Helios Underw Regulatory News (HUW)

26 May 2015

Helios Underwriting plc

("HUW" or the "Company")

Final results for the year ended 31 December 2014

HUW is pleased to announce its final results for the year ended 31 December 2014.

Financial highlights

Commenting, Sir Michael Oliver, Chairman, said:

"Your Board is pleased to report another set of encouraging results for 2014. The profit after tax for the year of £1,043,000 shows a significant improvement on 2013 of £731,000 and represents our best year to date. Net assets have increased to £10.5m from £9.8m at 31 December 2013, a growth of 6.71%. The results were helped by an excellent result from the 2012 underwriting account of 13.01% on our net underwriting capacity of £21.1m compared to the 2011 account, which produced 7.58% on underwriting capacity of £15.9m. Following a successful year the Board is pleased to recommend a final dividend of 1.5p per share together with a special dividend of 3.6p per share payable to all shareholders on the register at 5 June 2015."

Commenting, Nigel Hanbury, Chief Executive, said:

"2014 has been a year during which we have carried through our stated strategy. The returns give us confidence that the strategy is working, under difficult market conditions, for the benefit of the shareholders. We aim to do more of the same for 2015."

For further information please contact:

About HUW

HUW provides a limited liability direct investment into the Lloyd's insurance market and is quoted on the London Stock Exchange's AIM market (ticker: HUW). HUW's subsidiary underwriting vehicles trade within the Lloyd's insurance market as corporate members of Lloyd's writing £23 million of capacity for the 2015 account. The portfolio provides a good spread of classes of business being concentrated in property insurance and reinsurance. For further information please visit www.huwplc.com.

Chairman's statement

Your Board is pleased to report another set of encouraging results for 2014. The profit after tax for the year of £1,043,000 shows a significant improvement on 2013 of £731,000 and represents our best year to date. Net assets have increased to £10.5m from £9.8m at 31 December 2013, a growth of 6.71%. The results were helped by an excellent result from the 2012 underwriting account of 13.01% on our net underwriting capacity of £21.1m compared to the 2011 account, which produced 7.58% on underwriting capacity of £15.9m.

Shareholders will note that the profit after tax is considerably greater than the previous year, but the operating profit was down by some 4%. This is largely due to negative goodwill emanating from our program of acquisitions which had a beneficial effect combined with increased operating costs (reduced for 2015). The Board recognises that it is important to grow and continues to explore various options. To do so does inevitably increase costs, such as professional and advisors fees, which accounts for much of the reduced operating profit.

Following the precedent set last year we are once again reporting the Parent Company's adjusted net assets, plus the independent valuation of the Group's Limited Liability Vehicles as produced by Humphrey & Co, which is the market's primary provider of vendor valuations. This has increased to £1.72 per share from £1.64 per share (restated) in 2013, or total net assets of £14.7m (2013: £14.0m).

During 2014 we acquired four vehicles at acceptable prices and have made a further three purchases already this year with one more still to complete. These all should show satisfactory results on the open years of 2013 and 2014.

Including the three new acquisitions in 2015, our gross premium income limit underwritten for the 2015 year of account is £23.0m compared to £25.6m for 2014, £23.9m for 2013 and £23.7m for 2012. The reduction is explained by the continuing programme of "quality control", compulsory de-emptions and syndicate cessations. We continue with our strategy of reinsuring a significant portion of the youngest, least mature year, such that reinsurance has now risen to 70% from 50%. The gross premium figure nets down, after reinsurance, to £6.9m for 2015, £10.7m for 2014, £17.5m for 2013 and £23.7m for 2012. However, we have a significant war chest which can be utilised to purchase more vehicles if they become available at reasonable prices. Should such purchases be achieved, the net underwriting figure will rise considerably on all accounts between now and the time they come to close.

The Board considers that the risks attaching to the open accounts of 2014 and prior are sufficiently well developed that no further protection is required. However, the market remains very competitive and we continue to take advantage of the availability of reasonably priced stop loss reinsurance to mitigate any losses that may arise on the 2015 account.

Following a successful year the Board is pleased to recommend a final dividend of 1.5p per share together with a special dividend of 3.6p per share payable to all shareholders on the register at 5 June 2015. In aggregate these amount to a total of £457,000, compared to £384,000 in 2014. Furthermore the Board also intends to put in place a Scrip Dividend Scheme to give shareholders the opportunity to elect to receive dividends in the form of new ordinary shares instead of cash and an appropriate resolution will be proposed at the 2015 Annual General Meeting to give the Board the requisite authority. The terms and conditions of the proposed Scrip Dividend Scheme will be set out in a circular to be sent to shareholders shortly.

