(HUW) Hampden Underwriting

23 May 2011

Hampden Underwriting plc

("Hampden Underwriting" or the "Company")

Preliminary results for the year ended 31 December 2010

Hampden Underwriting, which provides investors with a limited liability direct investment into the Lloyd's insurance market, announces its preliminary results for the year ended 31 December 2010.

Highlights

·    Group's third acquisition of a Lloyd's corporate member during the year

·    Premium written during the year totalled £7.9m

·    Net profit attributable to equity shareholders of £132,000

·    Earnings per share of 1.78p

·    Net assets increase to £7.9m

·    Net assets per share of £1.06

Commenting upon these results Chairman, Sir Michael Oliver said:

"As commented on by the Group's Lloyd's Advisers, Hampden Agencies in this report, a profit was achieved despite the year having been adversely affected by the widely reported losses emanating from the UK motor market coupled with the Chilean earthquake.

We share the view of Hampden Agencies that the loss of investment return, combined with the improvements in risk management both centrally by Lloyd's and by Managing Agents, will enable the syndicates we support to successfully manage this difficult phase of the cycle. Losses inevitably give rise to opportunities in the insurance industry and we look forward to taking full advantage of these when they arise."

Enquiries:

Chairman's statement

It is gratifying to be able to report that, as predicted when last year's half year result was announced, the year has ended satisfactorily with a full year profit, albeit smaller than last year's with a corresponding further increase in our net asset value. As commented on by the Group's Lloyd's Advisers, Hampden Agencies in this report, a profit was achieved despite the year having been adversely affected by the widely reported losses emanating from the UK motor market coupled with the Chilean earthquake.

2010 was nevertheless a frustrating year for the Company. Our share price remains extremely volatile with modest trades resulting in substantial swings in its fortunes. One way of addressing the problem is growth, with more shares in issue held by a broader shareholder base. Last year we pursued two opportunities which would have had a transformational effect on the size of the Company. Sadly both fell at the final fence much to the disappointment of the Board. Rest assured however, our appetite for growth remains undiminished and we continue to evaluate other opportunities as they arise.

The 2008 year was the first year the Company underwrote in its own right and, with its profitable outcome together with the substantial distributable reserves established through our purchase of corporate members underwriting in prior years, we had hoped to herald the payment of our first dividend. However, the first quarter of 2011 is expected to be the worst in history for catastrophe losses; namely the tragic events in New Zealand, Australia and, of course, Japan. It is still unclear as to the likely impact of these losses on our portfolio: in particular the 2010 account. Your Board debated long and hard but finally came to the conclusion that in view of this uncertainty, it would be imprudent to pay a dividend now. It was not a decision taken lightly and, as and when the market gets a better feel for the likely impact of these catastrophic events, it is certainly one that we will revisit.

We share the view of Hampden Agencies that the loss of investment return, combined with the improvements in risk management both centrally by Lloyd's and by Managing Agents, will enable the syndicates we support to successfully manage this difficult phase of the cycle. Losses inevitably give rise to opportunities in the insurance industry and we look forward to taking full advantage of these when they arise.

Sir Michael Oliver

Non-executive Chairman

Lloyd's Adviser's Report

Market outlook

The insurance and reinsurance industry began 2011 in robust financial health with the asset side of balance sheets having been repaired following the financial losses sustained in 2008 and the first quarter of 2009. Both insurance and reinsurance capital bases at year end 2010 were at record highs. In the United States, which remains Lloyd's principal market being responsible for around 60% of premiums underwritten, the policyholders' surplus (a measure of supply of capacity) increased by 9% to $556.9bn at year end 2010 from $511.4bn a year earlier. Similarly, global reinsurance capital reached an all time high at 31 December 2010 increasing by 17% to $470bn from $402bn a year earlier, according to Aon Benfield Analytics.

The insurance pricing cycle is a classic supply-led cycle with demand playing a more limited role other than in catastrophe exposed reinsurance lines. Demand has been impacted by economic recession and low growth recoveries in developed markets with net written insurance premiums in the United States falling by 6.9% between 2007 and 2009, the first three-year decline since 1930 to 1933. However, demand has now begun to recover with a rise in net written premiums of 0.9% in 2010.

Currently, most lines of business remain challenging with pure underwriting margins being squeezed and capital providers being dependent on reserve releases and investment returns to generate their return on equity. Excess capital remains a major obstacle to a sustainable market turn.

