounts of outstanding claims and projections for IBNR, net of estimated irrecoverable amounts, having regard to each syndicate's reinsurance programme in place for the class of business, the claims experience for the year and the current security rating of the reinsurance companies involved. Each syndicate uses a number of statistical techniques to assist in making these estimates.

Accordingly, the two most critical assumptions made by each syndicate's managing agent as regards claims provisions are that the past is a reasonable predictor of the likely level of claims development and that the rating and other models used, including pricing models for recent business, are reasonable indicators of the likely level of ultimate claims to be incurred.

The level of uncertainty with regard to the estimations within these provisions generally decreases with time since the underlying contracts were exposed to new risks. In addition, the nature of short-tail risks, such as property where claims are typically notified and settled within a short period of time, will normally have less uncertainty after a few years than long-tail risks, such as some liability business where it may be several years before claims are fully advised and settled. In addition to these factors if there are disputes regarding coverage under policies or changes in the relevant law regarding a claim this may increase the uncertainty in the estimation of the outcomes.

The assessment of these provisions is usually the most subjective aspect of an insurer's accounts and may result in greater uncertainty within an insurer's accounts than within those of many other businesses. The provisions for gross claims and related reinsurance recoveries have been assessed on the basis of the information currently available to the directors of each syndicate's managing agent. However, ultimate liability will vary as a result of subsequent information and events and this may result in significant adjustments to the amounts provided. Adjustments to the amounts of claims provisions established in prior years are reflected in the Financial Statements for the period in which the adjustments are made. The provisions are not discounted for the investment earnings that may be expected to arise in the future on the funds retained to meet the future liabilities. The methods used, and the estimates made, are reviewed regularly.

Quota share reinsurance

Under the Group's quota share reinsurance agreements, 70% of the 2014, 2015 and 2016 underwriting year of insurance exposure is ceded to the reinsurers. Amounts payable to the reinsurers are included within "reinsurance premium ceded" in the consolidated income statement of the year and amounts receivable from the reinsurers are included within "reinsurers share of gross claims paid" in the consolidated income statement of the year.

Unexpired risks provision

Provision for unexpired risks is made where the costs of outstanding claims, related expenses and deferred acquisition costs are expected to exceed the unearned premium provision carried forward at the end of the reporting period. The provision for unexpired risks is calculated separately by reference to classes of business that are managed together, after taking into account relevant investment return. The provision is made on a syndicate-by-syndicate basis by the relevant managing agent.

Closed years of account

At the end of the third year, the underwriting account is normally closed by reinsurance into the following year of account. The amount of the reinsurance to close premium payable is determined by the managing agent, generally by estimating the cost of claims notified but not settled at 31 December, together with the estimated cost of claims incurred but not reported ("IBNR") at that date and an estimate of future claims handling costs. Any subsequent variation in the ultimate liabilities of the closed year of account is borne by the underwriting year into which it is reinsured.

The payment of a reinsurance to close premium does not eliminate the liability of the closed year for outstanding claims. If the reinsuring syndicate were unable to meet any obligations, and the other elements of Lloyd's chain of security were to fail, then the closed underwriting account would have to settle any outstanding claims.

The Directors consider that the likelihood of such a failure of the reinsurance to close is extremely remote and consequently the reinsurance to close has been deemed to settle the liabilities outstanding at the closure of an underwriting account. The Group will include its share of the reinsurance to close premiums payable as technical provisions at the end of the current period and no further provision is made for any potential variation in the ultimate liability of that year of account.

Run-off years of account

Where an underwriting year of account is not closed at the end of the third year (a "run-off" year of account) a provision is made for the estimated cost of all known and unknown outstanding liabilities of that year. The provision is determined initially by the managing agent on a similar basis to the reinsurance to close. However, any subsequent variation in the ultimate liabilities for that year remains with the corporate member participating therein. As a result, any run-off year will continue to report movements in its results after the third year until such time as it secures a reinsurance to close.

Net operating expenses (including acquisition costs)

Net operating expenses include acquisition costs, profit and loss on exchange and other amounts incurred by the syndicates on which the Group participates.

Acquisition costs, comprising commission and other costs related to the acquisition of new insurance contracts, are deferred to the extent that they are attributable to premiums unearned at the end of the reporting period.

