Helios Underw Regulatory News (HUW)

23 May 2012

Hampden Underwriting plc

("Hampden Underwriting" or the "Company")

Preliminary results for the year ended 31 December 2011

Hampden Underwriting, which provides investors with a limited liability direct investment into the Lloyd's insurance market, announces its preliminary results for the year ended 31 December 2011.

Highlights

Commenting upon these results Chairman, Sir Michael Oliver said:

"Whilst it gives me no pleasure to be reporting a loss in 2011, when compared to the Lloyd's quoted sector as a whole, all companies bar one saw a greater fall in their net tangible assets as a result of the events of 2011 than we did. The Company was well placed to deal with the loss and remains well capitalised to take full advantage of the improved conditions that inevitably follow losses of such severity."

Enquiries:

Chairman's statement

There have been many examples since corporate capital was first introduced into Lloyd's of companies whose ambition in the early years was too high and whose underwriting limit in comparison to its underlying assets was also too high. A substantial loss came along and the company was not even in a position to meet its solvency requirements to maintain its existing underwriting levels let alone take advantage of an improving underwriting climate by increasing its capacity. I am delighted to be able to say that we do not fall into that category.

The principal task in the formative years of an underwriting company has to be the safe custodianship of the company's assets, all the more so in a difficult underwriting climate. This has also been achieved.

Whilst it gives me no pleasure to be reporting a loss in 2011, that has to be looked at in the context of the year being the second worst on record for catastrophe losses. That said your Company was well placed to deal with the loss and remains well capitalised to take full advantage of the improved conditions that inevitably follow losses of such severity and indeed diversity. Our net asset value ("NAV") has fallen as a consequence but is still over £1 per share and if one looks at the value of our capacity using the most recent auction figures as opposed to the amortised value in the balance sheet, it is actually worth a further £1.1m, equivalent to approximately 15p a share. When compared to the Lloyd's quoted sector as a whole, all companies bar one saw a greater fall in their net tangible assets as a result of the events of 2011 than we did.

We have got off to a good start and have done what we said we would do. However, we are far too small and that is one of the reasons why the good start is not reflected in our share price which remains subject to violent swings when shares are either bought or sold. As I said last year we need more shares in the hands of more shareholders. It was always our intention to endeavour to raise fresh capital to enable us to do more of what we are currently doing but only when the time was right. That time is now. We are involved in continuing discussions with our advisers about raising capital which will of course involve giving you, our existing shareholders, the opportunity to participate. We hope to be able to tell you more about these plans in the near future.

We remain committed to implementing the policy of paying steady and sustained dividends. The uncertainty I spoke of last year concerning the full implications of the 2011 losses that prevented us from initiating that policy are still being felt. In these circumstances, we still feel that it would be imprudent to declare a dividend at this stage but it is our intention to pay an interim dividend later in the year.

Sir Michael Oliver

Non-executive Chairman

22 May 2012

Lloyd's Adviser's report

2011 review and outlook for 2012

Total insured losses for the global insurance industry from natural catastrophes in 2011 totalled $110bn, making 2011 the second most expensive year for the industry after 2005, when insured losses, according to Swiss Re Sigma, were $123bn including over $100bn from Hurricanes Katrina, Rita and Wilma. Most of the losses in 2011 came from the earthquake in Japan in March costing an estimated $35bn and the New Zealand earthquake in February which, while technically an aftershock of the September 2010 event, cost $12bn, becoming the country's most expensive disaster ever. Later in the year (between July and November 2011) an area in Thailand roughly equivalent to the size of Switzerland flooded, causing the highest insured loss from global fresh water floods, estimated at $12bn.

Hurricane losses were moderate with Hurricane Irene being the first hurricane to make landfall in the US since Hurricane Ike in 2008, causing an estimated $5.3bn of insured losses. Taken together, US insured losses in 2011 were the fifth highest on record, exceeding $35bn with a series of spring tornado losses estimated at $21.3bn, significantly above the 20 year inflation adjusted average of $5.2bn between 1991 and 2010.

Catastrophe losses contributed to the US property/casualty insurance industry making an underwriting loss of $36bn, representing the second largest annual underwriting loss ever, behind the $52.3bn underwriting loss in 2001. Despite these underwriting losses, investment gains (income and realised capital gains) enabled an overall net profit after tax of $19.2bn.