We now expect that turn to be closer with the first quarter of 2011 going down in history as the worst quarter ever for the global insurance and reinsurance markets.  Aon Benfield estimates the reinsurance market is expected to face a bill of $52.6bn which compares with $40.6bn for the whole of 2010. Of these losses, the most notable were the New Zealand earthquake in February, estimated to cost $10bn, and the Japanese earthquake on 11 March where estimated insured losses range from $25bn to $45bn, albeit 20% or less than the total economic losses of $200bn-$300bn. The Japanese earthquake is likely to be the most expensive insured earthquake loss in history being larger than the 1994 Northridge earthquake in California, which in 2010 dollars cost insured losses of $22.5bn.

Loss affected international treaty reinsurance programmes have, or are expected to pay, increased rates at renewal with rises being seen of up to 50% on Japanese earthquake only cover. In the United States, at the June and July renewals this year, we expect rate increases of up to 10% on cat exposed treaty reinsurance compared with the 6% to 10% reductions seen at 1 January, using Guy Carpenter numbers. The expected rate increases are a combination of increased demand and a higher cost of capital due to version 11 of the RMS catastrophe model for US wind risks which better reflects the impact of Hurricane Ike in 2008 on modelled loss exposures. Encouragingly, the market for direct and facultative property covers in the United States, where Lloyd's is a major player, has begun to recover with Willis reporting rate increases of up to 5%.

Among the largest rate rises being seen are in UK private motor where the market moved into loss in 2009 and 2010 but has now responded with the AA reporting record rate increases in the 12 months to end of March 2011 of 40%.

We are now in the challenging phase of the insurance cycle with reserve releases expected to reduce, no sign of any improvement in the low investment returns and competitive market conditions in many classes of business. In the face of challenging market conditions, the Lloyd's market has proved resilient and, in particular, the portfolio of syndicates on which Hampden Underwriting participates.

We remain of the view that the long term loss of investment return, combined with the improvements in risk management both centrally by Lloyd's and by managing agents, will enable the syndicates supported by Hampden Underwriting to successfully manage this phase of the cycle. In the short term, there are undoubtedly opportunities to charge higher rates on loss affected business, although it is not yet clear how sustainable rate rises will be given the level of excess capital in the industry. Against this backdrop, we remain patient waiting for a more significant change in the pricing cycle and to be able to take advantage of the more broad-based opportunities which will undoubtedly arise.

Lloyd's competitive position remains resilient

Lloyd's operating results continue to be excellent using both the three-year and annual reporting measures. The 2008 three-year account result announced on 30 March 2011 was a 10.3% return on capacity despite catastrophe losses from Hurricane Ike and significant underwriting losses from UK motor. Lloyd's annually accounted results for 2010 totalled a pre-tax profit of £2,195m, despite claims from the Chilean earthquake, the first New Zealand earthquake, Australian floods and the Deepwater Horizon oil rig in the Gulf of Mexico.

The traditional method for performance comparisons of competing insurance businesses is an analysis of the combined ratio, which is the ratio of net incurred claims plus net operating expenses to net earned premiums. In 2010, Lloyd's combined ratio was the second best in its peer group at 93%, with Lloyd's average combined ratio of 87.4% being the same as its nearest competitor, Bermudian reinsurers, over the period 2006 to 2010.

Hampden Underwriting's performance

Hampden Underwriting's first underwriting year through the Hampden Corporate Member is the 2008 Account with underwriting capacity of £5.1m and a further £3.6m from the three Nameco acquisitions (Nameco 321, Nameco 365 and Nameco 605). Hampden Underwriting has also added four smaller bespoke participations on MAP Syndicate 6103, Hiscox Syndicate 6104, Amlin Syndicate 6106 and ICAT Syndicate 4242, all of which give additional exposure to US catastrophe business which remains well rated. For 2011 an additional bespoke participation was added on Ark Syndicate 6105 which provides exposure to composite classes, excluding casualty reinsurance.

2008 account

Hampden Underwriting's portfolio result including capacity acquired through the Nameco purchases is a profit of 8.7% of capacity before Members' fees. This result is a satisfactory performance given that 2008 marked the third worst year on record for insured catastrophe losses and the exposure to UK motor losses, the latter being the main reason for the underperformance by 1.6 percentage points compared with the Lloyd's average. In UK motor there was an escalation in the frequency and severity of bodily injury claims. Here, claims costs have exceeded previous estimates due in part to recession based fraudulent claims but mainly because of the growth of accident management companies which have added to the costs of settling non-fault claims.

