26th Feb 2010 07:00
Brit Insurance Holdings N.V.
PRESS RELEASE
FOR IMMEDIATE RELEASE
26 february 2010
preliminary announcement for the year ended31 december 2009
Financial highlights
Return on equity excluding the effect of foreignexchange on non-monetary items of 17.4% (2008: 4.6%)
Gross written premium of £1,696.4m, a growthof 21.6% or 10.4% at constant currency
Combined ratio excluding the effect of foreignexchange on non-monetary items of 94.0% (2008: 96.4%)
Profit before tax excluding the effect of foreignexchange on non-monetary items of £171.3m, a growth of more than 300% (2008: £39.6m)
Earnings per share of 113.2p1 anincrease of 32% (2008: 86.0p1)
Recommended final distribution of 30.0p1per share making total distribution for the year of 60.0p1 per share (2008:60.0p1 per share). Distribution to be made in the form of a capital reduction
Net tangible assets (NTA) per share of £10.521.This represents growth of 6.0% and is stated after distributions during 2009 of 60.0p1per share (6.0% of opening NTA) and foreign exchange on non-monetary items representing5.1% of opening NTA
1 Statedafter 1 for 4 share consolidation on 25 February 2010
Operational and strategic highlights
Successful Group reorganisation with a new holdingcompany, Brit Insurance Holdings N.V., in the Netherlands
Continued active portfolio management withinand between business units to reflect ever-changing underwriting conditions
Extended presence in selected local marketswith the opening of a managing general agent in Chicago, USA and a representativeoffice in Tokyo, Japan
Excellent talent attracted across underwriting,operations, claims, investments and finance areas
Dane Douetil, Chief Executive Officer of BritInsurance Holdings N.V., commented:
"We are pleased with our results for 2009 andbelieve that the current rating environment will stay broadly flat in aggregate acrossour portfolio in 2010.
"We are clearly focused on the underwritingmargins achievable on a class by class basis and will continue to refine our portfolioto maximise shareholder value. In this context, we do not expect to grow the overallpremium base of the Group in the coming year.
"With our strong balance sheet, diverse businessfranchise and focus on optimising underwriting returns, we are confident of our abilityto continue to create value for our shareholders."
Financial highlights
|
|
Year ended |
Year ended |
|
|
31 December 2009 |
31 December 2008 |
|
Gross written premiums (£m) |
1,696.4 |
1,394.6 |
|
Net written premiums (£m) |
1,471.4 |
1,163.3 |
|
Net earned premiums (£m)2 |
1,495.5 |
1,145.6 |
|
Investment return (£m) |
137.4 |
7.4 |
|
Profit before tax excluding the effect of foreignexchange on non-monetary items (£m)1 |
171.3 |
39.6 |
|
Profit before tax (£m) |
116.4 |
89.2 |
|
Profit after tax (£m) |
87.5 |
66.6 |
|
|
|
|
|
Net assets (£m) |
894.6 |
849.7 |
|
Net tangible assets (£m) |
813.4 |
767.6 |
|
Total invested assets including cash (£m) |
3,475.3 |
3,233.7 |
|
|
|
|
|
Diluted earnings per share (pence)3 |
113.2 |
86.0 |
|
Distribution per share for the year - proposed/ paid (pence)3 |
60.0 |
60.0 |
|
Net assets per share (£)3 |
11.57 |
10.99 |
|
Net tangible assets per share (£)3 |
10.52 |
9.93 |
|
|
|
|
|
Return on equity excluding the effect of foreignexchange on non-monetary items |
17.4% |
4.6% |
|
Return on equity |
12.2% |
9.2% |
|
|
|
|
|
Claims ratio2 |
62.2% |
63.5% |
|
Expense ratio2 |
31.8% |
32.9% |
|
Combined ratio2 |
94.0% |
96.4% |
|
|
|
|
|
Investment return |
4.2% |
0.2% |
|
Tax rate |
24.8% |
25.3% |
1 UnderInternational Financial Reporting Standards (IFRS), unearned premium and deferredacquisition costs are classified as non-monetary items and therefore translated athistoric exchange rates. Corresponding monetary items are translated at closing rates.If non-monetary items were to be translated at closing rates, the 2009 result wouldincrease by £54.9m (2008 result decrease by £49.6m).