Industry capital remains strong for both insurers and reinsurers despite the catastrophe losses suffered in 2011. The policyholders' surplus of the US property casualty industry, a proxy for underwriting capacity, boosted by unrealised capital gains declined by only 1.6% to $550.3bn at year end 2011 compared with the record policyholders' surplus of $556.9bn at year end 2010. Aon Benfield Analytics estimated that reinsurers' capital fell by only 3% during 2011 or $15bn to $455bn compared with the record global reinsurance capital available at year end 2010.

The insurance pricing cycle is a classic supply led cycle with demand usually playing a more limited role. Typically demand measured by premium has grown over the long term, being linked to growth in GDP and levels of insurance penetration. However, since 2007 insurance underwriting has been particularly affected by deficient demand during the great recession of 2007-2009 when US net written premiums fell by an aggregate 6.8%, the first three year decline since 1930-1933. The 3.3% rise in net written premium growth in 2011 was driven in the main by rate rises rather than exposure growth with US GDP only increasing by 1.7% in 2011. US net written premium was 2.8% lower at year end 2011 than at the end of 2006. The demand component is expected to continue to recover with A M Best projecting an increase of 3.8% in net written premium for 2012, which will have a modest impact on the underwriting capacity required to write business.

The insurance and reinsurance marketplace is now beginning to show signs of a recovery in premium and rates but this is not yet broad, as we saw in 2001/2002. Our outlook is slowly becoming more positive, although we remain cautious overall due to the competition that remains evident in much of the non-catastrophe exposed classes.

Overall, the supply/demand characteristics still mean that we favour reinsurance underwriting where there is currently greater margin in an average loss year than in insurance underwriting. We continue to be more positive about US catastrophe exposed reinsurance with that market being boosted this year due to a change in a leading model for catastrophe losses. Since the start of Q3 2011 a new model from the catastrophe loss modelling company, Risk Management Solutions (RMS 11.0), has begun to be implemented by both insurers and reinsurers with exposures to US windstorm and storm surge for exposed coastal areas. Revised loss protections have in some cases increased by 40% to 60%, requiring some insurers to buy increased cover and forcing reinsurance underwriters to increase rates or reduce the amount of capacity they provide.

Rate rises for US catastrophe reinsurance at 1 January 2012 increased by 8% according to reinsurance broker Guy Carpenter, although, taking account of reductions in 2010 and 2011, rates are still lower by 7.5% than they were in 2009. In territories with significant underwriting losses such as Japan, rate increases have been much more significant with Guy Carpenter reporting earthquake excess of loss cover rates now back at 1993/1994 levels with rate increases of between 35% and 125%.

In 2011 Lloyd's received 41% of its income from the US and Canada with Lloyd's having overtaken American International Group as the largest underwriter of US excess and surplus lines ("E&S") insurance business in 2010. As the market leader in E&S business by premium volume Lloyd's is expected to benefit from a hardening market leading to business migrating back to the E&S market from the US admitted market.

We are currently seeing the start of a hardening market in the US for the commercial property and casualty business, with the Council of Insurance Agents and Brokers quarterly commercial P/C market index survey showing an increase for the first quarter of 2012 of 4.4% following a 2.7% increase in the last quarter of 2011. These increases mark the beginning of a reversal in the trend following 30 quarters of rate declines. The opportunity for Lloyd's to take advantage of a hard market when it arrives can be gauged from the fact that in the last hard market between 2000 and 2003, E&S income in the US increased from $12bn to over $30bn in a four year period.

The investment component of an insurer's operating result in principle should be a powerful force for underwriting discipline. The New York based Insurance Information Institute estimates that a 100% combined ratio, i.e. breakeven underwriting result before investments, would have generated a 5.5% return on equity in 2009/2010 compared with 10% in 2005 and 16% in 1979 when interest rates were so much higher. The recovery in asset markets since 2009 accompanied by further declines in interest rates and credit spreads have benefited insurers' profit and loss accounts with realised gains as well as balance sheets with unrealised gains. However, these may be one-off gains as maturing bonds and new premium are being invested at much lower yields and importantly locking in these low yields for the duration of the bond.

