Hardy Underwriting Group PLC : Final Results

Date:	1 March 2012
On behalf of:	Hardy Underwriting Bermuda Limited ("Hardy" or "the Group")
Embargoed until:	0700hrs

Hardy Underwriting Bermuda Limited

·   Financial Results for the year ended 31 December 2011

FINANCIAL

·   Gross premiums written of £268.4m (2010: £279.4m)

·   Net tangible assets of 183.5p per share (2010: 270.0p per share)

·   Loss before tax of £42.1m (2010: profit before tax of £10.0m)

·   Combined ratio of 120.9% (2010: 94.7%)

·   Post tax loss on equity of 22.6% (2010: return of 6.3%)

·   Basic loss per share of 67.5p (2010: earnings of 18.6p)

·   No final dividend. Dividend per share for the year of 4.4p (2010: 14.6p)

OPERATIONAL

·   Strategic review on track

·   Excellent performance of non-catastophe exposed lines of business

·   Appointment of Paul Dawson to develop a new energy account from 2012

Commenting on the Group's results, David Mann, Chairman of Hardy Underwriting Bermuda Limited, said:

"The Board has concluded that, in the light of the impact of the catastrophe losses on the Group's financial resources and of the ongoing strategic review, it would not be appropriate to pay a final dividend.

"2010 and 2011 have been challenging years for Hardy and we have learnt a great deal from the experience. As a consequence, we believe that the underwriting portfolio is in fundamentally better shape than it has ever been. The strategic review is proceeding and we remain focused on achieving the best possible outcome for all stakeholders."

For further enquiries, please contact:

Barbara Merry, Chief Executive	Tel: [phone]
Jamie MacDiarmid, Finance Director
Redleaf Polhill Ltd	Tel:  [phone]
Emma Kane/Adam Leviton/David Ison	[e-mail]

Chairman's and Chief Executive's Statement

This year has been dominated by an unprecedented series of extreme natural catastrophe events, exceeding 2010 which was itself extraordinary for frequency of large loss activity. A recent report from Aon Benfield estimates that 253 separate events generated a record total economic loss of US$435 billion in 2011 and insured losses of US $107 billion, second only to 2005 when Hurricanes Katrina, Rita and Wilma ravaged the US.

Since 2007, Hardy has focused its catastrophe exposed property treaty business on international risks which, as we have said before, makes our account atypical for Lloyd's. As a result, Hardy's exposure to these international losses is not unexpected, except as regards the frequency of the loss events. The scale of these events has, inevitably, had a major impact on the performance of Hardy in 2011 and, regrettably, the Group has incurred a significant loss before tax of £42.1 million (2010:  £10.0 million profit).

This result, however, should not undervalue the strong underwriting performance of our attritional non-catastrophe exposed classes which all contributed profits, albeit that for some lines of business premium volumes were lower than forecast due to disciplined underwriting in response to continued rating pressure. The US property treaty account also benefited from another relatively benign hurricane year.

The international loss events have been both dramatic and particularly difficult to estimate at an early stage with the necessary degree of accuracy. The Japanese earthquake and tsunami caused significant loss of life and devastation to large parts of the country outside the major cities. Loss estimates took a considerable time to emerge and perhaps because the losses fell more heavily on the cooperatives, rather than the non-life companies, the early advices proved inadequate and had to be revised upwards later in the year.

In New Zealand, the second and then third earthquakes proved equally difficult for ceding companies to assess with the future of the city of Christchurch itself being called into question at times. Quake losses are, by their nature, more difficult to assess than Atlantic wind events and again, in common with the whole reinsurance market, loss advices to us have increased dramatically during the course of the year.

The flooding in Thailand brought an unwelcome twist to the year. Whilst our exposure to many of the areas that will be affected by this event is small, we have participated on one particular proportional treaty which has been extremely hard hit, notwithstanding that Thailand was not generally considered to be prone to catastrophe activity. As a result of the unprecedented size and frequency of this event coming so soon after the other 2011 events, the Board concluded that it was necessary to conduct a strategic review of the business covering both underwriting strategy and capital.

From an underwriting strategy perspective, and specifically with regard to international property treaty underwriting, we were in any case reviewing our pricing methodology as we do on a regular basis. The extent of catastrophe activity over the last 18 months is extraordinary, but the scale of losses has highlighted the rapidly increasing economic values in many regions. Significantly higher premium levels are needed across the sector if the industry is to cope with losses of this nature and we have implemented changes to our rating scales designed to address this. We do not, however, expect that higher pricing will be realisable overnight and we therefore expect the account to contract as a result. We have also reduced our maximum exposure limits and our line size as well as imposing restrictions on terms and conditions. These measures taken together have had a considerable effect on risk assumption and the volatility of the underwriting portfolio has been correspondingly dampened over the course of the second half of 2011 and into 2012.

As regards capital, in the months before the Thai floods, we had already concluded that additional third party capital support should be sought for syndicate 382 both to facilitate the growth of the business and to migrate a further proportion of the catastrophe exposure from the Group. Such arrangements also enhance the return on equity for Hardy by way of fees and profit commissions. There was considerable interest in supporting the syndicate in this way, and we were delighted to welcome Tower Group with a 15.0% share of the 2012 account. Furthermore, our existing partner, Arig, has increased its participation from 7.5% to 10.0%.

It was clear during the many discussions we had with potential third party investors that we could have obtained much greater levels of support had we needed or desired it. It was also clear that many of those we spoke to were interested in long-term relationships and/or in acquiring some or all of the Hardy business. Having announced the strategic review on 1 December 2011, we received considerable interest in the Group, and a process was initiated to determine how best to realise the potential in Hardy for the benefit of shareholders and other stakeholders.

This review process is well under way and on track and shareholders will be advised as to the Board's recommendations as soon as possible.

Progress in 2011

Adrian Walker retired in the first half of the year, and Patrick Gage took over the position of Director of Underwriting at the most challenging time possible. In addition to dealing with the catastrophe activity affecting the business, steps have been taken to eliminate business lines that are too resource or capital intensive and therefore not producing an adequate return, leaving the focus very much on the development of the key market sectors where Hardy already has specific expertise.

The underlying performance of the marine and aviation, specialty lines and non-marine property business units has been profitable. We have had to be cautious during the year's mostly soft market conditions, but the teams have delivered good returns on income written. Underwriting overall is, however, still highly competitive with no apparent shortage of new capital ready to be deployed into the industry in both the developed and developing economies.

There are, however, clear signs of improved rating, particularly in the property classes of business and with a 2012 business plan that has a strong bias towards these lines, we are well positioned to exploit market opportunity.

The renewed focus on Hardy's existing market sectors builds on Hardy's core philosophies. The overall portfolio continues to be predominantly short tail, price driven and well diversified. Our underwriting platforms in London, Bermuda, Bahrain, Singapore and Guernsey all continue to enhance the distribution of the business in support of our primary market sector focus.   

The development of the energy account for 2012 is very much in keeping with this focus, and we are therefore delighted that we have been able to attract a very high calibre market leader to develop an energy book with us, which we expect to deliver excellent returns over the cycle whilst also enhancing the presence of the marine team in general.

The Solvency II programme has continued to occupy a good deal of resource and, despite much talk of delays in formal implementation across Europe, we are pleased that the Lloyd's market has been keen to move ahead in accordance with the original timetable. Hardy has made good progress and is on track to demonstrate the necessary systems, processes and controls around an appropriate internal model. The work is also delivering practical benefits to the business in that it pulls together all aspects of our risk and solvency assessment activities. A lot of hard work has gone into this project both by individuals dedicated to it and from almost everyone across the Group. They are all to be congratulated on what has been achieved so far as we go into the "business as usual" phase of embedding some of the new or enhanced processes into everyday practice.

The Board has concluded that, in the light of the impact of the catastrophe losses on the Group's financial resources and of the ongoing strategic review, it would not be appropriate to pay a final dividend.

2010 and 2011 have been challenging years for Hardy and we have learnt a great deal from the experience. As a consequence, we believe that the underwriting portfolio is in fundamentally better shape than it has ever been. The strategic review is proceeding and we remain focused on achieving the best possible outcome for all stakeholders.

Finally, we would like to thank the entire Hardy team for their considerable effort and commitment in such difficult and unsettling times.

Barbara J Merry                                                                                                   DP Mann

Chief Executive                                                                                                    Chairman

Business unit reviews

Marine and aviation

Head of business unit - Mervyn Sugden

Overview

The marine and aviation business unit embraces the traditional focus of the Hardy business, with Mervyn Sugden, the business unit manager, having underwritten for syndicate 382 since it was established in 1975. The teams for both the marine and aviation elements of the portfolio demonstrate lead underwriting capability and a keen focus on profitability. Underwriting results have been consistently strong, although premium volume has been a particular challenge. Syndicate 382 was originally set up as an energy syndicate so it is pleasing to see that we now have a very strong energy team underwriting for 2012.

Energy

We have materially expanded our capability in the Energy class for 2012 and beyond, having introduced a specialised team led by Paul Dawson. Hardy will be primarily focused upon companies engaged in upstream oil and gas operations worldwide. The Lloyd's and London market is the dominant market for upstream energy insurance and by accessing existing distribution we anticipate developing a leading position in this class. Market conditions remain promising with good growth in insurance demand consequent on strong underlying commodity prices and increased levels of investment. A number of high profile losses in the sector in recent years have also highlighted the role that energy insurance can serve in helping energy companies manage their risks. Although the energy insurance class is complex and potentially volatile, we believe that this is reflected in current rating conditions and opportunity exists for strong cross-cycle results. Our energy team has benefited from excellent support so far and is on track to deliver a significant account in 2012.

Cargo & Specie

Volumes in the cargo market have been affected by the recession in global economic activity, as well as by heavy pressure on rates. We saw little evidence of hardening in 2011 but remain confident for the short to medium term future, despite tough competition from the US domestic market which tends to lack the rating discipline seen at Lloyd's.

The specie book has seen less rating pressure than cargo in 2011, but poor economic conditions have coincided with some large loss activity. For the short to medium term, we are confident that general rating levels will be maintained and increased in poor performing areas.

Marine hull

The marine market has been very challenging all year with continuing downward pressure on rates and only very poorly performing accounts receiving any significant pricing correction as yet more capacity enters the global marine market. Coupled with this difficult rating environment, ship owners have been suffering from the ongoing effects of the global economic downturn with reduced earnings and low valuations impacting premium levels.

Against this rather bleak background we are pleased to be able to report that the marine portfolio has grown this year, with no compromise of underwriting discipline. Our historic levels of profitability have been retained with continuing emphasis on our recognised areas of hull expertise and on strong claims management. The liability account has also grown and we have diversified into other marine classes with lower claims activity in which we have traditionally been under-represented. Hardy's exposure to the Concordia disaster is not considered to be material.

With the global economic outlook appearing just as gloomy for 2012 we will be continuing to develop the book in the same manner and looking for opportunities that will complement the existing portfolio.

Aviation

Market conditions in 2011 proved to be much more challenging than we had initially anticipated. With the airline market having suffered a number of years of losses, we approached 2011 with some optimism regarding the rating environment. Unfortunately this proved to be misplaced as many airlines achieved significant rate reductions to offset the growth in exposures both in terms of fleet values and passenger numbers. The relatively low financial cost of the losses in 2011 leads us to believe that there is little chance of a material rating improvement in the short term. Our involvement in this market is consequently limited.

In the helicopter market, rates also continued to fall against a background of a very active loss pattern. We are confident in our strategy of writing for gross underwriting profit although this does mean that our income is modest at this point in the underwriting cycle.