2 Excludingthe effect of foreign exchange on non-monetary items.
3After1 for 4 share consolidation
For further information, please contact
|
Brit Insurance Holdings N.V. |
+31 (0) 20 719 1100 |
|
Dane Douetil, Chief Executive Officer, BritInsurance |
+44 (0) 20 7984 8500 |
|
Neil Manser, Head of Investor Relations, BritInsurance |
+44 (0) 20 7098 6980 |
|
David Haggie/Peter Rigby/Juliet Tilley, HaggieFinancial |
+44 (0) 20 7417 8989 |
Notes to Editors
Brit Insurance is an international general insuranceand reinsurance group specialising in commercial insurance. The Group writes a diverseportfolio of over 70 classes of insurance and reinsurance offering worldwide protection.The scope is wide-ranging: from sole traders to the largest multinational corporations;from manufacturers to professional services; from shops to satellites. Our distributionmodel is centred on brokers and intermediaries. Reflecting where our customers trade,we are organised into three strategic business units - Global Markets, UK and Reinsurance- which have access to our underwriting platforms including Brit Insurance Limitedand our Lloyd's syndicate, Brit Syndicate 2987.
www.britinsurance.com
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CONTENTS
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PAGE
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Preliminary Announcement for the year ended 31December 2009 |
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Chairman's statement |
4 |
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Financial results |
5 |
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Brit Global Markets |
13 |
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Brit Reinsurance |
16 |
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Brit UK |
19 |
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Investments |
22 |
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Condensed Consolidated Financial Statements |
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Consolidated Income Statement |
25 |
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Consolidated Statement of Comprehensive Income |
26 |
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Consolidated Statement of Financial Position |
27 |
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Consolidated Statement of Cash Flows |
28 |
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Consolidated Statement of Changes in Equity |
29 |
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Notes to the Financial Statements |
30 |
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Company Information |
58 |
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This document does not constitute or form partof, and should not be construed as, an offer for sale or subscription of, or solicitationof any offer or invitation or advice or recommendation to subscribe for, underwriteor otherwise acquire or dispose of any securities (including share options and debtinstruments) of the Company nor any other body corporate nor should it or any partof it form the basis of, or be relied on in connection with, any contract or commitmentwhatsoever which may at any time be entered into by the recipient or any other person,nor does it constitute an invitation or inducement to engage in investment activityunder Section 21 of the Financial Services and Markets Act 2000 (FSMA). This documentdoes not constitute an invitation to effect any transaction with the Company or tomake use of any services provided by the Company. Past performance cannot be reliedon as a guide to future performance.
Chairman's statement
Result
I am pleased to announce that the Group recordedprofit before tax of £171.3m and a return on equity of 17.4% (both excluding foreignexchange on non-monetary items). This is a respectable result given the backdropof continued uncertainty in the global economy affecting both the investment andunderwriting sides of our business.
Strategic progress in 2009
2009 was a busy year for the strategic developmentof the Group. Earlier in the year - and as I reported on in last year's annual report- the Board reviewed the longer term plans of the Group. These plans are focusedon delivering upper quartile underwriting performance and reducing our cost base.I am confident that the achievement of these goals is the most effective way of improvingreturns to our shareholders.
In June we announced that we had made a proposalto the board of Chaucer Holdings PLC regarding a potential takeover of Chaucer. Ultimatelywe could not reach a satisfactory agreement which was in the best interests of theGroup and our shareholders and withdrew our proposal.
We completed the Group reorganisation in December2009 with a new holding company, Brit Insurance Holdings N.V., in the Netherlands.This move should provide a favourable environment from which to further the Group'sinternational development, maintain its competitiveness as an international insurerand reinsurer and enhance access to additional sources of capital. In addition, theGroup should be able to align its corporate tax rate more closely with those of itsglobal peer group. Over time we believe the move will enhance the returns to shareholders.
