TIDMHUW
RNS Number : 7205A
Helios Underwriting Plc
31 May 2019
Helios Underwriting plc
("Helios" or the "Company")
Final results for the year ended 31 December 2018
Highlights
-- 32% increase in the capacity portfolio from the six
acquisitions of 2018 and a further acquisition in 2019 to date.
-- Profit before impairments and tax for the year of GBP608,000 (2017: loss of GBP406,000)
-- Basic earnings/(loss) per share of 3.14p (2017: loss of 4.75p)
-- Helios retained capacity for 2019 open underwriting year of
GBP15.8m (2018 year of account: GBP12.3m)
-- 2016 underwriting year of account profit return on capacity
of 8.6% (2015 underwriting year: 12.9%)
-- Recommended total dividend for this year of 3.0p per share (2017: 1.5p per share)
-- Adjusted net asset value of GBP1.90 per share (2017: GBP1.60 per share)
-- The catastrophe losses in 2018 of GBP5.2m were reduced by reinsurance to GBP1.3m
-- Stop loss in 2019 continues to protect the downside
Year ended 31 December
2018
--------------------------
2018 2017 2016
--------------------------------------------------- ------- -------- -------
Profit/(loss) before impairments and tax (GBP'000) 608 (406) 1,334
Adjusted net asset value per share - basic (GBP) 1.90 1.60 2.01
Dividends (p) 3.0 1.5 5.5
Growth in capacity (GBPm) 52.6 41.0 32.6
Value of capacity fund (WAV) (GBPm) 20.7 13.0 14.9
--------------------------------------------------- ------- -------- -------
Nigel Hanbury, Chief Executive, commented:
"As London's quoted consolidator of private capital at Lloyd's,
Helios continues to offer investors unique exposure to an
investment that is both uncorrelated from traditional equity market
movements and continues to outperform our benchmark Lloyds market
over the long term through targeted acquisitions of the
better-quality syndicates.
These results represent a period of strong performance for our
investment strategy with profit and NAV per share increasing
incrementally from last year's results. We have taken advantage of
a strong pipeline and fully deployed our available resources to
fund six acquisitions in the period, leading to a 32% increase in
the capacity portfolio.
We continue to see attractive investment opportunities in our
market as we look to further increase our capacity to further
enlarge and diversify our portfolio for the benefit of our
shareholders by taking advantage of a number of near-term
opportunities. We look forward to updating shareholders further in
due course."
For further information, please contact:
Helios Underwriting plc
Nigel Hanbury - Chief Executive 07787530 404 / nigel.hanbury@huwplc.com
Arthur Manners - Chief Financial Officer 07754 965 917
Stockdale
Robert Finlay 020 7601 6100
David Coaten
Buchanan 020 7466 5000
Helen Tarbet
Henry Wilson
Hannah Ratcliff
About Helios
Helios 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). Helios trades within the
Lloyd's insurance market writing approximately GBP54m of capacity
for the 2019 account. The portfolio provides a good spread of
business being concentrated in property insurance and reinsurance.
For further information please visit www.huwplc.com.
Chairman's statement
Continuing to build portfolio of capacity
Pace of acquisition activity stepped up in 2018
Summary
-- Profit before tax and impairments of GBP608,000 (2017: loss of GBP406,000)
-- Adjusted net asset value at GBP1.90 per share (2017: GBP1.60)
-- Seven acquisitions added GBP15.9m to the capacity fund for
the 2018 underwriting year - 37% increase
-- The value of the fund increased adding 24p per share to the adjusted net asset value
-- The underwriting result impacted by the catastrophe losses in 2018
-- Acquiring net assets at below their fair value, contributed GBP1.2m to operating pro ts
-- Final and special dividend of 1.5p each declared, making 3.0p in all (2017: 1.5p)
Your Board announces the results for 2018 which demonstrated the
continued progress of the Group's strategy. The pace of the
acquisition activity stepped up in 2018 as the sentiment of the
owners of Limited Liability Vehicles ("LLVs") was affected by the
underwriting losses arising from natural catastrophes that occurred
in 2017 and 2018. The profit before impairment for the year is
GBP608,000 (2017 loss: GBP406,000), whilst the adjusted net asset
value of the Group is GBP1.90 per share (2017: GBP1.60).
Again the full impact of the catastrophe losses on the Helios
portfolio of GBP5.2m (2017: GBP5.8m) was mitigated by the use of
quota share and stop loss reinsurance reducing the net loss for
2018 to GBP1.3m (2017: GBP1.3m).
Underwriting profits from the two older underwriting years, the
"off-risk" years, made a good contribution but the 2018
underwriting year in its first 12 months recognised a significant
loss following the series of natural catastrophes in the second
half of 2018.
Other income arising from fees from reinsurers, recoveries from
reinsurance policies and investment income have contributed to this
year's results. Total costs of GBP2.0m included the expenditure on
protecting the portfolio using stop loss reinsurance.
Strategy
The building of a portfolio of participations on leading Lloyd's
syndicates remains the strategic objective of the Group. During
2018 the key developments were:
-- building the portfolio of capacity to GBP54m for 2019 by
acquiring six new subsidiaries in year 2018 and a further one LLV
in 2019 to date;
-- maintaining the quality of the portfolio and the
outperformance of the underwriting results average against the
Lloyd's market as a whole; and
-- continuing to use quota share reinsurance to reduce the risk
from underwriting and to assist in the financing of the
underwriting capital of the portfolio.
Capacity acquired
During 2018 a further six corporate members were acquired and
one LLV has been bought to date in 2019. The increase in the
capacity for the 2016 to 2018 years of account is shown below.
Year of account - GBPm
---- ----------------------------
2016 2017 2018 2019
--------------------------- ---- -------- ------- -------
Capacity at 1 January 2018 37.8 37.0 41.0 52.6
Acquired during 2018 16.1 16.1 14.7 _
Acquired in 2019 to date 1.1 1.2 1.2 1.1
--------------------------- ---- -------- ------- -------
Current capacity - to date 55.0 54.3 56.9 53.7
--------------------------- ---- -------- ------- -------
% increase 45% 47% 37% 2%
--------------------------- ---- -------- ------- -------
The six acquisitions in 2018 were purchased for a total
consideration of GBP12m, of which GBP4.3m was attributed to the
value of capacity acquired. Since the beginning of 2019 the number
of LLVs available for sale has increased as the effect of the
losses in 2017 and 2018 feeds through to the necessary funding of
losses by owners of LLVs.
With prospective 2017 and 2018 underwriting year losses, there
is the prospect of acquiring further LLVs in the future at lower
prices. We will continue to build on the quality of the capacity
portfolio as it is essential to acquire and retain the
participations on the better managed syndicates. The Group has been
able to acquire LLV's making efficient use of its capital and,
having deployed fully its available resources, is now evaluating
sources of further capital to continue building its portfolio.
Adjusted net asset value per share
2018 2017
GBP'000 GBP'000
----------------------------------- -------- --------
Net assets less intangible assets 4,994 8,835
Group letters of credit 1,744 1,532
Fair value of capacity (NAV) 20,638 13,046
----------------------------------- -------- --------
27,376 23,412
----------------------------------- -------- --------
Shares in issue (Note 21) 14,441 14,604
Adjusted net asset value per share
(GBP) 1.90 1.60
----------------------------------- -------- --------
The adjusted net asset value has increased by 19% as the value
of capacity has increased and reflects the assets acquired below
fair value. The value of capacity is subject to fluctuation and
reflects the activity in the capacity auctions held in the autumn
of each year.
Dividend
The Board recommends a final dividend of 1.5p per share together
with a special dividend of 1.5p per share, making a total of 3p per
share (2017: final dividend of 1.5p). Subject to shareholder
approval, these dividends will be payable to shareholders on the
register on 19 July 2019. If approved, the dividend will be paid in
a single payment on 31 July 2019. The Board considers that the
dividend policy should reflect the growth in the adjusted net asset
value of the Group and the available cash resources depending on
the opportunity to make acquisitions at favourable prices.
Outlook
Our strategy to build a fund of capacity on quality syndicates
at Lloyd's continues to develop with the growth of the capacity
portfolio by 32% in the year 2018.
The 2018 underwriting year was affected by the second year of
catastrophe claims above the Lloyd's market long-term average. The
losses in the year affected both the 2017 and 2018 underwriting
years and have been fully recognised in these accounts so any
improvement in the next two years will contribute to earnings. In
addition, firmer market conditions should be reflected in the
underwriting returns in the future.
The strategy of building a capacity portfolio of the better
available syndicates at Lloyd's should allow Helios to maintain its
outperformance of returns on capacity against the Lloyd's market.
The recent soft underwriting conditions will distinguish the better
managed syndicates which will deliver top quartile performance
within the Lloyd's market which will reinforce the demand for these
syndicates and assist in the recovery of the auction values. We
anticipate more opportunities to acquire LLVs at attractive
prices.
Board
The 2018 underwriting year has again proved our strategy of
reducing risk while producing additional underwriting capital to
pursue acquisitions. I am pleased to say that we have proved to be
successful in insulating the Company from severe losses. The
Executive team is to be congratulated on achieving an excellent
result in the circumstances.
Michael Cunningham
Non-executive Chairman
30 May 2019
Chief Executive's review
Attractive growth opportunities
Strategy creating value for shareholders
Summary
-- Adjusted net asset value at GBP1.90 per share (2017: GBP1.60), a 19% increase
-- 32% increase in the capacity portfolio from acquisitions during 2018
-- Negative goodwill arising from acquisitions of GBP1.2m contributing to shareholder value
-- 3.0p per share total dividends payable (2017: 1.5p)
Highlights
-- The strategy of building a quality portfolio of syndicate
capacity continues successfully as the portfolio increased from
GBP41m to GBP54m - a 32% increase.
-- Quota share reinsurance has provided finance for acquisitions
and has mitigated the loss from catastrophe losses in 2017 and
2018.
-- The value of the capacity portfolio has increased to GBP21m
(2017: GBP13.0m) adding 24p to the adjusted net asset value.
-- Helios' portfolio underwriting results for 2016 underwriting
year outperformed Lloyd's return on capacity by a record 11.6%
demonstrating the quality of the portfolio.
-- Market conditions for underwriting continue to improve
following 2017 and 2018 catastrophe losses.
-- With the prospect of improving underwriting returns, together
with the opportunity to continue to build the capacity portfolio,
Helios is well placed to deliver value to shareholders in the
future.
Building the capacity fund
The pace of building a portfolio of underwriting capacity at
Lloyd's was stepped up in 2018 through the purchase of a further
six corporate members. The flow of vehicles for sale increased as
existing owners wish to cease underwriting due to a change of
circumstances and as the impact from 2017 and 2018 losses started
to be felt. During 2018 GBP14.7m (2017: GBP4.4m) of capacity was
added. Already we have seen that the number of LLVs that are
marketed for sale in 2019 has increased as the prospective 2017 and
2018 losses impact the owners of the LLVs. The assets were acquired
at below fair value creating negative goodwill of GBP1.2m. Given
the flow of LLVs for sale at the current time, the level of
discount to current values should be able to be maintained.
There remains a risk to the implementation of our strategy if
suitable vehicles are not available at attractive prices and, in
addition, having fully deployed our available capital, the Group
needs to access additional resources to enable the implementation
of our strategy to be continued.
Summary of acquisitions
---------------------------------------------
Cash Humphrey Discount
consideration Capacity value to
GBPm GBPm GBPm Humphrey
----------------------------- -------------- -------- -------- ---------
Fyshe Underwriting LLP 0.1 0.5 0.1 40%
Nomina No 505 LLP 0.3 0.9 0.4 14%
Llewellyn House Underwriting
Ltd 0.4 0.5 0.5 8%
Advantage DCP Limited 1.9 2.3 2.6 31%
Nomina No 321 LLP 0.1 0.4 0.1 -
Romsey Underwriting 9.4 10.0 10.4 10%
----------------------------- -------------- -------- -------- ---------
Total in 2018 12.2 14.7 14.1 14%
----------------------------- -------------- -------- -------- ---------
Capacity value
The value of the portfolio of the syndicate capacity remains the
major asset of the Group and an important factor in delivering
overall returns to shareholders. The adjusted net asset value
("ANAV"), being the value of the net tangible assets of the Group,
together with the current value of the portfolio capacity, is a key
management metric in determining growth in value to
shareholders.
The Board recognises that the average prices derived from the
annual capacity auctions managed by the Corporation of Lloyd's
could be subject to material change if the level of demand for
syndicate capacity reduces or if the supply of capacity for sale
should increase. In 2018, the average prices of capacity traded in
the capacity auctions recovered to an average of 39p per GBP of
capacity.
Together with the capacity acquired with LLVs, the total value
of the fund is now GBP20.7m as at 31 December 2018 (2017:
GBP13.0m). The movement in the capacity and its value is as
follows:
2018
--------------------
Fair value
Capacity (WAV)
GBPm GBPm
----------------------------------------- -------- ----------
At 1 January 41.0 13.1
Capacity acquired with LLVs 14.7 4.3
Other capacity movements/change in value (3.1) 3.3
----------------------------------------- -------- ----------
At 31 December 52.6 20.7
----------------------------------------- -------- ----------
As syndicate profitability resumes, the Board expects the
projected cash flows will lead to higher valuations for capacity by
stimulating the demand in the capacity auctions as some owners of
the LLVs will wish to reinvest cash generated within the LLV in
auction purchases.
We will continue to invest in the better managed syndicates at
Lloyd's, to provide the outperformance of returns that justify the
capacity values.
The accounting policy requires an assessment of the carrying
value of each syndicate participation against the latest average
auction prices. The impairment charge for this year of GBP281,000
(2017: GBP899,000) results in a reduction in the fair value of the
syndicate capacity held on the balance sheet.
These movements in the carrying value of capacity have no impact
on cash flow.
