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 £608,000 (2017: loss of £406,000)
• Basic earnings/(loss) per share of 3.14p (2017: loss of 4.75p)
• Helios retained capacity for 2019 open underwriting year of £15.8m (2018 year of account: £12.3m)
• 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 £1.90 per share (2017: £1.60 per share)
• The catastrophe losses in 2018 of £5.2m were reduced by reinsurance to £1.3m
• Stop loss in 2019 continues to protect the downside
|
| Year ended 31 December 2018 | ||
|
| 2018 | 2017 | 2016 |
| Profit/(loss) before impairments and tax (£'000) | 608 | (406) | 1,334 |
| Adjusted net asset value per share - basic (£) | 1.90 | 1.60 | 2.01 |
| Dividends (p) | 3.0 | 1.5 | 5.5 |
| Growth in capacity (£m) | 52.6 | 41.0 | 32.6 |
| Value of capacity fund (WAV) (£m) | 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 / [email protected]
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 £54m 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 £608,000 (2017: loss of £406,000)
• Adjusted net asset value at £1.90 per share (2017: £1.60)
• Seven acquisitions added £15.9m 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 £1.2m to operating profits
• 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 £608,000 (2017 loss: £406,000), whilst the adjusted net asset value of the Group is £1.90 per share (2017: £1.60).
Again the full impact of the catastrophe losses on the Helios portfolio of £5.2m (2017: £5.8m) was mitigated by the use of quota share and stop loss reinsurance reducing the net loss for 2018 to £1.3m (2017: £1.3m).
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 £2.0m 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 £54m 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 - £m | |||
|
| 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 £12m, of which £4.3m 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 £'000 | 2017 £'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 (£) | 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 £1.90 per share (2017: £1.60), a 19% increase
• 32% increase in the capacity portfolio from acquisitions during 2018
• Negative goodwill arising from acquisitions of £1.2m 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 £41m to £54m - 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 £21m (2017: £13.0m) 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 £14.7m (2017: £4.4m) 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 £1.2m. 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 consideration £m | Capacity £m | Humphrey value £m | Discount to 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 £ of capacity.
Together with the capacity acquired with LLVs, the total value of the fund is now £20.7m as at 31 December 2018 (2017: £13.0m). The movement in the capacity and its value is as follows:
|
| 2018 | |
|
| Capacity £m | Fair value (WAV) £m |
| 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 £281,000 (2017: £899,000) 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
| Underwriting year | 2018 £'000 | 2017 £'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 £2.9bn (2017: £4.6bn) was the second consecutive year of major claims and was £1bn 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 £'000 | 2017 £'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 £1m has been made.
During the year the six acquisitions were acquired for a total consideration of £12.2m, a discount of 14% to the Humphrey valuations which generated negative goodwill of £1.2m 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 £'000 | 2017 £'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.
| Syndicate | Managing agent | Capacity £'000 | Total |
| 510 | Tokio Marine Kiln Syndicates Ltd | 9,352 | 17% |
| 623 | Beazley Furlonge Limited | 8,037 | 15% |
| 33 | Hiscox Syndicates Limited | 6,686 | 12% |
| 2791 | Managing Agency Partners Limited | 5,254 | 9% |
| 609 | Atrium Underwriters Limited | 4,778 | 8% |
| 218 | ERS Syndicate Management 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 - £m | |||
|
| 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:
| Underwriting capital as at 31 December | 2018 £m | 2017 £m |
| 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 £1.6m in 2018 (2017: £1m) 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 £3bn from £35.5bn 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 £'000 | 2017 £'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
| Underwriting year | Helios retained capacity at 31 December 2018 £m | Portfolio midpoint forecasts | Total profit/(loss) currently estimated £'000 | % earned in the 2018 calendar year | Helios profits £'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
| Underwriting year | Helios retained capacity at 31 December 2017 £m | Portfolio midpoint forecasts | Total profit currently estimated £'000 | % earned in the 2017 calendar year | Helios profits £'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 £'000 | 2017 £'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 £1.6m of cash in 2018 after the repayment of the short term borrowings of £8.1m.