Shareholder distributions
In line with our distribution policy, the Boardis recommending a final distribution of 30.0p per share (after 1 for 4 share consolidation)making a total distribution of 60.0p per share for the year. As set out at the timeof the Group reorganisation this will take the form of a capital distribution ratherthan a dividend. The Group seeks to grow distributions per share in line with theresults and the longer term prospects of the Group.
Board of Directors
Following the Group reorganisation it has beenappropriate to review the composition of the Board of Brit Insurance Holdings N.V.to reflect our new domicile. We intend to appoint two Dutch directors. I am delightedthat the first of these, Willem Stevens, joined the Board in December 2009. Willembrings a wide range of expertise and experience in Dutch business to the Board.
Michael Smith and Ken Culley will not be offeringthemselves for re-election at the AGM in May and will leave the Board then. BothMichael and Ken have been involved in the Group for many years and I would like tothank them both for the significant contribution, wisdom and advice they have givenover that time.
After 15 years with Brit Insurance, and thelast 10 years as Group Finance Director, Matthew Scales has indicated that it ishis intention to step down as Finance Director of the Group within the next 12 months.The Board is pleased that, to ensure continuity, Matthew has agreed to stay on inhis role until a suitable successor is found and his departure date will be confirmedin due course.
Outlook
We are in a risk business, and 2009 has beena good year with relatively few natural disasters. Together with significantly improvedcapital market conditions, this has allowed the industry to recapitalise and becomemore competitive. As a result, the rate increases we saw last year have all but disappearedand our markets are now broadly flat. More than ever the combination of a sound capitalbase, a diversified underwriting portfolio and a committed workforce - all of whichwe have - will be the fundamentals for our future success.
John Barton
Chairman
25 February 2010
Financial results
In 2009 Brit Insurance produced a return onequity excluding the effect of foreign exchange on non-monetary items of 17.4% (2008:4.6%). The improvement in the result compared with 2008 reflects higher underwritingprofit as shown by a 2.4 percentage point improvement in the combined ratio, togetherwith significantly higher investment return.
|
Summary income statement |
12 months ended 31 December 2009 £m |
12 months ended 31 December 2008 £m |
|
Gross written premium |
1,696.4 |
1,394.6 |
|
Net written premium |
1,471.4 |
1,163.3 |
|
Net earned premium1 |
1,495.5 |
1,145.6 |
|
|
|
|
|
Underwriting result1 |
84.2 |
33.6 |
|
Investment return |
137.4 |
7.4 |
|
Other expenses |
(39.5) |
(28.8) |
|
Other foreign exchange |
(3.3) |
39.9 |
|
Other income, finance costs and associates |
(7.5) |
(12.5) |
|
Profit before tax1 |
171.3 |
39.6 |
|
Effect of foreign exchange on non-monetary items |
(54.9) |
49.6 |
|
Profit before tax |
116.4 |
89.2 |
|
Tax |
(28.9) |
(22.6) |
|
Profit after tax |
87.5 |
66.6 |
|
|
|
|
|
Combined ratio (excluding the effect of FX onnon-monetary items) |
94.0% |
96.4% |
|
RoE (excluding the effect of FX on non-monetaryitems) |
17.4% |
4.6% |
1 Excludingthe effect of foreign exchange on non-monetary items
Premiums
The Group experienced significant headline growthin gross written premium (GWP) for the 12 months to 31 December 2009 to £1,696.4m(2008: £1,394.6m), an increase of 21.6%. At constant exchange rates the growth was10.4% (2008: 4.2%). It included positive movements on prior year premium estimatesarising from prudent estimation of new business relationships in Brit UK and premiumadjustments in Brit Reinsurance. Excluding these effects, underlying premium growthat constant currency was 5.7%.
|
Gross written premiums |
12 months ended 31 December 2009 |
12 months ended 31 December 2008 |
Movement at constant exchange rates |
|
|
£m |
£m |
% |
|
Brit Global Markets |
875.3 |
781.3 |
-1.0 |
|
Brit Reinsurance |
364.2 |
260.7 |
23.5 |
|
Brit UK |
455.4 |
350.6 |
28.1 |
|
Other2 |
1.5 |
2.0 |
- |
|
Total Group |
1,696.4 |
1,394.6 |
10.4 |
2 Includesthe run-off of historic participations including Life Syndicate 389.
Premium rate increases for the year were 4.8%(2008: -1.9%). Rate increases were experienced in the majority of lines of businessand were greatest in Brit Reinsurance and in areas experiencing recent claims activity.Premium rates on Marine XL (18.5%) and Property Treaty North America (10.3%) helpedBrit Reinsurance to an average premium rate increase of 7.4%.