2009 account

US catastrophe reinsurance exposure came off risk at the end of June 2010 and insurance exposure on 31 December 2010. The non-catastrophe classes remain immature where rating conditions are more challenging and UK motor remains in loss. However, this account is benefiting from the benign calendar year for catastrophe losses and, despite most of the losses from the Chilean earthquake and the Deepwater Horizon rig explosion falling back to 2009, early estimates for the 2009 Account are encouraging with Hampden Underwriting's portfolio averaging a mid-point profit of 12.7% of capacity compared with the Lloyd's Market Average of 9.2% before Members' fees, a healthy outperformance of the Lloyd's average of 3.5 percentage points.

2010 account

The 2010 Account has already been affected by a number of natural catastrophes occurring both in calendar year 2010 and in 2011. Significant losses include the Chilean earthquake and Deepwater Horizon energy loss (both also affected 2009), two New Zealand earthquakes, Australian floods, the Gryphon oil and gas installation in the North Sea, April tornados in the United States and the largest so far being the Japanese earthquake and tsunami.

Given the number of major losses impacting the 2010 Account and forecasts of an active 2011 hurricane season to which some insurance business remains exposed, we expect the 2010 Account to move into loss, although at this stage, given the Account is still on risk and the Japanese earthquake loss is subject to material uncertainty, we are not providing a formal estimate.

Earthquake losses typically deteriorate due to latent damage as previously undamaged buildings become unsafe; an added uncertainty is the exposure to Contingent Business Interruption losses from non-Japanese businesses adversely affected by interruptions in the supply of components and finished products. To put the Japanese earthquake loss into context we expect it to settle within the modelled Realistic Disaster Scenario for a Tokyo earthquake (the modelled loss for 2010 was $53bn excluding Contingent Business Interruption) where there is a greater concentration of exposures; the Hampden Underwriting Business Plan RDS in 2010 for a Tokyo earthquake was 9.6% of capacity, net of reinsurance. During 2010 margins remained under pressure in the non-catastrophe exposed accounts and UK motor is again expected to be in loss. A first full set of early estimates from Managing Agents will be available at the end of May as at Quarter 5 on the 2010 Account.

2011 account

Hampden Underwriting's portfolio for 2011 provides a good spread of business across managing agents and classes of business with motor and liability providing a balance to the catastrophe exposed reinsurance and property business, as well as contributing to lower capital requirements due to Lloyd's credits for diversification.

28.6% of the capacity is in the three syndicates rated A by Hampden Agencies Ltd ("HAL"), being Syndicates 386, 609 and 2791, with Syndicate 2791 being the largest holding at 17.3% of capacity. 56.4% of the portfolio is in syndicates rated B, including the Kiln Syndicate 510 which makes up 15.8% of the portfolio and has a good track record of outperforming the market. 15.0% of the capacity is allocated to C rated syndicates.

The ratings are intended to indicate HAL's view of expected performance of a syndicate over a cycle, "A" being superior, "B" being above average and "C" being average.

Portfolio risk management

HAL manages the portfolio risk by diversification across classes of business, syndicates and managing agents as well as controlling the downside, in the event of a major loss, by monitoring the aggregate losses estimated by managing agents to Realistic Disaster Scenarios ("RDS"). HAL considers risk in the context of potential return and seeks to actively manage catastrophe exposure, dependent on market conditions.

Lloyd's first utilised RDS in 1995 to evaluate exposure at both syndicate and market level. These scenarios continue to be refined and updated to take account of loss experience and exposure values. For 2011 the largest loss modelled is a Florida windstorm totalling $125bn, which compares with only $60bn in 2005 indicating additional conservatism.

Exposure management is a critical component of being able to manage the insurance cycle.

Top 10 Syndicate Holdings

The two largest classes of business are reinsurance and US$ property insurance. As rating levels continue to be more attractive in reinsurance than insurance, the weighting of reinsurance remains higher than insurance. These classes include business exposed to catastrophes and therefore the next two largest classes, being US casualty and motor, provide balance to these exposures.

Consolidated statement of comprehensive income

Year ended 31 December 2010

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

Consolidated statement of financial position

At 31 December 2010

Consolidated statement of cash flows

Year ended 31 December 2010

Statement of changes in shareholders' equity

Year ended 31 December 2010