Investment income

Interest receivable from cash and short-term deposits and interest payable are accrued to the end of the period.

Dividend income from financial assets at fair value through profit or loss is recognised in the income statement when the Group's right to receive payments is established.

Syndicate investments and cash are held on a pooled basis, the return from which is allocated by the relevant managing agent to years of account proportionate to the funds contributed by the year of account.

Other operating expenses

All expenses are accounted for on an accruals basis.

Intangible assets: syndicate capacity

Syndicate capacity is an intangible asset which represents costs incurred in the Corporation of Lloyd's auctions in order to acquire rights to participate on syndicates' years of account.

At the individual subsidiary company level, the syndicate capacity is stated at cost, less any provision for impairment at initial recognition, and amortised on a straight line basis over the useful economic life, which is estimated to be five years (up to 2014: estimated to be seven years). No amortisation is charged until the following year when underwriting commences in respect of the purchased syndicate participation.

At the consolidation level, the Group's accounting policy for the year 2014 was consistent with the accounting policy of the subsidiaries as described above. As of 1 January 2015, the Group changed its accounting policy for accounting for the intangible asset, syndicate capacity, as set out below:

The syndicate capacity represents the cost of purchasing the Group's participation in the combined syndicates. The capacity is capitalised at cost in the statement of financial position. It has an indefinite useful life and is carried at cost less accumulated impairment. It is annually tested for impairment for each syndicate by reference to the weighted average value at Lloyd's auctions and expected future profit streams to be earned by those syndicates in which the Group participates and provision is made for any impairment in the consolidated income statement.

This change in accounting policy was applied retrospectively as if the new policy had always been in place. The effects of this change are disclosed in Note 22.

Financial assets

(a) Classification

The Group classifies its financial assets in the following categories: at fair value through profit or loss, and loans and receivables. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition. The Group does not make use of the held-to-maturity and available-for-sale classifications.

(i) Financial assets at fair value through profit or loss

All financial assets at fair value through profit or loss are categorised as designated at fair value through profit or loss upon initial recognition because they are managed and their performance is evaluated on a fair value basis in accordance with the Company's documented investment strategy. Information about these financial assets is provided internally on a fair value basis to the Group's key management.

The Group's investment strategy is to invest and evaluate their performance with reference to their fair values. Assets in this category are classified as current assets if expected to be settled within 12 months; otherwise, they are classified as non-current.

(ii) Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are classified as current assets, except for maturities greater than 12 months after the reporting period. The latter ones are classified as non-current assets.

The Group's loans and receivables comprise "other receivables, including insurance and reinsurance receivables" and "cash and cash equivalents".

The Parent Company's loans and receivables comprise "other receivables" and "cash and cash equivalents".

(b) Recognition, derecognition and measurement

Regular purchases and sales of financial assets are recognised on the trade date, being the date on which the Group commits to the purchase or sale of the asset. Financial assets are derecognised when the right to receive cash flows from the financial assets has expired or are transferred and the Group has transferred substantially all its risks and rewards of ownership.

Financial assets at fair value through profit or loss are initially recognised at fair value and transaction costs incurred expensed in the income statement.

Loans and receivables are initially recognised at fair value plus transaction costs and are subsequently carried at amortised cost less any impairment losses.

Fair value estimation

The fair value of financial assets at fair value through profit or loss which are traded in active markets is based on quoted market prices at the end of the reporting period. A market is regarded as active if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency and those prices represent actual and regular occurring market transactions on an arm's length basis. The quoted market price used for financial assets at fair value through profit or loss held by the Group is the current bid price.

The fair value of financial assets at fair value through profit or loss that are not traded in an active market is determined by using valuation techniques. These valuation techniques maximise the use of observable market data where it is available and rely as little as possible on entity-specific estimates.

Unrealised gains and losses arising from changes in the fair value of the financial assets at fair value through profit or loss, are presented in the income statement within "net investment income".

The fair values of short-term deposits are assumed to approximate to their book values. The fair values of the Group's debt securities have been based on quoted market prices for these instruments.

(c) Impairment 

The Group assesses at the end of each reporting period whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a 'loss event') and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated.