In Brit Global Markets average rate increaseswere 4.3% but ranged from 22.7% in Financial Institutions to -7.4% in Aerospace.For Brit UK, premium rates rose by 3.7% with the greatest increases experienced inMotor which was up by 9.7%.
|
Premium rating increases/(decreases) on renewalbusiness |
12 months ended 31 December 2009 % |
12 months ended 31 December 2008 % |
|
Brit Global Markets |
4.3 |
(2.0) |
|
Brit Reinsurance |
7.4 |
(3.3) |
|
Brit UK |
3.7 |
(0.8) |
|
Total Group |
4.8 |
(1.9) |
During the year, the Group actively managedits underwriting portfolio, evidenced by the reduction in Brit Global Markets'sshare of Group GWP from 56% in 2008 to 52% in 2009. At the same time Brit Reinsuranceand Brit UK grew as a proportion of Group GWP from 19% to 21% and 25% to 27% respectively.This portfolio shift reflects a number of decisive actions, e.g. the withdrawal fromUS Medical Expenses and Extended Warranty in Brit Global Markets, the cessation ofthe relationship with Augsburg Re for Aviation XL and the re-weighting of the FinancialInstitutions portfolio towards Crime and non-US Directors & Officers/ProfessionalIndemnity.
The Group expanded Brit Reinsurance during theperiod on the back of an average 7.4% renewal rate increase. Particular areas ofgrowth came from North America Property Treaty and Casualty Treaty. For Brit UK,in addition to an improving rating environment, the Group successfully leveragedrelationships with new trading partners arising from its focus on a narrow groupof brokers and selected coverholders. Examples of significant contributors to BritUK's growth in targeted areas include Xbridge (small business insurance) and Oak(high value home).
Net written premium (NWP) increased 26.5% to£1,471.4m (2008: £1,163.3m) and net earned premium (NEP) excluding the effect offoreign exchange on non-monetary items increased 30.5% to £1,495.5m (2008: £1,145.6m).
Underwriting
The Group combined ratio − excluding theeffect of foreign exchange on non-monetary items − improved to 94.0% (2008:96.4%) with a 1.3 percentage point reduction in the claims ratio together with a1.1 percentage point improvement in the expense ratio. The combined ratios for BritGlobal Markets and Brit UK were broadly stable at 96.9% and 99.7% respectively whereasthe combined ratio for Brit Reinsurance improved by 11.8 percentage points to 79.9%.
|
Combined ratio (excluding the effect of foreignexchange on non-monetary items) |
12 months ended 31 December 2009 |
12 months ended 31 December 2008 |
||||
|
Claims ratio |
Expense ratio |
Combined ratio |
Claims ratio |
Expense ratio |
Combined ratio |
|
|
% |
% |
% |
% |
% |
% |
|
|
Brit Global Markets |
62.7 |
34.2 |
96.9 |
61.2 |
35.2 |
96.4 |
|
Brit Reinsurance |
54.9 |
25.0 |
79.9 |
65.3 |
26.4 |
91.7 |
|
Brit UK |
66.7 |
33.0 |
99.7 |
66.4 |
32.9 |
99.3 |
|
Total Group3 |
62.2 |
31.8 |
94.0 |
63.5 |
32.9 |
96.4 |
3 Includesthe run-off of historic participations including Life Syndicate 389 and specificXL contracts underwritten by BIG.
The reduction in the Group claims ratio primarilyreflects a lower level of short-tail claims experience. Major claims net of reinstatementsin 2009 were £12m relating entirely to the Air France airplane crash in June recordedwithin Brit Reinsurance. This added 0.8 percentage points to the Group claims ratio(2008: £61m claims from Hurricanes Gustav and Ike; 5.3 percentage points).
