1st Mar 2005 07:02
BRIT Insurance Holdings PLC01 March 2005 For immediate release 1 March 20057.00 a.m. BRIT INSURANCE HOLDINGS PLC Record results for 2004 Brit Insurance Holdings PLC ("Brit" or the "Group"), the UK general insurancegroup, today announces record final results for the year ended 31 December 2004. Highlights • Record pre-tax profit of £102.5m (2003: £77.6m), an increase of 32.1% • Combined ratio 92.5% (2003: 88.5%) despite worst natural catastrophe year on record • Strong investment performance of £77.3m (2003: £50.9m) • Gross written premium £1,086.7m (2003: £1,015.7m) • Recommended final dividend of 2p per share, bringing the total for year to 6p per share representing 80.6% of profits after tax, to be paid on 22 April 2005 to shareholders on the register on 11 March 2005 • Dane Douetil to become Chief Executive Officer at the AGM on 19 April 2005. Neil Eckert remains an Executive Director until the year end and has agreed to stay as a non-executive director thereafter Results Year ended Year ended 31 December 31 December 2004 2003 £m £m Gross premiums written 1,086.7 1,015.7Net premiums written 910.4 850.8Gross premiums earned 1,023.1 834.3Net premiums earned 854.5 671.4Technical profit 122.0 100.3 Operating profit based on long term rate of investment 97.6 91.1 ReturnPre-tax profit 102.5 77.6Profit after tax and minority interests 72.0 57.5Basic earnings per share 7.45P 6.58P Net assets 710.0 697.5*Net assets per share 72.9P 71.6P* Combined ratio 92.5% 88.5% * Restated Neil Eckert, Chief Executive Officer said: "Brit is in fantastic shape to takefull advantage of current market conditions. 2004 was an unusual year withrecord natural catastrophes but we have still made record profits. "I am delighted that Dane is taking over as CEO and look forward to a successfulhandover and it is my intention to retain the whole of my Brit shareholding. Ilook forward to continuing to contribute as part of Brit's management team." Clive Coates, Chairman, said: "I would like to take this opportunity on behalfof all the stakeholders in our business to thank Neil for his immensecontribution to the successful development of Brit from a small investment trustin 1995, to its current position as one of the largest UK based insurance andreinsurance groups. We are pleased that he has agreed to remain with the Groupwhere we will continue to benefit from the drive, talent and enthusiasm whichhave been such a large influence on Brit's development." Dane Douetil, Deputy Chief Executive Officer, said: "I am delighted to be giventhe opportunity to lead Brit in its next stage of development. Furthermore, Iam pleased that Neil has agreed to remain with the Group which allows thecontinuation of the excellent partnership that he and I have developed duringthe seven years we have worked together." For further information, please contact Neil Eckert, Chief Executive Officer, Brit Insurance Holdings PLC 020 7984 8511David Haggie/Peter Rigby, Haggie Financial 020 7417 8989 There will be a presentation to analysts at Brit's office at 55 Bishopsgate at9.30 a.m. today A webcast of the analysts' presentation will be available on our websitewww.britinsurance.com this afternoon. Chairman's Statement In 2003 Brit emerged as a substantial and profitable participant in the UKinsurance sector. In 2004 the Group further built on and consolidated the solidplatform it has created in recent years and is again reporting record profits. Brit's pre-tax profits have increased to £102.5m from £77.6m and we arecontinuing to demonstrate the robustness of the Group's reserves. This strong result is all the more satisfactory for having been achieved in ayear notable for the industry in terms of the severity and frequency of naturalcatastrophe losses. Over the year Brit returned to the dividend register with two interim paymentsof 2p per share and I am delighted to announce a recommended final dividend of2p per share. While our stated dividend strategy is to pay a minimum of 70% ofpost-tax profits, in fact we are recommending approximately 81% of post-taxprofits for the year. We feel that it is appropriate to exceed the minimumthreshold in a period where there were exceptional levels of catastrophe losses,but Brit was still able to achieve a record result. These actions demonstratethe Group's desire both to distribute profits to shareholders and maintain tightinternal discipline on capital. Our capital strategy and forward planning have placed Brit in a strong positionas regulators implement their new rules. During 2004 the Group's insurancecompany, Brit Insurance Limited ("BIL") participated in the FSA's pilot onIndividual Capital Adequacy Standards ("ICAS") and, Brit believes, became one ofthe first in the UK to have successfully completed the study. The Board was further strengthened during the period by the appointment of twonew Non-Executive Directors, Peter Hazell and Michael Smith. We have carriedout a major review of Board's performance in accordance with the new CombinedCode, approved a revised Group Strategy Plan and further developed a detailedsuccession plan. In this regard, I would like to announce the followingchanges. With effect from the AGM on 19 April 2005, Dane Douetil will succeed Neil Eckertas CEO of Brit. This follows Dane's appointment as Deputy CEO 12 months ago,since when he has been working closely with Neil in anticipation of this plannedsuccession. Neil was one of the two key founders of the Company in 1995 and has led itsuccessfully over a 10 year