This long-term loss of investment yield will have a particular impact on casualty underwriting where premiums can be held for a "tail" of five to eight years before a claim is paid. Most lines of casualty, both in the US and non-US, other than loss affected business, remain competitive with rates stable overall. The reason for this is that in particular the 2004 through to 2007 accident years have continued to run off well, showing reserve releases, although recent research from Moody's indicates that the more recent accident years from 2009 and 2010 may have small deficiencies in reserves. So far, the predominant influence has been reserve releases, although going forward this is expected to abate over the next two years and contribute to the transition we are seeing from a soft market to a hardening market.

Overall, the market is "turning the corner" with signs of a broadening out of rate increases from business with loss experience and US catastrophe reinsurance to direct classes, particularly for US business. Disappointingly, casualty remains soft and we do not envisage this changing over the next 12 months.

The economy is likely to continue to have an influence during 2012. If the US economy continues its recovery exposure growth will improve and we would expect rates to continue to harden. Lloyd's is well placed to take advantage given its market position as one of the largest US catastrophe reinsurers and the No.1 US excess and surplus lines insurer measured by premium volume.

However, a further US recession could lead again to curtailed demand and the potential for recession sensitive claims as well as slowing the rate of recovery in the sectors where rates are rising. The continuing impact of the sovereign debt crisis in peripheral Europe is something which has the potential to impact both the asset (investments) and liability (claims) sides of the balance sheet. Lloyd's is well prepared having carried out stress tests on the potential impact of any euro sovereign debt write downs and restructurings.

Hampden Underwriting's 2011 results

The traditional method for comparing the performance of competing insurance business is an analysis of the combined ratio, which is the sum of net claims and expenses divided by net earned premiums. The combined ratio of Hampden Underwriting's portfolio for 2011 was 107.9% due in the main to catastrophe losses from property reinsurance as well as a continued disappointing performance by UK motor. This puts Hampden's Underwriting's performance in line with the average of its peers in Lloyd's as well as industry peer groups.

Syndicate profit distributions

Profit distributions from Hampden Underwriting's portfolio of syndicates continue to be made by reference to the traditional three year accounts. Using this measure of performance Hampden Underwriting's portfolio has outperformed Lloyd's on the 2009 account at 31 December 2011 and is estimated to outperform Lloyd's on the 2010 account.

The 2009 account result at 31 December 2011, before members' fees, was a profit of 18.27%, which is just over one percentage point above the Lloyd's market average result of 17.25%. The 2009 account benefited from good rates for property catastrophe reinsurance business coinciding with a year of low catastrophe losses and the absence of a large hurricane making landfall. Hampden Underwriting's portfolio benefited in particular from its participation on reinsurance business through special purpose reinsurance syndicates managed by managing agency partners, Hiscox and Amlin, which compensated for losses on two UK motor syndicates.

The 2010 account estimated result after eight quarters at Q4 2011 is a small loss at the mid-point of (2.04%) with Hampden Underwriting again outperforming the estimated loss of the Lloyd's market as a whole (3.95%). The majority of the insured losses on the 2010 account were due to catastrophe losses occurring in 2011.

Again, like 2009, no hurricanes made direct landfall in the US but insured catastrophe losses were 65% higher at $43bn compared with 2009. At this stage of development most syndicates do not report any prior year releases, which provides potential for the estimated result to improve, before closure at the end of 2012.

At this early stage of development of the 2011 account a complete set of published estimates is not available until the end of May 2012. This account is expected to produce a modest loss in line with the 2010 account, with the largest loss expected to be due to the Thai floods.

Hampden Underwriting's capital position

Net tangible assets reduced by only 2.5% during 2011 to £6.43m despite the catastrophe losses suffered, which puts the Company in a strong financial position to develop the portfolio as and when opportunities arise. Net tangible assets provide a significant capital surplus over the Lloyd's minimum capital requirement as at November 2011 which was just under £4m.

Hampden Underwriting's portfolio for 2012

Hampden's underwriting portfolio for 2012 continues to provide a good spread of business across managing agents and classes of business with motor and liability providing a balance to the catastrophe exposed reinsurance and property business, as well as contributing to lower capital requirements. 29.9% of the capacity is in the three syndicates rated "A" by Hampden Agencies, being Syndicates 386, 609 and 2791, with Syndicate 2791 being the largest holding at 16.4% of capacity.