If approved the dividend will be made in a single payment or share issue on 3 July 2015.

Sir Michael Oliver

Non-executive Chairman

22 May 2015

Chief Executive's review

Syndicate profit distributions

Profit distributions from Helios Underwriting's ("HUW") portfolio of syndicates continue to be made by reference to the traditional three-year Lloyd's accounting. Using this measure of performance, Helios Underwriting's portfolio significantly outperformed the Lloyd's result as a percentage of capacity on the 2012 account at 31 December 2014 with a profit of 13.01% (Lloyd's: 11.93%) and is estimated to outperform Lloyd's on the 2013 account with a profit of 8.5% at the mid-point estimate after eight quarters (Lloyd's: 4.8%).

At this early stage of development on the 2014 account, a complete set of published estimates is not available until the end of May 2015. In March 2015 Hampden Agencies updated its forecast profit for the 2014 year from its initial range of 0%-7.5% to 2.5%-10% for clients of Hampden Agencies on average.

HUW's 2014 underwriting result

The traditional method for comparing the performance of competing (re)insurance companies is an analysis of the combined ratio, which is the sum of net claims and expenses divided by net earned premium. I am delighted to report that the combined ratio of Helios Underwriting's portfolio for 2014 was 87.6% with the underwriting result benefiting from another benign year for catastrophe losses. Using this measure of performance, Helios Underwriting outperformed both the Lloyd's market combined ratio of 88.1% (by 0.5 percentage points) and a peer group of eleven competitor insurance and reinsurance companies whose average combined ratio was 93.1% (by 5.5 percentage points). Helios Underwriting has outperformed both the Lloyd's market and the competitor group in each of the past four financial years.

HUW's capital position

Net tangible assets per share fell marginally by 3% during 2014, principally as a result of the four acquisitions made in the year. Year-end net tangible assets were £6.7m (£6.9m at year end 2013) with the balance of Lloyd's minimum capital requirement in November 2014 of £13.1m (£11.1m in November 2013, being supplied by letters of credit from quota share reinsurance capital providers from which we benefit from both a fee and profit commission).

Strategic objective and risk management strategy

2014 has been a year during which we have carried through our stated strategy. The returns give us confidence that the strategy is working, under difficult market conditions, for the benefit of the shareholders.

During the year Helios successfully purchased four vehicles and, following the year end, were able to purchase three more with a fourth subject to completion. This succession of vehicles purchased exceeded our expectations. However at the time of going to press a quieter period seems to be upon us. Given the age profile of potential vendors it seems reasonable to assume that mortality will ensure further sales, although a satisfactory price can never be guaranteed. It is important to point out that the main threat to our strategy is that we are unable to secure sufficient purchases at acceptable prices.

Our strategic objective remains to underwrite at Lloyd's with superior capital efficiency, lower risk and higher return. In order to achieve this the Company announced in 2012 that it was purchasing quota share reinsurance. One of the reasons it did so was in response to deteriorating market conditions. These conditions have continued to worsen and we have re-examined our strategy to ensure that it remains appropriate. I am pleased to say that we believe that is the case. The essential features of the strategy constitute an increased purchase of quota share to 70%, from 50% initially, on the youngest year of account. The quota share cover is collateralised by letters of credit up to the amount of the indemnity.

We retain the maximum possible exposure to older, more mature years of account which, generally speaking, show a consistent pattern of improvement and, in our view, have a lower risk attaching to them although, for example, at the time of going to press, 2014 still contains significant unprotected (by us) risk. Furthermore we will receive an annual fee from this arrangement as well as a profit commission if appropriate.

I am pleased to report that the quota share arrangement has been renewed for the 2015 account with all three reinsurers.

To further protect the Company from underwriting losses, Helios purchases regular stop loss reinsurance from Hampden Insurance PCC (Guernsey) Limited, a Guernsey Protected Cell which is reinsured 100% with a very large A+ rated international reinsurer. We buy the maximum available to us with the ultimate aim that all vehicles are covered, although for various reasons some are not covered in the short term; for example, quotes might not be available for a recent LLV purchase, in which case we will run that risk until such time as it can be included. We buy cover in excess of a 10% of overall premium limit ("OPL") deductible, which is designed to contain any possible loss at an acceptable figure.

It is our judgement that should a single loss or series of losses strike the insurance market then the strategy outlined above will position us satisfactorily for the opportunities which would no doubt become apparent. However, if the timing of those losses are further out than might be expected, this strategy should continue to produce satisfactory profits within an acceptable risk profile.