Underwriting result
The calendar year underwriting profit from the Helios retained
capacity for 2018 has been generated from results recognised in the
portfolio from the 2016 to 2018 underwriting years as follows:
Underwriting year contribution
2018 2017
Underwriting year GBP'000 GBP'000
------------------ -------- --------
2015 - 1,295
2016 1,580 740
2017 912 (1,851)
2018 (1,709) -
------------------ -------- --------
783 184
------------------ -------- --------
During 2018, the 2016 underwriting year midpoint estimate
increased from 5.0% return on capacity to a final result of 8.6%.
The overall return on capacity for 2016 benefited from the below
average loss activity. The midpoint estimate for the 2017
underwriting year at 31 December 2018 was a loss of 8.6% (2017:
loss of 9.0%). The expected improvement in the midpoint estimate
for 2017 was impacted by the 2018 losses as this underwriting year
had some exposure to those events and by the deterioration of
syndicate estimates of potential losses. Nevertheless, we would
expect the 2017 underwriting year forecast to improve over the next
12 months and to make a contribution to 2019 calendar year
underwriting profits.
The level of major claims for the whole of Lloyd's during 2018
at GBP2.9bn (2017: GBP4.6bn) was the second consecutive year of
major claims and was GBP1bn higher than the long-term average.
These losses were incurred from smaller events - termed "secondary"
perils rather than losses from larger primary perils. Consequently,
the 2018 underwriting year result in the first 12 months retained
by Helios made a significant negative contribution mainly arising
from this attritional claims experience. The 2018 result at 12
months represents a loss of 8% (2017: loss of 15%) on the retained
capacity but we expect profits earned after January 2019 to reduce
the 2018 underwriting year loss substantially.
Following the recent receipt of the first estimates of the 2018
year of account we are pleased that the Helios midpoint loss of
3.5% is outperforming Lloyd's by 40 basis points.
The underwriting environment is continuing to improve in 2019
following two years of significant losses within most classes of
business.
Other income
Helios generates additional income at Group level from the
following:
2018 2017
GBP'000 GBP'000
--------------------------------- -------- --------
Fees from reinsurers 575 426
Corporate reinsurance recoveries 366 629
Gain on bargain purchases 1,184 65
Investment income (246) 158
--------------------------------- -------- --------
Total other income 1,879 1,278
--------------------------------- -------- --------
Fees from reinsurers continue to increase as the portfolio grows
while the profit commission will reduce with two underwriting years
now currently forecast to be loss making.
The Group has reinsurance policies at member level where any
expected underwriting year losses can be recovered up to the level
of indemnity for the member. For the 2017 and 2018 years of
account, an assessment has been made of the likely year of account
loss and a potential reinsurance recovery of GBP1m has been
made.
During the year the six acquisitions were acquired for a total
consideration of GBP12.2m, a discount of 14% to the Humphrey
valuations which generated negative goodwill of GBP1.2m in the
year.
The Group Funds at Lloyd's are now invested in cash to reduce
volatility.
Total costs
The costs of the Group comprise the operating expenses and the
cost of the stop loss protection bought to mitigate the downside
from large underwriting losses.
2018 2017
GBP'000 GBP'000
---------------- -------- --------
Pre-acquisition 56 (38)
Stop loss costs 296 259
Operating costs 1,702 1,646
---------------- -------- --------
Total costs 2,054 1,867
---------------- -------- --------
Quality of portfolio
We continue to focus ruthlessly on the quality syndicates. In
order to maintain the quality we strive to acquire LLVs with
portfolios that comprise quality syndicates, thereby having to pay
the average auction prices. Participations on weaker syndicates in
acquired portfolios are sold to maintain the overall quality. The
six largest participations with the leading managing agents at
Lloyd's account for 77% of the portfolio. These participations in
syndicates managed by these managing agents represent shares in the
better managed businesses at Lloyd's.
The underwriting results of the Helios portfolio have on average
outperformed the Lloyd's market average. Helios' average return on
capacity over the last three closed years is 13.1% and is on
average 8.5% higher than the average of the Lloyd's market. This
material outperformance cannot be expected to be maintained.
The combined ratio of the portfolio (before Helios corporate
costs) has been 5.5% lower than the Lloyd's market on average over
the last three calendar years. These incremental returns
demonstrate the diversity and breadth of underwriting expertise
within the businesses comprising the portfolio of syndicate
capacity.
Capacity
Syndicate Managing agent GBP'000 Total
--------- ---------------------------- -------- -----
Tokio Marine Kiln Syndicates
510 Ltd 9,352 17%
623 Beazley Furlonge Limited 8,037 15%
33 Hiscox Syndicates Limited 6,686 12%
Managing Agency Partners
2791 Limited 5,254 9%
609 Atrium Underwriters Limited 4,778 8%
ERS Syndicate Management
218 Ltd 4,368 8%
6117 Argo Managing Agency Limited 2,905 5%
--------- ---------------------------- -------- -----
Subtotal 41,381 77%
--------- ---------------------------- -------- -----
Other 12,283 22%
--------- ---------------------------- -------- -----
Total (includes the post balance
sheet acquisition) 53,664 100%
--------------------------------------- -------- -----
Reinsurance quota share
The use of quota share reinsurance to provide access to the
Lloyd's underwriting exposures for reinsurers and private capital
has been expanded. The core of the panel of reinsurers remains XL
Group plc and Everest Reinsurance Bermuda Limited.
This reinsurance reduces the exposure of the portfolio and
assists in the financing of the underwriting capital. Helios will
seek to reinsure a significant proportion of the capacity at the
start of the underwriting year to mitigate the open-year
underwriting exposures. For corporate members acquired during the
year, a proportion of the "on-risk" capacity will be ceded to
reinsurers whilst the capacity on older years will be retained 100%
by Helios. Therefore, the proportion of the overall capacity that
Helios retains is expected to rise as further corporate members are
acquired in the future. The profits earned after the company has
been acquired will be recognised by Helios.
The table shows that the Helios retained capacity increases
significantly in years 2 and 3 as further LLVs 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. Further
capacity was ceded to quota share reinsurers in 2018 from the
capacity acquired during the year as the reinsurers provided their
share of the necessary underwriting capital immediately; this
assisted in the funding of the acquisitions made.
The profits from the capacity on the older years are retained
100% by Helios.
Year of account - GBPm
----------------------------
2016 2017 2018 2019
------------------------------- ------ ------ ----- -----
Helios capacity at outset 8.4 9.9 12.3 15.8
Retained capacity in year
1 2.4 1.8 6.0 0.3
Retained capacity in years
2 and 3 23.1 17.3 0.4 -
------------------------------- ------ ------ ----- -----
Helios retained capacity 34.0 28.9 18.7 16.1
------------------------------- ------ ------ ----- -----
% of off-risk capacity
Ceded capacity at outset 19.7 22.8 28.7 36.8
Further capacity ceded to
QS 0.2 2.6 9.5 0.7
------------------------------- ------ ------ ----- -----
Total capacity ceded 19.9 25.4 38.2 37.6
------------------------------- ------ ------ ----- -----
Current total capacity 53.9 54.3 56.9 53.7
------------------------------- ------ ------ ----- -----
Helios share of total capacity 63% 53% 33% 30%
------------------------------- ------ ------ ----- -----
Development of profit estimates
As Helios has no active involvement in the underwriting or
management of the syndicates in 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.
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.
Following the 2018 and 2017 losses there has been a change in
pricing for most classes of business and the rate change data
published shows increases on average of 5%.
The biggest single risk faced by insurers arises from the
possibility of mispricing insurance on a large scale. This is
mitigated by the diversification of the syndicate portfolio and by
the depth of management experience within the syndicates that
Helios supports. These management teams have weathered multiple
market cycles and the risk management skills employed should reduce
the possibility of substantial under-reserving of previous-year
underwriting.
We assess the downside risk in the event of a major loss through
the monitoring of the aggregate net losses estimated by managing
agents to the catastrophe risk scenarios ("CRS") prescribed by
Lloyd's.
The individual syndicate net exposures will depend on the
business underwritten during the year and the reinsurance
protections purchased at syndicate level.
The aggregate exceedance probability ("AEP") assesses the
potential impact on balance sheet across the portfolio from either
single or multiple large losses with a probability of occurring
greater than once in a 30-year period.
In addition, Helios buys stop loss reinsurance that will
mitigate the impact of a significant loss to the portfolio.
For 2018, the scope of the stop loss cover has been rationalised
and terms have been included which will assist in funding a large
loss.
Capital position
The underwriting capital for the Helios portfolio is supplied as
follows:
2018 2017
Underwriting capital as at 31 December GBPm GBPm
--------------------------------------- ----- -----
Reinsurance panel 24.5 15.7
Helios own funds 8.3 10.5
Group letters of credit 2.2 2.1
--------------------------------------- ----- -----
Total 35.0 28.3
--------------------------------------- ----- -----
Helios has generated free cash of GBP1.6m in 2018 (2017: GBP1m)
from the distribution of its share of the final underwriting
profits of the 2015 underwriting year.
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
30 May 2019
Lloyd's Advisers' report - Hampden Agencies
Helios continues to outperform Lloyd's with combined ratio of
98.6% in 2018
Insurance rate rises moving faster than reinsurance
The quality of the Helios portfolio syndicates was again
demonstrated in 2018 with Helios reporting a combined ratio of
98.6% (2017: 106.9%) despite global insured losses from natural
catastrophes being the fourth highest on record at $76bn according
to Swiss Re. Helios' calendar year combined ratio (before corporate
costs) in 2018 outperformed the Lloyd's combined ratio which was
104.5% in 2018 (2017: 114.0%).
Over the last four calendar years, the average combined ratio of
the Helios portfolio was 95.9%, outperforming Lloyd's by 5.7
percentage points a year. The chart below shows the combined ratio
of the Helios portfolio compared with Lloyd's from 2015 to
2018.
With the closure of the 2016 account at 31 December 2018 the
Helios portfolio has outperformed Lloyd's for the eighth successive
three-year account result, reporting a profit of 8.6% on capacity
compared with the Lloyd's market average result which was a loss of
2.9% on capacity. Lloyd's syndicate returns are highly dispersed
with this dispersion increasing in the more difficult trading
environment of 2016.
The chart below shows the return on capacity of the Helios
portfolio compared with Lloyd's for the last four closed years from
2013 to 2016 and includes the open year estimates for 2017 and 2018
as at the end of Q1 2019. The open year estimates include the
recent acquisition in 2019 of Nameco 409. For the 2017 account the
estimate for the Helios portfolio is a midpoint 8.9% loss on
capacity at Q9 (Lloyd's average is a loss of 10.4%) and for the
2018 account the estimate is a midpoint 3.5% loss on capacity at Q5
(Lloyd's average is a loss of 3.8%).
$76bn insured losses from natural catastrophes in 2018 were the
fourth highest one-year total
The combined insurance losses from natural catastrophes in 2017
and 2018 were $219bn, the highest ever for a two-year period,
according to Swiss Re Sigma. Unlike 2017, which was affected by
three major natural catastrophe events, Hurricanes Harvey, Irma and
Maria, 2018 was affected by the frequency of smaller and mid-sized
events. The single largest insurance loss event of 2018 was the
camp fire in California ($12bn), while the US was also affected by
Hurricane Florence in September ($5.5bn) and Hurricane Michael in
October ($11bn). Typhoon Jebi was the strongest typhoon to hit
Japan in September 2018 since 1993 and, together with Typhoon
Trami, caused insured losses of $12bn. A number of companies have
announced deteriorations in their loss estimates from Jebi in Q1
2019.
In every ten-year period from 1851 to 2010 there was at least
one category three or worse hurricane which made landfall in the US
in every decade. Unique to the ten-year period 2007 to 2016, loss
activity from hurricanes was light with the lowest number of
hurricanes at five in a decade and not one being category three or
worse. The ten-year average of insured major losses between 2007
and 2016 was $46bn but this has now increased by 54% in the latest
ten-year period to 2018 to $71bn a year using 2018 prices.
Capital flow into reinsurance pauses
In the benign period for major losses between 2007 and 2016,
alternative capital from pension funds and other institutional
investors flowed into the reinsurance market searching for yield in
a low interest rate environment providing cost-effective risk
transfer for insurers to collateralised structures such as
collateralised reinsurance or catastrophe bonds. Over this period
total alternative capital grew fourfold and its market share
increased from 5.4% to 13.6% of global reinsurance capital
according to Aon Benfield.
2017 was the first test of the alternative market which reloaded
successfully and at Q3 2018 reached a new peak of $99bn before
falling back to $97bn at year end 2018. However, JLT Re estimates
that around 20% of this capital is trapped in loss reserves/buffers
and therefore cannot be used as collateral for 2019 reinsurance
programmes retrocession. The market has begun to see significant
dislocation which we see as a positive for market conditions
although the impact on the reinsurance market has been more muted.
A key reason for reinsurance rates falling for five successive
years between 2013 and 2017 was the growth of alternative capital
which was up by 78% over this period. There is no doubt that
alternative capital has suppressed reinsurance rate rises in 2018
and 2019 such that the reinsurance market has not reacted to major
losses to the same extent as in previous cycles.
Supply of capital remains close to all-time highs
Global reinsurer capital reduced by 3% to $585bn at year end
2018 although the reduction would have been 9.3% if JLT's estimate
of trapped capital is deducted from the $97bn alternative capital
component. The US property/casualty industry policyholders' surplus
reduced by just over 1% to $742.2bn at year end 2018, a decline of
$8.5bn from $750.7bn a year earlier.
How Lloyd's is responding
Lloyd's Performance Management Directorate has responded to the
deterioration in Lloyd's performance compared with its competitors
in the period 2016 to 2018 by placing a renewed focus on
profitability over growth in its approved syndicate business plans
for the 2019 year. At the same time Lloyd's is increasing its focus
on reducing acquisition costs and the fees and commissions charged
by brokers.
Lloyd's acquisition costs and administrative expenses as a
percentage of net premium reduced marginally in 2018 to 39.2%
compared with 39.5% in 2017. Lloyd's recently launched a Prospectus
that highlighted its ambition to reduce the costs of doing business
at Lloyd's with the aim to cut acquisition and administrative costs
for the most common risks from 30%-40% today to 10%-20%.
The attritional loss ratio which excludes major losses
deteriorated from 53.3% in 2016 financial year to 57.6% in 2018.
