TIDMBRIT
RNS Number : 7791F
Brit PLC
25 February 2015
Brit PLC
PRESS RELEASE
25 February 2015
Full Year results for the Year ended 31 December 2014
Brit delivers a Strong underwriting and investment
performance
Key points
-- Return on adjusted net tangible assets (RoNTA) before FX and
IPO costs of 20.7% (2013: 24.2%)
-- Profit after tax increased by 39.7% to GBP139.0m (2013: GBP99.5m)
-- Gross written premiums of GBP1,302.1m (2013: GBP1,185.7m), an
increase of 9.8%. The increase at constant exchange rates was
15.0%
-- Full year combined ratio of 89.5% despite challenging rating environment (2013: 85.4%)
-- Investment return for the period increased by 38.4% to
GBP75.7m (2013: GBP54.7m), representing a return of 2.9%
-- Total value creation of GBP139.2m driven by strong operating performance (2013: GBP91.3m)
-- Adjusted net tangible assets increased to GBP775.4m or
194.0pps (2013: GBP661.2m/168.6pps), after payment in September
2014 of an interim dividend of GBP25.0m
-- Final dividend declared of 12.5pps plus a special dividend of
12.5pps, bringing total dividend for the year including the interim
dividend of 6.25pps to 31.25pps
-- Recommended cash offer of 305 pps for the Company from Fairfax Financial Holdings Limited
Mark Cloutier, Group CEO of Brit PLC, said:
'Brit has had another successful year delivering on our
financial targets and moving towards our goal of being the leading
global speciality insurer. The return on adjusted net tangible
assets before FX and IPO costs of 20.7% is driven by strong
underwriting and investment performances, coupled with a continued
focus on strict cost control. Our underlying underwriting
performance once again excelled and coupled with a relatively
benign period in terms of major losses, resulted in a combined
ratio of 89.5%. Investment performance has been strong, with the
portfolio producing an annualised return of 2.9% as our "income
focused" portfolio benefitted from falling bond yields and
tightening credit spreads in the first half of the year. As a
result of our strong performance during the year I am also very
pleased to announce a final dividend of 12.5p per share, in line
with our guidance. The Group's robust capital position has also
facilitated a special dividend of 12.5p per share.
On 17 February we were pleased to announce that the Boards of
Fairfax and Brit have reached agreement regarding the terms of a
recommended cash offer of 305pps for Brit PLC. Our business is
complementary to their group's current offering and the deal
represents an exciting opportunity to continue our story on an even
stronger footing. Our position as a market-leading global specialty
insurer and reinsurer and our major presence in Lloyd's make us an
attractive addition to Fairfax's global footprint. There is very
little crossover in our respective international operations, thus
allowing Fairfax to further diversify its portfolio while enabling
Brit to leverage Fairfax's existing relationships and expertise in
the international insurance and reinsurance markets. The
combination will enable us to enhance our global product offering
and provide us with expanded underwriting opportunities and
distribution channels. We believe this is a great fit for both
companies, our employees, customers and trading partners as well as
representing an attractive financial return for shareholders
following our successful IPO in April 2014.
We have a fantastic team here at Brit and I am particularly
delighted to announce today the appointment of Matthew Wilson as
Deputy Group CEO and Chief Underwriting Officer. Underwriting
performance is at the core of our strategy and Matthew's leadership
over the past 5 years has been a key factor in the significant
transformation that has occurred at Brit. I look forward to working
closely with Matthew in his new role as we start an exciting new
chapter for the Brit Group.'
For further information, please contact:
Sam Dobbyn, Head of Investor Relations, Brit PLC +44 (0) 20 7984 8800
Paul Marriott, FTI Consulting +44 (0) 20 3727 1341
Tom Blackwell, FTI Consulting +44 (0) 20 3727 1051
Analyst Presentation
Brit will hold its analyst presentation to discuss its full year
results at 55 Bishopsgate, London EC2N 3AS, at 9.30 a.m. GMT on
Wednesday, 25 February,2015. The presentation may be accessed at
020 3059 8125 (UK) or +44 203 059 8125 (International).
About Brit PLC
Brit PLC is a market-leading global specialty insurer and
reinsurer, focused on underwriting complex risks. It has a major
presence in Lloyd's of London, the world's specialist insurance
market provider, with significant US and international reach. The
Brit Group underwrites a broad class of commercial specialty
insurance with a strong focus on property, casualty and energy
business. Its capabilities are underpinned by robust financials.
Brit PLC is listed on the London Stock Exchange.
www.britinsurance.com
Disclaimer
This document does not constitute or form part of, and should
not be construed as, an offer for sale or subscription of, or
solicitation of any offer or invitation or advice or recommendation
to subscribe for, underwrite or otherwise acquire or dispose of any
securities (including share options and debt instruments) of the
Company nor any other body corporate nor should it or any part of
it form the basis of, or be relied on in connection with, any
contract or commitment whatsoever which may at any time be entered
into by the recipient or any other person, nor does it constitute
an invitation or inducement to engage in investment activity under
Section 21 of the Financial Services and Markets Act 2000 (FSMA).
This document does not constitute an invitation to effect any
transaction with the Company or to make use of any services
provided by the Company. Past performance cannot be relied on as a
guide to future performance.
This document contains references to the proposed offer by FFHL
Group Limited for the entire issued and to be issued share capital
of Brit PLC, as announced on 17 February 2015 (the "Fairfax
Offer"). This document does not constitute a solicitation of (i)
any vote in relation to, (ii) approval of or (iii) acceptance of,
the Fairfax Offer. Any response in respect of the Fairfax Offer
should be made only on the basis of information contained in the
offer document to be despatched by FFHL Group Limited to
shareholders of Brit PLC, which will contain the full terms and
conditions of the Fairfax Offer, including how the Fairfax Offer
may be accepted. Shareholders are advised to read the formal
documentation in relation to the Fairfax Offer carefully once it
has been despatched.
Chairman's Statement
2014 has been a significant year for Brit. Strategically we have
made encouraging progress in delivering our ambition to become the
leading global specialty insurer. Financially, our underwriting,
investment and operational performance all contributed to an
excellent RoNTA of 20.7%. Most importantly, 2014 saw Brit's
successful return to the market following our initial public
offering (IPO) of 25% of the Company in April.
Our return to the market was met with significant investor
interest and I see this as pleasing recognition of the major
transformation our business has achieved over the past six years
and the strong track record of professionalism and performance that
we have built over that time. This is thanks to the hard work and
dedication of our employees and the support and trust of our
clients and shareholders. Having been CEO of Lloyd's for eight
years, until the end of 2013, I have seen from a distance how much
commitment this repositioning has taken from all areas of the
business and my first-hand experience over the 12 months since I
joined the Board as Chairman has further demonstrated what an
exceptional job the management team has done. I am confident this
is the best team to lead the business forward for you.
Offer from Fairfax
On 17 February 2015, we announced an offer for Brit from
Fairfax. Brit's Board was pleased to recommend this combination
with Fairfax, which I believe will greatly assist us in delivering
our strategy of building the leading global speciality (re)insurer.
The proposed deal provides an exciting opportunity to deliver our
growth ambitions. Our simple and capital-efficient Lloyd's focused
platform make us an attractive partner for Fairfax and our shared
values in underwriting discipline, speciality lines focus,
operational rigour and meticulous claims management make this
transaction a compelling proposition for all stakeholders. The
Offer represents a strong result for all our shareholders and
produces attractive financial returns following our successful IPO
in April 2014.
Performance
Our key differentiators are our focused Lloyd's platform, our
underwriting strategy and our investment strategy. We have made
good progress against all of our strategic priorities in 2014 and
delivered the targets we set at the time of the IPO. In
underwriting, we have reported an excellent combined ratio of 89.5%
underpinned by another year of attractive attritional loss ratio
performance. We have also developed our international capabilities
by delivering profitable growth in our US platform, which is now
reaching significant scale, as well as our specialist Bermudian
operations. In investments, our dynamic and active strategy
continues to set us apart from our peers, with a decision to focus
on income generating assets across a broad range of asset classes,
generating another year of outperformance, with a return of 2.9%,
well above investment benchmarks.
Capital advantages
The Brit business model remains simple but very effective. Our
decision to focus our capital solely on the Lloyd's platform
creates excellent capital efficiency, and our strict approach to
cost control allows us to operate a flexible and scalable model
across the business. This platform has enabled us to deliver
attractive returns (20.7% in 2014) despite challenging market
conditions and to maintain a strong statement of financial
position, pursue growth opportunities and to support a consistent
dividend for shareholders. I am delighted that we have delivered an
ordinary dividend of 18.75p per share for 2014 and a further
special dividend of 12.5p, driven by this year's excellent result
and our rigorous capital management strategy.
Brit strategy and outlook
Looking forward, the financial landscape in which the insurance
industry operates continues to offer material challenges.
Exceptionally low interest rates, geopolitical uncertainty, global
growth concerns and market volatility mean that the industry
continues to face a testing back drop. For the insurance industry
capital availability is increasing from both traditional and
non-traditional sources and we expect this to create further
competition and pressure on pricing and conditions in 2015. These
new forms of capital, along with evolving distribution channels and
constant improvements in technology continue to challenge industry
norms and as a Board we will be mindful as to how we can react to
this landscape quickly and drive the Brit and industry agenda.
I absolutely believe that we have the right platform and
business mix to deliver sector-leading returns for shareholders in
this challenging insurance rate and low yield environment. However,
to maintain strong profitability, we must focus more than ever on
our underwriting discipline, risk selection and capital management.
Integral to this is maintaining good relationships with brokers,
clients, cover holders and most importantly our regulators.
Brit is in a unique position as the largest Lloyd's-only
insurance business and we plan to develop this business by
continuing to invest in our people, by attracting top talent and by
supporting the innovation of new products to meet our clients'
needs. We also plan to build out our global distribution capability
selectively, with significant opportunities to grow in mature
markets such as the US and Bermuda, where we have achieved critical
mass and expect to capitalise further on our investments in 2015.
We also see opportunities in key growth markets over the
longer-term such as building on the capability of our Latin America
team in Miami and growing our presence in China.
We expect 2015 to be another difficult year for the insurance
industry but we remain committed to delivering our goal of mid-teen
RoNTA for our shareholders. We have the capital strength and
exceptional talent within our business to navigate these demanding
conditions and to continue to innovate and take advantage of
opportunities for incremental growth as and when they arise. I look
back at 2014 with immense pride at what has been achieved and I
look forward with confidence and realism that we have the platform
and the people to deliver strong returns for shareholders.
Finally, I express my sincere appreciation to the Board, the
executive and all the staff at Brit for their contribution and for
their ongoing commitment to delivering our strategy and for helping
the business take another significant step forward to becoming the
leading global specialty insurer.
Dr Richard Ward
24 February 2015
Chief Executive Officer's Report
2014 has been a landmark year for Brit, marking our return as a
publicly listed company and delivering another strong set of
results, a significant achievement given the shifting market
dynamics. Since our decision to reposition the business, we have
relentlessly focused on developing a platform that is aligned with
our key objective of long-term value creation while retaining a
highly disciplined approach to the business we choose to underwrite
in the short-term.
Our model allows us to 'see the difference' and our recent track
record is a strong vindication of what we have set out to achieve.
It also gives us a clear path to deliver our key business
objective: to maximise long-term value creation for shareholders by
leveraging our differentiating Lloyd's-only platform and leading
global specialty franchise to deliver the best insurance solutions
to complex risks faced by our clients.
We were very pleased to announce on 17 February 2015 an offer
for the business from Fairfax. Our business is complementary to the
Fairfax group's current offering and the deal represents an
exciting opportunity for us to continue our story on an even
stronger footing, for the benefit of both companies, our employees,
customers and trading partners. It will give Brit access to
Fairfax's existing relationships and expertise in the international
insurance and reinsurance markets, allowing us to enhance our
global product offering.
Financial highlights
In 2014 we have delivered against the targets set out at the
time of the IPO and continue to capitalise on profitable growth
opportunities.
-- We continue to create value for our stakeholders. In spite of
challenging market conditions we produced a RoNTA of 20.7% and the
total value we created was GBP139.2m. Underwriting and investment
performance both contributed to this result;
-- Our underwriting operations generated a profit of GBP102.0m
and produced a combined ratio of 89.5%:
o Our premium growth of 9.8% (15.0% at constant rates of
exchange), is driven by new business from the new teams and
initiatives put in place from 2012 to 2014. We have also seen
organic growth in a few selected lines where rating conditions
remain attractive such as US binder business and some other
specialty classes;
o The overall risk-adjusted trend in pricing is a decrease of
2.9%, which is in line with our projection at the time of the IPO
and our guidance repeated at half year. The price falls in treaty
reinsurance were marked and occurred early in the year as the bulk
of our reinsurance book renews in the first six months. The
insurance business pricing was more resilient with an overall
decrease in rates of 1.6%, justifying our strategy to focus on
insurance business where our expertise is highly valued. While we
are not alone in experiencing rating declines, we are happy with
the rating adequacy of our overall portfolio;
o Our claims experience has been in line with expectation and,
while we have sustained some losses from natural catastrophes (e.g.
Hurricane Odile) and man-made events (e.g. the Tripoli airport
attack), the claims environment has been benign. Our attritional
claims experience and the development of our prior year reserves
have been in line with the guidance offered at the time of our
IPO.
-- We have generated investment return net of fees ahead of our
guidance at 2.9% and have benefited from falling yields and the
tightening of credit spreads that have driven unrealised gains in
our government and corporate credit weighted portfolios. We have
shortened the duration of our portfolio in a defensive move against
expected interest rate rises and we therefore believe we are
well-positioned for 2015;
-- We are well capitalised with resources amounting to 150.4% of
the capital we need to meet regulatory requirements. As indicated
at the time of our IPO, we are and will continue to be active
managers of our capital and, in line with our guidance, will make a
special dividend of GBP50.1m to bring our surplus position back to
the upper end of the 120% to 140% range;
-- In 2014, we successfully completed the commutation of a
portfolio reinsurance transaction relating to the restructuring of
the Group in 2012. We are pleased to have commuted on favourable
terms, bringing closure on a portfolio of long-tail liability
reserves including those related to the financial crisis. This
transaction marked the final element of the major restructuring of
the business undertaken since 2011 by Brit's new management.
Focus on the fundamentals
At Brit we focus on five core fundamentals that drive our
overarching business objective: continuing to take advantage of our
differentiating Lloyd's-only operating platform; delivering
sustainable and profitable underwriting performance (which includes
the claims component of our business); focused growth; dynamic
asset management; and strong capital management. While we discuss
all of these in some detail elsewhere in this Strategic Report, I
will provide some additional perspective here.
Underwriting
Underwriting profitability lies at the heart of our strategy.
Evidence of that commitment is seen not only in this year's very
strong claims ratio but in the reduction in our attritional loss
ratio over the last five years.
Under Matthew Wilson's leadership, in what can best be described
as a challenging environment, underwriting performance of
GBP1,302.1m premium income and a claims ratio of 50.0% again proved
the wisdom of writing a diversified portfolio of specialty classes.
We saw good top line growth in 2014, predominantly from new teams
and initiatives, however we continue to maintain a highly
disciplined approach to organic growth, particularly given market
conditions and outlook.
In volatile market conditions, the ability to draw on
underwriting experience, sophisticated technical pricing tools and
long-term trading relationships to grow or reduce exposures
depending upon terms and conditions available by business class, is
critical to optimising shareholder returns. Over the past six years
we have consistently enhanced our product set, as well as the
skills of our underwriting community. As a result, we were very
well positioned to meet the challenges of the market conditions we
faced in 2014 - and will continue to see going forward.
The London market should be a centre of innovation: offering
products that are responsive to new and emerging forms of risk. We
believe the best response to excess capacity is to create demand
through the development of new products for emerging needs, rather
than allowing that excess capacity to cause us to give away our
margins.
Brit set an excellent example of such innovation in 2014 with
the roll-out of our new cyber-attack cover - targeted at first
party physical damage and business interruption loss arising from a
cyber-attack. We are proud of this development.
In tandem with our underwriting performance, delivery of a first
class accurate claims service to our clients is key to our success.
During the year we continued to strengthen our claims offering with
a number of new hires, deepening our skill set and expanding the
experience base in support of the new initiatives we implemented.
We have also led innovation within the claim side of the business
through the introduction of a fast track arbitration clause that
will greatly enhance the client's experience on complex issues,
with a more cost effective and robust solution to potential
conflict points. This is unique to Brit and has been well received
in the market.
Looking ahead, we expect that trading conditions in some classes
will continue to be challenging. However, we believe we have the
diversity in our portfolio, the cross-class expertise, the
discipline and the trading relationships that will enable us to
continue driving strong returns through shifting market cycles.
Focused growth
As a specialty (re)insurer we look to grow in two principal
ways. First, in the specialty classes in which Lloyd's and the
London market have a major and or leading presence. Secondly,
through opportunity-driven geographic growth in specialty classes
where we have expertise - in both mature and emerging markets
including the US, China and Latin America.
2014 saw 15.0% growth in our top line GWP at constant FX rates.
This was driven by our specialty insurance business which grew by
22.4%, while we chose to shrink our reinsurance portfolio by 8.1%
in response to difficult market conditions. The growth we achieved
in our book was driven predominantly by new underwriting
initiatives implemented in 2013 and 2014, which included the
addition of property and public entity specialty teams in the US, a
casualty and property treaty team in Bermuda and a number of
specialist class teams in London (high value homeowners, aviation,
political and credit risks, and fine art and specie). Growth in our
existing business was limited as we remained disciplined. This
growth was focused on areas where rates have been most resilient
and specifically our US property binder business and US specialty
classes.
Our growth has been described as being 'opportunistic' and we
agree with that view. Our approach is first to consider any
opportunity within the context of our overall strategy and our
basic understanding of the product offering to ensure it fits with
our longer-term plan. We then examine historical results very
closely and model the business in our own structure. This ensures
we fully understand the capital implications, aggregation and
correlation issues and expense impact. We only proceed if we fully
understand the class and the business meets all our criteria -
including a very high probability of achieving a profitable run
rate within its first 12 months. This disciplined approach means we
turn away many more 'opportunities' than we actually take on.
Given our capital structure and highly competitive expense
model, it is important to remember that we are under no pressure to
write new or unfamiliar premium (exposure); this is particularly
important given the current challenging market conditions.
Given current market conditions and the effect of rate
movements, we expect the impact of the various initiatives to
deliver a low to mid-single digit growth rate for Brit over the
next few years.
Investment management
An important part of our strategy is to optimise the
risk-adjusted return on our asset portfolio within the context of
the responsibilities of a property and casualty insurance business.
Under John Stratton's leadership our result in 2014 is a good
example of the effectiveness of that strategy.
Invested assets under management amounted to GBP2.6bn at the end
of 2014 (2013: GBP2.6bn), with investment return net of fees for
the year ahead of expectations at 2.9%, or GBP75.7m (2013: 2.1%, or
GBP54.7m).
At 31 December 2014, 88.2% of the Group's investment portfolio
was invested in cash and income generating assets. Over 70% of our
invested assets corresponded to cash, government bonds and
investment grade credit. A small proportion (11.8%) of the
portfolio is allocated to growth assets where investment is
targeted at lower volatility alternative and equity strategies.
During 2014, the duration and credit risk in the portfolio was
actively managed through portfolio rebalancing. This, together with
the ability of our growth strategies to manage periods of market
volatility enhanced our performance and, in particular,
risk-adjusted returns over the year.
While the macro-economic environment remains challenging, we
believe our investment portfolio is appropriately positioned for a
persistently slow global recovery and the prospect of changing
monetary policy in different regions. With our established and
flexible operating platform we remain well placed to actively
manage our duration and sector profile as the market backdrop
develops, accessing attractive investments as risk/reward
opportunities arise.
Operating platform
A key element in long-term value creation is to position the
Company with an efficient and scalable operating platform. Over the
past four years we have developed a model that enables us to
operate on a very competitive operating expense ratio. In 2014 our
operating expense ratio was stable at 12.0% (2013: 12.0%). We
monitor controllable expenses closely and work hard to ensure that
discretionary spending is targeted at improving business
performance, both for our shareholders and our trading
partners.
While we manage expenses carefully, we recognise that both
people and systems are critical to maintaining a competitive
advantage for a specialty business. In 2014 we have made a number
of infrastructure investments which will help empower us with a
highly flexible business model. Operating an expense-efficient,
scalable platform gives us greater ability to manage effectively
through the challenges of market cycles.
Capital management
Our Lloyd's-focused business allows us to maintain a very strong
capital position, while still achieving operating ratios that
enable us to produce sector-leading returns for our shareholders.
The capital efficiency embedded in the Lloyd's model - and the
operating efficiency we achieve there - also enhances our
flexibility when dealing with competitive pricing pressures and the
market impact of lower-cost forms of capital.
We seek to hold actual capital in a range of 120% to 140% of our
capital requirement and believe holding capital at this level
enhances our ability to manage our approach to opportunity-driven
growth, take advantage of positive market circumstances arising
following major industry losses, and support our attractive
dividend. Notwithstanding the prudent holding of that excess
capital, we achieved a 20.7% return on net tangible assets for our
shareholders this year and were able to recommend a final dividend
of 12.5p per share (GBP50.1m) taking the total ordinary dividend
for the year to 18.75p per share (GBP75.1m).
As excess capital builds above our expected range we will look
for ways to deploy it through growth in the business. As we
committed to at the time of the IPO, if market conditions or a lack
of good opportunities suggest growth is not right for us, we will
return that excess (above our prudent range) to our shareholders.
This was the case in 2014 where our strong results have afforded us
additional capital headroom and after consideration of the
potential capital requirements for 2015 and growth opportunities we
have proposed to pay a special dividend of a further 12.5p per
share (GBP50.1m). This takes the total payout for the full year to
GBP125.2m/31.25p per share or 90.1% of 2014 earnings. Our capital
buffer at the end of 2014, adjusted for these recommended
dividends, was 36.0% or GBP251.7m above requirements. Having
slightly reduced both our maximum catastrophe realistic disaster
scenario exposure and some of our credit exposures on the
investment portfolio in the second half of 2014, we believe this is
a prudent and appropriate level of capital buffer for our business
to carry. I expect to continue this rigorous capital management
policy in the future.
Brit has operated its governance and capital resources on a
'Solvency II' standard internal model for some years and we
therefore believe we are well positioned to comply with full
requirements when they become effective from 1 January 2016.
Conclusion and outlook
The results we have achieved this year and the strength of our
business model is a credit to the entire Brit team. Our people are
our core asset and everything we achieve is through their talent,
experience, hard work and commitment. At Brit we operate a culture
of achievement and involvement where we encourage our associates to
excel in every aspect of our business through experience, training,
natural talents and importantly, collaboration across business
activities.
In each of the past two years we have performed engagement
surveys to help us understand how our team members view our
Company, the corporate environment and the behaviour of management.
I am very happy to report extremely high participation levels in
both of those surveys with 2014 participation at 89%.
The surveys provide invaluable feedback on what we are doing
well and where we have room for improvement. Management takes that
feedback very seriously and takes every effort to continuously
improve our work environment and culture. I am delighted to report
this year we scored very well in some key measures or statements.
For example, 86% of employees would recommend Brit as a great place
to work and 85% of employees are proud to work here.
We believe having a workforce which is very engaged in the
future of the business sets our Group on a course for continued
outperformance for many years ahead.
Trading conditions are certainly not getting any easier with a
continued flow of capital to our market place, a generally
softening rate environment, and a continuing low yield investment
environment. Nonetheless we believe we are well positioned to face
the challenging days ahead with the flexibility we have built into
our business model through our low cost scalable operating
platform, our strong yet efficient capital structure, our dynamic
approach to asset management and our opportunity-driven growth
strategy. In addition, and very importantly given current market
trends, we have over the past four years shown clear underwriting
discipline; it is that which has enabled us to reach this stage and
we will continue to focus on this fundamental which is so core to
our business.
I would like to thank every member of the Brit team for their
commitment and efforts over the past year and congratulate them on
a great result. My thanks also go to our trading partners, brokers,
agents, policyholders and cedants for their support and friendship
as we have continued to develop the Brit story together.
Finally, I would like to extend my appreciation to our Board of
Directors for their encouragement, advice, direction and support
through what has been a very exciting and successful year for our
Group.
Mark Cloutier
24 February 2015
Financial Review
Overview of Results
The Group's income statement, re-analysed to show the key
components of our result, is set out below:
2014 2013 2012 2011
GBPm GBPm GBPm GBPm
----------------------------------- -------- -------- -------- --------
Gross written premium 1,302.1 1,185.7 1,147.9 1,179.9
Net earned premium (note
1) 970.4 947.7 942.8 1,003.6
Underwriting profit (note
1) 102.0 138.4 63.7 20.0
Underwriting profit 102.0 138.4 63.7 20.0
Return on invested assets,
net of fees 75.7 54.7 87.9 64.4
Corporate expenses (23.5) (14.9) (14.2) (18.9)
Finance costs (13.5) (15.0) (14.6) (16.7)
Other items 0.5 4.4 0.5 (0.3)
-------- -------- -------- --------
Profit on ordinary activities
before tax, FX, negative
goodwill write-off and corporate
activity costs 141.2 167.6 123.3 48.5
FX movements 21.6 (58.2) (27.4) 16.9
Write off of negative goodwill - - - 51.9
Transaction costs (note
2) (13.7) (2.0) - (35.5)
-------- -------- -------- --------
Profit on ordinary activities
before tax 149.1 107.4 95.9 81.8
Tax (10.1) (6.5) (5.2) (0.3)
Discontinued operations - (1.4) 23.8 19.2
-------- -------- -------- --------
Profit for the year (after
tax) 139.0 99.5 114.5 100.7
Pence Pence Pence Pence
Earnings per share (basic)
(all business) 34.8 23.8 25.8 21.6
Earnings per share (basic)
(continuing business) 34.8 24.1 20.4 17.5
Dividend per share 31.25 n/a n/a n/a
Note 1: Excluding the effects of foreign exchange on
non-monetary items.
Note 2: The 2013 and 2014 costs relate to the April 2014 IPO;
the 2011 costs relate to the acquisition by the Group of Brit
Insurance Holdings B.V.
Group performance and total value added
We have delivered a strong performance in our first period as a
re-listed Group. Underwriting return was healthy, benefitting from
targeted premium growth, a low attritional loss ratio, an absence
of large losses and favourable reserve development. This was
supported by a very competitive investment return net of fees of
2.9%. Our result for the year also included costs incurred in
relation to the IPO.
Profit before tax for the year was GBP149.1m (2013: GBP107.4m)
and profit after tax was GBP139.0m (2013: GBP99.5m). Return on
adjusted net tangible assets (RoNTA), excluding the effects of FX
on monetary items and IPO costs, decreased to 20.7% (2013: 24.2%).
Basic EPS was 34.8 pence per share (pps) (2013: 24.1pps). Total
value created for the year was GBP139.2m (2013: GBP91.3m).
Our adjusted net tangible assets increased to GBP775.4m or
194.0pps (2013: GBP661.2m/168.6pps), after payment in September of
an interim dividend of GBP25.0m.
Dividends
The Board declared and paid an interim dividend of 6.25pps. The
Board has also recommended a final ordinary dividend of 12.5pps and
a special dividend of 12.5pps. Subject to AGM approval, both the
final ordinary and special dividends will be paid on 30 April 2015
to shareholders on the register on 20 March 2015. The shares will
go ex-dividend on 19 March 2015.
Key performance indicators
2014 2013
--------------------------------------------------- ---------- ---------
Return on net tangible assets before FX movements
and IPO costs (RoNTA) 20.7% 24.2%
Total value created GBP139.2m GBP91.3m
Combined ratio 89.5% 85.4%
Investment return (net of external investment
related expenses) 2.9% 2.1%
Capital ratio 150.4% 141.0%
Ratio of front office employees to back office
employees 159.8% 149.7%
--------------------------------------------------- ---------- ---------
In 2014 we delivered a RoNTA of 20.7% driven by excellent
performance across all areas of the business. Strong underlying
underwriting results were supported by limited losses from natural
catastrophes and our investment return (net of fees) of 2.9%. In a
year with average levels of major claims we target a RoNTA in the
mid-teens range.
In 2014 value creation was GBP139.2m or 21.1% of opening
adjusted NTA. The company has now generated a total value of
GBP451.2m over the past four years, an average of GBP112.8mper
annum.
The combined ratio is our key underwriting metric. In a year
with average levels of major claims, we target a combined ratio in
the low to mid 90% range. In a year with low levels of major
claims, the ratio would be expected to fall to the high 80% range.
Overall, the combination of strong portfolio management,
underwriting discipline and opportunity-driven growth has led to us
achieving an excellent 89.5% CoR in 2014, in line with our
guidance. We have consistently delivered combined ratios below 100%
over the past four years and an average ratio of 91.5% over that
period.
We have a track record of delivering consistent investment
profitability and attractive risk adjusted returns ahead of
benchmarks. The return in 2014 was 2.9% despite the low yield
environment.
We target a capital ratio within a range of 120% to 140%. At 31
December 2014, the ratio was 150.4% and as such, management are
recommending a special dividend of GBP50.1m. Adjusted for this
special dividend and the recommended final ordinary dividend of
GBP50.1m, the ratio reduces to136.0%.
Ratio of front office employees to back office employees
monitors the efficiency of our business model. At 31 December 2014,
the ratio was 159.8%, reflecting that we had 1.6 front office
employees for every one back office employee.
Other performance measures
In addition to these KPIs, we have other measures that offer
further insight into the detail of our performance. These measures
are:
-- Premium related: Risk adjusted rate change; Retention rate;
-- Claims related: Claims ratio; Attritional loss ratio; Major
claims ratio; Reserve release ratio; Reserve releases as a
percentage of opening net claims reserves; and
-- Underwriting expense related:Underwriting expense ratio;
Commission ratio; Operating expense ratio.
These measures are explained in the sections below.
Underwriting - Group
Overview
Our underwriting profit for the year amounted to GBP102.0m
(2013: GBP138.4m) and our combined ratio, which excludes the effect
of foreign exchange on non-monetary items, was 89.5% (2013: 85.4%).
The premiums, claims and expenses components of this result are
examined below.
