Helios Underw Regulatory News (HUW)

Helios Underwriting plc

("Helios" or the "Company")

Final results for the year ended 31 December 2015

Helios is pleased to announce its final results for the year ended 31 December 2015

Highlights

· Premium written during the period totalled £21.5m (2014: £17.1m)

· Increased use of quota share reinsurance to reduce exposure

· Reduced exposure has enabled increased capital to be available for acquisitions

· Six acquisitions of corporate members during the period with a further two since the year end

· Profits reduce as levels of reinsurance have increased

· Operating profit before tax, goodwill and impairment of £609,000 (2014: £1,351,000)

· Profit for the year £789,000 (2014: £2,056,000)

· Earnings per share of 8.38p (2014: 24.11p)

· 2013 underwriting year of account profit return on capacity of 14.20% (2012 underwriting year: 13.01%)

· Recommended total dividend for this year of 5.0p per share (2014: 5.1p per share)

· Adjusted net asset value per share (Humphrey & Co valuation) - £1.97 per share (2014: £1.72 per share)

· 30p per share growth (increase in adjusted net assets plus dividends) in shareholder value represents 17% increase in value to shareholders

Commenting, Sir Michael Oliver, Chairman, said:

"The Board is pleased to report a set of encouraging results for 2015 which reflects the reduced risk profile of the Group and a focus on increasing the capital available to the Group to fund a number of advantageous acquisitions of corporate members made during the year. The Board is also pleased to recommend a final dividend of 1.5p per share, together with a special dividend of 3.5p per share, making a total of 5p per share."

Commenting, Nigel Hanbury, Chief Executive, said:

"I am delighted to report on a year where we have successfully managed to control our risk exposure, stay ruthlessly focused on quality syndicates and significantly expand our portfolio of corporate members. Our strategy has enabled us to grow our net asset value per share strongly."

For further information please contact:

Helios

Nigel Hanbury - Chief Executive 020 7863 6655 / nigel.hanbury@huwplc.com

Arthur Manners - Chief Financial Officer 07754 965917

Stockdale Securities 020 7601 6100

Robert Finlay

Rose Ramsden

Chairman's statement

Your Board is pleased to report a set of encouraging results for 2015 which reflects the reduced risk profile of the Group and a focus on increasing the capital available to the Group to fund a number of advantageous acquisitions of corporate members. Accordingly the profits before tax, goodwill and impairment for the year were £609,000 (2014: £1,351,000), whilst the adjusted net asset value of the Group (Humphrey's Valuation) has increased to £1.97 per share (2014: £1.72) - an increase of 15%.

Helios has been reducing its exposure to the underwriting risk on the portfolio for the last two years and this reduction is reflected in the reduction in profitability this year. Underwriting profits of £1.4m (2014: £0.7m) have been ceded to reinsurers. In addition the premiums paid for Stop Loss cover increased by £300,000.

The net aggregate contribution made from acquiring companies at above and below fair value reduced from £785,000 to £108,000 reflecting the more competitive environment for the buying of corporate members. The Board is committed to being selective on the acquisitions made in the future.

Strategy

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

· The profit for the year reflects the additional reinsurance cover bought to reduce the group exposure to large losses.

· We have changed the accounting policy relating to the amortisation of capacity value to hold the capacity at fair value in the balance sheet in the future.

· The management team has been strengthened by the appointment of an experienced Finance Director, Arthur Manners.

Capacity acquired

During the year a further six corporate members were acquired that increased the capacity for 2013 to 2015 years of account, and a further two corporate members have been bought since 31 December 2015, adding a further £4.6m of capacity to the open years. These companies have increased the capacity underwritten on 2013 to 2016 underwriting years as shown below.

These acquisitions in 2015 and 2016 to date were purchased for a total consideration of £11m, of which £3m was satisfied by the issue of new shares to certain vendors. We continue to grow and manage the quality of the portfolio of participations on the leading Lloyd's syndicates.

Underwriting result

The calendar year profits for 2015 have been generated from profits recognised in the portfolio from the 2013 and 2014 underwriting years. During 2015, the 2013 underwriting year mid-point estimates increased from 8.1% return on capacity to a final result of 14.1%. The mid-point estimate for the 2014 underwriting year is currently 8.7% and this year has made a healthy contribution to the 2015 result. As expected, the 2015 underwriting result has not made a significant contribution during the first 12 months but given the benign claims environment for the 2015 underwriting year to date, it should provide additional recognised profits for the next two financial years.

