10th Mar 2008 07:00
Brit Insurance Holdings PLC10 March 2008 PRESS RELEASEFOR IMMEDIATE RELEASE10 March 2008 BRIT INSURANCE HOLDINGS PLC Preliminary results for the year ended 31 December 2007 "Positioned to outperform" Brit Insurance Holdings PLC, the UK-domiciled international general insurer andreinsurer, today announces preliminary results for the year ended 31 December2007. HIGHLIGHTS - financial performance: • Return on equity increased to 22.1% (2006: 21.6%) • Profit before tax increased to £191.2m (2006: £186.3m) • Earnings per share increased to 43.2p (2006: 41.3p) • Gross written premiums increased to £1,264.9m (2006: £1,236.3m) • Underlying gross written premium growth of 6.7% (premiums adjusted for exchange rate movements) • Net tangible assets per share increased by 12.4% to 248.0p (2006: 220.7p) • Net unearned premium reserve increased to £555.1m (2006: £539.1m) • Recommended final dividend of 7.5p per share, plus a special dividend of 7.0p per share, payable on 19 May 2008 to shareholders on the register on 18 April 2008, ex-dividend date 16 April 2008 • Capital returned to shareholders since 2005, including the above proposed dividends, totals £234.4m • Combined Ratio of 92.7% (2006: 86.9%) • Investment return up to 5.42% (2006: 4.74%) HIGHLIGHTS - operations and capital management: • £50m share buy-back completed • New Gibraltar reinsurer, Rockhampton, expected to enhance earnings from 2008 through improved risk retention and tax management • Innovative use of alternative capital markets including an award-winning catastrophe swap • Norton Re I successful with return on the utilised capital of 27% profit for all investors. Brit Insurance's share of profit of £2.1m. Norton Re II established with increased capacity • New five year £150m revolving credit facility entered into on 21 December 2007, allowing more efficient and effective management of the overall capital base while enhancing liquidity • Continued focus on core activities: Disposal of EPIC Investment Partners and partial disposal of RI3K, two non-core holdings, resulting in a profit on disposal of £5.2m and an increase in net tangible assets of £12.6m OUTLOOK Brit Insurance is confident of continued success despite the downturn in theglobal economic outlook. Rating levels in Brit Global Markets and Brit Reinsurance remain at satisfactorylevels despite being under downward pressure from the high levels of the lasttwo years. The UK market remains highly competitive. However, rates in UK motorstabilised towards the end of 2007, giving weight to our view that the marketshould start to improve in the second half of 2008. Brit Insurance's underwriters are achieving increasing access to target businessboth in the UK and elsewhere. This, together with the diversity of theunderwriting portfolio which enables underwriters to be selective with the risksthey underwrite, will allow modest gross written premium growth of around 5% in2008. This can be achieved within the parameters established to deliver targetedcross cycle returns. Dane Douetil, Chief Executive Officer of Brit Insurance Holdings PLC, said: "I am extremely pleased with the record performance of the Group in 2007,particularly in view of a more normal claims environment. Improvements to marketconditions in the UK should come over the course of 2008 taking us towards thebeginning of the next growth phase in this market. Conditions elsewhere remainsatisfactory overall, though with competitive pressures. Brit Insurance is builtto weather storms and is positioned for outperformance." For further information, please contact Dane Douetil, Chief Executive Officer, Brit Insurance 020 7984 8500Holdings PLC David Haggie/Peter Rigby/Juliet Tilley, Haggie Financial 020 7417 8989 There will be a presentation to analysts at Brit Insurance's office at 55Bishopsgate at 9.30am today An audio webcast of the analysts' presentation will be available on our websitewww.britinsurance.com from 3pm today. Notes to Editors Brit Insurance's operations comprise three strategic business units: Brit GlobalMarkets, Brit Reinsurance and Brit UK. All three have access to the tworegulatory vehicles through which Brit Insurance underwrites: Brit InsuranceLimited which is a UK FSA regulated insurance company and Lloyd's syndicate 2987which is managed by Brit Syndicates Limited. Brit Insurance has UK underwritingoffices in London, Reading, Birmingham, Bristol, Glasgow, Leeds, Darlington,Ilford and Manchester. www.britinsurance.com 2007 OVERVIEW 2007 2006 2005 2004 2003 Gross written premiums (£m) 1,264.9 1,236.3 1,202.5 1,086.7 1,015.7 Net earned premiums (£m) 1,103.3 1,048.7 942.5 857.4 671.4 Investment return (£m) 137.4 112.6 121.8 76.1 42.7 Underwriting profit (£m) 80.1 137.2 (37.5) 63.9 56.3 Profit before tax (£m) 191.2 186.3 62.4 116.1 77.6 Earnings per share (EPS) (pence) 43.2 41.3 14.8 26.2 19.7 Return on equity (RoE) (%) 22.1 21.6 7.9 14.4 12.0 Combined ratio (%) 92.7 86.9 105.2 92.9 88.5 GWP represented by catastrophe 12.2 12.8 17.6 17.1 16.6exposed business (%) Net assets (£m) 848.9 813.3 724.7 722.7 697.5 Net tangible assets (NTA) (£m) 768.4 724.3 638.4 643.5 627.5 NTA per share (pence) 248.0 220.7 195.3 198.2 193.3 Net unearned premium reserve (£m) 555.1 539.1 542.8 514.5 466.7 Total invested assets (£m) 2,728.6 2,501.5 2,373.7 1,843.0 1,164.1 Staff turnover (%) 10.4 7.7 7.5 n/a n/a Figures for 2004 and subsequent years are stated in accordance with IFRS;figures for 2003 are stated in accordance with UK GAAP. Pre 2006 per sharefigures have been adjusted to reflect the 2006 share consolidation. Chairman's statement It gives me great pride and pleasure to look back on my six years as Chairman,tinged with a hint of sadness that my tenure is coming to an end at theforthcoming AGM. It is normal for a Chairman's statement to review thehighlights of the year; on this occasion however, I will also take theopportunity to look back over the six years as a whole. 2007 results I am very pleased to report on another year of record results for this Group.The 2007 PBT of £191.2m equates to a RoE of 22.1% and again shows our ability todeliver a sustainable return for our shareholders. This result brings our fiveyear average RoE to 16.3%, well ahead of our target average across cycle returnof 6% over the Bank of England Base Rate (the UK base rate) (10.6% for theperiod). In 2007 we have continued to focus on our core business of underwritingand disposed of our investment in EPIC Investment Partners and partiallydisposed of our investment in RI3K. We have also continued with our strategicdevelopment and capital management, including the innovative use of capitalmarkets. My years as Chairman The period since 2002 has been good for the non-life insurance market ingeneral. In this time, Brit Insurance has grown market share, income and profitsimpressively. The facts and figures only tell half the story however and I wouldlike to comment on some of the qualitative aspects. Brit Insurance has not only grown its business, it has grown it in a particularshape: on a model of diversity. In 2007 for example, the quality and spread ofthe business as a whole meant it could withstand the challenges of a soft UKmarket, two UK floods and a global sub-prime credit crisis and still return arecord profit. Whilst maintaining its growth and diversity, Brit Insurance has always beenprepared to make tough decisions. It has exited some major classes of business -aviation insurance in 2003 and catastrophe retrocession business in 2006 -because of insufficient return levels and for reasons of portfolio managementrespectively. In 2007 it disposed of two non-core holdings. Capital management and dividends Brit Insurance has also shown the appetite and talent for innovation andfinancial management. This has included the use of lower tier two subordinateddebt as a cheaper form of capital in 2004 and 2005 and, in 2006 and 2007, theuse of further capital markets strategies and techniques. Non-life insurance remains a cyclical business and I have no doubt that we willlook back on these years as a good period. The Group has managed its capital inline with the pricing cycle. This involved raising new equity in 2001 and 2002and returning capital to shareholders by way of special dividends in the lasttwo years and a share buyback in 2007. We are recommending a final dividend of 7.5p per share making a full-year totalof 15.0p, in line with our dividend policy. In addition to this, we arerecommending a 7.0p special dividend, reflecting the high level of earnings in2007. Efficient use of capital remains a clear imperative for the Board and we willcontinue to buy back our ordinary shares during 2008 should conditions allow andshould it be in the interest of the Group and its shareholders. Board changes On 28 February 2007, Kenneth Culley CBE was appointed as a Non-ExecutiveDirector. Ken also joined the Audit and Nomination Committees. On 1 October2007, John Barton joined the Board as a Non-Executive Director and DeputyChairman. At our AGM on 15 May 2008, John will succeed me as Chairman. Also at our AGM,two of our Non-Executive Directors - Neil Eckert and Anthony Townsend - willretire. Neil has served the Group for 12 years as both an Executive andNon-Executive Director. I would thank Neil, a founder and the first ChiefExecutive Officer of the Group, for his enormous contribution in the developmentof Brit Insurance. Anthony has been a Non-Executive Director since the Group'sacquisition of Wren in August 1999 and I thank him also for his significantcontribution over the years. Outlook In 2008, Brit Global Markets and Brit Reinsurance expect to see a limited marketdownturn and increased competition following the good margins enjoyed in recentyears. 2008 should see the bottom of the underwriting cycle in the UK marketwith margins in some lines beginning to improve during the second half of theyear. Our diversified portfolio will help maintain overall profitability acrossthe underwriting cycle. I leave the Group in good hands and have no doubt that John Barton and DaneDouetil, supported by the very strong team of Directors, management and staff atall levels, will adapt successfully to the changing market conditions and leadyour company through a further period of success. I would like to wish them thevery best while thanking them and all my colleagues for their support, hardwork, sound professional judgement and good humour. It has been a pleasure tochair this Company. Clive Coates, Chairman9 March 2008CHIEF EXECUTIVE OFFICER'S REPORT Our 2007 performance 2007 was a record year. Our return on equity (RoE) of 22.1% has againsignificantly exceeded our target of 6% above the UK base rate. Our five yearweighted average return is 16.3% which exceeds our target by 5.7%. This level ofreturn is especially pleasing given challenging conditions in certain areas ofinsurance pricing, difficult investment markets and increased claims. During 2007, we also made further developments to Group governance andoperations and we continue to be innovative in non-traditional insurance areas. Diversification and our three separate 'Strategic Business Units' (SBUs) Diversification is at the heart of the Group's business model. We write 80sub-classes across our three SBUs. The Group's results for 2007 are a testimonyto the financial benefits of the Group's strategy of diversification. Since 2001 we have materially grown the Group and have consciously constructedstrong and diverse underwriting and investment portfolios. The Group's inherentvalue to all stakeholders thus exceeds the sum of its parts. It is key to ourstrategy that we should be able to withstand adverse conditions in some parts ofthe Group by virtue of our overall diversity. Regulators and rating agencies areincreasingly giving credit for diversification and penalising so-called monolineinsurers. Events of recent years have demonstrated the fragility of a monolinemodel when challenged by a large or systemic event in a single area, for examplethe hurricanes of 2005 or the credit crunch of 2007. We believe this trend will continue as rating agency models are refined and newsolvency regulation is introduced across Europe from 2012. These importantchanges mean that larger and more diversified players will be the winners interms of capital efficiency, RoE and delivery of shareholder value. Investment returns We produced an excellent investment return of £137.4m or 5.42%, in unusuallydifficult market conditions. Brit Insurance's aim is to maximise investment return within the constraints ofthe Group's risk appetite. During 2007, emphasis was placed on using a widerrange of investment managers and the continued development of our portfolio. Weincreased the proportion invested in specialised investments funds, which areless correlated to interest and equity price factors. Reserve releases This is the fourth year for which we have disclosed our back year claimsdevelopment figures and we have had releases on each occasion. Our aim continuesas before - to reserve more recent years realistically yet cautiously and reviewthese estimates as the years mature. Back year reserve releases in 2007 totalled£58.7m and arose from all three of our business units. Sub-prime related issues We have no material exposure to sub-prime on the asset side of our balancesheet. It is not our policy to hold sub-prime assets in our investmentportfolio. Given the current high degree of investor interest in this area wehave, for this report, included a more detailed analysis of our portfolio thanwe would normally. We do have potential sub-prime related claims on the liability side of ourbalance sheet. Brit Insurance is a leader in a number of casualty classes ofinsurance. Some of these classes are exposed to liability arising from sub-primemortgage related issues. Our underwriting guidelines in these areas are strictand our line sizes closely monitored. At 29 February 2008, notifications, which may or may not turn into actualclaims, had been received from 25 insureds. Of these, 16 had made notificationson a precautionary basis with no sums specified whilst the amounts specified onthe remaining nine totalled £30.3m (£12.7m net). This £12.7m forms part of whatwe believe to be a sensible reserve of £62.5m net of reinsurance in respect ofpotential claims. This reserve is in addition to amounts carried within ournormal ultimate loss ratios (ULRs) for the affected classes. Our total grosspremium income from the classes of business affected amounted to £163.0m in2007. As a number of the classes potentially affected, such as casualty, are writtenon a 'claims made' basis, our exposure in these areas will fall away over theshort term. Brit Global Markets and Brit Reinsurance Global Markets continues to go from strength to strength, with GWP growing at anannual compound rate of 20.2% over the last three years. In 2007 its underlyinggrowth rate was 11.7%, writing £749.2m of business with a combined ratio of89.3%. Its 57 underwriters have on an average of over 20 years experience eachand they led 58.8% of their business and had a retention rate of 80.1%. Growthcame from all four of its largest divisions being Accident and Health, Marine,Property and Financial and Professional. Its fifth division, Aerospace, reducedits income in a more competitive market. Helped by careful risk selection, itreported an underwriting year claims ratio of 75%, outperforming the globalAerospace market for which the claims ratio estimates vary from 130% to 150%. Reinsurance had another good year writing £239.4m of premium with a combinedratio of 83.0%. Its 11 lead underwriters with over 264 years experience betweenthem have positioned the portfolio for more challenging market conditions andnow lead 29.6% of their business. This is a high percentage considering BritInsurance's overall market share. Both Global Markets and Reinsurance operated within the Group aggregateconstraints for any one or series of industry events resulting in them forgoingsome upside in a largely catastrophe free year but nevertheless made excellentreturns. In 2007, our catastrophe account equated to 12.2% of gross writtenpremium, a reduction from 12.8% in 2006. Brit UK Brit UK has been extremely profitable since its formation in 2003, since when ithas produced a cumulative profit before tax of £238.9m. For 2007, which webelieve is at or near the bottom of the pricing cycle, it reported a PBT of£15.8m. For 2008 we see a more positive pricing outlook. The investment we have made inour UK infrastructure and people means it is well positioned to deliver a