Premiums written
Premium growth Growth at
constant
2014 2013 Growth FX rates
GBPm GBPm % %
----------------------------------- -------- -------- -------- ----------
Brit Global Specialty Direct 1,056.8 903.1 17.0 22.4
Brit Global Specialty Reinsurance 245.3 281.0 (12.7) (8.1)
Other underwriting - 1.6 (100.0) (100.0)
Group 1,302.1 1,185.7 9.8 15.0
----------------------------------- -------- -------- -------- ----------
Premiums by class 2014 2013
GBPm GBPm
-------------------------------------- -------- --------
Brit Global Specialty Direct
Short-tail direct
Property 282.2 228.1
Energy 82.4 106.2
Marine 119.6 109.0
US specialty (BGSU) 102.0 67.0
Terrorism, political and aerospace 69.4 23.0
Accident and health 61.6 65.9
-------- --------
Short-tail direct total 717.2 599.2
-------- --------
Long-tail direct
Casualty 239.0 233.1
Specialist liability 100.2 70.8
-------- --------
Long-tail direct total 339.2 303.9
-------- --------
Discontinued lines 0.4 -
-------- --------
Total direct 1,056.8 903.1
-------- --------
Brit Global Specialty Reinsurance
Short-tail RI (property treaty) 109.1 136.9
Long-tail RI (casualty treaty) 135.7 141.4
Discontinued lines 0.5 2.7
-------- --------
Total reinsurance 245.3 281.0
Other underwriting - 1.6
Group total 1,302.1 1,185.7
While our underwriters have displayed excellent discipline in
the more challenging classes, we still achieved premium growth in
2014, with weaker lines being offset by growth in our fledgling
international platforms and business generated by our new
initiatives and team hires.
Gross written premium (GWP) in 2014 increased by 9.8% to
GBP1,302.1m (2013: GBP1,185.7m). Direct business increased by 17.0%
to GBP1,056.8m (2013: GBP903.1m), while reinsurance decreased by
12.7% to GBP245.3m (2013: GBP281.0m). At constant exchange rates
the overall increase was 15.0% (2013: 2.1%).
The drivers of the 9.8% increase in Group GWP, which was in line
with expectations, are set out in the chart below:
GBPm
-------------------------------- --------
2013 GWP 1,185.7
Underwriting initiatives 93.4
Organic growth 32.3
Prior year premium development 44.6
Foreign exchange (53.9)
2014 GWP 1,302.1
-------------------------------- --------
These drivers are explained further below:
-- The Group's underwriting initiatives, launched in both 2013
and 2014 resulted in a GBP93.4m increase in GWP. The main
contributors were aviation, Bermuda, high value homeowners, BGSU
and political and credit.
-- The Group's organic growth of GBP32.3m was driven by growth
in classes experiencing favourable rate increases including the
property binder book, specialist liability, and marine. These
growth areas were partly offset by premium reductions in classes
experiencing falling rates including reinsurance and energy.
-- The favourable development on prior years of GBP44.6m has
resulted from a review of premium estimates, predominantly from our
casualty book. This business was originally written in a stronger
rating environment.
-- These growth areas were offset by the impact of foreign
exchange (GBP53.9m), which reflect the movements during 2014 of
Sterling against a number of currencies in which the Group writes
business including the US dollar.
An increasing proportion of our GWP is US dollar-denominated,
reflecting the expansion of our US operations. Our GWP analysed by
currency is set out below:
Premiums by currency 2014 2013
% %
----------------------- ------ ------
Sterling (note 1) 19.2 21.9
US dollar 69.6 67.4
Euro 6.5 5.7
Canadian dollar 4.7 5.0
100.0 100.0
----------------------- ------ ------
Note 1: Includes incidental currencies
Premium ratings
Overall risk adjusted premium rates decreased by 2.9% during
2014 (2013: increased by 0.3%), brought about by low levels of
catastrophe activity and increased competition from new sources of
capacity. This reduction was strongly influenced by reinsurance
business which experienced rate reductions of 7.4%, driven by a
10.6% rate reduction in property treaty. Rates for direct business
fell by 1.6% in the period, with the principal movements being
decreases in energy, the property open market book and casualty.
These were partly offset by increases in specialist liability,
marine and the property binder book.
In response to these conditions, we have taken a defensive
position, particularly in our property treaty reinsurance book. We
have reduced our reinsurance volumes and have focused on increasing
our specialty business; our portfolio continues to re-balance
towards short-tail specialty business where we believe there is
greater rating adequacy. Critically, we are still seeing rate
adequacy in many lines which should allow target returns on capital
to be met.
Retention rates
Our retention rate for the period, which reflects the proportion
of our business that renews on a risk adjusted basis, was 83.0%
(2013: 83.0%). The retention rates we achieved in 2013 and 2014
reflect the successful renewal of a profitable book of business,
following the re-underwriting of the book that occurred between
2008 and 2012, through which we rebalanced our book and non-renewed
around half of our underwriting portfolio.
Our business is built on our talented underwriting professionals
and our strong relationships with brokers and policyholders. During
2014, we have retained our underwriting talent and have continued
to attract new hires. Our ability to lead business, combined with
our innovative approach to underwriting, supports our success in
building long-term and dependable market relationships. This is
reflected in our retention rate, which has increased to 83% from
70% in 2009 and by us leading, or being second agreement party, on
more than 70% of the business we write. This helps us to secure
favourable rates.
Outwards reinsurance
Our reinsurance expenditure in 2014 was GBP277.2m or 21.3% of
GWP (2013: GBP229.4m/19.3%), an increase of GBP47.8m (20.8%).
Included within our 2014 reinsurance expenditure was GBP42.9m in
respect of a specific one-off reinsurance contract, entered into to
provide adverse development cover for a discontinued professional
lines account with exposure to Italian medical malpractice. This
contract has provided the Group with significantly greater
certainty over a poorly performing legacy account. Under the terms
of this contract, GBP40.3m of reserves transferred to the
reinsurer, resulting in a net cost to the Group of GBP2.6m. An
effect of this contract was to reduce our attritional ratio while
increasing our underwriting expense ratio however there was no
material impact on our combined ratio.
During 2014, we also took advantage of reinsurance market
conditions to significantly strengthen our catastrophe cover. These
additional protections include a Group-wide property aggregate
catastrophe cover and some additional variable quota share
protections. As a result, the expected recoveries against a number
of our realistic disaster scenarios (RDS) have increased, thereby
reducing our net exposure to such events. Our largest net exposure
under the Lloyd's-defined RDSs has fallen to GBP113m (2013:
GBP149m).
Net earned premium
Net earned premium (NEP) in 2014, excluding the effects of
foreign exchange on non-monetary items, increased by 2.4% to
GBP970.4m (2013: GBP947.7m/0.5%). This growth was impacted by the
GBP42.9m reinsurance premium paid in respect of the specific
one-off reinsurance contract referred to in the outwards
reinsurance section.
Direct business increased by 7.2% to GBP756.4m (2013:
GBP705.7m/2.3%), while reinsurance decreased by 15.5% to GBP201.2m
(2013: GBP238.1m/3.6%).
At constant exchange rates the overall increase was 7.4% (2013:
decrease of 1.2%).
Claims
Our claims experience in 2014 was in line with expectations,
with an overall claims ratio of 50.0% (2013: 48.5%). Overall, the
combination of strong portfolio management, underwriting discipline
and opportunity-driven growth has led to us achieving an excellent
89.5% CoR in 2014.
Our key claims metrics were as follows:
2014 2013
% %
------------------------ ------ ------
Attritional loss ratio 51.0 51.3
Major claims ratio 2.3 3.2
Reserve release ratio (3.3) (6.0)
------------------------ ------ ------
Claims ratio 50.0 48.5
------------------------ ------ ------
Our 51.0% attritional ratio has benefitted from the one-off
reinsurance contract as described above however this was offset by
a number of one off risk losses earnings through from 2013 and
2014, as well as deterioration arising from rating pressures and a
change in business mix as the Group reduced short-tail reinsurance
exposures. We believe the impact of these effects leaves an
underlying attritional in the mid 51% range and on this basis is a
testament to the strength of our underwriting franchise in the face
of competitive pressures.
2014 saw limited natural catastrophe activity, the only event
being Hurricane Odile which resulted in incurred net losses of
GBP8.8m.
We had immaterial exposure to the losses of Malaysian Airlines'
MH370 and MH17, the Korean ferry (SEWOL) and Air Asia, but we did
incur net losses of GBP12.9m from the Tripoli airport attack.
As part of our quarterly reserving process, we released GBP32.1m
of claims reserves established for prior year claims, the
equivalent of a combined ratio reduction of 3.3% (2013:
GBP57.3m/6.0%). Of this release, 87.9% was derived from the 2011
and prior underwriting years (2013: 88.5% from the 2010 and prior
underwriting years). The main drivers of this release were casualty
treaty, property treaty and marine. Our statement of financial
position remains strong and we continue to operate a robust
reserving process. Reserve releases in 2014 were equivalent to 1.9%
of our opening net claims reserves (2013: 2.7%).
Underwriting expenses
Our underwriting expense ratio was 39.5% (2013: 36.9%). The key
components of this ratio were as follows:
2014 2013
% %
---------------------------- ----- -----
Commission ratio 27.5 24.9
Operating expense ratio 12.0 12.0
---------------------------- ----- -----
Underwriting expense ratio 39.5 36.9
---------------------------- ----- -----
Commission costs were GBP269.9m and the commission expense ratio
was 27.5% (2013: GBP235.8m/24.9%). In addition to the effects of
the one-off reinsurance, the ratio was affected by changes in
business mix, including increased binder business. We wrote more
business through cover-holders as, in the current softening
conditions, the rating of this business tends to be better than
open market business.
Our operating expenses are analysed later in this report.
Underwriting - by business unit
2014 2013
Brit Other Brit Other
Brit Global Under- Brit Global Under-
Global Specialty Writing Total Global Specialty Writing Total
Specialty Reinsur- and (note Specialty Reinsur- and (note
Direct ance Intra-Group 1) Direct ance Intra-Group 1)
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Gross written
premium
(GBPm) 1,056.8 245.3 - 1,302.1 903.1 281.0 1.6 1,185.7
Net Earned
Premium
(GBPm) 756.4 201.2 12.8 970.4 705.7 238.1 3.9 947.7
Underwriting
profit
(GBPm) 30.5 66.7 4.8 102.0 56.6 83.2 (1.0) 138.4
Claims ratio
(%) 53.5 37.2 43.0 50.0 52.5 36.6 43.6 48.5
Underwriting
expense
ratio (%) 42.5 29.6 19.5 39.5 39.5 28.5 92.3 36.9
Combined
ratio (%) 96.0 66.8 62.5 89.5 92.0 65.1 135.9 85.4
Rate change
(%) (1.6) (7.4) - (2.9) 0.8 (0.9) - 0.3
Note 1: Excluding the effect of foreign exchange on non-monetary
items.
Brit Global Specialty Direct
We lead approximately 50% of the direct business we write and
are second agreement party on a further 20%. This strong offering
to brokers and clients allows us to drive scale and relevance in
our core insurance lines of property, energy and casualty, where
the Lloyd's market has significant market share and relevance. The
broad nature of our insurance portfolio allows us to manage cycle
dynamics by class and allows us to take advantage of opportunities
that may arise in our diversifying lines of business such as
marine, terror, political risks, aviation and accident and
health.
In 2014 this was illustrated by 17.0% growth in our GWP (22.4%
at constant FX rates). The benefits of organic growth in more
resilient lines such as property binders, US specialty and the
income from new initiatives such as aviation, more than offset our
underwriting discipline of reducing our energy account.
Brit Global Specialty Direct's CoR was 96.0%, driven by a
particularly pleasing attritional loss ratio of 51.3%.
Brit Global Specialty Reinsurance
The profitability of our treaty reinsurance book remained strong
with a CoR of 66.8%, driven by low catastrophe experience in our
property account and another year of good performance from our
market leading casualty reinsurance account. During 2014, our
treaty reinsurance portfolio accounted for 18.8% of our GWP,
however, in the competitive landscape our underwriters maintained
discipline, resulting in a reduction of premiums of 12.7% (8.1% at
constant FX rates). This allowed us to reallocate their surplus
capital to direct lines with more robust rating levels.
Investment return
2014 has produced a strong investment performance, driven by two
aspects of our strategy - the focus on generating a higher running
yield and our broader exposure to credit markets.
The return on our invested assets after deducting external fees
was GBP75.7m or 2.9% (2013: GBP54.7m/2.1%). Our invested assets at
31 December 2014 amounted to GBP2,582.3m (2013: GBP2,590.9m).
Overall duration at 31 December 2014 was 1.1 years (2013: 2.0
years) and the average credit quality was 'A' (2013: 'A'). Our 2014
investment return of 2.9% was a combination of 2.2% of investment
income and 0.9% of realised and unrealised gains on the portfolio,
less fees equivalent to 0.2%.
Investment return 2014 2013
GBPm GBPm
------ ------
Income 57.9 57.5
Released gains/(losses) 12.7 1.2
Unrealised gains/(losses) 5.6 4.1
------ ------
Investment return before fees 76.2 62.8
Investment management fees (6.1) (5.9)
Investment return net of fees 70.1 56.9
Investment related derivative return 5.6 (2.2)
------ ------
Total return 75.7 54.7
-------------------------------------- ------ ------
Total return (%) 2.9% 2.1%
-------------------------------------- ------ ------
Our income producing assets performed well and we generated
income of GBP57.9m during the year, representing a running yield of
2.2% (2013: GBP57.5m/2.2%). Our total return in 2014 of GBP75.7m
(2013: GBP54.7m) was influenced by falling bond yields and a
contraction in credit spreads across the US and European markets
which led to gains on our fixed income and credit portfolios. Our
growth assets showed gains as equity markets and alternatives
rose.
Within our unrealised gains for the year there are GBP15.1m of
gains made within fund investments (2013: GBP8.3m). Of these gains,
GBP9.1m was distributed on scheduled distribution dates in January
2015 (January 2014: GBPnil), thereby converting unrealised gains
into income.
Expenses
Our operating expense ratio was unchanged at 12.0% (2013:
12.0%). Operating expenses for the period were as follows:
Expense analysis 2014 2013
GBPm GBPm
------ ------
Underlying operating expenses including bonus
provisions 138.0 129.5
Project costs, timing differences and other expense
adjustments 1.5 (0.7)
------ ------
Expenses before IPO related costs 139.5 128.8
IPO related costs 13.7 2.0
------ ------
Total operating expenses 153.2 130.8
----------------------------------------------------- ------ ------
Underlying operating expenses during 2014 increased by 6.6% to
GBP138.0m (2013: GBP129.5m). This increase related to an increase
in bonus costs, targeted expansion and investment in growth areas
such as our US specialty business (BGSU) and aviation, together
with increased costs reflecting the Company's listed status.
The allocation of operating expenses within the Consolidated
Income Statement and the Segmental Information is as follows:
Disclosure of operating expenses 2014 2013
GBPm GBPm
------ ------
Acquisition costs 58.7 51.7
Other insurance related expenses 57.3 62.2
------ ------
Total insurance related expenses 116.0 113.9
Other operating expenses 37.2 16.9
Total operating expenses 153.2 130.8
---------------------------------- ------ ------
Foreign exchange
We manage our currency exposures to mitigate its impact on
solvency rather than to achieve a short-term impact on earnings. We
experienced a total foreign exchange gain of GBP21.6m in 2014
(2013: loss of GBP58.2m). This total foreign exchange related gain
comprised:
-- An unrealised revaluation loss of GBP0.4m (2013: loss of
GBP65.4m), primarily relating to the mark to market of the capital
we hold in non-Sterling currencies to match our risk exposures. The
loss comprises a gain of GBP20.6m resulting from the weakening of
Sterling against the US dollar, offset by losses of GBP21.0m
resulting from the strengthening of Sterling against a number of
other currencies, primarily the Euro, Australian dollar and the
Canadian dollar;
-- Gains of GBP1.7m (2013: gain of GBP13.2m) on derivative
contracts which were entered into to help manage our FX exposures;
and
-- An accounting gain of GBP20.3m (2013: loss of GBP6.0m), as a
result of the IFRS requirement to recognise non-monetary assets and
liabilities at historic exchange rates.
The allocation of the FX result within the Consolidated Income
Statement is as follows:
Foreign exchange gains/ (losses) 2014 2013
GBPm GBPm
--------------------------------------------------------- -------------- ---------------
Net change in unearned premium provision - non-monetary
FX effect 9.3 (2.2)
Acquisition costs - non-monetary FX effect (2.3) 0.4
Net foreign exchange gains/ (losses) - non-monetary
(Note 1) 13.3 (4.2)
-------------- ---------------
20.3 (6.0)
-------------- ---------------
Net foreign exchange losses - monetary (Note 1) (0.4) (65.4)
Return on derivative contracts - FX related instruments 1.7 13.2
-------------- ---------------
1.3 (52.2)
-------------- ---------------
Total gain/ (loss) 21.6 (58.2)
--------------------------------------------------------- -------------- ---------------
Note 1: The sum of these two amounts, GBP12.9m (2013: GBP69.6m),
is the 'Net foreign exchange gains/(losses)' figure per the
Consolidated Income Statement.
Tax
The Group is liable to taxes on its corporate income in a number
of jurisdictions, in particular the UK, Gibraltar and the US, where
its companies carry on business. Our effective tax rate for the
period was 6.8% (2013: 6.1%) which is a composite tax rate
reflecting the mix of the tax rates charged in those
jurisdictions.
Financial position
At 31 December 2014 our adjusted net tangible assets totalled
GBP775.4m or 194.0pps (2013: GBP661.2m/168.6pps), an increase of
17.3% in the year.
At 31 December 2014 our gearing ratio was 13.8% (2013: 21.9%).
The reduction in the ratio reflects the collateralisation of the
US$80m letter of credit in April 2014.
We have successfully renegotiated our revolving credit facility.
The facility limit remains at GBP225m and has been extended by one
year to 31 December 2018. Under our capital policy we have
identified a maximum of US$235m (2013: GBP125.0m) of the facility
to form part of our capital resources, with the balance available
for liquidity funding. At 31 December 2014 a fully collateralised
US$80.0m letter of credit was in place (31 December 2013:
US$80.0m/uncollateralised) to support our underwriting activities.
At 31 December 2014 and at 31 December 2013 no other drawings were
outstanding on the facility.
Capital Strength
At Brit we carry capital resources significantly in excess of
our management capital requirements and seek to hold capital
resources in a range of 120% to 140% of our requirement. We believe
this is an appropriate level of capital for the business and
provides management with:
-- The flexibility to absorb major losses while still being in a
position to take advantage of subsequent market dislocations;
-- The ability to pursue opportunity-driven growth in our core business; and
-- The support to provide continuity in regular dividend payments to shareholders.
As shown in the table below, our statement of financial position
remains strong, with capital resources equivalent to 150.4% of
requirements (2013: 141.0%). Following approval and payment of the
recommended final ordinary and special dividends, the 31 December
2014 capital ratio will reduce to 136.0%.
Capital resources and requirements 2014 2013
GBPm GBPm
---------------------------------------------------- -------- --------
Adjusted net tangible assets 775.4 661.2
Subordinated debt 124.5 123.2
Letters of credit / contingent funding 150.6 125.0
-------- --------
Total available capital resources 1,050.5 909.4
Management entity capital requirements (698.6) (645.0)
-------- --------
Excess of resources over management entity capital
requirements 351.9 264.4
Capital ratio 150.4% 141.0%
Total value created for shareholders in 2014 was GBP139.2m. We
have recommended a final ordinary dividend of GBP50.1m (12.5pps)
for 2014. As stated at the time of the IPO, in the event that our
capital position is in excess of requirements and we do not need
this for growth opportunities, we will return it to our
shareholders. After allowing for an increase in our capital
requirements for 2015, driven by the growth of our business and
overall pressure on market conditions, the capital buffer remained
above our target level of 140%. Therefore, we have also recommended
a special dividend of GBP50.1m (12.5pps) taking total dividends
paid or recommended since the IPO in April to GBP125.2m
(31.25pps).
We remain committed to proactive capital and risk management.
After allowing for these dividends, our excess of capital resources
over management entity capital requirements of GBP251.7m, a capital
ratio of 136.0%, remains at the high end of our target range of
120% to 140% and is still comfortably in excess of our maximum RDS
event on a net basis of GBP113m.
Asset allocation
We have a diversified and dynamic approach to investment
strategy. Investment return is a key component of Brit's earnings
and a strategic priority for us. The recent low interest rate
environment and weak global economic performance has presented a
challenging environment for insurers for a number of years. We have
realigned our investment strategy and have transitioned to a
broader mix of asset classes in order to deliver a more balanced
and consistent risk adjusted return for our shareholders. We have
also invested in our in-house capabilities that allow us to be more
proactive in tactical decision-making within asset classes, which
we feel is necessary in what remain challenging investment
markets.
We continue to review our asset mix and have tactically moved to
a slightly more defensive credit positioning in late 2014. In
addition we have rebalanced some assets into our
growth/diversifying portfolio. Both of these changes are intended
to reduce the impact of any 'surprise' negative data, while broadly
maintaining the potential returns in a strong economic environment.
During 2015, we will continue to keep our asset mix and positioning
of our portfolio under review.
At 31 December 2014, 72.9% of our invested assets were
investment grade quality (2013: 72.9%). Our asset allocation, on
both a look-through basis and statutory disclosure basis, is set
out in the tables below:
31 December 2014 Statutory basis
---------------------------------------------------------------------------------------------
Equity Debt Loan Specialised Cash Derivative Derivative Total
securities securities instruments investment and cash assets liabilities invested
funds equivalents assets
(look
through)
------------------------
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------- ------------- ----------- ----------- ------------ ------------ ------------ ----------- ------------ ---------
Look Government
through debt
basis securities - 315.0 - 190.0 - - - 505.0
Corporate debt
securities - 433.7 - 312.7 - - - 746.4
Structured products - 236.9 - 97.1 - - - 334.0
Loan instruments - - 169.3 3.3 - - - 172.6
Equity securities 27.2 - - 72.4 - - - 99.6
Alternative
investments - - - 198.5 - - - 198.5
Cash and cash
equivalents - - - 199.0 321.4 - (1.3) 519.1
Derivatives - - - 4.7 - 2.4 - 7.1
Total invested
assets (statutory) 27.2 985.6 169.3 1,077.7 321.4 2.4 (1.3) 2,582.3
------------------------ ----------- ----------- ------------ ------------ ------------ ----------- ------------ ---------
31 December 2013 Statutory basis
---------------------------------------------------------------------------------------------
Equity Debt Loan Specialised Cash Derivative Derivative Total
securities securities instruments investment and cash assets liabilities invested
funds equivalents assets
(look
through)
------------------------
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------- ------------- ----------- ----------- ------------ ------------ ------------ ----------- ------------ ---------
Look Government
through debt
basis securities - 369.4 - 75.0 - - - 444.4
Corporate debt
securities - 341.0 - 452.2 - - - 793.2
Structured products - 288.4 - 48.6 - - - 337.0
Loan instruments - - 292.7 39.6 - - - 332.3
Equity securities 47.6 - - 107.5 - - - 155.1
Alternative
investments - - - 125.2 - - - 125.2
Cash and cash
equivalents - - - 86.7 315.7 0.5 (2.7) 400.2
Derivatives - - - 2.0 - 1.5 - 3.5
Total invested
assets (statutory) 47.6 998.8 292.7 936.8 315.7 2.0 (2.7) 2,590.9
------------------------ ----------- ----------- ------------ ------------ ------------ ----------- ------------ ---------
The changes between 2013 and 2014 have been driven principally
by a re-balancing of the portfolio following the commutation of the
2012 reinsurance contract described above.
Our investments in specialised investment funds account for
41.7% of our invested assets and the investments within these funds
are analysed in the tables above. We use these fund structures as
vehicles for investment as we believe they deliver a number of
advantages:
-- Group structure: Where a number of Group entities hold
similar investments, it is significantly more efficient for these
entities to invest via a fund structure, rather than having
separate segregated mandates;
-- Investment strategy: Where a Group entity wishes to make a
small investment in a niche strategy or specialist manager a
separate managed account would often not be viable. A fund
structure facilitates such an investment;
-- Operational complexity: Some of the investment strategies are
complex. By investing through a fund that complexity is centralised
within the fund and is the responsibility of the fund manager;
and
-- Admissibility: A fund structure simplifies the regulatory
admissibility assessment, especially when the structure meets the
requirement for 'undertakings for collective investment in
transferable securities' (UCITS).
Andrew Baddeley
24 February 2015
Consolidated Income Statement
For the year ended 31 December 2014
Year ended Year ended
31 December 31 December
2014 2013
Note GBPm GBPm
------------------------------------------------- ------ -------------- -----------------
Revenue
Gross premiums written 5 1,302.1 1,185.7
Less premiums ceded to reinsurers 5 (277.2) (229.4)
------------------------------------------------- ------ -------------- -----------------
Premiums written, net of reinsurance 1,024.9 956.3
Gross amount of change in provision for unearned
premiums (50.2) (34.0)
Reinsurers' share of change in provision for unearned
premiums 5.0 23.2
Net change in provision for unearned premiums (45.2) (10.8)
Earned premiums, net of reinsurance 979.7 945.5
------------------------------------------------- ------ -------------- -----------------
Investment return 6 70.1 56.9
Return on derivative contracts 7 7.3 11.0
Profit on disposal of asset held for sale - 4.4
Other income 0.5 -
Net foreign exchange gains 8 12.9 -
Total revenue 1,070.5 1,017.8
------------------------------------------------- ------ -------------- -----------------
Expenses
Claims incurred:
Claims paid:
Gross amount (758.7) (542.1)
Reinsurers' share 112.5 99.2
------------------------------------------------- ------ -------------- -----------------
Claims paid, net of reinsurance (646.2) (442.9)
Change in the provision for claims:
Gross amount 101.5 (34.1)
Reinsurers' share 59.9 17.8
------------------------------------------------- ------ -------------- -----------------
Net change in the provision for claims 161.4 (16.3)
Claims incurred, net of reinsurance 5 (484.8) (459.2)
Acquisition costs 9 (328.6) (287.5)
Other operating expenses 9 (94.5) (79.1)
Net foreign exchange losses 8 - (69.6)
Total expenses excluding finance costs (907.9) (895.4)
------------------------------------------------- ------ -------------- -----------------
Operating profit 162.6 122.4
Finance costs (13.5) (15.0)
Profit on ordinary activities before tax 149.1 107.4
Tax expense 13(a) (10.1) (6.5)
Profit for the year from continuing operations 139.0 100.9
------------------------------------------------- ------ -------------- -----------------
Loss from discontinued operations - (1.4)
-------------- -----------------
Profit for the year 139.0 99.5
------------------------------------------------- ------ -------------- -----------------
The accompanying Notes are an integral part of the annual
accounts.
Consolidated Income Statement (continued)
For the year ended 31 December 2014
Earnings per share from continuing operations
attributable to equity holders of the parent Year ended Year ended
(pence per share) 31 December 31 December
2014 2013
Note GBPm GBPm
----------------------------------------------- ----- -------------- -----------------
Basic 11 34.8 24.1
Diluted 11 34.8 24.1
----------------------------------------------- ----- -------------- -----------------
Total earnings per share attributable to
equity holders of the parent (pence per share) Year ended Year ended
31 December 31 December
2014 2013
Note GBPm GBPm
------------------------------------------------- ----- -------------- -----------------
Basic 11 34.8 23.8
Diluted 11 34.8 23.8
------------------------------------------------- ----- -------------- -----------------
The numbers of shares used for calculating the earnings per
share are those of Brit PLC. The number of Achilles Holdings 1 S.à
r.l. shares in the comparative period has been converted into the
equivalent number of Brit PLC shares to reflect the corporate
reorganisation on 28 March 2014.
Consolidated Statement of Comprehensive Income
For the year ended 31 December 2014
Year ended Year ended
31 December 31 December
2014 2013
Note GBPm GBPm
----------------------------------------------- ------ -------------- -----------------
Profit attributable to:
Equity holders of the parent 139.0 99.1
Non-controlling interests - 0.4
----------------------------------------------- ------ -------------- -----------------
Profit for the year 139.0 99.5
----------------------------------------------- ------ -------------- -----------------
Other comprehensive income
Items not to be reclassified to profit or
loss in subsequent periods:
Actuarial gains on defined benefit pension
scheme 0.4 2.0
Deferred tax charge relating to actuarial
gains on defined benefit pension scheme 13(b) (0.1) (0.5)
----------------------------------------------- ------ -------------- -----------------
Net other comprehensive income not to be
reclassified to profit or loss in subsequent
periods 0.3 1.5
Other comprehensive income for the year net
of tax 139.3 101.0
----------------------------------------------- ------ -------------- -----------------
Total comprehensive income for the period
attributable to:
Equity holders of the parent 139.3 100.6
Non-controlling interests - 0.4
----------------------------------------------- ------ -------------- -----------------
Total comprehensive income for the year 139.3 101.0
----------------------------------------------- ------ -------------- -----------------
The accompanying Notes are an integral part of the annual
accounts.
Consolidated Statement of Financial Position
At 31 December 2014
31 December 31 December
2014 2013
Note GBPm GBPm
-------------------------------------------- ----- -------------- --------------
Assets
Intangible assets 14 62.2 62.7
Property, plant and equipment 15 4.7 5.1
Deferred acquisition costs 134.3 125.7
Reinsurance contracts 16 526.4 450.0
Employee benefits 27.8 21.9
Current taxation 10.5 6.0
Financial investments 17 2,259.8 2,275.9
Derivative contracts 18 7.8 12.7
Insurance and other receivables 19 452.7 380.9
Cash and cash equivalents 20 321.4 315.7
Total assets 3,807.6 3,656.6
-------------------------------------------- ----- -------------- --------------
Liabilities and Equity
Liabilities
Insurance contracts 16 2,604.3 2,593.9
Borrowings 21 124.5 123.2
Deferred taxation 22.8 17.1
Provisions 22 1.9 2.4
Current taxation 2.9 10.6
Derivative contracts 18 2.7 11.1
Insurance and other payables 23 220.8 187.3
Total liabilities 2,979.9 2,945.6
-------------------------------------------- ----- -------------- --------------
Equity
Called up share capital 24 4.0 0.7
Share premium account - 455.7
Own shares (0.9) (1.6)
Reserves - (94.4)
Retained earnings 824.6 349.5
Total equity attributable to owners of the
parent 827.7 709.9
-------------------------------------------- ----- -------------- --------------
Non-controlling interests - 1.1
-------------------------------------------- ----- -------------- --------------
Total equity 827.7 711.0
-------------------------------------------- ----- -------------- --------------
Total liabilities and equity 3,807.6 3,656.6
-------------------------------------------- ----- -------------- --------------
The accompanying Notes are an integral part of the annual
accounts.