Capacity value

The Board has taken the view that it is appropriate to carry the value of the capacity acquired on the balance sheet at fair value at the date of acquisition. The building of a portfolio of participations on leading Lloyd's syndicates remains the strategic objective. Therefore the Board decided that it was not appropriate to amortise the cost of the capacity acquired and instead to change the accounting policy to include an impairment test will be carried out at each reporting date to assess whether the current value exceeds the value carried in the balance sheet. The 2014 results have been restated for this accounting policy.

Reinsurance

The proportion of the portfolio supported by the reinsurance market has increased and now the participants in the panel include private capital. By broadening the access to the Helios portfolio to private capital, we have expanded the potential pool of capital available to support the growth of the portfolio in the future. We expect to continue to use this source of financing in the future.

The reinsurers assist in the financing of their share of the underwriting capital required for the corporate members by providing letters of credit as Funds at Lloyd's amounting to £11m at 31 December 2015.

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 3.5p per share (2014: 3.6p), totals 5p per share (2014: 5.1p). The special dividend equates to approximately 20% of the 1.8m cash released from the 2013 year of account. These dividends will be payable to shareholders on the register on 28 June 2016. As last year, the Board will put in place a Scrip Dividend Scheme to give shareholders the opportunity to elect receive dividends in the form of new ordinary shares instead of cash. If approved the dividend will be paid in a single payment or share issue on 6 July 2016.

Sir Michael Oliver

Non-executive Chairman

27 May 2016

Chief Executive's review

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. This acquisition strategy has increased the portfolio from £13m at the start of the 2013 underwriting year to £33m currently. Since 1 January 2015 over £10m of capacity has been acquired. We remain selective on the purchases and have encountered increasing competition from other potential purchasers. There remains a risk to the implementation of our strategy if suitable vehicles are not available at attractive prices.

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 seven largest syndicate participations account for over 70% of the portfolio. These syndicates are managed by the leading managing agents at Lloyd's and 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 four years is 11% and is on average 3% higher than the average of the Lloyd's market.

The combined ratio of the portfolio (before Helios corporate costs) has been 4% higher on average over the last four calendar years. These incremental returns demonstrate the diversity and the breadth of underwriting expertise within the businesses comprising the portfolio of syndicate capacity.

Helios portfolio

Top seven syndicates for 2016

Source: 2016 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. For the 2016 underwriting year the panel of reinsurers was expanded to include private capital, a potential significant source of underwriting capital in the future. 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.

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 has remained consistent for the last three years. The market conditions continue to soften as the incidence of insured natural disasters and large loss events has been below normal expectations. 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 it would 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 realistic disaster scenarios ("RDSs") prescribed by Lloyd's. The RDS events comprise 16 compulsory events to assess the potential impact across the portfolio from the type of event proscribed. The nature and the size of the prescribed events have remained similar and the individual syndicate net exposures will depend on the business underwritten during the year and the reinsurance protections purchased at syndicate level.

The estimated aggregate net largest exposure for the Helios portfolio, before quota share and stop loss reinsurance, remains two separate hurricanes to affect the US Northeast Coast. The aggregate net loss has reduced to 23% (2015: 28%) of stamp capacity as the syndicates have reduced both their gross and net exposures. All the largest natural catastrophes would be substantial insured losses in excess of US$100bn, events that would generate a great deal of publicity.

Helios continues to buy stop loss reinsurance that will reduce the impact of a significant loss to the portfolio.

Capacity value

The value of the portfolio of the syndicate capacity remains an important factor in delivering overall returns to shareholders. The Enterprise value, 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 impairment charge for this year of £63,000 indicates a small reduction in the fair value of the syndicate capacity as a result of the fluctuations in the auction values of the syndicates in the portfolio.

Capital position

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

Helios has generated free cash of £1.8m in 2016 from the distribution of its share of the final underwriting profits for the 2013 underwriting year and early releases from the 2014 and 2015 years. These profits have assisted in funding the recent acquisitions and will provide working capital for the next 12 months. A bank facility is in place to fund cash shortfalls.

Corporate costs

Given the reduction in risk assumed and the associated reduction in underwriting profits, it remains essential to manage the central costs of Helios effectively. The fees and profit commissions receivable from the reinsurance panel offset a proportion of the costs incurred.