higherexpected return on equity for the next two to three years. Norton Re, Fremantle and Rockhampton Norton Re, Fremantle and Rockhampton are all examples of innovative developmentsin non-traditional insurance areas designed to enhance Group RoE. They are alsoall offshore, independently controlled and managed. One of our competitiveadvantages is that we can move quickly into such areas, whether as buyer, selleror arranger of these products. Norton Re Norton Re I was a stand-alone regulated reinsurance company set up in Bermuda towrite catastrophe retrocessional business for the 2007 year. A successorbusiness, Norton Re II, has been set up on a similar basis for the 2008 year.They are examples of the Group using its expertise and enhancing return onequity by attracting capital market investors to support a specific line ofbusiness in which our origination and management skills exceed our capacity orappetite to hold on our own balance sheet. We invested US$21.1m in Norton Re I for an 18.8% share, the other money comingfrom international institutions wanting short-term direct exposure to the risk/reward characteristics of this class of business and wishing to invest alongside us from the outset. There was a partial return of capital mid-year inrespect of unutilised capital. The full year result on the utilised capital hasbeen 27% profit for all investors. Brit Insurance's profit of £2.1m was enhancedby a level of expense recoveries and profit commission. Norton Re II is backed by slightly more capital (US$118.2m), most of which wasdrawn from the investors in Norton Re I. We have a 16.9% share. Fremantle Fremantle is a derivative contract which provides catastrophe cover in astructure not currently offered by the traditional reinsurance markets. In manyways it is economically akin to a reinsurance purchase; its annual cost isequivalent to some 3% of our annual reinsurance spend. It won Credit Magazine's2007 'Structured Credit Deal of the Year' award. Brit Insurance's transaction with Fremantle was a US$200m catastrophe risk swap.It provides Brit Insurance with US$40m of cover after a fourth qualifying eventand an additional US$40m after a fifth qualifying event occurring within a threeyear period. There is then an additional US$30m of cover each for qualifyingevents six to nine, again within the three year period. It is fully cashcollateralised. Rockhampton Rockhampton is a newly formed reinsurance company based in Gibraltar. It is anindependent protected cell company (PCC). Brit Insurance owns 20% of the corecapital and has provided 100% of the capital of its first cell. For 2008 thecell has written a proportion of the Group's outwards reinsurance programme onidentical terms to the third party reinsurers used by the Group. It has alsowritten a 5% whole account quota share of the Group's business. We will derive insurance portfolio benefits from our arrangements withRockhampton. It will allow us to retain more economic risk where the Group'sincreased scale, diversity and risk appetite allow us to do so. At the same timeRockhampton enjoys the benefits of operating in a favourable tax regime. Taxation and domicile We regularly weigh the benefits of operating from our UK base against the levelof tax that we bear. We remain of the opinion that with our size and businessmix, a UK domicile remains appropriate for the time being and that the cost,disruption and increased complexity of moving offshore would not currently be inthe interests of shareholders. The HM Revenue and Customs (HMRC) consultation paper on the taxation of foreignprofits may, if implemented in its current form, mitigate some of the currenttax inequities between UK and overseas-headquartered groups. We use offshore structures for specific projects and specific reasons, many ofwhich are driven by investor needs. The Fremantle special purpose vehicle is inCayman, the Norton companies are in Bermuda and Rockhampton is in Gibraltar. Thefactors involved in making these choices included the speed of company formationand licensing in each of these locations, the ease of local listing in Cayman,the access to the US and Bermuda investors, clients and brokers for Norton andthe availability of PCC legislation and the EU membership of Gibraltar. The useof these particular offshore structures should help reduce the Group's effectivetax rate. New bank facility On 21 December 2007 we entered into a new £150 credit facility agreement. Thisfacility will allow us extra back-up liquidity whilst providing more flexibilityand efficiency in our overall capital management. Historically we have tendednot to use senior bank facilities. However, we have structured a facility withsufficient headroom in the financial covenants. Our ability to arrange thisfacility in the recent challenging financial climate is a sign of the strengthof our business. Expense management Investment in people, processes and infrastructure will be a key contributor tothe Group achieving its profitability, growth, market position and customerservice objectives. In 2007 both headcount and expenses have increased in line with our expectationsand at significantly lower rates than in 2006. Management expenses before bonuspool and RI3K costs totalled £129.3m, an increase of 15.3% over 2006. Thisrepresented a significant reduction over the 2006 growth rate of 23.7%. Ourheadcount increased by 4.8% to 738, again a significant reduction over the 2006growth rate of 24.4%. One of the key drivers of the expense increase in 2007 was the investment madein our headcount and structure in the second half of 2006, the full annual costsof this were seen for the first time in 2007. Other factors were furtherrecruitment, ongoing investment in systems and processes and an impairmentprovision of £4.0m against IT software capitalised in 2005 and prior. Strategic review Growth aspirations Our overriding objective has always focused on profitability with an acrosscycle return target of at least 6% over the UK base rate. Our growth ambitionshave always been secondary and this remains the case. Pricing improvements have been slower to come through in Brit UK than we and themarket expected and there is increased pricing competition in Brit GlobalMarkets and Brit Reinsurance. It is therefore unlikely that we will meet ourpreviously stated aspiration of £2bn of premium by 2010. Whilst we retain our growth ambitions, we now believe a long-term growth targetcan serve as a distraction and that annual guidance will be more helpful. For2008, our guidance for Group top line growth is 5% but we will continue toreview our estimate in the light of market conditions. US dollars business and Lloyd's business During 2007 we changed our internal parameters for Lloyd's business fromrepresenting a maximum of 50% of Gross Written Premium to 60% and for US dollarbusiness from 40% to 55%. Lloyd's has become more attractive to Brit Insurance as it has continued toresolve some of its legacy issues and strengthen its capital base. Weparticularly note Lloyd's issue of more hybrid bonds and, the transactionbetween Berkshire Hathaway, Equitas and Lloyd's. Our growth in recent years has been driven by Brit Global Markets which containsa relatively high Lloyd's and US dollar component. As our non-Lloyd's platformdoes not have, at this stage in its development, direct licences to write USbusiness such business is written through our Lloyd's platform. Shares performance In May 2007 our share price reached a seven-year high and in January 2008 ittouched a five-year low without any material change to analysts' expectations ofour profitability. The share price is a reflection of a general level of marketturbulence and a general sell-off of financial stocks as a whole. However, it isinteresting to note that over this period the percentage of the Group's sharecapital owned by our top ten shareholders has grown from 50.2% to 53.4% and thetop 50 shareholders from 76.6% to 78.3%. I remain philosophical about this sortof volatility and concentrate on delivery of our stated strategy. Return of capital to shareholders in 2007 During 2007 we returned £50.0m of capital to shareholders by way of a sharebuy-back programme which was announced in March and completed in July. Anadditional £2.3m of shares were bought in December. We constantly monitor our capital requirements and will continue to seekshareholder approval at our AGM to enable us to buy back further shares (up to9.99% of issued share capital) should conditions allow and should it be in theinterest of the Group and its shareholders. Consideration is given to theprojected effect on key metrics such as return on equity, earnings per share andnet tangible assets per share. Dane Douetil CBE, Chief Executive Officer9 March 2008 FINANCIAL RESULTS Introduction Profit before tax for the year was £191.2m, an increase of 2.6% over 2006(£186.3m). RoE was 22.1% (2006: 21.6%) and the Group combined ratio was 92.7%(2006: 86.9%). Operating profit was £201.0m (2006: £200.1m). Gross written premium totalled £1,264.9m (2006: £1,236.3m), an increase of2.3%. Premium growth in respect of ongoing business, adjusted for exchange ratemovements was 6.7%. As anticipated, the premium growth has come from Brit GlobalMarkets. Claims and reserve movements are discussed below. Investment return was £137.4m, a return of 5.42% (2006: £112.6m, 4.74%). Group management expenses totalled £129.3m (2006: £112.1m), an increase of15.3%. This represented a significant reduction over the 2006 growth rate of23.7%. Commission costs for the period were £252.3m, 22.9% of net earned premium(2006: £247.6m and 23.6% of net earned premium). Sustainable profitable growthYear ended 31 December GWP Post tax RoE % Target RoE Excess/ (deficit) £m % %2007 1,264.9 22.1 11.5 10.62006 1,236.3 21.6 10.6 11.02005 1,202.5 7.9 10.7 (2.8)2004 1,086.7 14.4 10.4 4.02003 1,015.7 12.0 9.7 2.3 Five year average 16.3 10.6 5.7 Segmental analysisYear ended 31 December 2007 Brit Brit Brit UK Other Total RI3K Other Group Global Reinsurance underwriting under- total Markets corporate writing £m £m £m £m £m £m £m £m Gross written 749.2 239.4 274.0 2.3 1,264.9 - - 1,264.9premiums Earned premiums, 630.4 208.3 262.8 1.8 1,103.3 - - 1,103.3net of reinsurance Fees, commissions - - - - 0.0 0.5 21.0 21.5and other income Investment return 55.9 25.6 40.1 0.2 121.8 - 5.8 127.6and return onderivatives Disposal of a - - - - - - 7.1 7.1subsidiaryundertaking,disposal of anasset held for saleand part disposalof an associatedundertaking Total revenue 686.3 233.9 302.9 2.0 1,225.1 0.5 33.9 1,259.5 Claims incurred, (342.7) (117.4) (200.5) (0.2) (660.8) - - (660.8)net of reinsurance Expenses (219.9) (55.5) (86.6) (0.4) (362.4) (1.7) (33.6) (397.7) Total expenses (562.6) (172.9) (287.1) (0.6) (1,023.2) (1.7) (33.6) (1,058.5)excluding financecosts Operating profit/ 123.7 61.0 15.8 1.4 201.9 (1.2) 0.3 201.0(loss) Finance costs (12.7) Share of profit of 2.9associatedundertakings Profit on ordinary 191.2activities beforetax Income tax expense (53.6) Profit attributable 137.6to equity holdersof the parent Claims ratio 54.4% 56.4% 76.3% 59.9% Expense ratio 34.9% 26.6% 33.0% 32.8% Combined ratio 89.3% 83.0% 109.3% 92.7% Year ended 31 December 2006 Brit Brit Brit UK Other Total RI3K Other Group Global Reinsurance underwriting under- total Markets corporate writing £m £m £m £m £m £m £m £m Gross written 706.9 260.9 279.9 (11.4) 1,236.3 - - 1,236.3premiums Earned premiums, net 557.5 237.0 251.2 3.0 1,048.7 - - 1,048.7of reinsurance Fees, commissions - - - - 0.0 0.7 0.1 0.8and other income Investment return 46.4 26.2 32.7 0.1 105.4 0.0 5.0 110.4and return onderivatives Disposal of a - - - - - - - -subsidiaryundertaking,disposal of an assetheld for sale andpart disposal of anassociatedundertaking Total revenue 603.9 263.2 283.9 3.1 1,154.1 0.7 5.1 1,159.9 Claims incurred, net (259.3) (118.5) (174.9) (3.3) (556.0) - - (556.0)of reinsurance Expenses (217.1) (68.2) (68.6) (1.6) (355.5) (4.7) (43.6) (403.8) Total expenses (476.4) (186.7) (243.5) (4.9) (911.5) (4.7) (43.6) (959.8)excluding financecosts Operating profit/ 127.5 76.5 40.4 (1.8) 242.6 (4.0) (38.5) 200.1(loss) Finance costs (14.9) Share of profit of 1.1associatedundertakings Profit on ordinary 186.3activities beforetax Income tax expense (52.5) Profit attributable 133.8to equity holders ofthe parent Claims ratio 46.5% 50.0% 69.6% 53.0% Expense ratio 38.9% 28.8% 27.3% 33.9% Combined ratio 85.4% 78.8% 96.9% 86.9% UNDERWRITING DIVERSITY The Group's diverse underwriting business mix is set out below. The portfoliohas been built and is managed with a view to maximising capital efficiency andshareholder returns by limiting exposures to single large events and managingdown correlations such as geography, currency and tail length. Diversity by SBU Brit Global Markets Brit Reinsurance Brit UK CEO Mike Sibthorpe CEO Jonathan Turner CEO Peter Burrows Classes of business (%) Classes of business (%) Classes of business (%) Accident & Health 19.2 Property Treaty 49.9 Employers'/Public 32.8 LiabilityAerospace 2.2 Casualty Treaty 35.6 Professional Indemnity/D&O 13.2Financial & 36.9 Marine XL 3.8 Motor 23.3ProfessionalMarine 22.1 Aviation XL 10.5 Property and Commercial 30.7Property 19.6 Property 0.2 Combined (Packages) Retrocessional 100.0 100.0 100.0 2007 performance 2007 performance 2007 performance GWP £749.2m GWP £239.4m GWP £274.0mPBT £123.7m PBT £61.0m PBT £15.8mRisks led 58.8% Risks led 29.6% Risks led 87.1%(by value) (by value) (by value)Retention rate 80.1% Retention rate 87.4% Retention rate 72.3%(by value) (by value) (by value)Combined ratio 89.3% Combined ratio 83.0% Combined ratio 109.3% Key points Key points Key points • 107 employees (2006: 87) • 31 employees (2006: 29) • 166 employees (2006: 152) • 57 underwriters with an • 11 underwriters with an • 75 underwriters with an average of over 20 years' average of over 24 years' average of over 15 years' experience experience experience • London based • London based • Nine regional offices including London• 34.7% of business • 54.4% of business underwritten by BIL, 65.3% underwritten by BIL, • 82.6% of business by BSL 45.6% by BSL underwritten by BIL, 17.4% by BSL • 59.3% of Group ongoing GWP • 19.0% of Group ongoing GWP • 21.7% of Group ongoing GWP • Tail: short 47.1%; medium • Tail: short 50.2%; medium • Tail: short 44.3%; medium 18.6% long 34.3% 37.6% long 12.2% 23.1% long 32.6% Diversity by location of risk Gross written premiums Year ended 31 December 2007 £m % United Kingdom 335.7 26.5Europe 70.2 5.5United States 356.1 28.2Other (including worldwide) 502.9 39.8 1,264.9 100.0 Diversity by tail of business Gross written premiums Year ended 31 December 2007 £m % Short tail ( < 1.5 years) 595.0 47.0Medium tail (1.5 to 3.0 years) 297.5 23.5Long tail (>3.0 years) 372.4 29.5 1,264.9 100.0 Diversity by currency Gross written premiums Year ended 31 December 2007 £m % GBP and other currencies 504.9 39.9US dollar 620.3 49.0Canadian dollar 50.4 4.0Euro 89.3 7.1 1,264.9 100.0 Diversity by underwriting platform Gross written premiums Year ended 31 December 2007 £m % BIL 616.0 48.7BSL (Syndicate 2987) 646.6 51.1Other 2.3 0.2 1,264.9 100.0 Underwriting conditions Whilst rates in Brit Global Markets and Brit Reinsurance remain at satisfactorylevels, they are declining from the high levels seen in the last two years. TheUK market remains challenging. However, rates in motor stabilised towards theend of 2007, giving weight to our view that the market should start to improvein the second half of 2008. While headline risk pricing remains an importantmetric, we also closely monitor any changes in the terms and conditions and inmost areas these remain robust. The following rate indices should be read with caution. They are based onunderwriters' estimates of rate changes, including adjustments to terms andconditions. They relate to renewal business only, since this represents thebusiness for which we have the best year-on-year data. Particular caution shouldbe taken with respect to the figures at 31 January 2008 as one month's datainevitably represents a smaller population and may therefore be lessstatistically significant than that for a 12 month period. Brit Global MarketsPremium Rating Index (Year 2000 as base year) January Full Full Full Full Full Full Full Full 2008 year year year year year year year year 2007 2006 2005 2004 2003 2002 2001 2000 Accident & 178 169 164 152 149 142 131 100 n/aHealthAerospace 215 215 254 268 260 237 202 158 100Financial & 264 268 276 280 280 265 207 122 100ProfessionalMarine 176 181 182 171 160 156 144 112 100Property 158 168 171 151 152 155 150 112 100 Brit ReinsurancePremium Rating Index (Year 2000 as base year) January Full Full Full Full Full Full Full Full 2008 year year year year year year year year 2007 2006 2005 2004 2003 2002 2001 2000 Property Treaty 196 207 198 155 153 154 149 110 100Casualty Treaty 228 230 234 228 230 215 182 115 100Marine XL 272 288 286 193 183 179 171 115 100Aviation XL 130 125 125 128 139 159 167 100 100 Brit UKPremium Rating Index (Year 2000 as base year) January Full Full Full Full Full Full Full Full 2008 year year year year year year year year 2007 2006 2005 2004 2003 2002 2001 2000 Employers'/ 207 217 237 257 284 286 200 100 n/aPublic LiabilityProfessional 102 111 118 130 132 130 100 n/a n/aIndemnity/D&OMotor 104 101 104 111 122 120 115 108 100Property 119 122 125 130 131 132 123 104 100 CLAIMS Activity - WORLWIDE INSURANCE MARKETS Natural catastrophes As we anticipated in our 2006 Annual Report, claims frequency and severity in2007 have returned to more normal levels. Claims estimates for 2007 natural and man-made catastrophes are in the region ofUS$25bn (2006: US$16bn). 