These financial statements were approved by the Board of
Directors on 24 February 2015 and were signed on its behalf by:
Dr Richard Ward Mark Cloutier
Chairman Chief Executive Officer
Consolidated Statement of Cash Flows
For the year ended 31 December 2014
Year ended Year ended
31 December 31 December
2014 2013
Note GBPm GBPm
--------------------------------------------- ----- -------------- -----------------
Cash generated from operations
Cash flows provided by operating activities 27 (45.5) 55.9
Tax paid (16.7) (8.5)
Interest paid (11.3) (13.7)
Interest received 38.4 67.6
Dividends received 20.7 1.4
Net cash (outflows)/ inflows from operating
activities (14.4) 102.7
--------------------------------------------- ----- -------------- -----------------
Cash flows from investing activities
Purchase of property, plant and equipment 15 (1.6) (1.4)
Purchase of intangible assets 14 (3.1) (4.3)
Acquisitions (1.2) (1.2)
Disposal of consolidated structured entity 43.9 -
Disposal of asset held for sale - 17.4
Movements in associated undertaking loan
balances - (0.1)
Net cash inflows from investing activities 38.0 10.4
--------------------------------------------- ----- -------------- -----------------
Cash flows from financing activities
Share redemption - (94.2)
Purchase/(repurchase) of shares by/(from)
non-controlling interests 1.5 (0.6)
Buy-out of non-controlling interests - (5.1)
Disposal/(purchase) of own shares 0.3 (0.4)
Dividend paid (25.0) -
Net cash outflows from financing activities (23.2) (100.3)
--------------------------------------------- ----- -------------- -----------------
Net increase in cash and cash equivalents 0.4 12.8
Cash and cash equivalents at beginning of
the year 315.7 304.9
Effect of exchange rate fluctuations on cash and
cash equivalents 5.3 (2.0)
-------------- -----------------
Cash and cash equivalents at the end of the
year 20 321.4 315.7
--------------------------------------------- ----- -------------- -----------------
The accompanying Notes are an integral part of the annual
accounts.
Consolidated Statement of Changes in Equity
For the year ended 31 December 2014
Total
Equity
Called Attributable
up Share to owners
Share Premium Own Retained of the Non-controlling Total
capital account shares Reserves earnings parent interests equity
Note GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----- -------- -------- ------- --------- --------- ------------- ---------------- --------
At 1 January
2014 0.7 455.7 (1.6) (94.4) 349.5 709.9 1.1 711.0
----------------- ----- -------- -------- ------- --------- --------- ------------- ---------------- --------
Total
comprehensive
income
recognised - - - - 139.3 139.3 - 139.3
Purchase of
shares by
non-controlling
interests - - - - - - 1.5 1.5
Buy-out of
non-controlling
interests - 16.7 - - (14.1) 2.6 (2.6) -
Vesting of own
shares - - 0.7 - (0.7) - - -
Corporate
reorganisation (0.7) (472.4) 0.9 94.4 377.8 - - -
Establishment of
Brit PLC 800.0 - (1.2) - (798.8) - - -
Capital
reduction 24 (796.0) - - - 796.0 - - -
Disposal of own
shares - - 0.3 - - 0.3 - 0.3
Share based
payments 28 - - - - 0.6 0.6 - 0.6
Dividend 25 - - - - (25.0) (25.0) - (25.0)
----------------- ----- -------- -------- ------- --------- --------- ------------- ---------------- --------
At 31 December
2014 4.0 - (0.9) - 824.6 827.7 - 827.7
----------------- ----- -------- -------- ------- --------- --------- ------------- ---------------- --------
The accompanying Notes are an integral part of the annual
accounts.
Consolidated Statement of Changes in Equity
For the year ended 31 December 2014
Total
Equity
Called Attributable
up Share to owners Non
Share Premium Own Retained of the -controlling Total
capital account shares Reserves earnings parent interests equity
Note GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------- ----- --------- --------- -------- --------- --------- ------------- ------------- --------
At 1 January
2013 0.8 456.1 (1.2) 0.1 248.7 704.5 5.7 710.2
----------------- ----- --------- --------- -------- --------- --------- ------------- ------------- --------
Total
comprehensive
income
recognised - - - - 100.6 100.6 0.4 101.0
Redemption of
shares (0.1) (0.4) - (94.5) 0.8 (94.2) - (94.2)
Purchase of own
shares - - (0.4) - - (0.4) - (0.4)
Buy-out of
non-controlling
interests - - - - (0.7) (0.7) (4.4) (5.1)
Repurchase of
shares from
non-controlling
interests - - - - - - (0.6) (0.6)
Share based
payments 28 - - - - 0.1 0.1 - 0.1
----------------- ----- --------- --------- -------- --------- --------- ------------- ------------- --------
At 31 December
2013 0.7 455.7 (1.6) (94.4) 349.5 709.9 1.1 711.0
----------------- ----- --------- --------- -------- --------- --------- ------------- ------------- --------
Nature and Purpose of Group Reserves
Share premium account: The share premium account represents the difference between the price at which
shares are issued and their nominal value, less any distributions made from this account.
Own shares: Own shares represents the cost of shares held in trust for settling share-based payments and
shares held in treasury.
Retained earnings: Retained earnings represents the cumulative comprehensive income retained by the Group
after taxation and after any distributions made from this account.
Reserves: The balance results from a share cancellation less a legal reserve.
-----------------------------------------------------------------------------------------------------------
The accompanying Notes are an integral part of the annual
accounts.
Notes to the Consolidated Financial Statements
1 General information
The consolidated financial statements of Brit PLC and its
subsidiaries (collectively, the Group) for the year ended 31
December 2014 were authorised for issue in accordance with a
resolution of the Directors on 24 February 2015.
Brit PLC (the Company) is a limited company, incorporated and
domiciled in England and Wales, whose shares are publicly traded.
The Group's principal activity is the underwriting of general
insurance and reinsurance business.
2 Accounting policies and basis of preparation
2.1 Corporate reorganisation
Brit PLC was incorporated as a limited company on 19 December
2013 and was subsequently re-registered as a public limited company
on 24 March 2014.
On 28 March 2014, Brit PLC acquired the entire share capital of
the former ultimate holding company of the Group, Achilles Holdings
1 S.à.r.l.. Brit PLC was introduced as a new parent to the Achilles
Insurance Group by the principal investors who were the same before
and after the reorganisation.
Brit PLC's ordinary shares were admitted to trading on the
London Stock Exchange on 2 April 2014.
On the basis that the transaction was effected by creating a new
parent that is itself not a business, the transaction is considered
to be outside the scope of IFRS 3 Business Combinations. It has
therefore been accounted for using the pooling of interest method
as a continuation of the existing Group. The result is that the
consolidated financial statements of Brit PLC are the same as those
previously presented by Achilles Holdings 1 S.à.r.l., except for
the share capital being that of Brit PLC.
2.2 Basis of preparation
The consolidated financial statements for the year ended 31
December 2014 have been prepared in accordance with International
Financial Reporting Standards (IFRS) as adopted by the European
Union (EU).
The consolidated financial statements have been prepared on a
historical cost basis, except for financial investments and
derivative contracts which have been measured at fair value. The
consolidated financial statements are presented in Sterling and all
values are rounded to the nearest GBP0.1m except where otherwise
indicated.
Certain amounts recorded in the financial information include
estimates and assumptions made by management, particularly about
insurance liability reserves, investment valuations, interest rates
and other factors. Actual results may differ from the estimates
made.
The consolidated financial statements include the results of the
Company and all its subsidiary undertakings (collectively, the
Group) made up to the same accounting date.
The Group has adopted the following new standards and amendments
to standards with a date of initial application of 1 January
2014:
(a) Offsetting Financial Assets and Financial Liabilities - Amendments to IAS 32
These amendments clarify the meaning of 'currently has a legally
enforceable right to set-off' and also clarify the criteria for
non-simultaneous settlement mechanisms of clearing houses to
qualify for offsetting. These amendments have no impact on the
Group.
(b) Recoverable Amount Disclosures for Non-Financial Assets - Amendments to IAS 36
These amendments remove the unintended consequences of IFRS 13
'Fair Value Measurement' on the disclosures required under IAS 36
'Impairment of Assets'. In addition, these amendments require
disclosure of the recoverable amounts for the assets or
cash-generating units (CGUs) for which an impairment loss has been
recognised or reversed during the period. These amendments have no
impact on the Group.
(c) Novation of Derivatives and Continuation of Hedge Accounting - Amendments to IAS 39
These amendments provide relief from discontinuing hedge
accounting when novation of a derivative designated as a hedging
instrument meets certain criteria. These amendments have no impact
on the Group.
(d) IFRIC 21- Levies
IFRIC 21 was endorsed by the EU for periods commencing on or
after 17 June 2014. Earlier application was permitted and hence the
Group has early adopted the IFRIC in accordance with the IASB
effective date of 1 January 2014. It is applicable to all levies
imposed by governments under legislation, other than outflows that
are within the scope of other standards. The interpretation
clarifies that an entity recognises a liability for a levy no
earlier than when the activity that triggers payment, as identified
by the relevant legislation, occurs. It also clarifies that a levy
liability is accrued progressively only if the activity that
triggers payment occurs over a period of time, in accordance with
the relevant legislation. IFRIC 21 has no impact on the Group.
At the date of authorisation of these financial statements, the
following standards which have not been applied in these financial
statements were in issue but not yet effective:
Standard Effective
------------------------------------- ---------------------------------
IFRS 14 Regulatory Deferral Accounts Periods commencing on or after 1
(2014) January 2016
IFRS 15 Revenue From Contracts With Periods commencing on or after 1
Customers (2014) January 2017
IFRS 9 Financial Instruments (2013) Periods commencing on or after 1
January 2018
------------------------------------- ---------------------------------
In November 2009, as part of the phased project to replace IAS
39 'Financial Instruments: Recognition and Measurement', the IASB
issued IFRS 9 'Financial Instruments' which reconsiders the
classification and measurement of financial assets. This standard
has not yet been endorsed by the EU. The Group plans to assess the
impact of this standard on its financial statements in conjunction
with the revised standard on IFRS 4 'Insurance Contracts' which is
expected to be effective from no earlier than 2018. The Directors
anticipate that the adoption of the other standards in future
periods will have no material impact on the financial statements of
the Group.
2.3 Basis of consolidation
The consolidated accounts include the accounts of the Company,
its subsidiaries and the Group's participation in Lloyd's
syndicates' assets, liabilities, revenues and expenses.
Subsidiaries are those entities (including structured entities)
that an investor controls, when it is exposed, or has rights, to
variable returns from its involvement with the investee and has the
ability to affect those returns through its power over the
investee. The financial statements of subsidiaries are prepared up
to 31 December each year. Consolidation adjustments are made to
convert subsidiary accounts from local GAAP into IFRS so as to
remove any dissimilar accounting policies that may exist.
Subsidiaries are consolidated from the date control is transferred
to the Group and cease to be consolidated from the date control is
transferred from the Group. All inter-company balances, profits and
transactions are eliminated.
2.4 Product classification
Insurance contracts are those contracts that transfer
significant insurance risk. The significance of insurance risk is
dependent on both the probability of an insured event and the
magnitude of its potential effect to the policyholder.
Once a contract has been classified as an insurance contract, it
remains an insurance contract for the remainder of its lifetime,
even if the insurance risk reduces significantly during this
period.
Where the Group has issued financial guarantee contracts these
have been regarded as insurance contracts and have been accounted
for in accordance with IFRS 4 'Insurance Contracts'.
2.5 Other accounting policies
2.5.1 Insurance contracts
(a) Premiums
Premiums written relate to business incepted during the year,
together with any differences between booked premiums for prior
years and those previously accrued, and include estimates of
premiums due but not yet receivable or notified, less an allowance
for cancellations. Premiums are accreted to the income statement on
a pro rata basis over the term of the related policy, except for
those contracts where the period of risk differs significantly from
the contract period. In these circumstances, premiums are
recognised over the period of risk in proportion to the amount of
insurance protection provided. Reinstatement premiums are accreted
to the income statement on a pro rata basis over the term of the
original policy to which it relates. Premiums are shown net of
premium taxes and other levies on premiums. Pipeline premium
estimates are typically based on using standard actuarial
projection techniques (e.g. Basic Chain Ladder) on the key
assumption that historical development of premiums is
representative of future development.
(b) Profit commissions and overrider commissions receivable
Profit commission income arising from whole account quota share
contracts is recognised when the economic benefits are highly
probable. Profit commissions and overrider commissions are netted
off commission costs which are included within the 'acquisition
cost' line in the income statement.
(c) Deferred acquisition costs
Commission and other acquisition costs incurred during the
financial period that are related to securing new insurance
contracts and/or renewing existing insurance contracts, but which
relate to subsequent financial periods, are deferred to the extent
that they are recoverable out of future revenue margins. Deferred
acquisition costs are capitalised and amortised over the life of
the policy to which they relate on a basis consistent with the
earnings pattern of that policy.
(d) Claims incurred
Claims incurred comprise claims and claims handling costs paid
in the year and changes in the outstanding claims provisions,
including provisions for claims incurred but not reported and
related expenses, together with any adjustments to claims from
prior years. Claims handling costs are mainly those external costs
related to the negotiation and settlement of claims.
(e) Outstanding claims provisions
Outstanding claims represent the estimated ultimate cost of
settling all claims (including direct and indirect claims
settlement costs) arising from events which have occurred up to the
date of the statement of financial position, including provision
for claims incurred but not reported, less any amounts paid in
respect of those claims. The Group does not discount its
liabilities for unpaid claims, the ultimate cost of which cannot be
known with certainty at the date of the statement of financial
position.
(f) Provision for unearned premiums
The proportion of written premiums that relate to unexpired
terms of policies in force at the date of the statement of
financial position is deferred as a provision for unearned
premiums, generally calculated on a time apportioned basis. The
movement in the provision is taken to the income statement in order
that revenue is recognised over the period of the risk.
(g) Liability adequacy tests
At the date of each statement of financial position, liability
adequacy tests are performed, to ensure the adequacy of unearned
premiums net of related deferred acquisition costs, employing the
current estimates of future cash flows under its insurance
contracts. If as a result of these tests, the carrying amount of
the Group's insurance liabilities is found to be inadequate in
comparison to the value of these future cash flows, the deficiency
is charged to the income statement for the period by establishing
an unexpired risk provision. The tests are performed at a whole
account and portfolio level at the Statement of Financial Position
date to ensure the estimated costs of future claims and related
deferred acquisition costs do not exceed the unearned premium
provision.
(h) Reinsurance
The Group assumes and cedes reinsurance in the normal course of
business. Premiums and claims on reinsurance assumed are recognised
in the income statement along the same basis as direct business,
taking into account the product classification. Reinsurance
premiums ceded and reinsurance recoveries on claims incurred are
included in the respective expense and income accounts. Reinsurance
outwards premiums are earned according to the nature of the cover.
'Losses occurring during' policies are earned evenly over the
policy period. 'Risks attaching' policies are expensed on the same
basis as the inwards business being protected. Reinstatement
premiums on both inwards and outwards business are accreted to the
income statement on a pro rata basis over the term of the original
policy to which they relate.
Reinsurance assets include amounts recoverable from reinsurance
companies for paid and unpaid losses and loss adjustment expenses,
and ceded unearned premiums. Amounts recoverable from reinsurers
are calculated with reference to the claims liability associated
with the reinsured risks. Revenues and expenses arising from
reinsurance agreements are therefore recognised in accordance with
the underlying risk of the business reinsured.
Gains or losses on buying reinsurance are recognised immediately
in the income statement.
If a reinsurance asset is impaired, the Group reduces its
carrying amount accordingly, and will immediately recognise the
impairment loss in the income statement. A reinsurance asset will
be deemed to be impaired if there is objective evidence, as a
result of an event that occurred after initial recognition of the
asset, that the Group may not receive all amounts due to it under
the terms of the contract, and that the event has a reliably
measurable impact on the amounts that the Group will receive from
the reinsurer.
Gains or losses on buying retroactive reinsurance are recognised
immediately in the income statement and are not amortised. Premiums
ceded and claims reimbursed are presented on a gross basis in the
consolidated income statement and statement of financial position
as appropriate.
(i) Syndicate assets and liabilities
For each managed syndicate on which the Group participates, the
Group's proportion of the syndicate's assets and liabilities has
been reflected in its consolidated statement of financial position.
Syndicate assets are held subject to trust deeds for the benefit of
the syndicate's insurance creditors.
2.5.2 Revenue recognition
(a) Fee and commission income
Fee and commission income consists mainly of administration and
broking fees charged to third parties. It is recognised in the
accounting period in which the service is rendered by reference to
completion of the specific transaction, assessed on the basis of
the actual service provided as a proportion of the total services
to be provided.
(b) Investment return
Investment income comprises all interest and dividend income and
realised and unrealised gains and losses less investment management
fees. Interest income is recognised using the effective interest
method. Dividend income is recognised when the shareholders' right
to receive the payment is established.
Realised gains and losses on investments are calculated as the
difference between net sales proceeds and cost and are recognised
when the sale transaction occurs.
Unrealised gains and losses on investments are calculated as the
difference between the valuation at the date of the statement of
financial position and the valuation at the last statement of
financial position or purchase price, if acquired during the year.
Unrealised investment gains and losses include adjustments in
respect of unrealised gains and losses recorded in prior years
which have been realised during the year and are reported as
realised gains and losses in the current year's income
statement.
2.5.3 Recognition and derecognition of financial assets and financial liabilities
Financial assets and financial liabilities are recognised when
the Group becomes a party to the contractual provisions of the
contract.
A financial asset is derecognised when either the contractual
rights to the asset's cash flows expire, or the asset is
transferred and the transfer qualifies for derecognition under a
combination of risks and rewards and control tests.
A financial liability is derecognised when it is extinguished
which is when the obligation in the contract is discharged,
cancelled or expired.
All 'regular way purchases and sales' of financial assets are
recognised on the trade date, i.e. the date that the Group commits
to purchase or sell the asset. Regular way purchases and sales are
purchases and sales of financial assets that require delivery of
assets within the time frame generally established by regulation or
convention in the marketplace.
2.5.4 Investments
The Group has designated on initial recognition its financial
assets held for investment purposes (investments) at fair value
through profit or loss (FVTPL). This is in accordance with the
Group's documented investment strategy and consistent with
investment risk being assessed on a portfolio basis. Information
relating to investments is provided internally to the Group's
Directors and key managers on a fair value basis.
Fair value is the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. The fair value of
financial assets and liabilities traded in active markets (which
are the principal markets or the most advantageous markets that
maximise the amount that would be received to sell the asset or
minimises the amount that would be paid to transfer the liability)
are based on quoted market bid and ask price for both financial
assets and financial liabilities respectively.
The fair value of financial assets and liabilities that are not
traded in an active market, including over-the-counter derivatives,
is determined using valuation techniques. The Group uses a variety
of methods and makes assumptions that are based on market
conditions existing at each reporting date. Valuation techniques
include the use of comparable recent arm's length transactions,
reference to other instruments that are substantially the same,
discounted cash flow analysis, option pricing models and others
commonly used by market participants and which make the maximum use
of observable inputs.
Gains and losses on investments designated as FVTPL are
recognised through the income statement. Interest income from
investments in bonds and short-term investments is recognised at
the effective interest rate. Interest receivable is shown
separately in the statement of financial position based on the debt
instruments' stated rates of interest.
2.5.5 Derivatives
Derivative financial instruments include foreign exchange
contracts, forward rate agreements, interest rate futures, currency
and interest rate swaps and other financial instruments that derive
their value mainly from underlying interest rates, foreign exchange
rates, credit indices, commodity values or equity instruments. All
derivatives are initially recognised in the statement of financial
position at their fair value, which represents their cost. They are
subsequently remeasured at their fair value, with the method of
recognising movements in this value in the income statement. Fair
values are obtained from quoted market prices or, if these are not
available, by using valuation techniques such as discounted cash
flow models or option pricing models.
All derivatives are carried as assets when the fair values are
positive and as liabilities when the fair values are negative.
Derivative contracts may be traded on an exchange or
over-the-counter (OTC). Exchange-traded derivatives are
standardised and include certain futures and option contracts. OTC
derivative contracts are individually negotiated between
contracting parties and include forwards and swaps.
Derivatives are subject to various risks including market,
liquidity and credit risk, similar to those related to the
underlying financial instruments. Many OTC transactions are
contracted and documented under International Swaps and Derivatives
Association (ISDA) master agreements or their equivalent, which are
designed to provide legally enforceable set-off in the event of
default, reducing the Group's exposure to credit risk. The notional
or contractual amounts associated with derivative financial
instruments are not recorded as assets or liabilities on the
statement of financial position as they do not represent the fair
value of these transactions.
2.5.6 Intangible assets
(a) Syndicate participation rights
Lloyd's syndicate participation rights that have been acquired
on acquisition of a subsidiary are initially recognised at fair
value. They are considered to have an indefinite useful life as
they will provide benefits over an indefinite future period and are
therefore not subject to an annual amortisation charge. The
continuing value of the capacity is reviewed for impairment
annually by reference to the expected future profit streams to be
earned from the respective syndicate, with any impairment in value
being charged to the income statement.
(b) Computer software
Acquired computer software licences are capitalised on the basis
of the costs incurred to acquire and bring into use the specific
software. Internal development costs that are directly associated
with the production of identifiable and unique software products
controlled by the Group are also capitalised where the cost can be
measured reliably, the Group intends to and has adequate resources
to complete development and the computer software will generate
future economic benefits.
All computer software costs are finite life assets and amortised
on a straight-line basis over their expected useful lives, not
exceeding a period of five years.
(c) Trade names and distribution channels
Trade names and distribution channels that have been acquired on
acquisition of a subsidiary are initially recognised at fair value.
They are deemed to be finite life assets and amortised on a
straight-line basis over their expected useful economic lives, as
follows:
Trade names 5 years
Distribution channels 15 years
---------------------- ---------
(d) Renewal rights
Renewal rights are recognised at fair value upon acquisition and
amortised straight line over their expected useful lives which
varies between two and four years.
2.5.7 Property, plant and equipment
Property, plant and equipment are carried at cost, less
accumulated depreciation and any impairment in value. Depreciation
is calculated so as to write-off the cost over their estimated
useful economic lives on a straight-line basis having regard to the
residual value of each asset, as follows:
Office refurbishment costs, office machinery, furniture 5 years
and equipment
Computers, servers, data storage devices, networks and 3 years
other IT infrastructure
-------------------------------------------------------- --------
The assets' residual values and useful lives are reviewed at the
date of each statement of financial position and adjusted if
appropriate.
An item of property, plant and equipment is derecognised upon
disposal or when no future economic benefits are expected to arise
from the continued use of the asset. Gains and losses on the
disposal of property, plant and equipment are determined by
comparing proceeds with the carrying amount of the asset and are
included in the income statement. Costs for repairs and maintenance
are expensed as incurred.
2.5.8 Impairment
Syndicate participation rights are not subjected to amortisation
but are tested annually for impairment as they are an asset with an
indefinite useful life. Other assets, except for assets arising
from insurance contracts, are tested for impairment whenever events
or changes in circumstances indicate that the carrying amount may
not be recoverable.
If the carrying value of an asset is impaired, it is reduced to
the recoverable amount by an immediate charge to the income
statement. The recoverable amount is the higher of an asset's fair
value less costs to sell and value in use.
Value in use is based on discounting cash flows at the Group's
weighted average cost of capital which is loaded where significant
uncertainties exist. Assets are grouped at the lowest levels for
which there are separately identifiable cash flows (cash-generating
units).
Impairment reviews are made by comparing carrying value to
recoverable amount.
2.5.9 Cash and cash equivalents
Cash and cash equivalents in the statement of financial position
include cash in hand, deposits held at call with banks and other
short-term highly liquid investments with a maturity of three
months or less at the date of acquisition.
2.5.10 Income taxes
Income tax comprises current and deferred tax. Income tax is
recognised in the income statement except where it relates to an
item which is recognised in equity.
(a) Current income tax
Current income tax is the expected tax payable on the taxable
profit for the period using tax rates (and laws) enacted or
substantively enacted at the date of the statement of financial
position and any adjustment to the tax payable in respect of
previous periods. The Group calculates current income tax using
current income tax rates.
(b) Deferred income tax
Deferred income tax is provided in full, using the liability
method, on temporary differences arising between the tax bases of
assets and liabilities and their carrying amounts in the
consolidated financial statements. However, if the deferred income
tax arises from initial recognition of an asset or liability in a
transaction other than a business combination that at the time of
the transaction affects neither accounting nor taxable profit or
loss, it is not recognised.
Deferred income tax is determined using tax rates (and laws)
that have been enacted or substantively enacted by the date of the
statement of financial position 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.
Deferred income tax relating to items recognised in other
comprehensive income is also recognised in other comprehensive
income.
Deferred income tax is provided on temporary differences arising
on investments in subsidiaries and associates, except where the
Group controls the timing of the reversal of the temporary
difference and it is probable that the temporary difference will
not reverse in the foreseeable future.
Deferred income tax assets and liabilities are offset when there
is a legally enforceable right to offset current tax assets against
current tax liabilities and when the deferred income taxes relate
to the same fiscal authority.
Deferred tax assets and liabilities are not discounted.
2.5.11 Employee benefits
The Group operates a defined contribution group personal pension
plan and several other defined contribution schemes. It also makes
payments into a number of personal money purchase pension plans.
Contributions in respect of these schemes are charged to the income
statement in the period to which they relate.
The Group also operates a defined benefit pension scheme. The
asset recognised in the statement of financial position in respect
of the defined benefit scheme is the fair value of the scheme
assets less the present value of the defined benefit obligation
which is determined by discounting the estimated future cash
outflows. The discount rate is based on market yields at the
reporting date of high-quality corporate bonds that have terms to
maturity which approximate to those of the related pension
liability.
Actuarial gains and losses are recognised immediately through
other comprehensive income.
The Group determines the net interest expense/income on the net
defined benefit liability/asset for the period by applying the
discount rate used to measure the defined benefit obligation at the
beginning of the annual period to the net defined benefit
liability/asset.
Past service costs arising in the period are recognised as an
expense at the earlier of the date when the plan amendment or
curtailment occurs and the date when the Group recognises related
restructuring costs or termination benefits.
The Group recognises an accrual in respect of profit-sharing and
bonus plans where a contractual obligation to employees exists or
where there is a past practice that has created a constructive
obligation.
2.5.12 Share-based payments
The fair value of equity instruments granted under share-based
payment plans are recognised as an expense and spread over the
vesting period of the instrument. The total amount to be expensed
is determined by reference to the fair value of the awards made at
the grant date, excluding the impact of any non-market vesting
conditions. At the date of each statement of financial position,
the Group revises its estimate of the number of equity instruments
that are expected to become exercisable. It recognises the impact
of the revision of original estimates, if any, in the income
statement, and a corresponding adjustment is made to equity over
the remaining vesting period. The fair value of the awards and
ultimate expense are not adjusted on a change in market vesting
conditions during the vesting period.
2.5.13 Earnings per share
Basic earnings per share are calculated by dividing profit after
tax attributable to equity shareholders of the parent company by
the weighted average number of ordinary shares in issue during the
period.
Diluted earnings per share requires that the weighted average
number of ordinary shares in issue is adjusted to assume conversion
of all dilutive potential ordinary shares. These arise from awards
made under share-based incentive schemes. Share awards with
performance conditions attaching to them are not considered to be
dilutive unless these conditions have been met at the reporting
date.
Shares held in employee share trusts are excluded from the
weighted average number of shares in issue until they have vested
unconditionally with the employees.
2.5.14 Own shares
Where the Company purchases its own share capital, the
consideration paid is shown as a deduction from total shareholders'
equity. No gain or loss is recognised in the income statement on
the purchase, sale, issue or cancellation of own shares and any
consideration paid or received is recognised directly in
equity.
2.5.15 Provisions and contingencies
Provisions are liabilities with uncertainties in the amount or
timing of payments. Provisions are recognised if there is a present
obligation as a result of past events, it is probable that an
outflow of resources embodying economic benefits will be required
to settle the obligation, and a reliable estimate of the amount of
the obligation can be made at the date of the statement of
financial position.
A contingent liability is a possible obligation that arises from
past events or a present obligation that is not recognised as it is
not probable that an outflow of resources will be required to
settle the obligation or the amount of obligation cannot be
measured with sufficient reliability. A contingent liability is
disclosed but not recognised.
2.5.16 Leased assets
Where the Group enters into an operating lease, the payments
(net of any incentives received from the lessor) are charged to the
income statement on a straight-line basis over the lease term.
An operating lease is one in which the risks and rewards remain
with the lessor.
2.5.17 Foreign currency translation
Items included in the financial statements of the parent and
subsidiaries are measured using the functional currency which is
the primary economic environment in which the entity operates. The
Group present its consolidated financial statements in Sterling
which is the functional currency of the parent.
Foreign currency transactions are recorded in the functional
currency for each entity using the exchange rates prevailing at the
dates of the transactions or at the average rate for the period
when this is a reasonable approximation. Substantially all of the
Group's operations have Sterling as their functional currency.
Monetary assets and liabilities denominated in foreign currencies
are translated at period end exchange rates. The resulting exchange
differences on translation are recorded in the income statement.
Non-monetary assets and liabilities that are measured at historical
cost denominated in a foreign currency are not retranslated.
2.5.18 Borrowings
Borrowings are initially recognised at fair value, net of
transaction costs incurred and subsequently stated at amortised
cost. Fair value is normally determined by reference to the fair
value of the proceeds received. 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 rate method.
2.5.19 Segmental reporting
An operating segment is a component of an entity that engages in
business activities from which it may earn revenues and incur
expenses, whose operating results are regularly reviewed by the
entity's chief operating decision maker and for which discrete
financial information is available.
2.5.20 Loans and receivables
Loans and receivables are financial assets with fixed or
determinable payments. Loans and receivables are measured at
amortised cost, using the effective interest rate method.
2.5.21 Offsetting of financial instruments
Financial assets and liabilities are offset and the net amount
reported in the statement of financial position only when there is
a legally enforceable right to offset the recognised amounts and
there is an intention to settle on a net basis, or to realise the
assets and settle the liability simultaneously.
2.5.22 Dividend and capital distributions
Dividend and capital distributions to the Company's shareholders
are recognised in the Group's financial statements in the period in
which they are declared and appropriately approved.
2.5.23 Collateral
The Group receives collateral from certain reinsurers and
pledges collateral where required for regulatory purposes.
Collateral received in the form of cash is recognised as an
asset on the statement of financial position with a corresponding
liability for the repayment. Non-cash collateral received is not
recognised on the statement of financial position.
Collateral pledged is not derecognised from the statement of
financial position unless the Group defaults on its obligations
under the relevant agreement.
3 Critical accounting estimates and judgements in applying accounting policies
3.1 Introduction
The Group makes various assumptions that affect the reported
amounts of assets and liabilities. Estimates and judgements are
regularly re-evaluated and are based on a combination of historical
experience and other factors, including exposure analysis,
expectations of future experience and expert judgement.
3.2 The ultimate liability arising from claims made under insurance contracts
The estimation of the ultimate liability arising from claims
made under insurance contracts is the Group's most critical
accounting estimate. There are several sources of uncertainty that
need to be considered in the estimate of the amounts that the Group
will ultimately pay to settle such claims. Significant areas
requiring estimation and judgement include:
-- Estimates of the amount of any liability in respect of claims
notified but not settled and incurred but not reported claims
(IBNR) to be included within provisions for inwards insurance and
reinsurance contracts;
-- The corresponding estimate of the amount of outwards
reinsurance recoveries which will become due as a result of the
estimated claims on inwards business;
-- The recoverability of amounts due from reinsurers; and
-- Estimates of the proportion of exposure which has expired in
the period as represented by the earned proportion of premiums
written.