period to become one of the leading companies in theUK insurance market. He will continue to work in an executive capacitysupporting Dane until the end of the year, at which time he has agreed to remainon the Board in a non-executive capacity. Our succession planning preserves anexperienced and successful executive team whilst embracing orderly managementchange that we believe is in shareholders' best interests. Glyn MacAulay will retire from the main Board with effect from the AGM and PeterHazell, who was formerly UK Managing Partner at PricewaterhouseCoopers, willsucceed him as Chairman of the Audit Committee. Glyn has served on the mainBoard since 1996. He has been involved with the Group during a period ofenormous change culminating in today's substantial and profitable insurancebusiness. His experience, judgement and hard work are appreciated by all hiscolleagues and I wish to record my personal thanks for his outstandingcontribution to Brit. We are in the process of recruiting a new Non-ExecutiveDirector and details will be announced in due course. The Reinsurance and London Market operations continue to develop well producinghealthy results. Separately, the growth of our UK business, a core element inthe Group's strategy, has continued apace. Three regional offices have beenestablished over the last twelve months and a new IT platform currently intesting will shortly be rolled out across the regions. This UK regional pushwas an area where Brit was exposed to operational risk and I am delighted thattargets are being achieved. Brit has acquired both teams of people and portfolios of business to join itsunderwriting operations during 2004 and expects further such opportunities in2005. This increasing scale and breadth of Brit's activities, especially in the UKregional market, and its role as a medium sized, publicly quoted company, havemade it vital for Brit to raise brand awareness. This has been achieved throughan integrated strategy encompassing public relations, advertising and generalpromotional activity as well as our portfolio of sports sponsorships. Care hasbeen taken to measure and evaluate our activities and we are delighted to berunning such a successful campaign. In particular, the Brit Insurance Oval hasachieved a high profile and we look forward to the 2005 Ashes cricket serieswith great anticipation. As expected, 2004 saw further reserve deterioration hit several participants inthe insurance market, a trend we expect to continue during 2005. This combinedwith low investment returns has led to continued pricing discipline. The yearend renewal season was late and was completed against a backdrop of thedevastating tsunami that hit South East Asia. This is no doubt one of the mostterrible human tragedies in recent memory. Our response has been to make ameaningful charitable donation. Our investment return of £77.3m (2003 £50.9m) has exceeded our expectations.More than 86% of our invested assets are managed by our associated company, TheEquity Partnership Limited, which has performed well and the relationship hasproved to be successful. Finally, I am proud of the Group culture that has been created. We havestrength and depth in terms of management. We have a strong emphasis ontraining, career development, discipline and professionalism. Staff retention ishigh and Brit offers a happy and vigorous environment in which to work. I wouldlike to thank all the Staff and my fellow Directors for their contribution toanother record year for the Group and I look forward to a successful 2005. Clive CoatesChairman1 March 2005 OPERATING REVIEW Introduction Brit has delivered another record year during 2004 despite the industryexperiencing one of the most active hurricane seasons in living memory. Fullyear profit before tax was £102.5m (2003: £77.6m). We are continuing to build on our operational strengths which extend way beyondour underwriting and risk management expertise into disciplines such asinvestment, brand, business process and IT and HR. Both the Group's business model and its management are now established and overthe last three years have delivered strong, growing profits, laying thefoundations of a solid track record. Financial Performance Brit's financial performance in 2004 was helped by the combination of goodunderwriting conditions and strong investment management performance. Operatingprofit rose to £101.9m from £75.4m in 2003. Our underwriting performance wasnotable for record levels of earned premium income and an excellent combinedratio of 92.5% despite an abnormally high level of catastrophe claimscontributing 10.5 percentage points to this ratio. Total invested funds andcash increased by 34.8% while the Group's post-tax return (excludingamortisation of intangibles) on weighted average net tangible assets for theyear was 13.0%, up from 12.8% for 2003. Dividends We are delighted to recommend a final dividend of 2p per share taking theoverall total for the year to 6p per share. This represents a distribution of80.6% of profits after tax and minority interests. While our dividend strategyis to pay a minimum of 70% of post-tax profits, during this period we havechosen to exceed this amount in the light of the robust financial performance inspite of an unusually active hurricane season. Our strategy on dividends isdesigned to reward investors while at the same time applying a self imposedcapital discipline. Capital Allocation Another achievement during 2004 was the Group's involvement in the FSA pilotstudy on Individual