Classes of business for 2015

The final important piece of the risk management matrix is to ruthlessly focus on quality syndicates which have traditionally outperformed in difficult times.

Helios Underwriting's portfolio for 2015 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 through diversification to lower capital requirements. The two largest classes of business remain reinsurance and US dollar property insurance. Currently, the balance of risk and reward has now shifted from net sellers of reinsurance to net buyers of reinsurance. Reinsurance exposure based on syndicate business plans has therefore reduced for 2015 to 24.0% from 30.9% in 2014 while US$ property insurance exposure has increased to 17.6% from 16.0% in 2014.

We continue to actively increase our exposure to higher quality syndicates and ended the year with 54% of our capacity supporting syndicates rated either "AA" (excellent) or "A" (very good), the top two out of four syndicate ratings according to Hampden. HUW's portfolio for 2015 continues to provide a good spread of business across managing agents and classes of business. 24.6% of the capacity is in the two syndicates rated "AA" by Hampden Agencies, being Syndicates 609 and 2791, while Kiln Syndicate 510, rated "B", is the largest holding at 17.1% of capacity. The top ten syndicates comprise 82.5% of the portfolio. Apart from a small participation on a life syndicate through a Nameco acquisition, one new syndicate was joined for 2015 which writes catastrophe-exposed US middle market commercial insurance risks.

In our view there is a correlation between quality and the price these syndicates are likely to achieve at auction, which leaves us exposed to a drop in value which would certainly occur if there were a very significant, market-changing catastrophe. Our weighted average value of capacity is £7.8m and it is not inconceivable that this could reduce significantly in a major crisis. Shareholders should be aware that such a reduction would affect our adjusted net asset value at least in the short term.

Top ten syndicates for 2015

Source: 2015 syndicate capacities sourced from Lloyd's.

Principal risks and uncertainties

The principal risks and uncertainties to the Group's future cash flows will arise from the Group's participation in the results of Lloyd's syndicates. These risks and uncertainties are mostly managed by the syndicate managing agents. The Group's role in managing these risks and uncertainties, in conjunction with Hampden Agencies Limited, is limited to a selection of syndicate participations, monitoring the performance of the syndicates and the purchase of appropriate member level reinsurance.

The Group benefits from strategic collateralised quota share arrangements on its 2013, 2014 and 2015 years of account.

The 2013 year of account arrangement is in respect of 50% of its business with Bermudan reinsurer XL Re Limited ("XL Re", part of global NYSE quoted insurer XL Group plc) through Hampden Insurance PCC (Guernsey) Limited-Cell 6 ("Cell 6"), a special purpose vehicle.

The 2014 year of account has a strategic collateralised quota share arrangement in respect of 50% of its business with XL Re, 12.45% with Bermudan reinsurer Everest Reinsurance Bermuda Limited ("Everest", part of global NYSE quoted insurer Everest Re Group, Ltd) and 7.55% with Guernsey reinsurer Polygon Insurance Co Limited ("Polygon") through Cell 6.

The Group anticipates these arrangements as strategic long-term relationships. However, the contracts are annually renewable and the Group has a contingency plan in place in the event of non-renewal under both normal and adverse market conditions. Further information on risk management is disclosed in Note 3 to the Financial Statements.

The biggest single risk faced by insurers is deficient loss reserves combined with inadequate pricing, which accounts for 44.3% of insurance failures according to AM Best in its latest review of insurer impairments in the US. Particularly for casualty business, where the period or "tail" for a claim to be paid may be many years after the receipt of premium, the feedback loop between reserving and pricing is critical. Under-reserving leads to inadequate pricing based on false profitability which then can be exacerbated by multiple years of underwriting losses before pricing can be corrected. Under-reserving usually arises due to unforeseen events such as legislative, social or economic changes but can also be due to risks which underwriters are aware of but which have not been fully priced into the premium charged.

Rapid growth is the third largest reason for insurer impairments, accounting for 12.3% of impairments, while investment problems (6.6%) and catastrophe losses (7.1%) play a much smaller role. Rapid growth can be associated with moving into new lines of business where there is limited or no prior experience and therefore could cause both increased pricing and reserving risk. Cyber liability has the potential to fall into this category if not managed carefully. Excessive growth in a softening/soft market when compared with peers is usually a warning signal since that growth is usually, by definition, accompanied by underwriting business at a lower rate than the previous carrier.

HUW approaches the management of portfolio risk by diversifying across classes of business, syndicates and managing agents and, with the advice of Hampden Agencies, 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 ("RDSs") prescribed by Lloyd's. Risk is assessed in the context of potential return with catastrophe exposure being actively managed dependent on market conditions.