Notwithstanding the Air France claim, Brit Reinsuranceimproved its claims ratio by 10.4 percentage points. The claims ratio for Brit UKwas stable with Brit Global Markets reporting a 1.5 percentage point deterioration.
As part of the Group's standard quarterly reservingreviews, the Group released £81.2m of claims reserves from prior years (2008: £79.1m)equivalent to 5.4 percentage points of net earned premium (2008: 6.9 percentage pointsof net earned premium). The Group experienced reserve releases in the majority ofclasses of business but in particular Property (Brit UK and Brit Global Markets),Treaty Casualty Reinsurance and UK Liability.
|
Net reserve movements by SBU |
12 months ended 31 December 2009 £m |
12 months ended 31 December 2008 £m |
|
Brit Global Markets |
13.8 |
22.0 |
|
Brit Reinsurance |
24.1 |
20.1 |
|
Brit UK |
41.2 |
38.6 |
|
Other |
2.1 |
(1.6) |
|
Total Group |
81.2 |
79.1 |
The Group has benefited from consistent netreserve releases over the last five years as claims in the 2002 to 2004 underwritingyears have settled materially below initial estimates. Modest releases have alsobeen experienced on the 2005 and 2006 underwriting years. More recent underwritingyears are at an earlier stage of development but the Group's reserving process overthis period was unchanged from prior years.
To aid understanding of the Group's reservingtrack record, the net ultimate loss ratios on an underwriting year basis are setout overleaf. This table should be read horizontally and shows how over time theultimate net loss ratio on each underwriting year develops from the level at whichit was initially set. These figures are based on premium net of brokerage which isthe basis on which the Group sets its claims reserves.
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Development of Group ultimate net loss ratioby underwriting year |
||||||||
|
|
After 1 year |
After 2 years |
After 3 years |
After 4 years |
After 5 years |
After 6 years |
After 7 years |
After 8 years |
|
2002 |
76% |
71% |
67% |
61% |
58% |
57% |
55% |
55% |
|
2003 |
74% |
72% |
64% |
59% |
56% |
53% |
51% |
|
|
2004 |
81% |
79% |
72% |
70% |
67% |
66% |
|
|
|
2005 |
106% |
109% |
107% |
104% |
101% |
|
|
|
|
2006 |
81% |
83% |
80% |
76% |
|
|
|
|
|
2007 |
89% |
92% |
92% |
|
|
|
|
|
|
2008 |
95% |
99% |
|
|
|
|
|
|
|
2009 |
85% |
|
|
|
|
|
|
|
This data is based on an underwriting year approachand hence a significant amount of risk remains in force after one year. The ultimatenet loss ratio after one year is therefore not necessarily a good indicator for theultimate outcome as it can still be affected by new claim events. After two yearsthe majority of risk has expired and consequently the movement in the ultimate netloss ratio from this point offers a better indicator of the reserving track record.For example the increase in the ultimate net loss ratio for 2008 is partially causedby the Air France claim which although occurring in 2009 relates to risks writtenin the 2008 underwriting year.
The expense ratio of 31.8% was 1.1 percentagepoints lower than 2008, primarily as a result of operational leverage arising fromsignificant growth in net earned premium in Brit Reinsurance and Brit UK. For BritUK, the non-commission expense ratio fell by 3.0 percentage points.
The Group combined ratio including the effectof foreign exchange on non-monetary items was 95.6% (2008: 99.4%). See 'Foreignexchange' for more detail.
Other underwriting related items
During 2009, £203.7m of reinsurance was cededto a cell of Brit Insurance (Gibraltar) Insurance PCC Limited (BIG), a Gibraltar-basedreinsurance company 100% owned by the Group. Amounts ceded included a whole accountquota share and £15.0m relating to specific excess of loss reinsurance contractsunderwritten alongside external reinsurers and on equivalent terms.
Within 'Disposal and partial disposal of associatedundertakings', the Group has recognised a £4.2m gain on its participation on NortonII. This represents the recycling of translation gains of which £4.1m were alreadyrecognised in shareholders' equity at 31 December 2008.
The Group's catastrophe swap contract withFremantle Limited, which is accounted for as a derivative, cost £4.8m in 2009 (2008:£7.4m). This contract expires in June 2010.