Capital Adequacy Standards ("ICAS"), a development whichunderlined the fact that capital allocation has been at the heart of Brit'sunderwriting business model for the last three years. Following the FSA's review in August of the Individual Capital Adequacysubmission for the Group's insurance company, Brit Insurance Limited ("BIL"),and Brit's receipt of the FSA's indicative Individual Capital Guidance for thecompany, Brit believes BIL became one of the first insurance companies in the UKto have successfully completed the ICAS study. While one immediate direct benefit has been Brit's improved ability to manageits reinsurance spend, the use of the ICAS model is more widely embedded in ourbusiness as it not only looks at underwriting risk, but also at the Group'sinvestment, liquidity, counterparty and operational risks. This has given us agreater understanding of the extent to which risks correlate under differentcircumstances and of what that means in terms of the potential financial impacton the Group as a whole. Accordingly, the model has enabled Brit to take a moreinformed view of its capital requirements both now and in the future. As set out more fully in the Financial Review, we have sufficient, but notexcessive, capital to cover our projected regulatory requirements and tomaintain the strong insurer financial strength rating necessary to attract highquality business, both now and in the foreseeable future. Brit continues to invest heavily in the ICAS model and in its understanding ofdifferent capital structures. Underwriting Strategy In 2004 Brit completed the restructuring of its underwriting operations intothree customer facing units - the London Market, Reinsurance, and UKUnderwriting Centres. All three have access to the two regulatory vehiclesthrough which Brit underwrites: BIL and Lloyd's Syndicate 2987 which is managedby Brit Syndicates Ltd ("BSL"). Brit manages its underwriting activities as one operation regardless ofregulatory vehicle or underwriting centre. This ensures effective portfoliomanagement from both a risk and return on capital perspective, while leading toefficient reinsurance buying and common procedures, protocols and controls. The decision on where to place the business is complex and is driven by acombination of factors including frictional costs, levies, licensingrequirements, use of capital, the financial strength ratings required by clientsand client preference. This has led to the majority of the London marketbusiness being written by the Lloyd's operation while most of the UK andEuropean business is written by BIL. Reinsurance business is split 54% BIL/46%Syndicate 2987. Brit intends to continue to grow BIL while maintainingSyndicate 2987's current level of capacity. Capital is set at class level and again at sub-class level, and is traded weeklyat Brit's Underwriting Committee where underwriters ask for, or give up, capitalas business conditions dictate. This process enables capital to be directed towhere the best returns are likely to be achieved. During the course of 2004 115internal trades were made in respect of £132.4m of capacity. The drive to implement common standards and management across the Group'sunderwriting operations was further enhanced during 2004 when, followingregulatory consent, we mirrored the BIL and BSL Boards to achieve commonExecutive and Non-Executive Directors across the two regulatory vehicles. The Brit Brand Over the course of 2004 Brit also built its brand both nationally andinternationally, so supporting the growth plans of its underwriting centres. Anintegrated strategy embraced activity such as public relations, advertising andsponsorships, as well as customer and distributor development, marketingservices, the production of high quality documentation and adoption of onedistinct corporate identity. This strategy will continue into 2005. Brit has used a number of sports sponsorships, each chosen to match the Group'svalues, stature and dynamism, to leverage mainstream press and broadcast mediacoverage. This approach has resulted in a significant increase in spontaneousbrand awareness. In addition, the Brit Super Series Squash Finals was nominatedas a finalist in the British Sports Industry Awards for "Best Sponsorship of anEvent or Programme" while the decision to aggregate Brit Insurance Oval andSurrey County Cricket Club into a single title sponsorship produced results thatfar surpassed those of previous individual sponsors. Activation programmesinvolving the community won further hearts and minds. In the UK regional marketthe Brit Novice Hurdles series of horse races, which culminates in theprestigious Cheltenham Festival, has been selected to reflect Brit branchlocations and develop Brit's local presence. The Underwriting Centres London Market Underwriting Centre The London Market Underwriting Centre is the largest of Brit's 3 underwritingcentres accounting for £431.6m of gross written premium in 2004 split £107.8m inBIL and £323.8m in Syndicate 2987. Mike Sibthorpe, who has been with Brit since 1998 and is also Active Underwriterof Syndicate 2987, heads up the London Market Underwriting Centre. We have over70 underwriters within the Centre writing business in the international marketfor larger corporates and coverholders. The London Market underwriting performance in 2004 shows a combined ratio of92.1% although much of the business is longer tail so in line with Brit'sconservative reserving policy, claims are projected at the ultimate actuarialestimates. Actual