2007 was however below the long-term claims trend andsignificantly below 2005's record year, in which natural catastrophes accountedfor over US$80bn. During 2007 natural events which contributed to the increase in claims activityseen by the insurance industry included: Start date Event Location Estimated claims US$bn 18 January European windstorm Germany, Belgium, UK 5.9 Kyrill13 April Storms and floods East Coast, US 1.67 June Floods NSW, Australia 1.025 June Floods UK 2.620 July Floods UK 2.121 October Wildfires California, US 1.1 Source: Swiss Re Man-made catastrophes in 2007 included industrial fires and explosions, aviationand space losses. The cost of these is currently estimated at over US$2bn. In the UK, the most significant 2007 claims activity resulted from the June andJuly floods (see table earlier in this announcement). On 25 June prolonged heavyrainfall resulted in many parts of northern and eastern England being flooded.This was followed on 20 July, by further heavy rainfall causing localised flashflooding across parts of southern England and the midlands. In the US and Caribbean region, the 2007 season saw increased storm activityover 2006. Windstorm activity in 2007 was much greater than the claims figureswould suggest as, while 2007 was a year of high activity, the major windstormseither failed to make landfall or made it in areas of low insured values. Forthe first time two category five hurricanes, Hurricanes Dean and Felix, reachedlandfall in the same season. 2007 also witnessed Hurricane Humberto, the fastestrecorded developing storm in Atlantic basin history. In total there were 14named storms resulting in total estimated claims of US$1.5bn (2006: nine storms;US$0.2bn). Six of these reached hurricane strength (2006: five) and four madelandfall (three Mexico, one US) whilst classified as a hurricane (2006: none). We are still in a period of heightened activity that began in 1995 and isanticipated to last for the foreseeable future. Research has found that the riskof landfalling hurricanes in the Atlantic basin for the next five years remainssignificantly above the historical average. In 2007, our catastrophe account equated to 12.2% of gross written premium, areduction from 2006 levels (12.8%) and a further reduction from 2005 levels(17.6%). We regard this appropriate for our overall business mix and strategyand do not believe this percentage will change materially in 2008. Casualty classes and sub-prime related claims Sub-prime issues have the potential to affect the global insurance market. In the US, higher interest rates and falling property prices contributed toincreased levels of mortgage defaults among high-risk, or sub-prime, borrowers.This has exacerbated a slowdown in the US economy and resulted in large lossesfor some banks and other financial institutions. Among those suffering losses are investors who bought sub-prime mortgage bonds.It is estimated that market losses in respect of such bonds could be betweenUS$220bn and US$450bn. Brit Insurance has no material exposure to sub-primerelated investments. Claims on directors and officers' policies (D&O) could arise from the relaxationof lending criteria and from investment strategies involving bonds backed bysub-prime mortgages. Claims could also arise on professional indemnity policies(PI) as professional advisors face legal suits for advice given. The financialimpact on the insurance industry has been estimated at up to US$6bn. CLAIMS AND CLAIMS DEVELOPMENT - BRIT INSURANCE The Group's claims ratio was 59.9% (2006: 53.0%). Claims have arisen from eventssuch as the Australian floods, European Windstorm Kyrill, the UK floods, thesub-prime crisis, the California wildfires and a number of aviation and spaceevents. Claims arising from Gross Netspecific 2007 events £m £mAustralian floods 2.5 1.9European Windstorm Kyrill 3.0 2.0California wildfires 6.6 6.2UK floods (June and July) 20.0 14.2Sub-prime 106.1 62.5 Sub-prime claimsSBU Class Gross Net £m £mBrit Global Financial Institutions / D&O 69.1 25.5Markets Financial Risks 19.1 19.1 88.2 44.6 Brit Reinsurance Casualty Treaty 17.9 17.9 Total 106.1 62.5 At 29 February 2008 notifications had been received from 25 insureds. Of these,six insureds with direct policies and three insureds with reinsurance policieshave specified amounts totalling £30.3m (£12.7m net). The remaining insureds (13direct, three reinsurance) made notifications on a precautionary basis with noamounts specified. The classes affected by the sub-prime crisis have proved profitable over recentyears and our GWP in these classes in 2007 was £163.0m. The analysis of claims development by accident year shows how our ultimate claimestimates have subsequently developed: Ultimate gross claims Accident year 2001 2002 2003 2004 2005 2006 2007 Total and prior years £m £m £m £m £m £m £m £m At end of accident 1,834.9 253.9 441.5 691.9 1,125.9 649.8 834.3year One year later 1,866.7 254.4 415.7 642.1 1,154.9 667.2 Two years later 1,888.1 250.6 384.2 619.2 1,150.9 Three years later 1,889.5 252.5 367.1 608.2 Four years later 1,887.6 247.1 342.5 Five years later 1,867.4 239.8 Six years later 1,856.7 Estimate of 1,856.7 239.8 342.5 608.2 1,150.9 667.2 834.3 5,699.6cumulative claimsCumulative paid (3,686.0)claims Less third party (0.4)participations onsyndicates Gross liability as 2,013.2per the balance sheet Ultimate net claims Accident year 2001 2002 2003 2004 2005 2006 2007 Total and prior years £m £m £m £m £m £m £m £m At end of accident 1,276.3 195.5 391.0 580.4 784.9 573.7 722.0year One year later 1,313.8 195.2 359.3 516.7 792.2 590.8 Two years later 1,323.5 192.1 316.8 500.8 784.4 Three years later 1,316.4 187.8 305.4 482.7 Four years later 1,316.6 183.4 278.8 Five years later 1,310.1 172.7 Six years later 1,297.5 Estimate of 1,297.5 172.7 278.8 482.7 784.4 590.8 722.0 4,328.9cumulative claimsCumulative paid (2,641.5)claims Less third party (0.3)participations onsyndicates Net liability as per 1,687.1the balance sheet The tables above show the development of claims over a period of time on a grossand net of reinsurance basis. The tables show the cumulative incurred claims,including both notified and IBNR claims, for each successive accident year ateach balance sheet date since 2001. They have been grossed up to include 100% ofthe managed syndicate claims rather than the claims that reflect the BritInsurance percentage ownership of each syndicate's capacity during therespective accident years. In addition, claims in currencies other than Sterlinghave been retranslated at 31 December 2007 exchange rates. Prior year reserves have again proved robust in aggregate with an overallrelease of £58.7m, representing 2.9% of opening net reserves (2006: £33.9m and1.7%; 2005: £110.8m and 7.2%). These releases are across all three SBUs and havebeen further analysed below. During the period, there have been no materialchanges to the reserves previously reported in respect of Hurricanes Katrina,Rita and Wilma. Reserve movementsSBU Class Year ended Year ended Year ended 31 December 31 December 31 December 2007 2006 2005 £m £m £m Brit Global Markets Accident & Health (4.6) 0.3 9.4 Aerospace 12.8 9.0 7.5 Financial & 11.2 17.2 22.6 Professional Marine 4.0 (15.9) 11.5 Property 6.1 6.4 15.1 29.5 17.0 66.1 Brit Reinsurance Property Treaty 2.7 3.7 2.0 Casualty treaty 8.9 1.3 0.5 Marine XL (0.4) (3.9) (2.1) Aviation XL (12.3) 2.0 0.8 Property retrocessional 5.3 (15.1) (6.2) 4.2 (12.0) (5.0) Brit UK Employers'/Public 6.9 7.7 18.4 Liability Professional Indemnity/ 11.7 6.5 4.1 D&O Motor 1.7 1.2 8.8 Property and commercial 4.9 16.6 12.3 Combined (Package) 25.2 32.0 43.6 Other underwriting (0.2) (3.1) 6.1 Total 58.7 33.9 110.8 INVESTMENTS A diverse portfolio Overview Asset allocation by asset class 31 December 2007 31 December 2006 £m % £m % Equities 218.7 8.0 226.4 9.1Bonds 1,493.6 54.7 1,825.7 73.0Specialised investment funds 281.0 10.3 27.2 1.1Cash and cash equivalents 735.3 27.0 421.1 16.8Total 2,728.6 100.0 2,500.4 100.0 Asset allocation by asset class 31 December 2007 £m %Sterling 1,633.2 59.9US dollar 683.5 25.0Euro 298.8 11.0Other 113.1 4.1Total 2,728.6 100.0 Brit Insurance's portfolio is highly liquid with over 40% of assets held in cashand assets under one year to maturity. These assets consist mostly of overnightmoney market funds and certificates of deposit. These are monitored and managedto ensure there is limited exposure to any single issue or institution. The bond portfolio is 98.5% invested in government and investment grade credit,with the weighting towards investment grade bonds being increased in the run upto year end to take advantage of the higher yields available. The value of our equity portfolio was reduced by 3.4% over the course of theyear as profits were taken on certain strategic investments, and to lessenexposure to risk as market volatility increased in the second half of the year. During the year our exposure to assets with low correlation to interest rate andequity price movements was increased. These are referred to as specialisedinvestment funds. The strategies adopted include relative value trades, whichtake advantage of pricing differentials between credit categories, differentialsbetween countries or currencies and differentials between individual assets andtheir related indices. Also included in this category is a well diversifiedmortgage backed asset fund. Given the current high degree of investor interest in this area we have for thisreport, included more detailed analysis of our portfolio than we normally would.Equities Type Name 31 December 2007 £m Listed Equities Advent Capital Holdings Plc 0.5 Climate Exchange Plc 4.0 EPIC Reconstruction PLC 2.9 EPIC Select Opportunities Fund 1.0 Equity Partnership Investment Co - Capital 7.9 Shares Equity Partnership Investment Co - Income 5.0 Shares Trading Emissions Plc 1.6 CPAM Managed Equity Holdings 22.0 Ruffer Managed Equity Holdings 14.3 59.2 OEICs EEA Environmental Fund 11.2 Elite EEA UK Equity Fund 30.7 Elite EEA UK Financials Fund 71.8 HSBC UK Freestyle Fund 4.1 Odey Allegra International 5.0 122.8 Unit Trusts Artemis Institutional UK Alpha Fund 20.9 Artemis Income Fund 14.8 35.7 Unlisted equities XN Holdings Inc 1.0 1.0 Total 218.7 Bonds Bond portfolio by credit rating 31 December 2007 31 December 2006 £m £m Government 470.0 571.4AAA 264.6 306.7AA 563.0 713.9A 173.3 233.7B and below 22.7 -Total 1,493.6 1,825.7 Fixed income by currency 31 December 2007 31 December 2006 % % Sterling 59.3 58.9US dollar 25.4 31.1Euro 11.1 6.8Other 4.2 3.2Total 100.0 100.0 Bond portfolio duration 31 December 2007 31 December 2006 Yrs Yrs Sterling 1.65 1.96US dollar 1.50 1.54Euro 1.62 1.54CAN dollar 1.68 1.76 Specialised investment funds Type of fund Name of fund December 2007 £m Fund of Funds Absolute Return Trust Ltd 4.3 Acencia Debt Strategies 8.8 Alpha Diversified Blend of Funds Trust 3.0 Barclays Bank GAM Diversity Fund Note 15.0 Bramdean Alternatives Limited 4.6 Collingham Investment Fund 6.3 FRM Credit Alpha Limited 4.3 Goldman Sachs Absolute Return Tracker Index 67.3 Portfolio Gottex Market Neutral Fund 2.2 Harbourvest Global Private Equity 5.0 Opus Credit Fund Limited 3.7 Saltus European Debt Strategies Limited 0.3 124.8 Hedge Funds Finisterre Sovereign Debt Fund 7.5 Lodsworth Arbitrage Fund Limited 2.3 9.8 Property Fund Matrix European Real Estate Investment Trust 3.2 Limited 3.2 Debt Funds ABN Amro Absolute Return Fund 11.2 AP Investment Europe Limited 10.3 Goldman Sachs - US Mortgage Backed Securities 78.9 Goldman Sachs Liquidity Partners 2007 12.3 Offshore GSC European Credit Fund 7.2 Schroder Strategic Bond Fund 15.9 Harbourmaster Global Senior Loan Index Fund 7.4 143.2 Total 281.0 Cash and cash equivalents Cash and cash equivalents by credit rating 31 December 2007 31 December 2006 £m £m AAA 335.9 230.6AA 379.8 190.5A 19.6 -Total 735.3 421.1 Investment performance Investment return for the year was £137.4m (5.42%) (2006: £112.6m and 4.74%). Investment return Year ended Year ended 31 December 2007 31 December 2006 £ £ Equities 10.9 31.4Bonds 97.9 60.4Specialised investment funds 5.4 0.8Cash and cash equivalents 23.2 20.0Total portfolio 137.4 112.6 Investment return Year ended Year ended 31 December 2007 31 December 2006 % % Equities 5.64 18.92Bonds 5.63 3.42Specialised investment funds 4.24 5.55Cash and cash equivalents 5.10 4.27Total portfolio 5.42 4.74 FINANCIAL MANAGEMENT Capital Strategy The capital strategy focuses on: • achieving a target return on equity of at least 6% over the UK base rate across the cycle • having a balance sheet that will give a stable platform for growth and • having sufficient capital to satisfy regulatory requirements with a suitable margin and to achieve and maintain BIL's target 'A' rating (see below), while ensuring that the Group does not have excessive capital which would diminish RoE Capital requirements The Group's regulatory capital requirements are calculated by reference to ourinternal capital model. The capital requirements are based on the key risksfaced by the Group. These risks mainly relate to the underwriting premium,reserves and investments. Following a period of premium growth, capitalrequirements continue to increase as reserves on long tailed classes take timeto reach full maturity. During 2007, in accordance with the regulatory timetable, we agreed our capitalrequirements for BIL and Syndicate 2987 with the FSA and Lloyd's respectively. In addition to current regulatory and rating capital requirements, the Group isalso actively researching and assessing anticipated changes to regulations suchas the impact of Solvency II, which is now expected to be introduced from 2012. Capital resources The Group continues to have a strong balance sheet that is not dependent onshort-term gearing. BIL maintains a high 'A' rating with the rating agencies(Fitch: A+ (Strong); A M Best: A (Excellent)), consistent with our target range. The Group's principal sources of actual and potential capital are equity,subordinated debt, reinsurance and other instruments such as catastrophe bonds. Capital resources 31 December 31 December 31 December 31 December 2007 2006 2005 2004 £m £m £m £m Net tangible assets 768.4 724.3 638.4 643.5Long-term subordinated 147.3 147.2 147.1 -debt*Total capital resources 915.7 871.5 785.5 643.5 * Subordinated borrowings which have at least five years remaining to maturityor call and are of the types which qualify as regulatory capital Our gearing ratio at 31 December 2007 was 19.0% (31 December 2006: 20.9%). Overthe medium term as the Group grows, it has the ability to raise additionallong-term subordinated debt while keeping the gearing ratio in the desired rangeof 20% to 30%. Process The Group's Capital Committee, under the authority of the Portfolio ManagementCommittee (PMC), is responsible for managing all capital issues affecting theGroup. The Capital Committee is responsible for: •ensuring the Group has appropriate capital •capital allocation to each line of business to allow measurement and comparison of return on capital by line of business and •a full review of internal capital model assumptions and results The Capital Committee, which meets quarterly, is chaired by the Group FinanceDirector and includes the SBU CEOs and Actuarial and Risk Managementrepresentatives. Current and future financial projections of capitalrequirements are made to assess the level of capital required by the Group.Capital requirements are assessed using: •internal capital models •rating agency capital models and •regulatory benchmarks Brit Insurance has been developing capital modelling for a number of years.During 2007 we continued to embed capital modelling into our business. The mainareas of use are: • Performance management: Return on capital is embedded into our business planning process. The capital models are used to allocate capital to each line of business. The return on capital generated by each line of business is used as a key performance measure in the business planning process. • Outwards reinsurance purchase: We have used the capital models to assess our outwards reinsurance programme. • Corporate planning: The model results are used to forecast future capital requirements and to assess whether the Group has sufficient resources to fund those requirements. • Risk management: Senior management sponsor embedded risk management throughout the Group. By ensuring that we fully understand and pro-actively manage our risks we can use our capital more effectively enabling us to take on more risk in a controlled manner. Share buy-back In our 2006 Annual Report the Board announced that we intended to pursue a sharebuy-back programme for up to £50m of ordinary shares by market value. Thisprogramme was concluded on 18 July 2007. 