Investment return
The Group continued to maintain a cautious investmentstance during 2009 with the majority of investments in cash and short-dated highquality bonds. Investment return was £137.4m, a significant improvement over theprior year (2008: £7.4m) and benefited from significant appreciation in equitiesand specialised funds as well as the mark to market effect of narrowing credit spreads.Overall investment return for the year was 4.2% (2008: 0.2%), with a positive contributionfrom each of the Group's asset classes.
The Investments section contains a breakdownof the investment portfolio and investment return for 2009.
Other corporate expenses
Other non-insurance related expenses, whichinclude Group central costs as well as one-off project costs, increased by £10.7mto £39.5m compared with 2008. The main increase arose from a number of projects includingwork leading to the Group reorganisation as well as the proposed acquisition of ChaucerHoldings PLC in the first half of the year. Excluding costs associated with theseprojects, other corporate expenses increased 10.1% but as a proportion of net earnedpremium fell to 2.1% (2008: 2.5%).
|
|
Year ended 31 December 2009 |
Year ended 31 December 2008 |
||
|
|
Expenses |
Ratio |
Expenses |
Ratio |
|
|
£m |
% |
£m |
% |
|
Acquisition costs - commission4 |
345.1 |
23.1 |
265.2 |
23.1 |
|
Other insurance related expenses |
130.7 |
8.7 |
111.8 |
9.8 |
|
Underwriting expenses |
475.8 |
31.8 |
377.0 |
32.9 |
|
Other corporate expenses |
39.5 |
2.6 |
28.8 |
2.5 |
|
Total expenses |
515.3 |
34.4 |
405.8 |
35.4 |
4 Excludingthe effect of foreign exchange on non-monetary items.
Group headcount at 31 December 2009 was 741.Headcount has remained broadly constant since 31 December 2008 (725).
Foreign exchange
The Group experienced significant foreign exchangerelated effects in 2009 amounting to a pre-tax charge of £58.2m (2008: £89.5m gain).
The Group recognised a charge of £54.9m relatingto the IFRS requirement to recognise non-monetary assets and liabilities (DAC andUPR) at historic rather than closing exchange rates. At 31 December 2008, the differencebetween recognising non-monetary assets and liabilities at historic rather than closingexchange rates was a net asset of £54.0m. As highlighted at the end of 2008, thisreversed during 2009. At 31 December 2009, the difference between recognising non-monetaryassets and liabilities at historic rather than closing exchange rates was an additional£0.9m net liability. The reduction in the balance reflects the relative stabilityin exchange rates during 2009. The charge in 2009 of £54.9m is the movement betweenthe differences at 31 December 2008 and 31 December 2009.
On the basis that exchange rates remain constant,the additional net liability at 31 December 2009 of £0.9m will reverse as a gainto earnings during 2010. Figures relating to this adjustment are disclosed separatelyin the segmental information in the column 'Effect of foreign exchange on non-monetaryitems'. The Group considers this purely a timing difference in profit recognitionand has therefore presented additional profit before tax and RoE figures excludingits effect.
The Group also recognised a charge of £3.3m(2008: £39.9m gain) reflecting the translation of net assets denominated in foreigncurrencies and trading activities in the normal course of business.
The total foreign exchange related charge of£58.2m is made up of £33.4m 'Net foreign exchange loss' per the face of the incomestatement and a reclassification of part of the foreign exchange translation on non-monetaryitems to premium and acquisition costs. This latter adjustment can be seen in thecolumn 'Effect of foreign exchange on non-monetary items' in the Notes to the FinancialStatements - Segmental Information.