Asset carried at amortised cost

For loans and receivables, the amount of the loss is measured as the difference between the asset's carrying amount and the present value of the estimated future cash flows (excluding future credit losses that has not been incurred) discounted at the financial asset's original effective interest rate. The carrying amount of the asset is reduced and the amount of the loss is recognised in profit or loss. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. As a practical expedient, the Group may measure impairment on the basis of an instrument's fair value using an observable market price.

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor's credit rating), the reversal of the previously recognised impairment loss is recognised in profit or loss.

Cash and cash equivalents

For the purposes of the statements of cash flows, cash and cash equivalents comprise cash and short-term deposits at bank.

Current and deferred tax

The tax expense for the period comprises current and deferred tax. Tax is recognised in the income statement, except to the extent that it relates to items recognised in other comprehensive income or directly in equity, in which case tax is also recognised in other comprehensive income or directly in equity, respectively.

Current tax

The current income tax charge is calculated on the basis of the tax laws enacted at the balance sheet date in the countries where the Company and its subsidiaries operate and generate taxable income. Management establishes provisions when appropriate, on the basis of amounts expected to be paid to the tax authorities.

Deferred tax

Deferred tax is provided in full, using the balance sheet liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the Financial Statements.

However, if the deferred tax arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss, it is not accounted for.

Deferred tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the end of the reporting period and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.

Deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which the temporary differences can be utilised.

Other payables

These present liabilities for services provided to the Group prior to end of the financial year which are unpaid. These are classified as current liabilities, unless payment is not due within 12 months after the reporting date. They are recognised initially at their fair value and subsequently measured at amortised cost using the effective interest method.

Share capital and share premium

Ordinary shares are classified as equity.

The difference between the fair value of the consideration received and the nominal value of the share capital issued is taken to the share premium account. Incremental costs directly attributable to the issue of shares or options are shown in equity as a deduction, net of tax, from proceeds.

Dividend distribution policy

Dividend distribution to the Company's shareholders is recognised in the Group's and the Parent Company's Financial Statements in the period in which the dividends are approved by the Company's shareholders.

3. Segmental information

Nigel Hanbury is the Group's chief operating decision-maker. He has determined its operating segments based on the way the Group is managed, for the purpose of allocating resources and assessing performance.

The Group has three segments that represent the primary way in which the Group is managed, as follows:

•    syndicate participation;

•    investment management; and

•    other corporate activities.

Year ended 31 December 2016	Syndicate participation £'000	Investment management £'000	Other corporate activities £'000	Total £'000
Net earned premium	24,302	-	(1,394)	22,908
Net investment income	663	222	-	885
Other income	643	-	1,491	2,134
Net insurance claims and loss adjustment expenses	(12,805)	-	-	(12,805)
Expenses incurred in insurance activities	(10,422)	-	(397)	(10,819)
Other operating expenses	884	-	(1,853)	(969)
Goodwill on bargain purchase	-	-	-	-
Impairment of goodwill	-	-	-	-
Impairment of syndicate capacity (see Note 13)	-	-	(555)	(555)
Profit before tax	3,265	222	(2,708)	779

Restated year ended 31 December 2015*	Syndicate participation £'000	Investment management £'000	Other corporate activities £'000	Total £'000
Net earned premium	17,257	-	(1,397)	15,860
Net investment income	250	5	-	255
Other income	144	-	392	536
Net insurance claims and loss adjustment expenses	(7,515)	-	-	(7,515)
Expenses incurred in insurance activities	(7,178)	-	(393)	(7,571)
Other operating expenses	35	-	(847)	(812)
Goodwill on bargain purchase	-	-	244	244
Impairment of goodwill	-	-	(136)	(136)
Impairment of syndicate capacity (see Note 13)	-	-	(63)	(63)
Profit before tax	2,993	5	(2,200)	798

*     Refer to Note 27 for details of the restatement of the profit for the year 2015 as a result of a reclassification.

The Group does not have any geographical segments as it considers all of its activities to arise from trading within the UK.

No major customers exceed 10% of revenue.

Net earned premium within 2016 other corporate activities totalling £1,394,000 (2015: £1,397,000 - 2013, 2014 and 2015 year of account) presents the 2014, 2015 and 2016 years of account net Group quota share reinsurance premium payable to Hampden Insurance Guernsey PCC Limited - Cell 6. This net quota share reinsurance premium payable is included within "reinsurance premium ceded" in the consolidated income statement of the year.