Our involvement in both the satellite and aviation reinsurance markets is by way of consortium participations, so we achieve greater diversification. We believe in the long term that there is scope for profitable growth in both areas although the overcapacity that is particularly evident in the satellite market resulted in the syndicate limiting its line to a modest level.

Non-marine property

Head of business unit - Tony Hepburn

Overview

This account comprises direct and facultative property, including construction insurance of industrial and commercial risks (heavy industry, general manufacturing, commercial property portfolios), together with residential and small commercial risks. Large risks, including the construction and engineering account, are written on a worldwide basis. Residential and smaller risks have been more focused on the UK and US, though some geographical diversification is gradually being introduced.

2011 has been a difficult year for property insurers. The year began in an environment of, at best, flat rates while insurers were still suffering from the effects of a number of large catastrophe events in 2010. This trend of an unusually high number of severe natural catastrophes continued through 2011 resulting in the worst ever year for insured natural catastrophe losses. Against this backdrop our non-marine property business has generally performed very well, producing profits and being in the top quartile of performers within the Lloyd's market.

The direct and facultative account, which tends to cover the larger industrial and commercial risks, has continued to grow in both London and Bermuda. The natural catastrophe losses during 2011 have caused a number of our peers to change their underwriting stance or, in some cases, withdraw from the class altogether. By focusing on risks that we understand fully, and where we are able to obtain price adequacy, our underwriting results have once again been very good. The account is catastrophe exposed, but careful risk selection has minimised the impact that recent activity might otherwise have had.

The construction and engineering account has now been running for two years and continues to develop in line with our expectations. Coverage tends to be for a longer period than other classes, matching the period of each construction project. The team writes a worldwide account and combines underwriting and risk management capability across the industry. We will build on this expertise to develop the book further. This sector is traditionally less cyclical than most and rating levels have been broadly flat.

The direct property account developed as a predominantly UK book covering small commercial and residential risks and was then complemented by a US account for 2011. In the UK we have resisted the temptation to grow too quickly during the soft market, but through judicious selection of producing agents have gradually increased volumes whilst maintaining profitability above the market average. In the US the book has been successfully established during 2011 and is expected to deliver good profits.

The impact of the heavy losses of the last two years has started to have some beneficial effect on rating levels, especially in natural catastrophe exposed classes. We are seeing good rate increases across many parts of our non-marine portfolio and aim to be able to take advantage of what we hope is the sustained hardening that the market needs.

In the high value UK homeowners market rates did increase a little at the beginning of 2011. We did not feel, however, that these increases would provide us with a reasonable return on capital over the long term and so we took the decision to cease underwriting this business. The portfolio will now be run off and we expect to have no material exposure by the end of 2012.

Property treaty

Head of business unit - David Carson

Overview

The property treaty (reinsurance) account generates the majority of the catastrophe exposures underwritten by the Group. Business is underwritten from London, Bermuda and Singapore. The account has been atypical as compared to the average Lloyd's property treaty catastrophe portfolio and focused on international business, although recent changes have reduced this bias. The account is protected by a blend of proportional and non-proportional reinsurance.

In last year's annual report we commented that 2010 was a most testing year, the worst since 1999 for international losses. 2011 was worse still and the impact this has had on the business as a whole is deeply disappointing.

Global economic loss from natural catastrophe events in 2011 is the highest on record although the insured loss, estimated at US $107 billion, is less than 2005 when events were concentrated in the US.

The major events of 2011 were: the Brisbane Floods in Australia (January), the Lyttelton earthquake in Christchurch, NZ (February), the Tohoku earthquake and tsunami in Japan (March), the tornadoes in Alabama and Missouri (April and May), the Sumner earthquake in Christchurch, NZ (June), Hurricane Irene in the Bahamas and the US (August), and the extensive flooding in Thailand (July through to November). Whilst our US portfolio emerged relatively unscathed in 2011, our larger International account was severely impacted.

Our portfolio is always reviewed in the light of losses, but the scale of activity over the last two years has caused us to look even more closely at our risk appetite and at how we write in the international catastrophe sector in particular. Whilst rate increases provide opportunities for "pay back" in selected territories there is also a need to be more cautious. The level of data in the international sector is generally lower than in the more mature US markets. The combination of an increase in economic values in those regions, and a higher incidence of activity from non-modelled perils, means that more restricted wordings, and significantly increased margin over benchmark price are required to give confidence for sustained long-term profitability

In response we have re-calibrated our pricing matrices and are continuing to improve the premium to exposure ratio for the whole portfolio. Additionally we have decided to scale back our international portfolio in 2012 by reducing line sizes and overall exposure. Consequently our maximum loss limits, based on exceedence probability for individual events and annually in the aggregate, have been reduced significantly, and this is commented on further in the Risk section of the report and accounts.

We are maintaining our US account at a similar level to that of previous years, as we aim to return the overall property treaty portfolio to profitability.

Catastrophe rates have hardened significantly in loss-affected areas and more modestly elsewhere, with an average rate increase on renewal business incepting at 1 January 2012 portfolio of 8.9%.

Our Bermuda office continues to develop well and its portfolio of US business has produced good profits over the last two and a half years. Importantly, the team has developed some solid strategic relationships with both clients and brokers that bode well for the future.

Hardy Asia's first full year of operation in Singapore has, sadly, been blighted by the extraordinary flooding in Thailand. Despite only having a handful of local treaties, significant losses have been generated by this event, which is unparalleled in its nature. Changes have been made to our ongoing underwriting strategy as a result.

In September, following an extensive underwriting review, it was decided to discontinue our Japanese Kyosai portfolio. The forecast margins for the portfolio are considered to be insufficient to be sustainable in the long term given the expense involved in managing the book, and the strengthening of reserves that has been necessary as we run off the portfolio has also had a detrimental impact on the results of this business unit.

Lloyd's remains a strong and stable market and we continue to see good, profitable growth potential. This does, however, need to be managed in the context of our own capital base and the risk appetite of both the group and the syndicate.

Specialty lines

Head of business unit - Adrian Daws

Overview

This business unit has grown significantly since 2007, providing underwriting profit and diversification to the overall risk profile. The rating environment continues to be challenging but the business has produced a highly satisfactory underwriting profit in 2011.

Financial Institutions

Trading conditions have remained difficult throughout 2011 and opportunities to grow the book have been limited. The market continues to see claims activity resulting from the global financial turmoil, while sovereign debt issues in the Eurozone remain a concern. We have maintained our focus on the first party fidelity element of the account, which is less volatile. Reinsurance conditions for 2012 are likely to force a hardening in market conditions for capacity programmes, although smaller/medium sized business will remain competitive.

Accident and Health

This has become a more significant part of the business unit with the continued development of a profitable coverholder relationship, focusing on international risks. The account includes general personal accident, sports, medical expense and a limited book of personal accident catastrophe exposures. We have employed a dedicated underwriter to oversee the facility and we expect further growth in 2012.

We have participated in the Kidnap and Ransom class for a number of years through facilities but commencing in 2011 we employed a specialist team to underwrite a more significant account, mainly through Hardy's new operation in Guernsey but also directly into the syndicate. The class has traditionally delivered above average returns to the Lloyd's market and we expect to grow the book considerably as the demand for the product grows in an increasingly uncertain world.

Terrorism

An increased renewal retention rate and significant new global demand in the wake of the Arab Spring, offering niche opportunities within our risk appetite, have contributed to profitable growth in 2011.  We have expanded the team to ensure that we build on this over the coming years, maintaining a balance between lead and support capacity as well as in specialist and commodity products and territories.

Political Risks

The global economy cooled significantly in 2011, particularly since the summer events in Europe which further reduced economic growth and increased uncertainty. The prospects for growth in the East for 2012 are far better than in the West where there is continued doubt over the future of the Euro. During 2011 the syndicate was able to consolidate its position with its major clients whilst successfully concluding several recovery projects which had a positive impact on back year results. Our cautious optimism for the year ahead is based on an anticipated reduction in the dominance of the banking sector matched by increasing demand from manufacturing and trading clients.

Special Risks and Schemes

In 2011 we decided to terminate our involvement in a facility writing mobile phone insurance. Management of the distribution had become increasingly complex and with the underperformance of one of the key suppliers of business, it was clear that the line did not fit into our strategy for the growth of the syndicate.

Financial review

Summary of results

2011 saw a series of large international catastrophes resulting in significant market losses, most notably from earthquakes in Japan and New Zealand and more recently floods in Thailand. The Group's performance has been severely impacted by these events resulting in a pre tax loss of £42.1 million.

	2007		2008		2009		2010		2011
	£m		£m		£m		£m		£m
Gross premiums written	147.5		172.8		242.0		279.4		268.4
Net insurance premium revenue	108.6		120.8		176.6		192.7		190.5
Total underwriting return	19.4		8.7		34.3		9.3		(39.5)
Investment income	6.2		7.8		5.6		2.9		4.8
Other income	0.6		0.2		0.3		0.1		0.4
Other charges	(7.4)		(10.6)		(11.9)		(11.1)		(5.7)
Finance charges	(2.0)		(1.7)		(1.6)		(2.3)		(2.4)
Profit/(loss)  before tax and foreign exchange	16.8		4.4		26.7		(1.1)		(42.4)
Foreign exchange gain/(loss)	1.5		18.7		(6.6)		11.1		0.3
Profit/(loss) before tax	18.3		23.1		20.1		10.0		(42.1)
Post tax return/(loss) on equity	17.7%		22.9%		13.4%		6.3%		(22.6)%
Basic earnings/(loss) per share	38.4p		55.4p		36.8p		18.6p		(67.5)p
Interim dividend per share	3.3p		3.6p		4.0p		4.4p		4.4p
Final dividend per share	7.7p		8.5p		9.3p		10.2p		-

Return on equity is calculated as profit after tax expressed as a percentage of opening net assets adjusted for the proceeds from the placing and open offer with effect from 1 April 2009.

Underwriting performance

Premiums

Gross premiums written for the Group have reduced by 3.9% to £268.4 million in 2011 from £279.4 million in 2010. The main driver for this reduction is the introduction of third party capital into the syndicate in 2011 on a limited tenure basis reducing the Group's share of underwriting capacity from 100.0% to 92.5%. The remaining 7.5% share has been provided by Arab Insurance Group ("Arig") with whom Hardy has a joint venture coverholder in Bahrain. On a 100% basis the gross premiums written for the syndicate increased by 3.5%. 2011 income was also affected by withdrawal from lines of business that were not generating satisfactory returns.

Premium rates for renewal business increased by 3.6% in 2011 across the business (2010: flat). Both catastrophe exposed classes, property treaty and non-marine property business units experienced rate increases of 7.8% and 4.6% respectively. Marine and aviation saw a rate reduction of 0.7% as it continues to experience challenging market conditions with downwards pressure on rates. Specialty lines also saw a rate reduction of 0.9% in competitive market conditions.

Reinsurance purchased

The Group's purchased reinsurance increased by 8.1% in 2011 from £73.1 million to £78.9 million, following an increase of catastrophe reinsurance protection in order to protect the Group's aggregate exposures and manage risk levels.

Claims

The claims experience within the Group's catastrophe exposed classes, property treaty and non-marine property, has been severely impacted by the significant international catastrophes in 2011. These losses have contributed 38.3% to the Group's combined ratio of 120.9% in 2011. Excluding these losses, the underlying combined ratio of 82.6% demonstrates strong performance in other classes, most notable in the marine and aviation division which reported a 72.7% combined ratio against a backdrop of difficult market conditions. Specialty lines had another robust year with a combined ratio of 82.1%.