14,301,412 shares were bought back fora total consideration, including expenses, of £50.0m. This represented 4.3% ofthe total issued share capital of 329,764,397. The average trade price was347.2p. During December 2007, an additional 1,013,000 shares were purchased for £2.3m,representing 0.3% of the total issued share capital. The effect of these buy-backs was to increase 2007 earnings per share by 0.78pence. The full year effect will not be seen until 2008. Aggregate exposure management Introduction The Group's Realistic Disaster Scenario Committee monitors and controls theaccumulation of risk for over thirty key realistic disaster scenario (RDS)events. These RDSs reflect the diversity of the Group's exposures. There arespecific scenarios for elemental, man-made and economic disasters, and fordifferent business classes such as marine, aerospace, casualty and property. TheRDSs are regularly reviewed in light of Group exposures and environmentalfactors. The Group's RDS Committee reviews each scenario quarterly, with more frequentreviews of the peak zone natural peril catastrophe RDSs which present thegreatest exposure to the Group. During 2006, the Group carried out an extensive review of the way it managed itscatastrophe exposures and its tolerance for downside risk. This framework wasretained for 2007. Portfolio management The Group manages its overall gross and net aggregate sums insured by type andlocation. Since 2005 it has reduced its aggregation to natural perils byre-engineering the portfolio. This included the run-off of both the catastropheretrocessional portfolio and the Gulf of Mexico offshore oil and gas portfolio.The US property direct and reinsurance portfolios were re-engineered resultingin substantially reduced aggregate exposure. Aggregate claims tolerance The Group's tolerance for catastrophe risk is a function of expectedprofitability and available capital. This tolerance is expressed as the maximumnet claims acceptable under a number of scenarios. Exposure and compliance with the severity band matrix is formally reviewed on aquarterly basis, with informal reviews being conducted more frequently. TheBoard may decide to increase or decrease the maximum tolerances based on marketconditions and other factors. The tolerance for catastrophe risk is set using industry claims bandings. Forexample for a US Windstorm, tolerance is set for seven separate industry claimsbands increasing from a 'US$20bn-US$30bn' band to a 'US$200bn-US$350bn' band.The underlying frequency and severity of catastrophe events varies by peril andterritory. For instance, a US$20bn US windstorm is expected to occur much morefrequently than a US$20bn Japanese earthquake. Therefore, in terms of riskappetite and claims tolerance, it is not appropriate to treat these eventsequally. The severity bands show the industry claims for each peril which areprobabilistically equivalent. An example band is shown below. US windstorm California European Japanese Japanese typhoon earthquake windstorm earthquakeUS$70bn-US$100bn US$30bn-US$40bn US$10bn-US$15bn US$20bn-US$30bn US$10bn-US$15bn The portfolio contains a mix of business and therefore given an industry eventthere will be a large range of possible aggregate claims to the Group. Tocapture this claim distribution whilst being able to measure compliance, themeasure used is a weighted 75th percentile of the claim distribution within aparticular band. Ultimately, the size of a probable maximum loss (PML) arisingfrom an event or series of events will always remain judgemental for BritInsurance and others in the industry. The Group uses its own and commercially available proprietary risk managementsoftware. However, there is always a risk that the assumptions and techniquesused in these models are unreliable or that claims arising from an unmodelledevent are greater than those arising from a modelled event. As a further guide to the level of catastrophe exposure written by the Group,the table below shows hypothetical claims at 1 January 2008 for various RDSs. Event Modelled Brit Brit Comments industry Insurance Insurance gross gross claims claims net claims US$m £m £mFlorida hurricane 100,000 204 103 Category 4 storm on the SS Scale, landfalling in Tampa. Brit- Tampa Bay Insurance claims estimates include demand surge, flood associated with the hurricane, and non-property exposures.Florida hurricane 100,000 192 97 Category 5 storm on the SS Scale, landfalling in Miami. Brit- Miami Insurance claims estimates include demand surge, flood associated with the hurricane, and non-property exposures.US north east 70,000 184 90 Category 4 storm on the SS Scale,coast hurricane landfalling in Suffolk County, New York State. Brit Insurance claims estimates include demand surge, flood associated with the hurricane, and non-property exposures.California 70,000 195 71 Magnitude 7.2 earthquake on the MMIearthquake scale, on the Elsinore fault in Los Angeles. Brit Insurance claims- Los Angeles estimates include demand surge, fire following the earthquake, and non-property exposures.California 70,000 189 67 Magnitude 7.4 earthquake on the MMIearthquake scale, on the San Andreas Fault in San Francisco. Brit Insurance- San Francisco claims estimates include demand surge, fire following the earthquake, and non-property exposures.Europe windstorm 30,000 230 120 A winter storm with peak gusts in excess of 112mph resulting in a broad swath of damage across southern England, France, Belgium, Netherlands, Luxembourg, Germany and Denmark. Brit Insurance claims estimates include demand surge and UK coastal flood.Japan earthquake 50,000 141 67 Based on a repeat of the Great Kanto event in 1923, a magnitude 7.9 earthquake in the Tokyo Metropolitan Area. Source: RMS/Lloyd's/Brit Insurance OTHER FINANCIAL MANAGEMENT Risk Transfer including Reinsurance purchased Strategy Our strategy is to use outwards reinsurance to reduce risk and volatility andcontrol aggregations. Reinsurance Different outwards reinsurance strategies are modelled and reviewed to determinethe most effective programmes to protect our balance sheet and reduce earningsvolatility. With the Group's increasing diversity, the outwards reinsurancestrategy has been reviewed and the approach to risk retention has been refined. Reinsurance spend as a percentage of gross written premiums was 11.5% (2006:15.5%). Reinsurance expenditure Year ended Year ended 31 December 2007 31 December 2006 £m £mProportional 41.7 34.2Non-proportional 103.9 157.2Total 145.6 191.4 Innovative capital markets risk transfer mechanism In June 2007 BIL entered into a three-year cash collateralised catastrophe swapcontract with Fremantle Limited (Fremantle), a Cayman Islands company. Fremantle will pay BIL up to US$200m in the event of four to nine qualifyingnatural catastrophes (trigger events) - US$40m for each of the fourth and fifthevents and US$30m for each of the sixth to ninth events. The first three triggerevents are excluded. Trigger events Market claims (US$bn) California earthquake 10.00+New Madrid earthquake 20.00+US hurricane (Florida) 15.00+US hurricane (Gulf states & East Coast states) 12.00+US hurricane (bypassing) 12.00+EU windstorm 7.00*UK windstorm 4.00*Japan typhoon 12.00*Japan earthquake 24.25* + actual industry claims as measured by an independent agent * Indicative monetary value only - actual triggers are physical parameters suchas wind speed or seismic strength Fremantle was formed solely for the purpose of issuing loan notes underpinningthe catastrophe swap programme. In its first issue Fremantle raised US$200m bythe issue of three-year principal at-risk variable rate notes, as follows: Class US$m Rating Annual spread above Fitch LIBOR (basis Moody's points) A 60 AAA Aa1 90 B 60 BBB+ A3 200 C 80 BB- Ba2 400 The proceeds from the notes secure Fremantle's obligations under the catastropheswap contract with BIL. This innovative product increases the range of options at our disposal in ourasset/liability management toolkit and reduces our dependence on traditionalreinsurance solutions. Although this is a relatively small part of our overallcatastrophe hedging programme, it widens our access to the capital markets whileoffering structural features which are considered to be attractive compared withtraditional products. In particular it gives us a multi-year, multi-event hedge,which is cash collateralised. Under the provisions of International Financial Reporting Standard (IFRS) 4 andInternational Accounting Standard (IAS) 39, this catastrophe swap contract isaccounted for as a derivative and not an insurance contract. The cost of theinstrument in 2007 was £5.7m. Fremantle won the structured credit award at the 2007 'Credit Magazine CreditDeals of the Year Awards'. Rockhampton Insurance PCC Limited On 19 September 2007, we announced that we were to put in place a small team ofsenior underwriters to work in Gibraltar. They are developing the reinsurancebusiness of a dedicated cell in a newly formed and independently owned protectedcell company, to be known as Rockhampton Insurance PCC Limited. From 2008, Rockhampton will be part of our overall risk management frameworkwriting a selected part of our outwards reinsurance programme. The cell isparticipating in the Group's purchased quota share and excess of lossreinsurance programmes alongside external reinsurers and on equivalent terms. Ithas also written a 5% whole account quota share of the Group's business. The cell is consolidated in the Group's financial statements as if it were asubsidiary. In future years, the expected impact on the Group's financialstatements will be to both increase the Group's post tax earnings and directlyenhance earnings per share over the medium term. Subject to performance andmarket conditions, Rockhampton anticipates its business and range of activitieswill expand over time. Reinsurance recoverables Our reinsurance recoverables by financial strength rating are as follows. 31 December 2007 31 December 2006 % % AAA 1.1 0.6AA 39.8 40.6A 46.2 39.6BBB and below - 2.1Not rated 3.1 6.0Collateralised 9.8 11.1Total 100.0 100.0 SALE OF HOLDING IN Epic Investment Partners Limited (EIP) In January 2007, we sold our stake in EIP to Syndicate Asset Management plc(SAM) for a cash consideration of £1.3m and £3.1m of SAM loan notes. The profiton disposal was £2.9m. We originally announced our willingness to dispose of ourstake in EIP in March 2006. PARTIAL SALE OF RI3K LIMITED (RI3K) On 3 May 2007, we completed the sale of 10.3m ordinary shares in RI3K to aconsortium of investors, for a cash consideration of £8.3m. The profit ondisposal was £2.3m and the resulting increase in NTA was £9.7m. This salereduced the Group's holding in RI3K from 85.6% to 22.4% (19.9% on a fullydiluted share basis) at the date of sale. Our holding at 31 December 2007 was21.8%. RI3K is now accounted for as an associated undertaking. The sale of ourmajority stake in RI3K represents both a significant step in the development ofRI3K and achieves our objective of focusing our business on our core activities. ASSOCIATED UNDERTAKINGS Norton Re Insurance Limited Norton Re Insurance Limited (Norton Re I), a 100% subsidiary of Norton HoldingsLimited in which the Group has an 18.8% interest, writes catastropheretrocession business. The initial underwriting period has now closed and contracts bound by Norton ReI have closely followed the proposed business plan. Investors made a return of27% on capital with an initial tranche of capital returned to investors inFebruary 2008. The Group's share of profit after tax for the year ended 31December 2007 was £2.1m. For 2008, Norton Re II has been established and will continue to use theunderwriting expertise of Brit Insurance's underwriting services operating fromBermuda. Most of the key investors have continued with Norton Re II togetherwith a number of new investors. Brit Insurance subscribed for US$20.0m, givingit an overall interest of 16.9% of the US$118.2m capital. Ebix Inc During 2007, the Group reduced its shareholding in Ebix Inc, the NASDAQ-listedprovider of application software products to the insurance industry, from 33.6%to 22.4%. Of this reduction, 7.2% related to a part disposal of shares resultingin a realised profit of £1.9m, while the remaining 4.0% related to the dilutionof our holding. At 31 December 2007 the carrying value of the Group's holding inEbix was £10.7m (2006: £10.3m) and the Group's share of Ebix's profit after taxfor the year was £1.6m (2006: £1.1m). Counterparty/credit risk The Group's principal exposures to reinsurers are analysed by rating above. TheGroup also runs, at any time, shorter-term credit exposures in respect ofpremium income due from clients and/or brokers. The Group has a good trackrecord of avoiding credit losses. This is due in part to its highly experiencedunderwriting and finance professionals and in part to its investment, severalyears ago, in hiring a senior specialist in-house credit analyst team withexperience gained at leading ratings agencies. Asset guidelines are clearly defined to ensure that the investment portfolio isnot exposed to significant individual credit risk. These limits and exposuresare monitored daily by the fund managers and the investments team An analysis by credit rating of our bond portfolio and our cash and cashequivalents is included above. Liquidity risk Brit Insurance manages its liquidity risk as follows: • the nature of the Group's investment portfolio (high cash component, low bond duration and high bond quality) • the Group manages its liabilities carefully against early crystallisation. An example of this is our use of lower tier two long-term subordinated debt rather than shorter-term bank debt and • the Group has access to a £150.0m revolving credit facility (see below) On 21 December 2007, the Group entered into a new five year £150.0m revolvingcredit facility syndicated to four banks and led by the Royal Bank of Scotland.The cost of the facility is LIBOR plus 85.00 basis points (if drawn) and LIBORplus 29.75 basis points (if undrawn) and its principal financial covenants areset out below. The facility was undrawn at 31 December 2007. 