4. Operating profit before goodwill and impairment

Year ended 31 December 2016	Underwriting year of account*				Pre- acquisition £'000	Corporate  reinsurance £'000	Other  corporate £'000	Total £'000
	2014 and prior £'000	2015 £'000	2016 £'000	Sub-total £'000
Gross premium written	250	3,521	30,131	33,902	(2,595)	-	-	31,307
Reinsurance ceded	26	(487)	(6,244)	(6,705)	575	(1,394)	(248)	(7,772)
Net premium written	276	3,034	23,887	27,197	(2,020)	(1,394)	(248)	23,535
Net earned premium	1,679	11,986	12,676	26,341	(1,791)	(1,394)	(248)	22,908
Other income	1,566	543	82	2,191	(76)	557	347	3,019
Net insurance claims incurred and loss adjustment expenses	990	(6,196)	(8,680)	(13,886)	1,081	-	-	(12,805)
Operating expenses	(1,300)	(4,169)	(5,575)	(11,044)	723	-	(1,467)	(11,788)
Operating profit before goodwill and impairment	2,935	2,164	(1,497)	3,602	(63)	(837)	(1,368)	1,334
Quota share adjustment	(1,274)	(1,133)	1,013	(1,394)	-	1,394	-	-
Operating profit before goodwill and impairment after quota share adjustment	1,661	1,031	(484)	2,208	(63)	557	(1,368)	1,334

*     The underwriting year of account results represent the Group's share of the syndicates' results by underwriting year of account before corporate member level reinsurance and members' agents charges.

Restated year ended 31 December 2015*	Underwriting year of account**				Pre- acquisition £'000	Corporate  reinsurance £'000	Other  corporate £'000	Total £'000
	2013 and prior £'000	2014 £'000	2015 £'000	Sub-total £'000
Gross premium written	(25)	2,362	21,331	23,668	(2,157)	-	-	21,511
Reinsurance ceded	(123)	(353)	(3,723)	(4,199)	421	(1,397)	(407)	(5,582)
Net premium written	(148)	2,009	17,608	19,469	(1,736)	(1,397)	(407)	15,929
Net earned premium	712	9,092	9,475	19,279	(1,615)	(1,397)	(407)	15,860
Other income	246	147	15	408	(90)	382	91	791
Net insurance claims incurred and loss adjustment expenses	1,414	(4,190)	(5,468)	(8,244)	726	3	-	(7,515)
Operating expenses	(706)	(3,160)	(3,962)	(7,828)	779	-	(1,334)	(8,383)
Operating profit before goodwill and impairment	1,666	1,889	60	3,615	(200)	(1,012)	(1,650)	753
Quota share adjustment	(392)	(950)	(55)	(1,397)	-	1,397	-	-
Operating profit before goodwill and impairment after quota share adjustment	1,274	939	5	2,218	(200)	385	(1,650)	753

*     The underwriting year of account results represent the Group's share of the syndicates' results by underwriting year of account before corporate member level reinsurance and members' agents charges.

**    Refer to Note 27 for details of the restatement of the profit for the year 2015 as a result of a reclassification.

Pre-acquisition relates to the element of results from the new acquisitions before they were acquired by the Group.

5. Net investment income

Year ended 31 December 2016 £'000		Year ended 31 December 2015 £'000
Investment income	594	926
Realised losses on financial assets at fair value through profit or loss	(19)	(327)
Unrealised gain/(losses) on financial assets at fair value through profit or loss	256	(360)
Investment management expenses	(59)	(44)
Bank interest	113	60
Net investment income	885	255

6. Operating expenses (excluding goodwill and amortisation)

Year ended 31 December 2016 £'000		Year ended 31 December 2015 £'000
Expenses incurred in insurance activities:
Acquisition costs	7,052	5,119
Change in deferred acquisition costs	(49)	(128)
Administrative expenses	3,528	2,476
Other	288	104
10,819		7,571
Other operating expenses:
Exchange differences	(16)	35
Directors' remuneration	312	195
Acquisition costs in connection with the new subsidiaries acquired in the year	100	91
Professional fees	443	405
Administration and other expenses	10	17
Auditors' remuneration:
- audit of the Parent Company and Group Financial Statements	31	30
- audit of subsidiary company Financial Statements	35	19
- under provision of prior year audit fee	34	-
- audit related assurance services	20	20
969		812
Operating expenses	11,788	8,383

The Group has no employees other than the Directors of the Company.