The assumptions used and the manner in which these estimates and
judgements are made are set out below, including the reserving
process for the estimation of gross, and net of reinsurance,
ultimate premiums and claims:
-- Quarterly statistical data is produced in respect of gross
and net premiums and claims (paid and incurred);
-- Projections of ultimate premiums, reinstatement premiums and
claims are produced by the internal actuarial department using
standard actuarial projection techniques (e.g. Basic Chain Ladder,
Bornhuetter-Ferguson, Initial Expected Loss Ratio). The Basic Chain
Ladder and Bornhuetter-Ferguson projection methods are based on the
key assumption that historical development of premiums and claims
is representative of future development. Claims inflation is taken
into account in the Initial Expected Loss Ratio selections but is
otherwise assumed to be in line with historical inflation trends,
unless explicit adjustments for other drivers of inflation such as
legislative developments are deemed appropriate.
-- Some classes of business have characteristics which do not
necessarily lend themselves easily to statistical estimation
techniques e.g. due to low data volumes. In such cases, for
example, a policy-by-policy review may also be carried out to
supplement statistical estimates;
-- In the event of catastrophe losses, and prior to detailed
claims information becoming available, claims provision estimates
are compiled using a combination of output from specific recognised
modelling software and detailed reviews of contracts exposed to the
event in question;
-- The initial ultimate selections derived by the actuarial
department, along with the underlying key assumptions and
methodology, are discussed with class underwriters, divisional
underwriting directors and the claims team at 'Pre-Committee'
meetings. The actuarial department may make adjustments to the
initial ultimates following these meetings;
-- Following the completion of the 'Pre-Committee' meetings and
peer review process within the actuarial department, the ultimate
selections (Actuarial Estimate), assumptions, methodology and
uncertainties are presented to the Reserving Committee, chaired by
the Chief Financial Officer and reporting to the Executive
Management Committee for discussion and debate;
-- Following review of the Actuarial Estimate, the Reserving
Committee recommends the Committee Estimate to be adopted in the
financial statements; and
-- Claims provisions are subject to independent external actuarial review at least annually.
The results of the independent external actuarial review are
presented to both the Reserving Committee and the Audit Committee
with key assumptions, methodologies and uncertainties also
highlighted. The purpose of the external review is to provide both
committees with an independent actuarial view of reserve
requirements compared to the recommendations of the internal
actuarial department and provide additional information on which to
base the establishment of the reserves for the Group.
The estimates and judgements are applied in line with the
overall reserving philosophy and seek to state the claims
provisions on a best estimate, undiscounted basis. A management
risk margin is also applied over and above the actuarial best
estimate to allow for the inherent uncertainty within the best
estimate reserve position.
In addition to claims provisions, the reserve for future loss
adjustment expenses is also subject to estimation with
consideration being given to the level of internal and third party
loss adjustment expenses incurred annually. The estimated loss
adjustment expenses are expressed as a percentage of gross claims
reserves and the reasonableness of the estimate is assessed through
benchmarking. Further judgements are made as to the recoverability
of amounts due from reinsurers. Provisions for bad debts are made
specifically, based on the solvency of reinsurers, internal and
external ratings, payment experience with them and any disputes of
which the Group is aware.
The carrying value at the date of the statement of financial
position of gross claims reported and loss adjustment expenses and
claims incurred but not reported were GBP2,057.9m (2013:
GBP2,097.7m) as set out in Note 16. The amount of reinsurance
recoveries estimated at that date is GBP445.4m (2013:
GBP374.0m).
3.3 Pipeline premiums
Written premiums include pipeline premiums of GBP292.2m (2013:
GBP234.4m) which represent future premiums receivable on in-force
insurance contracts. Pipeline premium estimates are typically based
on standard actuarial projection techniques (e.g. Basic Chain
Ladder) on the key assumption that historical development of
premiums is representative of future development.
3.4 Intangible assets
Intangible assets with indefinite useful lives are tested for
impairment on an annual basis in accordance with IAS 36 'Impairment
of Assets'. Determining the assumptions used in the test requires
estimation. The indefinite useful life intangible assets of the
Group consist of syndicate participation rights and their carrying
amount at the date of the statement of financial position was
GBP45.4m (2013: GBP45.4m). For further information, refer to Note
14.
3.5 Financial investments
Financial investments are carried in the statement of financial
position at fair value. The carrying amount of financial
investments at the date of the statement of financial position was
GBP2,259.8m (2013: GBP2,275.9m). Determining the fair value of
certain investments requires estimation.
The Group value investments using designated methodologies,
estimation and assumptions. These securities, which are reported at
fair value on the consolidated statement of financial position,
represent the majority of the invested assets. The measurement
basis for assets carried at fair value is categorised into a 'fair
value hierarchy' in accordance with the valuation inputs and
consistent with IFRS 13 'Fair Value Measurement'. The fair value
hierarchy gives the highest priority to quoted prices in active
markets for identical assets or liabilities (level one); the middle
priority to fair values other than quoted prices based on
observable market information (level two); and the lowest priority
to unobservable inputs that reflect the assumptions that we
consider market participants would normally use (level three). At
31 December 2014, financial investments amounting to GBP202.6m
(2013: GBP331.7m) were classified as level three.
The classification within the fair value hierarchy is based on
the lowest level of significant input to its valuation. Any change
to investment valuations may affect our results of operations and
reported financial condition. For further information, refer to
Note 17.
4 Risk management policies
4.1 Insurance risk
Insurance risk arises from the possibility of an adverse
financial result due to actual experience being different from that
expected when an insurance product was designed and priced. The
actual performance of insurance contracts is subject to the
inherent uncertainty in the occurrence, timing and amount of the
final insurance liabilities. This is the principal risk the Group
is exposed to as the Group's primary function is to underwrite
insurance contracts. The risk arises due to the possibility of
insurance contracts being under-priced, under-reserved or subject
to unforeseen catastrophe claims.
The areas of insurance risk discussed below include underwriting
(including aggregate exposure management), reinsurance and
reserving.
4.1.1 Underwriting risk
(a) Introduction
This is the risk that insurance premiums will not be sufficient
to cover the future losses and associated expenses. It arises from
the fluctuations in the frequency and severity of financial losses
incurred through the underwriting process by the Group as a result
of unpredictable events.
The Group is also exposed to the risks resulting from its
underwriters accepting risks for premiums which are insufficient to
cover the ultimate claims which result from such policies. This
risk is considered to be heightened in the current competitive
underwriting environment which is resulting in significant
downwards pressure on premium rates. This trend in premium rates
has been factored into the Group's pricing models and risk
management tools and is continually monitored to assess whether any
corrective action is required. Additional controls over the
underwriting strategy are described in the section below.
The Group writes all of its business through Lloyd's and
therefore can take advantage of Lloyd's centralised infrastructure
and service support. Lloyd's also has an established global
distribution framework, with extensive licensing agreements
providing the Group access to over 200 territories. Exclusively
using the Lloyd's platform subjects the Group to a number of
resulting underwriting risks. The Group relies on the efficient
functioning of the Lloyd's market and if for any reason, BSL is
restricted or otherwise unable to write insurance through the
Lloyd's market, this would have a material adverse effect on the
Group's business and results of operations. In particular, any
damage to the brand or reputation of Lloyd's, increase in tax
levies imposed on Lloyd's participants or deterioration in Lloyd's
asset base when compared with its liabilities may have a material
adverse effect on the Group's ability to write new business.
BSL also benefits from the ability to write business based on
the Lloyd's financial rating, which allows the Group to write more
business as part of the Lloyd's platform. A downgrade in Lloyd's
financial strength ratings may have an adverse effect on the
Group.
(b) Controls over underwriting strategy
The Board sets the Group's underwriting strategy for accepting
and managing underwriting risk. The PLC Underwriting Committee
chaired by an independent non-executive Director, meets quarterly
and is responsible for the management of underwriting risk in line
with the RMF using specific measurable targets/actions and any
breaches are reported to Executive Management, the Risk Oversight
Committee and the Board.
The UK Underwriting Committee meets monthly to drive the
underwriting strategy and to monitor performance against the plans.
The assessment of underwriting performance is all-encompassing
applying underwriting KPIs, technical pricing MI, premium
monitoring, delegated underwriting operations and claims MI. The
risks are managed by the committee in line with the underwriting
risk policy and within the risk tolerance set by the Board. The
underwriting risk policy also sets out a number of controls, which
are summarised below.
The Group carries out a detailed annual business planning
process for each of its underwriting units. The resulting plans set
out premium, territorial and aggregate limits and reinsurance
protection thresholds for all classes of business and represent a
key tool in managing concentration risk. Performance against the
plans is monitored on a regular basis by the Underwriting Committee
as well as by the Boards of the regulated entities. A dedicated
Exposure Management team also performs Realistic Disaster Scenario
(RDS) analysis on a regular basis to ensure that the Group's net
losses remain within its risk appetite.
The Group has developed underwriting guidelines, limits of
authority and business plans which are binding upon all staff
authorised to underwrite. These are detailed and specific to
underwriters and classes of business. Gross and net line size
limits are in place for each class of business with additional
restrictions in place on catastrophe exposed business.
A proportion of the Group's insurance risks are written by third
parties under delegated underwriting authorities, with the
remaining being written through individual risk acceptances or
through reinsurance treaties. The third parties are closely vetted
in advance and are subject to tight reporting requirements. In
addition, the performance of these contracts is closely monitored
by underwriters and regular audits are carried out.
The technical pricing framework ensures that the pricing process
in the Group is appropriate. It ensures pricing methodologies are
demonstrable and transparent and that technical (or benchmark)
prices are assessed for each risk. The underwriting and actuarial
functions work together to maintain the pricing models and assess
the difference between technical price and actual price. The
framework also ensures that sufficient data is recorded and checked
by underwriters to enable the Group to maintain an effective rate
monitoring process.
Compliance is checked through both a peer review process and,
periodically, by the Group's internal audit department which is
entirely independent of the underwriting units.
In order to limit risk, the number of reinstatements per policy
is limited, deductibles are imposed, policy exclusions are applied
and whenever allowed by statute, maximum indemnity limits are put
in place per insured event.
(c) Underwriting risk profile
The core insurance portfolio of property, energy and casualty
covers a variety of largely uncorrelated events and also provides
some protection against the underwriting cycle as different classes
are at different points in the underwriting cycle. The underwriting
portfolio is managed to target top quartile underwriting
performance and the mix of business is continually adjusted based
on the current environment (including the current pricing strength
of each class). This assessment is conducted as part of the
business planning and strategy process which operates annually and
uses inputs from the technical pricing framework. The business plan
is approved by the Board and is monitored monthly.
The Group underwrites a well-diversified portfolio across
multiple regions and classes. While the underlying risk and the
policyholder may be situated anywhere in the world, more than 90%
of the GWP of the Group in 2014 was sourced in London. The other
business written by the syndicate is sourced through a wholly-owned
service company in the United States, which accounted for 7.8% of
the Group's annual GWP in 2014. The Group has also recently started
writing business through the Lloyd's China Platform and from its
office in Bermuda (which opened in September 2013). In 2014, 21.3%
of the Group's GWP was reinsured to third parties.
(d) Geographical concentration of premium
The Group enters into policies with policyholders from all over
the world, with the underlying risk relating to premiums spread
worldwide. This allows the Group to benefit from a wide geographic
diversification of risk. The three principal locations of the
Group's policyholders are the United States, UK and Ireland and
mainland Europe. The concentration of insurance premium before and
after reinsurance by the location of the underlying risk is
summarised below:
Gross premiums Net premiums
written written
GBPm GBPm
---------------------------- --------------- -------------
2014
United States 501.4 401.9
United Kingdom 96.7 72.6
Europe (excluding UK) 84.0 51.9
Other (including worldwide) 620.0 498.5
----------------------------
1,302.1 1,024.9
---------------------------- --------------- -------------
2013
United States 421.5 336.6
United Kingdom 93.0 68.3
Europe (excluding UK) 61.8 41.8
Other (including worldwide) 609.4 509.6
---------------------------- --------------- -------------
1,185.7 956.3
---------------------------- --------------- -------------
The nature of the London Market business is such that the
insureds and reinsureds are often operating on a multi-territory or
worldwide basis and hence coverage is often provided on a worldwide
basis. Premiums written on a multi-territory or worldwide basis are
included in "Other" in the table above.
(e) Portfolio mix
The Group's third party underwriting takes place through the
syndicate underwriting business in a wide variety of business
lines. The business lines can be broken down into four principal
categories: (i) short-tail direct insurance; (ii) long-tail direct
insurance; (iii) short-tail reinsurance; and (iv) long-tail
reinsurance.
The breakdown of premium before reinsurance by principal lines
of business is summarised below:
2014 2013
Gross premiums Gross premiums
written written
GBPm % GBPm %
Property, marine, energy, accident
Short-tail direct and health, BGSU, aerospace, terrorism
insurance and political 717.6 55% 599.2 50%
Long-tail direct Professional lines, specialty lines,
insurance specialist liability 339.2 26% 303.9 26%
Short-tail Reinsurance Property treaty 109.6 8% 139.6 12%
Long-tail Reinsurance Casualty treaty 135.7 10% 141.4 12%
Other Other underwriting and other corporate - <1% 1.6 <1%
------------------------ ----------------------------------------- ---------- ------ ---------- ------
1,302.1 100% 1,185.7 100%
------------------------------------------------------------------ ---------- ------ ---------- ------
The Group underwrites a business mix of both insurance and
reinsurance, long and short-tail business across a number of
geographic areas which results in a diversification of the Group's
portfolio. The business mix is monitored on an ongoing basis with
particular focus on the short-tail vs. long-tail split and the
proportion of delegated underwriting business. Long-tail business
makes up 36.5% of the portfolio at 31 December 2014 (2013: 37.4%)
and delegated underwriting represents 38.0% (2013: 41.8%).
Underwriting risk is mainly driven by the syndicate's US
catastrophe exposure. Casualty Treaty is also a driver due to its
long-tail exposure.
i) Short-tail direct insurance
Short-tail insurance generally refers to lines of business where
the claims are typically settled within a short time of the claim
being made; therefore, they are typically classes where a large
element of the claims is property damage.
The Group's short-tail business consists of six principal lines
of business:
Property Property coverage including business interruption
on a worldwide basis and delegated underwriting
business predominantly in North America.
------------------------- -----------------------------------------------------
Marine Coverage for cargo (including specie and fine
art), hull (including yacht) and marine liability.
------------------------- -----------------------------------------------------
Energy Coverage for upstream (offshore) and midstream
activities related to oil and gas production.
------------------------- -----------------------------------------------------
US specialty Public and non-profit package on both a self-insured
retention (SIR) and first dollar basis; property
and liability Package business for US criminal
justice service operations; property direct and
facultative reinsurance.
------------------------- -----------------------------------------------------
Accident and health Coverage for personal accident (including kidnap
and ransom), bloodstock and contingency
------------------------- -----------------------------------------------------
Terrorism, political and Coverage for terrorism (including aviation war),
aerospace political and credit risks, and satellites at
both launch and in-orbit.
------------------------- -----------------------------------------------------
The key risks on short-tail business are exposures to
catastrophe claims, particularly US windstorms, earthquakes, flood
and terrorist events.
The property lines are also exposed to an increased frequency of
fire and weather related events. Coverage on energy is provided in
respect of physical damage and business interruption/loss of income
and would be exposed to large individual claims and extreme
catastrophe losses. Within US specialty, the syndicate writes
business in property direct and facultative reinsurance exposed to
wind, earthquake and flood catastrophe claims as well as expanding
in a number of niche casualty lines. Accident and health offers
further diversification due to low correlation with other business
lines. Personal accident has the potential to suffer from large
losses due to a high concentration of multiple deaths from a
catastrophe or large claims from highly valued insured individuals.
Medical expense claims are subject to high inflationary costs and
may experience a high claim frequency. Both bloodstock and
contingency classes have exposure to multiple claims from a single
event/location. Terrorism, aerospace and political classes have key
exposures to single catastrophe events and terrorist events or a
series of losses.
ii) Long-tail direct insurance
Long-tail insurance refers to insurance where on average the
claims are not settled for several years after the expiry of the
policy. The long-tail direct insurance business can be categorised
into two principal lines of business:
Casualty Includes cover for financial institutions, legal
expenses, directors' and officers', and professional
lines.
--------------------- ------------------------------------------------------
Specialist liability Cover for employers' liability and public liability
both in the UK and internationally but excluding
the US.
--------------------- ------------------------------------------------------
Key exposures on casualty lines lie with increasing claim
frequency due to global recessionary events or international
systemic malpractice. The specialist liability portfolio is subject
to large losses resulting in bodily injury claims. This portfolio
is also exposed to the risk of latent claims arising from risks
which were not envisaged at the time of writing the policy.
iii) Short-tail reinsurance
The Group's short-tail reinsurance business centres around
property treaty. This typically covers catastrophic loss
accumulation or individual large loss ceded by insurance and
reinsurance company clients. The key exposures which property
treaty is exposed to are US windstorms and Californian earthquakes.
Property treaty also has exposures to Japanese earthquakes and
European windstorms.
Property treaty Catastrophe excess of loss and risk excess of
loss reinsurance.
---------------- ----------------------------------------------
iv) Long-tail reinsurance
Introduction
The Group's long-tail reinsurance business centres around
casualty treaty. Core lines of business include Officers', Workers'
Compensation, Medical Malpractice, Accident & Health, and other
accident classes including Property Terror.
Casualty treaty Casualty and accident treaty reinsurance. Worldwide
portfolio, written on excess of loss basis (currently
only one specialist quota share contract written).
The largest regional block is the US and Canada.
The account is a mix of risk, catastrophe and
clash business.
---------------- -------------------------------------------------------
The key risks this division is exposed to include exposure to
man-made catastrophe claims such as terrorism, increased claim
activity in the event of an economic downturn and the potential for
latent claims which were not foreseen at the time the policies were
underwritten. This division contains the longest tailed liabilities
the Group holds, i.e. there can be a significant delay between the
notification and final settlement of a claim. This delay can result
in the final settlement being subject to significant claims
inflation.
Aggregate exposure management
The Group is exposed to the potential of large claims from
natural catastrophe events. The Group's catastrophe risk appetite
is set by the board who may adjust limits to reflect market
conditions. Overall, the Group has a maximum catastrophe risk
tolerance for major catastrophe events (as measured through RDS
losses such as a Florida Miami windstorm) of 30% of Brit PLC Group
level net tangible assets. This equates to a maximum acceptable
loss (after all reinsurance) of GBP229.7m at 31 December 2014.
The Group closely monitors aggregation of exposure to natural
catastrophe events against agreed risk appetites using stochastic
catastrophe modelling tools, along with knowledge of the business,
historical loss information, and geographical accumulations.
Analysis and monitoring also measures the effectiveness of the
Group's reinsurance programmes. Stress and scenario tests are also
run, such as Lloyd's and internally developed Realistic Disaster
Scenarios (RDS). The selection of the RDS is adjusted with
development of the business. Below are the key RDS losses to the
Group for all classes combined (unaudited):
Modelled Modelled
Group loss Group loss
at 1 October 2014 at 1 October 2013
Estimated
Industry Loss (note 1) (note 1)
Gross Net Gross Net
GBPm GBPm GBPm GBPm GBPm
-------------------------- ---------------- ---------- --------- ---------- ---------
Gulf of Mexico windstorm 71,474 449 110 349 149
Florida Miami windstorm 80,128 346 82 262 83
US North East windstorm 50,000 388 83 304 133
San Francisco earthquake 50,000 382 113 273 89
Japan earthquake 26,745 117 86 93 51
Japan windstorm 8,024 55 46 47 34
European windstorm 17,829 140 80 148 79
-------------------------- ---------------- ---------- --------- ---------- ---------
Note 1: At 31 December 2014 foreign exchange rates.
Actual results may differ materially from the losses above given
the significant uncertainties within model assumptions, techniques
and simulations applied to calculate these event loss estimates.
There could also be unmodelled losses which result in actual losses
exceeding these figures. Moreover, the portfolio of insured risks
changes dynamically over time.
Sensitivity to changes in net claims ratio
The Group profit on ordinary activities before tax is sensitive
to an independent 1% change in the net claims ratio (excluding the
effect of foreign exchange on non-monetary items) for each class of
business as follows:
Movement in profit Movement in profit
year ended year ended
31 December 2014 31 December 2013
GBPm % GBPm %
----------------------------- ---------- --------- ---------- ---------
Short-tail direct insurance 5.1 52% 5.0 52%
Long-tail direct insurance 2.5 26% 2.1 22%
Short-tail Reinsurance 0.7 8% 0.9 10%
Long-tail Reinsurance 1.3 13% 1.4 15%
Other 0.1 1% 0.1 1%
----------------------------- ---------- --------- ---------- ---------
9.7 100% 9.5 100%
----------------------------- ---------- --------- ---------- ---------
Subject to taxation, the impact on shareholders' equity would be
the same as that on profit following a change in the net claims
ratio.
4.1.2 Reinsurance
The Group purchases reinsurance to manage its exposure to
individual risks and aggregation of risks arising from individual
large claims and catastrophe events. This allows the Group to
mitigate exposure to insurance losses against the risk appetite,
reduce volatility of reported results and protect capital.
Proportional quota share reinsurance is purchased to provide
protection against claims arising either from individual large
claims or aggregation of losses. Quota share reinsurance is also
used to manage the Group's net exposure to classes of business
where the Group's risk appetite is lower than the efficient
operating scale of the class of business on a gross of reinsurance
basis. These placements are reviewed on the basis of market
conditions.
The Group also has in place a comprehensive programme of excess
of loss reinsurances to protect itself from severe size or
frequency of losses:
-- Facultative reinsurance is used to reduce risk relating to
individual contracts. The amount of cover bought varies by class of
business. Facultative reinsurance is also used as a tool to manage
the net line size on individual risks to within tolerance.
-- Risk excess of loss reinsurance is used to protect a range of
individual inwards contracts which could give rise to individual
large claims. The optimal net retention per risk is assessed for
each class of business given the Group's risk appetite during the
business planning exercise.
-- An aggregate catastrophe excess of loss cover is in place to
protect the Group against combined property claims from multiple
policies resulting from catastrophe events. This is supplemented by
specific covers for peril regions, catastrophe swaps and industry
loss warranties where they are a cost-efficient means to ensure
that the Group remains within its catastrophe risk appetite.
Given the fundamental importance of reinsurance protection to
the Group's risk management, the Group has in place internal
controls and processes to ensure that the reinsurance arrangements
provide appropriate protection of capital and maintain our ability
to meet policyholder obligations. The Head of Outwards Reinsurance,
the CEO of Brit Global Specialty and Chief Risk Officer propose
external reinsurance arrangements with input from class
underwriters for class level reinsurance. The CEO of Brit Global
Specialty proposes reinsurance arrangements with BIG. All
reinsurance purchases must be signed off by the Group's
Underwriting Committee. The Head of Outwards Reinsurance monitors
and reports on the placement of reinsurance protections.
The Group remains exposed to a number of risks relating to its
reinsurance programme:
-- It is possible for extremely severe catastrophe losses to
exhaust the reinsurance purchased. Any losses exceeding the
reinsurance protection would be borne by the Group.
-- Some parts of the programme have limited reinstatements which
limit the amount that may be recovered from second or subsequent
claims. If the entirety of the cover is exhausted, it may not be
possible to purchase additional reinsurance at a reasonable
price.
-- A dispute may arise with a reinsurer which may mean the
recoveries received are lower than anticipated.
These risks are managed through a combination of techniques and
controls including exposure management, capital modelling and
internal actuarial review of outward reinsurance costs. The
counterparty risk in relation to reinsurance purchased is managed
by the Group's Credit Committee. This is further discussed in the
Credit risk section below.
4.1.3 Reserving risk
Reserving risk arises as the actual cost of losses for
policyholder obligations incurred before 31 December 2014 differs
from the established reserves due to inaccurate assumptions or
unforeseen circumstances. This is a key risk for the Group as the
reserves for unpaid losses represent the largest component of the
Group's liabilities and are inherently uncertain. The Reserving
Committee is responsible for the management of Syndicate 2987's
reserving risk, and the BIG Management Committee performs a similar
function for BIG.
The Group has a rigorous process for establishing reserves for
insurance claim liabilities and a number of controls are used to
mitigate reserving risk. The reserving process starts with controls
over claims data which ensure complete and accurate recording of
all paid and notified claims. Claims staff validate policy terms
and conditions, adjust claims and investigate suspicious or
disputed claims in accordance with the Group's claims policy. Case
reserves are set for notified claims using the experience of
specialist claims staff, underwriters and external experts where
necessary.
Whilst the case reserve is expected to be sufficient to meet the
claims amount when it is settled, incurred but not reported (IBNR)
claims require additional reserves. This is particularly the case
for the longest tailed classes of business where the final
settlement can occur several years after the claim occurred.
Actuarial triangulation techniques are employed by the Group's
experienced actuaries to establish the IBNR reserve. These
techniques project IBNR reserves based on historical development of
paid and incurred claims by underwriting year. For the most
uncertain claims, the triangulation techniques are supplemented by
additional methods to ensure the established reserve is
appropriate. The actuarial team work closely with other business
functions such as underwriting, claims and exposure management to
ensure that they have a full understanding of the emerging claims
experience across the Group. Further details on the actuarial
methods used can be found in Note 16.
The Group's reserving policy sets out the approach to estimating
claims provisions and is designed to produce accurate and reliable
estimates that are consistent over time and across classes of
business. The actuarial best estimate set out in the policy is
subject to sign-off by the Reserving Committee, chaired by the
Chief Financial Officer and reporting to the Group's Executive
Management Committee, as part of the formal governance arrangements
for the Group. The estimate agreed by the committees is used as a
basis for the Group financial statements. A management risk margin
is also applied over and above the actuarial best estimate to allow
for the inherent uncertainty within the best estimate reserve
position and wider inherent uncertainty across the economic and
insurance environment. This margin increases the reserves reflected
in the Group financial statements above the mean expectation.
Finally, the reserves in the financial statements are presented to
the Audit Committee for recommendation to the Board who are
responsible for the final sign-off. The reserves are subject to an
independent external actuarial review at least annually.
The reserves can be more or less than is required to meet the
claims arising from earned business. The level of uncertainty
varies significantly between the classes written by the Group but
typically is highest for those classes where there are significant
delays in the settlement of the final claim amount. More
specifically, the key areas of uncertainty within the Group's
reserves are considered to be claims from the casualty treaty and
specialty liability classes. The issues contributing to this
heightened uncertainty are common to all entities which write such
business.
Further details on the reserve profile and claims development
tables can be found in Note 16.
4.2 Investment risk management
4.2.1 Introduction
This section describes the Group's approach to managing its
investment risk, from both a quantitative and a qualitative
perspective. Investment risk includes market risk (which is covered
in section 4.3), investment credit risk (which is covered in
section 4.4) and liquidity risk (which is covered in section
4.5).
4.2.2 Investment governance framework
Investment risk is managed in line with the elements of the
Group Risk Management Framework (RMF) - identification, measurement
and management. The Board has overall responsibility for
determining the investment strategy, including defining the amount
of risk tolerance. This is achieved through investment policies,
guidelines and the Group's Strategic Asset Allocation, by which the
assets are managed, which reflect the risk appetite and the
business strategy of the Group. The Group's Strategic Asset
Allocation is discussed is section 4.2.4 below.
The Investment Committee has been mandated to review, advise and
make recommendations to the Board on investment strategy with a
view to optimising the Group's investment performance. The
Investment Committee can assign the management of these assets to
external investment and fund managers as well as to the internal
investment team.
The Risk Oversight Committee ensures that the investment risk is
managed within the framework and also reports to the Board. An
Operational Risk Working Group oversees the operational risk that
is relevant to the investment management function.
Monthly information is provided covering portfolio composition,
performance, forecasting and the results of stress and scenario
tests. Any operational issues and breaches to the Risk Appetite
Framework are reported to the Risk Oversight Committee and the
Board quarterly.
4.2.3 Risk tolerance
Investment risk tolerances are set by the Board, defining the
Group's appetite to investments earnings risk, solvency risk due
purely to investment, currency risk and liquidity risk. The
appetite to these elements of investment risk is derived from the
overall risk appetite and business strategy of the Group and
reflects a number of factors, including the current and expected
economic climate, capital management strategy, liquidity needs and
asset liability matching (ALM) policy. The investment risk
tolerance helps determine the Strategic Asset Allocation.
Risk metrics are monitored and reported on regularly to ensure
that performance is within the Board-approved levels, and limits
continue to remain appropriate, within the governance framework
highlighted above.
4.2.4 Strategic asset allocation
The Strategic Asset Allocation represents the medium-term target
asset allocation across the economic cycle with the aim to optimise
risk-adjusted returns. Funds are allocated across various asset
classes defined by type or risk reflecting entity-level
considerations and governance matters. Tactical ranges (known as
the Tactical Asset Allocation) around the asset allocation in the
Strategic Asset Allocation provide flexibility to optimise the
balance between risk and return.
The Strategic Asset Allocation has been designed and is managed
within the constraints of the Group's Credit, Foreign Exchange,
Liquidity, and ALM Policies and Guidelines. The Strategic Asset
Allocation, the Tactical Asset Allocation and the investment
guidelines form part of the guidelines framework that is set by the
Investment Committee and approved by the Board, in line with the
Group's risk appetite and business strategy.
4.2.5 Solvency matching
Assets are considered by both currency and duration profile in
relation to the liabilities thereby managing the impact of foreign
exchange and interest rate risk on the solvency position.
Under this strategy, the total assets of each Group underwriting
entity are sought to be held in currencies in proportion to the
currencies in that entity's technical provisions. The Group seeks
to implement this through the use of cash, investments and foreign
exchange forward contracts in the respective currencies.
For each Group underwriting entity, a solvency matched duration
target is calculated that seeks to minimise the sensitivity of the
Group to changes in interest rates impacting its solvency position.
Within the investment guidelines for each entity, limits above and
below this solvency matched position are stipulated. Cash,
investments and interest rate derivatives are structured to target
appropriate positioning within this range recognising the current
yield curve.
4.2.6 Investment management
The Group outsources investment management where it is believed
to be in its best interest. Where the Group sees fit, investment
activities will also be carried out, analysed and monitored by the
Investment department.
The Group aims to appoint 'best in class' managers, targeting
their specific area of expertise. The managers are subject to a
rigorous manager selection process. The Group also monitors and
controls its third party investment managers on an ongoing basis.
Investment management agreements with each internal and external
manager document the relevant guidelines and procedures in place to
deal with monitoring of performance and controls.
The investment guidelines specify the allowable strategic asset
allocations for each investing entity along with the detailed
concentration limits surrounding each of the investment portfolios.
The tactical ranges around the asset allocation provide flexibility
to optimise the balance between risk and return. Investment manager
agreements are constructed so that in aggregate the investment
portfolios are consistent with the parameters set out in the
investment guidelines.