The Group has maintained its prudent reserving approach and using the market information available, considers the reserves held against the catastrophes in 2011 to be appropriate whilst being mindful that there is uncertainty surrounding the estimation of these catastrophes at this relatively early stage of development.

Best estimate reserves and margin

Hardy has a conservative approach to the estimation of outstanding claims reserves and maintains reserves with a margin above management's actuarial best estimate to account for the inherent uncertainties implicit in writing large commercial insurance and reinsurance risks. At any time there is a range of possible outcomes at which claims could ultimately settle. As time passes the uncertainty surrounding the likely claims settlement reduces and the level of margin required to be held is reduced.

A review of the reserves is performed every quarter and involves underwriters who provide detailed knowledge of their business and the actuarial team who provide statistical analysis. We believe this inclusive approach is the best way to ensure that insurance risk is understood along with the quantum and volatility of claims in each class of business. With this information the actuarial team forms an updated view of best estimate reserves, and any required adjustments are made to the margin within the held reserves.

Our objective is to maintain adequate reserve strength to allow for the inherent uncertainty surrounding the estimate of ultimate claims levels. Subject to business mix and the nature of claims incurred in the year, the Group aims to hold a margin above actuarial best estimate reserves within the range 7.5% to 12.5% of best estimate reserves, which we consider to be prudent for a predominantly short tail portfolio. As at 31 December 2011, the Group estimates that the margin is within this range.

Due to our conservative reserving approach we were able to make reserve releases from prior years of £9.7 million in 2011 (2010: £18.6 million).

		Year ended		Year ended
		31 December 2011		31 December 2010
		£m		£m
Marine and aviation		6.4		13.0
Specialty lines		(2.5)		2.3
Non-marine property		3.6		(1.6)
Property treaty		2.2		4.9
Total release		9.7		18.6

Expenses

Total expenses, which include expenses incurred in insurance activities, other operating expenses and finance charges, increased slightly to £91.1 million from £90.4 million in 2010. Expenses incurred in insurance activities amounted to £83.0 million compared to £77.0 million in 2010 and other operating expenses incurred in the period totalled £5.7 million compared to £11.1 million in 2010.

Expenses incurred in insurance activities represent costs relating to acquisition costs and administrative expenses. Acquisition costs, which comprise of premium commissions paid to insurance intermediaries for providing business and other acquisition costs directly related to underwriting activities, increased to £67.9 million from £64.9 million in 2010. The main driver for this is due to the increase in premium income in lines of business which have a higher commission rate. Administrative costs increased to £15.1 million from £12.1 million in 2010 primarily driven by increased IT, Solvency II project costs and other support costs.

Other operating expenses include corporate expenses, employee incentives and other expenses not directly attached to underwriting. These costs decreased to £5.7 million from £11.1 million in 2010 with the main driver being lower employee incentive and other corporate costs incurred in the period.  Finance charges, relating to the Group's US $30m subordinated bond and US $65m letter of credit facility have remained flat at £2.4 million.

Investment performance

Investment income for the year ended 31 December 2011 was £4.8 million, a return of 1.7% compared with £2.9 million or 0.9% in 2010.

The investment return for the period is set out below.

		Year to 31 December 2011			Year to 31 December 2010
		Average balance	Return	Return	Average balance	Return	Return
		£m	£m	%	£m	£m	%
Fixed income		172.5	2.5	1.4%	200.9	2.1	1.0%
Cash and deposits		113.5	2.3	2.0%	108.6	0.8	0.7%
		286.0	4.8	1.7%	309.5	2.9	0.9%

The Group has maintained its conservative investment strategy and continues to invest in short dated high quality fixed income securities, money market instruments and deposits. Given this strategy, the main element of risk in the portfolio is interest rate volatility. This risk is managed through the use of short duration benchmarks. The actual durations for the fixed income portfolios were:

		31 December 2011		31 December 2010
		Years		Years
Sterling		0.5		0.5
Euro		0.6		0.6
US dollar		1.5		1.6

Financial markets have continued to experience a great deal of volatility, in particular due to the European sovereign debt crisis. The Group has paid particular attention to this issue and has no direct exposure to sovereign debt issued by Portugal, Italy, Ireland, Greece or Spain, but may have indirect exposure through Eurozone bank investments.

Summary balance sheet

		2007		2008		2009		2010		2011
		£m		£m		£m		£m		£m
Intangible assets		15.5		15.5		15.5		15.5		15.5
Financial investments and cash		173.4		234.8		290.6		301.9		276.4
Reinsurance assets		40.0		59.2		68.0		105.2		191.7
Other assets		80.3		101.5		125.9		151.4		153.0
Total assets		309.2		411.0		500.0		574.0		636.6
Insurance liabilities		173.2		238.6		279.6		350.0		452.0
Subordinated debt		14.7		20.3		18.1		18.6		18.9
Other liabilities		36.1		50.4		50.2		52.1		58.2
Total liabilities		224.0		309.3		347.9		420.7		529.1
Total equity		85.2		101.7		152.1		153.3		107.5
Net assets per share		242.5p		289.5p		296.4p		300.0p		214.5p
Net tangible assets per share		198.3p		245.4p		266.2p		270.0p		183.5p

Intangible assets

The Group completed the acquisition of the remaining third party capacity on syndicate 382 during 2006. The total cost to acquire the capacity was £15.5 million, representing an average cost of 5.2 pence per pound of the syndicate 382 capacity for the 2011 year of account.

Financial investments and cash

Hardy is a short-tail insurance and reinsurance group and the investment strategy adopted focuses on maintaining sufficient liquidity for the prompt payment of claims in conjunction with providing a steady income stream. As such, the investment portfolio is liquid, of short duration and limits exposure by asset class, credit quality and issuer. The application of this policy has meant that, at the year end, all assets are held in fixed income securities, money market investments and deposits.

The day to day management of the fixed income portfolio is undertaken by two outsourced investment managers, Amundi (UK) Limited and Threadneedle Investment Asset Management. The performance of the managers and compliance with the Group's investment guidelines is monitored by the Finance Committee.

The allocation over the main asset classes is set out below.

	As at 31 Dec 2011			As at 31 Dec 2010
	£m	%		£m	%
Fixed income	147.4	53%		199.9	66%
Cash and deposits	129.0	47%		102.0	34%
	276.4	100%		301.9	100%

The fixed income portfolios are analysed by asset type and credit rating below.

As at 31 December 2011	Holding		Credit rating
	£m	%	AAA	AA	A	BBB
Government	48.0	33%	18%	15%	-	-
Government agency	9.8	7%	5%	2%	-	-
Supranationals	12.4	8%	8%	-	-	-
Corporate	55.3	37%	1%	16%	14%	6%
Asset backed securities	21.9	15%	15%	-	-	-
Fixed income securities	147.4	100%	47%	33%	14%	6%

As at 31 December 2010	Holding		Credit rating
	£m	%	AAA	AA	A	BBB
Government	97.1	49%	47%	2%	-	-
Government agency	17.4	9%	7%	2%	-	-
Supranationals	9.5	5%	5%	-	-	-
Corporate	75.9	37%	12%	14%	9%	2%
Fixed income securities	199.9	100%	71%	18%	9%	2%

Reinsurance assets

Exposure to reinsurance credit risk may increase over time because the Group's evolving catastrophe profile may require a greater level of reinsurance buying than has historically been the case. The management of this risk, through the selection of high quality security and control over the reinsurance recovery process, remains a key focus for the Group and is designed to ensure that the residual risk to the balance sheet remains low.

		31 December 2011		31 December 2010
		£m		£m
Reinsurers' share of:
Recoveries due on paid claims		28.5		7.2
Notified outstanding claims		82.2		52.2
Incurred but not reported claims		51.5		19.4
Reinsurance unearned premium reserve		29.5		26.4
Total reinsurance asset		191.7		105.2

The Group has a policy of buying reinsurance from entities with a rating of A- or above. Where we deviate from that position additional security may be provided in the form of a letter of credit if deemed necessary. The credit taken for reinsurance recoveries on notified outstanding and claims incurred but not reported ("IBNR") represents 42.9% of the gross insurance liabilities (2010: 33.2%). The Group has no material exposure to bad debt.

The composition of the security supporting reinsurance recoveries on paid and notified outstanding claims is analysed below:

		31 December 2011		31 December 2010
		%		%
Reinsurers rated by S&P:
AA		13		18
A		74		79
BBB		12		1
BB and lower		1		2
		100		100

Capital management

The total underwriting capacity for syndicate 382 for the 2012 underwriting year is £330 million. The Group's share is 75.0% at £247.5 million. The remaining capacity of £82.5 million has been provided by two parties, Arig and Tower Group.

Arig provides 10% of capacity for syndicate 382 for the 2012 underwriting year via their own corporate member, Arig Capital Limited.

Tower Group provides 15% capacity for syndicate 382 for the 2012 underwriting year via a quota share arrangement through a new corporate member, Hardy I.C. Limited ("HICL"), which is wholly owned by Hardy Underwriting Group Limited. Tower Group is one of the 50 largest providers of property and casualty insurance products and services in the US and provides personal and commercial insurance for small to medium-sized businesses via a network of retail and wholesale agents across the US.

The capital required to support the Group's share of underwriting for the 2012 underwriting year is 54.8% on capacity of £247.5 million(2011 underwriting year: 56.8% on capacity of £277.5 million).

The following table sets out the composition of the assets supporting the current capital requirement.

Year of account		2012		2011
		£m		£m
Capital requirement:		135.6		157.6
Satisfied by:
Investments		109.9		125.7
LOC		41.9		41.4
Solvency (deficits)/credits		(15.8)		6.5
Total FAL provided		136.0		173.6

In addition to the FAL provided, the Group has free funds of £4.5 million as at 31 December 2011.  

The Group's capital requirement has remained fairly stable compared to 2011 relative to underwriting capacity. Whilst the group has enough capital to support the 2012 underwriting year, the participations of Tower Group and Arig enhance the overall level of capital to support the growth in the syndicate's business.

The Group uses LOCs to support its regulatory capital requirement. The current facility provides US $65.0 million for the 2012 underwriting year. The facility will require renewal in advance of the 2013 underwriting year.

On 15 December 2010 the Group commenced a share buy-back programme and, as of 31 December 2011, 1,677,766 shares had been acquired at a range of between 261 pence and 275 pence per share. These shares are held as treasury shares. This buy back programme was suspended early in 2011.

Consolidated income statement
For the year ended 31 December 2011

		Year ended		Year ended
	Notes	31 December 2011		31 December 2010
		£'000		£'000
Gross premiums written	5	268,446		279,419
Written premiums ceded to reinsurers	5	(78,938)		(73,054)
Net premiums written		189,508		206,365
Change in net provision for unearned premiums	5	1,016		(13,648)
Net insurance premium revenue		190,524		192,717
Financial income	6	4,781		2,888
Other operating income	7	407		149
Net income		195,712		195,754
Claims incurred	8	(289,678)		(167,169)
Reinsurers' share of claims incurred	8	142,677		60,783
Net claims incurred		(147,001)		(106,386)
Expenses incurred in insurance activities	9	(83,002)		(76,996)
Foreign exchange gains	10	261		11,075
Other operating expenses	11	(5,728)		(11,086)
Total operating expenses		(235,470)		(183,393)
Operating (loss)/profit		(39,758)		12,361
Finance charges	13	(2,369)		(2,343)
(Loss)/profit before tax		(42,127)		10,018
Comprises:
Underlying (loss)/profit 1		(43,325)		9,060
Notional adjustment for foreign exchange movements on non-monetary items	10	1,198		958
Income tax credit/(expense)	14	7,534		(467)
(Loss)/profit for the year		(34,593)		9,551
(Loss)/earnings per share (pence)
Basic	15	(67.5)		18.6
Diluted	15	(67.5)		17.9

All the operations relate to continuing activities during the current and previous year.