paid and outstanding loss ratios remain at historically lowlevels supporting our view that the underwriting conditions remain favourable.The unprecedented catastrophe activity in 2004 impacted the US Property andMarine accounts to a degree but the quality and diversity of our underwritingmeant that the overall result was first class. Brit's London Market operation is increasingly leading the business it writesand obtaining larger lines on business it believes is better priced. This isdue to a number of factors including Brit's increased brand profile in themarket, strong balance sheet and ability to offer reliable capacity and thelevel of service it provides to brokers. Additionally many of the underwritingteams that have joined Brit in the past few years are beginning to recognise thebenefits of Brit's structure and market presence and this has given them theconfidence and opportunity to develop their business with encouraging results. Reinsurance Underwriting Centre Under the leadership of Richard Finn, the Reinsurance Underwriting Centre hascontinued to grow with particular progress being made over the year indeveloping the property division outside of the US. The property division willbe further boosted in 2005 by the acquisition of a new team which is wellrespected for leading US and Canadian business. Despite the unusual frequency of major loss events the Centre has achieved acreditable overall result in the circumstances, with a combined ratio of 95.1%(2003: 65.7%). Modest growth should be achievable during 2005 as a result of the widening ofthe Centre's geographic reach. In addition the recent high claims activityshould create more stability for renewal rates than was previously anticipated. Separately, another feature of 2004 was Brit's growing relationship withAugsburg Re for aviation excess of loss business. Due to the sector's continuingshortage of lead underwriters and capacity, the Centre is anticipating stronggrowth in aviation reinsurance and retrocessional business generally during2005. UK Underwriting Centre The delivery mechanisms and profile of the UK operation are distinctly differentfrom those of Brit's other two underwriting Centres as most of the business iswritten on a non-subscription basis and comes through regional retail brokers.Accordingly it is crucial to build the right infrastructure which draws onmodern processes while delivering first class service. Over 2004, the Centre continued to establish its brand across the UK regions,securing a strong foothold in small to medium sized commercial business. Newbranch offices opened in Leeds, Birmingham and Manchester. Gross writtenpremium rose from £309.4m to £345.4m and its combined ratio improved from 95.3%to 91.9%. The number of staff in the regional offices rose as follows: 31 December 2004 31 December 2003 Birmingham 7 -Bristol 9 8Glasgow 7 4Leeds 7 -Darlington 30 31Manchester 2 -Ilford 120 118London 52 39 Total 234 200 A slowing in rate increases or in some classes decreases against 2002 and 2003,particularly in the casualty divisions, made it difficult to achieve the samerate of growth as in 2003. Motor business, the cycle for which probably peakedseveral years ago, came under some rating pressure and Brit has cut back itspresence generally, and particularly in the area of private motor. Business written Gross Written Premium Gross Written 2004 Premium 2003Underwriting Centre £m % £m % London MarketAccident and Financial 123.3 11.3 114.0 11.2Aerospace 28.6 2.6 61.5 6.1Casualty 112.1 10.3 114.5 11.3Marine 80.0 7.4 81.3 8.0Property 87.6 8.1 97.0 9.5 431.6 39.7 468.3 46.1 ReinsuranceProperty 133.5 12.3 102.9 10.1Marine 7.1 0.7 2.0 0.2Casualty 60.7 5.6 55.0 5.4Aviation 36.0 3.3 19.9 2.0Cat Retro and Other 42.7 3.9 42.0 4.1 280.0 25.8 221.8 21.8 UKProperty 61.7 5.7 69.0 6.8Casualty 129.2 11.9 86.0 8.5Motor 105.6 9.7 113.0 11.1Liability 37.3 3.4 41.4 4.1Package and Other 11.6 1.1 0.0 0.0 345.4 31.8 309.4 30.5 Other 29.7 2.7 16.2 1.6 Group Totals 1,086.7 100.0 1,015.7 100.0 The key January 2005 renewals season has been encouraging. From the Group'smanagement accounts, gross written premium in January 2005 was £187.9m (January2004: £152.1m), an increase of 23.5%. For various reasons, we would not expectthis high rate of increase to continue through the remainder of the year. Underwriting Rating Levels Brit's Premium Index uses 2000 as its base year and reflects the broad trend foreach underwriting centre in respect of rates, terms and conditions. The analysisis based on a set coding structure with the data being input by Brit'sunderwriters. It is compulsory for all open market business to be included andthe data is independently audited by the compliance team on a regular basis. The index mainly tracks renewal business as it is often hard to judgedifferences in rates for new business. Some caution needs to be exercised whenusing this table as the varying levels of claims inflation in different classesrequire different rating increases simply to retain the status quo. Inevitablythere is also an element of subjectivity in respect of any assessment of theimpact of changes in terms and conditions. Overall, however, Brit believes that rating levels, while off the highs ofrecent years, are currently strong and that the market as a whole is generallymaintaining discipline, particularly in the area of terms and conditions. Premium Index (Year 2000 as base year) 2000 2001 2002 2003 2004 Jan 2005Underwriting Centre London MarketAccident & Financial N/A 100 131 142 