This increase in the attritional loss ratio highlights the need for
continued increases in rates combined with ensuring that the terms
and conditions of cover are not too broad.
Lloyd's Performance Management Director, Jon Hancock, recognises
the need to "close the performance gap" between Lloyd's and its
competitors. In order to address performance, Lloyd's has reduced
the amount of premium income syndicates are permitted to write
based on the business plan approvals for 2019 by around GBP3bn from
GBP35.5bn of gross written premium in 2018. Every syndicate has
been required to provide a remediation plan for the worst
performing portfolios at syndicate level, called Decile 10, while
Lloyd's has also highlighted the need to address poor performance
in eight specific classes at market level.
The Decile 10 portfolios were self-certified where syndicates
were required to identify the worst performing 10% of business
written and without a credible remediation plan required to place
the portfolio into run-off. The eight specific classes of business
at market level included three in the marine sector, cargo, yachts
and hull, and also overseas motor, power generation, non-US
professional indemnity and two non-US property classes being
property direct and facultative open market and binder
business.
The psychology of industry participants
Our view is that the psychology of industry participants has
always been an important component of the market cycle as trends
are reinforced over time. The mood of the market is beginning to
change as more brokers and buyers expect rate increases, making it
easier for underwriters to charge price increases. The factors that
have contributed to this change in mood include concerns about the
adequacy of industry reserves for the most recent accident years,
low investment returns and deteriorating underwriting results.
The need for increased rates at Lloyd's is highlighted by the
fact that if prior year releases and major losses are excluded the
Lloyd's combined ratio for 2018 improved to 96.4% from 98.6% in
2017, showing that without prior year releases Lloyd's has
insufficient premium to pay claims in an average major loss
year.
Broader industry pressures are evident with the rating agency A
M Best suggesting that US property and casualty insurers' reserves
are currently deficient. If this analysis is correct, reserve
erosion will increase pressure for rates to increase particularly
on US liability business.
Twice a year, Barclays Research conducts a survey of 50
interviews with large company corporate risk managers in the US in
order to assess the directional trend in property and casualty
insurance pricing. In its most recent survey taken in January 2019,
70% of buyers are expecting rate increases in the highest levels
since mid-2013 and this compares with only 12% of buyers expecting
rate increases two years ago.
Willingness to deploy capital is contributing to improved market
conditions
The availability of capital remains ample to satisfy insurance
and reinsurance demands. However, it is the willingness to deploy
capital which is contributing to improved market conditions. AIG,
for example, is making fundamental changes to its underwriting
strategy for 2019 including reducing its property gross limits from
$2.5bn to $750m along with reducing casualty gross limits from
$250m to $100m.
The insurance market in 2019
We are increasingly encouraged that underwriting discipline is
returning to the market following the softening market conditions
in both reinsurance and insurance during the 2013 and 2017 period.
While rate rises in 2019 continue to be modest they are compounding
on rate rises experienced in 2018 and in insurance, in particular
the excess and surplus lines market, which is so important to
Lloyd's, there are signs that the pace of rate rises is
accelerating.
Rate rises have been compounding since Q4 2017
Hampden's latest survey of rate changes in Lloyd's in the first
quarter of 2019 shows rate increases in all major classes averaging
2.5%; the lowest average rate increase is in reinsurance at
1.4%.
In the US, using data from the Council of Insurance Agents and
Brokers ("CIAB"), property and casualty insurance rates have now
increased for six successive quarters to Q1 2019 following a period
of rate reductions for 13 quarters from Q3 2014. The average rate
increase across all lines of business and sizes of account
accelerated to 3.5% in Q1 2019 (2.4% in Q4 2018) compared with only
0.3% in Q4 2017.
US property catastrophe rate increases in contrast slowed in
January 2019 according to reinsurance broker Guy Carpenter to 2.6%
compared with 8.1% in 2018. However, we expect higher rate
increases in loss affected Florida renewals in June 2019 following
two years of losses on Florida reinsurance business. The 1 April
Japanese wind renewals, which were impacted by losses from Typhoons
Jebi and Trami, were up by 15% to 25% according to Willis Re.
Insurance classes are currently more attractive than
reinsurance
Currently, market conditions in most insurance classes are more
attractive compared with reinsurance. This is reflected in the
share of insurance business in the Helios portfolio for 2019 which
has increased to 74.2% (72.3% for 2018) compared with only 25.8%
for reinsurance business (27.7% in 2017), based on syndicate
business plans.
The economy drives the property casualty insurance industry with
net written premiums, a proxy for demand, tracking nominal GDP
growth fairly well other than in "hard markets". Full year US real
GDP growth was strong in 2018 at 3%. While one in four economists
are forecasting a recession in 2019/2020, the average forecast of
economists by Blue Chip Economic Indicators is for GDP growth of
2.3% for 2019. In the US net written premium growth for insurers
accelerated to 10.8% in 2018 from 4.6% in 2017. The main driver was
organic growth in underlying direct written premiums combined with
what is likely a one-off change owing to a reduction in reinsurance
ceded to US affiliates prompted by US tax reforms. The increase in
net written premiums is further evidence of improving market
conditions.
Low investment returns reinforce the need for underwriting
discipline
Investment returns remain low measured by the yields on
government bonds and therefore reinforces the need for underwriting
discipline. The average yield of US p/c insurers' investments was
3.4% in 2018, which is still more than 1% point lower than before
the financial crisis of 2007/2008. While the US Federal Reserve
increased interest rates four times in 2018, the yield curve
flattened which, in our view, benefits Lloyd's syndicates compared
with competitors owing to the short duration of syndicates' bond
portfolios while competitors typically have longer durations.
Between January 2018 and April 2019 the US Treasury five-year yield
reduced from 2.4% to 2.3% while the two-year Treasury increased
from 2% to 2.3%.
A continued focus on quality
Our focus in this market remains on quality syndicates with key
success characteristics being conservative reserving with a focus
on profit rather than growth.
The Helios portfolio for 2019 continues to provide a good spread
of business across managing agents and classes of business. For
2019 48% of the portfolio measured by capacity is on syndicates
graded "AA" or "A" by Hampden with the second and third largest
participations at 15.1% and 12.4% respectively being on Beazley
Syndicate 623 and Hiscox Syndicate 33.
Lloyd's has had a tough two years in 2017 and 2018 but we at
Hampden are encouraged by the reaction of the syndicates, Lloyd's
and the wider insurance market. The Helios portfolio has a strong
record of outperformance of Lloyd's overall and therefore should
benefit in the current market as underperforming syndicates in
Lloyd's not backed by Helios re-underwrite their books of business.
This is not a "hard market" but the rating momentum, particularly
in insurance classes, is greater than in 2018, which suggests to us
that the improved rating environment is sustainable, improving
underwriting prospects for 2019 and beyond.
Hampden Agencies
30 May 2019
Summary financial information
The information set out below is a summary of the key items that
the Board assesses in estimating the financial position of the
Group. Given the Board has no active role in the management of the
syndicates within the portfolio, the following approach is
taken:
A) It relies on the quarterly syndicate forecasts to assess its
share of the underlying profitability of the syndicates within the
portfolio.
B) It calculates the amounts due to/from the quota share
reinsurers in respect of their share of the profits/losses as well
as fees and commissions due.
C) An adjustment is made to exclude pre-acquisition profits on companies bought in the year.
D) Costs relating to stop loss reinsurance and operating costs are deducted.
Year to 31 December
---------------------
2018 2017
GBP'000 GBP'000
------------------------------------------- ---------- ---------
Underwriting profit 783 183
------------------------------------------- ---------- ---------
Other income:
- fees from reinsurers 575 426
- corporate reinsurance policies 366 629
- goodwill on bargain purchase 1,184 65
- investment income (246) 158
------------------------------------------- ---------- ---------
Total other income 1,879 1,278
------------------------------------------- ---------- ---------
Costs:
- pre-acquisition (56) 38
- stop loss costs (296) (259)
- operating costs (1,702) (1,646)
------------------------------------------- ---------- ---------
Total costs (2,054) (1,867)
------------------------------------------- ---------- ---------
Operating profit/(loss) before impairments
of goodwill and capacity 608 (406)
Impairment charge - capacity (281) (899)
Tax 129 611
------------------------------------------- ---------- ---------
Profit/(loss) for the year 456 (694)
------------------------------------------- ---------- ---------
Year to 31 December 2018
Helios
retained
capacity Total % earned
at profit/(loss) in the
31 December Portfolio currently 2018 Helios
2018 midpoint estimated calendar profits
Underwriting year GBPm forecasts GBP'000 year GBP'000
------------------ ------------ ---------- -------------- --------- --------
2016 33.9 8.6% 2,915 54% 1,580
2017 28.2 (8.2%) (2,312) 39% 912
2018 18.3 N/A - - (1,709)
------------------ ------------ ---------- -------------- --------- --------
783
------------------ ------------ ---------- -------------- --------- --------
Year to 31 December 2017
Helios
retained
capacity % earned
at Total profit in the
31 December Portfolio currently 2017 Helios
2017 midpoint estimated calendar profits
Underwriting year GBPm forecasts GBP'000 year GBP'000
------------------ ------------ ---------- ------------ --------- --------
2015 19.7 12.9% 2,547 51% 1,295
2016 18.3 3.5% 641 116% 740
2017 12.0 N/A - - (1,851)
------------------ ------------ ---------- ------------ --------- --------
184
------------------ ------------ ---------- ------------ --------- --------
Summary balance sheet
See Note 28 for further information.
2018 2017
GBP'000 GBP'000
----------------------- -------- --------
Intangible assets 16,051 12,175
Funds at Lloyd's 8,388 10,489
Other cash 9,717 1,078
Other assets 10,156 6,669
----------------------- -------- --------
Total assets 44,312 30,411
----------------------- -------- --------
Deferred tax 2,569 2,963
Borrowings 9,196 1,094
Other liabilities 3,891 4,391
----------------------- -------- --------
Total liabilities 15,656 8,448
----------------------- -------- --------
Total syndicate equity (7,611) (954)
----------------------- -------- --------
Total equity 21,045 21,009
----------------------- -------- --------
Cash flow
Helios has generated GBP1.6m of cash in 2018 after the repayment
of the short term borrowings of GBP8.1m.
Year to Year to
31 December 31 December
2018 2017
Analysis of free working capital GBP'000 GBP'000
------------------------------------ ------------ ------------
Opening balance (free cash) 1,078 7,229
Income
Cash acquired on acquisition 1,057 420
Distribution of profits (net
of tax retentions) 3,887 4,064
Transfers from Funds at Lloyd's 14,880 2,211
Other income 323 300
Proceeds from the sale of capacity 65 -
Borrowings 9,196 1,081
Expenditure
Operating costs (1,778) (1,281)
Payable funds for acquisitions (721) -
Payments to QS reinsurers (1,918) (550)
Acquisition of LLVs (10,859) (4,858)
Transfers to Funds at Lloyd's (3,212) (5,818)
Tax (766) (655)
Dividends paid (219) (803)
Revolving credit facility repayment (1,094) -
Share buy backs (202) -
------------------------------------ ------------ ------------
Closing balance 9,717 1,078
------------------------------------ ------------ ------------
Year to Year to
31 December 31 December
2018 2017
Adjusted NAV GBP'000 GBP'000
---------------------------------- ------------ ------------
Net assets less intangible assets 4,994 8,835
Group letter of credit 1,744 1,532
Fair value of capacity (WAV) 20,638 13,046
---------------------------------- ------------ ------------
27,376 23,412
---------------------------------- ------------ ------------
Shares in issue - on the market
(Note 21) 14,441 14,604
Shares in issue - total of on
the market and JSOP shares 14,941 15,104
Adjusted net asset value per
share GBP - on the market 1.90 1.60
Adjusted net asset value per
share GBP - on the market and
JSOP shares 1.83 1.55
---------------------------------- ------------ ------------
Consolidated statement of comprehensive income - Year ended 31
December 2018
Year ended Year ended
31 December 31 December
2018 2017
Note GBP'000 GBP'000
----------------------------------------- ---- ------------ ------------
Gross premium written 6 38,703 34,701
Reinsurance premium ceded 6 (7,675) (6,717)
----------------------------------------- ---- ------------ ------------
Net premium written 6 31,028 27,984
----------------------------------------- ---- ------------ ------------
Change in unearned gross premium
provision 7 (360) 1,761
Change in unearned reinsurance
premium provision 7 284 (319)
----------------------------------------- ---- ------------ ------------
Net change in unearned premium
provision 7 (76) 1,442
----------------------------------------- ---- ------------ ------------
Net earned premium 5,6 30,952 29,426
Net investment income 8 295 1,010
Other underwriting income 266 267
Gain on bargain purchase 22 1,184 65
Other income (184) (35)
----------------------------------------- ---- ------------ ------------
Revenue 32,513 30,733
----------------------------------------- ---- ------------ ------------
Gross claims paid (23,631) (19,204)
Reinsurers' share of gross claims
paid 4,859 4,905
----------------------------------------- ---- ------------ ------------
Claims paid, net of reinsurance (18,772) (14,299)
----------------------------------------- ---- ------------ ------------
Change in provision for gross
claims 7 (1,109) (8,761)
Reinsurers' share of change in
provision for gross claims 7 909 5,028
----------------------------------------- ---- ------------ ------------
Net change in provision for claims 7 (200) (3,733)
----------------------------------------- ---- ------------ ------------
Net insurance claims incurred
and loss adjustment expenses 6 (18,972) (18,032)
----------------------------------------- ---- ------------ ------------
Expenses incurred in insurance
activities (11,696) (11,819)
Other operating expenses (1,237) (1,288)
----------------------------------------- ---- ------------ ------------
Operating expenses 9 (12,933) (13,107)
----------------------------------------- ---- ------------ ------------
Operating profit/(loss) before
impairments of goodwill and capacity 6 608 (406)
Impairment of syndicate capacity 13 (281) (899)
----------------------------------------- ---- ------------ ------------
Profit/(loss) before tax 327 (1,305)
Income tax credit 10 129 611
----------------------------------------- ---- ------------ ------------
Profit/(loss) for the year 456 (694)
----------------------------------------- ---- ------------ ------------
Other comprehensive income
Foreign currency translation differences - -
Income tax relating to the components
of other comprehensive income - -
----------------------------------------- ---- ------------ ------------
Other comprehensive income for
the year, net of tax - -
----------------------------------------- ---- ------------ ------------
Total comprehensive income for
the year 456 (694)
----------------------------------------- ---- ------------ ------------
Profit/(loss) for the year attributable
to owners of the Parent 456 (694)
----------------------------------------- ---- ------------ ------------
Total comprehensive income for
the year attributable to owners
of the Parent 456 (694)
----------------------------------------- ---- ------------ ------------
Earnings/(loss) per share attributable
to owners of the Parent
Basic 11 3.14p (4.75)p
Diluted 11 3.03p (4.75)p
----------------------------------------- ---- ------------ ------------
The profit/(loss) attributable to owners of the Parent, the
total comprehensive income and the 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
2018
31 December 31 December
2018 2017
Note GBP'000 GBP'000
------------------------------------------ ----- ----------- -----------
Assets
Intangible assets 13 16,051 12,175
Financial assets at fair value through
profit or loss 15 58,075 48,074
Reinsurance assets:
- reinsurers' share of claims outstanding 7 22,698 14,836
- reinsurers' share of unearned premium 7 4,057 2,354
Other receivables, including insurance
and reinsurance receivables 16 52,938 32,949
Deferred acquisition costs 17 6,782 4,420
Prepayments and accrued income 439 268
Cash and cash equivalents 12,202 2,844
------------------------------------------ ----- ----------- -----------
Total assets 173,242 117,920
------------------------------------------ ----- ----------- -----------
Liabilities
Insurance liabilities:
- claims outstanding 7 88,032 59,833
- unearned premium 7 24,772 15,916
Deferred income tax liabilities 18 2,635 2,963
Borrowings 19 9,196 1,094
Other payables, including insurance
and reinsurance payables 20 25,321 15,558
Accruals and deferred income 2,241 1,546
------------------------------------------ ----- ----------- -----------
Total liabilities 152,197 96,910
------------------------------------------ ----- ----------- -----------
Equity
Equity attributable to owners of the
Parent:
Share capital 21 1,510 1,510
Share premium 21 15,387 15,387
Other reserves - treasury shares (JSOP) (50) (50)
Retained earnings 4,198 4,163
------------------------------------------ ----- ----------- -----------
Total equity 21,045 21,010
------------------------------------------ ----- ----------- -----------
Total liabilities and equity 173,242 117,920
------------------------------------------ ----- ----------- -----------
The Financial Statements were approved and authorised for issue
by the Board of Directors on 30 May 2019, and were signed on its
behalf by:
Nigel Hanbury
Chief Executive
The notes are an integral part of these Financial
Statements.