The RDS events comprise 16 compulsory events including a Florida hurricane, a Californian earthquake and a Japanese earthquake, together with six scenarios subject to de minimis reporting of the more difficult to model liability or political risk scenarios. The largest losses modelled for 2015 remain $125bn for a Florida windstorm in both Miami Dade and Pinellas. The largest earthquake loss modelled remains in California with a $78bn industry loss for both Los Angeles and San Francisco. Syndicates are also required by Lloyd's to report two further realistic events (Alternative A and B) that represent potential material impact to the syndicate.

HUW's largest modelled exposures net of reinsurance at syndicate level as a percentage of gross premiums have reduced for 2015 compared with 2014 before taking into account HUW's stop loss reinsurance and quota share reinsurance protections. This reflects a reduced reinsurance exposure which is consistent with the reduction in margins for peak zone catastrophe exposures. The largest for 2015 is the larger of two windstorm events consisting of a north-east US hurricane, immediately followed by a South Carolina hurricane at 28.2% of gross premium, net of reinsurance (32.2% in 2014). The next largest is the Gulf of Mexico windstorm at 25.1% net (30.4% in 2014).

All RDS exposures as a percentage of gross premium are within the 30% net of reinsurance Hampden Agencies guidelines.

Corporate, social and environmental responsibility

The Group aims to meet the expectations of its shareholders and other stakeholders in recognising, measuring and managing the impacts of its business activities. The majority of the Group's business activities are carried out by the syndicates in which activities, including employment of syndicate staff, are the responsibility of the syndicate managing agents. Each managing agent also has responsibility for the environmental activities of each syndicate although, by their nature, syndicates do not produce significant environmental emissions.

For the reasons described above, the Board of Directors does not consider it appropriate to monitor or report any performance indicators in relation to corporate, social or environmental matters.

Outlook

2014 has shown that our strategy works under current conditions. We aim to do more of the same for 2015. We can see encouraging possibilities under most circumstances, but the threat remains that the satisfactory flow of target vehicles either dries up or the price to acquire them becomes unaffordable. We believe neither is likely but the possibility remains.

Nigel Hanbury

Chief Executive

22 May 2015

Lloyd's Advisers' report - Hampden Agencies

Good news for reinsurance buyers

We expect that Lloyd's will continue to underwrite profitably in 2015, although current competitive market conditions, particularly in reinsurance, make Lloyd's more vulnerable to above average catastrophe losses. Going forward, we forecast that the amplitude of the underwriting cycle will be lower than in previous cycles due to two factors. First, the claims paying ability of both insurers and reinsurers has seldom been stronger when capital is compared with premium income, which is likely to limit the upside in good years. Second, in an era of low investment returns and declining yields on the traditional bond investments favoured by insurers, the long-term loss of investment return remains a force for underwriting discipline and should limit the downside in each cycle trough.

However, the reduction in bond investment yields has contributed to a significant influx of alternative capital into the catastrophe reinsurance sector as institutional third party investors supply capital to the reinsurance sector in a "search for yield". Alternative capital has contributed to reduced rates for reinsurance and a consequent reduction in prospective underwriting returns from reinsurance. Today, the risk reward ratio favours net buyers of reinsurance as opposed to net sellers of reinsurance, with syndicates able to buy significantly better reinsurance cover and stop loss reinsurance being available again to clients of Hampden for the 2014 and 2015 accounts. Our target result for the 2015 three-year account is a modest profit in the range of 0% to 5% of capacity assuming an average year for major losses.

Lloyd's competitive position remains strong

Lloyd's competitive position remains strong as we enter 2015. Underwriting discipline is evidenced by the fact that 27.5% of syndicates have de-empted their underwriting capacity for 2015 compared with 12.6% of syndicates de-empting for 2014. Total market underwriting capacity at 1 January 2015 reduced by just under 1% to £26.2bn. In June 2014 Fitch Ratings upgraded Lloyd's to "AA-" (very strong) reflecting its expectation that Lloyd's future cross cycle underwriting performance will be more favourable than that achieved by Lloyd's historically, both in absolute terms and compared with peers.

Catastrophe losses have been benign in both 2013 and 2014

Reported financial results for both insurers and reinsurers in 2013 and 2014 have benefited from below average catastrophe losses with Swiss Re Sigma estimating total insured losses (natural catastrophe and man-made) of $35bn in 2014 compared with $45bn in 2013. Insured catastrophe losses in 2014 were 45% lower than the ten-year average to 2013 of $64bn a year and 22% lower than in 2013. Benign catastrophe losses have contributed to an artificially rosy picture of financial results and also played a part in increasingly competitive underwriting conditions, particularly in the reinsurance sector.