The investment guidelines, derived from the Strategic Asset
Allocation and Tactical Asset Allocation, issued to fund managers
stipulate exposure limits for counterparties, credit quality and
subordination levels to help control credit risk.
4.3 Market risk
4.3.1 Introduction
Market risk is the risk that the fair value or future cash flows
of a financial instrument will fluctuate because of changes in
market prices. Market risk comprises three types of risk: interest
rate risk, currency risk and other price risk. Credit risk on
financial investments and cash is covered in the credit risk
section.
4.3.2 Interest Rate Risk
Introduction
Interest rate risk is the risk that the fair value and/or future
cash flows of a financial instrument will fluctuate because of
changes in interest rates. The Group is exposed to interest rate
risk through its investment portfolio, borrowings and cash and cash
equivalents. The sensitivity of the price of these financial
exposures is indicated by their respective durations. This is
defined as the modified duration which is the change in the price
of the security subject to a 100 basis points parallel shift in
interest rates. The greater the duration of a security, the greater
the possible price volatility.
The banded durations of the Group's financial investments and
cash and cash equivalents sensitive to interest rate risk are shown
in the table below:
Duration 1 year 1 to 3 to Over
or less 3 years 5 years 5 years Equities Total
GBPm GBPm GBPm GBPm GBPm GBPm
--------------------------- --------- --------- --------- --------- --------- --------
At 31 December 2014
Cash and cash equivalents 321.4 - - - - 321.4
Financial Investments 1,222.2 311.2 231.0 468.2 27.2 2,259.8
--------------------------- --------- --------- --------- --------- --------- --------
1,543.6 311.2 231.0 468.2 27.2 2,581.2
--------------------------- --------- --------- --------- --------- --------- --------
At 31 December 2013
Cash and cash equivalents 315.7 - - - - 315.7
Financial Investments 1,055.7 415.3 251.5 505.8 47.6 2,275.9
--------------------------- --------- --------- --------- --------- --------- --------
1,371.4 415.3 251.5 505.8 47.6 2,591.6
--------------------------- --------- --------- --------- --------- --------- --------
The Group takes into account the duration of its required
capital, targeting an investment portfolio duration that, under a
variation in interest rates, preserves the solvency ratio of the
Group. The duration of the investment portfolio is then set within
an allowable range relative to the targeted duration. This is
achieved by the use of interest rate derivatives.
As the claims liabilities are measured on an undiscounted basis,
the reported liabilities are not sensitive to changes in interest
rates. This leads to the conflict between targeting a longer
duration to protect the solvency position against movements in
interest rates, whilst a shorter duration for the assets will
reduce the possible volatility around the income statement.
Sensitivity to changes in bond yields
The sensitivity of the profit to the changes in investment
yields is set out in the table below. The analysis is based on the
information at 31 December 2014.
Impact on profit before tax 2014 2013
GBPm GBPm
----------------------------- ------- -------
Increase:
25 basis points (6.8) (14.4)
50 basis points (13.5) (28.7)
100 basis points (27.0) (57.5)
Decrease:
25 basis points 6.8 14.4
50 basis points 13.5 28.7
100 basis points 27.0 57.5
------------------------------ ------- -------
Subject to taxation, the effect on shareholders' equity would be
the same as the effect on profit.
4.3.3 Currency risk
Introduction
Currency risk is the risk that the fair value of assets and
liabilities or future cash flows will fluctuate as a result of
movements in the rates of foreign exchange. As the Group reporting
currency is Sterling it is exposed to currency risk because it
underwrites insurance business internationally, dealing in five
main currencies: US dollars, Sterling, Canadian dollars, Euros and
Australian dollars. All other currencies are included as
Sterling.
The split of assets and liabilities for each of the Group's main
currencies, converted to Sterling, is set out in the tables
below:
GBP US $ CAD $ EUR EUR AUS $ Total
GBP Conv. Conv. Conv. Conv. Conv.
GBPm GBPm GBPm GBPm GBPm GBPm
--------------------- ------ -------- ------- -------- ------- --------
At 31 December 2014
Total assets 779.1 2,221.6 330.4 374.5 102.0 3,807.6
Total liabilities 701.6 1,819.4 167.8 222.9 68.2 2,979.9
--------------------- ------ -------- ------- -------- ------- --------
Net assets 77.5 402.2 162.6 151.6 33.8 827.7
--------------------- ------ -------- ------- -------- ------- --------
At 31 December 2013
Total assets 813.3 2,013.7 294.7 378.1 156.8 3,656.6
Total liabilities 786.7 1,615.0 163.8 288.2 91.9 2,945.6
--------------------- ------ -------- ------- -------- ------- --------
Net assets 26.6 398.7 130.9 89.9 64.9 711.0
--------------------- ------ -------- ------- -------- ------- --------
The non-Sterling denominated net assets of the Group may lead to
a reported loss (depending on the mix relative to the liabilities),
should Sterling strengthen against these currencies. Conversely,
reported gains may arise should Sterling weaken.
The Group matches its currency position so holds net assets
across a number of currencies. The Group takes into consideration
the underlying currency of its required capital and invests its
assets proportionately across these currencies so as to protect the
solvency of the Group, and hence capital available for distribution
to shareholders, against variation in foreign exchange rates. As a
result, the Group holds a significant proportion of its assets in
foreign currency investments.
In part, foreign currency forward contracts are used to achieve
the desired exposure to each currency. From time to time the Group
may also choose to utilise options on foreign currency derivatives
to mitigate the risk of reported losses due to changes in foreign
exchange rates. The degree to which options are used is dependent
on the prevailing cost versus the perceived benefit to shareholder
value from reducing the chance of a reported loss due to changes in
foreign currency exchange rates. The details of all foreign
currency derivatives contracts entered into are given in Note
18.
As a result of the accounting treatment for non-monetary items,
the Group may also experience volatility in its income statement
due to fluctuations in exchange rates. In accordance with IFRS,
non-monetary items are recorded at original transaction rates and
are not re-valued at the reporting date. These items include
unearned premiums, deferred acquisition costs and reinsurers' share
of unearned premiums. Consequently, a mismatch arises in the income
statement between the amount of premium recognised at historical
transaction rates, and the related claims that are valued using
foreign exchange rates in force at the reporting date. The Group
considers this to be a timing issue which can cause volatility in
the income statement.
Sensitivity to changes in foreign exchange rates
The table below gives an indication of the impact on profit of a
percentage movement in the relative strength of Sterling against
the value of the US dollar, Canadian dollar, Australian dollar and
Euro simultaneously. The analysis is based on the information at 31
December 2014.
Impact on profit before tax 2014 2013
GBPm GBPm
------------------------------ -------- --------
Sterling weakens:
10% against other currencies 104.1 72.1
20% against other currencies 208.3 144.2
Sterling strengthens:
10% against other currencies (104.1) (72.1)
20% against other currencies (208.3) (144.2)
------------------------------- -------- --------
Subject to taxation, the effect on shareholders' equity would be
the same as the effect on profit.
4.3.4. Other price risk
Introduction
This is the risk that the fair value or future cash flows of a
financial instrument will fluctuate because of changes in market
prices (other than those arising from interest rate risk or
currency risk), whether those changes are caused by factors
specific to the individual financial instrument or its issuer, or
factors affecting all similar financial instruments traded in the
market.
Financial assets and derivatives that are recognised at their
fair value are susceptible to losses due to adverse changes in
their prices. This is known as price risk.
Listed investments are recognised in the financial statements at
quoted bid price. If the market for the investment is not
considered to be active, then the Group establishes fair valuation
techniques. This includes using recent arm's length transactions,
reference to current fair value of other similar investments,
discounted cash flow models and other valuation techniques that are
commonly used by market participants.
The prices of fixed and floating rate income securities are
predominantly impacted by currency, interest rate and credit risks.
Credit risk on investments is discussed in the following section of
this Note.
The Group invests a proportion of its assets in equities and
hedge funds. These investments are limited within the investment
guidelines to a diverse, small and manageable part of the Group
investment portfolio.
Sensitivity to changes in other price risk
The sensitivity of the profit to the changes in the prices of
equity and hedge fund investments is set out in the table below.
The analysis is based on the information at 31 December 2014.
Impact on profit before tax 2014 2013
GBPm GBPm
---------------------------- -------- -------
Increase in fair value:
10% 34.1 28.0
20% 68.2 56.1
30% 102.3 84.1
Decrease in fair value:
10% (34.1) (28.0)
20% (68.2) (56.1)
30% (102.3) (84.1)
---------------------------- -------- -------
Subject to taxation, the effect on shareholders' equity would be
the same as the effect on profit.
4.4 Credit risk
This is the risk that one party to a financial instrument will
cause a financial loss for the other party by failing to discharge
an obligation. The main sources of credit risk relate to:
-- Reinsurers: through the failure to pay valid claims against a
reinsurance contract held by the Group.
-- Brokers and coverholders: where counterparties fail to pass
on premiums or claims collected or paid on behalf of the Group.
-- Investments: through the issuer default of all or part of the
value of a financial instrument or the market value of that
instrument.
-- Cash and cash equivalents: through the default of the banks
holding the cash and cash equivalents.
The insurance and non-insurance related counterparty credit
risks are managed separately by the Group.
4.4.1 Investment credit risk
Investment credit risk management process
The Investment Committee chaired by the Group CEO is responsible
for the management of investment credit risk. The Investment
Guidelines and investment policy set out clear limits and controls
around the level of investment credit risk. The Group has
established concentration guidelines that restrict the exposure to
any individual counterparty. The investment guidelines further
limit the type, credit quality and maturity profile of both the
Group's cash and investments. In addition, the investment risk
framework further limits potential exposure to credit risk through
aggregate investment risk limits.
Investment credit risk profile
The summary of the investment credit risk exposures for the
Group is set out in the tables below:
BBB
and Not
AAA AA A BBB P-1 P-2 below Equities Rated Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------- ------ ------ -------- --------- ------ ------ ------- --------- ------- --------
At 31 December 2014
Financial
investments 199.1 239.8 1,063.8 42.4 18.8 - 338.9 27.2 329.8 2,259.8
Derivative
contracts - - - - - - - - 7.8 7.8
Cash and
cash equivalents 151.9 - - - 60.9 108.6 - - - 321.4
------------------- ------ ------ -------- --------- ------ ------ ------- --------- ------- --------
351.0 239.8 1,063.8 42.4 79.7 108.6 338.9 27.2 337.6 2,589.0
------------------- ------ ------ -------- --------- ------ ------ ------- --------- ------- --------
At 31 December 2013
Financial
investments 221.2 310.1 978.0 57.5 5.7 - 382.5 47.6 273.3 2,275.9
Derivative
contracts - - - - - - - - 12.7 12.7
Cash and
cash equivalents 243.5 - 4.0 37.1 37.1 31.1 - - - 315.7
------------------- ------ ------ -------- --------- ------ ------ ------- --------- ------- --------
464.7 310.1 982.0 42.8 42.8 31.1 382.5 47.6 286.0 2,604.3
------------------- ------ ------ -------- --------- ------ ------ ------- --------- ------- --------
The table above gives an indication of the level of credit
worthiness of assets that are most exposed to credit risk. The
ratings are mainly sourced from Standard & Poor's and where
these are not available an equivalent rating agency.
4.4.2 Insurance credit risk
Insurance credit risk management process
The Credit Committee chaired by the Chief Financial Officer and
reporting to the Executive Management Committee, is responsible for
the management of credit risk arising from insurance activities.
Some responsibilities for reinsurance related credit decisions have
been delegated to the Reinsurance Security Committee chaired by the
Head of Group Financial Performance.
Reinsurer credit risk is managed by transacting only with
reinsurance counterparties that satisfy a minimum level of
financial strength or provide appropriate levels of collateral, and
have been approved for use by the Reinsurance Security Committee.
The reinsurer security list, which sets out the list of approved
reinsurance counterparties, is reviewed at least annually and
following any significant change in risk profile, which includes
any changes to reinsurers' financial ratings. Credit risk appetite
limits are set for reinsurance entities and groups to limit
accumulations of risk. These positions are monitored quarterly
against current statement of financial position exposures and in
relation to a number of extreme loss scenarios.
Reinsurance aged debt is monitored and managed against tolerance
limits set by the Board. A bad debt provision is held against all
non-rated reinsurers or any reinsurer where there is deemed to be a
specific risk of non-payment.
Any breaches of credit risk appetite are reported to the Risk
Oversight Committee and the Board on at least a quarterly
basis.
Insurance credit risk profile
The summary of the insurance credit risk exposures for the Group
is set out in the tables below:
BBB and Not
AAA AA A below rated Total
GBPm GBPm GBPm GBPm CollateralGBPm GBPm GBPm
----------------------- ------ ------ ------ -------- --------------- ------- ------
At 31 December 2014
Reinsurance assets 0.4 201.9 148.7 - 82.9 11.5 445.4
Insurance receivables - - - - - 424.2 424.2
----------------------- ------ ------ ------ -------- --------------- ------- ------
0.4 201.9 148.7 - 82.9 435.7 869.6
----------------------- ------ ------ ------ -------- --------------- ------- ------
At 31 December 2013
Reinsurance assets - 174.5 134.9 3.5 36.4 24.7 374.0
Insurance receivables - - - - 16.5 335.3 351.8
----------------------- ------ ------ ------ -------- --------------- ------- ------
- 174.5 134.9 3.5 52.9 360.0 725.8
----------------------- ------ ------ ------ -------- --------------- ------- ------
Insurance credit risk arises primarily from reinsurers (whereby
reinsurers fail to pay recoveries due to the Group in a timely
manner) and brokers and coverholders (whereby intermediaries fail
to pass on premiums due to the Group in a timely manner).
As at 31 December 2014, collateral of GBP250.7m (2013: GBP64.1m)
is held in third-party trust accounts or as a letter of credit
(LOC) to guarantee Syndicate 2987 against reinsurance
counterparties and is available for immediate drawdown in the event
of a default. Of this amount, GBP82.9m (2013: GBP36.4m) had been
drawn against reinsurance assets at 31 December 2014.
As at 31 December 2013, GBP16.5m was included within insurance
receivables relating to funds provided to RiverStone Insurance
Limited as collateral for standby letters of credit. This was
repaid during 2014.
The following table shows movements in impairment provisions
during the year:
Impairment Impairment
provision provision
against against
reinsurance insurance
assets receivables
GBPm GBPm
-------------------------------------- ------------- -------------
2014
Opening provision at 1 January 0.8 6.5
(Release)/strengthening for the year (0.2) 2.0
Net foreign exchange differences - 0.3
--------------------------------------- ------------- -------------
Closing provision at 31 December 0.6 8.8
--------------------------------------- ------------- -------------
2013
Opening provision at 1 January 0.4 6.4
Strengthening for the year 0.4 0.2
Net foreign exchange differences - (0.1)
--------------------------------------- ------------- -------------
Closing provision at 31 December 0.8 6.5
--------------------------------------- ------------- -------------
The following table shows the amount of insurance receivables
that were past due but not impaired at the end of the year.
2014 2013
GBPm GBPm
------------------------------ ------ ------
0-3 months past due 9.1 7.5
4-6 months past due 2.2 1.7
7-9 months past due 0.6 1.3
10-12 months past due 0.2 1.0
More than 12 months past due 0.5 1.8
------------------------------- ------ ------
12.6 13.3
------------------------------ ------ ------
4.5 Liquidity risk
Liquidity risk is the risk that the Group may encounter
difficulty in meeting obligations associated with financial
liabilities that are settled by delivering cash or another
financial asset. The predominant liquidity risk the Group faces is
the daily calls on its available cash resources in respect of
claims arising from insurance contracts.
The Group monitors the levels of cash and cash equivalents on a
daily basis, ensuring adequate liquidity to meet the expected cash
flow requirements due over the short-term.
The Group also limits the amount of investment in illiquid
securities in line with the Liquidity policy set by the Board. This
involves ensuring sufficient liquidity to withstand claim scenarios
at the extreme end of business plan projections, by reference to
modelled realistic disaster scenarios. Contingent liquidity also
exists in the form of a Group revolving credit facility.
The tables below present the fair value of monetary assets and
the undiscounted value of monetary liabilities of the Group into
their relevant maturing groups based on the remaining period at the
end of the year to their contractual maturities or expected
repayment dates. Borrowings are stated at their nominal value.
31 December 2014 Fair values
Statem-ent
of financial < 1 1 to 3 to >5
position Year 3 years 5 years Years Equities Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Assets
Reinsurance assets 445.4 120.5 142.1 74.9 107.9 - 445.4
Financial investments 2,259.8 1,222.2 311.2 231.0 468.2 27.2 2,259.8
Derivative contracts 7.8 7.8 - - - - 7.8
Insurance receivables 424.2 424.2 - - - - 424.2
Cash and cash equivalents 321.4 321.4 - - - - 321.4
3,458.6 2,096.1 453.3 305.9 576.1 27.2 3,458.6
--------------------------- -------------- -------- --------- --------- ------- --------- --------
31 December 2014 Undiscounted values
Statem-ent
of financial < 1 1 to 3 to >5
position Year 3 years 5 years Years Equities Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Liabilities
Insurance contract liabilities 2,057.9 568.7 671.2 349.2 468.8 - 2,057.9
Derivative contracts 2.7 2.7 - - - - 2.7
Borrowings 124.5 - - - 135.0 - 135.0
Insurance and other
payables 220.8 220.8 - - - - 220.8
2,405.9 792.2 671.2 349.2 603.8 - 2,416.4
-------------------------------- -------------- ------ --------- --------- ------- --------- --------
31 December 2013 Fair values
Statem-ent
of financial < 1 1 to 3 to >5
position Year 3 years 5 years Years Equities Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Assets
Reinsurance assets 374.0 108.3 124.7 62.8 78.2 - 374.0
Financial investments 2,275.9 1,055.7 415.3 251.5 505.8 47.6 2,275.9
Derivative contracts 12.7 12.7 - - - - 12.7
Insurance receivables 351.8 351.8 - - - - 351.8
Cash and cash equivalents 315.7 315.7 - - - - 315.7
3,330.1 1,844.2 540.0 314.3 584.0 47.6 3,330.1
--------------------------- -------------- -------- --------- --------- ------- --------- --------
31 December 2013 Undiscounted values
Statem-ent
of financial < 1 1 to 3 to >5
position Year 3 years 5 years Years Equities Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Liabilities
Insurance contract liabilities 2,097.7 600.1 691.4 356.3 449.9 - 2,097.7
Derivative contracts 11.1 11.1 - - - - 11.1
Borrowings 123.2 - - - 135.0 - 135.0
Insurance and other
payables 187.3 187.3 - - - - 187.3
2,419.3 798.5 691.4 356.3 584.9 - 2,431.1
-------------------------------- -------------- ------ --------- --------- ------- --------- --------
4.6 Operational risk
Operational risk is the potential for loss arising from the
failure of people, process or technology or the impact of external
events. The nature of operational risk means that it is dispersed
across all functional areas of Brit. Operational risk exposures are
managed through a consistent set of management processes that drive
risk identification, assessment, control and monitoring.
The Chief Operating Officer chairs the Operational Risk Working
Group (ORWG) that provides a dedicated forum for managing
operational risk in line with the Operational Risk policy and
appetite limits set by the Board. This group reports to the EMC
where it is augmented by operational risk owners within executive
management who actively manage operational risk within their
respective areas (such as Underwriting, Claims, Investments and
Finance).
An operational risk management framework is in place to ensure
an appropriate standard approach is taken to managing operational
risk across the Group. The key elements of this framework are:
-- Allocation of responsibility for the identification and
assessment of operational risk. Standard tools are used to
facilitate these assessments;
-- Definition of standard elements of sound operating controls
that are expected to be in place to address all identified
operational risks;
-- A process that integrates with Brit's internal model to
support the setting and monitoring of operational risk appetite and
tolerances;
-- Governance, reporting and escalation for operational risk;
-- Infrastructure supporting the operational risk management framework; and
-- Operational risk management training and awareness.
4.7 Capital management
The Group's capital policy is to hold management capital at an
entity level and surplus capital resources at both entity and Group
levels. Management capital is the capital required by each entity
for current trading purposes based on our business strategy and
regulatory requirements. The level of the surplus capital held at
Group level is based on our risk appetite and provides flexibility,
allowing the Group to deal with shock events and to take advantage
of opportunities as they arise.
The capital policy is set by the Board and is based on the
output of the internal model which reflects the risk profile of the
business. The policy requires capital to be held well in excess of
regulatory minimum requirements and underpins the Group's Statement
of Financial Position strength. The policy ensures the capital
adequacy of the Group, and each entity, through an efficient
capital structure. The Group proactively responds to developments
in the financial environment to ensure its capital strength is
maintained whilst optimising risk adjusted returns.
At Brit we seek to hold capital resources in a range of 120% to
140% of our requirement. We believe this is an appropriate level of
capital for the business and provides management with:
-- The flexibility to absorb major losses while still being in a
position to take advantage of subsequent market dislocations;
-- The ability to pursue opportunity-driven growth in our core business; and
-- The support to provide continuity in regular dividend payments to shareholders.
The Group manages Adjusted net tangible assets, Subordinated
debt, Letters of credit and Contingent funding as capital which
amounted to GBP1,050.5m as at 31 December 2014 (31 December 2013 :
GBP909.4m.
All external capital requirements have been complied with during
the year by the Company as well as its individual insurance
subsidiaries.
The Lloyd's market is subject to the solvency and capital
adequacy requirements of the Prudential Regulation Authority (PRA),
as a result of which the Group may be adversely affected. The PRA
may impose more stringent requirements on Lloyd's which may result
in higher capital requirements or a restriction on trading
activities for entities within the Group. If Lloyd's fails to
satisfy its solvency test in any year, the PRA may require Lloyd's
to cease trading and/or its members to cease or reduce their
underwriting exposure, which may result in a material adverse
effect to the Group's reputation, financial condition and results
of operations.
Brit Global Specialty solely underwrites through the Group's
wholly-aligned Lloyd's Syndicate 2987 which benefits from the
Lloyd's credit ratings of A (Excellent) from A.M. Best, AA- (Very
Strong) from Fitch and A+ (Strong) from Standard & Poor's. A
downgrade in Lloyd's financial strength ratings may have an adverse
effect on the Group.
The Group's business plan and underwriting capacity for the
syndicate may be affected by a decrease in the value of the Group's
Funds at Lloyd's or by recommendations from the Lloyd's Franchise
Board. The Group is also reliant upon the compliance of Lloyd's
with US regulations, including the maintenance by Lloyd's of its
trading licences and approvals in the US.
5 Segmental information
As at 31 December 2014, the reportable segments identified were
as follows:
-- 'Brit Global Specialty Direct', which underwrites the Group's
international and US business, other than reinsurance. In the main,
Brit Global Specialty Direct deals with wholesale buyers of
insurance, rather than individuals. Risks are large and usually
syndicated by several underwriters by means of the subscription
market.
-- 'Brit Global Specialty Reinsurance', which underwrites
reinsurance business (essentially the insurance of insurance and
reinsurance companies) and includes writing non-proportional cover
for major events such as earthquakes or hurricanes. These insurance
and reinsurance companies calculate how much risk they want to
retain and then pass on their remaining exposure to reinsurers in
return for a premium.
-- 'Other underwriting', which comprises excess of loss
reinsurance ceded from the strategic business units to a cell of
Brit Insurance (Gibraltar) PCC Limited and life Syndicate 389.
-- 'Other corporate', which is made up of residual income and
expenditure not allocated to other segments.
Foreign exchange differences on non-monetary items are
separately disclosed. This provides a fairer representation of the
claims ratios and financial performance of the strategic business
units (SBUs) which would otherwise be distorted by the mismatch
arising from IFRSs whereby unearned premium, reinsurer's share of
unearned premium and deferred acquisition costs are treated as
non-monetary items and the majority of other assets and liabilities
are treated as monetary items. Non-monetary items are carried at
historic exchange rates, while monetary items are translated at
closing rates.
The Group investment return is managed centrally and an
allocation is made to each of the strategic business units based on
the average risk free interest rate for the period being applied to
the opening insurance funds of each strategic business unit. The
annualised average risk free rate applied to insurance funds was
1.5% for the year ended 31 December 2014 (31 December 2013:
1.5%).
The ratios set out in the segmental analysis are calculated as
follows:
-- The claims ratio is calculated as claims incurred, net of
reinsurance divided by earned premiums, net of reinsurance.
-- The expense ratio is calculated as acquisition costs and
other insurance related expenses divided by earned premiums, net of
reinsurance.
-- The combined ratio is the sum of the claims and expense ratios.
Information regarding the Group's reportable segments is
presented below:
(a) Statement of profit or loss by segment
Year ended 31 December 2014
Total underwriting Total
excluding underwriting
the Effect after the
effect of effect
of foreign foreign of foreign
Brit Brit exchange exchange exchange
Global Global on on on
Specialty Specialty Other Intra non-monetary non-monetary non-monetary Other Continuing Discontinued
Direct Reinsurance Underwriting Group items items items corporate Operations Operations Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------
Gross
premiums
written 1,056.8 245.3 22.1 (22.1) 1,302.1 - 1,302.1 - 1,302.1 - 1,302.1
Less
premiums
ceded
to
reinsurers (250.9) (45.3) (3.1) 22.1 (277.2) - (277.2) - (277.2) - (277.2)
------------- ---------- ------------- ------------- ------- --------------------- ------------- ------------- ---------- ----------- ------------- ---------
Premiums
written,
net of
reinsurance 805.9 200.0 19.0 - 1,024.9 - 1,024.9 - 1,024.9 - 1,024.9
Gross earned
premiums 993.8 247.4 14.6 (14.6) 1,241.2 10.7 1,251.9 - 1,251.9 - 1,251.9
Reinsurers'
share (237.4) (46.2) (1.8) 14.6 (270.8) (1.4) (272.2) - (272.2) - (272.2)
------------- ------------- ------- --------------------- ------------- ------------- ----------
Earned
premiums,
net
of
reinsurance 756.4 201.2 12.8 - 970.4 9.3 979.7 - 979.7 - 979.7
Investment
return 16.6 7.2 0.1 - 23.9 - 23.9 46.2 70.1 - 70.1
Return on
derivative
contracts - - - - - - - 7.3 7.3 - 7.3
Other income - - - - - - - 0.5 0.5 - 0.5
Net foreign
exchange
gains - - - - - 13.3 13.3 (0.4) 12.9 - 12.9
Total
revenue 773.0 208.4 12.9 - 994.3 22.6 1,016.9 53.6 1,070.5 - 1,070.5
------------- ---------- ------------- ------------- ------- --------------------- ------------- ------------- ---------- ----------- ------------- ---------
Gross claims
incurred (574.6) (86.6) (5.9) 9.9 (657.2) - (657.2) - (657.2) - (657.2)
Reinsurers'
share 170.2 11.7 0.4 (9.9) 172.4 - 172.4 - 172.4 - 172.4
------------- ---------- ------------- ------------- ------- --------------------- ------------- ------------- ---------- ----------- ------------- ---------
Claims
incurred,
net
of
reinsurance (404.4) (74.9) (5.5) - (484.8) - (484.8) - (484.8) - (484.8)
Acquisition
costs
-
commission (232.4) (35.3) 0.1 - (267.6) (2.3) (269.9) - (269.9) - (269.9)
Acquisition
costs
- other (46.8) (9.3) (2.6) - (58.7) - (58.7) - (58.7) - (58.7)
Other
insurance
related
expenses (42.3) (15.0) - - (57.3) - (57.3) - (57.3) - (57.3)
Other
expenses - - - - - - - (37.2) (37.2) - (37.2)
Total
expenses
excluding
finance
costs (725.9) (134.5) (8.0) - (868.4) (2.3) (870.7) (37.2) (907.9) - (907.9)
------------- ---------- ------------- ------------- ------- --------------------- ------------- ------------- ---------- ----------- ------------- ---------
Operating
profit 47.1 73.9 4.9 - 125.9 20.3 146.2 16.4 162.6 - 162.6
---------- ------------- ------------- ------- --------------------- ------------- ------------- ---------- ----------- ------------- ---------
Finance
costs (13.5) - (13.5)
Profit on
ordinary
activities
before
tax 149.1 - 149.1
Tax expense (10.1) - (10.1)
----------- ------------- ---------
Profit attributable to
owners
of the parent 139.0 - 139.0
------------------------- ------------- ------------- ------- --------------------- ------------- ------------- ---------- ----------- ------------- ---------
Claims ratio 53.5% 37.2% 43.0% 50.0% 49.5%
Expense
ratio 42.5% 29.6% 19.5% 39.5% 39.4%
Combined
ratio 96.0% 66.8% 62.5% 89.5% 88.9%
Year ended 31 December 2013
Total
underwriting Total
excluding underwriting
the Effect after the
effect of of effect of
foreign foreign foreign
Brit exchange exchange exchange
Global Brit Global on on on
Specialty Specialty Other Intra non-monetary non-monetary non-monetary Other Continuing Discontinued
Direct Reinsurance Underwriting Group items items items corporate Operations Operations Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------
Gross premiums
written 903.1 281.0 6.0 (4.4) 1,185.7 - 1,185.7 - 1,185.7 - 1,185.7
Less premiums
ceded
to reinsurers (181.5) (50.1) (2.2) 4.4 (229.4) - (229.4) - (229.4) - (229.4)
------------------ ---------- ------------ ------------- ------ ------------- ------------- ------------- ---------- ----------- ------------- --------
Premiums written,
net of
reinsurance 721.6 230.9 3.8 - 956.3 - 956.3 - 956.3 - 956.3
Gross earned
premiums 868.1 283.8 6.1 (4.2) 1,153.8 (2.1) 1,151.7 - 1,151.7 - 1,151.7
Reinsurers' share (162.4) (45.7) (2.2) 4.2 (206.1) (0.1) (206.2) - (206.2) - (206.2)
------------------ ------------- ------ ------------- ------------- ------------- ----------
Earned premiums,
net
of reinsurance 705.7 238.1 3.9 - 947.7 (2.2) 945.5 - 945.5 - 945.5
Investment return 16.8 7.8 0.2 - 24.8 - 24.8 32.1 56.9 - 56.9
Return on
derivative
contracts - - - - - - - 11.0 11.0 - 11.0
Profit on
disposal
of asset held
for
sale - - - - - - - 4.4 4.4 - 4.4
Other income - - - - - - - - - 1.4 1.4
Total revenue 722.5 245.9 4.1 - 972.5 (2.2) 970.3 47.5 1,017.8 1.4 1,019.2
------------------ ---------- ------------ ------------- ------ ------------- ------------- ------------- ---------- ----------- ------------- --------
Gross claims
incurred (482.3) (93.1) (3.5) 2.7 (576.2) - (576.2) - (576.2) - (576.2)
Reinsurers' share 111.9 6.0 1.8 (2.7) 117.0 - 117.0 - 117.0 - 117.0
------------------ ---------- ------------ ------------- ------ ------------- ------------- ------------- ---------- ----------- ------------- --------
Claims incurred,
net
of reinsurance (370.4) (87.1) (1.7) - (459.2) - (459.2) - (459.2) - (459.2)
Acquisition costs
- commission (196.5) (39.3) (0.4) - (236.2) 0.4 (235.8) - (235.8) - (235.8)
Acquisition costs
- other (38.8) (9.7) (3.2) - (51.7) - (51.7) - (51.7) - (51.7)
Other insurance
related
expenses (43.4) (18.8) - - (62.2) - (62.2) - (62.2) (1.2) (63.4)
Other expenses - - - - - - - (16.9) (16.9) - (16.9)
Net foreign
exchange
losses - - - - - (4.2) (4.2) (65.4) (69.6) - (69.6)
Total expenses
excluding
finance costs (649.1) (154.9) (5.3) - (809.3) (3.8) (813.1) (82.3) (895.4) (1.2) (896.6)
------------------ ---------- ------------ ------------- ------ ------------- ------------- ------------- ---------- ----------- ------------- --------
Operating
profit/(loss) 73.4 91.0 (1.2) - 163.2 (6.0) 157.2 (34.8) 122.4 0.2 122.6
------ ------------- ------------- ------------- ---------- --------
Loss on sale of
subsidiary - (1.5) (1.5)
Finance costs (15.0) - (15.0)
Profit/(loss) on ordinary
activities before tax 107.4 (1.3) 106.1
Tax expense (6.5) (0.1) (6.6)
Profit/(loss) attributable
to owners of the parent 100.9 (1.4) 99.5
------------------------------ ------------ ------------- ------ ------------- ------------- ------------- ---------- ----------- ------------- --------
Claims ratio 52.5% 36.6% 43.6% 48.5% 48.6%
Expense ratio 39.5% 28.5% 92.3% 36.9% 37.0%
Combined ratio 92.0% 65.1% 135.9% 85.4% 85.6%
----------------- ----------- ------------ ------------- --------------------- ---------------------------- ------------------------------------------------
b) Depreciation, amortisation, impairment and capital
expenditure by segment
Year ended 31 December 2014
Brit Global
Specialty Brit Global
Direct Specialty Total
GBPm ReinsuranceGBPm GBPm
----------------------------------------------- ------------ ----------------- ------
Depreciation of property, plant and equipment 1.4 0.6 2.0
Amortisation of intangibles 4.0 1.7 5.7
Capital expenditure 3.7 1.0 4.7
----------------------------------------------- ------------ ----------------- ------
Year ended 31 December 2013
Brit Global
Specialty Brit Global
Direct Specialty Total
GBPm ReinsuranceGBPm GBPm
----------------------------------------------- ------------ ----------------- ------
Depreciation of property, plant and equipment 1.4 0.6 2.0
Impairment of property, plant and equipment 0.2 - 0.2
Amortisation of intangibles 3.3 1.5 4.8
Impairment of intangibles 0.2 - 0.2
Capital expenditure 4.6 1.1 5.7
----------------------------------------------- ------------ ----------------- ------
Capital expenditure consists of additions of property, plant and
equipment and intangible assets but excludes assets recognised on
business combinations.
c) Geographical information
The Group's strategic business units operate mainly in four
geographical areas, though the business is managed on a worldwide
basis.