Parent Company statement of financial position - At 31 December
2018
Company number: 05892671
31 December 31 December
2018 2017
Note GBP'000 GBP'000
---------------------------------------- ---- ----------- -----------
Assets
Investments in subsidiaries 14 24,559 15,456
Financial assets at fair value through
profit or loss 15 - 1
Other receivables 16 6,693 9,446
Cash and cash equivalents 8,430 982
---------------------------------------- ---- ----------- -----------
Total assets 39,682 25,885
---------------------------------------- ---- ----------- -----------
Liabilities
Borrowings 19 9,196 1,094
Other payables 20 1,835 182
---------------------------------------- ---- ----------- -----------
Total liabilities 11,031 1,276
---------------------------------------- ---- ----------- -----------
Equity
Equity attributable to owners of the
Parent:
Share capital 21 1,510 1,510
Share premium 21 15,387 15,387
---------------------------------------- ---- ----------- -----------
16,897 16,897
---------------------------------------- ---- ----------- -----------
Retained earnings:
At 1 January 7,712 13,029
Profit/(loss) for the year attributable
to owners of the Parent 4,463 (4,514)
Other changes in retained earnings (421) (803)
---------------------------------------- ---- ----------- -----------
At 31 December 11,754 7,712
---------------------------------------- ---- ----------- -----------
Total equity 28,651 24,609
---------------------------------------- ---- ----------- -----------
Total liabilities and equity 39,682 25,885
---------------------------------------- ---- ----------- -----------
The Financial Statements were approved and authorised for issue
by the Board of Directors on 30 May 2019, 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 2018
Attributable to owners
of the Parent
-----------------------------------------
Other
Share Share reserves Retained Total
capital premium (JSOP) earnings equity
Note GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
-------------------------------- ---- -------- --------- --------- --------- --------
At 1 January 2017 1,460 15,399 - 5,660 22,519
-------------------------------- ---- -------- --------- --------- --------- --------
Total comprehensive income
for the year:
Loss for the year - - - (694) (694)
Other comprehensive income,
net of tax - - - - -
-------------------------------- ---- -------- --------- --------- --------- --------
Total comprehensive income
for the year - - - (694) (694)
-------------------------------- ---- -------- --------- --------- --------- --------
Transactions with owners:
Dividends paid 12 - - - (803) (803)
Treasury shares (JSOP) 23 - - (50) - (50)
Share issue, net of transaction
costs 21 50 (12) - - 38
-------------------------------- ---- -------- --------- --------- --------- --------
Total transactions with
owners 50 (12) (50) (803) (815)
-------------------------------- ---- -------- --------- --------- --------- --------
At 31 December 2017 1,510 15,387 (50) 4,163 21,010
-------------------------------- ---- -------- --------- --------- --------- --------
At 1 January 2018 1,510 15,387 (50) 4,163 21,010
-------------------------------- ---- -------- --------- --------- --------- --------
Total comprehensive income
for the year:
Profit for the year - - - 456 456
Other comprehensive income,
net of tax - - - - -
-------------------------------- ---- -------- --------- --------- --------- --------
Total comprehensive income
for the year - - - 456 456
-------------------------------- ---- -------- --------- --------- --------- --------
Transactions with owners:
Dividends paid 12 - - - (219) (219)
Company buy back of ordinary 21,
shares 23 - - - (202) (202)
Share issue, net of transaction
costs 21 - - - - -
-------------------------------- ---- -------- --------- --------- --------- --------
Total transactions with
owners - - - (421) (421)
-------------------------------- ---- -------- --------- --------- --------- --------
At 31 December 2018 1,510 15,387 (50) 4,198 21,045
-------------------------------- ---- -------- --------- --------- --------- --------
The notes are an integral part of these Financial
Statements.
Parent Company statement of changes in equity - Year ended 31
December 2018
Share Share Retained Total
capital premium earnings equity
Note GBP'000 GBP'000 GBP'000 GBP'000
-------------------------------- ---- -------- -------- --------- --------
At 1 January 2017 1,460 15,399 13,029 29,888
-------------------------------- ---- -------- -------- --------- --------
Total comprehensive income
for the year:
Profit for the year - - (4,514) (4,514)
Other comprehensive income,
net of tax - - - -
-------------------------------- ---- -------- -------- --------- --------
Total comprehensive income
for the year - - (4,514) (4,514)
-------------------------------- ---- -------- -------- --------- --------
Transactions with owners:
Dividends paid 12 - - (803) (803)
Share issue, net of transaction
costs 21 50 (12) - 38
-------------------------------- ---- -------- -------- --------- --------
Total transactions with
owners 50 (12) (803) (765)
-------------------------------- ---- -------- -------- --------- --------
At 31 December 2017 1,510 15,387 7,712 24,609
-------------------------------- ---- -------- -------- --------- --------
At 1 January 2018 1,510 15,387 7,712 24,609
-------------------------------- ---- -------- -------- --------- --------
Total comprehensive income
for the year:
Profit for the year - - 4,463 4,463
Other comprehensive income,
net of tax - - - -
-------------------------------- ---- -------- -------- --------- --------
Total comprehensive income
for the year - - 4,463 4,463
-------------------------------- ---- -------- -------- --------- --------
Transactions with owners:
Dividends paid 12 - - (219) (219)
Company buy back of ordinary 21,
shares 23 - - (202) (202)
Share issue, net of transaction
costs - - - -
-------------------------------- ---- -------- -------- --------- --------
Total transactions with
owners - - (421) (421)
-------------------------------- ---- -------- -------- --------- --------
At 31 December 2018 1,510 15,387 11,754 28,651
-------------------------------- ---- -------- -------- --------- --------
The notes are an integral part of these Financial
Statements.
Consolidated statement of cash flows - Year ended 31 December
2018
Year
ended Year ended
31 December 31 December
2018 2017
Note GBP'000 GBP'000
----------------------------------------------------- ---- ------------ ------------
Cash flows from operating activities
Profit/(loss) before tax 327 (1,305)
Adjustments for:
- interest received 8 (144) (126)
- investment income 8 (841) (731)
- gain on bargain purchase 22 (1,184) (65)
- impairment of goodwill 22 - -
- profit on sale of intangible assets (125) (4)
- impairment of intangible assets 13 281 899
Changes in working capital:
- change in fair value of financial assets
held at fair value through profit or loss 8 490 426
- increase in financial assets at fair value
through profit or loss 10,585 2,314
- (increase)/decrease in other receivables (7,113) 2,921
- increase/(decrease) in other payables 3,955 (1,790)
- net increase/(decrease) in technical provisions 2,162 (2,801)
----------------------------------------------------- ---- ------------ ------------
Cash generated from/(used in) operations 8,393 (262)
----------------------------------------------------- ---- ------------ ------------
Income tax paid (962) (630)
----------------------------------------------------- ---- ------------ ------------
Net cash from/(used in) operating activities 7,431 (893)
----------------------------------------------------- ---- ------------ ------------
Cash flows from investing activities
Interest received 144 126
Investment income 841 731
Purchase of intangible assets 13 - (180)
Proceeds from disposal of intangible assets 86 28
Acquisition of subsidiaries, net of cash acquired (6,825) (3,471)
----------------------------------------------------- ---- ------------ ------------
Net cash from/(used in) investing activities (5,754) (2,766)
----------------------------------------------------- ---- ------------ ------------
Cash flows from financing activities
Net proceeds from issue of ordinary share
capital - -
Payment for Company buy back of shares 24 (202) -
Proceeds from borrowings 19 9,196 1,094
Repayment of borrowings 19 (1,094) -
Dividends paid to owners of the Parent 12 (219) (803)
----------------------------------------------------- ---- ------------ ------------
Net cash from financing activities 7,681 291
----------------------------------------------------- ---- ------------ ------------
Net increase/(decrease) in cash and cash equivalents 9,358 (3,368)
Cash and cash equivalents at beginning of
year 2,844 6,212
----------------------------------------------------- ---- ------------ ------------
Cash and cash equivalents at end of year 12,202 2,844
----------------------------------------------------- ---- ------------ ------------
Cash held within the syndicates' accounts is GBP2,522,000 (2017:
GBP1,766,000) of the total cash and cash equivalents held at the
year end of GBP12,202,000 (2017: GBP2,844,000). 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.
Parent Company statement of cash flows - Year ended 31 December
2018
Year ended Year ended
31 December 31 December
2018 2017
Note GBP'000 GBP'000
--------------------------------------------- ------ ------------ ------------
Cash flows from operating activities
Profit/(loss) before tax 4,204 (4,672)
Adjustments for:
- investment income - 1
- dividends received (8,079) (4,361)
- impairment of investment in subsidiaries 14 2,506 8,099
Changes in working capital:
- change in fair value of financial
assets held at fair value through profit
or loss - 21
- decrease in financial assets at fair
value through profit or loss 1 2,347
- (increase)/decrease in other receivables (601) 163
- increase/(decrease) in other payables 2,182 (146)
--------------------------------------------- ------ ------------ ------------
Net cash from/(used in) operating activities 213 1,452
--------------------------------------------- ------ ------------ ------------
Cash flows from investing activities
Investment income - (1)
Dividends received 8,079 4,361
Acquisition of subsidiaries 14, 22 (12,142) (4,052)
Amounts owed by subsidiaries 25 3,617 (4,914)
--------------------------------------------- ------ ------------ ------------
Net cash used in investing activities (446) (4,606)
--------------------------------------------- ------ ------------ ------------
Cash flows from financing activities
Payment for Company buy back of shares 24 (202) -
Proceeds from borrowings 19 9,196 1,094
Repayment of borrowings 19 (1,094) -
Dividends paid to owners of the Parent 12 (219) (803)
--------------------------------------------- ------ ------------ ------------
Net cash from financing activities 7,681 291
--------------------------------------------- ------ ------------ ------------
Net increase/(decrease) in cash and
cash equivalents 7,448 (2,863)
Cash and cash equivalents at beginning
of year 982 3,845
--------------------------------------------- ------ ------------ ------------
Cash and cash equivalents at end of
year 8,430 982
--------------------------------------------- ------ ------------ ------------
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
2018
1. General information
The Company is a public limited company listed on AIM. The
Company was incorporated in England and is domiciled in the UK and
its registered office is 40 Gracechurch Street, London EC3V 0BT.
These Financial Statements comprise the Company and its
subsidiaries (together referred to as the "Group"). The Company
participates in insurance business as an underwriting member at
Lloyd's through its subsidiary undertakings.
2. Significant accounting policies
The principal accounting policies adopted in the preparation of
the Group and Parent Company Financial Statements (the "Financial
Statements") are set out below. These policies have been
consistently applied to all the years presented, unless otherwise
stated.
Basis of preparation
The Financial Statements have been prepared in accordance with
International Financial Reporting Standards ("IFRS") and
interpretations issued by the IFRS Interpretations Committee
("IFRIC") as adopted by the European Union ("EU"), and those parts
of the Companies Act 2006 applicable to companies reporting under
IFRS.
No statement of comprehensive income is presented for Helios
Underwriting plc, as a Parent Company, as permitted by Section 408
of the Companies Act 2006.
The Financial Statements have been prepared under the historical
cost convention as modified by the revaluation of financial assets
at fair value through profit or loss.