147 152Aerospace 100 158 202 237 260 271Casualty 100 122 207 288 303 306Marine 100 112 144 156 159 161Property 100 112 150 155 152 150 ReinsuranceProperty - USA and Canada 100 110 149 154 155 159Property - International 151 149Property - Retrocessional 100 110 132 120 117 117Marine 100 115 171 179 183 188Casualty 100 115 182 215 230 231Aviation 100 100 167 159 139 128 UKProperty 100 104 123 132 131 131Casualty N/A N/A 100 130 129 128Motor 100 108 115 120 122 121Liability N/A 100 200 286 284 261 The indices are based on the underwriters' estimates of the rate movementsexperienced by their business. They are subjective as they are calculated usingjudgement to estimate the effect of changes in terms and conditions as well aschanges in premium. Split of Premium Income by Geographical Area An analysis of gross written premium by geographical area is as follows: 2004 2003 £m £m UK 419.7 403.4Other EU member states 96.6 69.1USA 228.6 234.8Other (including worldwide) 341.8 308.4 1,086.7 1,015.7 Split of Premium Income by Tail 2002 Short tail 49.6% Medium tail 24.3% Long tail 26.1% 2003 Short tail 44.1% Medium tail 19.2% Long tail 36.7% 2004 Short tail 48.0% Medium tail 17.4% Long tail 34.6% Realistic Disaster Scenario ("RDS") We continue to monitor over 20 types of RDS across the Group and conduct aformal review quarterly. Both the return periods used and the type of RDSevents that are tested are continually assessed and have been slightly modifiedin 2004. The Group currently works to a return period of one in one hundredyears for windstorm and one in two hundred years for earthquake. The tableshows exposures prevailing in the fourth quarter of 2004. We have managed the net loss percentages to approximately the same levels asearlier years. The increasing scale and diversity of our business written hasenabled us to achieve this on a reduced percentage reinsurance spend. Insummary, the Group's risk appetite in respect of exposure to a single eventremains capped at the following levels: • Gross loss not to exceed 30% of Gross Premium net of brokerage • Net loss after reinsurance recoveries and reinstatement premiums not to exceed the lower of 10% of Gross Premium net of brokerage or 20% of capital. RDS exposure - as percentage of Gross Premium net of brokerage Gross Loss Net Loss £m % £m % US windstorm 207.0 23.5 55.9 6.3California earthquake 255.2 29.0 55.5 6.3European windstorm 229.6 26.0 61.7 7.0Japanese earthquake 240.3 27.3 56.9 6.5 Catastrophe Losses Gross Reinsurance Net Net Loss Recoveries Reinstatements Loss US$m US$m US$m US$m Hurricane Charley (43.0) 7.2 2.1 (33.7)Hurricane Frances (42.5) 10.0 (0.2) (32.7)Hurricane Ivan (130.2) 93.1 (12.3) (49.4)Hurricane Jeanne (27.4) 15.9 0.7 (10.8)Total Hurricane Losses (243.1) 126.2 (9.7) (126.6)Typhoon Songda (20.8) 6.6 0.6 (13.6)Asian Tsunami (42.3) 9.1 1.7 (31.5) (306.2) 141.9 (7.4) (171.7) (159.5) 73.9 (3.8) (89.4) £m equivalent The overall level of catastrophe claims is more than twice our expectation for anormal year, and the total effect is the equivalent of approximately 10.5percentage points on our combined ratio. Reinsurance One of the major benefits of the development of Brit's ICAS model has been ourability to manage better the Group's outward reinsurance buying and we have cutour reinsurance spend as a percentage from 21.2% of gross written premium incomein 2002 to 16.2% in both 2003 and 2004. The figure for 2004 would have been 1.1percentage points lower but for reinstatement premiums, which totalled £11.9m. We constantly monitor our exposure to our counterparty reinsurance risk, notjust on the basis of current exposure but also taking into account all theGroup's outstandings and IBNRs by legal entity. We also run a matrix which sets a cap on our exposure to any one reinsurer andis based on the entity's financial net worth and Brit's internal rating of thatentity. This enables the Group to manage its relationship with a particularreinsurer from overweight to underweight as circumstances dictate. We seek tohave the same open and transparent dialogue with our reinsurers as we do withall stakeholders in our business and view our relationships as long term, astrategy we expect to serve us well over time. Claims Our decision just over a year ago to separate underwriting and claims from thesame reporting line continues to prove its worth. The focus that Bob Foster, whoheads our Claims Division, has been able to achieve has enabled proactivemanagement of our claims handling and the Group was delighted to receiveexternal validation of its strategy in the form of the 2004 Claims Team of theYear Award from key industry publication, Insurance Day. Immediate benefits of the restructuring include more efficient service due to agreater focus on fewer third party suppliers of claim services and, in manycases, further mitigation of claims through active management. Brit puts claims service at the centre of its brand and strives to achieveprompt settlement. We believe this strategy benefits both our clients and Britas it enables the Group to assess more accurately its actual cost of sales.This in turn means we are better placed to get our pricing right. Where we donot have full knowledge of a definite claim amount we actuarially assess thereserve to ultimate including claims inflation. We are represented on the Lloyd's Claims Steering Group. The Group has proposedmajor changes to the Lloyd's market which Brit believes will radically reformthe way claims are managed in terms of the efficiency of