1 Underlying (loss)/profit comprises (loss)/profit before tax with non-monetary items translated at closing foreign exchange rates (see explanation in note 4 to the financial statements).

Consolidated STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31 December 2011

			Year ended		Year ended
			31 December 2011 £'000		31 December 2010 £'000
(Loss)/profit for the year			(34,593)		9,551
Other comprehensive income			-		-
Total comprehensive (loss)/income recognised			(34,593)		9,551

Consolidated statement of financial position
As at 31 December 2011

The financial statements were approved on 1 March 2012 and signed on behalf of the Board.

B Merry		J MacDiarmid
Chief Executive		Finance Director

Consolidated statement of changes in equity
For the year ended 31 December 2011

		Common Shares	Contributed Surplus	Other Reserves	Retained Earnings	Total
	Note	£'000	£'000	£'000	£'000	£'000
Balance  at 1 January 2011		10,554	77,314	1,880	63,551	153,299
Total comprehensive income for the year
Loss recognised		-	-	-	(34,593)	(34,593)
Transactions with owners, recorded directly in equity
Proceeds of shares issued in relation to share options exercised	24	10	98	-	-	108
Share-based payments	25	-	-	48	-	48
Employee Benefit Trust holding	25	-	-	(1,501)	-	(1,501)
Purchase of treasury shares	25	-	-	(2,609)	-	(2,609)
Dividends	16	-	-	-	(7,244)	(7,244)

For the year ended 31 December 2010

		Common Shares	Contributed Surplus	Other Reserves	Retained Earnings	Total
	Note	£'000	£'000	£'000	£'000	£'000
Balance  at 1 January 2010		10,464	77,295	3,357	60,975	152,091
Total comprehensive income for the year
Profit recognised		-	-	-	9,551	9,551
Transactions with owners, recorded directly in equity
Proceeds of shares issued in relation to share options exercised	24	90	19	-	-	109
Share-based payments	25	-	-	1,927	-	1,927
Employee Benefit Trust holding	25	-	-	(1,429)	-	(1,429)
Purchase of treasury shares	25	-	-	(1,975)	-	(1,975)
Dividends	16	-	-	-	(6,975)	(6,975)
Balance at 31 December 2010		10,554	77,314	1,880	63,551	153,299

Consolidated STATEMENT OF Cash flows
For the year ended 31 December 2011

		Year ended		Year ended
		31 December 2011		31 December 2010
		£'000		£'000
(Loss)/profit before tax		(42,127)		10,018
Depreciation of property, plant and equipment		1,338		1,065
Interest and equity dividend income		(7,465)		(6,093)
Net unrealised losses on investments		2		1,891
Foreign exchange gains		(261)		(11,075)
Share-based payments		48		1,927
Finance charges		2,369		2,343
Change in underwriting balances		24,169		19,972
Increase in debtors and prepayments		9,149		(2,679)
Decrease in creditors and accruals		(8,034)		(5,053)
Interest received		7,465		6,093
Income tax paid		(5,680)		(3,750)
Net cash (utilised)/generated from operating activities		(19,027)		14,659
Cash flows from investing activities
Purchase of financial assets		(218,992)		(269,643)
Proceeds from sale of financial assets		269,066		261,321
Purchase of property, plant and equipment		(848)		(1,456)
Cash generated/(used) in investing activities		49,226		(9,778)
Cash flows from financing activities
Dividends paid		(7,244)		(6,975)
Cash received from issue of shares		108		109
Purchase of own shares including those arising on share buy-back programme		(4,110)		(3,404)
Finance charges		(2,369)		(2,343)
Net cash used in financing activities		(13,615)		(12,613)
Net increase/(decrease) in cash and cash equivalents		16,584		(7,732)
Cash and cash equivalents at beginning of year		101,939		98,254
Effect of exchange rate fluctuations on cash and cash equivalents		10,554		11,417
Cash and cash equivalents at end of year		129,077		101,939

Change in underwriting balances shows the movement in the underwriting debtors and creditors in the relevant period.

Included within cash and cash equivalents held by the Group are balances totalling £120.4 million (2010: £95.1 million) not available for immediate use by the Group outside of the Lloyd's syndicate within which they are held.

Notes to the consolidated financial statements

1              Summary of significant accounting policies

Hardy Underwriting Bermuda Limited is a company domiciled in Bermuda. The financial statements of the Company for the twelve-month period ended 31 December 2011 relate to the Company and its subsidiaries (together referred to as the "Group"). The financial information has been prepared in accordance with Bermudian law.

The principal accounting policies applied in the presentation of these financial statements are set out below. These accounting policies have been consistently applied to all the years presented, unless otherwise stated.

The financial statements are presented in pounds sterling, rounded to the nearest thousand, unless otherwise stated.

a.     Basis of preparation

Hardy Underwriting Bermuda Limited was incorporated under the laws of Bermuda on 17 October 2007. With effect from 6 February 2008, under a scheme of arrangement involving a share exchange with the members of Hardy Underwriting Group plc, the Company became the new holding company of the Hardy group.

The financial information set out in this statement is extracted from the Group's consolidated financial statements for the year ended 31 December 2011. The auditors have reported on those 2011 financial statements which include comparative amounts for 2010. Their report was unqualified, although an 'emphasis of matter' paragraph has been included referring to the Company's exposure to claims arising from the severe flooding in Thailand and their potential impact on the terms of the 'letter of credit' facilities which provide a part of its regulatory capital. As explained in note 3 the group's actual loss may vary materially from the current estimate and further information may cause the estimate to be revised.

Statement of compliance

The group consolidated financial statements are prepared in accordance with all of the International Financial Reporting Standards ("IFRS"), as adopted by the European Union, which are effective at 31 December 2011.

All new standards and interpretations released by International Accounting Standards Boards (IASB) have been considered and of these the following new and amended standards have been adopted by the Group in the period. None of these amendments have had a material impact on the transactions in the year or historic transactions where retrospective application is required.  

IFRS 7 (Amended) Financial instruments: Disclosures. The amendments require an explicit statement that the interaction between qualitative and quantitative disclosures better enables users to evaluate an entity's exposure to risks arising from financial instruments.

IAS 1 (Amended) Presentation of Financial Statements. IAS 1 is amended to clarify that reconciliation from opening to closing balances is required to be presented in the statement of changes in equity for each component of equity. IAS 1 is also amended to allow the analysis of the individual other comprehensive income line items by component of equity to be presented in the notes.

The following standards are in issue but are only effective in future accounting periods.

IAS 1: Amendment: Presentation of items of other comprehensive income (effective 1 July 2012)

IAS 12: Amendment: Deferred tax: Recovery of underlying assets (effective 1 January 2012)

IFRS 9: Financial Instruments (effective 1 January 2015)

IFRS 10: Consolidated financial statements (effective 1 January 2013)

IFRS 11: Joint arrangements (effective 1 January 2013)

IFRS 12: Disclosure of interests in other entities (effective 1 January 2013)

IFRS 13: Fair Value Measurement (effective 1 January 2013)

IAS 32: Amendment: Offsetting financial assets and financial liabilities (effective 1 January 2014)

IFRS 7: Amendment: Offsetting financial assets and liabilities (effective 1 January 2013)

The implications of these standards and interpretations are under review.

Measurement convention

The consolidated financial statements are prepared on the historical cost basis, as modified by the revaluation of financial instruments at fair value through the income statement.

Estimates

The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The areas involving a high degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in note 2.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the year in which the estimate is revised if the revision affects only that year, or in the year of the revision and future years if the revision affects both current and future years.

b.     Basis of consolidation

Subsidiary undertakings which are those entities in which the Group, directly or indirectly, has the power to govern their financial and operating policies so as to obtain benefits from their activities. In assessing control, potential voting rights that presently are exercisable or convertible are taken into account. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.

Where the Group has joint control of an entity (joint ventures) the consolidated financial statements incorporate the Group's share of the results, assets and liabilities on a line by line basis. The results of the joint venture are included in the Group results from the date of acquisition until the date of disposal.

Intra-group transactions, balances and unrealised gains arising from intra-group transactions are eliminated in preparing the consolidated financial statements.

c.     Foreign currency translation

The functional currency used in the financial statements is sterling, being the currency of the primary economic environment of the entities that make up the Group. The consolidated financial statements are presented in pounds sterling, being the presentational currency for the Group.

Transactions in US dollars, Canadian dollars, Japanese yen and euros are translated into sterling at the average rates ruling during the reporting period. Underwriting transactions denominated in other foreign currencies are translated into sterling using the exchange rates prevailing at the date of the transaction.

Monetary items are translated at rates of exchange ruling at the balance sheet date. This creates a foreign exchange gain or loss between the net assets translated at closing rates and the profit for the period which is derived by reference to average rates. The foreign exchange gain or loss is credited or charged to the income statement.

Non-monetary assets and liabilities denominated in foreign currencies, including unearned premiums and deferred acquisition costs, are recorded in sterling at the rate prevailing at the time of initial recognition and are not subsequently restated.

The following exchange rates were used to translate foreign currency assets, liabilities, income and expenses into sterling:

Average exchange rates		2011		2010
US dollar		1.60		1.55
Canadian dollar		1.59		1.59
Euro		1.15		1.17
Yen		127.88		135.52

Closing exchange rates		2011		2010
US dollar		1.55		1.57
Canadian dollar		1.58		1.56
Euro		1.20		1.17
Yen		119.57		126.98

d.     Insurance contracts

Insurance contracts are those contracts that transfer significant insurance risk at the inception of the contract. Insurance risk is transferred when an insurer agrees to compensate a policyholder if a specified uncertain future event adversely affects the policyholder. Insurance risk is considered significant if, and only if, an insured event could cause significant additional benefits to be paid in any scenario, excluding scenarios that lack commercial substance.

Insurance premium revenues

Insurance premium revenues comprise the proportion of premiums written that are earned in the period.

Gross premiums written represent premiums due up to the balance sheet date in respect of contracts incepting in the financial year and are stated before the deduction of commissions but are after the deduction of taxes, duties levied on premiums and other deductions.

Premiums are earned over the period of risk under the policy. The provision for unearned premiums represents the proportion of gross premiums written which is estimated to relate to exposures in subsequent financial periods.

Premiums ceded to reinsurers are accounted for in the same accounting period as the related direct insurance or inwards reinsurance business except in relation to excess of loss contracts, where the premium is charged over the period of cover. The provision for reinsurers' share of unearned premiums represents that part of reinsurance premiums ceded which is estimated to be earned in subsequent accounting periods.

Claims and reinsurers' share of claims

Claims incurred represent the cost of claims and claims handling expenses paid during the financial year, together with the movement in provisions for outstanding claims and future claims handling provisions. Reinsurance recoveries are accounted for in the same period as the incurred claims for the related business.

The provision for claims outstanding comprises amounts set aside for notified claims and IBNR on an undiscounted basis. The IBNR amount is based on estimates calculated using statistical techniques which are reviewed by external consulting actuaries. The techniques generally use projections, based on past experience of the development of claims over time, to form a view of the likely ultimate claims to be experienced. In addition factors such as knowledge of specific events and terms and conditions of policies are taken into account. For more recent underwriting, consideration is given to the variations in the business portfolio accepted and the underlying terms and conditions. Where a high degree of volatility arises from projections, estimates may be based on rating, on other models of the business accepted and also on assessments of underwriting conditions. The critical assumption used when estimating claims provisions is that past experience is a reasonable predictor of likely future claims development and that the rating and other models used to analyse current business are a fair reflection of the likely level of ultimate claims to be incurred.