Use of judgements and estimates
The preparation of Financial Statements in conformity with IFRS
requires the use of judgements, estimates and assumptions in the
process of applying the Group's accounting policies that affect the
reported amounts of assets and liabilities at the date of the
Financial Statements and the reported amounts of revenues and
expenses during the reporting year. Although these estimates are
based on management's best knowledge of the amounts, events or
actions, actual results may ultimately differ from these estimates.
Further information is disclosed in Note 3.
The Group participates in insurance business through its Lloyd's
member subsidiaries. Accounting information in respect of syndicate
participations is provided by the syndicate managing agents and is
reported upon by the syndicate auditors.
Going concern
The Group and the Company have net assets at the end of the
reporting period of GBP21,045,000 and GBP28,651,000
respectively.
The Company's subsidiaries participate as underwriting members
at Lloyd's on the 2016, 2017 and 2018 years of account, as well as
any prior run-off years, and they have continued this participation
since the year end on the 2019 year of account. This underwriting
is supported by Funds at Lloyd's totalling GBP10,578,000 (2017:
GBP12,164,000), letters of credit provided through the Group's
quota share reinsurance agreements totalling GBP24,544,000 (2017:
GBP15,683,000) and solvency credits issued by Lloyd's totalling
GBPnil (2017: GBP1,052,000).
The Directors have a reasonable expectation that the Group and
the Company have adequate resources to meet their underwriting and
other operational obligations for the foreseeable future.
Accordingly, they continue to adopt the going concern basis of
accounting in preparing the annual Financial Statements.
International Financial Reporting Standards
Adoption of new and revised standards
During the current year the Group and the Company adopted all
the new and revised IFRS, amendments and interpretations that are
relevant to its operations and are effective for accounting periods
beginning on 1 January 2018, apart from IFRS 9 "Financial
Instruments", for which a temporary exemption has been applied by
the Group, as explained further below. These are set out below and
did not have a material impact on the accounting policies of the
Group and the Company:
-- IFRS 15 "Revenue from Contracts with Customers", issued on 28
May 2014, including amendments to IFRS 15, issued on 11 September
2015 (effective 1 January 2018).
-- Clarifications to IFRS 15 "Revenue from Contracts with
Customers", issued on 12 April 2014 (effective 1 January 2018).
-- Amendments to IFRS 2: Classification and Measurement of
Share-based Payment Transactions, issued on 20 June 2016 (effective
1 January 2018).
-- Amendments to IFRS 4: Applying IFRS 9 "Financial Instruments"
with IFRS 4 "Insurance Contracts", issued on 12 September 2016
(effective 1 January 2018).
-- IFRIC Interpretation 22 "Foreign Currency Transactions and
Advance Consideration", issued on 8 December 2016 (effective 1
January 2018).
-- Amendments to IAS 40: Transfers of Investment Property,
issued on 8 December 2016 (effective 1 January 2018).
-- Annual Improvements to IFRS 2014-2016 Cycle, issued on 8
December 2016 (effective 1 January 2018).
Temporary exemptions from IFRS 9 "Financial Instruments",
(effective 1 January 2018)
The effective date of IFRS 9 Financial Instruments is January
2018. An insurer that has not previously adopted any version of
IFRS 9, including the requirements for the presentation of gains
and losses on financial liabilities designated as at fair value
through profit or loss and whose activities are predominantly
connected with insurance as its annual reporting date that
immediately precedes 1 April 2016 (or a later date as specified in
paragraph 20G of IFRS 4), may apply IAS 39 - Financial Instruments:
Recognition and Measurement, rather than IFRS 17 - Insurance
Contracts.
The Group has applied the temporary exemption from IFRS 9 as its
activities are predominately connected with insurance and it has
not previously adopted any version of IFRS 9, including the
requirements for the presentation of gains and losses on financial
liabilities designated at fair value through profit or loss, for
annual period beginning before 1 January 2022. Consequently, the
Group has a single date of initial application for IFRS 9 in it's
entirely, being 1 January 2022.
New standards, amendments and interpretations not yet
adopted
At the date of authorisation of these Financial Statements, the
following standards, amendments and interpretations were in issue
but not yet effective:
(i) Adopted by the EU
-- IFRS 16 "Leases", issued on 13 January 2016 (effective 1 January 2019).
-- IFRS 23 "Uncertainty over Income Tax Treatments", issued on 7
June 2017, (effective date 1 January 2019).
-- Amendments to IFRS 9: Prepayment Features with Negative
Compensation, issued on 12 October 2017, (effective date 1 January
2019).
-- Amendments to IAS 28: Long-term Interests in Associates and
Joint Ventures, issued on 12 December 2017, (effective date 1
January 2019).
-- Annual improvements to IFRS 2015-2017 Cycle, issued on 12
December 2017, (effective date 1 January 2019).
-- Amendments to IAS 19: Plan Amendment, Curtailment or
Settlement, issued on 7 February 2017, (effective date 1 January
2019).
(ii) Not adopted by the EU
Standards:
-- IFRS 17 "Insurance Contracts", issued on 18 May 2017, (effective date 1 January 2022).
Amendments:
-- Amendments to References to the Conceptual Framework in IFRS,
issued on 29 March 2017, (effective date 1 January 2020).
-- Amendment to IFRS 3 Business Combinations, issued on 22
October 2018, (effective 1 January 2020).
-- Amendments to IAS 1 and IAS 8: Definition of Material, issued
on 31 October 2018, (effective 1 January 2020).
Principles of consolidation, business combinations and
goodwill
(a) Consolidation and investments in subsidiaries
The Group Financial Statements incorporate the Financial
Statements of Helios Underwriting plc, the Parent Company, and its
directly and indirectly held subsidiaries being Hampden Corporate
Member Limited, Nameco (No. 365) Limited, Nameco (No. 605) Limited,
Nameco (No. 321) Limited, Nameco (No. 917) Limited, Nameco (No.
229) Limited, Nameco (No. 518) Limited, Nameco (No. 804) Limited,
Halperin Underwriting Limited, Bernul Limited, Dumasco Limited,
Nameco (No. 311) Limited, Nameco (No. 402) Limited, Updown
Underwriting Limited, Nameco (No. 507) Limited, Nameco (No. 76)
Limited, Kempton Underwriting Limited, Devon Underwriting Limited,
Nameco (No. 346) Limited, Pooks Limited, Charmac Underwriting
Limited, Nottus (No 51) Limited, Chapman Underwriting Limited,
Llewellyn House Underwriting Limited, Advantage DCP Limited, Romsey
Underwriting Limited, RBC CEES Trustee Limited (see Notes 14 and
23), Helios UTG Partner Limited, Nomina No 035 LLP, Nomina No 342
LLP, Nomina No 380 LLP, Nomina No 372 LLP, Salviscount LLP,
Inversanda LLP, Fyshe Underwriting LLP, Nomina No 505 LLP and
Nomina No 321 LLP (Note 14).
The Financial Statements for all of the above subsidiaries are
prepared for the year ended 31 December 2018 under UK GAAP.
Consolidation adjustments are made to convert the subsidiary
Financial Statements prepared under UK GAAP to IFRS so as to align
accounting policies and treatments.
No income statement is presented for Helios Underwriting plc as
permitted by Section 408 of the Companies Act 2006. The profit
after tax for the year of the Parent Company was GBP4,463,000
(2017: loss GBP4,514,000).
Subsidiaries are entities over which the Group has the power to
govern the financial and operating policies generally accompanying
a shareholding or partnership participation of more than one half
of the voting rights. The existence and effect of potential voting
rights that are currently exercisable or convertible are considered
when assessing whether the Group controls another entity.
Subsidiaries are fully consolidated from the date on which
control is transferred to the Group. They are deconsolidated from
the date that control ceases.
Intra-group transactions, balances and unrealised gains on
intra-group transactions are eliminated.
In the Parent Company's Financial Statements, investments in
subsidiaries are stated at cost and are reviewed for impairment
annually or when events or changes in circumstances indicate the
carrying value to be impaired.
(b) Business combinations and goodwill
The Group uses the acquisition method of accounting to account
for the acquisition of subsidiaries. The cost of an acquisition is
measured as the fair value of the assets given, equity instruments
issued and liabilities incurred or assumed at the date of exchange.
Acquisition costs are expensed as incurred.
The excess of the cost of acquisition over the fair value of the
Group's share of the identifiable net assets acquired is
capitalised and recorded as goodwill. Following initial
recognition, goodwill is measured at cost less accumulated
impairment losses. Goodwill is tested for impairment annually or if
events or changes in circumstances indicate that the carrying value
may be impaired and recognised directly in the consolidated income
statement. If the cost of acquisition is less than the fair value
of the net assets of the subsidiary acquired, the difference is
recognised directly as revenue in the consolidated income statement
as a gain on bargain purchase. The gain on bargain purchase is
recognised within the operating profit, as acquiring LLV's at a
discount to their net asset fair value is an important part of the
predominant strategy for the Company.
Segmental reporting
Operating segments are reported in a manner consistent with the
internal reporting provided to the chief operating decision-maker.
The chief operating decision-maker, who is responsible for
allocating resources and assessing performance of the operating
segments, has been identified as Nigel Hanbury.
Foreign currency translation
Items included in the Financial Statements of each of the
Group's entities are measured using the currency of the primary
economic environment in which the entity operates (the "functional
currency"). The Financial Statements are presented in thousands of
pounds sterling, which is the Group's functional and presentational
currency. All amounts have been rounded to the nearest thousand,
unless otherwise indicated.
Foreign currency transactions and non-monetary assets and
liabilities, including deferred acquisition costs and unearned
premiums, are translated into the functional currency using annual
average rates of exchange prevailing at the time of the transaction
as a proxy for the transactional rates. The translation difference
arising on non-monetary asset items is recognised in the
consolidated income statement.
Certain supported syndicates have non-sterling functional
currencies and any exchange movement that they would have reflected
in other comprehensive income as a result of this has been included
within profit before tax at consolidation level, to be consistent
with the Group's policy of using sterling as the functional
currency.
Monetary items are translated at period-end rates; any exchange
differences arising from the change in rates of exchange are
recognised in the consolidated income statement of the year.
Underwriting
Premiums
Gross premium written comprises the total premiums receivable in
respect of business incepted during the year, together with any
differences between booked premiums for prior years and those
previously accrued, and includes estimates of premiums due but not
yet receivable or notified to the syndicates on which the Group
participates, less an allowance for cancellations. All premiums are
shown gross of commission payable to intermediaries and exclude
taxes and duties levied on them.
Unearned premiums
Gross premium written is earned according to the risk profile of
the policy. Unearned premiums represent the proportion of gross
premium written in the year that relates to unexpired terms of
policies in force at the end of the reporting period calculated on
a time apportionment basis having regard, where appropriate, to the
incidence of risk. The specific basis adopted by each syndicate is
determined by the relevant managing agent.
Deferred acquisition costs
Acquisition costs, which represent commission and other related
expenses, are deferred over the period in which the related
premiums are earned.
Reinsurance premiums
Reinsurance premium costs are allocated by the managing agent of
each syndicate to reflect the protection arranged in respect of the
business written and earned.
Reinsurance premium costs in respect of reinsurance purchased
directly by the Group are charged or credited based on the annual
accounting result for each year of account protected by the
reinsurance.
Claims incurred and reinsurers' share
Claims incurred comprise claims and settlement expenses (both
internal and external) occurring in the year and changes in the
provisions for outstanding claims, including provisions for claims
incurred but not reported ("IBNR") and settlement expenses,
together with any other adjustments to claims from previous years.
Where applicable, deductions are made for salvage and other
recoveries.
The provision for claims outstanding comprises amounts set aside
for claims notified and IBNR. The amount included in respect of
IBNR is based on statistical techniques of estimation applied by
each syndicate's in-house reserving team and reviewed, in certain
cases, by external consulting actuaries. These techniques generally
involve projecting from past experience the development of claims
over time to form a view of the likely ultimate claims to be
experienced for more recent underwriting, having regard to
variations in the business accepted and the underlying terms and
conditions. The provision for claims also includes amounts in
respect of internal and external claims handling costs. For the
most recent years, where a high degree of volatility arises from
projections, estimates may be based in part on output from the
rating and other models of the business accepted, and assessments
of underwriting conditions.
The reinsurers' share of provisions for claims is based on
calculated amounts of outstanding claims and projections for IBNR,
net of estimated irrecoverable amounts, having regard to each
syndicate's reinsurance programme in place for the class of
business, the claims experience for the year and the current
security rating of the reinsurance companies involved. Each
syndicate uses a number of statistical techniques to assist in
making these estimates.
Accordingly, the two most critical assumptions made by each
syndicate's managing agent as regards claims provisions are that
the past is a reasonable predictor of the likely level of claims
development and that the rating and other models used, including
pricing models for recent business, are reasonable indicators of
the likely level of ultimate claims to be incurred.
The level of uncertainty with regard to the estimations within
these provisions generally decreases with time since the underlying
contracts were exposed to new risks. In addition, the nature of
short-tail risks, such as property where claims are typically
notified and settled within a short period of time, will normally
have less uncertainty after a few years than long-tail risks, such
as some liability business where it may be several years before
claims are fully advised and settled. In addition to these factors
if there are disputes regarding coverage under policies or changes
in the relevant law regarding a claim this may increase the
uncertainty in the estimation of the outcomes.
The assessment of these provisions is usually the most
subjective aspect of an insurer's accounts and may result in
greater uncertainty within an insurer's accounts than within those
of many other businesses. The provisions for gross claims and
related reinsurance recoveries have been assessed on the basis of
the information currently available to the directors of each
syndicate's managing agent. However, ultimate liability will vary
as a result of subsequent information and events and this may
result in significant adjustments to the amounts provided.
Adjustments to the amounts of claims provisions established in
prior years are reflected in the Financial Statements for the
period in which the adjustments are made. The provisions are not
discounted for the investment earnings that may be expected to
arise in the future on the funds retained to meet the future
liabilities. The methods used, and the estimates made, are reviewed
regularly.