Details of the Directors' remuneration are disclosed below:

Directors' remuneration	Year ended 31 December 2016 £	Year ended 31 December 2015 £
Sir Michael Oliver	20,000	20,000
Jeremy Evans	15,000	15,000
Michael Cunningham	15,000	15,000
Andrew Christie	15,000	15,000
Arthur Manners	118,000	-
Nigel Hanbury	129,000	130,050
Total	312,000	195,050

The Chief Executive, Nigel Hanbury and the Finance Director Arthur Manners have a bonus incentive scheme in addition to their basic remuneration. The above figures for Nigel Hanbury and Arthur Manners include an accrual for the year of £50,000 each (2015: £63,000 for Nigel Hanbury only) in respect of this scheme. No other Directors derive other benefits, pension contributions or incentives from the Group. At 31 December 2016 no share options were held by the Directors (2015: nil).

7. Earnings per share

Basic earnings per share is calculated by dividing the net profit attributable to ordinary equity holders of the Company after tax by the weighted average number of ordinary shares outstanding during the period.

Diluted earnings per share is calculated by dividing the net profit attributable to ordinary equity holders of the Company by the weighted average number of ordinary shares outstanding during the year, plus the weighted average number of ordinary shares that would be issued on the conversion of all the dilutive potential ordinary shares into ordinary shares.

The Group has no dilutive potential ordinary shares.

Earnings per share has been calculated in accordance with IAS 33 "Earnings per share".

The earnings per share and weighted average number of shares used in the calculation are set out below:

Year ended 31 December 2016		Restated year ended 31 December 2015
Profit for the year after tax attributable to ordinary equity holders of the parent	£713,000	£910,000
Weighted average number of ordinary shares in issue	11,463,456	9,411,794
Basic and diluted earnings per share	6.22p	9.67p

The basic and diluted earnings per share as originally reported for the year ended 31 December 2015 was 8.38p, based on profit for the year after tax attributable to ordinary shareholders as originally reported of £789,000. The weighted average number of shares in issue for the year ended 31 December 2015 remained unchanged. Refer to Note 27 for details regarding the restatement.

8. Intangible assets

Goodwill £'000		Restated* syndicate capacity £'000	Total £'000
Cost
At 1 January 2015	-	6,592	6,592
Additions	136	2	138
Disposals	-	(61)	(61)
Impairment	(136)	-	(136)
Acquired with subsidiary undertakings	-	2,265	2,265
At 31 December 2015	-	8,798	8,798
At 1 January 2016	-	8,798	8,798
Additions	493	6	499
Disposals	-	(87)	(87)
Impairment	-	-	-
Acquired with subsidiary undertakings	-	2,364	2,364
At 31 December 2016	493	11,081	11,574
Impairment
At 1 January 2015	-	224	224
Impairment for the year	-	63	63
Disposals	-	-	-
At 31 December 2015	-	287	287
At 1 January 2016	-	287	287
Impairment for the year	-	555	555
Disposals	-	-	-
At 31 December 2016	-	842	842
Net book value
As at 31 December 2014	-	6,368	6,368
As at 31 December 2015	-	8,511	8,511
As at 31 December 2016	493	10,239	10,732

*     Refer to Note 22 for the details regarding the restatement of the syndicate capacity as a result of the change of the accounting policy for intangibles - syndicate capacity.

Note 21 sets out the details of the entities acquired by the Group during the year, the fair value adjustments and the goodwill arising.

9. Financial statements

The financial information set out in this announcement does not constitute statutory accounts but has been extracted from the Group's Financial Statements which have not yet been delivered to the Registrar.  The Group's annual report will be posted to shareholders shortly and further copies will be available from the Company's registered office: 40 Gracechurch Street, London EC3V 0BT and on the Company's website www.huwplc.com.

 

END

 

 

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