In 2014 the North Atlantic hurricane season was relatively mild with no major hurricane making landfall in the US, the ninth year running that this has happened. However, Mexico was impacted by $1.6bn of insured losses from Hurricane Odile in September 2014, making Odile the second most costly catastrophe event in Mexico after Hurricane Wilma in 2005. The largest losses for the year were a spate of strong storms with hailstones in mid-May hitting many parts of the US over a five day period, resulting in insured losses of $2.9bn. The next largest losses were in Europe in June with wind and Hailstorm Ela, which caused significant damage to properties and vehicles in France, Germany and Belgium, resulting in overall insured losses of $2.7bn.

Lloyd's net ultimate claims for 2014 major losses at 31 December 2014 were only £670m, which compares with Lloyd's 15-year average (excluding 2014) of £1,617m a year indexed for inflation to 2014. In 2014 Lloyd's issued ten major loss codes with three of those affecting the aviation war market where exposed policies were underwritten into the 2013 underwriting year of account. These aviation war losses included the Malaysia Airlines loss, MH370, on 8 March 2014 where the whole loss has been shared equally between the hull underwriters and the aviation war underwriters, and the second Malaysia Airlines loss, MH017, over Ukraine on 17 July 2014. The largest insured event was a terrorist attack at Tripoli Airport in Libya between 13 July and 22 July 2014 where various aircraft were damaged during fighting, with Willis reporting that the hull war reserve for the losses is estimated at $407m.

Late in the year, on 28 December 2014, the Air Asia loss led by Allianz is estimated at $100m to $140m and will affect the 2014 year of account. Aviation losses during 2014 dominated Lloyd's major losses on an annual accounting basis costing £310m, net of reinsurance out of a total of £670m of major losses.

Alternative capital is the most significant trend to affect the reinsurance market

The most significant trend to affect the reinsurance industry in recent years has been the development and growing acceptance of alternative "third party" sources of capital provided by institutional investors in the form of catastrophe bonds, "sidecars" and collateralised structures. During 2014 the growth in alternative capital accelerated compared with 2012 and 2013 with reinsurance broker Guy Carpenter estimating that a further $15bn of alternative capital was raised during the year. Total alternative capital is now $60bn, which is equivalent to 18% of total reinsurance capital compared with 15% at year end 2013. Aon Benfield estimates that $100bn of new alternative capital will have entered the market in the six years from 2013 to 2018. This would bring total alternative capital close to $150bn by year end 2018. As recently as 2008, alternative capital totalled only 8% of total reinsurance capital compared with 18% at year end 2014.

The impact of alternative capital on the property catastrophe sector of the reinsurance market has been dramatic. Its influence is particularly significant for low probability loss events such as one expected every 250 years, or a series of events with the same probability, where it now has a market share according to broker Aon Benfield of between 40% and 50%. The impact on pricing has been significant. Willis Re estimates that the expected return (the difference between the coupon and the expected loss from catastrophe bonds with US wind exposures) fell by 26% from 6.18% in 2013 to only 4.5% in 2014.

The balance of risk and reward has now shifted from net sellers of reinsurance to net buyers of reinsurance. The scale of the impact on traditional reinsurance profit margins is analysed by Dowling & Partners, which expects a 90% combined ratio (equivalent to a 10% underwriting profit) on Florida business at June 2015 compared with 60% in June 2012. This represents a 75% reduction in profits over three years.

Supply - continues to outpace demand

Reinsurance capital grew to $540bn by the end of 2013, an increase of 7% or $40bn since the end of 2012, according to reinsurance broker Aon Benfield. At the end of 2014 there was a further increase of 6% or $35bn to a record $575bn including $64bn of deployed alternative capacity. Reinsurance capital has increased by 70% since year end 2008 when it was $340bn. The policyholders' surplus of the US property casualty insurance industry, a proxy for underwriting capacity, grew by 11.3% to a record $653.3bn at year end 2013. At 30 September 2014 policyholders' surplus had grown by a further $20.6bn to $673.9bn, a rise of 3.2%. US insurers' capital has increased by 48% since year end 2008. The premium to surplus ratio, a measure of the claims paying ability of the industry, fell to a near record low of $1 of surplus for every $0.73 of net written premium (a ratio of 1 is strong; a lower ratio is even stronger).