Quota share reinsurance
Under the Group's quota share reinsurance agreements, 70% of the
2017, 2018 and 2019 underwriting year of insurance exposure is
ceded to the reinsurers. Amounts payable to the reinsurers are
included within "reinsurance premium ceded" in the consolidated
income statement of the year and amounts receivable from the
reinsurers are included within "reinsurers" share of gross claims
paid" in the consolidated income statement of the year.
Unexpired risks provision
Provision for unexpired risks is made where the costs of
outstanding claims, related expenses and deferred acquisition costs
are expected to exceed the unearned premium provision carried
forward at the end of the reporting period. The provision for
unexpired risks is calculated separately by reference to classes of
business that are managed together, after taking into account
relevant investment return. The provision is made on a
syndicate-by-syndicate basis by the relevant managing agent.
Closed years of account
At the end of the third year, the underwriting account is
normally closed by reinsurance into the following year of account.
The amount of the reinsurance to close premium payable is
determined by the managing agent, generally by estimating the cost
of claims notified but not settled at 31 December, together with
the estimated cost of claims incurred but not reported ("IBNR") at
that date and an estimate of future claims handling costs. Any
subsequent variation in the ultimate liabilities of the closed year
of account is borne by the underwriting year into which it is
reinsured.
The payment of a reinsurance to close premium does not eliminate
the liability of the closed year for outstanding claims. If the
reinsuring syndicate were unable to meet any obligations, and the
other elements of Lloyd's chain of security were to fail, then the
closed underwriting account would have to settle any outstanding
claims.
The Directors consider that the likelihood of such a failure of
the reinsurance to close is extremely remote and consequently the
reinsurance to close has been deemed to settle the liabilities
outstanding at the closure of an underwriting account. The Group
will include its share of the reinsurance to close premiums payable
as technical provisions at the end of the current period and no
further provision is made for any potential variation in the
ultimate liability of that year of account.
Run-off years of account
Where an underwriting year of account is not closed at the end
of the third year (a "run-off" year of account) a provision is made
for the estimated cost of all known and unknown outstanding
liabilities of that year. The provision is determined initially by
the managing agent on a similar basis to the reinsurance to close.
However, any subsequent variation in the ultimate liabilities for
that year remains with the corporate member participating therein.
As a result, any run-off year will continue to report movements in
its results after the third year until such time as it secures a
reinsurance to close.
Net operating expenses (including acquisition costs)
Net operating expenses include acquisition costs, profit and
loss on exchange and other amounts incurred by the syndicates on
which the Group participates.
Acquisition costs, comprising commission and other costs related
to the acquisition of new insurance contracts, are deferred to the
extent that they are attributable to premiums unearned at the end
of the reporting period.
Investment income
Interest receivable from cash and short-term deposits and
interest payable are accrued to the end of the period.
Dividend income from financial assets at fair value through
profit or loss is recognised in the income statement when the
Group's right to receive payments is established.
Syndicate investments and cash are held on a pooled basis, the
return from which is allocated by the relevant managing agent to
years of account proportionate to the funds contributed by the year
of account.
Other operating expenses
All expenses are accounted for on an accruals basis.
Intangible assets: syndicate capacity
Syndicate capacity is an intangible asset which represents costs
incurred in the Corporation of Lloyd's auctions in order to acquire
rights to participate on syndicates' years of account.
At the individual subsidiary company level, the syndicate
capacity is stated at cost, less any provision for impairment at
initial recognition, and amortised on a straight line basis over
the useful economic life, which is estimated to be five years (up
to 2014: estimated to be seven years). No amortisation is charged
until the following year when underwriting commences in respect of
the purchased syndicate participation.
At the consolidation level, the Group's accounting policy for
the year 2014 was consistent with the accounting policy of the
subsidiaries as described above. As of 1 January 2015, the Group
changed its accounting policy for accounting for the intangible
asset, syndicate capacity, as set out below:
The syndicate capacity represents the cost of purchasing the
Group's participation in the combined syndicates. The capacity is
capitalised at cost in the statement of financial position. It has
an indefinite useful life and is carried at cost less accumulated
impairment. It is annually tested for impairment for each syndicate
by reference to the weighted average value at Lloyd's auctions and
expected future profit streams to be earned by those syndicates in
which the Group participates and provision is made for any
impairment in the consolidated income statement.
Financial assets
(a) Classification
The Group classifies its financial assets in the following
categories: at fair value through profit or loss, and loans and
receivables. The classification depends on the purpose for which
the financial assets were acquired. Management determines the
classification of its financial assets at initial recognition. The
Group does not make use of the held-to-maturity and
available-for-sale classifications.
(i) Financial assets at fair value through profit or loss
All financial assets at fair value through profit or loss are
categorised as designated at fair value through profit or loss upon
initial recognition because they are managed and their performance
is evaluated on a fair value basis in accordance with the Company's
documented investment strategy. Information about these financial
assets is provided internally on a fair value basis to the Group's
key management.
The Group's investment strategy is to invest and evaluate their
performance with reference to their fair values. Assets in this
category are classified as current assets if expected to be settled
within 12 months; otherwise, they are classified as
non-current.
(ii) Loans and receivables
Loans and receivables are non-derivative financial assets with
fixed or determinable payments that are not quoted in an active
market. They are classified as current assets, except for
maturities greater than 12 months after the reporting period. The
latter ones are classified as non-current assets.
The Group's loans and receivables comprise "other receivables,
including insurance and reinsurance receivables" and "cash and cash
equivalents".
The Parent Company's loans and receivables comprise "other
receivables" and "cash and cash equivalents".
(b) Recognition, derecognition and measurement
Regular purchases and sales of financial assets are recognised
on the trade date, being the date on which the Group commits to the
purchase or sale of the asset. Financial assets are derecognised
when the right to receive cash flows from the financial assets has
expired or are transferred and the Group has transferred
substantially all its risks and rewards of ownership.
Financial assets at fair value through profit or loss are
initially recognised at fair value and transaction costs incurred
expensed in the income statement.
Loans and receivables are initially recognised at fair value
plus transaction costs and are subsequently carried at amortised
cost less any impairment losses.
Fair value estimation
The fair value of financial assets at fair value through profit
or loss which are traded in active markets is based on quoted
market prices at the end of the reporting period. A market is
regarded as active if quoted prices are readily and regularly
available from an exchange, dealer, broker, industry group, pricing
service or regulatory agency and those prices represent actual and
regular occurring market transactions on an arm's length basis. The
quoted market price used for financial assets at fair value through
profit or loss held by the Group is the current bid price.
The fair value of financial assets at fair value through profit
or loss that are not traded in an active market is determined by
using valuation techniques. These valuation techniques maximise the
use of observable market data where it is available and rely as
little as possible on entity-specific estimates.
Unrealised gains and losses arising from changes in the fair
value of the financial assets at fair value through profit or loss
are presented in the income statement within "net investment
income".
The fair values of short-term deposits are assumed to
approximate to their book values. The fair values of the Group's
debt securities have been based on quoted market prices for these
instruments.
(c) Impairment
The Group assesses at the end of each reporting period whether
there is objective evidence that a financial asset or group of
financial assets is impaired. A financial asset or a group of
financial assets is impaired and impairment losses are incurred
only if there is objective evidence of impairment as a result of
one or more events that occurred after the initial recognition of
the asset (a "loss event") and that loss event (or events) has an
impact on the estimated future cash flows of the financial asset or
group of financial assets that can be reliably estimated.
Asset carried at amortised cost
For loans and receivables, the amount of the loss is measured as
the difference between the asset's carrying amount and the present
value of the estimated future cash flows (excluding future credit
losses that have not been incurred) discounted at the financial
asset's original effective interest rate. The carrying amount of
the asset is reduced and the amount of the loss is recognised in
profit or loss. If a loan has a variable interest rate, the
discount rate for measuring any impairment loss is the current
effective interest rate determined under the contract. As a
practical expedient, the Group may measure impairment on the basis
of an instrument's fair value using an observable market price.
If, in a subsequent period, the amount of the impairment loss
decreases and the decrease can be related objectively to an event
occurring after the impairment was recognised (such as an
improvement in the debtor's credit rating), the reversal of the
previously recognised impairment loss is recognised in profit or
loss.
Cash and cash equivalents
For the purposes of the statements of cash flows, cash and cash
equivalents comprise cash and short-term deposits at bank.
Borrowings
Borrowings are recognised initially at fair value, net of
transaction costs incurred. Borrowings are subsequently carried at
amortised cost; any difference between the proceeds (net of
transaction costs) and the redemption value is recognised in the
income statement over the period of the borrowings, using the
effective interest method.
Fees paid on the establishment of loan facilities are recognised
as transaction costs of the loan to the extent that it is probable
that some or all of the facility will be drawn down. To the extent
that there is no evidence that it is probable that some or all of
the facility will be drawn down, the fee is capitalised as a
prepayment for liquidity services, and amortised over the period of
the facility to which it relates.
Borrowings are classified as current liabilities unless the
Group has an unconditional right to defer settlement of the
liability for at least 12 months after the end of the reporting
period.
Borrowing costs
Borrowing costs are recognised in income statement in the period
in which they are incurred.
Joint Share Ownership Plan ("JSOP")
On 14 December 2017, the Company issued and allotted 500,000 new
ordinary shares of GBP0.10 each ("ordinary shares"). The new
ordinary shares have been issued at a subscription price of 133.5p
per ordinary share, being the closing price of an ordinary share on
13 December 2017, pursuant to The Helios Underwriting plc
Employees' Joint Share Ownership Plan (the "Plan").
The new ordinary shares have been issued into the respective
joint beneficial ownership of (i) each of the participating
Executive Directors as shown in Note 23 and (ii) the Trustee of RBC
CEES Trustee Limited ("The Trust") and are subject to the terms of
joint ownership agreements ("JOAs") respectively entered into
between the Director, the Company and the Trustee. The nominal
value of the new ordinary shares has been paid by the Trust out of
funds advanced to it by the Company with the additional
consideration of 123.5p left outstanding until such time as new
ordinary shares are sold. The Company has waived its lien on the
shares such that there are no restrictions on their transfer.
The terms of the JOAs provide, inter alia, that if Jointly Owned
Shares become vested and are sold, the proceeds of sale will be
divided between the joint owners so that the participating Director
receives an amount equal to any growth in the market value of the
jointly owned ordinary shares above the greater of either:
(a) the initial market value (133.5p per share), less a
"carrying cost" (equivalent to simple interest at 4.5% per annum on
the initial market value accruing over the three years from the
date of award) and the Trust receives the initial market value of
the Jointly Owned Shares plus the carrying cost; or
(b) if higher, 150p (so that the participating Director will
only ever receive value if the share sale price exceeds this).
The vesting of the award will be subject to performance
conditions measured over the three calendar years from the award
date.
A proportion of the Jointly Owned Shares shall vest pro rata to
the percentage by which the average return on capacity of the last
three closed underwriting years of account of the Helios Capacity
Portfolio outperforms on average the return on capacity of the
Lloyd's market (the "Performance Percentage") over the Performance
Period such that:
(i) if the Performance Percentage is 4% or greater, all of the
Jointly Owned Shares shall vest; and
(ii) if the Helios Capacity Portfolio fails to outperform the
return on capacity of the Lloyd's market, none of the Jointly Owned
Shares shall vest; but
(iii) if the Performance Percentage is between 0% and 4%, a
proportion of the Jointly Owned Shares shall vest pro rata on a
straight line basis.
The Plan was established and approved by resolution of the
Remuneration Committee of the Company on 13 December 2017 and
provides for the acquisition by employees, including Executive
Directors, of beneficial interests as joint owners (with the Trust)
of ordinary shares in the Company upon the terms of a JOA. The
terms of the JOA provide that if the jointly owned shares become
vested and are sold, the proceeds of sale will be divided between
the joint owners on the terms set out above.
Current and deferred tax
The tax expense for the period comprises current and deferred
tax. Tax is recognised in the income statement, except to the
extent that it relates to items recognised in other comprehensive
income or directly in equity, in which case tax is also recognised
in other comprehensive income or directly in equity,
respectively.
Current tax
The current income tax charge is calculated on the basis of the
tax laws enacted at the balance sheet date in the countries where
the Company and its subsidiaries operate and generate taxable
income. Management establishes provisions when appropriate, on the
basis of amounts expected to be paid to the tax authorities.
Deferred tax
Deferred tax is provided in full, using the balance sheet
liability method, on temporary differences arising between the tax
bases of assets and liabilities and their carrying amounts in the
Financial Statements.
However, if the deferred tax arises from initial recognition of
an asset or liability in a transaction other than a business
combination that at the time of the transaction affects neither
accounting nor taxable profit or loss, it is not accounted for.
Deferred tax is determined using tax rates (and laws) that have
been enacted or substantively enacted by the end of the reporting
period and are expected to apply when the related deferred income
tax asset is realised or the deferred income tax liability is
settled.
Deferred tax assets are recognised to the extent that it is
probable that future taxable profits will be available against
which the temporary differences can be utilised.
Other payables
These present liabilities for services provided to the Group
prior to end of the financial year which are unpaid. These are
classified as current liabilities, unless payment is not due within
12 months after the reporting date. They are recognised initially
at their fair value and subsequently measured at amortised cost
using the effective interest method.
Share capital and share premium
Ordinary shares are classified as equity.
The difference between the fair value of the consideration
received and the nominal value of the share capital issued is taken
to the share premium account. Incremental costs directly
attributable to the issue of shares or options are shown in equity
as a deduction, net of tax, from proceeds.
Where the Company buys back its own ordinary shares on the
market, and these are held in treasury, the purchase is made out of
distributable profits, hence shown as a deduction from the
Company's retained earnings.
Dividend distribution policy
Dividend distribution to the Company's shareholders is
recognised in the Group's and the Parent Company's Financial
Statements in the period in which the dividends are approved by the
Company's shareholders.