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.

Nigel Hanbury

Chief Executive

27 May 2016

Lloyd's Advisers' report - Hampden Agencies

With the closure of the 2013 Account at 31 December 2015 Lloyd's has now reported twelve consecutive years of underwriting profits for private capital. The 2013 three year account result for the Helios portfolio was 14.2% of capacity, which compares with the average for the portfolio of syndicates supported by private capital of 12.5% of capacity.

Underwriting profitability is set to continue for both the 2014 and 2015 Accounts with the mid-point estimate for the Helios portfolio at Q8 on 2014 being 8.9% of capacity, a 0.4% improvement on 2013 at the same stage. The 2013 result and estimates for 2014 and 2015 have benefitted from below average major loss activity. Global insured major losses, according to Swiss Re Sigma, were $37bn in 2015, $44bn in 2014 and $45bn in 2013; these were significantly below the ten year average of $62bn a year. For 2016 Hampden has a target profit, excluding prior years, of 0% to 5% of capacity assuming a long term average for catastrophe losses.

The Insurance Market in 2016

So far in 2016 the trend of rate reductions have continued in most classes of business other than motor. Overall, market conditions are 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.

Property catastrophe reinsurance rates at 1 January 2016 have now declined for four years in succession. Guy Carpenter estimates rates reduced by 5% to 8% compared with reductions of over 11% a year earlier.

Property and casualty insurance rates in the United States began to decline during the first quarter of 2015. This has continued for a fifth successive quarter with the Council of Insurance Agents and Brokers reporting rate reductions of 3.7% in Q1 2016, the largest fall since reductions started in Q1 2015. The impact of rate reductions has reduced net written premium growth for the full year 2015 to only 2.7%, which is lagging nominal GDP growth of 3.5%.

We are now at the 'soft market' stage in the insurance cycle when we expect the outperformance of quality syndicates relative to the Lloyd's average to increase compared with the 'hard market' years. Key success characteristics of quality syndicates include a focus on conservative reserving, often above the best estimate recommended by external actuaries, and a willingness to walk away from under-priced business rather than chase growth in premium income.

The Investment Environment

Our view is that disciplined underwriters can make a profit in today's market. Importantly, underwriting discipline is reinforced by two key factors which were not present in the late 1990s. First, the investment environment. Low and declining bond yields now offer little protection to sub-par underwriting. We think it is no coincidence that the US industry made underwriting profits in eight years out of ten in the 1950s when the US Treasury 10-year yield averaged 3.2% and so far this decade the average yield is 2.5% with underwriting profits being made three years out of six.

Second, the process of setting regulatory capital for insurers has become much more robust with the introduction by the Prudential Regulatory Authority of the Solvency II regime which was fully implemented by Lloyd's for the 2016 year. Syndicates are required to calculate their own capital requirements to Solvency II standards. Capital requirements are therefore a risk sensitive measure with the two most important risks of insurers being underwriting risk and reserving risk. The Lloyd's capital requirements have been on an upward trend as a percentage of net earned premiums as the margin for achieving underwriting profitability has reduced as rates have declined.

Supply of Capital Close to All Time Highs

Good underwriting results continue to attract capital to the insurance 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 2015 alternative capital continued to grow and now accounts for 19% of total dedicated reinsurance capital according to broker, Guy Carpenter. The market share of alternative capital has increased by 138% since 2008 and has exacerbated the level of rate reductions in particular for property catastrophe reinsurance business. Since 2008 Aon Benfield estimates that total reinsurance capital has increased by 55% although it fell back marginally by 2% to $565bn at 31 December 2015.

Balance of Power Shifting to Net Buyers of Reinsurance

With net written premium growth slowing down and underwriting margins being squeezed by a combination of reducing rates and increased expenses, one way to mitigate downside risk is to buy more reinsurance. The balance of power has continued to shift to net buyers of reinsurance from the sellers of reinsurance. One benefit of current market conditions is that syndicates have been able to secure a fuller reinsurance programme at more reasonable cost than in previous years in 2016.

Reserve Strength is Becoming Increasingly Important

Bottom line results in the current rating environment are becoming increasingly dependent on conservative reserving, given the modest forecast for pure year underwriting return. We consider the Helios portfolio of syndicates to be conservatively reserved overall with the last three year account closed result for 2013 including a prior year release of 4.7% of capacity from the 2012 and prior years.