| Analysis of free working capital | Year to 31 December 2018 £'000 | Year to 31 December 2017 £'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 |
| Adjusted NAV | Year to 31 December 2018 £'000 | Year to 31 December 2017 £'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 £ - on the market | 1.90 | 1.60 |
| Adjusted net asset value per share £ - on the market and JSOP shares | 1.83 | 1.55 |
Consolidated statement of comprehensive income - Year ended 31 December 2018
|
| Note | Year ended 31 December 2018 £'000 | Year ended 31 December 2017 £'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
|
| Note | 31 December 2018 £'000 | 31 December 2017 £'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
|
| Note | 31 December 2018 £'000 | 31 December 2017 £'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 |
| |||
|
| Note | Share capital £'000 | Share premium £'000 | Other reserves (JSOP) £'000 | Retained earnings £'000 | Total equity £'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 shares | 21, 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
|
| Note | Share capital £'000 | Share premium £'000 | Retained earnings £'000 | Total equity £'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 shares | 21, 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
|
| Note | Year ended 31 December 2018 £'000 | Year ended 31 December 2017 £'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 £2,522,000 (2017: £1,766,000) of the total cash and cash equivalents held at the year end of £12,202,000 (2017: £2,844,000). 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
|
| Note | Year ended 31 December 2018 £'000 | Year ended 31 December 2017 £'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 £21,045,000 and £28,651,000 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 £10,578,000 (2017: £12,164,000), letters of credit provided through the Group's quota share reinsurance agreements totalling £24,544,000 (2017: £15,683,000) and solvency credits issued by Lloyd's totalling £nil (2017: £1,052,000).
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 £4,463,000 (2017: loss £4,514,000).
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 £0.10 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:
| 2018 | No stated maturity £'000 | 0-1 year £'000 | 1-3 years £'000 | 3-5 years £'000 | >5 years £'000 | Total £'000 |
| Claims outstanding | 2 | 33,228 | 30,565 | 12,299 | 11,938 | 88,032 |
| 2017 | No stated maturity £'000 | 0-1 year £'000 | 1-3 years £'000 | 3-5 years £'000 | >5 years £'000 | Total £'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:
| 2018 | AAA £'000 | AA £'000 | A £'000 | BBB or lower £'000 | Not rated £'000 | Total £'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 |
| 2017 | AAA £'000 | AA £'000 | A £'000 | BBB or lower £'000 | Not rated £'000 | Total £'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 |
|
| ||
| 2018 | Neither past due nor impaired £'000 | Less than 6 months £'000 | Between 6 months and 1 year £'000 | Greater than 1 year £'000 | Impaired £'000 | Total £'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 |
|
| ||
| 2017 | Neither past due nor impaired £'000 | Less than 6 months £'000 | Between 6 months and 1 year £'000 | Greater than 1 year £'000 | Impaired £'000 | Total £'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:
| 2018 | GBP £'000 converted | USD £'000 converted | EUR £'000 converted | CAD £'000 converted | Other £'000 converted | Total £'000 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) |
| 2017 | GBP £'000 converted | USD £'000 converted | EUR £'000 converted | CAD £'000 converted | Other £'000 converted | Total £'000 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 £27,000 on shareholders' funds (2017: £174,000).
(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 £28.3m (2017: £18.2m), 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 £24.5m (2017: £15.7m) 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 £32,688,000 (2017: £28,699,000) 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.
| Year ended 31 December 2018 | Syndicate participation £'000 | Investment management £'000 | Other corporate activities £'000 | Total £'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 |
| Year ended 31 December 2017 | Syndicate participation £'000 | Investment management £'000 | Other corporate activities £'000 | Total £'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 £203,000 (net insurance claims and loss adjustment expenses within 2017: £1,589,000 - 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* |
|
|
|
| |||
| Year ended 31 December 2018 | 2016 and prior £'000 | 2017 £'000 | 2018 £'000 | Sub-total £'000 | Pre- acquisition £'000 | Corporate reinsurance £'000 | Other corporate £'000 | Total £'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* |
|
|
|
| |||
| Year ended 31 December 2017 | 2015 and prior £'000 | 2016 £'000 | 2017 £'000 | Sub-total £'000 | Pre- acquisition £'000 | Corporate reinsurance £'000 | Other corporate £'000 | Total £'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 £'000 | Reinsurance £'000 | Net £'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 £'000 | Reinsurance £'000 | Net £'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 £8,803,000 (2017: £5,983,000);
• a 10% increase/decrease in the managing agents' calculation of net claims reserves will decrease/increase the Group's pre-tax profits by £6,533,000 (2017: £4,500,000); and
• a 10% increase/decrease in the run-off year net claims reserves will decrease/increase the Group's pre-tax profits by £7,000 (2017: £9,000).
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
| Underwriting pure year* | After one year £'000 | After two years £'000 | After three years £'000 | After four years £'000 | After five years £'000 | After six years £'000 | After seven years £'000 | After eight years £'000 | Profit on RITC received £'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
| Underwriting pure year* | After one year £'000 | After two years £'000 | After three years £'000 | After four years £'000 | After five years £'000 | After six years £'000 | After seven years £'000 | After eight years £'000 | Profit on RITC received £'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 31 December 2018 £'000 | Year ended 31 December 2017 £'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.