3. Key accounting judgements and estimation uncertainties
In applying the Company's accounting policies, the Directors are
required to make judgements, estimates and assumptions in
determining the carrying amounts of assets and liabilities. These
judgements, estimates and assumptions are based on the best and
most reliable evidence available at the time when the decisions are
made, and are based on historical experience and other factors that
are considered to be applicable. Due to the inherent subjectivity
involved in making such judgements, estimates and assumptions, the
actual results and outcomes may differ. The estimates and
underlying assumptions are reviewed on an ongoing basis. Revisions
to accounting estimates are recognised in the period in which the
estimate is revised, if the revision affects only that period, or
in the period of the revision and future periods, if the revision
affects both current and future periods.
The measurement of the provision for claims outstanding is the
most significant judgement involving estimation uncertainty
regarding amounts recognised in these Financial Statements in
relation to underwriting by the syndicates and this is disclosed
further in Notes 4 and 7.
The management and control of each syndicate is carried out by
the managing agent of that syndicate, and the Company looks to the
managing agent to implement appropriate policies, procedures and
internal controls to manage each syndicate.
The key accounting judgements and sources of estimation
uncertainty set out below therefore relate to those made in respect
of the Company only, and do not include estimates and judgements
made in respect of the syndicates.
Purchased syndicate capacity
Estimating value in use
Where an indication of impairment of capacity values exists, the
Directors will carry out an impairment review to determine the
recoverable amount, which is the higher of fair value less cost to
sell and value in use. The value in use calculation requires an
estimate of the future cash flows expected to arise from the
capacity and a suitable discount rate in order to calculate present
value.
Assessing indicators of impairment
In assessing whether there have been any indicators of
impairment of assets, the Directors consider both external and
internal sources of information such as market conditions,
counterparty credit ratings and experience of recoverability.
Recoverability of receivables
The Company establishes a provision for receivables that are
estimated not to be recoverable. When assessing recoverability,
factors such as the ageing of the receivables, past experience of
recoverability and the credit profile of individual or groups of
customers are all considered.
4. Risk management
The majority of the risks to the Group's future cash flows arise
from each subsidiary's participation in the results of Lloyd's
syndicates. As detailed below, these risks are mostly managed by
the managing agents of the syndicates. The Group's role in managing
these risks, in conjunction with its subsidiaries and members'
agent, is limited to a selection of syndicate participations,
monitoring the performance of the syndicates and the purchase of
appropriate member level reinsurance.
Risk background
The syndicates' activities expose them to a variety of financial
and non-financial risks. The managing agent is responsible for
managing the syndicate's exposure to these risks and, where
possible, introducing controls and procedures that mitigate the
effects of the exposure to risk. For the purposes of setting
capital requirements for the 2017 and subsequent years of account,
each managing agent will have prepared a Lloyd's Capital Return
("LCR") for the syndicate to agree capital requirements with
Lloyd's based on an agreed assessment of the risks impacting the
syndicate's business and the measures in place to manage and
mitigate those risks from a quantitative and qualitative
perspective. The risks described below are typically reflected in
the LCR and typically the majority of the total assessed value of
the risks concerned is attributable to insurance risk.
The insurance risks faced by a syndicate include the occurrence
of catastrophic events, downward pressure on pricing of risks,
reductions in business volumes and the risk of inadequate
reserving. Reinsurance risk arises from the risk that a reinsurer
fails to meet its share of a claim. The management of the
syndicate's funds is exposed to investment risk, liquidity risk,
credit risk, currency risk and interest rate risk (as detailed
below), leading to financial loss. The syndicate is also exposed to
regulatory and operational risks including its ability to continue
to trade. However, supervision by Lloyd's and the Prudential
Regulation Authority provides additional controls over the
syndicate's management of risks.
The Group manages the risks faced by the syndicates on which its
subsidiaries participate by monitoring the performance of the
syndicates it supports. This commences in advance of committing to
support a syndicate for the following year, with a review of the
business plan prepared for each syndicate by its managing agent. In
addition, quarterly reports and annual accounts, together with any
other information made available by the managing agent, are
monitored and if necessary enquired into. If the Group considers
that the risks being run by the syndicate are excessive, it will
seek confirmation from the managing agent that adequate management
of the risk is in place and, if considered appropriate, will
withdraw support from the next year of account. The Group also
manages its exposure to insurance risk by purchasing appropriate
member level reinsurance.
Impact of Brexit vote
The Brexit vote will have an impact on various risk factors,
including currency risks. The Lloyd's market is in the process of
developing a strategy for dealing with Brexit and the Company will
monitor these developments and identify whether it needs to modify
its participation in the Lloyd's market.
(a) Syndicate risks
(i) Liquidity risk
The syndicates are exposed to daily calls on their available
cash resources, principally from claims arising from its insurance
business. Liquidity risk arises where cash may not be available to
pay obligation when due, or to ensure compliance with the
syndicate's obligations under the various trust deeds to which it
is party.
The syndicates aim to manage their liquidity position so that
they can fund claims arising from significant catastrophic events,
as modelled in their Lloyd's realistic disaster scenarios
("RDS").
Although there are usually no stated maturities for claims
outstanding, syndicates have provided their expected maturity of
future claims settlements as follows:
No stated
maturity 0-1 year 1-3 years 3-5 years >5 years Total
2018 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------------- --------- -------- --------- --------- -------- --------
Claims outstanding 2 33,228 30,565 12,299 11,938 88,032
------------------- --------- -------- --------- --------- -------- --------
No stated
maturity 0-1 year 1-3 years 3-5 years >5 years Total
2017 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------------- --------- -------- --------- --------- -------- --------
Claims outstanding 132 21,004 22,546 8,192 7,959 59,833
------------------- --------- -------- --------- --------- -------- --------
(ii) Credit risk
Credit ratings to syndicate assets (Note 28) emerging directly
from insurance activities which are neither past due nor impaired
are as follows:
BBB or
AAA AA A lower Not rated Total
2018 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
---------------------- -------- -------- -------- -------- --------- --------
Financial investments 9,081 13,725 13,812 6,557 6,506 49,681
Deposits with ceding
undertakings - - - - 6 6
Reinsurers' share of
claims outstanding 1,225 4,453 14,818 19 2,063 22,578
Reinsurance debtors 27 170 871 1 251 1,320
Cash at bank and in
hand 106 132 1,629 291 327 2,485
---------------------- -------- -------- -------- -------- --------- --------
10,439 18,480 31,130 6,868 9,153 76,070
---------------------- -------- -------- -------- -------- --------- --------
BBB or
AAA AA A lower Not rated Total
2017 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
---------------------- -------- -------- -------- -------- --------- --------
Financial investments 6,245 10,294 11,104 5,262 4,675 37,580
Deposits with ceding
undertakings - - - - 5 5
Reinsurers' share of
claims outstanding 56 3,242 9,867 239 1,304 14,708
Reinsurance debtors - 92 468 8 151 719
Cash at bank and in
hand 318 143 1,051 234 20 1,766
---------------------- -------- -------- -------- -------- --------- --------
6,619 13,771 22,490 5,743 6,155 54,778
---------------------- -------- -------- -------- -------- --------- --------
Syndicate assets (Note 28) emerging directly from insurance
activities, with reference to their due date or impaired, are as
follows:
Past due but not impaired
--------------------------------
Neither Between Greater
past due Less than 6 months than 1
nor impaired 6 months and 1 year year Impaired Total
2018 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
---------------------- ------------- --------- ----------- -------- -------- ---------
Financial investments 49,681 - - - - 49,681
Deposits with ceding
undertakings 6 - - - - 6
Reinsurers' share of
claims outstanding 22,578 123 - - (3) 22,698
Reinsurance debtors 1,320 538 12 14 - 1,884
Cash at bank and in
hand 2,485 - - - - 2,485
Insurance and other
debtors 42,984 813 171 225 (6) 44,187
---------------------- ------------- --------- ----------- -------- -------- ---------
119,054 1,474 183 239 (9) 120,941
---------------------- ------------- --------- ----------- -------- -------- ---------
Past due but not impaired
--------------------------------
Neither Between Greater
past due Less than 6 months than 1
nor impaired 6 months and 1 year year Impaired Total
2017 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
---------------------- ------------- --------- ----------- -------- -------- --------
Financial investments 37,580 - - - - 37,580
Deposits with ceding
undertakings 5 - - - - 5
Reinsurers' share of
claims outstanding 14,708 133 - - (5) 14,836
Reinsurance debtors 719 157 20 15 - 911
Cash at bank and in
hand 1,766 - - - - 1,766
Insurance and other
debtors 26,205 573 154 271 (5) 27,198
---------------------- ------------- --------- ----------- -------- -------- --------
80,983 863 174 286 (10) 82,296
---------------------- ------------- --------- ----------- -------- -------- --------
(iii) Interest rate equity price risk
Interest rate risk and equity price risk are the risks that the
fair value of future cash flows of financial instruments will
fluctuate because of changes in market interest rates and market
prices, respectively.
(iv) Currency risk
The syndicates' main exposure to foreign currency risk arises
from insurance business originating overseas, primarily denominated
in US dollars. Transactions denominated in US dollars form a
significant part of the syndicates' operations. This risk is, in
part, mitigated by the syndicates maintaining financial assets
denominated in US dollars against its major exposures in that
currency.
The table below provides details of syndicate assets and
liabilities (Note 28) by currency:
GBP USD EUR CAD Other Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
2018 converted converted converted converted converted converted
--------------------- ---------- ---------- ---------- ---------- ---------- ----------
Total assets 19,637 85,608 7,108 9,780 6,797 128,930
Total liabilities (26,707) (89,915) (7,421) (6,805) (5,693) (136,541)
--------------------- ---------- ---------- ---------- ---------- ---------- ----------
(Deficiency)/surplus
of assets (7,070) (4,307) (313) 2,975 1,104 (7,611)
--------------------- ---------- ---------- ---------- ---------- ---------- ----------
GBP USD EUR CAD Other Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
2017 converted converted converted converted converted converted
--------------------- ---------- ---------- ---------- ---------- ---------- ----------
Total assets 14,405 57,140 4,368 7,229 4,367 87,509
Total liabilities (18,831) (57,167) (3,899) (5,143) (3,423) (88,463)
--------------------- ---------- ---------- ---------- ---------- ---------- ----------
(Deficiency)/surplus
of assets (4,426) (27) 469 2,086 944 (954)
--------------------- ---------- ---------- ---------- ---------- ---------- ----------
The impact of a 5% change in exchange rates between GBP and
other currencies would be GBP27,000 on shareholders' funds (2017:
GBP174,000).
(v) Reinsurance risk
Reinsurance risk to the Group arises where reinsurance contracts
put in place to reduce gross insurance risk do not perform as
anticipated, result in coverage disputes or prove inadequate in
terms of the vertical or horizontal limits purchased. Failure of a
reinsurer to pay a valid claim is considered a credit risk, which
is detailed separately below.
The Group currently has reinsurance programmes on the 2016, 2017
and 2018 years of account.
The Group has strategic collateralised quota share arrangements
in place in respect of 70% of its underwriting business with XL Re
Limited, Bermudan reinsurer Everest Reinsurance Bermuda Limited
(part of global NYSE-quoted insurer Everest Re Group Limited),
Guernsey reinsurer Polygon Insurance Co Limited and other private
shareholders through HIPCC Limited - Cell 6.
(b) Group risks - corporate level
(i) Investment, credit, liquidity and currency risks
The other significant risks faced by the Group are with regard
to the investment of funds within its own custody. The elements of
these risks are investment risk, liquidity risk, credit risk,
interest rate risk and currency risk. To mitigate this, the surplus
Group funds are deposited with highly rated banks and fund
managers. The main liquidity risk would arise if a syndicate had
inadequate liquid resources for a large claim and sought funds from
the Group to meet the claim. In order to minimise investment risk,
credit risk and liquidity risk, the Group's funds are invested in
readily realisable short-term deposits. The Group's maximum
exposure to credit risk at 31 December 2018 is GBP28.3m (2017:
GBP18.2m), being the aggregate of the Group's insurance
receivables, prepayments and accrued income, financial assets at
fair value, and cash and cash equivalents, excluding any amounts
held in the syndicates. The syndicates can distribute their results
in sterling, US dollars or a combination of the two. The Group is
exposed to movements in the US dollar between the balance sheet
date and the distribution of the underwriting profits and losses,
which is usually in the May following the closure of a year of
account. The Group does not use derivative instruments to manage
risk and, as such, no hedge accounting is applied.
As a result of the specific nature and structure of the Group's
collateralised quota share reinsurance arrangements through Cell 6,
the Group's Funds at Lloyd's calculation benefits from an aggregate
GBP24.5m (2017: GBP15.7m) letter of credit ("LOC") acceptable to
Lloyd's, on behalf of XL Re Limited, Everest Reinsurance Bermuda
Limited, Polygon Insurance Co Limited (the reinsurers) and other
private shareholders. The LOC is pledged in aggregate to the
relevant syndicates through Lloyd's and thus Helios Underwriting
plc is not specifically exposed to counterparty credit risk in this
matter. Should the bank's LOC become unacceptable to Lloyd's for
any reason, the reinsurer is responsible under the terms of the
contract for making alternative arrangements. The contract is
annually renewable and the Group has a contingency plan in place in
the event of non-renewal under both normal and adverse market
conditions.
(ii) Market risk
The Group is exposed to market and liquidity risk in respect of
its holdings of syndicate participations. Lloyd's syndicate
participations are traded in the Lloyd's auctions held in September
and October each year. The Group is exposed to changes in market
prices and a lack of liquidity in the trading of a particular
syndicate's capacity could result in the Group making a loss
compared to the carrying value when the Group disposes of
particular syndicate participations.
(iii) Regulatory risks
The Company's subsidiaries are subject to continuing approval by
Lloyd's to be a member of a Lloyd's syndicate. The risk of this
approval being removed is mitigated by monitoring and fully
complying with all requirements in relation to membership of
Lloyd's. The capital requirements to support the proposed amount of
syndicate capacity for future years are subject to the requirements
of Lloyd's. A variety of factors are taken into account by Lloyd's
in setting these requirements including market conditions and
syndicate performance and, although the process is intended to be
fair and reasonable, the requirements can fluctuate from one year
to the next, which may constrain the volume of underwriting a
subsidiary of the Company is able to support.
The Company is subject to the AIM Rules. Compliance with the AIM
Rules is monitored by the Board.