Supply measured by excess capital presents a significant challenge to insurance and reinsurance company managements. Reinsurance companies are particularly challenged in today's environment by the commoditisation of the market for peak property catastrophe reinsurance. Barriers to entry are higher for insurance lines of business, particularly casualty, although Aon Benfield speculates that alternative capital's "next most likely disruptive move will be in property insurance and business interruption".

Choices faced by company managements are centred on four key strategies. Our favoured strategy is capital management with excess capital being repaid to shareholders through share buy-backs or special dividends. A second approach is organic growth but this is difficult to achieve in today's competitive rating environment other than in selected lines such as cyber liability. A third approach and an alternative to organic growth is to acquire, and in part this explains the increased merger and acquisition activity we have seen in the industry in 2014 and 2015. 2014 saw the first annual increase in transaction volume since 2011 with a 21% increase in mergers and acquisitions in the global insurance industry, rising from 319 transactions in 2013 to 384 in 2014. Like M&A in other sectors, insurance industry, M&A has had mixed results. A KPMG survey suggested that just 17% of M&A deals added value, 30% made no difference, while 53% destroyed values. The fourth approach is to be patient and wait for better underwriting opportunities.

Demand - opportunity to absorb risk from cyber liability

Insurance demand is a combination of two factors. First is exposure growth which is driven mainly by economic and demographic growth. During the great recession of 2007-2009 US net written insurance premiums fell by an aggregate 6.8%, the first three-year decline since 1930-1933. Growth in overall net premiums, a proxy for demand, began to recover in 2010, accelerating to 4.6% in 2013. In the first nine months of 2014 US net written premiums rose by 3.9% over the same period in 2013. The second is rate. During calendar year 2014 US property and casualty rates stabilised with rates up marginally in the first and third quarters but down marginally in the second and fourth quarters. The main impetus for net written premium growth is the recovering US economy as the number and value of insurable interests such as property, employment and liability risks increase. However, the recovery from the 2007-2009 worldwide great recession has been weak with an annual average in the US of 2.3% real GDP gains from the trough in 2009. This is around half the level of economic growth which would normally occur after a recession.

US nominal GDP growth has averaged just 3.5% per annum in the last seven years which is well below its 6.6% per annum average since World War Two. With low inflation rates across the globe in 2015 nominal growth is not going to be boosted by inflation. As of January 2015 14 of the OECD list of 34 major economies have year-on-year consumer price inflation ("CPI") changes of zero or less while another 13 are less than 1%. Lloyd's remains heavily dependent on US income as a source of business with 44% of income being US and Canada domiciled and an estimated 60% of income being US dollar denominated in 2014 based on year and exchange rates.

Lloyd's is well placed to take advantage of its leading position in the excess and surplus ("E&S") lines segment of the US insurance market where non-standard insurance risks are placed. In 2013, according to A M Best, Lloyd's had an 18.8% share (18.0% in 2012) of the US E&S market with its next biggest competitor being AIG with 12.8% (14.5% in 2012). Lloyd's total E&S premium grew to $7.1bn in 2013, a rise of 13%, having benefited from a combination of GDP growth, reduced competition from AIG and an increased flow of business as admitted carriers moved away from underwriting more difficult risks. Lloyd's reports a further increase of 15% to over $8bn in 2014.

Lloyd's remains committed to developing its business in emerging markets, although income in many of these countries will be affected in sterling terms by depreciating currencies as well as the fact that the main engine for growth in insurance premiums in emerging countries remains auto insurance, where Lloyd's has limited involvement. One potential bright area of innovation where Lloyd's is a leading player is the market for cyber insurance. The leading player in the Lloyd's market is Beazley, whose Breach Response product is the fastest growing class of business for Beazley - Syndicate 623 is the third largest syndicate in Helios Underwriting's portfolio. While great care needs to be taken in managing exposures in a class of business where actuarial data is limited, US cyber insurance income for all carriers is estimated to have risen from $1.3bn in 2013 to $2bn in 2014 with further strong growth anticipated this year.

The investment environment - reinvestment yields continue to fall

The investment environment remains critical in order to understand the insurance industry, both from a balance sheet perspective (the asset side) and from a profit and loss perspective. The current era is one of low inflation and low interest rates. Already in 2015 a total of 24 central banks have reduced interest rates including India, Canada, Russia, Australia, Denmark, Sweden, Switzerland and China. In Denmark, Sweden and Switzerland central bank interest rates are negative. In 300 years, the Bank of England base rate has never been lower than the current 0.5%. The current government bond yield environment is described by Bank of America Merrill Lynch as "the death of zero" with 2015 having a theme of negative yield. This follows the story of no yield in 2014 and low yields in 2013. Ten countries now have negative yielding government bonds including €1.4 trillion in the Eurozone in January 2015 compared with almost zero in June 2014, and €2.4 trillion in Japan in January 2015 compared with zero in October 2014.