The segmental split shown below is based on the location of the
underlying risk.
Gross premiums written Year ended Year ended
31 December 31 December
2014 2013
GBPm GBPm
----------------------------- ------------- -------------
US 501.4 421.5
UK 96.7 93.0
Europe (excluding UK) 84.0 61.8
Other (including worldwide) 620.0 609.4
------------------------------ ------------- -------------
1,302.1 1,185.7
----------------------------- ------------- -------------
The nature of the London Market business is such that the
insureds and reinsureds are often operating on a multi-territory or
worldwide basis and hence coverage is often provided on a worldwide
basis. Premiums written on a multi-territory or worldwide basis are
included in 'Other' in the table above.
6 Investment return
Year ended 31 December 2014
Investment Net realised Net unrealised Total investment
income gains (losses)/gains return
GBPm GBPm GBPm GBPm
-------------------------------- ----------- ------------- ---------------- -----------------
Equity securities 0.8 2.2 (0.6) 2.4
Debt securities 26.5 2.5 (5.0) 24.0
Loan instruments 9.8 1.7 (3.9) 7.6
Specialised investment funds 20.1 6.3 15.1 41.5
Cash and cash equivalents 0.7 - - 0.7
Total investment return before
expenses 57.9 12.7 5.6 76.2
Investment management expenses (6.1) - - (6.1)
-------------------------------- ----------- ------------- ---------------- -----------------
Total investment return 51.8 12.7 5.6 70.1
-------------------------------- ----------- ------------- ---------------- -----------------
Year ended 31 December 2013
Investment Net realised Net unrealised Total investment
income (losses)/gains gains/(losses) return
GBPm GBPm GBPm GBPm
-------------------------------- -------------------- ---------------- ---------------- -----------------
Equity securities 0.3 (0.1) 1.0 1.2
Debt securities 43.5 (15.3) (8.2) 20.0
Loan instruments 8.3 0.8 3.0 12.1
Specialised investment funds 4.9 15.7 8.3 28.9
Cash and cash equivalents 0.5 0.1 - 0.6
Total investment return before
expenses 57.5 1.2 4.1 62.8
Investment management expenses (5.9) - - (5.9)
-------------------------------- -------------------- ---------------- ---------------- -----------------
Total investment return 51.6 1.2 4.1 56.9
-------------------------------- -------------------- ---------------- ---------------- -----------------
7 Return on derivative contracts
Year ended Year ended
31 December 31 December
2014 2013
GBPm GBPm
-------------------------------- ------------- -------------
Interest rate swaps 6.6 (2.6)
Futures (1.4) 0.4
Non-currency options 0.4 -
-------------------------------- ------------- -------------
Investment related derivatives 5.6 (2.2)
--------------------------------- ------------- -------------
Currency forwards 4.1 13.2
Currency options (2.4) -
-------------------------------- ------------- -------------
Currency related derivatives 1.7 13.2
--------------------------------- ------------- -------------
7.3 11.0
-------------------------------- ------------- -------------
8 Net foreign exchange gains/(losses)
The Group recognised foreign exchange gains of GBP12.9m (31
December 2013: losses of GBP69.6m) in the Income Statement in the
period.
Foreign exchange gains and losses result from the translation of
the Statement of Financial Position to closing exchange rates and
the income statement to average exchange rates. However, as an
exception to this, IAS 21 'The Effects of Changes in Foreign
Exchange Rates' requires that net unearned premiums and deferred
acquisition costs (UPR/DAC), being non-monetary items, remain at
historic exchange rates. This creates a foreign exchange mismatch,
the financial effects of which are shown in the table below:
Year ended Year ended
31 December 31 December
2014 2013
GBPm GBPm
--------------------------------------------------------- ------------- -------------
(Losses)/ gains on foreign exchange arising from:
Translation of the Statement of Financial Position
and income statement (0.4) (65.4)
Maintaining UPR/DAC items in the Statement of Financial
Position at historic rates 20.3 (6.0)
Maintaining UPR/DAC items in the income statement
at historic rates (7.0) 1.8
---------------------------------------------------------- ------------- -------------
Net foreign exchange gains/(losses) 12.9 (69.6)
---------------------------------------------------------- ------------- -------------
Principal exchange rates applied are set out in the table
below.
Year ended Year ended
31 December 31 December
2014 2013
GBPm GBPm
Average Closing Average Closing
------------------- -------- -------- -------- --------
US dollar 1.65 1.56 1.56 1.66
Canadian dollar 1.82 1.81 1.61 1.76
Euro 1.24 1.29 1.18 1.20
Australian dollar 1.83 1.91 1.62 1.85
------------------------ -------- -------- -------- --------
In accordance with IAS 1 'Presentation of Financial statements',
exchange gains and losses are presented on a net basis. They are
reported within revenue where they result in a net gain and within
expenses where they result in a net loss.
9 Acquisition costs and other operating expenses
Year ended 31 December Year ended 31 December
2014 2013
------------------------------------ --------------------------------- ---------------------------------
Other Other
Acquisition operating Acquisition operating
costs expenses Total costs expenses Total
GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------------ ------------ ----------- ------ ------------ ----------- ------
Salary, pension and social
security costs (Note 10) 25.6 45.4 71.0 20.8 37.8 58.6
Other staff-related costs 0.8 3.9 4.7 0.7 3.1 3.8
Accommodation costs 3.5 3.1 6.6 3.1 3.3 6.4
Legal and professional charges 1.7 4.8 6.5 1.3 5.7 7.0
IT costs 0.5 11.9 12.4 0.6 11.8 12.4
Travel and entertaining 2.8 1.9 4.7 2.0 1.8 3.8
Marketing and communications 0.2 1.0 1.2 0.1 4.4 4.5
Amortisation and impairment
of intangible assets 0.7 5.0 5.7 0.5 4.5 5.0
Depreciation and impairment
of property, plant and equipment 0.2 1.8 2.0 0.2 2.0 2.2
Regulatory levies and charges 21.3 - 21.3 22.1 0.2 22.3
Costs relating to initial
public offering - 13.7 13.7 - 2.0 2.0
Other 1.4 2.0 3.4 0.3 2.5 2.8
------------------------------------ ------------ ----------- ------ ------------ ----------- ------
Expenses before commissions 58.7 94.5 153.2 51.7 79.1 130.8
Commission costs 269.9 269.9 235.8 - 235.8
Acquisition costs and other
operating expenses - continuing
operations 328.6 94.5 423.1 287.5 79.1 366.6
Acquisition costs and other
operating expenses - discontinued
operations - - - - 1.2 1.2
Total acquisition costs and
other operating expenses 328.6 94.5 423.1 287.5 80.3 367.8
------------------------------------ ------------ ----------- ------ ------------ ----------- ------
Netted off against 'commission costs' above are GBP1.2m (2013:
GBP8.8m) of profit commissions receivable in respect of whole
account quota share reinsurance contracts ceded by the Group.
10 Staff costs
Year ended Year ended
31 December 31 December
2014 2013
GBPm GBPm
------------------------------------------ ------------- -------------
Wages and salaries 60.5 48.0
Social security costs 6.7 6.5
Pension costs 3.8 4.1
------------------------------------------- ------------- -------------
Staff costs from continuing operations 71.0 58.6
Staff costs from discontinued operations - 1.2
------------------------------------------- ------------- -------------
Total staff costs 71.0 59.8
------------------------------------------- ------------- -------------
The average number of employees during the year, including
executive and non-executive Directors, was as follows:
Year ended Year ended
31 December 31 December
2014 2013
Number Number
--------------------------------------------- ------------- -------------
Front office staff
Underwriters 139 112
Claims staff 50 44
Other underwriting and direct support staff 97 94
---------------------------------------------- ------------- -------------
Total front office staff 286 250
---------------------------------------------- ------------- -------------
Back office staff
Management 76 74
Administration 103 93
---------------------------------------------- ------------- -------------
Total back office staff 179 167
Total employees 465 417
---------------------------------------------- ------------- -------------
'Management' includes non-executive Directors and employees who
have other members of staff reporting to them.
11 Earnings and net assets per share
The numbers of shares used for calculating the earnings per
share and net assets per share are those of Brit PLC. The number of
Achilles Holdings 1 S.à.r.l. shares in the comparative periods have
been converted into the equivalent number of Brit PLC shares to
reflect the corporate reorganisation on 28 March 2014. For further
information refer to Note 2.
The calculations of the basic and diluted earnings per share
from continuing operations are based on the following figures:
Year ended Year ended
31 December 31 December
2014 2013
------------------------------------------------------- ------------- -------------
Profit on ordinary activities after tax, attributable
to the parent (GBPm) 139.0 100.5
Basic weighted average number of shares (number
in millions) 399.4 416.8
Diluted weighted average number of shares (number
in millions) 399.7 417.2
Basic earnings per share (pence per share) 34.8 24.1
Diluted earnings per share (pence per share) 34.8 24.1
-------------------------------------------------------- ------------- -------------
The calculations of the total basic and diluted earnings per
share are based on the following figures:
Year ended Year ended
31 December 31 December
2014 2013
------------------------------------------------------- ------------- -------------
Profit on ordinary activities after tax, attributable
to the parent (GBPm) 139.0 99.1
Basic weighted average number of shares (number
in millions) 399.4 416.8
Diluted weighted average number of shares (number
in millions) 399.7 417.2
Basic earnings per share (pence per share) 34.8 23.8
Diluted earnings per share (pence per share) 34.8 23.8
-------------------------------------------------------- ------------- -------------
The calculations of the net assets and net tangible assets per
share are based on the following figures:
31 December 31 December
2014 2013
---------------------------- ------------ ------------
Net assets (GBPm) 827.7 711.0
Intangible assets (GBPm) (62.2) (62.7)
----------------------------- ------------ ------------
Net tangible assets (GBPm) 765.5 648.3
----------------------------- ------------ ------------
31 December 31 December
2014 2013
---------------------------------------------------- ------------ ------------
Number of shares in issue at the end of the period
(number in millions) 400.5 393.0
Number of own shares (number in millions) (0.8) (0.9)
----------------------------------------------------- ------------ ------------
Number of shares in issue less own shares (number
in millions) 399.7 392.1
----------------------------------------------------- ------------ ------------
31 December 31 December
2014 2013
------------------------------------------------- ------------ ------------
Net assets per share (pence per share) 207.1 181.3
Net tangible assets per share (pence per share) 191.5 165.3
-------------------------------------------------- ------------ ------------
12 Finance costs
Year ended Year ended
31 December 31 December
2014 2013
GBPm GBPm
----------------------------------------------------- ------------- -------------
Revolving credit facility and other bank borrowings 3.2 4.9
Lower Tier Two subordinated debt 10.3 10.1
------------------------------------------------------ ------------- -------------
13.5 15.0
----------------------------------------------------- ------------- -------------
13 Tax expense
(a) Tax (charged)/credited to income statement
Year ended Year ended
31 December 31 December
2014 2013
GBPm GBPm
Current tax:
Current taxes on income for the year (5.1) (2.0)
Overseas tax on income for the year (4.1) (2.8)
(9.2) (4.8)
Double tax relief 3.5 2.2
Adjustments in respect of prior years 1.2 2.2
Total current tax (4.5) (0.4)
---------------------------------------------------------- ------------- -------------
Deferred tax:
Relating to the origination and reversal of temporary
differences (7.0) (8.5)
Relating to changes in tax rates - 1.4
Adjustments in respect of prior years 1.4 1.0
Total deferred tax (5.6) (6.1)
---------------------------------------------------------- ------------- -------------
Total tax charged to income statement from continuing
operations (10.1) (6.5)
Total tax charged to income statement from discontinued
operations - (0.1)
Total tax charged to income statement (10.1) (6.6)
---------------------------------------------------------- ------------- -------------
Overseas tax and double tax relief principally arise from taxes
suffered as a result of the Group's operations at Lloyd's. Double
tax relief is effectively limited to an amount equal to the tax due
at the UK tax rate on the same source of income.
(b) Tax charged to other comprehensive income
Year ended Year ended
31 December 31 December
2014 2013
GBPm GBPm
--------------------------------------------------- ------------- -------------
Deferred tax charge on actuarial gains on defined
benefit pension scheme (0.1) (0.5)
---------------------------------------------------- ------------- -------------
(0.1) (0.5)
--------------------------------------------------- ------------- -------------
(c) Tax reconciliation
Based on the analysis of Group profits, the weighted average
rate of tax is 10.8% (2013: 10.2%). The tax on the Group's profits
before tax differs from the theoretical amount that would arise
based on the weighted average rate of tax as follows:
Year ended Year ended
31 December 31 December
2014 2013
GBPm GBPm
Profit on continuing ordinary activities before
tax 149.1 107.4
Loss on sale of subsidiary - (1.5)
Income less expenses of discontinued business - 0.2
------------------------------------------------------ ------------- -------------
Total profit on ordinary activities before tax 149.1 106.1
------------------------------------------------------ ------------- -------------
Tax calculated at weighted average rate of tax on
income (16.1) (10.8)
Non-deductible and non-taxable items 2.6 2.6
Taxes on income at rates in excess of the domestic
rate and where credit is unavailable (0.5) (0.6)
Effect of temporary differences not recognised 0.2 (2.4)
Effect of revaluation of deferred tax following
change in rate of tax - 1.4
Other items 1.1 -
Adjustments to tax charge in respect of prior years 2.6 3.2
------------------------------------------------------ ------------- -------------
(10.1) (6.6)
----------------------------------------------------- ------------- -------------
Tax expense on profit on ordinary activities (10.1) (6.5)
Tax expense on profit on discontinued operations - (0.1)
------------------------------------------------------ ------------- -------------
Total tax charged to income statement (10.1) (6.6)
------------------------------------------------------ ------------- -------------
The weighted average rate of tax is based on the geographic
split of profit across Group entities in jurisdictions with
differing tax rates. As the mix of taxable profits changes, so will
the weighted average rate of tax.
14 Intangible assets
Syndicate
Distribution Trade participat- Renewal
channels names ions rights Software Total
GBPm GBPm GBPm GBPm GBPm GBPm
-------------------------------- ------------- ------- ------------- -------- ---------- -------
Cost:
At 1 January 2013 6.3 12.1 45.4 - 27.2 91.0
Additions - - - - 4.3 4.3
Additions through acquisitions - - - 1.4 - 1.4
Disposals - - - - (12.1) (12.1)
-------------------------------- ------------- ------- ------------- -------- ---------- -------
At 31 December 2013 6.3 12.1 45.4 1.4 19.4 84.6
At 1 January 2014 6.3 12.1 45.4 1.4 19.4 84.6
Additions - - - - 3.1 3.1
Additions through acquisitions - - - 2.1 - 2.1
Disposals - - - - (3.7) (3.7)
-------------------------------- ------------- ------- ------------- -------- ---------- -------
At 31 December 2014 6.3 12.1 45.4 3.5 18.8 86.1
-------------------------------- ------------- ------- ------------- -------- ---------- -------
Amortisation:
At 1 January 2013 0.7 6.5 - - 21.8 29.0
Charge for the year 0.4 1.7 - 0.4 2.3 4.8
Impairment - - - - 0.2 0.2
Disposals - - - - (12.1) (12.1)
-------------------------------- ------------- ------- ------------- -------- ---------- -------
At 31 December 2013 1.1 8.2 - 0.4 12.2 21.9
At 1 January 2014 1.1 8.2 - 0.4 12.2 21.9
Charge for the year 0.4 1.8 - 1.3 2.2 5.7
Disposals - - - - (3.7) (3.7)
-------------------------------- ------------- ------- ------------- -------- ---------- -------
At 31 December 2014 1.5 10.0 - 1.7 10.7 23.9
-------------------------------- ------------- ------- ------------- -------- ---------- -------
Carrying amount:
At 31 December 2013 5.2 3.9 45.4 1.0 7.2 62.7
At 31 December 2014 4.8 2.1 45.4 1.8 8.1 62.2
-------------------------------- ------------- ------- ------------- -------- ---------- -------
Additional information
The gross cost of software fully amortised but still in use is
GBP6.1m (2013: GBP8.7m).
All software additions in 2014 and 2013 were internally
developed.
The software amortisation charge for the year of GBP2.2m (2013:
GBP2.3m) is included in the 'other operating expenses' line in the
Income Statement.
There were impairments to intangible assets of GBP0.2m in 2013
which have been included in the other operating expenses' line in
the income statement.
Assets not yet in use with a total cost of GBP1.8m (2013:
GBP3.8m) are included in software.
Further information is given in Note 5(b).
Impairment tests for syndicate participations
Syndicate participations are indefinite life intangible assets
and are therefore reviewed annually for impairment. They have been
allocated to cash-generating units (CGUs) as follows:
31 December 31 December
2014 2013
GBPm GBPm
------------------------------ ------------ ------------
Global Specialty Direct 33.8 33.8
Global Specialty Reinsurance 11.6 11.6
------------------------------- ------------ ------------
45.4 45.4
------------------------------ ------------ ------------
The recoverable amounts of the CGUs have been determined using a
value in use calculation.
Each value in use calculation uses cash flow projections based
on business plans approved by senior management covering a three
year period and subsequent cash flows which assume a nil growth
rate. These cash flows have been discounted using a risk-adjusted
discount rate of 9.1% (2013: 8.7%). In each syndicate participation
impairment review, the recoverable amount significantly exceeds the
carrying value of the CGU including its associated syndicate
participations and it is considered that a reasonably possible
change in key assumptions will not cause the carrying value of the
CGU to exceed its recoverable amount.
The key assumptions used for the impairment calculations were
that cash flows and profit levels will mainly depend on the level
of premiums written by each strategic business unit, the rates at
which these premiums are written and the claims activity on both
prior and future underwriting years. The business plans reflect
senior management's best estimates based on historical experience,
growth rates for the respective insurance industry sector, the
insurance pricing cycle and expected results from ongoing and
future strategic business unit product and distribution
strategies.
Commissions and other insurance related expenses are assumed to
remain materially in line with current amounts relative to premium
levels.
15 Property, plant and equipment
Computers
and office
machinery,
Office furniture
refurbishment and equipment Total
GBPm GBPm GBPm
-------------------------------- --------------- --------------- -------
Cost:
At 1 January 2013 14.1 9.7 23.8
Additions 0.3 1.1 1.4
Additions through acquisitions - 0.1 0.1
Disposals (8.4) (4.5) (12.9)
-------------------------------- --------------- --------------- -------
At 31 December 2013 6.0 6.4 12.4
At 1 January 2014 6.0 6.4 12.4
Additions - 1.6 1.6
Disposals (0.3) (0.5) (0.8)
-------------------------------- --------------- --------------- -------
At 31 December 2014 5.7 7.5 13.2
-------------------------------- --------------- --------------- -------
Depreciation:
At 1 January 2013 10.1 7.9 18.0
Charge for the year 1.0 1.0 2.0
Impairment 0.1 0.1 0.2
Disposals (8.4) (4.5) (12.9)
-------------------------------- --------------- --------------- -------
At 31 December 2013 2.8 4.5 7.3
At 1 January 2014 2.8 4.5 7.3
Charge for the year 1.0 1.0 2.0
Disposals (0.3) (0.5) (0.8)
-------------------------------- --------------- --------------- -------
At 31 December 2014 3.5 5.0 8.5
-------------------------------- --------------- --------------- -------
Carrying amount:
At 31 December 2013 3.2 1.9 5.1
At 31 December 2014 2.2 2.5 4.7
-------------------------------- --------------- --------------- -------
The gross cost of property, plant and equipment fully
depreciated but still in use is GBP4.3m (2013: GBP3.2m).
The depreciation charge for the year of GBP2.0m (2013: GBP2.0m)
is included in the 'other operating expenses' line in the income
statement.
There were impairments to property, plant and equipment of
GBP0.2m in 2013 which have been included in the 'other operating
expenses' line in the income statement.
Further information is given in Note 5(b).
16 Insurance and reinsurance contracts
(a) Balances on insurance and reinsurance contracts
31 December 31 December
2014 2013
GBPm GBPm
---------------------------------------------- ------------ ------------
Gross
Claims reported and loss adjustment expenses 914.4 994.7
Claims incurred but not reported 1,143.5 1,103.0
----------------------------------------------- ------------ ------------
2,057.9 2,097.7
Unearned premiums 546.4 496.2
Total gross liabilities 2,604.3 2,593.9
----------------------------------------------- ------------ ------------
Recoverable from reinsurers
Claims reported and loss adjustment expenses 216.8 202.3
Claims incurred but not reported 229.2 172.5
Impairment provision (0.6) (0.8)
----------------------------------------------- ------------ ------------
445.4 374.0
Unearned premiums 81.0 76.0
Total reinsurers' share of liabilities 526.4 450.0
----------------------------------------------- ------------ ------------
Net
Claims reported and loss adjustment expenses 697.6 792.4
Claims incurred but not reported 914.3 930.5
Impairment provision 0.6 0.8
----------------------------------------------- ------------ ------------
1,612.5 1,723.7
Unearned premiums 465.4 420.2
Total net insurance liabilities 2,077.9 2,143.9
----------------------------------------------- ------------ ------------
Insurance contracts - assumptions and changes in assumptions
Process used to decide on assumptions required
The risks associated with these insurance liabilities are
complex and subject to a number of variables that complicate
quantitative analysis, particularly with casualty insurance
liabilities.
The Group uses several statistical methods to incorporate the
various assumptions made in order to estimate the ultimate costs of
claims. The two methods more commonly used are the chain-ladder and
the Bornhuetter-Ferguson methods.
Chain-ladder methods may be applied to premiums, paid claims or
incurred claims (i.e. paid claims plus case estimates). The basic
technique involves the analysis of historical claims development
factors and the selection of estimated development factors based on
these historical patterns. The selected development factors are
then applied to cumulative claims data for each underwriting year
that is not yet fully developed to produce an estimated ultimate
claims cost for each underwriting year.
Chain-ladder techniques are most appropriate for mature classes
of business that have a relatively stable development pattern.
Chain-ladder techniques are less suitable in cases in which the
insurer does not have a developed claims history for a particular
class of business or for underwriting years at early stages of
development where the outcome is still highly uncertain.
The Bornhuetter-Ferguson method uses a combination of a
benchmark or market-based estimate and an estimate based on claims
experience. The former is based on a measure of exposure such as
premium and the latter is based on the paid or incurred claims to
date. The two estimates are combined using a formula that gives
more weight to the experience-based estimate as time passes. This
technique is used in situations in which developed claims
experience is not available for the projection (recent underwriting
years or new classes of business).
The choice of selected results for each year of each class of
business depends on an assessment of the technique that has been
most appropriate to observed historical developments. In certain
instances, this has meant that different techniques or combinations
of techniques have been selected for the individual underwriting
year or groups of underwriting years within the same class of
business.
Standard statistical techniques may not be solely appropriate
for assessing ultimate claims for a number of classes of business
(e.g. Casualty Treaty) and particular events (e.g. natural
catastrophes) and therefore alternative methodologies may be
employed to add additional rigour to the process. Examples include
reviewing potential exposure on a policy by policy basis and taking
account of market intelligence to determine Brit's share of the
loss.
In addition to the estimation of claims reserves, certain
estimates are produced for unearned premiums. For open market
business, earned premium is calculated at policy level. However,
premium derived from delegated underwriting authorities is
calculated by applying the 1/144ths method to estimated premiums
applied to the master policy. This assumes that attachments to
master policies arise evenly throughout the period of that master
policy.
Reinsurance outwards premiums are earned according to the nature
of the cover. 'Losses occurring during' policies are earned evenly
over the policy period. 'Risks attaching' policies are earned on
the same basis as the inwards business being protected.
Changes in assumptions
The Group did not change its estimation techniques for the
insurance contracts disclosed in this Note during the year.
Claims development tables
The tables below show the development of claims over a period of
time on a gross and net of reinsurance basis.
The claims development tables have been presented on an
underwriting year basis.
The tables show the cumulative incurred claims, including both
notified and IBNR claims, for each successive underwriting year at
the end of each year, together with cumulative paid claims at the
end of the current year.
The claims have been adjusted to make them comparable on a year
by year basis.
They have been grossed up to include 100% of the managed
syndicate claims rather than the claims that reflects the Group
percentage ownership of each syndicate's capacity during the
respective underwriting years. In addition, claims in currencies
other than Sterling have been retranslated at 31 December 2014
exchange rates.
Ultimate gross claims
Intra
2005 Group
and and other
Underwriting prior underwriting
year years 2006 2007 2008 2009 2010 2011 2012 2013 2014 adjustments Total
-------------- ---------- -------- -------- -------- -------- -------- -------- -------- -------- -------- ------------- ----------
At end of
underwriting
year 93.1% 67.8% 84.7% 90.3% 73.8% 76.5% 81.3% 76.0% 70.1% 70.4%
One year
later 91.1% 68.4% 86.6% 90.0% 76.1% 88.6% 78.7% 71.7% 70.3% -
Two years
later 90.6% 63.7% 85.6% 92.8% 73.0% 92.4% 79.1% 72.2% - -
Three years
later 89.4% 61.7% 93.1% 96.8% 74.7% 92.9% 78.7% - - -
Four years
later 89.1% 59.1% 95.4% 98.2% 75.4% 91.9% - - - -
Five years
later 87.7% 57.0% 95.5% 98.0% 76.3% - - - - -
Six years
later 86.9% 57.2% 96.0% 99.8% - - - - - -
Seven years
later 86.7% 58.5% 95.8% - - - - - - -
Eight years
later 86.3% 59.1% - - - - - - - -
Nine years
later 86.2% - - - - - - - - -
-------------- ---------- -------- -------- -------- -------- -------- -------- -------- -------- -------- ------------- ----------
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------- ---------- -------- -------- -------- -------- -------- -------- -------- -------- -------- ------------- ----------
Total
ultimate
gross claims
at
31 December
2014 3,568.8 329.2 628.0 663.0 503.8 637.9 583.2 633.9 655.3 698.3 - 8,901.4
Less
accumulated
gross paid
claims (3,438.3) (286.3) (531.9) (505.6) (371.3) (455.1) (363.3) (290.8) (179.8) (38.5) - (6,460.9)
Unearned
premium
portion of
gross
ultimate
claims - - - - - - - - (25.1) (386.1) - (411.2)
Claims
handling
provision
and
other
corporate
adjustments 1.9 0.7 1.5 2.4 2.0 2.7 3.2 5.2 6.8 4.2 (2.0) 28.6
Total
outstanding
gross claims
at 31
December
2014 132.4 43.6 97.6 159.8 134.5 185.5 223.1 348.3 457.2 277.9 (2.0) 2,057.9
-------------- ---------- -------- -------- -------- -------- -------- -------- -------- -------- -------- ------------- ----------
Ultimate net claims
Intra
2005 Group
and and other
Underwriting prior underwriting
year years 2006 2007 2008 2009 2010 2011 2012 2013 2014 adjustments Total
-------------- ---------- -------- -------- -------- -------- -------- -------- -------- -------- -------- ------------- ----------
At end of
underwriting
year 88.5% 76.6% 87.2% 96.0% 79.6% 79.9% 87.0% 82.2% 75.4% 76.3%
One year
later 86.6% 76.3% 83.1% 96.2% 79.1% 89.3% 84.2% 78.2% 76.9% -
Two years
later 85.8% 68.0% 83.7% 96.8% 76.3% 91.3% 83.6% 77.7% - -
Three years
later 84.0% 65.4% 88.0% 100.2% 74.8% 91.3% 81.7% - - -
Four years
later 83.1% 63.6% 89.9% 102.4% 75.3% 89.5% - - - -
Five years
later 81.7% 61.0% 90.3% 101.3% 76.7% - - - - -
Six years
later 80.8% 60.4% 90.7% 101.8% - - - - - -
Seven years
later 80.4% 61.0% 90.9% - - - - - - -
Eight years
later 80.0% 60.9% - - - - - - - -
Nine years
later 80.0% - - - - - - - - -
-------------- ---------- -------- -------- -------- -------- -------- -------- -------- -------- -------- ------------- ----------
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------- ---------- -------- -------- -------- -------- -------- -------- -------- -------- -------- ------------- ----------
Total
ultimate net
claims at
31 December
2014 2,512.2 276.7 489.2 520.5 409.7 497.7 485.1 528.3 533.1 573.7 - 6,826.2
Less
accumulate
net paid
claims (2,416.7) (251.8) (428.8) (428.4) (323.5) (360.0) (307.7) (243.4) (150.3) (34.7) - (4,945.3)
Unearned
premium
portion of
net
ultimate
claims - - - - - - - - (21.4) (311.8) - (333.2)
Claims
handling
provision,
bad
debt
provision
and other
corporate
adjustments 1.2 0.7 1.5 2.5 2.1 3.5 3.2 5.2 7.1 4.2 33.6 64.8
Total
outstanding
net claims
at 31
December
2014 96.7 25.6 61.9 94.6 88.3 141.2 180.6 290.1 368.5 231.4 33.6 1,612.5
-------------- ---------- -------- -------- -------- -------- -------- -------- -------- -------- -------- ------------- ----------
The percentages in the gross and net triangles are shown on an
ultimate loss basis inclusive of catastrophe losses by year of
account. The development patterns reflect our conservative
reserving philosophy where positive development from the initial
reserving position is slowly recognised as experience begins to
emerge.