Operational risks
As there are relatively few transactions actually undertaken by
the Group, there are only limited systems and operational
requirements of the Group and therefore operational risks are not
considered to be significant. Close involvement of all Directors in
the Group's key decision making and the fact that the majority of
the Group's operations are conducted by syndicates provide control
over any remaining operational risks.
Capital management objectives, policies and approach
The Group has established the following capital management
objectives, policies and approach to managing the risks that affect
its capital position:
-- to maintain the required level of stability of the Group,
thereby providing a degree of security to shareholders;
-- to allocate capital efficiently and support the development
of the business by ensuring that returns on capital employed meet
the requirements of the shareholders; and
-- to maintain the financial strength to support increases in
the Group's underwriting through acquisition of capacity in the
Lloyd's auctions or through the acquisition of new
subsidiaries.
The Group's capital management policy is to hold a sufficient
level of capital to allow the Group to take advantage of market
conditions, particularly when insurance rates are improving, and to
meet the Funds at Lloyd's ("FAL") requirements that support the
corporate member subsidiaries' current and future levels of
underwriting.
Approach to capital management
The capital structure of the Group consists entirely of equity
attributable to equity holders of the Company, comprising issued
share capital, share premium and retained earnings as disclosed in
the statements of changes in equity on pages 28 and 29.
At 31 December 2018 the corporate member subsidiaries had an
agreed FAL requirement of GBP32,688,000 (2017: GBP28,699,000) to
support their underwriting on the 2019 year of account (2018 year
of account). The funds to support this requirement are held in
short-term investment funds and deposits or provided by the quota
share reinsurance capital providers by way of an LOC. The FAL
requirements are formally assessed and funded twice yearly and must
be met by the corporate member subsidiaries to continue
underwriting. At 31 December 2018 the agreed FAL requirements for
the Group were 62% (2017: 70%) of the capacity for the following
year of account.
5. Segmental information
Nigel Hanbury is the Group's chief operating decision-maker. He
has determined its operating segments based on the way the Group is
managed, for the purpose of allocating resources and assessing
performance.
The Group has three segments that represent the primary way in
which the Group is managed, as follows:
-- syndicate participation;
-- investment management; and
-- other corporate activities.
Other
Syndicate Investment corporate
participation management activities Total
Year ended 31 December 2018 GBP'000 GBP'000 GBP'000 GBP'000
--------------------------------- -------------- ----------- ----------- --------
Net earned premium 30,749 - 203 30,952
Net investment income 586 (291) - 295
Other income (330) - 412 82
Net insurance claims and loss
adjustment expenses (18,972) - - (18,972)
Expenses incurred in insurance
activities (11,359) - (337) (11,696)
Other operating expenses (302) - (935) (1,237)
Gain on bargain purchase (Note
22) - - 1,184 1,184
Impairment of goodwill - - - -
Impairment of syndicate capacity
(see Note 13) - - (281) (281)
--------------------------------- -------------- ----------- ----------- --------
Profit before tax 372 (291) 246 327
--------------------------------- -------------- ----------- ----------- --------
Other
Syndicate Investment corporate
participation management activities Total
Year ended 31 December 2017 GBP'000 GBP'000 GBP'000 GBP'000
--------------------------------- -------------- ----------- ----------- --------
Net earned premium 29,426 - - 29,426
Net investment income 909 101 - 1,010
Other income (169) - 401 232
Net insurance claims and loss
adjustment expenses (19,621) - 1,589 (18,032)
Expenses incurred in insurance
activities (11,543) - (276) (11,819)
Other operating expenses 30 - (1,318) (1,288)
Goodwill on bargain purchase - - 65 65
Impairment of goodwill - - - -
Impairment of syndicate capacity
(see Note 13) - - (899) (899)
--------------------------------- -------------- ----------- ----------- --------
Profit before tax (968) 101 (438) (1,305)
--------------------------------- -------------- ----------- ----------- --------
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 2018 other corporate activities
totalling GBP203,000 (net insurance claims and loss adjustment
expenses within 2017: GBP1,589,000 - 2015, 2016 and 2017 years of
account) presents the 2016, 2017 and 2018 years of account net
Group quota share reinsurance premium recoverable to HIPCC Limited
- Cell 6 (Note 25). This net quota share reinsurance premium
payable is included within "reinsurance premium ceded" in the
consolidated income statement of the year.
6. Operating profit before impairments of goodwill and
capacity
Underwriting year of account*
-----------------------------------------
2016 Pre- Corporate Other
Year ended 31 and prior 2017 2018 Sub-total acquisition reinsurance corporate Total
December 2018 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
---------------------- ---------- -------- -------- --------- ------------- ------------ ----------- ---------
Gross premium
written 1,333 6,253 45,283 52,869 (14,166) - - 38,703
---------------------- ---------- -------- -------- --------- ------------- ------------ ----------- ---------
Reinsurance ceded 81 (954) (9,840) (10,713) 3,131 203 (296) (7,675)
---------------------- ---------- -------- -------- --------- ------------- ------------ ----------- ---------
Net premium written 1,414 5,299 35,443 42,156 (11,035) 203 (296) 31,028
---------------------- ---------- -------- -------- --------- ------------- ------------ ----------- ---------
Net earned premium 4,912 19,457 18,903 43,272 (12,227) 203 (296) 30,952
Other income 335 (261) (120) (46) 94 575 938 1,561
Net insurance
claims incurred
and loss adjustment
expenses 1,220 (11,035) (16,204) (26,019) 6,681 - 366 (18,972)
Operating expenses (2,949) (6,076) (7,602) (16,627) 5,396 - (1,702) (12,933)
---------------------- ---------- -------- -------- --------- ------------- ------------ ----------- ---------
Operating profit
before impairments
of goodwill and
capacity 3,518 2,085 (5,023) 580 (56) 778 (694) 608
---------------------- ---------- -------- -------- --------- ------------- ------------ ----------- ---------
Quota share adjustment (1,938) (1,173) 3,314 203 - (203) - -
---------------------- ---------- -------- -------- --------- ------------- ------------ ----------- ---------
Operating profit
before impairments
of goodwill and
capacity, after
quota share
adjustment 1,580 912 (1,709) 783 (56) 575 (694) 608
---------------------- ---------- -------- -------- --------- ------------- ------------ ----------- ---------
* 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' agent's
charges.
Underwriting year of account*
-----------------------------------------
2015 Pre- Corporate Other
Year ended 31 and prior 2016 2017 Sub-total acquisition reinsurance corporate Total
December 2017 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------------------ ---------- -------- -------- --------- ------------ ------------ ---------- --------
Gross premium
written 15 4,688 32,021 36,724 (2,023) - - 34,701
------------------------ ---------- -------- -------- --------- ------------ ------------ ---------- --------
Reinsurance ceded 128 (789) (6,244) (6,905) 447 - (259) (6,717)
------------------------ ---------- -------- -------- --------- ------------ ------------ ---------- --------
Net premium written 143 3,899 25,777 29,819 (1,576) - (259) 27,984
------------------------ ---------- -------- -------- --------- ------------ ------------ ---------- --------
Net earned premium 1,974 15,063 14,151 31,188 (1,503) - (259) 29,426
Other income 211 313 233 757 (98) 425 223 1,307
Net insurance
claims incurred
and loss adjustment
expenses 1,742 (8,524) (14,458) (21,240) 990 1,589 629 (18,032)
Operating expenses (1,588) (4,825) (5,697) (12,110) 649 - (1,646) (13,107)
------------------------ ---------- -------- -------- --------- ------------ ------------ ---------- --------
Operating profit
before impairments
of goodwill and
capacity 2,339 2,027 (5,771) (1,405) 38 2,014 (1,053) (406)
------------------------ ---------- -------- -------- --------- ------------ ------------ ---------- --------
Quota share adjustment (1,044) (1,287) 3,920 1,589 - (1,589) - -
------------------------ ---------- -------- -------- --------- ------------ ------------ ---------- --------
Operating profit
before impairments
of goodwill and
capacity, after
quota share adjustment 1,295 740 (1,851) 184 38 425 (1,053) (406)
------------------------ ---------- -------- -------- --------- ------------ ------------ ---------- --------
* 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' agent's
charges.
Pre-acquisition relates to the element of results from the new
acquisitions before they were acquired by the Group.
7. Insurance liabilities and reinsurance balances
Movement in claims outstanding
Gross Reinsurance Net
GBP'000 GBP'000 GBP'000
---------------------------------------- -------- ----------- --------
At 1 January 2017 50,087 9,674 40,413
Increase in reserves arising from
acquisition of subsidiary undertakings 6,390 1,467 4,923
Movement of reserves 8,761 5,028 3,733
Other movements (5,405) (1,333) (4,072)
---------------------------------------- -------- ----------- --------
At 31 December 2017 59,833 14,836 44,997
---------------------------------------- -------- ----------- --------
At 1 January 2018 59,833 14,836 44,997
Increase in reserves arising from
acquisition of subsidiary undertakings 25,576 6,969 18,607
Movement of reserves 1,109 909 200
Other movements 1,514 (16) 1,530
---------------------------------------- -------- ----------- --------
At 31 December 2018 88,032 22,698 65,334
---------------------------------------- -------- ----------- --------
Included within other movements are the 2014 and prior years'
claims reserves reinsured into the 2015 year of account on which
the Group does not participate and currency exchange
differences.
Movement in unearned premium
Gross Reinsurance Net
GBP'000 GBP'000 GBP'000
-------------------------------- -------- ----------- --------
At 1 January 2017 16,821 2,548 14,273
Increase in reserves arising
from acquisition of subsidiary
undertakings 2,909 291 2,617
Movement of reserves (1,761) (319) (1,442)
Other movements (2,053) (166) (1,886)
-------------------------------- -------- ----------- --------
At 31 December 2017 15,916 2,354 13,562
-------------------------------- -------- ----------- --------
At 1 January 2018 15,916 2,354 13,562
Increase in reserves arising
from acquisition of subsidiary
undertakings 8,042 1,322 6,720
Movement of reserves 360 284 76
Other movements 454 97 357
-------------------------------- -------- ----------- --------
At 31 December 2018 24,772 4,057 20,715
-------------------------------- -------- ----------- --------
Assumptions, changes in assumptions and sensitivity
As described in Note 4, the majority of the risks to the Group's
future cash flows arise from its subsidiaries' participation in the
results of Lloyd's syndicates and are mostly managed by the
managing agents of the syndicates. The Group's role in managing
these risks, in conjunction with the Group's members' agent, is
limited to a selection of syndicate participations and monitoring
the performance of the syndicates and their managing agents.
The amounts carried by the Group arising from insurance
contracts are calculated by the managing agents of the syndicates,
derived from accounting information provided by the managing agents
and reported upon by the syndicate auditors.
The key assumptions underlying the amounts carried by the Group
arising from insurance contracts are:
-- the claims reserves calculated by the managing agents are accurate; and
-- the potential deterioration of run-off year results has been
fully provided for by the managing agents.
There have been no changes in assumptions in 2018.
The amounts carried by the Group arising from insurance
contracts are sensitive to various factors as follows:
-- a 10% increase/decrease in the managing agents' calculation of gross claims reserves will decrease/increase the Group's pre-tax profits by GBP8,803,000 (2017: GBP5,983,000);
-- a 10% increase/decrease in the managing agents' calculation
of net claims reserves will decrease/increase the Group's pre-tax
profits by GBP6,533,000 (2017: GBP4,500,000); and
-- a 10% increase/decrease in the run-off year net claims
reserves will decrease/increase the Group's pre-tax profits by
GBP7,000 (2017: GBP9,000).
The 10% movement has been selected to give an indication of the
possible variations in the assumptions used.
Analysis of gross and net claims development
The tables below provide information about historical gross and
net claims development:
Claims development - gross
After After After After After After After After Profit
one two three four five six seven eight on RITC
Underwriting year years years years years years years years received
pure year* GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------- -------- -------- -------- -------- -------- -------- -------- -------- ---------
2011 17,686 27,192 27,045 26,825 26,296 25,966 25,393 25,237 2,023
2012 18,641 26,402 25,951 25,253 25,055 24,484 24,224 2,629
2013 13,837 23,473 23,097 22,538 22,044 21,746 1,641
2014 14,081 23,696 24,470 23,887 24,223 2,785
2015 13,501 26,271 26,889 26,656 3,275
2016 17,554 33,451 34,240
2017 29,768 43,429
2018 22,464
------------- -------- -------- -------- -------- -------- -------- -------- -------- ---------
Claims development - net
After After After After After After After After Profit
one two three four five six seven eight on RITC
Underwriting year years years years years years years years received
pure year* GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------- -------- -------- -------- -------- -------- -------- -------- -------- ---------
2011 15,006 23,287 23,143 22,541 21,983 21,732 21,378 21,291 2,118
2012 15,406 22,491 22,139 21,377 20,981 20,702 20,532 2,488
2013 11,953 20,584 20,085 19,445 19,170 18,983 1,993
2014 11,723 20,458 21,112 20,624 20,880 2,171
2015 11,515 22,524 22,901 22,814 2,164
2016 14,209 26,920 28,473
2017 20,926 31,783
2018 16,674
------------- -------- -------- -------- -------- -------- -------- -------- -------- ---------
* Including the new acquisitions during 2018.
At the end of the three years syndicates are normally reinsured
to close. Participations on subsequent years on syndicates may
therefore change. The above table shows seven years of development
and how the reinsurance to close received performed.
8. Net investment income
Year ended Year ended
31 December 31 December
2018 2017
GBP'000 GBP'000
-------------------------------------------- ------------ ------------
Investment income 841 731
Realised losses on financial assets at fair
value through profit or loss (145) 652
Unrealised (losses) on financial assets
at fair value through profit or loss (490) (426)
Investment management expenses (55) (73)
Bank interest 144 126
-------------------------------------------- ------------ ------------
Net investment income 295 1,010
-------------------------------------------- ------------ ------------
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.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR EASSFDLANEEF
(END) Dow Jones Newswires
May 31, 2019 02:00 ET (06:00 GMT)
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