31 December 2007 Position Headroom NTA plus qualifying subordinated debt: must be at £915.7m £265.7mleast £650.0m Gearing: borrowings (excluding subordinated debt) 2.9% 32.1%must not exceed 35.0% of NTA plus qualifyingsubordinated debt The Group metric is to have sufficient liquidity at all times in each of itsthree liquidity centres: BIL, Syndicate 2987 and the remainder of the Group.Each centre needs to have the liquidity to cope independently with a minimum oftwo and an appetite of three RDSs. DIVIDEND POLICY The Group's dividend policy aims to pay, in the absence of unforeseencircumstances, 50% of post tax earnings over time, subject to a minimum of 15pper share per annum. This policy allows a sufficient level of retained earningsto finance the Group's medium-term strategic growth ambitions. Defined Benefit Pension Scheme The pension fund deficit as calculated under IAS 19 fell from £12.4m to £5.2m.During 2007, an additional contribution of £5.4m was made by the Group and afurther additional contribution of £5.0m will be made in 2008. The scheme hasbeen closed to new members since October 2001. Expense MANAGEMENT As stated in our 2006 Annual Report, we expect that as our premium base grows,the overall insurance expense ratio will remain broadly in line with 2006levels. Our insurance expense ratio for 2007 was 32.8% (2006: 33.9%). Group management expenses before foreign exchange, bonus pool and RI3K totalled£129.3m, equivalent to a total management expense ratio of 11.7% (2006: £112.1mand 10.7%). During 2007, headcount excluding RI3K increased by 4.8% from 704 to 738. The key drivers of the 2007 expense increase were: • expansion in the second half of 2006, in headcount and of our regional network, the full annualised cost of which was first seen in 2007 • further headcount increases during 2007 • ongoing investment in enhanced structures and processes and • an impairment provision of £4.0m against IT software capitalised in 2005 and prior During 2007, the Group made a profit on foreign exchange of £18.6m which hasbeen included in 'other income'. In 2006, a foreign exchange loss of £25.4m wasincurred for the year and included within expenses. The commission cost ratio for the period was 22.9% (2006: 23.6%). Expense Year ended Year ended 31 December 2007 31 December 2006 Expenses Ratio* Expenses Ratio* £m % £m % Staff costs before bonus pool 64.0 5.8 51.5 4.9Accommodation costs 7.8 0.7 7.0 0.7Legal & professional charges** 10.4 0.9 14.3 1.4IT costs 6.8 0.6 5.7 0.5Regulatory levies and charges 16.9 1.6 14.3 1.4Amortisation, depreciation and 12.2 1.1 6.4 0.6impairmentOther 11.2 1.0 12.9 1.2Management expenses before foreign 129.3 11.7 112.1 10.7exchange, bonus pool and RI3KForeign exchange loss - - 25.4 2.4Bonus pool 14.4 1.3 14.0 1.3RI3K 1.7 0.2 4.7 0.4Expenses before commissions 145.4 13.2 156.2 14.9Commission costs 252.3 22.9 247.6 23.6Total expenses 397.7 36.0 403.8 38.5 - Insurance related expenses 110.0 10.0 107.9 10.3Commission costs 252.3 22.9 247.6 23.6Insurance expenses 362.3 32.8 355.5 33.9Group overheads 35.4 3.2 22.9 2.2Foreign exchange loss - - 25.4 2.4Total expenses 397.7 36.0 403.8 38.5 *Ratio calculated as the expense as a proportion of net earned premiums. **Includes audit and investment management fees. Foreign Exchange RISK AND MANAGEMENT The Group manages foreign exchange risk by broadly matching assets andliabilities held in each of its four biggest currencies - Sterling, US dollars,Euros and Canadian dollars. During 2007, the Group sold US dollars on a regular basis each month to keep theUS dollar position within a predefined corridor. The average rate for the USdollar sales was US$1.9978 to £1 sterling. The Group's exchange profit in 2007 also includes £13.0m in respect ofadjustments arising from the IFRS treatment of non-monetary items. IFRS requiresthe use of the transaction rate rather than the closing rate for such items,notably the unearned premium reserve (UPR) and deferred acquisition costs (DAC). The effect on the year-on-year comparative reported profits is shown below: Year ended Year ended 31 December 31 December 2007 2006 £m £m Profit on currency trades 5.5 4.7(Loss)/profit on restatement of opening net assets (2.7) 5.7Profit/(loss) on restatement of income statement to 2.8 (8.9)average ratesProfit on exchange before exchange adjustments arising 5.6 1.5from the IFRS treatment of non-monetary itemsExchange adjustments arising from the IFRS treatment of 13.0 (26.9)non-monetary itemsProfit/(loss) on exchange 18.6 (25.4) Taxation The Group's effective tax rate was 28.0% (2006: 28.2%). The tax charge benefitedfrom tax free disposals and the announced reduction of UK corporation tax (CT),countered by higher overseas taxes. Brit Insurance is a substantial payer of UK and overseas corporation tax (CT) onits profits. It also incurs and collects significant amounts of indirect tax,notably insurance premium tax (IPT), pay as you earn income tax (PAYE), nationalinsurance contributions (NIC) and value added tax (VAT). The following are theprincipal UK taxes payable or accounted for by the Group for the year ended 31December 2007. Tax Year ended 31 December 2007 Year ended 31 December 2006 Borne by Collected by Borne by Collected by Brit Insurance Brit Insurance Brit Brit Insurance Insurance £m £m £m £mCT 36.0 - 53.2 -PAYE/NIC 6.4 18.0 5.2 13.0IPT 0.1 14.1 0.1 16.7VAT 3.9 0.8 3.0 0.7Business rates 1.1 - 0.9 -Stamp duty - - 0.2 -TOTAL 47.5 32.9 62.6 30.4 During the year there were a number of developments that will have an impact onthe tax burden suffered by UK tax payers. Most recently we welcomed the HMRCdiscussion paper on the taxation of foreign profits. As Government fiscal policydevelops over the next year we expect to see a positive effect on retainedprofits from 2009. OUR BRAND Brand development in 2007 During 2007, the Brit Insurance brand continued to grow in stature andrecognition. Our brand building activities have focussed on marketing campaignsand sports sponsorship. Promotional campaigns to the insurance trade ran throughout the year. They useda range of media and promotional tools, such as trade press cover-wraps closelylinked to broker relationship building events. Sponsorship remains a key tool for our brand development and our focus oncricket is now firmly established. During 2007, activity surrounding the sponsorship of Surrey County Cricket Cluband the Brit Insurance Oval was refined and the new Test Match Grounds (TMG)sponsorship was successfully integrated into our programme. This new sponsorshippackage gives the Brit Insurance brand media exposure throughout the season atHeadingley, Edgbaston, Old Trafford, Trent Bridge and Chester-le-Street cricketgrounds. Both the Surrey and TMG sponsorships generated good TV and press exposure forthe brand. For instance the value of cricket coverage at the Brit Insurance Ovalrecorded year on year increases of 43% for television and 14% for print media. The Design Museum There is a clear association between good design and reduced risk, aligning wellwith Brit Insurance's proposition to help clients manage risk and reduce thechances of loss. In January 2008 we entered into a new four year partnership with the DesignMuseum, one of the world's leading museums devoted to contemporary design. The partnership involves sponsorship of a new set of international awards with asupporting exhibition. The 'Brit Insurance Designs of the Year' exhibitionopened to critical acclaim at the Design Museum in London on 13 February 2008displaying the 100 short listed designs for the inaugural 'Brit Insurance DesignAwards'. The exhibition and awards celebrate the most innovative and progressiveinternational design over the previous 12 months and span the seven major designdisciplines: Architecture, Graphics, Fashion, Product, Furniture, Interactiveand Transport. Our partnership with the Design Museum will increase our visibility beyond sportand provide further opportunities to develop our brand awareness. It also allowsBrit Insurance to maintain high media visibility during the cricket closeseason. CORPORATE RESPONSIBILITY 'FTSE4GOOD' During 2007, Brit Insurance was independently assessed according to the'FTSE4Good' criteria. We were pleased to satisfy the requirements to become aconstituent of the 'FTSE4Good Index Series'. Created by the global index companyFTSE Group, FTSE4Good is an equity index series designed to facilitateinvestment in companies that meet globally recognised corporate responsibilitystandards. Companies in the FTSE4Good Index Series meet stringent social,ethical and environmental criteria and are positioned to capitalise on thebenefits of responsible business practice. Charitable Giving and Community Involvement The Brit Insurance Charitable Fund The Brit Insurance Charitable Fund was established in July 2006, demonstratingthe Group's ongoing commitment to the support of local and internationalcommunities. The Group donates up to 0.5% of the Group's pre-tax profit eachyear, capped at £1m, to the Fund. The Fund made donations ofover £385,000 in2007 including: £€285,000 to the British Red Cross (see below) £€35,000 to the victims of the UK floods and the Bangladesh Cyclone and £€21,400 (2006: £9,000) to various UK registered charities, matching amounts raised and donated by our people British Red Cross - Building Safer Communities Programme In 2007, Brit Insurance entered into a three year partnership with the BritishRed Cross. The aim is to support the common objectives of helping the UKcommunity to be better prepared for and cope with emergencies. The £285,000donated by the Fund to the British Red Cross in 2007 has been used to sponsor: •'Emergency Response Unit' vehicles •a UK disaster readiness survey •the 'prepare for the unexpected' pages on the British Red Cross website •communications systems •recruitment and training of British Red Cross volunteers and •a volunteering programme available for all Brit Insurance employees The UK community During 2007 Brit Insurance continued to make substantial contributions, bothfinancially and in staff time and expertise, to many grass roots projects in theUK relating to youth, education and disability. Consolidated Income Statementfor the year ended 31 December 2007 Note Year ended Year ended 31 December 31 December 2007 2006 £000 £000RevenueGross premiums written 4 1,264,908 1,236,289Less premiums ceded to reinsurers 4 (145,553) (191,371)Premiums written, net of reinsurance 1,119,355 1,044,918Gross amount of change in provision for unearned (10,771) 4,945premiumsReinsurers' share of change in provision for (5,315) (1,200)unearned premiumsNet change in provision for unearned premiums (16,086) 3,745Earned premiums, net of reinsurance 1,103,269 1,048,663Fees, commissions and other income 5 21,477 775Investment return 6 137,396 112,640Return on derivative contracts 7 (9,739) (2,162)Disposal of subsidiary undertaking 2,346 -Disposal of asset held for sale 2,887 -Partial disposal of associated undertaking 1,871 -Total revenue 1,259,507 1,159,916 ExpensesClaims incurred:Claims paid:Gross amount (584,790) (690,705)Reinsurers' share 112,966 324,101Claims paid, net of reinsurance (471,824) (366,604) Change in the provision for claims:Gross amount (201,510) 59,683Reinsurers' share 12,515 (249,121)Net change in the provision for claims (188,995) (189,438) Claims incurred, net of reinsurance 4 (660,819) (556,042)Acquisition costs 8 (298,395) (289,450)Other operating expenses 8 (99,275) (114,354)Total expenses excluding finance costs (1,058,489) (959,846)Operating profit 201,018 200,070 Finance costs (12,784) (14,864)Share of profit after tax of associated 2,919 1,058undertakingsProfit on ordinary activities before tax 191,153 186,264Income tax expense 9 (i) (53,587) (52,495) Profit attributable to equity holders of the 137,566 133,769parent Basic earnings per share (pence per share) 10 43.24p 41.25p Diluted earnings per share (pence per share) 10 43.13p 41.05p Consolidated Statement of Recognised Income and Expensefor the year ended 31 December 2007 Note Year ended Year ended 31 December 31 December 2007 2006 £000 £000 Foreign exchange translation differences (348) (1,340)Actuarial gains on defined benefit pension 16 1,974 8,869schemeTax on items taken to equity 9 (ii) (592) (2,661)Net income recognised directly in equity 1,034 4,868Profit for the period 137,566 133,769Total recognised income and expense for theperiod attributable to equity holders of the parent 138,600 138,637 Consolidated Balance Sheetas at 31 December 2007 31 December 31 December 2007 2006 Note £000 £000AssetsProperty, plant and equipment 10,030 10,144Intangible assets 80,465 88,982Deferred acquisition costs 132,208 122,225Investments in associated undertakings 33,045 21,093Reinsurance contracts 11 380,766 374,068Financial investments 12 1,993,264 2,079,298Derivative contracts 13 1,779 15Trade and other receivables 14 467,519 540,322Assets held for sale - 1,080Cash and cash equivalents 15 735,321 421,090 Total assets 3,834,397 3,658,317 Liabilities and Equity LiabilitiesInsurance contracts 11 2,622,973 2,400,057Employee benefits 16 5,159 12,422Borrowings 174,206 173,863Current taxation 12,324 22,158Deferred taxation 17 21,381 4,484Provisions 405 443Derivative contracts 13 1,853 -Trade and other payables 18 147,200 231,598 Total liabilities 2,985,501 2,845,025 EquityCalled up share capital 20&21 247,335 246,107Share premium account 21 138,003 135,767Capital redemption reserve 21 586 586Translation reserve 21 (1,333) (1,340)Capital reorganisation reserve 21 - 180,000Own shares 21 (63,091) (5,777)Retained earnings 21 527,396 257,949 Total equity attributable to equity holders of 848,896 813,292the parentTotal liabilities and equity 3,834,397 3,658,317 Consolidated Cash Flow Statementfor the year ended 31 December 2007 Note Year ended Year ended 31 December 31 December 2007 2006 £000 £000 Cash generated from operationsCash flows provided by operating activities 22 269,674 209,644 Income tax paid (47,116) (41,129)Interest paid (12,326) (11,411)Interest received 109,183 84,866Dividends received 5,684 2,182 Net cash inflows from operating activities 325,099 244,152 Cash flows from investing activities Net sale/(purchase) of investments 98,528 (235,028)Purchase of property, plant and equipment and related (3,922) (4,444)exchange adjustmentsPurchase of intangible assets (7,501) (6,630)Proceeds from disposal of property, plant and 365 2equipmentRepayment of loan from assets held for sale - 300Proceeds from disposal of asset held for sale 1,233 -Net increase in cash from disposal of 7,595 -subsidiary undertakingProceeds from partial disposal of associated 5,088 -undertakingNet movements in associated undertaking ordinary and 1,497 -preference sharesInvestment in associated undertaking (10,017) (10,737) Net cash inflows/(outflows) from investing 92,866 (256,537)activities Cash flows from financing activities Proceeds from exercised share options 3,464 2,497Equity dividends paid (54,451) (53,555)Repurchase of unsecured loan stock - (22,425)Acquisition of own shares for employee (5,534) (288)incentive schemesRepurchase of treasury shares (52,317) -Proceeds from sale of own shares - 288 Net cash outflows from financing activities (108,838) (73,483) Net increase/(decrease) in cash and cash 309,127 (85,868)equivalentsCash and cash equivalents at beginning of the 421,090 526,638yearEffect of exchange rate fluctuations on cash 5,104 (19,680)and cash equivalentsCash and cash equivalents at the end of the 15 735,321 421,090year Notes 1 General information Brit Insurance Holdings PLC (the Company) is a company registered in England andWales under the Companies Act 1985. The address of the registered office isprovided in the Company's website at www.britinsurance.com. 2 Accounting policies The preliminary results have been prepared in accordance with InternationalFinancial Reporting Standards (IFRS) adopted for use by the European Union(EU). This preliminary announcement is prepared on the same basis as set out in theprevious year's annual accounts. Basis of preparation The preliminary results have been prepared in accordance with IFRS and thoseparts of the Companies Act 1985 applicable to companies reporting under IFRS.IFRS comprises standards issued by the International Accounting Standards Board(IASB) and interpretations issued by the International Financial ReportingInterpretations Committee (IFRIC) and as adopted by the EU. At the date of authorisation of these preliminary results, the followingstandards which have not been applied in these preliminary results were in issuebut not yet effective: Standard Effective IFRIC 11 IFRS 2 - Group and treasury Share Transactions Periods commencing on or after 1 March 2007 IFRIC 14 IAS 19 - The Limit on a Defined Benefit Asset, Periods commencing on or after 1Minimum Funding Requirements and their Interaction January 2008 IFRS 8 Operating segments Periods commencing on or after 1 January 2009 IAS 27R Consolidated Financial Statements and Periods commencing on or after 1Accounting for Investments in Subsidiaries July 2009 IFRS 3R Business Combinations Periods commencing on or after 1 July 2009 The directors anticipate that the adoption of these standards in future periodswill have no material impact on the financial statements of the Group except foradditional disclosures on segmental information required by IFRS 8. In accordance with IFRS 4, 'Insurance Contracts', the Group continues to complywith the recommendations of the Statement of Recommended Practice on Accountingfor Insurance Businesses issued by the Association of British Insurers inDecember 2005 (as revised in December 2006). However the Group has the option tomake improvements to its policies if the changes make the financial statementsmore relevant to decision making needs of the users. Certain amounts recorded in the financial information include estimates andassumptions made by management, particularly about insurance liability reserves,investment valuations, interest rates and other factors. Actual results maydiffer from the estimates made. For further information on the use of estimatesand judgements, refer to Note 3. 