Risk management

The two major risks faced by insurers and reinsurers are deficient loss reserves and inadequate pricing, which, taken together, account for 40% of insurer impairments according to A M Best. The pricing cycle is easier to identify in real time. The reserving cycle is more difficult to identify in real time as typically reserving standards slip after a period of reserve releases and there is a lag before this is recognised. Hampden Agencies approaches the management of portfolio risk by diversifying across classes of business, syndicates and managing agents and importantly understanding the cycle management and reserving strategy of each syndicate as well as the rate environment.

We also assess the downside in the event of a major loss through monitoring the aggregate losses estimated by managing agents to realistic disaster scenarios. Risk is assessed in the context of potential return with catastrophe exposure being actively managed dependent on market conditions. With improved rating in reinsurance business for 2012 this class of business is likely to increase its share of gross premium. Hampden Underwriting's largest modelled exposures net of reinsurance on the basis of Lloyd's realistic disaster scenarios are similar for 2012 compared with 2011, with the largest remaining a two-event scenario incorporating two consecutive Atlantic seaboard windstorms in the north-east of America at 19.2% of capacity net of reinsurance.

The next highest is a Gulf of Mexico windstorm at 18.7% of capacity net. Realistic disaster scenario exposure as a percentage of capacity remains for all scenarios within the 20% net of reinsurance Hampden Agencies guideline.

Top 10 syndicate holdings

The top ten syndicates comprise 84.1% of the portfolio. Two new syndicates were joined for 2012, managed by the Catlin and Pembroke agencies.

Consolidated statement of comprehensive income

Year ended 31 December 2011

The (loss)/profit attributable to equity shareholders and (loss)/earnings per share set out above are in respect of continuing operations.

Consolidated statement of financial position

At 31 December 2011

Consolidated statement of cash flows

Year ended 31 December 2011

The accounting policies and notes are an integral part of these Financial Statements.

Statements of changes in shareholders' equity

Year ended 31 December 2011

Notes to the financial statements

Year ended 31 December 2011

1. 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 statements for the year ended 31 December 2011 (the "Financial Statements").

Basis of preparation

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

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 more important 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 amount, event or actions, actual results ultimately may differ from these estimates.

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

International Financial Reporting Standards

The following standards and amendments to standards are mandatory for the first time for the financial year beginning 1 January 2011. The adoption of these standards does not have a material impact on the Group's Financial Statements.

In addition, the following is a list of standards that are in issue but are not effective in 2011, or have not yet been adopted in the EU, together with the effective date of application to the Group:

The Directors do not anticipate that the adoption of these standards will have a material impact on the Financial Statements.

2. Segmental information

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

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.

3. Net investment income

4. Operating (loss)/profit before tax

The Group has no employees.

5. (Loss)/earnings per share

Basic (loss)/earnings per share is calculated by dividing the (loss)/earnings attributable to ordinary shareholders by the weighted average number of ordinaryshares outstanding during the period.

The Group has no dilutive potential ordinary shares.

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

Reconciliation of the (loss)/earnings and weighted average number of shares used in the calculation is set out below:

6. Intangible assets

7. Financial assets at fair value through profit or loss

The Group uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique:

Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities.

Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly.

Level 3: techniques which use inputs that have a significant effect on the recorded fair value that are not based on observable market data.

The Group has no level 3 investments.

As at 31 December 2011, the Group held the following financial assets carried at fair value on the statement of financial position:

Assets measured at fair value

Funds at Lloyd's represents assets deposited with the Corporation of Lloyd's (Lloyd's) to support the Group's underwriting activities as described in the Accounting Policies. The Group has entered into a Lloyd's Deposit Trust Deed which gives the Corporation the right to apply these monies in settlement of any claims arising from the participation on the syndicates. These monies can only be released from the provision of this Deed with Lloyd's express permission and only in circumstances where the amounts are either replaced by an equivalent asset, or after the expiration of the Group's liabilities in respect of its underwriting.

The Directors consider any credit risk or liquidity risk not to be material.

8. Share capital and share premium

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 and Financial Statements will be posted to shareholders shortly. Further copies will be available from the Company's registered office: Hampden House, Great Hampden, Great Missenden, Buckinghamshire HP16 9RD and on the Company's website www.hampdenplc.com.