The reinsurers' share of provisions for claims is based on calculated amounts for outstanding claims and projections for IBNR, net of estimated irrecoverable amounts, having regard to the reinsurance programme in place for the class of business, the claims experience for the year and also the current security rating of the reinsurance companies involved. Statistical techniques are used to assist in making these estimates.

We seek to ensure that all claims incurred are adequately provided for but material adjustments may be necessary in later periods as a result of subsequent information and events. Any adjustments to original provisions are made in the financial period in which the need for a change in provision becomes apparent.

Liability adequacy test

At each reporting date an assessment is made to determine whether recognised insurance liabilities are adequate. If that assessment shows that the carrying amount of insurance liabilities (less related acquisition costs) is inadequate in the light of estimated future cash flows, the entire deficiency is recognised in the income statement as an impairment of any associated deferred acquisition costs and, where these are fully depleted, via the provision for unexpired risks. 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.

e.     Financial income

Financial income comprises interest income, dividend income and fair value gains and losses on financial instruments through the income statement. Fair value gains and losses include both those realised on disposal of financial instruments and those unrealised, representing the movement in the fair value of financial instruments at fair value through the profit or loss held at the reporting date. Dividend income is recognised when the shareholder's right to receive the payment is established. Interest income on financial assets is recognised on an accrual basis.

f.      Other operating income

Other operating income includes the fees and profit commission charged by the Group to third party members of syndicate 382. All such income is accounted for in the accounting period in which the service is rendered by reference to the stage of completion of the specific transaction, assessed on the basis of the actual services provided as a proportion of the total services to be provided.

g.     Expenses incurred in insurance activities

Expenses incurred in insurance activities are recognised on an accruals basis. These comprise the Group's share of syndicate operating expenses, acquisition costs and the direct costs of membership of Lloyd's and other expenses attributable to the Group's underwriting activities.

Acquisition costs include brokerage and expenses incurred in respect of insurance contracts written and incepting during the financial period. They are allocated in accordance with the earnings pattern of the premiums on the underlying business. Deferred acquisition costs represent the proportion of acquisition costs incurred in respect of unearned premiums at the balance sheet date. Deferred acquisition costs are only deferred to the extent that they are considered recoverable out of future revenues.

h.     Other operating expenses

Other operating expenses are recognised on an accruals basis. They comprise operating expenses such as remuneration, office and administrative costs.

i.      Leases

Costs in respect of operating leases are charged to the income statement on a straight-line basis over the lease term.

j.      Finance charges

Finance charges comprise interest payable on loans together with fees and commissions charged for the utilisation of letters of credit. Interest payable on loans is charged to the income statement using the effective interest method. Fees paid for the arrangement of debt and letter of credit facilities are charged to the income statement on an amortised cost basis over the life of the facility.

k.     Taxation

The income tax expense comprises both current and deferred tax.

The tax currently payable is based on taxable income for the year. Taxable income differs from profits accounted for in the income statement because it excludes items of income and expenditure that are taxable or deductible in other periods or are not subject to, or allowable for, taxation. The Group's liability for current tax is calculated using tax rates applicable at the balance sheet date.

Deferred tax is recognised using the balance sheet method, providing for temporary differences between the tax bases of dealing with assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred tax is not recognised for temporary differences arising on the initial recognition of an asset or a liability in a transaction, other than a business combination, that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.

Deferred income tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.

l.      Dividend distribution

Dividends payable to the Group's shareholders are recognised as a liability in the period in which the dividend is declared and appropriately approved. Dividends are recognised in the statement of changes in equity. Dividends declared after the balance sheet date, but before the financial statements are authorised, are not recognised but are disclosed in the notes to the financial statements.

m.   Employee benefits

(i) Pensions

Contributions to the Group's defined contribution pension scheme are charged to the income statement when payable.

(ii) Share-based payments

The Group operates a number of employee and executive share schemes. The details of these schemes can be found in the Directors' Remuneration Report. Share options and share awards granted are measured at fair value on the date of grant and are expensed on a straight-line basis over the vesting period, with a corresponding increase in equity. The amount recognised as an expense is based on the Group's estimate of the number of shares that will eventually vest.

The Group uses option pricing models to assess the fair value of options granted to employees for all options issued after 7 November 2002. At each balance sheet date the Group re-assesses the number of share options that are expected to vest. Any adjustments are recognised through the income statement with a corresponding adjustment to equity over the remaining vesting period.

The proceeds of any share options exercised, net of any directly attributable transaction costs, are credited to share capital and contributed surplus.

n.     Intangible assets

Intangible assets comprise the costs of purchased syndicate capacity. This capacity is considered to have an indefinite useful life represented by participation rights to membership of syndicate 382, since it is deemed that the benefits from that capacity have no foreseeable time limit. Purchased syndicate capacity is capitalised at cost and is subsequently measured at cost less any impairment. The Board has considered the future prospects of the London insurance market and consequently believes that the ownership of the capacity by the Group will provide economic benefit over an indefinite number of future periods.

Purchased syndicate capacity is subject to an annual impairment test. An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount.

o.     Property, plant and equipment

Property, plant and equipment is stated at cost less accumulated depreciation and any impairment. Depreciation has been provided on a straight-line basis to write off the cost of fixed assets, less their residual values, over their estimated useful economic lives. The rates used are as follows:

Office equipment         25%

Computer equipment  33%

Underwriting system  20%

p.     Financial assets

Purchases and sales of financial assets are recognised on the trade date, which is when the Group commits to purchase or sell the asset. Financial assets are recognised initially at fair value and, for instruments not at fair value through the income statement, include any directly attributable transaction costs. Subsequent to initial recognition, financial assets are measured as described below.

Financial assets are de-recognised when contractual rights to receive cash flows from the investment expire, or where the investments, together with substantially all the risks and rewards of ownership, have been transferred.

Investments

All investments have been designated at fair value through profit or loss on initial recognition. This has been deemed the most appropriate IAS 39 classification for these assets as this reflects the fact that the investment portfolios are managed, and their performance evaluated, on a fair value basis. Management determines the designation of investments on initial recognition. Investments are designated at fair value through the income statement because the Group manages its investments on a fair value basis in accordance with its documented risk management and investment strategies.

Financial assets at fair value through the income statement are measured at fair value, with fair value changes being recognised in the income statement. The fair values of listed investments are based on quoted bid prices at the close of business on the balance sheet date.

Trade and other receivables

Trade and other receivables are initially recognised at fair value and thereafter stated at amortised cost less impairment losses.

Cash and cash equivalents

Cash and cash equivalents represent cash balances, money market deposits lodged with banks and other short-term highly liquid investments purchased within three months of maturity.

q.     Impairment (non-financial assets)

The carrying amount of the Group's assets is reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the carrying value is reduced to the estimated recoverable amount by means of a charge to the consolidated income statement.

An impairment loss is reversed if there is new information which results in a change in the estimates used to determine the recoverable amount, being the higher of fair value less selling costs and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate which reflects current market assessments of the time value of money and the risks specific to the asset for which the estimate of future cash flows has not been adjusted.

An impairment loss is reversed only to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of depreciation, if no impairment loss had been recognised.

r.     Subordinated debt

The long-term loan is recognised initially at fair value, net of transaction costs incurred. The loan is subsequently stated at amortised cost. Any difference between the initial carrying amount and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest method.

s.     Provisions

A provision is recognised in the balance sheet when the Group has a present legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation.

t.     Own shares

Investments in own shares are valued at their acquisition cost and are deducted from shareholders' equity in the balance sheet.

2           Critical accounting estimates and judgements in applying accounting policies

The Group makes estimates and assumptions that affect the reported amounts of assets and liabilities during the financial year. Estimates are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Estimates and judgements in applying accounting policies are continually evaluated for appropriateness.

Certain critical accounting estimates and judgements in applying the Group's accounting policies are described below.

Gross written premiums include estimates for pipeline premiums, together with adjustments to premiums written in prior accounting periods.

The Group's estimates for reported and unreported losses and the resulting provisions and related reinsurance recoverables are continually monitored and formally reviewed quarterly and updated based on the latest available information. Adjustments resulting from this review are reflected in income. The process relies upon the basic assumption that past experience, adjusted for the effect of current developments and likely trends, is an appropriate basis for predicting future events. Estimation of claims provisions is a complex process, however, and significant uncertainty exists as to the ultimate settlement of these liabilities.

Purchased syndicate capacity is considered to have an indefinite useful economic life as it entitles the Group to participate on the underwriting activities of syndicate 382 and the benefit from such participation has no foreseeable time limit. The carrying value of the intangible asset is reviewed annually for impairment, by assessing the discounted cash flows arising from the asset.

Financial investments held by the Group at the reporting date are shown at fair value and the methods and assumptions used by the Group to arrive at these values are described in note 21.

The most critical estimate included within the Group's financial position is the estimate for losses incurred but not reported. The total estimate as at 31 December 2011 is £117.6 million (2010: £62.5 million) and is included within total insurance liabilities in the statement of financial position.

3           Thailand floods

The current estimate of ultimate claims arising from the severe flooding in Thailand is:

£m

Gross claims                                                    46.9

Reinsurance recoveries                                (27.1)

Net claims                                                         19.8

This estimate is sensitive to the assumptions about the quantum of the industry insured losses which remain substantially uncertain due to the size, duration and complexity of the event. The Group's actual loss may vary materially from the estimate due to inherent difficulties in accessing accurate data, which is currently of a preliminary nature and based on estimates from clients and brokers.

The directors consider that the Thailand floods loss estimate is the best that can be made on the basis of information currently available. Further information may cause the estimate to be revised. The cost or benefit of these adjustments will be reflected in the financial statements for the period in which the adjustments are made.

The Group holds a part of its regulatory capital supporting its ongoing underwriting in the form of a Letter of Credit deposited at Lloyd's. A significant deterioration in the loss estimate outlined above could result in a breach of the covenants of this Letter of Credit. This may potentially require the Group to seek agreement from the providers of the Letter of Credit to amend those covenants, to significantly change the amount and nature of business it is able to underwrite or to raise additional finance.

4              Segment information

The Group's operating segments consist of four segments which recognise the different types of insurance risks underwritten. Financial information is reported in this format to the Group Board, being the chief operating decision maker as defined in IFRS 8.

The operating segments have been identified as follows:

·      marine and aviation, which underwrites a broad spectrum of aviation and marine classes including general aviation, airlines, space, cargo, jewellers block, other specie and marine hulls

·      specialty lines, which includes a diverse range of accounts including financial institutions, terrorism, political risks and accident and health insurance

·      non-marine property, which underwrites property risks on both a direct insurance and facultative reinsurance basis

·      property treaty, which underwrites the reinsurance of property risks on both a non-proportional and proportional basis

Segmental results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. The operating segments do not cross-sell business between each other and there is no individual policyholder that comprises greater than 10% of the Group's total gross premiums written.

Financial income, other operating income, other operating expenses, finance costs and taxation are not allocated to business segments as these items are determined by entity level factors and do not relate directly to the performance of each operating segment.

Information regarding the Group's operating segments is presented below.