3 Critical accounting estimates and judgements in applying accounting policies The Group makes estimates and assumptions that affect the reported amounts ofassets and liabilities. Estimates and judgements are continually evaluated andbased on historical experience and other factors, including expectations offuture events that are believed to be reasonable under the circumstances. i) The ultimate liability arising from claims made under insurance contracts The estimation of the ultimate liability arising from claims made underinsurance contracts is the Group's most critical accounting estimate. There areseveral sources of uncertainty that need to be considered in the estimate of theamounts 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 provisions (IBNR) included within provisions for insurance and reinsurance contracts. • The corresponding estimate of the amount of reinsurance recoveries which will become due as a result of these estimated claims. • The recoverability of amounts due from reinsurers. • 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 aremade are set out below: •Quarterly statistical data is produced in respect of gross and net premiums and claims (paid and incurred). •Projections are produced by an internal actuarial department, with appropriate adjustment for specific claims made by management where deemed appropriate. •The resulting projections are discussed with the experienced underwriting and claims personnel and claims provision recommendations made to an internal reserving panel consisting of senior underwriters, claims managers and finance staff. •Claims provisions are subject to independent external actuarial review at least annually. The panel then approves those estimated claims provisions to be included in the financial statements. •Some classes of business have characteristics which do not necessarily lend themselves easily to statistical estimation techniques. These classes would include Financial Risk, Casualty Treaty, Catastrophe Retrocessional and Mortgage Indemnity Guarantee business. In these cases review is carried out on a policy-by-policy basis to support 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 specific recognised modelling software and reviews of material contracts exposed to the event in question. Overall the objectives of the estimates and judgements applied to claimsprovisions seek to state such provisions on a best estimate, undiscounted basis. In addition to claims provisions, the reserve for future loss adjustmentexpenses is also subject to estimation. In arriving at this estimate, regard ishad to the levels of internal and third party loss adjusting expenses incurredannually and the length of time expected to be necessary to adjust all claimsarising from the different classes of business. For this purpose, classes ofbusiness are grouped into short, medium and long tail categories. The estimatedloss adjustment expenses are expressed as a percentage of net insuranceprovisions. These are benchmarked to assess the reasonableness of the estimate. Further judgements are made as to the recoverability of amounts due fromreinsurers. Provisions for bad debts are made specifically, based on thesolvency of reinsurers, payment experience with them and any disputes of whichthe Group is aware. The carrying value at the balance sheet date of gross claims reported and lossadjustment expenses and claims incurred but not reported were £2,013,152,000(2006: £1,801,007,000). The amount of reinsurance recoveries estimated at thebalance sheet date is £326,080,000 (2006: £314,067,000). ii) Impairment of goodwill Determining whether goodwill is impaired requires an estimation of the value inuse of the cash-generating units to which goodwill has been allocated. The valuein use calculation requires the Group to estimate the future cash flows expectedto arise from the cash-generating unit and a suitable discount rate in order tocalculate present value, both of which are material sources of uncertainty. The carrying amount of goodwill at the balance sheet date was £63,615,000 (2006:£70,991,000). 4 Segmental information (i) Primary reporting format - business segments As at 31 December 2007, the Group is organised into three Strategic BusinessUnits offering varying products and serving different markets. The three are Brit Global Markets, Brit Reinsurance and Brit UK. The Global Markets Strategic Business Unit underwrites Brit's international andUS business other than reinsurance. In the main, Global Markets deals withwholesale buyers of insurance, not individuals. Risks are large and usuallysyndicated by several underwriters - the subscription market. The Brit Reinsurance Strategic Business Unit underwrites reinsurance businesswhich is essentially the insurance of insurance and reinsurance companies andincludes providing non-proportional cover for major events such as earthquakesor hurricanes. These insurance and reinsurance companies calculate how much riskthey want to bear and pass on the remaining exposure to reinsurers in return fora premium. The Brit UK Strategic Business Unit is developing business opportunities withinthe UK general commercial insurance markets through both wholesale and retailbrokers and has opened offices in key locations across the UK. 'Other underwriting' is made up of Syndicate 389 (Life - final year of account2003), and historic participations on external managed syndicates in run off(final year of account 2000). RI3K functions as an autonomous business function supplying electronicinfrastructure to the insurance and reinsurance industry. RI3K was discontinuedas a segment with effect from 3 May 2007 when the Group sold its majorityholding in the shares of RI3K Limited. Certain revenues and expenses are incurred relating to central functions whichalong with certain related assets and liabilities are retained at the corporatecentre level. 'Other corporate' is made up of residual income and expenditure attaching to thecorporate centre not allocated to other segments. This is the basis on which the Group reports its primary segment information. a) Income statement by segment The income statements by segment for the year ended 31 December 2007 and theyear ended 31 December 2006 are included earlier in this announcement. b) Balance sheet by segment As at 31 December 2007 Brit Brit Brit UK Other Total RI3K Other Total Global Reinsurance Strategic underwriting underwriting £000 corporate £000 Markets Strategic Business £000 £000 £000 Strategic Business Unit Business Unit £000 Unit £000 £000 Reinsurance 249,634 67,599 62,325 1,208 380,766 - 380,766contractsIntangible 8,959 3,286 56,557 28 68,830 - 11,635 80,465assetsOther assets 1,805,982 651,660 811,080 5,757 3,274,479 - 98,687 3,373,166Total assets 2,064,575 722,545 929,962 6,993 3,724,075 - 110,322 3,834,397 Insurance 1,431,954 525,238 661,374 4,407 2,622,973 - - 2,622,973contractsOther 88,286 28,416 32,007 345 149,054 - 213,474 362,528liabilitiesTotal 1,520,240 553,654 693,381 4,752 2,772,027 - 213,474 2,985,501liabilities As at 31 December 2006 Brit Brit Brit UK Other Total RI3K Other Total Global Reinsurance Strategic underwriting underwriting £000 corporate £000 Markets Strategic Business £000 £000 £000 Strategic Business Unit Business Unit £000 Unit £000 £000 Assets held for - - - - - - 1,080 1,080saleReinsurance 231,341 98,898 42,678 1,151 374,068 - - 374,068contractsIntangible 8,313 3,804 57,539 259 69,915 7,431 11,636 88,982assetsOther assets 1,558,498 710,109 764,584 42,585 3,075,776 621 117,790 3,194,187Unallocated - - - - - - - -assetsTotal assets 1,798,152 812,811 864,801 43,995 3,519,759 8,052 130,506 3,658,317 Insurance 1,201,782 549,913 613,708 34,654 2,400,057 - - 2,400,057contractsOther 131,203 57,583 40,400 1,838 231,024 (528) 214,472 444,968liabilitiesTotal 1,332,985 607,496 654,108 36,492 2,631,081 (528) 214,472 2,845,025liabilities (ii) Secondary reporting format - geographical segments 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 riskinsured. This is the basis on which the Group reports its secondary segmentalinformation. Gross premiums written Year ended Year ended 31 December 2007 31 December 2006 £000 £000 United Kingdom 335,666 339,125Europe 70,186 63,863United States 356,146 382,277Other (including worldwide) 502,910 451,024 1,264,908 1,236,289 Total assets 31 December 2007 31 December 2006 £000 £000 United Kingdom 2,187,022 2,116,920Europe 336,233 217,464United States 1,168,877 1,225,809Other (including worldwide) 142,265 98,124 3,834,397 3,658,317 All capital expenditure during 2006 and 2007 has been made in the UnitedKingdom. 5 Fees, commissions and other income Year ended Year ended 31 December 2007 31 December 2006 £000 £000 Electronic infrastructure design and development 543 658Other fees and commissions 2,377 117Exchange gains 18,557 - 21,477 775 In accordance with International Accounting Standard 1 'Presentation ofFinancial Statements', exchange gains and losses are presented on a net basis.They are reported within revenue where they result in a net gain and withinexpenses where they result in a net loss. 6 Investment return Year ended 31 December 2007 Year ended 31 December 2006 Investment Net Net Total Investment Net Net Total income realised unrealised investment income realised unrealised investment £000 gains/ gains/ return £000 (losses) (losses) return (losses) (losses) £000 gains/ gains/ £000 £000 £000 £000 £000 Cash and 23,151 - - 23,151 19,967 - - 19,967cashequivalentsEquity 5,684 20,488 (15,251) 10,921 2,182 13,692 15,564 31,438securitiesDebt 88,632 (1,325) 10,592 97,899 79,116 (9,984) (8,667) 60,465securitiesSpecialised 519 2,824 2,082 5,425 - - 770 770investmentfunds 117,986 21,987 (2,577) 137,396 101,265 3,708 7,667 112,640 7 Return on derivative contracts Year ended Year ended 31 December 2007 31 December 2006 £000 £000 Currency forwards (5,017) -Currency options - (2,070)Catastrophe swap contracts (5,721) -Other 999 (92) (9,739) (2,162) 8 Acquisition costs and other operating expenses Year ended Year ended 31 December 2007 31 December 2006 £000 £000 Commissions 259,786 244,099Movement on related acquisition cost deferral (7,482) 3,490 252,304 247,589Staff costs 70,433 62,481Other staff related costs 9,565 5,951Accommodation costs 7,909 7,328Legal and professional charges 6,024 9,743Audit fees 1,196 1,276IT costs 6,794 5,895Marketing and communications 3,039 2,822Irrecoverable VAT 1,799 2,641Depreciation of property, plant and equipment 3,056 2,544Loss on the disposal of property, plant and equipment 500 0Amortisation of intangible assets 4,567 3,889Impairment of intangible assets 4,023 0Printing, stationery, postage and telephone 1,203 1,120Travel and entertaining 2,862 3,153Insurance 958 982Regulatory levies and charges 16,952 14,335Investment management expenses 3,173 3,298Exchange losses - 25,384Other 3,814 3,991Movement on insurance related acquisition cost (2,501) (618)deferral 145,366 156,215Acquisition costs and other operating expenses 397,670 403,804 The amounts above have been allocated as follows:Acquisition costs 298,395 289,450Other operating expenses 99,275 114,354 397,670 403,804 9 Income tax expense (i) Tax charged to income statement Year ended Year ended 31 December 2007 31 December 2006 £000 £000Current tax:For the period (40,160) (54,224) Adjustments in respect of prior years:Adjustments 2,878 5,200Total current tax (37,282) (49,024) Deferred tax:Origination and reversal of temporary differences (15,278) (2,702)Deferred tax assets previously unrecognised - 1,833Other adjustments in respect of prior years (1,027) (2,602)Total deferred tax (16,305) (3,471) Total tax charged to income statement (53,587) (52,495) An amount of tax relating to the associated companies of £76,000 (2006: £78,000)has been charged to the income statement within the Group's share of profitafter tax of associated undertakings. (ii) Tax charged to equity Year ended Year ended 31 December 2007 31 December 2006 £000 £000 Deferred tax (592) (2,661) (iii) Tax reconciliation The tax on the Group's profits before tax differs from the theoretical amountthat would arise from using the current standard rate for corporation taxapplicable in the UK of 30% (2006: 30%) as follows: Year ended Year ended 31 December 2007 31 December 2006 £000 £000 Profit on ordinary activities before tax 191,153 186,264 Tax calculated at standard rate for corporation tax (57,346) (55,879)Expenses not deductible for tax purposes (907) (899)Equity dividends not subject to corporation tax 654 539Sale of substantial shareholdings 2,131 -Overseas tax not recoverable (1,277) (1,004)Effect of future tax rate changes 1,061 -Deferred tax in respect of associated undertakings (630) -Deferred tax assets previously unrecognised - 1,833Other adjustments to tax charge in respect of prior 1,851 2,598yearsTax effect of share of results of associated 876 317undertakings (53,587) (52,495) The effect of future tax rate changes reflects reduction in future taxliabilities/reliefs as a result of the announced reduction in UK corporation taxfrom 30% to 28% with effect from 1 April 2008. 10 Earnings per share The calculations of the basic and diluted earnings per share are based on thefollowing figures: Year ended Year ended 31 December 2007 31 December 2006 £000 £000 Profit on ordinary activities after tax 137,566 133,769 31 December 31 December 2007 2006 Number Number Basic weighted average number of shares 318,174,520 324,262,139Employee share options 770,328 1,606,725Diluted weighted average number of shares 318,944,848 325,868,864 Basic earnings per share (pence per share) 43.24 41.25Diluted earnings per share (pence per share) 43.13 41.05 11 Insurance and reinsurance contracts (i) Balances on insurance and reinsurance contracts 31 December 31 December 2007 2006 £000 £000Gross Insurance contractsClaims reported and loss adjustment expenses 1,076,151 953,758Claims incurred but not reported 937,001 847,249 2,013,152 1,801,007Unearned premiums 609,821 599,050Total insurance contracts 2,622,973 2,400,057 Recoverable from reinsurersReinsurance contractsClaims reported and loss adjustment expenses 207,385 224,998Claims incurred but not reported 129,897 106,113Impairment provision (11,202) (17,044) 326,080 314,067Unearned premiums 54,686 60,001Total reinsurance contracts 380,766 374,068 NetClaims reported and loss adjustment expenses 868,766 728,760Claims incurred but not reported 807,104 741,136Impairment provision 11,202 17,044 1,687,072 1,486,940Unearned premiums 555,135 539,049Net insurance and reinsurance contracts 2,242,207 2,025,989 Insurance contracts - assumptions and changes in assumptions Process used to decide on assumptions required The risks associated with these insurance contracts and in particular withcasualty insurance contracts are complex and subject to a number of variablesthat complicate quantitative sensitivity analysis. The Group uses several statistical methods to incorporate the variousassumptions made in order to estimate the ultimate costs of claims. The twomethods more commonly used are the chain-ladder and the Bornhuetter-Fergusonmethods. Chain-ladder methods may be applied to premiums, paid claims or incurred claims(i.e., paid claims plus case estimates). The basic technique involves theanalysis of historical claims development factors and the selection of estimateddevelopment factors based on this historical pattern. The selected developmentfactors are then applied to cumulative claims data for each accident year thatis not yet fully developed to produce an estimated ultimate claims cost for eachaccident year. Chain-ladder techniques are most appropriate for mature classes of business thathave a relatively stable development pattern. Chain-ladder techniques are lesssuitable in cases in which the insurer does not have a developed claims historyfor a particular class of business. The Bornhuetter-Ferguson method uses a combination of a benchmark ormarket-based estimate and an estimate based on claims experience. The former isbased on a measure of exposure such as premiums; the latter is based on the paidor incurred claims to date. The two estimates are combined using a formula thatgives more weight to the experience-based estimate as time passes. Thistechnique is used in situations in which developed claims experience are notavailable for the projection (recent accident years or new classes of business). The choice of selected results for each year of each class of business dependson an assessment of the technique that has been most appropriate to observedhistorical developments. In certain instances, this has meant that differenttechniques or combination of techniques have been selected for the individualaccident year or groups of accident years within the same class of business. Claims for a number of classes of business, including Financial Risk, MortgageIndemnity Guarantee, Catastrophe Retrocession and Casualty Treaty, do not alwaysconform to the statistical distribution expected. For these classes claimsreserves are additionally reviewed on a policy by policy basis by Underwritersand Claims Managers and these reviews take account of market intelligence inaddition to notified claims. In addition to the estimation of claims reserves certain estimates are producedfor unearned premiums. All inwards premiums are deemed to earn out on a pro ratabasis over the term of the related policy, except for those contracts where theperiod of risk differs significantly from the contract period. For open marketbusiness earned premium is calculated at policy level. However, premium derivedfrom delegated underwriting authorities is calculated by applying the 1/144thsmethod to estimated premiums applied to the master policy. This assumes thatattachments to master policies arise evenly throughout the period of that masterpolicy. 