The development of the 2007 and 2008 years of account was
impacted by exposure to the financial crisis which resulted in
reserving action which has subsequently led to stability in the
ratios for a number of years. The 2010 year of account includes the
impact of natural catastrophes occurring in 2011 which attached
back to policies incepting in the 2010 year of account.
During 2014, the net aggregate reserve releases from prior years
amounted to GBP32.1m, of which 87.9% was derived from the 2011 and
prior underwriting years (2013: GBP57.3m / 88.5% from the 2010 and
prior underwriting years). Reserves in Brit Global Specialty Direct
and Brit Global Specialty Reinsurance experienced releases of
GBP3.4m (2013: releases of GBP13.0m) and GBP29.2m (2013: releases
of GBP45.3m) respectively with a strengthening of GBP0.5m (2013:
strengthening of GBP1.0m) within Other Underwriting.
(b) Movements in insurance and reinsurance contracts
(i) Claims and loss adjustment expenses
31 December 2014 31 December 2013
Gross Reinsurance Net Gross Reinsurance Net
GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------------- -------- ------------ -------- ---------- --------------- ---------
As at 1 January 2,097.7 (374.0) 1,723.7 2,099.0 (361.5) 1,737.5
Cash paid for claims settled
in the year (758.7) 112.5 (646.2) (542.1) 99.2 (442.9)
Increase in liabilities 657.2 (172.4) 484.8 576.2 (117.0) 459.2
Net foreign exchange differences 61.7 (11.5) 50.2 (35.4) 5.3 (30.1)
---------------------------------- -------- ------------ -------- ---------- --------------- ---------
As at 31 December 2,057.9 (445.4) 1,612.5 2,097.7 (374.0) 1,723.7
---------------------------------- -------- ------------ -------- ---------- --------------- ---------
(ii) Unearned premiums
31 December 2014 31 December 2013
Gross Reinsurance Net Gross Reinsurance Net
GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------ ---------- ------------ -------- ----------- ------------ --------
As at 1 January 496.2 (76.0) 420.2 462.2 (52.8) 409.4
Premiums written in the year 1,302.1 (277.2) 1,024.9 1,185.7 (229.4) 956.3
Premiums earned during the
year (1,251.9) 272.2 (979.7) (1,151.7) 206.2 (945.5)
As at 31 December 546.4 (81.0) 465.4 496.2 (76.0) 420.2
------------------------------ ---------- ------------ -------- ----------- ------------ --------
17 Financial investments
31 December 31 December
2014 2013
GBPm GBPm
------------------------------ ------------ ------------
Equity securities 27.2 47.6
Debt securities 985.6 998.8
Loan instruments 169.3 292.7
Specialised investment funds 1,077.7 936.8
------------------------------- ------------ ------------
2,259.8 2,275.9
------------------------------ ------------ ------------
All financial investments have been designated as held at fair
value through profit or loss.
Basis for determining the fair value hierarchy of financial
instruments
The Group has classified the fair value measurements using a
fair value hierarchy that reflects the significance of the inputs
used in making those measurements. The fair value hierarchy
comprises the following levels:
(a) Level one - quoted prices (unadjusted) in active markets for
identical assets;
(b) Level two - inputs other than quoted prices included within
level one that are observable for the asset, either directly (i.e.
as prices) or indirectly (i.e. derived from prices); and
(c) Level three - inputs for the assets that are not based on
observable market data (unobservable inputs).
The level in the fair value hierarchy within which the fair
value measurement is categorised in its entirety is determined on
the basis of the lowest level input that is significant to the fair
value measurement. The significance of an input is assessed against
the fair value measurement in its entirety.
Assets are categorised as level one where fair values are
determined in whole directly by reference to an active market
relate to prices which are readily and regularly available from an
exchange, dealer, broker, industry group, pricing service or
regulatory agency and those prices represent actual and regularly
occurring market transactions on an arm's length basis, i.e. the
market is still active.
For assets and liabilities that are recognised at fair value on
a recurring basis, the Group determines whether transfers have
occurred between levels in the hierarchy by reassessing
categorisation (based on the lowest level of input that is
significant to the fair value measurement as a whole) at the end of
each reporting period.
Fair values for level two and level three assets include:
-- Values provided at the request of the Group by pricing
services and which are not publicly available or values provided by
external parties which are readily available but relate to assets
for which the market is not always active; and
-- Assets measured on the basis of valuation techniques
including a varying degree of assumptions supported by market
transactions and observable data.
For all assets not quoted in an active market or for which there
is no active market, the availability of financial data can vary
and is affected by a wide variety of factors, including the type of
financial instrument, whether it is new and not yet established in
the marketplace, and other characteristics specific to each
transaction. To the extent that valuation is based on the models or
inputs that are unobservable in the market, the determination of
fair value requires additional judgement. Accordingly, the degree
of judgement exercised is higher for instruments classified in
level three and the classification between level two and level
three depends highly on the proportion of assumptions used,
supported by market transactions and observable data.
Valuation techniques
Level one
Assets included in level one are government bonds, treasury
bills, exchange-traded equities and exchange-traded funds which are
measured based on quoted prices.
Level two
Level two securities contain certain investments in US and
non-US government agency securities, US and non-US Corporate debt
securities, loan instruments, structured products (Asset Backed
Securities (ABS), Collateralised Mortgage Obligations (CMOs),
Commercial Mortgage Backed Securities (CMBSs), Collateralised Loan
Obligations (CLOs), Mortgage Backed Securities (MBSs) and
Residential Mortgage Backed Securities (RMBSs)) and specialised
investment funds.
US and non-US government agency securities are priced using
valuations from independent pricing vendors who use discounted cash
flow models supplemented with market and credit research to gather
specific information. US and non-US corporate debt securities are
investment grade and the information collected during pricing of
these instruments includes credit data as well as other
observations from the market and the particular sector. Prices for
all these securities are based on a limited number of transactions
so they are derived indirectly using inputs that can be
corroborated by observable market data.
Level two loan instruments consist primarily of below
investment-grade debt of a wide variety of corporate issuers and
industries. These instruments are mostly over the counter (OTC)
traded. These instruments are priced using pricing models whose
inputs are derived principally from or corroborated by observable
market data through correlation or other means for substantially
the full term of the asset or liability.
Level two structured products include certain ABS, CMOs, CMBSs,
CLOs, MBSs and RMBSs. These structured products include pools of
assets with a variety of underlying collateral. During pricing, the
prepayment models might be adjusted for the underlying collateral
and current price data, treasury curve, swap curve as well as the
cash settlement.
Level two specialised investment funds contain alternative and
credit opportunities funds that are valued based on the underlying
assets in the fund on a security by security basis. A number of
direct and indirect inputs such as benchmark yield curves, credit
spreads, estimated default rates, anticipated market interest rate
volatility, coupon rates and anticipated timing of principal
repayments are considered during their valuation.
Level three
Level three securities contain certain investments in ABS, CMO,
CMBS and RMBS as well as investments in Insurance-Linked Securities
(ILS), loan instruments and specialised investment funds.
Level three ABSs, MBSs and CMBSs include debt securities backed
by pools of loans with a variety of underlying collateral. These
instruments are priced using unobservable inputs.
Level three CMOs are non-agency mortgage backed securities that
are valued using unobservable data at the time of valuation.
Level three RMBSs include non-agency RMBS backed by
non-conforming residential mortgages. Pricing models factor in
interest rates, bond or credit swap spreads and volatility.
ILSs are financial instruments whose performance is primarily
driven by insurance and/or reinsurance loss events. Instead of an
active market, there is a secondary market existing for ILS
contracts. Valuations of these securities require mark-to-market
considerations when evaluating risk/return and pricing models use
at least one significant input not being based on observable market
data.
Level three loan instruments consist primarily of below
investment-grade debt of a wide variety of corporate issuers and
industries. These instruments are mostly over the counter (OTC)
traded. These instruments are priced using unobservable inputs.
Level three specialised investment funds include securities that
are valued using techniques appropriate to each specific
investment. The valuation techniques include fair value by
reference to Net Asset Values (NAVs) adjusted and issued by fund
managers based on their knowledge of underlying investments and
credit spreads of counterparties.
Disclosures of fair values in accordance with the fair value
hierarchy
31 December 2014
Level one Level two Level three Total
GBPm GBPm GBPm GBPm
Equity securities 27.2 - - 27.2
Debt securities 142.9 702.7 140.0 985.6
Loan instruments - 165.2 4.1 169.3
Specialised investment funds 686.3 332.9 58.5 1,077.7
------------------------------ ---------- ---------- ------------ --------
856.4 1,200.8 202.6 2,259.8
------------------------------ ---------- ---------- ------------ --------
31 December 2013
Level one Level two Level three Total
GBPm GBPm GBPm GBPm
Equity securities 47.6 - - 47.6
Debt securities 251.6 489.8 257.4 998.8
Loan instruments - 292.7 - 292.7
Specialised investment funds 792.9 69.6 74.3 936.8
------------------------------ ---------- ---------- ------------ --------
1,092.1 852.1 331.7 2,275.9
------------------------------ ---------- ---------- ------------ --------
Fair values are classified as level one when the financial
instrument or derivative is actively traded and a quoted price is
available. In accordance with the Group's policy if an instrument
classified as level one subsequently ceases to be actively traded,
it is immediately transferred out of level one. In such cases,
instruments are classified into level two, unless the measurement
of its fair value requires the use of significant unobservable
inputs, in which case it is classified as level three. All fair
value measurements above are recurring as they are required to be
measured and recognised at the end of each reporting period.
All unrealised gains of GBP5.6m (31 December 2013: GBP4.1m) and
realised gains of GBP12.7m (31 December 2013: GBP1.2m) on financial
investments held during the period, are presented in investment
return in the consolidated income statement.
Transfers from level one to level two
A total of GBP190.4m of funds were transferred from level one to
level two during 2014 (2013: GBPnil). Additional information was
obtained in 2014 from one fund manager relating to the underlying
assets within their specialised investment funds which identified
that the majority of the underlying assets were level two.
Reconciliation of movements in level three financial investments
measured at fair value
Specialised
investment
Debt Securities Loan instruments funds Total
GBPm GBPm GBPm GBPm
-------------------------------------- ---------------- ----------------- ------------------- -----------------
At 1 January 2013 19.2 - 49.8 69.0
Transfers from level two 88.0 - - 88.0
Total (losses)/gains recognised
in the income statement (0.4) - 6.7 6.3
Purchases 159.5 - 73.7 233.2
Sales proceeds (9.1) - (52.5) (61.6)
Foreign exchange gains/(losses) 0.2 - (3.4) (3.2)
-------------------------------------- ---------------- ----------------- ------------------- -----------------
At 31 December 2013 257.4 - 74.3 331.7
Transfers (to)/ from level two (83.0) 0.2 (22.1) (104.9)
Total gains recognised in the income
statement 1.8 (0.1) 1.2 2.9
Purchases 20.3 3.9 3.7 27.9
Sales proceeds (64.6) - (2.1) (66.7)
Foreign exchange gains 8.1 0.1 3.5 11.7
-------------------------------------- ---------------- ----------------- ------------------- -----------------
At 31 December 2014 140.0 4.1 58.5 202.6
-------------------------------------- ---------------- ----------------- ------------------- -----------------
Total net gains recognised in the income statement under
'investment return' in respect of level three financial investments
for the period amounted to GBP2.9m (31 December 2013: GBP6.3m).
Included in this balance are GBP0.7m of unrealised gains (31
December 2013: GBP0.9m) attributable to assets still held at the
end of the year.
During the year ended 31 December 2014 the transfers of
financial assets between fair value hierarchy level two and level
three is as follows:
Transfers from level two to level three
A loan of GBP0.2m (2013:GBPnil) was transferred from level two
to level three due to its inputs becoming unobservable during
2014.
Transfers from level three to level two
There were transfers amounting to GBP105.1m (2013:GBPnil), which
comprised the following:
31 December 31 December
2014 2013
GBPm GBPm
----------------------------- ------------ ------------
ABSs 49.0 -
CMOs 3.0 -
CMBSs 9.7 -
RMBSs 18.1 -
Specialised investment funds 22.1 -
Other financial assets 3.2 -
----------------------------- ------------ ------------
105.1 -
----------------------------- ------------ ------------
The availability of financial data for structured products such
as ABSs, CMOs, RMBSs and CMBSs can vary and is affected by a wide
variety of factors, including the type of financial instrument,
whether it is established in the marketplace and other
characteristics specific to each transaction. At the time the 2014
levelling exercise was performed, there was an increase in the
availability of indirect observable market inputs (e.g. interest
rates, yield curves, volatilities, prepayment speeds, credit risk,
default rates) over those inputs available at the time of the 2013
levelling exercise. This increase in the availability of inputs was
driven by an increase in trading of the instruments
held by the Group or through an increase in trading of similar
instruments.
These factors, together with the pricing validation exercise
conducted on a regular basis throughout 2014, has given management
comfort and allowed it to reassess certain structured products as
level two in the fair value hierarchy.
A total of GBP22.1m of funds were transferred from level three
to level two during 2014 (2013: GBPnil). Additional information was
obtained in 2014 from fund managers relating to the underlying
assets within their specialised investment funds which identified
that the majority of the underlying assets were level two.
Sensitivity of level three financial investments measured at
fair value to changes in key assumptions
The following table shows the sensitivity of the fair value of
level three financial investments to changes in key
assumptions.
31 December 2014 31 December 2013
------------------------------ --- ------------------------ ------------------------
Effect of Effect of
possible possible
alternative alternative
Carrying assumptions Carrying assumptions
amount (+/-) amount (+/-)
GBPm GBPm GBPm GBPm
Debt securities 144.1 4.6 257.4 12.9
Specialised investment funds 58.5 1.3 74.3 5.1
----------------------------------- --------- ---------
202.6 331.7
--------------------------------- --------- ------------- --------- -------------
In order to determine reasonably possible alternative
assumptions, the Group adjusted key unobservable model inputs as
follows:
-- For debt securities, the Group adjusted, dependent on the
type and valuation methodology of the investment, key variables
including the probability of spread movements, leverage ratio
changes and changes in mortgage default rates used in the
models.
-- For specialised investment funds, the assumptions have been
adjusted by between 5% and 8% as determined by historic movements
in volatility of valuations or price changes in the underlying
investments.
18 Derivative contracts
The disclosure provided in the tables below include derivatives
that are set off in the Group's statement of financial
position.
Derivative contract assets
Gross amounts Related
of derivative Net amounts amount
contract of derivative of
liabilities contract cash collateral
set off assets presented received
Gross amounts in the statement in the statement not set
of derivative of financial of financial off in the
contract position position statement Net amount
31 December 2014 assets GBPm GBPm of financial GBPm
GBPm position
GBPm
-------------------- ---------------- ------------------ ------------------- ----------------- -------------
Currency forwards 474.5 (469.1) 5.4 - 5.4
Options 2.4 - 2.4 - 2.4
-------------------- ---------------- ------------------ ------------------- ----------------- -------------
476.9 (469.1) 7.8 - 7.8
-------------------- ---------------- ------------------ ------------------- ----------------- -------------
31 December 2013
Currency forwards 478.9 (468.2) 10.7 - 10.7
Options 2.0 - 2.0 - 2.0
------------------- ------ -------- ----- -----
480.9 (468.2) 12.7 - 12.7
------------------- ------ -------- ----- -----
Derivative contract liabilities
Gross amounts Net amounts Related
of derivative of derivative amount
contract contract of
assets set liabilities cash collateral
Gross amounts off in the presented pledged
of derivative statement in the statement and not
contract of financial of financial set off
liabilities position position in the statement Net amount
31 December 2014 GBPm GBPm GBPm of financial GBPm
position
GBPm
---------------------- ---------------- --------------- ------------------ -------------------- -------------
Currency forwards (326.8) 325.4 (1.4) - (1.4)
Interest rate swaps (1.3) - (1.3) 1.44 0.1
(328.1) 325.4 (2.7) 1.4 (1.3)
---------------------- ---------------- --------------- ------------------ ------------------- --------------
31 December 2013
Currency forwards (348.6) 340.2 (8.4) - (8.4)
Interest rate swaps (2.7) - (2.7) 2.1 (0.6)
(351.3) 340.2 (11.1) 2.1 (9.0)
---------------------- --------- --------- --------- -------- -----------
Disclosures of fair values in accordance with the fair value
hierarchy
31 December 2014
Level one Level two Level three Total
GBPm GBPm GBPm GBPm
Derivative contract assets - 5.4 2.4 7.8
Derivative contract liabilities - (2.7) - (2.7)
--------------------------------- ---------- ---------- ------------ -------
31 December 2013
Level one Level two Level three Total
GBPm GBPm GBPm GBPm
Derivative contract assets 10.7 - 2.0 12.7
Derivative contract liabilities (8.4) (2.7) - (11.1)
--------------------------------- ---------- ---------- ------------ -------
Valuation techniques
Level one
Futures contracts are 'forward-based' derivative contracts that
are standardised, transferable and exchange-traded and therefore
quoted prices are available in an active market.
Level two
The fair value of the Interest rate swaps are determined using
pricing models based on observable market data such as prices of
instruments with similar maturities and characteristics, interest
rate yield curves and measures of interest rate volatility. The
value is adjusted to reflect the credit risk of the
counterparty.
The valuation technique used to determine the fair value of
forward contracts is derived from observable inputs such as active
foreign exchange and interest rate markets that may require
adjustments for certain unobservable inputs.
Level three
The valuation technique to measure the fair value of put options
is to use pricing models which require market-based inputs such as
expected volatility, expected dividend yield and the risk-free rate
of interest.
Reconciliation of movements in level three derivative contracts
measured at fair value
Currency
Put options forwards Total
GBPm GBPm GBPm
------------------------------------------------ ------------ ---------- ------
At 1 January 2013 - (0.7) (0.7)
Transferred to level 1 - 0.7 0.7
On disposal of asset held for sale 2.0 - 2.0
------------------------------------------------ ------------ ---------- ------
At 31 December 2013 2.0 - 2.0
Purchases 0.1 - 0.1
Total gains recognised in the income statement 0.3 - 0.3
------------------------------------------------ ------------ ---------- ------
At 31 December 2014 2.4 - 2.4
------------------------------------------------ ------------ ---------- ------
19 Insurance and other receivables
31 December 31 December
2014 2013
GBPm GBPm
-------------------------------------------- ------------ ------------
Arising out of direct insurance operations 117.9 156.2
Arising out of reinsurance operations 306.3 195.6
Prepayments 8.5 8.0
Accrued income 4.0 5.2
Outstanding settlement on investments 11.9 12.3
Other debtors 4.1 3.6
452.7 380.9
-------------------------------------------- ------------ ------------
20 Cash and cash equivalents
31 December 31 December
2014 2013
GBPm GBPm
----------------------------- ------------ ------------
Cash at bank and on deposit 294.2 284.3
Cash equivalents 27.2 31.4
321.4 315.7
----------------------------- ------------ ------------
The carrying amounts disclosed above reasonably approximate fair
values.
The source of these amounts can be further analysed as
follows:
Classification Definition 31 December 31 December
2014 2013
GBPm GBPm
------------------------ --------------------------------------- ------------ ------------
Short term investment funds,
money market funds, treasury
Cash within segregated bills or cash held within segregated
fund mandates mandates. 58.8 64.5
Cash within the Lloyd's Overseas
Deposits Trust Funds held to
Lloyd's Trust Funds meet regulatory requirements. 31.8 29.9
Highly liquid instruments held
to meet on going working capital
Self-managed cash requirements. 136.1 189.5
Letter of cash credit Cash held as collateral for
collateral letters of credit. 60.6 2.0
Cash within segregated accounts
held to meet margin calls and
Derivative operating to enable derivative positions
cash to be rolled. 34.1 29.8
------------------------ ---------------------------------------- ------------
321.4 315.7
---------------------------------------------------------------- ------------ ------------
The cash and cash equivalent balances held in Lloyds's trust
Funds and letter of credit collateral are not available for use by
the Group.
21 Borrowings
31 December 2014 31 December 2013
-------------- ---------- ------ ---------- --------------------------------- -----------------------------------
Initial Initial
capitalised capitalised
Effective borrowing Amortised Fair borrowing Amortised Fair
interest costs cost value costs cost value
Maturity Call rate GBPm GBPm GBPm GBPm GBPm GBPm
-------------- ---------- ------ ---------- ------------ ---------- ------- ------------ ---------- ---------
Non-current
Lower tier
two
subordinated
debt 2030 2020 8.3% 1.8 124.5 137.3 1.8 123.2 131.0
Revolving
credit LIBOR
facility 2018 - +2.3% 9.4 - - 8.2 - -
-------------- ---------- ------ ---------- ------------ ---------- ------- ------------ ---------- ---------
11.2 124.5 137.3 10.0 123.2 131.0
-------------------------------- ---------- ------------ ---------- ------- ------------ ---------- ---------
As at 31 December 2014, the fair value of the lower tier two
subordinated debt was determined by reference to trading market
values on recognised exchanges and was therefore categorised as a
level one measurement in the fair value hierarchy. As at 31
December 2013, the fair value of the lower tier two subordinated
debt was determined by reference to a portfolio of securities with
similar characteristics with a discount applied to allow for
illiquidity and was therefore categorised as a level two
measurement in the fair value hierarchy. For further information
relating to the fair value hierarchy, refer to Note 17.
Lower Tier Two subordinated debt
The lower tier two subordinated debt has a nominal value of
GBP135.0m and interest is payable annually at a rate of 6.625%. It
is listed callable in whole by the Group on 9 December 2020 and
following this date the interest rate resets to the higher of
i) 3.4% above the gross redemption yield of the 4.75% Treasury
Gilt due 2030 quoted on the Reset Date or
ii) 3.4% above the gross redemption yield of the 8% Treasury
Gilt due 2021 quoted on the Reset Date.
The effective interest rate method of accounting has been
applied over the term up to the call date.
Revolving credit facility
During 2014, the Group renegotiated its GBP225m revolving credit
facility with its existing banking partners, with certain
amendments taking effect on the date of the corporate
reorganisation. The main changes were to reduce the margin from
3.0% to 2.3% and to extend the expiry date from 31 December 2017 to
31 December 2018.
At 31 December 2014, a US$80.0m (GBP51.3m) (2013:
US$80.0m/GBP48.2m), letter of credit had been put in place under
the facility while the remainder was undrawn. At 31 December 2014,
the US$80.0m was fully collateralised (2013: uncollateralised).
22 Provisions
Onerous
lease Dilapidation
provision provision Total
GBPm GBPm GBPm
---------------------------------- ----------- ------------- ------
At 1 January 2013 2.9 1.5 4.4
Amounts utilised during the year (2.1) (0.3) (2.4)
Unwinding of discount 0.2 0.2 0.4
---------------------------------- ----------- ------------- ------
At 31 December 2013 1.0 1.4 2.4
---------------------------------- ----------- ------------- ------
At 1 January 2014 1.0 1.4 2.4
Amounts utilised during the year (0.6) (0.1) (0.7)
Unwinding of discount 0.1 0.1 0.2
---------------------------------- ----------- ------------- ------
At 31 December 2014 0.5 1.4 1.9
---------------------------------- ----------- ------------- ------
23 Insurance and other payables
31 December 31 December
2014 2013
GBPm GBPm
-------------------------------------------- ------------ ------------
Arising out of direct insurance operations 6.0 14.7
Arising out of reinsurance operations 156.3 111.8
Other taxes and social security costs 1.4 1.2
Accruals and deferred income 34.7 31.0
Outstanding settlements on investments 17.3 23.8
Other creditors 5.1 4.8
220.8 187.3
-------------------------------------------- ------------ ------------
The carrying amounts disclosed above are reasonably approximate
fair values as all amounts are payable within one year of the date
of the statement of financial position.
24 Share Capital
31 December
31 December 31 December 31 December
2014 2013 2014 2013
On incorporation
On incorporation 1p each 200p each 200p each
GBPm GBPm GBPm Number Number Number
----------- ------------ ----------------------------------------- ---------------------------------------------- --------------- ------------ -----------------
Ordinary
shares:
Allotted,
Issued
and
fully
paid 4.0 - - 400,452,960 1 1
----------- ------------ ----------------------------------------- ---------------------------------------------- --------------- ------------ -----------------
GBPm Number
----------------------------------------------------- --------- ------------
As at 31 December 2013 - 1
Issue of ordinary share on corporate reorganisation 800.0 399,999,999
Capital reduction (796.0) -
Shares issued in respect of share based incentive
schemes - 452,960
------------------------------------------------------ --------- ------------
As at 31 December 2014 4.0 400,452,960
------------------------------------------------------ --------- ------------
Following court approval, on 30 April 2014, the share capital of
the Company was reduced by the cancellation of 199p from the
nominal value of each ordinary share.
The number of shares reported is for Brit PLC, the ultimate
parent of the Group.
Brit PLC was incorporated on 19 December 2013.
25 Dividends
A final ordinary dividend of 12.5p per share (2013: nil) and a
special dividend of 12.5p per share (2013: nil) was agreed by the
Board on 24 February 2015 and is subject to shareholder approval at
the AGM on 21 April 2015. These financial statements do not include
as a liability the provision for these dividends. Subject to AGM
approval, both the final ordinary and special dividends are payable
on 30 April 2015 to shareholders on the register on 20 March 2015.
The shares will go ex-dividend on 19 March 2015.
An interim dividend of 6.25p (2013: nil) per share was paid on
26 September 2014.
26 Commitments
Operating lease commitments
The Group has entered into a number of operating lease
arrangements to lease properties and office equipment.
Property leases typically have rent reviews every five years
where the lease payments could be increased to reflect market
rates.
Operating lease payments recognised in the consolidated income
statement during 2014 were GBP3.3m (2013: GBP3.1m).
The future minimum lease payments under non-cancellable
operating leases were as follows:
31 December 31 December
2014 2013
GBPm GBPm
--------------------------------------------------- ------------ ------------
Not later than one year 3.1 3.4
Later than one year and not later than five years 1.5 6.5
4.6 9.9
--------------------------------------------------- ------------ ------------
27 Cash flows provided by operating activities
Year ended Year ended
31 December 31 December
2014 2013
GBPm GBPm
Profit on ordinary activities before tax 149.1 107.4
Adjustments for non-cash movements:
Realised and unrealised (gains)/losses on investments (18.3) (5.3)
Realised and unrealised (gains)/losses on derivatives (7.3) (11.0)
Amortisation of intangible assets 5.7 4.8
Impairment of intangible assets - 0.2
Depreciation of property, plant and equipment 2.0 2.0
Impairment of property, plant and equipment - 0.2
Foreign exchange (gains)/losses on cash and cash
equivalents (5.3) 2.0
Profit on disposal of asset held for sale - (4.4)
Charges to equity in respect of employee share
schemes 0.6 0.1
Interest income (37.2) (56.1)
Dividend income (20.7) (1.4)
Finance costs on borrowing 13.5 15.0
Movements in operating assets and liabilities:
Deferred acquisition costs (8.6) (12.4)
Insurance and other receivables excluding accrued
income (73.0) (38.6)
Insurance and reinsurance contracts (66.0) (3.1)
Financial investments (9.5) 41.5
Derivative contracts 3.8 10.6
Insurance and other payables 31.7 11.6
Employee benefits (5.5) (5.2)
Provisions (0.5) (2.0)
Cash flows provided by operating activities (45.5) 55.9
-------------------------------------------------------- ------------- -------------
28 Share-based payments
The Group has a number of long-term employee incentive
schemes.
The compensation cost recognised in the income statement under
International Financial Reporting Standard 2 'Share-based Payments'
for the Group's share-based payments arrangements are shown
below:
Year ended Year ended
31 December 31 December
2014 2013
GBPm GBPm
------------------------------------------- ------------- -------------
Equity-settled plans
Retention Partnership Plan 0.2 0.1
Performance Share Plan (PSP) 0.2 -
Brit All Employee Share Plan 0.1 -
Cash-settled plans
PSP dividend equivalents settled in cash 0.1 -
0.6 0.1
------------------------------------------- ------------- -------------
The total liability in respect of cash-settled plans at 31
December 2014 was GBP0.1m (2013: GBPnil). The total intrinsic value
of cash-settled awards which had vested at 31 December 2014 was
GBPnil (2013: GBPnil).
(a) Retention Partnership Plan (RPP)
During 2011, selected employees in the senior management team
were invited to buy a number of shares in Achilles Holdings 1 S.à
r.l. under the RPP. For each share bought, the participant was
granted five nil-cost options over shares in Achilles Holdings 1
S.à r.l.. As a result of the corporate reorganisation, the
outstanding RPP awards were exercised with an effective date of 28
March 2014.
Reconciliation of movement in the number of Retention
Partnership Plan options
Year ended Year ended
31 December 31 December
2014 2013
Number of Number of
options options
---------------------------- ------------- -------------
Outstanding at 1 January 401,080 451,215
Forfeited - (50,135)
Exercised (401,080) -
Outstanding at 31 December - 401,080
----------------------------- ------------- -------------
The numbers of shares Achilles Holdings 1 S.à r.l. have been
converted into the equivalent number of Brit PLC shares in order to
reflect the corporate reorganisation on 28 March 2014.
(b) Performance Share Plan (PSP)
During 2014 selected employees were awarded the right to acquire
a defined number of Brit PLC shares at no cost to the employee.
Subject to continued service and the satisfaction of the
performance conditions, the right to acquire shares may be
exercised in differing proportions with effect from the third,
fourth and fifth anniversaries of the grant date. These proportions
are 50%, 25% and 25% respectively.
The performance conditions are:
- 75% of each award is subject to achieving specific targets for
average annual Return on Net Tangible Assets (RoNTA) over a fixed
three-year performance period; and
- 25% of each award is subject to the Group's Total Shareholder
Return (TSR) achieving specific targets relative to a bespoke
industry comparator group over a fixed three-year performance
period.