Year ended 31 December 2011

	Marine and aviation	Specialty lines	Non-marine property	Property treaty	Total operating segments	Effects of foreign exchange on non-monetary items	Other foreign exchange	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Gross premiums written	57,049	41,024	77,549	92,824	268,446	-	-	268,446
Net insurance premium revenue	50,517	36,420	46,207	57,404	190,548	(24)	-	190,524
Net claims incurred	(18,390)	(14,234)	(23,906)	(90,471)	(147,001)	-	-	(147,001)
Expenses incurred in insurance activities	(18,317)	(15,654)	(20,333)	(29,021)	(83,325)	323	-	(83,002)
Total operating expenses	(36,707)	(29,888)	(44,239)	(119,492)	(230,326)	323	-	(230,003)
Underwriting return before foreign exchange	13,810	6,532	1,968	(62,088)	(39,778)	299	-	(39,479)
Foreign exchange gains					-	899	(638)	261
Underwriting return after foreign exchange					(39,778)	1,198	(638)	(39,218)

The claims ratio is net claims incurred as a percentage of net insurance premium revenue.

The expense ratio is expenses incurred in insurance activities (excluding other operating expenses) as a percentage of net insurance premium revenue.

The combined ratio is the sum of the claims ratio and expense ratio.

Year ended 31 December 2010

	Marine and aviation	Specialty lines	Non-marine property	Property treaty	Total operating segments	Effects of foreign exchange on non-monetary items	Other foreign exchange	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Gross premiums written	54,539	52,287	66,230	106,363	279,419	-	-	279,419
Net insurance premium revenue	48,545	52,250	42,168	51,039	194,002	(1,285)	-	192,717
Net claims incurred	(13,059)	(17,236)	(17,755)	(58,336)	(106,386)	-	-	(106,386)
Expenses incurred in insurance activities	(17,290)	(19,693)	(16,970)	(23,384)	(77,337)	341	-	(76,996)
Total operating expenses	(30,349)	(36,929)	(34,725)	(81,720)	(183,723)	341	-	(183,382)
Underwriting return before foreign exchange	18,196	15,321	7,443	(30,681)	10,279	(944)	-	9,335
Foreign exchange gains					-	1,902	9,173	11,075
Underwriting return after foreign exchange					10,279	958	9,173	20,410
Financial income								2,888
Other operating income								149
Other operating expenses								(11,086)
Operating profit								12,361
Finance charges								(2,343)
Profit before tax								10,018
Taxation charge								(467)
Profit after tax								9,551
Claims ratio (%)	26.9%	33.0%	42.1%	114.3%	54.8%
Expense ratio (%)	35.6%	37.7%	40.3%	45.8%	39.9%
Combined ratio (%)	62.5%	70.7%	82.4%	160.1%	94.7%

The segment assets and liabilities as at 31 December 2011 are as follows:

		Marine and aviation		Specialty lines		Non-marine property		Property treaty		Total
		£'000		£'000		£'000		£'000		£'000
Assets attributable to business segments		107,904		102,838		120,643		163,252		494,637
Other group assets										141,969
Total assets										636,606
Liabilities attributable to business segments		79,762		79,341		107,715		237,377		504,195
Other group liabilities										24,903
Total liabilities										529,098

The segment assets and liabilities as at 31 December 2010 are as follows:

		Marine and aviation		Specialty lines		Non-marine property		Property treaty		Total
		£'000		£'000		£'000		£'000		£'000
Assets attributable to business segments		108,313		104,666		93,048		136,955		442,982
Other group assets										131,008
Total assets										573,990
Liabilities attributable to business segments		88,183		82,185		75,655		140,561		386,584
Other group liabilities										34,107
Total liabilities										420,691

Geographical segments

The situs of the risk is analysed as follows:

		Year ended		Year ended
		31 December 2011		31 December 2010
		£'000		£'000
UK		34,394		29,613
Other EC member states		31,470		17,814
United States of America		120,737		23,506
Worldwide		81,845		208,486
Gross premiums written		268,446		279,419
The "Worldwide" category does not have any significant concentration in any geographic region.

5              Net insurance premium revenue

		Year ended		Year ended
		31 December 2011		31 December 2010
		£'000		£'000
Gross premiums written		268,446		279,419
Change in gross unearned premiums provision		(2,019)		(21,694)
Gross earned premiums		266,427		257,725
Premiums ceded to reinsurers		(78,938)		(73,054)
Change in ceded unearned premiums provision		3,035		8,046
Ceded earned premiums		(75,903)		(65,008)
Net insurance premium revenue		190,524		192,717

6              Financial income

		Year ended		Year ended
		31 December 2011		31 December 2010
		£'000		£'000
Interest on financial investments at fair value through income statement		7,465		6,093
Realised losses on financial investments at fair value through income statement		(2,438)		(1,952)
Net unrealised fair value losses on financial investments at fair value through income statement		(2)		(1,003)
Investment manager fees		(244)		(250)
		4,781		2,888

7              Other operating income

		Year ended		Year ended
		31 December 2011		31 December 2010
		£'000		£'000
Other income		407		149

Other income comprises third party share of managing agent fees and profit commissions.

8              Net claims incurred

		Year ended		Year ended
		31 December 2011		31 December 2010
		£'000		£'000
Claims paid		198,108		121,593
Movement in insurance liabilities (note 27)		91,570		45,576
Gross claims incurred		289,678		167,169
Reinsurers' share of claims paid		(83,686)		(36,022)
Reinsurers' share of movement in insurance liabilities (note 27)		(58,991)		(24,761)
Reinsurers' share of claims incurred		(142,677)		(60,783)
Net claims paid		114,422		85,571
Net movement in insurance liabilities		32,579		20,815
Net claims incurred		147,001		106,386

The current period has benefited from a release of claims reserves established in previous reporting periods. This reassessment of claims reserves has contributed to the profit recognised in the period by £9.7 million (2010: £18.6 million) due to the development of claims being more favourable than previously estimated. The release is analysed by business segments, as follows:

		Year ended		Year ended
		31 December 2011		31 December 2010
		£'000		£'000
Marine and aviation		6,362		13,004
Specialty lines		(2,457)		2,298
Non-marine property		3,563		(1,602)
Property treaty		2,243		4,857
Total release		9,711		18,557

9              Expenses incurred in insurance activities

		Year ended		Year ended
		31 December 2011		31 December 2010
		£'000		£'000
Commission expenses payable		59,587		58,552
Other acquisition costs		10,923		9,235
Change in deferred acquisition costs		(2,603)		(2,901)
Total acquisition costs		67,907		64,886
Administrative expenses		15,095		12,110
Expenses incurred in insurance activities		83,002		76,996

10           Foreign exchange movements

Foreign exchange gains and losses result from the translation of the monetary items in the statement of financial position to closing rates and the income statement to average exchange rates.

Net unearned premium ("UEP") and deferred acquisition costs ("DAC") are treated as non-monetary items in accordance with IAS 21 which requires that non-monetary items remain at historical rates. As a result a foreign exchange mismatch arises caused by these non-monetary items translated at historic rates and the resulting monetary items retranslated at the end of each period. The impact of this mismatch is shown in the table below.

		Year ended		Year ended
		31 December 2011		31 December 2010
Foreign exchange gains arising from:		£'000		£'000
Translation of monetary items in the statement of financial position and income statement		(638)		9,173
Gain representing the non-retranslation of non-monetary items in the statement of financial position		1,198		958
(Loss)/gain representing the non-retranslation of non-monetary items in the income statement		(299)		944
		261		11,075

		Year ended		Year ended
		31 December 2011		31 December 2010
Effects of foreign exchange on non-monetary items:		£'000		£'000
UEP and DAC items at historic rates		72,029		75,649
UEP and DAC items at closing rates		73,650		76,072
Valuation difference in closing balance sheet		1,621		423
Valuation difference in opening balance sheet		(423)		535
		1,198		958

11           Operating expenses

		Year ended		Year ended
		31 December 2011		31 December 2010
		£'000		£'000
Other operating expenses		5,728		11,086

There are no expenses included within other operating expenses that relate to profit related remuneration of staff and directors employed in the underwriting function (2010: £919,371).

Acquisition and administrative expenses are included in the calculation of the Group's combined ratio. Other operating expenses are not included in the combined ratio as these are determined by entity level factors and not allocated to business segments.

		Year ended		Year ended
		31 December 2011		31 December 2010
		£'000		£'000
Fees payable to the Group's auditor for the audit of the Group's financial statements		45		61
Fees payable to the Group's auditor for other services:
Audit of financial statements of subsidiaries		263		183
Tax services		100		72
Further assurance services:
Actuarial services		80		-
All other services		41		12
		529		328
All the amounts shown above were paid to KPMG with the exception of £14,750 (2010: £14,000) which was paid to Mazars.

12           Employee benefit expense

		Year ended		Year ended
		31 December 2011		31 December 2010
		£'000		£'000
The aggregate director and staff expense for the group was:
Wages and salaries		10,910		9,399
Pension costs		2,111		1,790
Social security costs		1,537		1,494
Other costs		425		303
Share-based payments		48		1,927
		15,031		14,913

Average number of employees employed by the Group during the year

121

106

13           Finance charges

		Year ended		Year ended
		31 December 2011		31 December 2010
		£'000		£'000
Letter of credit charges		1,663		1,610
Subordinated debt interest		706		733
		2,369		2,343

14           Income tax expense

The Company and its subsidiaries are subject to tax laws enacted in the jurisdictions in which they are incorporated and domiciled. The principal subsidiaries of the Company and the country in which they are incorporated are listed in note 35.

		Year ended			Year ended
		31 December 2011			31 December 2010
		£'000			£'000
Current tax expense
Current period	4,660				1,618
Adjustments for prior years	(6,078)				1,126
Deferred tax (see note 28)
Current period	(5,820)				(1,908)
Impact of tax rate change	(296)				(369)
	(7,534)				467
Reconciliation of effective tax rate:
(Loss)/profit before income tax	(42,127)				10,018
Tax calculated at the standard rate of corporation tax in Bermuda of 0%	-				-
Effect of permanent differences	(1,209)				(356)
Effect of temporary differences	49				66
Prior period adjustments	(6,078)				1,126
Impact of UK corporation tax rate change	(296)				(369)
	(7,534)				467

15           (Loss)/earnings per share

Basic
Basic loss or earnings per share is calculated by dividing the loss or profit after tax by the weighted average number of ordinary shares in issue during the year, excluding ordinary shares purchased by the Group and held as treasury shares.
		Year ended		Year ended
		31 December 2011		31 December 2010
(Loss)/profit for the year (£'000)		(34,593)		9,551
		Number of shares		Number of shares
		Thousands		Thousands
Issued shares at 1 January		52,768		52,318
Effect of own shares held		(1,572)		(1,253)
Effect of shares issued in year		37		363
Weighted average number of ordinary shares in issue during year		51,233		51,428
Basic (loss)/earnings per share (pence per share)		(67.5)p		18.6p

Diluted
Diluted loss or earnings per share is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. The Company has two categories of dilutive potential ordinary shares being share options and rewards of shares under the group share schemes. For share options, a calculation is made to determine the number of shares that could have been acquired at fair value (determined as the average annual market price of the Company's shares) based on the monetary value of the subscription rights attached to outstanding share options. The number of shares calculated as above is compared with the number of shares that would have been issued assuming the exercise of the options. Diluted earnings per share are calculated using the same losses or profits for the year as for basic loss or earnings per share.
		Year ended		Year ended
		31 December 2011		31 December 2010
		Thousands		Thousands
Weighted average number of ordinary shares in issue during year		51,233		51,428
Adjusted for share options and share schemes		656		1,807
Weighted average number of ordinary shares for diluted earnings per share		51,889		53,235
Diluted (loss)/earnings per share (pence per share)*		(67.5)p		17.9p
* The dilutive impact on shares is excluded when it decreases the loss per share in accordance with IAS 33 Earning per share.