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 inwardsbusiness being protected. Changes in assumptions The Group did not change its estimation techniques for the insurance contractsdisclosed in this note during the year. Claims development tables The tables included earlier in this announcement show the development of claimsover a period of time on a gross and net of reinsurance basis. The tables show the cumulative incurred claims, including both notified and IBNRclaims, for each successive accident year at each balance sheet date, togetherwith cumulative claims as at the current balance sheet date. 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 ratherthan the claims that reflects Brit Insurance percentage ownership of eachsyndicates' capacity during the respective accident years. In addition, claims in currencies other than sterling have been retranslated at31 December 2007 exchange rates. Material Surpluses Released The net aggregate reserve releases from prior years amounted to £58,669,000(2006: £33,890,000). In part this arises from the Group's reserving philosophywhich aims to make the most recent years, with the greatest uncertainty ofresult, prudently reserved leaving a potential for subsequent release. Inaddition, in 2007 there were a number of one-off circumstances giving rise toadditional releases as follows: There has been benign claims activity for prior years in Casualty Treaty,Aerospace, US Property, Non-US Professional Indemnity, UK Professional Indemnity/D&O and UK Employers'/Public Liability allowing releases of reserves in theseclasses. Offset against these is a strengthening of reserves in Aviation XL dueto a loss on TAM Airlines. During the period, there have been no material changes to the reservespreviously reported in respect of 2005 accident year Hurricanes Katrina, Ritaand Wilma. (ii) Movements in insurance and reinsurance contracts a) Claims and loss adjustment expenses Year ended 31 December 2007 Year ended 31 December 2006 Gross Reinsurance Net Gross Reinsurance Net £000 £000 £000 £000 £000 £000As at 1 January 1,801,007 (314,067) 1,486,940 1,992,665 (591,981) 1,400,684Cash paid for claims (584,790) 112,966 (471,824) (690,705) 324,101 (366,604)settled in the yearIncrease in 786,300 (125,481) 660,819 626,387 (74,980) 551,407liabilitiesNet exchange 10,635 502 11,137 (127,340) 28,793 (98,547)differencesAs at 31 December 2,013,152 (326,080) 1,687,072 1,801,007 (314,067) 1,486,940 b) Unearned premiums Year ended 31 December 2007 Year ended 31 December 2006 Gross Reinsurance Net Gross Reinsurance Net £000 £000 £000 £000 £000 £000As at 1 January 599,050 (60,001) 539,049 603,995 (61,201) 542,794Premiums written in 1,264,908 (145,553) 1,119,355 1,236,289 (191,371) 1,044,918the yearPremiums earned during (1,254,137) 150,868 (1,103,269) (1,241,234) 192,571 (1,048,663)the yearAs at 31 December 609,821 (54,686) 555,135 599,050 (60,001) 539,049 12 Financial investments 31 December 31 December 2007 2006 £000 £000Equity securities :Listed 217,664 226,437Unlisted 1,005 - 218,669 226,437 Debt securities :Listed 1,102,308 1,397,953Unlisted 2,811 -Certificates of deposit 388,465 427,752 1,493,584 1,825,705 Specialised investment funds 281,011 27,156 1,993,264 2,079,298 All financial investments have been designated as held at fair value through theprofit and loss. Amounts of £11,547,000 (2006: £nil) included within specialised investment fundshave been fair valued by reference to valuation models. 13 Derivative contracts 31 December 31 December 2007 2006 £000 £000Derivative contract assets Currency forwards 1,768 -Other 11 15 1,779 15 31 December 31 December 2007 2006 £000 £000Derivative contract liabilities Currency forwards 1,827 -Catastrophe swap contracts 26 - 1,853 - In 2007 the Group's principal subsidiary, Brit Insurance Limited (BIL), enteredinto three year catastrophe swap contracts, principally with Fremantle Limited(Fremantle), an unrelated Cayman Islands exempted company. Fremantle will pay BIL up to US$200 million in the event of four to ninequalifying natural catastrophes (events) - US$40 million for each of the fourthand fifth events and US$30 million for each of the sixth to ninth events. Thefirst three events are excluded. These catastrophe swap contracts have been accounted for as derivatives underInternational Accounting Standard 39 'Financial Instruments: Recognition andMeasurement' and not as insurance contracts under International FinancialReporting Standard 4 'Insurance contracts' as the contracts do not require BILto be adversely affected by a qualifying event. The catastrophe swap contractshave been fair valued by reference to a risk based valuation model. 14 Trade and other receivables 31 December 31 December 2007 2006 £000 £000Trade debtors 280 10,171Arising out of direct insurance operations 250,850 332,900Arising out of reinsurance operations 170,852 160,679Prepayments 2,762 2,644Accrued income 35,053 31,934Other debtors 7,722 1,994 467,519 540,322 The carrying amounts disclosed above reasonably approximate fair values at yearend. All amounts are due within one year of the balance sheet date. 15 Cash and cash equivalents 31 December 31 December 2007 2006 £000 £000Cash at bank and on deposit 460,360 367,518Cash equivalents 274,961 53,572 735,321 421,090 The carrying amounts disclosed above reasonably approximate fair values at yearend. Included in cash and cash equivalents are amounts totalling £250,368,000 (31December 2006: £183,105,000) not available for use by the Group which are heldwithin the Lloyd's syndicates and as Funds at Lloyd's. In addition, there are amounts totalling £27,098,000 (31 December 2006: £nil)which have been deposited in separate bank accounts so as to guarantee paymentof (a) the interest and capital payable to the holders of the outstanding 8.5%unsecured subordinated loan stock 2008 in the period up to and including 31December 2008 and (b) the interest and capital payable to the holders of theoutstanding US dollar floating rate unsecured subordinated loan notes 2034 inthe period up to and including 15 August 2009. 16 Employee benefits The Group has the following pension schemes in operation: (i) Brit Group Services Limited - defined benefit pension scheme The Group operates a funded pension plan providing benefits for its employeesbased on final pensionable salaries. The assets of the scheme are held in a separate trustee administered fund. Thisscheme closed to new entrants on 4th October 2001. The scheme is subject to a formal actuarial valuation every three years and theresults of the valuation carried out as at 31 July 2006 were updated to theaccounting date by an independent qualified actuary in accordance withInternational Accounting Standard 19 'Employee Benefits' (IAS 19). As requiredby IAS 19, the value of the defined benefit obligation and current service costhave been measured using the projected unit credit method. The following table sets out the key IAS 19 assumptions used for the scheme. 31 December 31 December 31 December 2007 2006 2005 % % % Retail price inflation 3.30 2.90 2.80Discount rate 5.80 5.20 4.80Pension increases in payment 3.20 2.90 2.80General salary increases 5.30 4.90 4.80Life expectancy of a pensioner aged 60 atbalance sheet dateMale 26.8 years 24.7 years 24.6 yearsFemale 29.2 years 27.6 years 27.5 yearsLife expectancy of a member retiring at age 60in 20 years' timeMale 28.0 years 25.9 years 25.8 yearsFemale 30.2 years 28.7 years 28.6 years The expected rate of return on assets has been derived by taking the weightedaverage of the long term expected rate of return on each of the asset classes atthe start of each year. The expected returns for individual asset classes at the start of each year wereas follows: 31 December 31 December 31 December 2007 2006 2005 % % % Equities 7.50 7.30 7.50Corporate Bonds 4.80 4.40 4.80Gilts 4.10 4.00 4.60Cash 4.30 4.00 4.50 Weighted average expected return 6.60 6.40 6.70 The amount included in the balance sheet arising from the Group's obligations inrespect of the scheme is as follows: 31 December 31 December 31 December 2007 2006 2005 £000 £000 £000 Present value of defined benefit obligations 93,543 89,719 95,049Fair value of scheme assets (88,384) (77,297) (72,231)Net pension benefit obligations 5,159 12,422 22,818 The amounts recognised in the income statement are as follows: 31 December 31 December 2007 2006 £000 £000 Current service cost 1,940 2,456Past service cost 22 25Interest cost 4,624 4,546Expected return on scheme assets (5,044) (4,680)Total expense recognised in the income statement 1,542 2,347 The above charges have been recognised in the acquisition costs and otheroperating expenses lines of the income statement. The actual return on thescheme's assets over the year was £7,795,000 (2006: £4,354,000). The allocation of the scheme's assets were as follows: 31 December 2007 31 December 2006 31 December 2005 Allocation Fair value Allocation Fair value Allocation Fair value % £000 % £000 % £000 Equity 68 59,833 70 54,035 71 51,023instrumentsDebt instruments 31 27,546 29 22,826 28 20,760Other 1 1,005 1 436 1 448 100 88,384 100 77,297 100 72,231 A reconciliation of the present value of the defined benefit obligation is asfollows: 31 December 31 December 2007 2006 £000 £000 Opening defined benefit obligations 89,719 95,049Current service cost 1,940 2,456Past service cost 22 25Interest cost 4,624 4,546Actuarial losses/(gains) 777 (9,195)Benefits paid (3,539) (3,162)Closing defined benefit obligations 93,543 89,719 A reconciliation of the fair value of the scheme assets is as follows: 31 December 31 December 2007 2006 £000 £000 Opening fair value of scheme assets 77,297 72,231Expected return on scheme assets 5,044 4,680Difference between expected and actual return on 2,751 (326)scheme assetsContributions by the employer 6,831 3,874Benefits paid (3,539) (3,162)Closing fair value of scheme assets 88,384 77,297 Up until the end of October 2007, the Group had been making regularcontributions of 24.7% of eligible salaries. The group has paid regular contributions of 33.7% of eligible salaries fromNovember 2007 onwards and has made a back payment to cover the contributionsthat would have been paid had the 33.7% contribution rate been in effect from 31July 2006. In addition during the year, the Group made lump sum contributions totalling£4,790,000. During 2008 the Group expects to continue to pay similar regular contributionsplus a lump sum contribution of £5,000,000. A summary of the scheme's experience was as follows: 31 December 31 December 31 December 31 December 31 December 2007 2006 2005 2004 2003 £000 £000 £000 £000 £000 Defined benefit obligation (93,543) (89,719) (95,049) (79,216) (72,171)Scheme assets 88,384 77,297 72,231 60,746 56,655Deficit (5,159) (12,422) (22,818) (18,470) (15,516) The recent history of experience gains and losses is as follows: 31 31 31 31 December December December December 2007 2006 2005 2004 £000 £000 £000 £000Difference between expected and actualreturn on scheme assets:Amount - gain/(loss) 2,751 (326) 7,992 571Percentage of scheme assets 3% 0% 11% 1%Experience gains and losses on obligations:Amount - (loss)/gain (740) 4,137 (686) (843)Percentage of the present value of the obligations (1%) 5% (1%) (1%)Total amount recognised outside incomestatement:Actuarial gains/(losses) on defined benefit pension scheme 1,974 8,869 (3,901) (2,938)Percentage of the present value of the obligations 2% 10% (4%) (4%) The cumulative amount recognised in the Consolidated Statement of RecognisedIncome and Expense since 1 January 2004 is a gain of £4,004,000 (2006: gain of£2,030,000). (ii) Brit Group Services Limited - Defined Contribution Stakeholder Scheme From 5 October 2001, Brit Group Services Limited has operated a definedcontribution stakeholder pension scheme. The assets of the scheme are heldseparately from those of the Company in an independently administered fund. The pension cost charge represents contributions payable by Brit Group ServicesLimited to the fund and amounted to £5,341,000 (2006: £3,815,000). At 31 December 2007 no contributions were payable to the fund (2006: £nil). (iii) Brit Insurance Limited - Defined Contribution Scheme For Brit Insurance Limited employees, the Group operates a defined contributionpension scheme. The assets of the scheme are held separately from those of theCompany in an independently administered fund. The pension cost charge represents contributions payable by Brit InsuranceLimited to the fund and amounted to £61,000 (2006: £26,000). At 31 December 2007, no contributions were payable to the fund (2006: £nil). 17 Deferred taxation The movement in deferred tax assets and liabilities during the year, taking intoconsideration the offsetting of balances within the same tax jurisdiction is asfollows: Unrealised Pensions Foreign Declared Other Total (profits)/ £000 exchange underwriting £000 £000 losses (profits)/ results on losses £000 investments on £000 non-monetary items £000 As at 1 January 2006 (4,561) 6,845 (2,274) 634 1,004 1,648Movements in the year:(Charged)/credited to income statement in respect ofcurrent year (3,097) (324) 4,891 (2,934) (1,238) (2,702)Deferred tax assets 1,833 - - - - 1,833previously unrecognisedOther adjustments in respect of prior years - (134) - (2,769) 301 (2,602)(Charged)/credited to income statement (Note 9) (1,264) (458) 4,891 (5,703) (937) (3,471)Charged to equity (Note 9) - (2,661) - - - (2,661)At 31 December 2006 (5,825) 3,726 2,617 (5,069) 67 (4,484) As at 1 January 2007 (5,825) 3,726 2,617 (5,069) 67 (4,484)Movements in the year:Credited/(charged) to income statement in respect ofcurrent year 2,157 (1,587) (3,568) (14,592) 1,251 (16,339)Effect of proposed change in tax rate 176 (77) 47 936 (21) 1,061Other adjustments in respect of prior years 116 - 7 (238) (912) (1,027)Credited/(charged) to income statement (Note 9) 2,449 (1,664) (3,514) (13,894) 318 (16,305)Charged to equity (Note 9) - (592) - - - (592)At 31 December 2007 (3,376) 1,470 (897) (18,963) 385 (21,381) Deferred income tax assets are recognised for temporary differences to theextent that the realisation of the related tax benefit through the futuretaxable profits is probable. 18 Trade and other payables 31 December 31 December 2007 2006 £000 £000 Trade creditors 808 2,264Arising out of direct insurance operations 34,463 41,286Arising out of reinsurance operations 63,034 131,866Other taxes and social security costs 1,597 1,344Shares held by third parties - CF Epic Investment 21,452 33,811FundsAccruals and deferred income 23,489 20,502Other creditors 2,357 525 147,200 231,598 Estimated fair values of amounts are the amounts recorded at year end. All amounts are payable within one year of the balance sheet date. 19 Equity dividends 31 December 31 December 2007 2006 £000 £000Final 2005 dividend paid - 9.0p per ordinary share - 29,198First 2006 dividend paid - 7.5p per ordinary share - 24,357Final 2006 dividend paid - 7.5p per ordinary share 24,437 -Special 2006 dividend paid - 2.0p per ordinary share 6,516 -First 2007 dividend paid - 7.5p per ordinary share 23,498 - 54,451 53,555 The Company had distributable reserves of £153,963,000 at 31 December 2007 (31December 2006: £82,950,000). The Directors recommend a final dividend of 7.5p per ordinary share, plus aspecial dividend of 7.0p per ordinary share for the year ended 31 December 2007.These dividends will be paid on 19 May 2008 to shareholders on the register on18 April 2008. Based on the number of shares in issue as at 9 March 2008, butexcluding treasury shares and those owned by the Group's Employee Benefit Trustwhich has waived its entitlement to dividends, this would amount to £44,988,000. 