Participants do not receive any dividends until after the shares
have been received. A payment may be made at the time of vesting to
reflect the dividend that would have accrued on vested shares
between the date of grant and vesting.
The fair value of the PSP share awards with a TSR performance
condition is calculated at the date of grant using a Monte Carlo
simulation. This valuation process simulates the future TSRs for
the Group and each stock in the comparator group over the three
performance periods. The TSR for each stock is simulated by
assuming a log-normal model of share returns. The inputs to that
model are the risk-free interest rate, expected future dividends,
the expected volatility of share returns over the life of the
awards and the historical correlation matrix of returns between
companies. Expected dividends are deducted in the calculation of
fair value because any dividends accrued over the vesting period
are expected to be paid separately in cash.
The fair value of the PSP share awards with a RoNTA performance
condition is equal to the share price on date of grant less the
value of expected dividends in respect of the shares. The value of
expected dividends is excluded because it is anticipated, as for
the PSP awards with vesting based on TSR, that they will be paid
separately in cash.
For PSP share awards granted during the year, the following key
assumptions have been made:
Year ended Year ended
31 December 31 December
2014 2013
------------------------------------------- ------------- -------------
Risk-free interest rate (3 - 5 year terms) 1.3% - 1.8%
pa -
------------------------------------------- ------------- -------------
Expected volatility 22.0% pa -
Expected dividend yield 7.7% pa -
------------------------------------------- ------------- -------------
The risk-free rate is equal to the yields available on
zero-coupon UK government bonds at the date of grant with terms
equal to the expected lives of the awards. Expected volatility is
based on the historic volatility of the Group's share returns since
the IPO and the historic volatility of the comparator group
companies over periods commensurate with the expected term of the
awards. The expected dividend yield is based on declared dividends
and the Group's dividend policy as at the date of grant and the
share price on the date of grant.
The calculation of the compensation cost recognised in the
income statement in respect of these awards assumes forfeitures due
to employee turnover of 5% per annum prior to vesting, with
subsequent adjustments to reflect actual experience.
Reconciliation of movement in the number of PSP awards
Year ended Year ended
31 December 31 December
2014 2013
Number of Number of
awards awards
--------------------------- ------------- -------------
Outstanding at 1 January - -
Granted 2,596,365 -
Outstanding at 31 December 2,596,365 -
--------------------------- ------------- -------------
There were no awards exercisable at the end of the year.
The weighted average fair value at date of grant for
equity-settled awards granted during 2014 was 158p. In addition,
the weighted average fair value at date of grant for the related
dividend equivalents, which are cash-settled, was 54p.
The weighted average remaining contractual life at the end of
the year was 3.5 years.
(c) Brit All-Employee Share Plan
The Brit All-Employee Share Plan (comprising the Share Incentive
Plan (SIP) for UK employees and the International Share Incentive
Plan for overseas employees) provides for the award of Brit PLC
Free Shares, Partnership Shares, Matching Shares and Dividend
Shares. In 2014, Free Share awards were granted with a vesting
period of three years from the Award Date. Vesting is unconditional
for participants still in-service at the vesting date. Participants
will also receive Dividend Shares which represent the value of
reinvested dividends that would have accrued over the vesting
period on the shares in the Free Share award. No Partnership or
Matching shares had been awarded by 31 December 2014.
The fair value of the Brit All-Employee Share Plan awards is
equal to the share price on date of grant. Dividends are not
deducted in the calculation of fair value because dividends will be
accumulated over the vesting period and repaid in equivalent
Dividend shares.
The calculation of the compensation cost recognised in the
income statement in respect of these awards assumes forfeitures due
to employee turnover of 10% per annum prior to vesting, with
subsequent adjustments to reflect actual experience.
Reconciliation of movement in the number of Brit All-Employee
Share Plan awards
Year ended Year ended
31 December 31 December
2014 2013
Number of Number of
awards awards
--------------------------- ------------- -------------
Outstanding at 1 January - -
Granted 528,205 -
Forfeited (19,555) -
Vested (6,108) -
Outstanding at 31 December 502,542 -
--------------------------- ------------- -------------
The weighted average fair value at date of grant for awards
granted during 2014 was 239p.
The weighted average remaining contractual life at the end of
the year was 2.5 years.
Employee share trusts and award settlement
Awards under the RPP were settled by the transfer of shares from
an independent trust. New Brit PLC shares have been issued to an
independent trust in order to settle awards as they vest under the
Share Incentive Plan (SIP) for UK employees.
29 Related party transactions
(a) Principal investors
The principal investors in Brit PLC are a number of Apollo and
CVC investment funds.
The Group has paid monitoring fees to Apollo and CVC affiliated
investment funds amounting to GBP7.4m (31 December 2013: GBP2.0m)
of which GBP5.4m (31 December 2013:GBPnil) was paid in connection
with the termination of those monitoring fee arrangements on 27
March 2014.
Apollo Capital Management LP and Athene Asset Management LLC are
members of the Apollo Group and CVC Credit Partners LLC is a member
of the CVC Group. The Group has incurred investment management
fees, including performance fees, payable to these companies as
follows:
Year ended Year ended
31 December 31 December
2014 2013
GBPm GBPm
------------------------------ ------------- -------------
Apollo Capital Management LP 0.6 0.4
Athene Asset Management LLC 1.0 0.9
CVC Credit Partners LLC 0.2 0.1
------------------------------- ------------- -------------
1.8 1.4
------------------------------ ------------- -------------
The Group has made investments in Apollo and CVC investment
funds as follows:
31 December 31 December
2014 2013
GBPm GBPm
------------------------------------------------- ------------ ------------
Apollo Offshore Credit Strategies Fund 27.2 22.1
CVC Credit Partners European Opportunities Fund 15.3 17.0
-------------------------------------------------- ------------ ------------
42.5 39.1
------------------------------------------------- ------------ ------------
The Group has made investments in the loan notes of members of
the Apollo Group as follows:
31 December 31 December
2014 2013
GBPm GBPm
------------------------- ------------ ------------
Great Wolf Resorts Inc. 0.6 1.5
Rexnord Corporation 1.3 1.7
-------------------------- ------------ ------------
1.9 3.2
------------------------- ------------ ------------
(b) Key management
(i) Compensation
The amount of the emoluments granted in respect of the financial
year to the members of the administrative, managerial and
supervisory bodies by reason of their responsibilities, and any
commitments arising or entered into in respect of retirement
pension for former members of those bodies, are broken down as
follows:
Year ended Year ended
31 December 31 December
2014 2013
GBPm GBPm
------------------------------------------------- ------------- -------------
Salaries and other short-term employee benefits 6.6 6.3
Post-employment benefits 0.2 0.2
Share based payments 0.1 -
Termination benefits - 0.5
-------------------------------------------------- ------------- -------------
6.9 7.0
------------------------------------------------- ------------- -------------
For the purposes of International Accounting Standard 24,
'Related Party Disclosures', key managers are defined as the Board
of Directors and members of the Executive Management Committee
which is the primary vehicle for implementing Board decisions in
respect of UK-managed operations.
(ii) Loans
On 27 March 2014, certain key managers and certain other
employees of the Group entered into loan agreements with Achilles
Holdings 1 S.à r.l., pursuant to which they borrowed GBP1.4m from
Achilles Holdings 1 S.à.r.l. for the purpose of funding their
acquisition of additional shares in Achilles Holdings 2 S.à.r.l., a
Group company. The loans are interest free and are repayable in
full on 28 February 2015 or, if earlier, the date on which the
borrower ceases to be employed by a Group company. As part of the
corporate reorganisation, the relevant shares in Achilles Holdings
2 S.à.r.l. were exchanged for shares in Achilles Holdings 1
S.à.r.l., which in turn were exchanged for shares in Brit PLC. Each
key manager and employee has been required to sell 25% of all of
their shares in Brit PLC resulting from the corporate
reorganisation and use 50% of the post-tax consideration for full
or partial repayment of their respective loan. As at 31 December
2014, the total amount of such loans outstanding was GBP0.2m.
One of the loans referred to above was made to a Director, Mark
Cloutier. The initial loan was GBP0.5m and the amount outstanding
at 31 December 2014 was GBP0.2m.
(iii) Other transactions with Directors
Certain Directors are also directors of other companies as set
out in the Governance section of the Annual Report. Some of these
companies and their subsidiaries trade with companies within the
Brit Group. All such trading is carried out on arms-length
commercial terms.
30 Guarantees and contingent liabilities
(a) Lloyd's
Assets have been pledged, as Funds at Lloyd's, by way of
deposits and fixed and floating charges for Brit UW Limited, the
corporate member of the Group. As at 31 December 2014 the Funds at
Lloyd's requirement amounted to GBP490.9m (2013: GBP551.2m).
(b) Revolving credit facility
The Group has access to a GBP225.0m revolving credit facility.
For further information, refer to Note 21. Guarantees have been
made by Brit PLC and Brit Insurance Holdings Limited to the
syndicated banks providing the facility.
As at 31 December 2014, a US$80m (GBP51.3m) letter of credit had
been provided to Lloyd's (2013: US$80.0m/GBP48.2m). At 31 December
2014, this letter of credit was fully collateralised with USD cash
held in a charged bank account (31 December 2013:
uncollateralised).
(c) Collateral pledged
As part of its reinsurance arrangements, a subsidiary company
entered into a collateralised reinsurance arrangement with a
counterparty and the fair value of the assets held to support this
liability as at 31 December 2013 was GBP428.1m. The reinsurance
arrangements ceased on 18 August 2014 and the collateral pledged
was withdrawn on that date.
A Group company, Brit Syndicates Limited, has a letter of credit
facility with Citibank PLC. Letter of credit to the value of
US$14.6m (GBP9.3m) were in issuance at 31 December 2014 (31
December 2013: US$3.3m (GBP2.0m) and were fully collateralised in
cash.
(d) Taxation
The Group operates in a wide variety of jurisdictions around the
world through its Lloyd's syndicate and uncertainties therefore
exist with respect to the interpretation of complex tax laws and
practices of those territories. The Group establishes provisions
for taxes other than current and deferred income taxes, based upon
various factors which are continually evaluated, if there is a
present obligation as a result of past events, it is probable that
an outflow of resources embodying economic benefits will be
required to settle the obligation and a reliable estimate of the
amount of the obligation can be made.
Income taxes are provided for as set out in accounting policy
Note 2.5.10.
31 Subsequent events
On 17 February 2015, the boards of Fairfax Financial Holdings
Limited (Fairfax) and the Company announced that they had reached
agreement regarding the terms of a recommended cash offer through
which the entire issued and to be issued ordinary share capital of
the Company would be acquired by FFHL Group Ltd, an entity
wholly-owned by Fairfax.
Under the terms of this offer, shareholders of the Company would
be entitled to receive 305 pence in cash for each Brit share,
comprising 280 pence in cash and 25 pence by way of the 2014
finalordinary and special dividends recommended by the Board of the
Company.
32 Financial information and posting of accounts
The financial information set out above does not constitute the
Company's statutory accounts for the year ended 31 December 2014 or
2013, but is derived from those accounts. Statutory accounts for
Achilles Holdings 1 S.à r.l. for 2013 have been delivered to the
Registre de Commerce et des Sociétés de Luxembourg and the
statutory accounts for Brit PLC for 2014 will be delivered to the
Registrar of Companies following the Company's annual general
meeting. The auditor has reported on those accounts; their reports
were unqualified and did not contain statements under Section
498(2) or (3) of the Companies Act 2006.
The audited Annual Report and Accounts for 2014 are expected to
be posted to shareholders by no later than 6 March 2015. It will
also be posted by that date on the Company's website. Copies of the
Report may be obtained, once it is published, by writing to the
Company Secretary, Brit PLC, 55 Bishopsgate, London EC2N 3AS, UK.
The annual general meeting of the Company will be held at the same
address at 9.30am on 21 April 2015.
The preliminary results were approved by the Board on 24
February 2015.
Glossary of terms
A
Acquisition costs: Costs incurred in the course of writing
business and issuing policies including commissions paid to
intermediaries and related internal expenses such as underwriter
related costs.
Adjusted net tangible assets oradjusted NTA: Total equity, less
intangible assets net of the deferred tax liability on those
intangible assets.
Adjusted net tangible assets per share: Calculated as closing
adjusted net tangible assets divided by the number of shares in
issue at the statement of financial position date less own
shares.
Admitted market: Insurance provided by an insurer that is
admitted (or licensed) in the US state in which the policy was
sold. Admitted insurance must also be sold by an agent who is
licensed in that state.
Aggregate exposure: The expected maximum total of claims that
could be incurred by an insurer in respect of any event or series
of similar events. Also see 'realistic disaster scenarios'.
Apollo: Means (i) AP Achilles Holdings (EH-1), LLC, AP Achilles
Holdings (EH-2), LLC, AP Achilles Holdings (EH-3), LLC, and AP
Achilles Holdings (EH-4), LLC; (ii) AP Helios Co-Invest, L.P.; and
(iii) AP Selene Co-Invest, L.P.
Asset allocation: The allocation of our investments across
different kinds of asset classes, such as equities, bonds, and
cash, in order to achieve a balance between return and risk.
Asset leverage: The ratio of invested assets to adjusted net
tangible assets. In this calculation both invested assets and
adjusted net tangible assets are reduced by the amount of any
recommended final ordinary and special dividends.
Attritional losses: Common losses, as opposed to a major or
catastrophe losses, incurred from ordinary insurance and/or
reinsurance operations.
Attritional loss ratio: Attritional losses incurred expressed as
a percentage of net earned premiums (excluding the effect of
foreign exchange movements on non-monetary items).
Available capital resources: Adjusted net tangible assets,
subordinated debt and Letters of credit / contingent funding.
B
BGSB: Brit Global Specialty Bermuda, the business of the Group
operating in Bermuda.
BGSU: Brit Global Specialty USA, the business of the Group
operating in the United States, of which BISI is the managing
general agent.
BIG: Brit Insurance (Gibraltar) PCC Limited, the Group's captive
reinsurer incorporated in Gibraltar.
Binder business: Business conducted by a coverholder acting
under a binding authority.
Binding authority: See 'delegated underwriting authority'.
BISI: Brit Insurance Services USA, Inc., a company incorporated
in Illinois, USA.
Broker: An intermediary who negotiates contracts of insurance or
reinsurance, receiving a commission for placement and other
services rendered.
C
Capital ratio: Available capital resources expressed as a
percentage of management entity capital requirement.
Captive: An entity that provides risk-mitigation services for
other entities within the same Group only.
Catastrophe or Cat: Perils including earthquakes, hurricanes,
hailstorms, severe winter weather, floods, fires, tornadoes,
explosions and other natural or man-made disasters. Catastrophe
losses may also arise from acts of war, acts of terrorism and
political instability.
Claims: Moneys demanded by an insured for indemnity under an
insurance contract.
Claims development triangles: Tabulations of claims development
data, set out with underwriting years along one axis and calendar
years of development along the other.
Claims incurred: Claims arising from events that have occurred,
regardless of whether or not they have been reported to the
insurer.
Claims ratio: Calculated as total claims incurred expressed as a
percentage of net earned premiums (excluding the effect of foreign
exchange movements on non-monetary items). The claims ratio is the
aggregate of the reserve release ratio, major claims ratio and the
attritional loss ratio.
Clash reinsurance: A form of reinsurance that provides
additional cover in the event that the reinsured is exposed to
multiple claims from two or more of its insureds arising out of the
same loss occurrence.
Combined ratio or CoR: Calculated as total claims incurred and
total expenses incurred by the underwriting divisions, expressed as
a percentage of net earned premiums (excluding the effect of
foreign exchange movements on non-monetary items). The combined
ratio is the aggregate of the claims ratio and the expense
ratio.
Commission ratio: Commission expense incurred by the
underwriting division expressed as a percentage of net earned
premiums (excluding the effect of foreign exchange movements on
non-monetary items).
Commutation: An agreement between a ceding insurer and a
reinsurer that provides for the valuation, payment and complete
discharge of all obligations between the parties under a particular
reinsurance contract.
Constant FX rates: An increase or decrease in figures between
two years after eliminating the effect of FX rate movements.
Corporate member: A company providing the capital to support the
underwriting activity of a syndicate at Lloyd's. Brit's corporate
member is Brit UW Limited.
Coverholder: An entity authorised by an insurer to enter into a
contract of insurance on its behalf.
CVC: Means (i) Bishop, L.P. and (ii) the CVC European Equity V
Funds.
CVC European Equity V Funds: Means CVC European Equity V Funds
means CVC European Equity Partners V (A) L.P., CVC European Equity
Partners V (B) L.P., CVC European Equity Partners V (C) L.P., CVC
European Equity Partners V (D) L.P. and CVC European Equity
Partners V (E) L.P, whose shareholdings in the Company are held
directly by their wholly owned direct subsidiary, White Poolco
Holdings Limited.
Cycles: Trends or patterns that may exist in a given market
environment. See 'hard market' and 'soft market'.
D
Deferred acquisition costs orDAC: Costs incurred for the
acquisition or renewal of insurance policies which are capitalised
and amortised over the term of those policies.
Delegated underwriting authority: An authority granted by an
underwriter to an agent (known as a coverholder) whereby that agent
is entitled to accept, within certain limits, insurance business on
behalf of the underwriter. The coverholder has full power to commit
the underwriter within the terms of the authority.
E
Earned premium: That proportion of a premium which relates to
the portion of a risk which has expired during a given period.
Energy downstream: Cover for the petrochemical / refining
sector.
Energy midstream: Cover for elements of production not covered
by energy upstream including land rigs, gas plants and general
midstream energy excluding petrochemical and refining. Coverage
provided for physical damage, business interruption.
Energy upstream: Cover for exploration and upstream production
including construction, operational physical damage risk, business
interruption / loss of production income, liabilities (on a package
basis), operators extra expenses and the typical ancillary
coverages required by the energy sector.
Excess and Surplus or E&S: A generic US regulatory
classification referring to insurance coverage not ordinarily
written by insurers fully admitted in various states. The E&S
lines business is largely unregulated as to rate and form but
insurers must be authorised to write such business in a state by
the local regulator.
Excess of loss or XL: A type of reinsurance that covers
specified losses incurred by the reassured party in excess of a
stated amount (the excess) up to a higher amount of limit, for
example GBP5m excess of GBP1m. Such coverage can operate on a per
loss basis or an aggregate basis.
Executive Management Committee orEMC: Acommittee at Brit
consisting of the senior management and the CEO.
Expense ratio: Calculated as total expenses incurred by the
underwriting divisions expressed as a percentage of a percentage of
net earned premiums (excluding the effect of foreign exchange
movements on non-monetary items). The expense ratio is the
aggregate of the commission ratio and the operating expense
ratio.
F
FCA: The UK Financial Conduct Authority, established pursuant to
the Financial Services Act 2012 and responsible for, among other
things, the conduct regulation of all firms authorised and
regulated under FSMA and the prudential regulation of firms which
are not regulated by the PRA.
First Dollar: An insurance policy written with low excess and
deductible, and written in the admitted market.
FSC: The Financial Services Commission of Gibraltar, a statutory
body corporate established by the 1989 Financial Services
Commission Ordinance (since replaced by the Financial Services
Commission Act 2007), responsible for regulating the financial
services industry in Gibraltar.
Funds at Lloyd's or FAL: Funds held in trust at Lloyd's to
support a Lloyd's underwriter's underwriting activities.
FX: Foreign exchange.
G
Gearing ratio: Calculated as total borrowings (subordinated
debt, revolving credit facility cash drawdowns and uncollateralised
drawn letters of credit) divided by adjusted net tangible assets
and subordinated debt.
Gross written premium or gross premiums written or GWP: Amounts
payable by the insured, including any brokerage or commission
deducted by intermediaries but excluding any taxes or duties levied
on the premium.
H
Hardening or hard market: An insurance market where prevalent
prices are high, with more restrictive terms and conditions offered
by insurers.
Higher hazard liability business: The provision of cover to
industries that have inherent and significant hazards, including
industries where personnel work at height, depth or in confined
space.
HMRC: Her Majesty's Revenue and Customs.
I
Incurred but not reported orIBNR: Claims incurred but not
reported, including claims which are incurred but not enough
reported (i.e. where the amount of the notification is
insufficient).
International Accounting Standards orIAS: See 'International
Financial Reporting Standards'.
International Financial Reporting Standards or IFRS: Accounting
and reporting Standards established by the International Accounting
Standards Board, as adopted by the European Commission for use in
the European Union. UK listed entities have reported on an IFRS
basis since 2005.
Invested assets: Financial investments, cash and cash
equivalents and investment related derivatives.
Investment related derivatives: Includes options and interest
rate swaps. Excludes currency forwards.
Investment return: Income, net realised and unrealised gains and
losses on financial investments, cash and cash equivalents and
investment related derivatives (net of investment management
fees).
Investment return percentage: Investment return expressed as a
percentage of average invested assets, calculated on a month by
month basis.
L
Lead underwriter or lead: A lead underwriter (usually a
specialist in the field of the insurance concerned) is the first
underwriter to take a portion of a risk, quote an appropriate rate
of premium and set terms and conditions.
Letter of credit or LoC: A written undertaking by a financial
institution to provide funding if required.
LIBOR: The daily London Interbank Offered Rate set by the
British Banking Association.
Line size: The proportion of an insurance or reinsurance risk
that is accepted by an underwriter or which an underwriter is
willing to accept.
Lloyd's China Platform: The branch of Lloyd's in Shanghai in the
People's Republic of China operated through Lloyd's Insurance
Company (China) Limited, on which certain Lloyd's syndicates have
representation.
Lloyd's of London: The Society of Lloyd's and Corporation of
Lloyd's created and governed by the Lloyd's Acts 1871-1982,
including the Council of Lloyd's (and its delegates and other
persons through whom the Council may act), as the context may
require.
London Market: The London insurance market, which includes the
Lloyd's market.
Long-tail: The term used to describe business where the
difference between the timing of the average premium receipt and
the timing of the average claim payment is over three years.
M
Major claims: Claims arising from natural or man-made
catastrophes, or claims in excess of GBP10.0m (net of reinsurance
and allowing for reinstatements) from large single risk loss
events.
Major claims ratio: Major claims incurred expressed as a
percentage of net earned premiums (excluding the effect of foreign
exchange movements on non-monetary items).
Management entity capital requirement: The capital required by
an entity based on business strategy and regulatory
requirements.
Managing Agency: A company that manages a syndicate at Lloyd's
on behalf of the member or members providing the capital. Brit's
managing agency is Brit Syndicates Limited.
N
Net earned premium or NEP: The net written premium adjusted by
the change in net unearned premium (i.e. the premium for which
insurance exposure has yet to be incurred) for a year.
Net tangible assets or NTA: The total assets of a company, minus
any intangible assets, less all liabilities.
Net tangible assets per share: Calculated as closing net
tangible assets divided by the number of shares in issue at the
statement of financial position date less own shares.
Net written premiums or NWP: Gross premiums written during a
specified period less outwards reinsurance premiums ceded.
O
Operating expense ratio: Calculated as operating expenses
incurred by the underwriting divisions expressed as a percentage of
net earned premiums (excluding the effect of foreign exchange
movements on non-monetary items).
Ordinary dividend (interim and final): The sustainable regular
dividendthat the Company aims to pay shareholders. Dividends are
linked to past performance and future prospects, expected cash
flows and working capital needs, as well as the availability of
distributable reserves.
Outstanding claims: Claims which have been notified at the
statement of financial position date but not settled.
Own risk and solvency assessment or ORSA: The name given to the
entirety of the processes and procedures employed by an insurer to
identify, assess, monitor, manage and report the short and long
term risks it faces or may face and to determine the capital
necessary to ensure that the insurer's overall solvency needs are
met at all times.
P
Portfolio director: The employees of the Group appointed to
manage the Group's underwriting portfolios: short tail direct, long
tail direct, short tail reinsurance and long tail reinsurance.
Pps: Pence per share.
PRA: The UK Prudential Regulation Authority established pursuant
to the Financial Services Act 2012 and responsible for the
prudential regulation and supervision of banks, building societies,
credit unions, insurers and major investment firms.
Premium leverage: The ratio of gross written premium to adjusted
net tangible assets. For this calculation the adjusted net tangible
assets are reduced by the amount of the recommended final ordinary
and special dividends.
Premium trust fund or PTF: The premiums and other monies that
members receive in respect of their underwriting at Lloyd's which
are held by their managing agents in trust for them subject to the
discharge of their underwriting liabilities.
Protected cell company orPCC: A company that has been separated
into legally distinct portions or cells. The revenue streams,
assets and liabilities of each cell are kept separate from all
other cells. Each cell has its own separate portion of the PCC's
overall share capital, allowing shareholders to maintain sole
ownership of an entire cell.
Q
Quota share or QS: A type of reinsurance which provides that the
reassured shall cede to the reinsurer a specified percentage of all
the premiums that it receives in respect of a given section or of
all of its underwriting account for a given period in return for
which the reinsurer is obliged to pay the same percentage of any
claims and specified expenses arising on the reinsured
business.
R
Ratio of front office employees to back office employees:
Calculated as the average number of front office staff divided by
the average number of back office staff employed during the year.
Front office employees are defined as underwriters, other
underwriting staff, claims staff and direct support staff. The
balance of employees are classified as back office.
Realistic Disaster Scenarios or RDS: Specific scenarios which
the Group uses to test its ability to settle claims arising from
certain types of disaster.
Reinsurance: The transfer of some or all of an insurance risk to
another insurer. The company transferring the risk is called the
'ceding company' and the company assuming the risk is called the
'assuming company' or the 'reinsurer'.
Representative office: An office established by a Brit to
conduct marketing and other non-transactional operations
overseas.
Reserves: Outstanding claims and claims incurred but not
reported.
Reserve releases: The amount of the reserves at the end of the
previous period determined as being excess to requirements at the
end of the current period.
Reserve release ratio: The amount of reserve releases expressed
as a percentage of net earned premiums (excluding the effect of
foreign exchange movements on non-monetary items).
Retention rate: The ratio, in percent, of the value of premiums
relating to risks written in one year renewed in the following
year. The data used is risk adjusted (i.e. it allows for changes to
terms and conditions).
Retrocession: The transfer of some or all of areinsurance risk
to another reinsurer.
Return on equity or RoE: See 'Return on net tangible assets or
RoNTA'.
Return on net tangible assets before foreign exchange movements
and IPO costs or RoNTA: Profit after tax before the effects of
foreign exchange movements on monetary and non-monetary items,
before the return on currency related derivative contracts, before
charges in respect of intangible assets and before costs incurred
in respect of the IPO, expressed as a percentage of adjusted
opening net tangible assets. The adjusted opening net tangible
assets are also modified on a weighted average basis for capital
distributions, share buybacks or share issues during the
period.
Risk adjusted rate change: Change in premium rates during the
year expressed as a percentage of opening premium rates. The data
reflects internal estimates by Brit's underwriters, based on
available year-on year underlying renewal data after allowing for
changes to terms and conditions.
Risk management framework or RMF: The Group's own internal
framework for risk management.
Running yield: The income return, expressed as a percentage of
invested assets.
S
Service companies: Subsidiary companies set up to operate a
binding authority on behalf of the Syndicate to write business from
non-Lloyd's brokers or direct from policymakers.
Short-tail: The term used to describe business where the
difference between the timing of the average premium receipt and
the timing of the average claim payment is under three years.
Softening or soft market: An insurance market where prevalent
prices are low, and terms and conditions offered by insurers are
less restrictive.
Solvency capital requirement orSCR: The higher of the two
capital levels required by Solvency II. The SCR is the prudent
amount of assets to be held in excess of liabilities and functions
as an early warning mechanism if it is breached. The SCR is
calculated using either the standard formula or an approved
internal model.
Solvency matched: The matching of the currencies of the Group's
liabilities and management entity capital requirements with the
currencies of the assets held by the Group.
Solvency II: A combination of several EU Directives that codify
and harmonise EU insurance regulation, primarily concerning the
amount of capital that EU insurance companies must hold to reduce
the risk of insolvency. Principal components are Directive
2009/138/EC on the taking-up and pursuit of the business of
insurance and reinsurance and Directive 2012/23/EU on the financial
position of insurance undertakings. Solvency II will come into
force in all EU member states on 1 January 2016.
Special dividend: Any dividend paid in excess of the ordinary
dividend. In the event that the Group's capital position is in
excess of requirements and that excess capital is not needed for
growth opportunities, the Company will consider returning it to its
shareholders. This will be done via a special dividend.
Strategic asset allocation orSAA: The Group's strategic asset
allocation defines the overall Group investment strategy and
reflects entity-level considerations and governance matters. See
'asset allocation'.
Syndicate: A group of underwriting members of Lloyd's or a
single corporate member managed as a unit to underwrite insurance
business at Lloyd's to which a particular syndicate number is
assigned by or with the authority of Lloyd's of London. Brit
operates through
Lloyd's Syndicate 2987.
T
Tactical asset allocation: This is the allocation of invested
assets from time to time (within the strategic asset allocation
ranges and investment risk framework) to reflect shorter-term
changes in market conditions.
Tail: See 'short-tail' and 'long-tail'.
Technical price: The price for the risk which is expected to
produce the long-term required return on capital for the Group.
The Company: Brit PLC.
The Group: Brit PLC and its subsidiaries.
The Syndicate: Brit Syndicate 2987.
Total available resources: Sum of the closing adjusted net
tangible assets, subordinated debt and letters of credit /
contingent funding.
Total invested assets: The sum of 'financial investments',
'assets held for sale', 'cash and cash equivalents' and net
'derivative contracts'.
Total operating expenses: These represent all expenses incurred
by the Group, excluding commission costs. They include costs
incurred in respect of the IPO.
Total value created: Calculated as closing adjusted net tangible
assets plus dividends paid during the year, less opening adjusted
net tangible assets.
Treaty: A reinsurance contract pursuant to which the reinsurer
is obliged to accept, within agreed limits, all risks underwritten
by the reinsured within specified classes of business in a given
time period.
U
Ultimate claims: The total forecast claims expected to arise
from a policy or class of business. Ultimate claims include those
losses paid, those notified and IBNR.
Underlying operating expenses: Calculated as Total operating
expenses less IPO related expenses, project costs and other timing
differences. Underlying operating expenses include bonus costs.
Underwriting capacity: The maximum premium income which a
Lloyd's syndicate is permitted to underwrite. A capacity figure is
assigned to each underwriting year and the relevant premium income
is defined as gross written premiums less commissions payable.
Underwriting profit: Operating profit generated by our
underwriting segments less investment return.
Unearned premium reserve orUPR: The portion of premium income
written in the calendar year that is attributable to periods after
the statement of financial position date. It is accounted for as
unearned premiums in the underwriting provisions.
Unrealised gains or losses:
Gains or losses that are yet to be crystallised in the form of a
cash movement from disposals of invested assets.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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