16           Dividends per share

		Year ended		Year ended
		31 December 2011		31 December 2010
		£'000		£'000
Interim dividend for year ended 31 December 2011 of 4.4p per share		2,184		-
Final dividend for the year ended 31 December 2010 of 10.2p per share		5,060		-
Interim dividend for year ended 31 December 2010 of 4.4p per share		-		2,247
Second interim dividend for the year ended 31 December 2009 of 9.3p per share		-		4,728
		7,244		6,975
In view of the impact of the catastrophe losses on the Group's financial resources and the ongoing strategic review process, the Board has decided it would no be appropriate to pay a final dividend.

17           Intangible assets

Intangible assets comprise purchased capacity on syndicate 382. This capacity is considered to have an indefinite useful economic life.

18           Property, plant and equipment

				Office equipment		Computer equipment		Total
				£'000		£'000		£'000
Cost
As at 1 January 2010				1,635		3,693		5,328
Additions				168		1,288		1,456
As at 31 December 2010				1,803		4,981		6,784
Additions				203		645		848
As at 31 December 2011				2,006		5,626		7,632
Depreciation
As at 1 January 2010				331		1,922		2,253
Charge for the year				413		652		1,065
As at 31 December 2010				744		2,574		3,318
Charge for the year				456		882		1,338
As at 31 December 2011				1,200		3,456		4,656
Carrying amounts
At 31 December 2010				1,059		2,407		3,466
At 31 December 2011				806		2,170		2,976

19           Reinsurance assets

		As at		As at
		31 December 2011		31 December 2010
		£'000		£'000
Reinsurers' share of unearned premium		29,452		26,417
Reinsurers' share of outstanding claims		136,338		73,532
Impairment provision		(2,693)		(1,937)
Reinsurance assets (note 27)		163,097		98,012
Amounts due from reinsurers in respect of claims already paid by the Group are included in trade and other receivables.

20           Deferred acquisition costs

		As at		As at
		31 December 2011		31 December 2010
		£'000		£'000
As at 1 January		32,445		29,544
Acquisition costs deferred in the year		32,640		30,954
Amortisation charged to income		(30,037)		(28,053)
Reclassification with UEP		3,524		-
As at 31 December		38,572		32,445

Amounts have been transferred between UEP and DAC to reclassify the asset and liability which had previously been offset.

21           Trade and other receivables

		As at		As at
		31 December 2011		31 December 2010
		£'000		£'000
Receivables arising from direct insurance operations due from agents, brokers and intermediaries		49,576		33,004
Receivables arising from reinsurance operations due from agents, brokers and intermediaries		55,062		71,402
Reinsurance recoveries due from reinsurers		27,773		7,203
Other receivables		2,324		906
		134,735		112,515
Amounts due from reinsurers are stated after a provision for impairment of receivables from reinsurers of £0.7 million (2010: £0.3 million). All trade and other receivables are due within twelve months of the balance sheet date.

22           Financial investments

		As at		As at
		31 December 2011		31 December 2010
		£'000		£'000
Financial assets at fair value through the income statement
Designated upon initial recognition		147,364		199,939
Financial assets at fair value through the income statement
Debt and other fixed income securities		147,364		199,939

The Group has designated all investments at fair value through the income statement.
Hardy Re Limited ("HRe"), Hardy Underwriting Limited ("HU") and Hardy Names Limited ("HN") are wholly owned subsidiaries of Hardy Underwriting Bermuda Limited. They have entered into Lloyd's Deposit Trust Deeds under the terms of which they have deposited funds (cash and investments) with Lloyd's, as security in respect of their underwriting business at Lloyd's. At 31 December 2011 the total deposited under the Trust Deeds, including cash, amounted to £109.9 million (2010: £125.7 million) and the relevant investments together with income thereon represent the maximum contingent liability under the Trust Deeds. HRe, HU and HN may, however, incur further liabilities pursuant to their underwriting activities at Lloyd's which would need to be met from their other assets.
In addition, on behalf of HU, the Company has deposited letters of credit with Lloyd's totalling US $65.0 million (2010: US $65.0 million). These letters of credit have been issued by Lloyds TSB Bank and Barclays Bank and are secured on the assets of the Group.The facility supports underwriting on the 2012 year of account. Included in investments held by the Group are balances totalling £38.7 million (2010: £75.1 million) which are not available to the Group because they are held within syndicate premium trust funds to meet related insurance liabilities. Total investments for the year ended 31 December 2011 have decreased by £52.6 million (2010: increased by £7.6 million) and a breakdown of the movement is shown below:
		2011		2010
		£'000		£'000
As at 1 January		199,939		192,365
Exchange differences on monetary assets		(2,499)		17,388
Additions		218,992		212,672
Sales and redemptions		(269,066)		(220,595)
Fair value unrealised gains and losses		(2)		(1,891)
As at 31 December		147,364		199,939

Fair value measurement

The table below summarises the fair value hierarchy for the group in accordance with revised IFRS 7 - Financial Instruments: Disclosures. The levels of the fair value hierarchy are defined as follows:

Level 1 - fair values measured using quoted prices in active markets for identical instruments. An active market is a market in which transactions for the instrument occur with sufficient frequency and volume on an ongoing basis such that quoted prices reflect prices at which an orderly transaction would take place between market participants at the measurement date.

Level 2 - fair values measured using directly or indirectly observable inputs or other similar valuation techniques for which all significant inputs are based on observable market data.

Level 3 - fair values measured using valuation techniques for which significant inputs are not based on market observable data.

The group measures the fair value of its financial assets based on prices provided by investment managers who obtain market data from independent pricing services. The pricing services used by the investment manager obtain actual transaction prices for holdings that have quoted prices in active markets. For those securities that are not actively traded, the pricing services use common market valuation pricing models. Observable inputs used in common market valuation pricing models include, but are not limited to, broker quotes, credit ratings, interest rates and yield curves, prepayment speeds, default rates and other such inputs that are available from market sources.

Included within Level 1 of the hierarchy are Government bonds and Treasury bills, which are measured using quoted prices.

Level 2 of the hierarchy includes Government agencies, Supranationals and Corporate securities. The fair values of these assets are based on prices obtained from both investment managers and investment custodians as discussed above. The Group records the unadjusted price provided and validates the price through a number of methods, including a comparison of the prices provided by the investment manager with the investment custodian and the valuation used by external parties to derive fair value.

There have not been material movements of instruments between levels in the period.

As at 31 December 2011
		Level 1	Level 2	Level 3	Total
		£'000	£'000	£'000	£'000
Financial assets:
Debt and fixed income		19,567	127,797	-	147,364

As at 31 December 2010
		Level 1	Level 2	Level 3	Total
		£'000	£'000	£'000	£'000
Financial assets:
Debt and fixed income		39,012	160,927	-	199,939

23           Cash and cash equivalents

		As at		As at
		31 December 2011		31 December 2010
		£'000		£'000
Short-term bank deposits		123,309		85,367
Deposits with credit institutions		5,768		16,572
		129,077		101,939
Included in cash and cash equivalents held by the Group are balances totalling £120.4 million (2010: £95.1 million) which are not available to the Group because they are held within syndicate premium trust funds to meet related insurance liabilities.

24           Common shares and contributed surplus

		Number of shares		Common shares		Contributed surplus
		Thousands		£'000		£'000
As at 1 January 2010		52,318		10,464		77,295
Issues in relation to share options exercised		450		90		19
As at 31 December 2010		52,768		10,554		77,314
Issues in relation to share options exercised		51		10		98
As at 31 December 2011		52,819		10,564		77,412
The total authorised number of common shares is 75.0 million (2010: 75.0 million), with a par value of 20 pence per share. All issued shares are fully paid.

25           Other reserves

		Own Shares		Merger Reserve		Other Reserve		Treasury Shares		Share-based Payments		Total
		£'000		£'000		£'000		£'000		£'000		£'000
As at 1 January 2010		(2,287)		2,441		75		-		3,128		3,357
Share-based payments (note 31)		-		-		-		-		1,927		1,927
Employee Benefit Trust holding		(1,429)		-		-		-		-		(1,429)
Purchase of own shares held in Treasury		-		-		-		(1,975)		-		(1,975)
As at 31 December 2010		(3,716)		2,441		75		(1,975)		5,055		1,880
Share-based payments (note 31)		-		-		-		-		48		48
Employee Benefit Trust holding		(1,501)		-		-		-		-		(1,501)
Purchase of own shares held in Treasury		-		-		-		(2,609)		-		(2,609)
As at 31 December 2011		(5,217)		2,441		75		(4,584)		5,103		(2,182)
On 15 December 2010 the Group commenced a Share buy-back programme, under which the company intended to purchase up to 2,700,000 shares. To date the Group has acquired 1,677,766 shares which are held as Treasury shares. These shares were acquired at a range of between 261p and 275p. The share buy-back programme was suspended early in 2011. The merger reserve relates to the merger of Hardy Underwriting Group Plc "HUG" with HU on formation of the Group in 1996. Other reserves were created following the capitalisation of reserves in HUA during 1998.

26           Financial liabilities - subordinated debt

		As at		As at
		31 December 2011		31 December 2010
		£'000		£'000
Subordinated debt		18,876		18,617
The Group issued a US $30.0 million subordinated bond on 19 September 2006. The bond bears a variable interest rate set at three month US dollar LIBOR plus 3.3%. The bond must be redeemed by no later than 15 September 2036 at the principal plus any accrued interest. The Group has the option to redeem all or some of the bond at any time on or after 15 December 2011. The subordinated debt is carried at amortised cost. As the debt is held in US dollars the movement in the exchange rate has meant that when re-valued to the reporting currency the subordinated debt is held on the balance sheet at a higher value than the previous reporting period. No further capital has been added to the loan.

27           Insurance liabilities and reinsurance assets

		As at		As at
		31 December 2011		31 December 2010
		£'000		£'000
Gross
Claims reported		190,741		148,302
Loss adjustment expenses		3,540		4,599
Claims incurred but not reported		117,618		62,530
Unearned premiums		140,054		134,511
Total gross insurance liabilities		451,953		349,942
Recoverable from reinsurers
Claims reported		82,195		52,196
Claims incurred but not reported		51,450		19,399
Unearned premiums		29,452		26,417
Total reinsurers' share of insurance liabilities		163,097		98,012
Net
Claims reported		108,546		96,106
Loss adjustment expenses		3,540		4,599
Claims incurred but not reported		66,168		43,131
Unearned premiums		110,602		108,094
Total net insurance liabilities		288,856		251,930
The gross liabilities for claims reported, loss adjustment expenses and claims incurred but not reported are net of expected recoveries from salvage and subrogation. The amounts for salvage and subrogation at the end of 2011 and 2010 are not material.

Movement in outstanding claims reserves

		Gross		Reinsurance		Net
		£'000		£'000		£'000
Claims reported		107,628		(33,772)		73,856
Loss adjustment expenses		4,001		-		4,001
Claims incurred but not reported		55,108		(11,983)		43,125
Total as at 1 January 2010		166,737		(45,755)		120,982
Increase in year		45,576		(24,761)		20,815
Net exchange adjustments		3,118		(1,079)		2,039
Total as at 31 December 2010		215,431		(71,595)		143,836
Claims reported		148,302		(52,196)		96,106
Loss adjustment expenses		4,599		-		4,599
Claims incurred but not reported		62,530		(19,399)		43,131
Total as at 31 December 2010		215,431		(71,595)		143,836
Increase in year		91,570		(58,991)		32,579
Net exchange adjustments		4,898		(3,059)		1,839
Total as at 31 December 2011		311,899		(133,645)		178,254
Claims reported		190,741		(82,195)		108,546
Loss adjustment expenses		3,540		-		3,540
Claims incurred but not reported		117,618		(51,450)		66,168
Total as at 31 December 2011		311,899		(133,645)		178,254

Movement in provision for unearned premiums

		Gross		Reinsurance		Net
		£'000		£'000		£'000
As at 1 January 2010		112,817		(18,371)		94,446
Movement during 2010		21,694		(8,046)		13,648
As at 31 December 2010		134,511		(26,417)		108,094
Movement during 2011		2,019		(3,035)		(1,016)
Reclassification from DAC		3,524		-		3,524
As at 31 December 2011		140,054		(29,452)		110,602

Amounts have been transferred between UEP and DAC to reclassify the asset and liability which had previously been offset.