The yield on invested assets for insurers, which are typically focused on safe government and corporate bonds, continues to decline as the yield on maturing bonds generally exceeds yields on new investments. Asset managers Conning & Company estimate that US insurers' book yield has reduced from 4.42% prior to the Great Recession to an estimated 3.28% in 2014, a fall of 114 basis points. The scenario of reducing investment yields continues to be a significant factor encouraging underwriting discipline. For every 1% reduction in investment yield an insurer wishing to maintain its return on equity for its shareholders must reduce its combined ratio by a certain percentage, which varies by line of business. The Insurance Information Institute estimates that the combined ratio for reinsurance business needs to fall by 7.3% compared with a fall of only 1.8% for personal lines business. However, low investment yields also raise the prospect of insurers making riskier investments on the asset side of their balance sheet with the objective of boosting returns through taking on more asset risk.

Reducing bond yields are symptomatic of a deflationary environment with 19 of the 34 OECD major countries having year-on-year declines in consumer prices as at January 2015. In the US, the Federal Reserve's favoured measure of inflation/deflation (the PCE Deflator) fell by 0.2% in both November and December 2014. We view deflation as less of a threat to insurers than inflation, other than recession sensitive lines of business, should recession follow deflation. In particular, reserves may develop beneficially to become "redundant" as reserving trend assumptions prove pessimistic in direct contrast to deficiencies which follow unexpected bouts of inflation.

Current yields are the lowest since the 1950s

US Treasury yields have been falling in every decade since the 1980s. During the 1980s the average yield of the US Treasury ten-year note was 10.6%, falling to 6.7% during the 1990s. By the 2000s it was 4.5% and in this decade so far the average is 2.5%. The yield in this decade averaging 2.5% is consistent with the 1950s, when yields averaged 3.2%. That was a decade when the US P&C industry made an underwriting profit (a combined ratio of lower than 100%) in eight years out of ten. In periods when yields have been higher, the industry has tended to underwrite at a loss.

The Treasury yield curve is close to its most depressed level in 50 years with a three-year duration required to get a positive yield of at least 1%. The impact of the financial crisis on achievable investment returns across the yield curve can be seen in the chart below [included in full Financial Statements], which shows pre-crisis levels for bonds with a duration of one month right up to 30 years, which varied from 4.82% to 5.11%, an almost flat yield curve. Compare this to the yield curve today with higher yields for duration risk. Only 0.02% is earned on a one-month Treasury bill, while the 30 year maturity yields are currently 2.47% (as at 1 April 2015). We also show the yield curve in July 2012, when yields were the lowest since July 2007.

Rating - opportunities for buyers of reinsurance

2015 marks the third successive year of property catastrophe reinsurance rate reductions in Lloyd's largest market, the US. The principal driver of underwriting profitability is the level of premium rates combined with policy terms and conditions. Reinsurance margins are under pressure, not just from reductions of rate which compound over time but also from a relaxation in terms and conditions whose effects are more difficult to measure. Reductions in reinsurance rates are bad news for net sellers of reinsurance but good news for net buyers of reinsurance who are able to take advantage of more cost effective outwards reinsurance and reduce their net exposures.

Reinsurance rate decreases at 1 January 2015 averaged as much as or higher than the decreases experienced in 2014. Guy Carpenter's World Rate On Line Index fell by 11% in 2014 and is down by 11.4% at 1 January 2015 at a level of 195. Since its last peak in 2006 the World Rate On Line Index has fallen by 33.33%. Rate decreases at 1 January 2015 averaged as much as or more than the decreases experienced in 2014.

Apart from property catastrophe reinsurance, offshore energy rates are under the most pressure while aviation rates continue to fall despite an estimated $1.6bn of market losses in 2014. UK fleet motor rates continue to increase in contrast to private car, where the AA reports rates were down 10% in the year to 31 December 2014, despite marginal increases in both quarter three and quarter four, following three years of rate reductions. Most property and casualty insurance rates in the US were stable in 2014 apart from "big ticket" commercial property. Property underwriters have been able to take advantage of cheaper reinsurance.

The upturn in property and casualty insurance rates in the US began in the third quarter of 2011 following nearly eight years of rate decreases. During 2014 rates stabilised, ending the year up by 0.4%, with small increases in the first and third quarters compensated by small rate decreases in the second and fourth quarters, using data supplied by the Council of Insurance Agents and Brokers ("CIAB"). However, by Q1 2015 the CIAB reports that rate reductions across all accounts averaged 2.3%.