20 Share capital 31 December 31 December 31 December 31 December 2007 2006 2007 2006 £000 £000 Number '000 Number '000 Authorised:Ordinary shares of 75p each 350,000 350,000 466,667 466,667 Allotted, issued and fullypaid:Ordinary shares of 75p each 247,335 246,107 329,780 328,143 31 December 31 December 2007 2006 Number NumberNumber of ordinary shares of 75p each,allotted, issued and fully paid:Opening balance 328,142,566 326,980,768Exercised share options 1,637,527 1,161,798Closing balance 329,780,093 328,142,566 As at 31 December 2007 there were 7,309,444 shares (2006: 8,946,971) reservedfor issue under options. 21 Reconciliation of movements in equity For the Year ended 31 December 2007 Note Called Share Capital Translation Capital Own Retained Total equity up premium redemption reserve reorganisation shares earnings attributable share account reserve £000 reserve £000 to capital £000 £000 £000 £000 shareholders £000 £000 Balance at 1 246,107 135,767 586 (1,340) 180,000 (5,777) 257,949 813,292January 2007Arising in theperiod:Foreign exchange translationdifferences - - - (348) - - - (348)Actuarial gains ondefined benefitpension scheme - - - - - - 1,974 1,974Tax on items taken directlyto or transferredfrom equity - - - - - - (592) (592)Profit for the year - - - - - - 137,566 137,566Total recognisedincome andexpense forthe year - - - (348) - - 138,948 138,600Acquisition of own shares - - - - (5,534) - (5,534)Purchase of treasuryshares - - - - - (52,317) - (52,317)Vesting of own shares - - - - - 537 (537) -Sale of own shares - - - - - - - -Equity dividends 19 - - - - - - (54,451) (54,451)Share-based payments - - - - - - 3,691 3,691Exercised share options 1,228 2,236 - - - - - 3,464Capital reorganisation - - - - (180,000) - 180,000 -Partial disposal ofassociatedundertaking - - - 355 - - - 355Effect of associates'capitalmovements - - - - - - 1,796 1,796Balance at 31 December 2007 247,335 138,003 586 (1,333) - (63,091) 527,396 848,896 The capital redemption reserve results from the redemption of some of theGroup's own shares and its purpose is to maintain the Group's capital. The translation reserve arises on the revaluation of the overseas associatedundertakings. Following an application to the High Court, the Company was permitted totransfer an amount from the share premium account to a capital reorganisationreserve of £180,000,000. This capital reorganisation became effective on 29March 2006. On 2 March 2007, following £29,412,000 being deposited in separate bank accountsby the Company on the terms approved by the Court, the £180,000,000 wastransferred from the capital reorganisation reserve to retained earnings. For the Year ended 31 December 2006 Note Called Share Capital Translation Capital Own Retained Total equity up premium redemption reserve reorganisation shares earnings attributable share account reserve £000 reserve £000 to capital £000 £000 £000 £000 shareholders £000 £000Balance at 1 January 2006 245,236 314,758 586 - - (7,550) 171,630 724,660Arising in theperiod:Foreign exchangetranslationdifferences - - - (1,340) - - - (1,340)Actuarial gains ondefinedbenefitpension scheme - - - - - - 8,869 8,869Tax on items taken directlyto ortransferredfrom equity - - - - - - (2,661) (2,661)Profit for the year - - - - - - 133,769 133,769Total recognisedincome andexpense forthe year - - - (1,340) - - 139,977 138,637Acquisition of own shares - - - - (288) - (288)Vesting of own shares - - - - - 1,758 (1,758) -Sale of own shares - - - - - 303 (15) 288Equity dividends 19 - - - - - - (53,555) (53,555)Share-based payments - - - - - - 1,670 1,670Exercised share options 871 1,626 - - - - - 2,497Capital reorganisation - (180,000) - - 180,000 - - -Premium on repurchase ofunsecuredsubordinatedloan stock - (617) - - - - - (617)Balance at 31 December 2006 246,107 135,767 586 (1,340) 180,000 (5,777) 257,949 813,292 22 Cash flows provided by operating activities Year ended Year ended 31 December 2007 31 December 2006 £000 £000Profit on ordinary activities before tax 191,153 186,264 Adjustments for non-cash movements:Realised and unrealised gains on investments and (9,671) (9,213)derivativesLoss on sale of property, plant and equipment 500 -Amortisation of software 4,567 3,889Impairment of software 4,023 -Depreciation of property, plant and equipment and related exchange adjustments 3,056 2,534Foreign exchange gains on financing items (115) (1,068)Foreign exchange (gains)/losses on cash and cash equivalents (5,104) 19,680Share of profit after tax of associated undertakings (2,919) (1,058)Charges in respect of employee share schemes 3,691 1,670Cash contributions in excess of charges in respect of defined benefit pension scheme (5,289) (1,527)Interest income (112,302) (99,083)Dividend Income (5,684) (2,182)Finance costs on borrowing 12,784 13,937Profit on disposal of subsidiary undertaking (2,346) -Profit on disposal of asset held for sale (2,887) -Profit on partial disposal of associated undertaking (1,871) - Changes in working capital:Deferred acquisition costs (9,983) 2,872Trade and other receivables excluding accrued income 75,922 71,778Insurance and reinsurance contracts 216,218 82,511Trade and other payables (84,398) (61,314)Working capital disposed of in sale of subsidiary 367 -Provisions (38) (46)Cash flows provided by operating activities 269,674 209,644 23 Financial Information and posting of accounts The financial information set out above does not constitute the Company'sstatutory accounts for the year ended 31 December 2006 or 2007, but is derivedfrom those accounts. Statutory accounts for 2006 have been delivered to theRegistrar of Companies and those for 2007 will be delivered by no later than 30June 2008. The auditor has reported on those accounts in accordance with Section235 of the Companies Act 1985; their reports were unqualified and did notcontain statements under Section 237(2) or (3). The audited Annual Report and Accounts for 2007 are expected to be posted toshareholders by no later than 15 April 2008. Copies of the Report may beobtained from that date by writing to the Company Secretary, Brit InsuranceHoldings PLC, 55 Bishopsgate, London, EC2N 3AS. The Annual General Meeting ofthe Company will be held at the same address at 12.00pm on 15 May 2008. The Preliminary Results were approved by the Board on 9 March 2008. GLOSSARY Aggregate exposure: The maximum total of claims that can be incurred by aninsurer in respect of any event or series of similar events. It is usuallyrelated to a particular risk type, class of business and/or geographical area.Also see 'realistic disaster scenario'. Asset allocation: The process of dividing our investments among different kindsof assets, such as stocks, bonds, property and cash, in order to achieve abalance between return and risk. Bordereaux: A detailed list of financial information (eg premiums or claims)prepared by cedants or coverholders for periodic submission to underwriters toadvise them of risks covered and claims incurred. Capacity: The maximum premium income which an insurer is permitted tounderwrite. For a Lloyd's syndicate, a capacity figure is assigned to eachunderwriting year and is defined as gross written premiums less commissionspayable. Cell: See 'Protected cell company' Casualty: A class of insurance, mainly comprising accident and liabilitybusiness. Claims: Demand by an insured for indemnity under an insurance contract. Claim development triangles: Tabulations of claims development data. This datais set out with underwriting years along one axis and years of development (egcalendar year end dates) along the other. Claims incurred: Claims that have occurred, regardless of whether or not theyhave been reported to the insurer. Claims made basis: A policy under which only claims notified to the insurerduring the policy period are covered. Claims ratio: Ratio, in percent, of net claims incurred to net earned premiums Combined ratio: Ratio, in percent, of net claims incurred, acquisition costsplus insurance related administrative expenses to net earned premiums. Also thesum of the claims ratio and the expense ratio. Coverholder: See 'Delegated authority'. Deferred acquisition costs (DAC): Costs incurred for the acquisition or renewalof insurance policies (eg brokerage and underwriter related costs) which arecapitalised and amortised over the term of those policies. Delegated authority: An authority granted by an underwriter to an agent (knownas a coverholder) whereby that agent is entitled to accept, within certainlimits, insurance business on behalf of the underwriter. The coverholder dealswith premium collection, the issue of certificates and the servicing of claims,and has full power to commit the underwriter within the terms of the authority. Earned premium: That proportion of a premium which relates to the portion of arisk which has expired during the period. Earnings per share (EPS) - Basic: Ratio, in pence, calculated by dividing theconsolidated profit after tax by the weighted average number of ordinary sharesissued, excluding shares owned by the Group. Earnings per share (EPS) - Diluted: For calculating diluted earnings per sharethe number of shares and profit or loss for the year is adjusted for alldilutive potential ordinary shares such as share options granted to employees. Expense ratio: Acquisition costs plus insurance related administrative expensesdivided by net earned premiums Gearing ratio: Ratio, in percent, of total borrowings to total capitalresources. Gross written premium (GWP): Amounts payable by the insured, including anybrokerage or commission deducted by intermediaries but excluding any taxes orduties levied on the premium. Gross premiums written: See 'Gross written premium' Gross written premium represented by catastrophe exposed premium: Percentage ofGroup calendar year GWP with potential exposure to catastrophic events. Hard market: An insurance market where prevalent prices are high, with morerestrictive terms and conditions offered by insurers. IFRS: International Financial Reporting Standards - Standards formulated by theInternational Accounting Standards Board (IASB). UK listed entities havereported on an IFRS basis since 2005. Incurred but not reported (IBNR): Anticipated or likely claims that may resultfrom an insured event although no claims have been reported so far. Investment return: Investment return is calculated using the 'Dietz' method.This method calculates a return percentage for the average funds invested over amonth. It assumes that all net contributions take place in the middle of theperiod. The annual return is calculated by geometrically adding the monthlyreturns figures. LIBOR: London Interbank Offered Rate - An interest rate at which banks canborrow funds, in marketable size, from other banks in the London interbankmarket. Line size: The proportion of an insurance or reinsurance risk that is acceptedby an underwriter or which an underwriter is willing to accept. Long tail: The difference between the average claim payment and the averagepremium payment term. Long tail is over three years. Long-term subordinated debt: Subordinated borrowings which have at least fiveyears remaining to maturity or call and are of types which qualify as regulatorycapital. Management expenses: Total Group expenses excluding foreign exchange losses,staff bonus costs, RI3K Ltd expenses and debt servicing (finance) costs. Medium tail: The difference between the average claim payment and the averagepremium payment term. Medium tail is 1.5 to three years. MMI scale: The Modified Mercalli Intensity (MMI) scale measures the shakingseverity generated by an earthquake. The scale ranges from 'I' (not felt) to'XII' (damage nearly total). Monoline insurers: An insurer who has exposure to only one line of business. Net tangible assets per share: Shareholder funds less intangible assets dividedby the number of shares in issue at the balance sheet date less own shares. Net written premiums: Gross premiums written less outwards reinsurance premiums. OEIC: Open ended investment company Outstanding claims: Claims which have been notified at the balance sheet datebut not settled. Protected cell company (PCC): A company that has been separated into legallydistinct portions or cells. The revenue streams, assets and liabilities of eachcell are kept separate from all other cells. Each cell has its own separateportion of the PCC's overall share capital, allowing shareholders to maintainsole ownership of an entire cell while owning only a small proportion of the PCCas a whole. PCCs can provide a means of entry into captive insurance markets toentities for which it was previously uneconomic. Rating model: A formal, structured tool to assist an underwriter in setting aprice for a risk. Realistic disaster scenario (RDS): A stress test for underwriting entities toshow how they withstand accumulated exposure. Levels of claims are assessed inrespect of a number of hypothetical disaster scenarios, using consistent andappropriate methods and assumptions. Also see 'aggregate exposure'. Reserves: Outstanding claims and claims incurred but not reported (IBNR). Retention ratio: Ratio, in percent, of the value of premiums written in one yearrenewed in the following year. Retrocession/retrocessional: Reinsurance of the reinsurance account. Return on equity (RoE): Profit before tax achieved by the Group adjusted formovements charged to the income statement in respect of intangible assets,divided by opening net tangible assets adjusted on a weighted average basis forshare issues or buy-backs during the period. Short tail: The difference between the average claim payment and the averagepremium payment term. Short tail is under 1.5 years. Soft market: An insurance market where prevalent prices are low, and terms andconditions offered by insurers are less restrictive. Solvency II: Initiative launched by the European Commission to revise current EUinsurance solvency rules. Solvency II focuses on capital requirements, riskmodelling, prudential rules, supervisory control, market discipline anddisclosure and in currently forecast to apply from 2012. Specialised investment funds: Investments in assets with low correlation tointerest rate and equity price movements. SS scale: The Saffir-Simpson (SS) scale is used to classify hurricanes fromcategory 1 (wind speed 74 to 95 mph) to category 5 (wind speed 156+ mph). The SSscale evaluates winds and storm surge generated by the hurricane over open waterpre-landfall. Strategic Business Unit (SBU): Underwriting division of Brit Insurance. BritInsurance underwrites through three SBUs: Brit Global Markets, Brit Reinsuranceand Brit UK. Tail: See 'short tail, 'medium tail' and 'long tail'. Technical price: The price for the risk which is expected to produce the longterm required return on capital for the Group. Total capital resources: Net tangible assets plus long-term subordinated debt. Total invested assets: The sum of 'financial investments', 'assets held forsale' and 'cash and cash equivalents'. UCIT: Undertaking for collective investments in transferable securities UK base rate: The Bank of England Base Rate Ultimate loss ratio (ULR): The ratio of the sum of paid claims, outstandingclaims and IBNR to premiums, all of which can be expressed either gross or netof reinsurance recoveries and reinsurance premiums. Underlying premium growth: Increase in Gross Written Premium between twocalendar years where the earlier year is restated using the exchange ratesapplicable to the latter year. Underwriting profit: Profit before tax arising from each SBU less investmentreturn. Unearned premium reserve (UPR): The portion of premium income written in thecalendar year that is attributable to periods after the balance sheet date. Itis accounted for as unearned premiums in the underwriting provisions. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
BRE.L