delivery of informationand quality of the data received. Accordingly, Brit has been an early adopterof the main recommendations. Claims Triangulation The table shows a claims triangulation for the 2002, 2003 and 2004 underwritingyears. The triangulation shows the position (paid and outstanding) for theseyears at different stages of development. Actual claim amounts are expressed asa percentage of the estimated ultimate Gross Premiums net of brokerage ("GNP")for each year. 12 months 24 months 36 months Ultimate GNP £m 2002 Gross Claims Paid 4.4% 21.4% 30.0% 476.0 Gross Outstanding 10.1% 14.5% 13.8% Gross Incurred 14.5% 35.9% 43.8% 2003 Gross Claims Paid 3.7% 16.1% 754.4 Gross Outstanding 6.4% 15.8% Gross Incurred 10.1% 31.9% 2004 Gross Claims Paid 6.0% 965.0 Gross Outstanding 12.5% Gross Incurred 18.5% Reserving strength is crucial for any insurer; Brit's policy of reserving fullyon first notification is supported by a number of internal and external reviewsand benchmarking exercises. Adjusted for the abnormal catastrophes of 2004,both 2004 and 2003 are developing more favourably at their respective stagesthan 2002. Business Process Brit continues to invest in better business process and its informationtechnology capability. The Group's commitment to reform of business process includes involvement inrelevant market committees. In particular, Dane Douetil is a member of theMarket Reform Group which consists of the major London brokers and insurancecompanies and representatives of Lloyd's. He also chairs the Lloyd's MarketAssociation Market Processes Committee. Real progress was made during 2004 and Brit is hopeful that further progressthrough Accounting and Settlement, Claims Loss Advice and Settlement System ("CLASS"), the contract certainty at inception programme and the London MarketPrinciples ("LMP") slip will bear fruit during 2005. However, first it will benecessary for significant market standardisation to be achieved if the newelectronic world is to be effectively utilised. Further impetus for change is also likely to flow from the Spitzer enquiry inthe US as this will create increased pressure for brokers to become moreefficient in their processes. Those underwriting units that are able to takeover some of the processing from brokers and to provide them with a betterservice are likely to be the medium term winners. We believe Brit is ideally equipped to take advantage of this marketrepositioning and the Group will continue to place itself generally at theforefront of market process changes. Strategic Investments The Group owns 40.9% of The Equity Partnership Limited ("EPL"), an investmentmanagement group. The Group's share of EPL's pre-tax profit is £0.6m (2003:£0.2m) and it made a further significant contribution in the form of a very goodinvestment return. Of the Group's total invested assets of £1,833.1m (including100% of syndicate assets), EPL manages some £1,583.9m, plus some £603.0m ofexternal client monies. The Group owns 32.0% of Ebix, a Nasdaq listed US software supplier, which hasrecorded its best ever results in 2004. Its share price performed well risingfrom US$12.26 to US$15.00 during the year. The Group owns 77.2% of Ri3k, an electronic reinsurance trading platformsupplier which made a loss for the year but has been winning significant newcustomers. It now has the opportunity to position itself as the globalreinsurance industry's preferred solution to the increasingly critical issues ofcontractual certainty and transparency. Our People Brit believes passionately that the quality of the Group's people and theirassociated business skills can be a true business differentiator; accordingly,it is committed to being an industry leader in terms of people development andhas an ongoing programme of training and appraisal of all staff. In particular,our graduate recruitment and training drive has been an outstanding success,enabling us to secure a range of high calibre people. These programmes,together with personal development initiatives, an active social programme andan enhanced internal communications focus give Brit a unique and enjoyable, buthard working, culture. Investor Relations Regular communication with major investors and stakeholders is the bedrock ofBrit's investor relations strategy. Shareholders are encouraged to contact theGroup directly with questions or concerns which Brit seeks to deal with asswiftly as possible, subject to such obvious restraints as price sensitivity. The investor relations section of the Group's website, www.britinsurance.com isa key element in this process. Brit was delighted when the 2004 DriverIsCorporate Website survey, which reviews the UK's top 350 quoted companies,placed Brit's site at the top of the insurance sector and equal eighth overall. As well as the dissemination of information through various media, a programmeof meetings is conducted after the release of final and interim results or anyother significant announcement. Current and Future Strategy In the 2003 Annual Report, Brit set out its intention, having evolved from adiverse portfolio of insurance investments, to become a significant UK andinternational insurance Group. The last twelve months have seen great strides towards the delivery of thisstrategic goal and our key area of growth has been, and will continue to be,commercial insurance business both in UK and international markets. The UK and international commercial accounts are developing well and we haveestablished a strong regional presence in the UK market