US pricing cycle likely to be more muted than in previous cycles

Our view is that the US insurance pricing cycle is likely to be more muted than it was in the past with a reduced amplitude of both rate peaks and rate troughs. It is also likely in the current low interest rate environment that the duration of cycles will be shorter with the industry becoming more efficient at analysing and pricing risks. Like rating, cash flow has also peaked but is also remaining stable, indicating that for 2015 and 2016 margins will remain acceptable with the added benefit of continued prior year releases. However, prior year releases are expected to reduce as soft market accident years since 2007 are not considered as well reserved as the hard market years between 2002 and 2006.

Prospects for 2015

Our formal profit target for the 2015 three-year account is a range of 0% to 5% of underwriting capacity, which is lower than the 0% to 7.5% on capacity range we set in advance for the 2014 account, which we have since upgraded to 2.5% to 10.0% due to the benign catastrophe losses in calendar year 2014. Each September we update our assessment of market conditions and in our forecast assume a level of major losses, such as catastrophes, which is equal to the long-term average of each of the syndicates within the Hampden Agencies portfolio, to arrive at a target underwriting result. So far in 2015 the assessment we made last September about the rating environment is proving correct in that the trend of rate reductions seen in most classes of business during 2014 is continuing into 2015.

In setting our profit target, we aim to be cautious in our forecasting. The profit target is for the pure year only and therefore excludes prior year reserve movements. Apart from 2010, which was affected by a series of earthquake and weather related catastrophe losses in each of the years 2008, 2009 and 2011 through to 2013, Hampden's pure year profit target set in advance of each underwriting year has been lower than the results and estimates for the Hampden portfolio.

Reduced profitability from underwriting reinsurance business is bad news for net sellers of reinsurance but good news for net buyers of reinsurance, who are now able to buy much more cost effective reinsurance to protect the downside in an increasingly challenging market. With income reducing, control of expenses becomes ever more important, particularly as it coincides with reducing investment returns. While Hampden's target profit does not include potential prior year releases, bottom line results in the current rating environment are becoming increasingly dependent on conservative reserving. Where reserving is merely adequate or worse the current environment leaves little room to hide.

Competitive market conditions also coincide with the balance of power shifting from underwriters to brokers. Today, the growing power of intermediaries is a theme which cannot be ignored as they seek to capture a larger share of the economic pie from transactions through fees for services. Time will tell whether broker facilities are simply another symptom of a soft market or a more permanent change which enables both brokers and underwriters to reduce costs and streamline the placement process. Such broker facilities are likely to favour the larger syndicates in the Lloyd's market, which are favoured by Helios Underwriting, with smaller syndicates being squeezed.

Hampden Agencies

22 May 2015

Consolidated income statement

Year ended 31 December 2014

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

Consolidated statement of financial position

At 31 December 2014

Consolidated statement of cash flows

Year ended 31 December 2014

Cash held within the syndicates' accounts is £1,059,000 (2013: £980,000) of the total cash and cash equivalents held at the year end of £3,605,000 (2013: £1,066,000). The cash held within the syndicates' accounts is not available to the Group to meet its day-to-day working capital requirements.

Statements of changes in shareholders' equity

Year ended 31 December 2014

Notes to the financial statements

Year ended 31 December 2014

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 statements for the year ended 31 December 2014 (the "Financial Statements"). These policies have been consistently applied to all the years presented, unless otherwise stated.

The Financial Statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") as endorsed by the European Union ("EU"), 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:

· 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 2014 other corporate activities totalling £465,000 (2013: £22,000 - 2013 year of account only) presents the 2013 and 2014 years of account net Group quota share reinsurance premium payable to Hampden Insurance PCC (Guernsey) Limited - Cell 6. This net quota share reinsurance premium payable is included within "reinsurance premium ceded" in the Consolidated Income Statement.

All of the Group's Limited Liability Vehicles have entered into Group quota share reinsurance contracts with Hampden Insurance PCC (Guernsey) Limited - Cell 6 for the 2015 underwriting year of account.

4. Operating profit before goodwill and amortisation

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

* 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.

5. Net investment income

6. Operating expenses (excluding goodwill and amortisation)

7. Earnings per share

Basic earnings per share is calculated by dividing the earnings attributable to ordinary shareholders after tax by the weighted average number of ordinary shares outstanding during the period.

The Group has no dilutive potential ordinary shares.

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

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

8. Intangible assets

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: 85 Gracechurch Street, London EC3V 0AA and on the Company's website www.huwplc.com.