28           Deferred income tax liability

		2011		2010
		£'000		£'000
Net deferred tax liability
Deferred tax assets		(2,221)		(444)
Deferred tax liabilities		3,788		8,127
Total deferred tax liability		1,567		7,683
The above liability is calculated using the tax rate of 25% expected on crystallisation of the asset or liability.

Deferred tax assets and deferred tax liabilities relating to the same tax authority are presented net on the Group's statement of financial position.
(a) Group deferred tax assets analysed by balance sheet headings
		2010		Income Statement charge/ (credit)			2011
		£'000		£'000			£'000
At 31 December
Trade and other payables		(411)		(95)			(506)
Temporary differences on: - Recognition of underwriting losses		-		(1,515)			(1,515)
- Property, plant and equipment		-		(27)			(27)
Other items		(33)		(140)			(173)
Total deferred tax assets		(444)		(1,777)			(2,221)
(b) Group deferred tax liabilities analysed by balance sheet headings
At 31 December
Temporary differences on: - Recognition of underwriting profits		6,076			(4,149)			1,927
- Intangible assets - Syndicate capacity		1,849			12			1,861
- Property, plant and equipment		202			(202)			-
Total deferred tax liabilities		8,127			(4,339)			3,788
Net deferred tax liability		7,683			(6,116)			1,567

On 23 March 2011 the Government announced its intention to reduce the UK corporation tax rate from 28% to 23% over a period of four years from 1 April 2011. The first of these rate reductions to 26% was enacted on 29 March 2011 and became effective on 1 April 2011. The second of the rate reductions, to 25%, was enacted on 19 July 2011 and will become effective as of 1 April 2012.

Under IAS 12, rate changes can only be reflected in deferred tax assets or liabilities if they are substantially enacted or enacted by the balance sheet date. Therefore only these two rate reductions have been reflected in the deferred tax balance at 31 December 2011.

The effect of the announced further 2% rate reduction will reduce the Company's future current tax charge and reduce the Company's deferred tax assets and liabilities accordingly. It is anticipated that the net impact on the deferred tax balance will not be material.

A deferred tax asset, amounting to £0.8 million, has not been recognised in respect of losses in HUG because of the uncertainty whether future taxable profits will be available against which these losses can be utilised. This is because HUG is an intermediate holding company within the group, and as such as no taxable income.

29           Trade and other payables

		As at		As at
		31 December 2011		31 December 2010
		£'000		£'000
Arising out of direct insurance operations		9,722		7,086
Arising out of reinsurance operations		40,975		29,439
Other creditors		6,005		7,924
		56,702		44,449
All trade and other payables are due within twelve months of the balance sheet date. Trade and other payables are initially recognised at fair value and subsequently measured at amortised cost.

30           Net assets per share

Net assets and net tangible assets per share are calculated based on the number of ordinary shares in issue at the year end, excluding ordinary shares purchased by the Group and held as treasury shares.
		Year ended		Year ended
		31 December 2011		31 December 2010
		£'000		£'000
Net assets		107,508		153,299
Intangible assets		(15,509)		(15,509)
Net tangible assets		91,999		137,790
Issued shares at 31 December (number of shares '000s)		52,819		52,768
Effect of own shares held (number of shares '000s)		(2,685)		(1,744)
Issued shares after adjustment (number of shares '000s)		50,134		51,024
Net assets per share		£2.14		£3.00
Net tangible assets per share		£1.84		£2.70

31           Share-based payments

During the year ended 31 December 2011, the Group had a number of long-term employee incentive schemes which are classified as equity settled share-based payments. The compensation cost recognised in the income statement under IFRS2, Share-based payments, is as follows:
				Year ended				Year ended
				31 December 2011				31 December 2010
				£'000				£'000
Approved and unapproved share option schemes				(7)				-
Deferred annual bonus scheme awards				5				727
SAYE options scheme				23				20
Performance share plan				27				1,180
				48				1,927
Deferred annual bonus scheme
The DAB scheme was approved by shareholders in June 2005 and first launched in March 2006. Awards of deferred shares and matching shares are made under the scheme. Awards will be satisfied by the transfer of shares from the Group's Employee Benefit Trust, which may acquire shares for this purpose by buying shares in the market. The Trustees have waived their entitlement to dividends on any shares acquired. Awards of deferred shares are granted equivalent to the value of the annual bonus deferred divided by the share price on the date of grant. Under the scheme all employees have the opportunity to defer up to 30% of their annual bonus. During the vesting period each participant is entitled to instruct the Trustee to vote on the deferred shares held on his or her behalf and is entitled to receive dividends, or dividend equivalent payments, which are paid in respect of deferred share awards. Up to one matching share is awarded for every deferred share. Matching shares will vest partly or in full on the third anniversary of the date of grant to the extent that certain performance conditions are met. The performance conditions are described in full in the Directors' Remuneration Report. Matching shares do not receive the right to vote or receive dividends during the vesting period. The fair value of the matching share awards is measured as the market share price, adjusted to take into account the terms and conditions on which the shares are granted. The fair value of the matching share awards granted during the year was £334,075 (2010: £662,818).

Save as you earn share option scheme
The SAYE scheme was approved by shareholders in June 2005 and first launched in May 2006. Under the scheme all employees have the opportunity to participate in a three year savings plan. Participants can save up to £250 per month, which is used to purchase shares at a predetermined discounted fixed option price. For all scheme years to date, the discount was 10% off the market value of the Group's shares on the launch date. The fair value of the options granted under the scheme is estimated using the Black-Scholes option-pricing model. The fair value of the options granted during the year was £27,769 (2010: £12,048). The significant inputs into the Black-Scholes model are as follows:
Share options granted on		30 April 2009		30 April 2010		30 April 2011
Number of options issued		78,948		27,413		47,238
Share price at the date of grant		£2.92		£2.65		£2.83
Exercise price		£2.46		£2.50		£2.53
Standard deviation of expected share price returns		27%		32%		38%
Option life		3 years		3 years		3 years
Annual risk free interest rate		1.70%		1.77%		1.79%
Dividend yield		3.70%		3.70%		3.70%

Performance share plan ("PSP")

The PSP scheme was approved by shareholders in May 2007 and first launched later that month.

Under the scheme some senior employees receive awards of free shares, which will vest after three years subject to performance conditions and continued employment.

The performance measure is split into two separate and equal parts: one part having a NTA value condition and the other having a TSR condition.

For the NTA condition full vesting will only occur at NTA per share growth of 45% above RPI over three years. No vesting will occur below a 15% growth level, with a pro-rata vesting between these points. The NTA per share is adjusted to add back dividends paid in the performance period.

For the TSR condition, performance is measured over three years against a comparator group of other insurance companies. Full vesting will occur on achievement of upper quartile performance. No vesting will occur at median performance, with pro-rata vesting between upper quartile and median performance.

The fair value of the awards granted under the scheme has been estimated using appropriate valuation methodologies. With respect to the NTA condition the fair value has been calculated using assumptions about the likelihood of meeting the performance criteria based on the directors' expectations in light of the Group's business model and market conditions.

The fair value of the awards under the TSR condition has been estimated using a Monte-Carlo simulation model, which calculates a fair value based on a large number of randomly generated simulations of the Company's share price.

The fair value of the awards granted during the year was £1,443,383 (2010: £1,378,513).

The significant inputs into the valuation model are as follows:

Awards granted on		26 March 2009				7 April 2010				7 April 2011
		NTA condition		TSR condition		NTA condition		TSR condition		NTA condition		TSR condition
Number of awards granted		279,484		279,484		313,299		313,299		328,042		328,042
Share price at the date of grant		£2.71		£2.71		£2.80		£2.80		£2.82		£2.82
Volatility of expected share price returns - company		N/A		27%		N/A		32%		N/A		38%
Volatility of expected share price returns - comparator group		N/A		38%		N/A		34%		N/A		31%
Correlation with comparator group		N/A		16%		N/A		13%		N/A		12%
Expected life		3 years		3 years		3 years		3 years		3 years		3 years
Annual risk free interest rate		N/A		1.70%		N/A		1.77%		N/A		1.79%

Options

The number and weighted average exercise price of share options are as follows:

	Weighted average exercise price 31 December 2011 £		Number of options		Weighted average exercise price 31 December 2010 £		Number of options
Outstanding at the beginning of the year	£2.13		113,379		£2.13		118,099
Lapsed/forfeited during the year	£1.98		(48,920)		£2.33		(4,720)
Outstanding and exercisable at the end of the year	£2.23		64,459		£2.13		113,379

The options outstanding at 31 December 2011 have a weighted average exercise price of £2.23 and a remaining contractual life up to March 2014.

32           Commitments

The Group leases office premises under operating leases. None of the leases includes contingent rentals. The future aggregate minimum lease payments under operating leases are as follows:

		Year ended		Year ended
		31 December 2011		31 December 2010
		£'000		£'000
Less than one year		347		262
Between one and five years		1,241		1,166
		1,588		1,428

During the year ended 31 December 2011, £0.6 million was recognised as an expense in the income statement in respect of operating leases (2010: £0.3 million).

33           Contingencies

The managed syndicates are subject to the New Central Fund annual subscription, which is an annual fee calculated on gross premiums written by the syndicates. This fee was 0.5% for 2010, 2011 and 2012. In addition to this fee, the Council of Lloyd's has the discretion to call a further contribution of up to 3.0% of the syndicate's managed capacity if required.

34           Related parties

Directors of the Company and their immediate relatives control 4.41% (2010: 5.61%) of the voting shares of the Company. This includes the shares held in the Hardy EBT. The Company considers that the directors are the key management personnel of the Company in the context of the IAS 24 definition.

In addition to salaries, the Group also provides non-cash benefits to directors and executive officers, and contributes to a post-employment defined contribution pension plan on their behalf. Directors participated in the Group's share option schemes. Full details of all the elements of remuneration payable to the directors are contained in the Directors' Remuneration Report. No other transactions took place between the Company and key management personnel.

35           Principal subsidiary companies of Hardy Underwriting Bermuda Limited

The Company owns 100% of the ordinary share capital in the following subsidiaries.

Hardy Underwriting Group Plc*		UK holding company
Hardy Re Limited*		Bermudian reinsurance company
Hardy Bermuda Limited*		Bermudian managing general agent
Hardy Underwriting Limited		UK corporate member of Lloyd's
Hardy Names Limited		UK corporate member of Lloyd's
Hardy IC Limited		UK corporate member of Lloyd's
Hardy (Underwriting Agencies) Limited		UK managing agent
Hardy Insurance Services Limited		UK service company
Hardy Underwriting Asia Pte Ltd		Singaporean service company
Hardy Guernsey Limited*		Guernsey insurance company
* held directly

The Company also owns 50% of the ordinary share capital in HAIM, a joint venture with Arig. HAIM, which was established in 2009 and is based in Bahrain, focuses on construction, property and onshore energy. Primarily HAIM writes business from the Middle East and North African regions but also considers business from other parts of Asia and Africa. Both Hardy and Arig have equal representation on the board of directors of HAIM.