which has grown asexpected to represent an increasing share of our overall account. The insurance market continues to experience low investment returns whichtogether with pressure on back year reserves among a number of our competitorsgive us real confidence that the necessary market conditions will remain inforce for good returns to be generated on our account. Similarly, the Group's reinsurance account is prospering despite a year that sawsome of the most intense and costly hurricane activity for many years. TheGroup's underwriting discipline is being maintained and the reinsurance accountis expected to represent approximately 20% of our overall portfolio for the 2005underwriting year. Brit has maintained a niche presence in selected areas of personal linesbusiness where it perceives itself to offer a competitive advantage to itscustomers, although it does not expect major growth in this area. Brit sets out its stall as a strongly capitalised, well reserved andconservatively managed group. We have concentrated hard on customer service,business process, risk management and the calibre and training of our people.Our strong balance sheet is attractive to major customers and brokers and wehave an outstanding and growing underwriting team. We have continued to concentrate on the development of our fund management andinvestment operations, an area that will always represent a key part of anysuccessful insurance group's activities. Acquisitions that involve reserve risk have been avoided and we have stayed trueto our word on paying a full dividend. We believe this encourages internalcapital discipline and rewards those investors that hold our shares. Ourfinancial performance has continued to improve despite 2004 being notable forits claims activity. In short we are delivering on our strategy that was first set out in 2001. Welook forward to building on this platform and delivering a strong and profitable2005. Neil EckertGroup Chief Executive OfficerFinancial Review Highlights 2004 • Profit before tax of £102.5m (2003:£77.6m) • 28.0% expense ratio (2003:28.8%) • 64.5% claims ratio (2003:59.7%) • 92.5% combined ratio (2003:88.5%) • 7.0% increase in gross written premium • 27.3% increase in net earned premium • Dividend payments resumed • Capital reorganisation Summary of Results Total operating profit was £101.9m (2003: £75.4m). Operating profit at thelong-term rate of investment return was £97.6m (2003: £91.1m). The assumed long term rates of return remain unchanged and are as below: Equities 7%Cash and bonds 5%Syndicate funds 5% Total operating profit by company: Insurance Lloyd's companies Other Total Total 2004 2004 2004 2004 2003 £m £m £m £m £m Technical result 56.3 65.7 0.0 122.0 100.3 Investment return 31.4 35.1 3.7 70.2 63.1 Investment income (33.0) (28.4) 0.0 (61.4) (44.0) transferred to technical account Interest payable - - (4.9) (4.9) (4.6) Fees and commissions 0.9 - 1.6 2.5 8.6 Other income - - 0.3 0.3 1.5 Other expenses 0.2 (1.2) (20.3) (21.3) (25.4) Amortisation (1.7) - (8.1) (9.8) (8.4) Operating profit at 54.1 71.2 (27.7) 97.6 91.1 long-term rate of return Short-term 0.9 3.4 0.0 4.3 (15.7) fluctuations in investment return Operating profit 55.0 74.6 (27.7) 101.9 75.4 Underwriting operations As previously stated, Brit underwrites through two regulatory vehicles: UKauthorised insurer, BIL, and Lloyd's Syndicate 2987 which is managed by BSL.The net assets of BIL totalled £334.2m at 1 January 2004 and increased to£369.2m at 31 December 2004. Underwriting at Lloyd's is supported by Funds at Lloyd's ("FAL") which totalled£288.2m at 31 December 2004 (2003: £308.0m). Capacity at Lloyd's for the 2004underwriting year was £500.0m (2003:£513.8m). All Lloyd's business written bythe Group for 2004 underwriting year was through Syndicate 2987 of which Britowns 100%. For 2005, the FAL supports £500.0m (2004: £500.0m) of capacity onSyndicate 2987 and the run-off requirements of Syndicate 389 and remainingnon-managed syndicates. Due to Lloyd's market capacity management initiativesthe Qualifying Quota Shares ("QQSs") utilised to increase Syndicate 2987'scapacity in 2004 are not available for use in 2005. Overall Lloyd's capacity by underwriting year: 2005 2004 2003 2002Syndicate 100% share Brit 100% share Brit 100% share Brit 100% share Brit £m share £m share £m share £m share £m £m £m £m 389 - - - - 15.0 13.8 14.0 12.72040 - - - - 14.0 - 14.0 -2400 - - - - - - 30.0 1.52987 500.0 500.0 500.0 500.0 500.0 500.0 450.0 440.0 TOTAL 500.0 500.0 500.0 500.0 529.0 513.8 508.0 454.2 Group QQSs - - 50.0 50.0 100.0 100.0 75.0 73.33rd party QQSs - - - - 22.0 22.0 53.3 52.1 TOTAL after QQSs 500.0 500.0 550.0 550.0 651.0 635.8 636.3 579.6 Gross written premium for 2004 was £1,086.7m (2003: £1,015.7m). Net writtenpremium income for 2004 was £910.4m (2003: £850.8m). Net earned premium incomewas £854.5m (2003: £671.4m). The rates of premium growth have been slowed by anumber of factors including exchange differences, a downwards revision inestimated pipeline premiums relating to binding authorities and lineslips, andunderwriting discipline in areas of unattractive market pricing. Investment The Investment Committee has responsibility for the overall investment policy ofthe Group, including cash and liquidity management. Investment policy at thedate of this report is to continue holding the majority of funds in short dated,liquid investments with high credit quality. Group invested assets totalled £1,833.1m (including 100% of syndicate assets) at31 December 