We have analysed the reserve strength of the 2016 Helios portfolio of freehold syndicates (excluding Special Purpose Syndicates which have a limited tenure) at the closure of the 2013 Account into the 2014 Account of those syndicates. The ratio of Incurred but Not Reported reserves to Net Outstanding Claims reserves was 115% at the closure of the 2013 Account of these syndicates into the 2014 Account. There will be two further calendar years of development before the 2016 Account receives its share of 2015 and prior year reserves so this measure is a proxy for future reserve strength. The 115% ratio compares favourably with an equivalent figure for private capital syndicates of 72% in 2007 and only 45% in 2004. However, over this period, we would expect part of the increase in IBNR to be due to the "tail" of claims settlement getting longer; Lloyd's reports that coverholder business which has a longer "tail" has increased from 25% to 32% of Lloyd's income between 2002 and 2015.

Conservative reserving we believe has an additional benefit in that it reinforces pricing discipline in today's more challenging underwriting conditions. This is particularly important in liability business where under-reserving can lead to under-pricing business which in turn becomes under‑reserved. A relatively modest pure year underwriting loss can then be magnified by prior year deteriorations which on liability business can be for three or more years.

Our Approach in This Market - A Focus on Quality

Our approach in this market is to focus syndicate portfolios on quality syndicates. The Helios portfolio for 2016 continues to provide a good spread of business across managing agents and classes of business. The two largest classes of business remain reinsurance at 28.6% and US dollar property insurance at 17.7% shown in the 'doughnut' chart below. Liability and motor exposures provide balance against the more volatile property catastrophe exposures as well as contributing through diversification to lower capital requirements.

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) and 'C' (Market Average).

Helios continues to focus its portfolio on the quality syndicates which have traditionally outperformed in difficult times. The Helios portfolio contains 55% by underwriting capacity in syndicates graded 'AA' and 'A' by Hampden.

Hampden Agencies

27 May 2016

Consolidated statement of comprehensive income

Year ended 31 December 2015

The profit attributable to owners of the Parent 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 2015

The Financial Statements were approved and authorised for issue by the Board of Directors on 27 May 2016, 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 2015

The consolidated profit for the year 2014 and retained earnings as at 1 January 2014 and 31 December 2014 have been restated to reflect the effects of the change in the Group's accounting policy in accounting for intangible assets, syndicate capacity (refer to Note 21).

Other comprehensive income comprises of foreign currency translation differences of £149,000, net of tax relating to these items of £28,000.

Consolidated statement of cash flows

Year ended 31 December 2015

Cash held within the syndicates' accounts is £1,411,000 (2014: £1,059,000) of the total cash and cash equivalents held at the year end of £3,634,000 (2014: £3,605,000). 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 2015

1. General information

The Company is a public limited company listed on AIM and incorporated and domiciled in the UK.

2. Accounting policies

The principal accounting policies adopted in the preparation of the financial information set out in this announcement are set out in the full financial statement for the year ended 31 December 2015 (the "Financial Statements"). These policies have been consistently applied to all the years presented, unless otherwise stated.

Change in accounting policy

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. For details of this change, refer to this accounting policy as disclosed further below and Note 21.

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.

3. Segmental information

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.

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 2015 other corporate activities totalling £1,054,000 (2014: £465,000 - 2013 and 2014 years of account) presents the 2013, 2014 and 2015 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.

All of the Group's Limited Liability Vehicles transferred their capacity to Nameco (No 917) Limited for the 2016 underwriting year of account. Therefore, Nameco (No 917) Limited is the only Limited Liability Vehicle to enter into a reinsurance contract with Hampden Insurance Guernsey PCC Limited - Cell 6 for the 2016 underwriting year of account.

4. Operating profit before goodwill and impairment

* 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.

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

5. Net investment income

6. Operating expenses (excluding goodwill and amortisation)

7. Earnings per share

Basic earnings per share is calculated by dividing the profit attributable to ordinary shareholders 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:

The basic and diluted earnings per share as originally reported for the year ended 31 December 2014 was 12.23p, based on a profit for the year after tax attributable to ordinary shareholders of £1,043,000. The weighted average number of shares in issue for the year ended 31 December 2014 remained unchanged.

8. Intangible assets

Note 20 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.