2004 (2003: £1,434.9m). Since 1 March 2004 group asset allocationand overall investment management has been delegated to EPIC Asset ManagementLtd ("EPAM"), a 70 per cent subsidiary of The Equity Partnership Ltd ("EPL"), anassociated company of the Group. Overall asset mix varies from time to time. It is not anticipated that thetotal invested in equities will exceed 10 per cent of total invested assets. Total invested assets at 31 December 2004 were allocated as below: 31 December 31 December 2004 2003 £m £mEquities 175.7 154.0Bonds 711.5 793.7Cash and deposits 945.9 487.2 Total 1,833.1 1,434.9 The return from the main asset classes is shown below alongside various marketindices. Sterling fixed income investment performance 2004 BRIT Bonds and cash 4.56%1 month £ LIBID 4.40%1-3 year Gilts 4.64% US$ Fixed income investment performance 2004 BRIT Bonds and cash 1.19%Cash 1.30%1 Year US Treasury 0.82% Equity Returns 2004 Brit Equity 18.99%All share index 9.21%FT 100 7.54%Nasdaq in GBP 1.33% The currency mix of the investment portfolio was: 31 December 31 December 2004 2003 % % Sterling 64.6 61.8US$ 26.4 30.9Euros 7.1 5.7Other 1.9 1.6 Total 100.0 100.0 Equity investments include managed equity portfolios, which form part of theGroup's FAL, investments in Lloyd's entities and a number of strategicinvestments. A breakdown is given below: Equity Investments 31 December Return for year 31 December Return for year 2004 2004 2003 2003 £m £m £m £m Lloyd's listed investments 13.9 0.8 13.7 2.8Other listed investments 1.0 0.2 0.9 0.7Non listed investments 1.1 0.1 1.1 (0.2)Managed portfolios 133.8 20.3 116.0 13.5Protected funds 1.4 - 1.4 -Ebix Inc 7.2 0.9 6.3 4.9EPIC PLC - Capital shares 12.0 2.0 9.9 (5.1)EPIC PLC - Income shares 5.3 0.9 4.7 0.8 Total 175.7 25.2 154.0 17.4 The duration of the total bond portfolio was 1.65 years at 31 December 2004(2003: 1.27 years). The bond portfolios were invested as below: 2004 2003Rating £m £m Government 352.4 425.5AAA 162.4 164.2AA 138.9 133.9A 55.5 64.4BBB 1.0 4.4Other 1.3 1.3 Total 711.5 793.7 Ri3k Limited The Group has continued to invest in Ri3K during the year. Ri3K placed over1,000 contracts through its platform during the year and now has 142 customers,generating a turnover of £2.6m (2003: £0.2m). In addition the company providedconsultancy services to several customers. The Group results for the yearinclude a loss before tax of £2.5m in respect of Ri3K (2003: loss £3.9m). Expenses 2004 2003 £m £m Commissions 173.9 132.1Other acquisition costs 38.0 33.5Operating expenses 32.9 45.2Total technical account expenses 244.8 210.8Non-technical account net operating expenses 31.1 33.8 Total expenses 275.9 244.6 Operating expenses and other acquisition costs incurred by the group during theyear were: 31 December 2004 31December 2003 Technical Non-Technical £m £m Total £m Payroll costs before profit related pay 25.2 6.8 32.0 28.9Profit related pay 5.8 1.9 7.7 6.7Accommodation costs 2.9 0.6 3.5 4.3Legal & professional charges 2.9 1.1 4.0 4.1IT costs 4.7 0.0 4.7 5.6Marketing & communications 0.0 2.6 2.6 1.0Amortisation 0.0 10.0 10.0 8.5Exchange movements 0.0 1.4 1.4 7.9VAT irrecoverable 1.9 0.6 2.5 1.8Lloyd's charges 12.2 0.0 12.2 16.9Depreciation 2.4 2.8 5.2 2.6Other syndicate expenses 5.7 0.0 5.7 6.1Other 7.2 (1.1) 6.1 3.5 70.9 26.7 97.6 97.9Peoples Choice 0.0 0.0 0.0 10.6Ri3K 0.0 4.4 4.4 4.0 TOTAL 70.9 31.1 102.0 112.5 Profit after tax The profit after tax and minority interests was £72.0m (2003:£57.5m). Theeffective tax rate was 29.4% (2003: 26.3%), and is likely over time to trendupwards slightly given our predominance of US and UK business. From 2005, theGroup is likely to be in a cash tax paying position, following the utilisationof almost all loss carry forwards, and elimination of associated deferred taxassets. Earnings per Share Basic earnings per share were 7.45p (2003: 6.58p). Details of the calculationare given in Note 11 to the financial statements. Key Ratios 2004 2003 (Restated) Net written premium / Gross written premium 83.8% 83.8%Net written premium growth 7.0% 62.9%Net written premium / Weighted average shareholders' funds 130.5% 146.9%Technical result / Net earned premium 14.3% 14.9%Claims ratio 64.5% 59.7%Expense ratio 28.0% 28.8%Combined ratio 92.5% 88.5%Gross technical provisions / Gross written premium 170.7% 140.0%Net technical provisions / Net written premium 168.0% 128.9%Shareholders' funds / Net technical provisions 46.4% 63.6%Insurance debtors / Shareholders' funds 63.4% 57.8%Insurance debtors / Total assets 15.8% 17.3%Group borrowings / Shareholders' Funds 9.8% 8.4% Dividend per Share A final dividend for the year of 2p per share is proposed. A first interimdividend of 2p per share was paid on 28 May 2004 and a second interim dividendof 2p per share was paid on 15 October 2004. Total dividend for the year is 6pper share. Capital Reorganisation On 23 April 2004, the Company reorganised its share capital in order torecommence the payment of dividends. A transfer of £170.0m was made from theshare premium account to the profit and loss account to effect thereorganisation. At 31 December 2004, the Company had distributable reserves of£49.1m (2003: deficit of £65.6m). Technical Provisions Net technical provisions as at 31 December totalled £1,529.4m (2003: £1,096.6m)and are analysed below. Net Technical Provisions 2004 2003 £m £mProvisions for unearned premium 507.2 466.7Notified claims outstanding 394.7 305.7IBNR 623.6 323.8Related Shares:
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