|
Effect of foreign exchange on non-monetary items |
12 months ended 31 December 2009 £m |
12 months ended 31 December 2008 £m |
|
UPR/DAC valued at historic rates of exchange |
461.8 |
464.5 |
|
UPR/DAC valued at closing rates of exchange |
460.9 |
518.5 |
|
Valuation difference in closing balance sheet(A) |
(0.9) |
54.0 |
|
Valuation difference in opening balance sheet(B) |
54.0 |
4.4 |
|
Effect of foreign exchange on non-monetary items(A-B) |
(54.9) |
49.6 |
|
|
|
|
|
Foreign exchange (losses)/gains |
12 months ended 31 December 2009 £m |
12 months ended 31 December 2008 £m |
|
(Losses)/gains on exchange |
(3.3) |
39.9 |
|
Effect of FX on non-monetary items (from above) |
(54.9) |
49.6 |
|
Total foreign exchange (losses)/gains |
(58.2) |
89.5 |
|
Of which: |
|
|
|
Net FX (losses)/gains (per face of income statement) |
(33.4) |
124.0 |
|
Included within premium and acquisition costs(per segmental) |
(24.8) |
(34.5) |
Associated undertakings
The Group's share of the result of associatedundertakings was a loss of £2.3m (2008: loss of £0.5m). The loss from associatesis partially offset by an additional £0.5m of profit relating to Norton II priorto the members' voluntary liquidation. Norton Re II is forecast to generate an internalrate of return (IRR) of approximately 8% for investors, a satisfactory result consideringthe catastrophe activity during 2008, and follows an IRR of 21% for Norton in 2007.
Result before tax
The Group's profit before tax excluding theeffect of foreign exchange on non-monetary items was £171.3m, an increase of morethan 300% over the prior period (2008: £39.6m). Including the effect of foreign exchangeon non-monetary items, the profit before tax rose 30.5% to £116.4m (2008: £89.2m).
Tax
The Group's effective tax rate was 24.8% andbenefited from realisation of certain assets without incurring a tax liability. TheGroup reorganisation, which was completed in late 2009, should lead to a reductionin the tax rate in 2010 and beyond.
Net income, EPS and return on equity
Net income for the 12 months to 31 December2009 was £87.5m compared to £66.6m in 2008. This translates into earnings per share(EPS) of 113.2p (2008: 86.0p, adjusted for 1 for 4 share consolidation) and returnon equity of 12.2% (2008: 9.2%).
Excluding the effect of foreign exchange onnon-monetary items, the annualised return on equity was 17.4% an improvement comparedwith the return on equity excluding the effect of foreign exchange on non-monetaryitems of 4.6% for 2008.
Distributions
At the time of the Group reorganisation in December2009, it was announced that for an initial period the Group would make distributionsto shareholders by way of reductions of the par value of Brit Insurance HoldingsN.V. shares (i.e. in the form of a capital distribution). The distribution will befree from Dutch dividend withholding tax. The Group has been advised that for UKand Dutch shareholders the distribution is capital for tax purposes. The Group hasalso been advised that it would be appropriate for UK funds to account for the distributionas income. Shareholders should seek independent advice on their own tax and accountingaffairs.
The Board has recommended a final distributionfor the year ended 31 December 2009 of 30.0p per share (after 1 for 4 share consolidation)making a total distribution of 60.0p per share for the year (2008: 60.0p per shareafter 1 for 4 share consolidation).
The final distribution will be conditional onthe approval of shareholders and the Dutch Court. Details of the distribution procedure,including a timetable of key dates will be made available in due course.
Net asset value
Net tangible asset value (NTA) of £813.4m was6.0% higher than at 31 December 2008. This growth reflects the profit after tax forthe period of £87.5m less payment of the 2008 final and 2009 interim dividends of£46.4m. NTA per share at 31 December 2009 was £10.52 compared with £9.93 at 31 December2008 (adjusted for 1 for 4 share consolidation).
Financing
On 9 November 2009 and as part of the Groupreorganisation, the Group entered into a three-year revolving credit facility agreementfor up to £175m with The Royal Bank of Scotland plc, Lloyds TSB Bank plc and Calyon.This became effective on 21 December 2009 and replaces the previous £150m revolvingcredit facility. At 31 December 2009, £107.0m of the facility was drawn down, anamount that was unchanged at 25 February 2010.
The Group gearing ratio at 31 December 2009was 25.1% (31 December 2008: 15.9%). The Group's current appetite is to retain agearing ratio below 30%.
Capital management
The main internal benchmark for assessing capitaladequacy is management capital. This is defined as 120% of the Individual CapitalAssessment (ICA), plus a capital buffer designed to deal with shock events. Managementcapital must at all times be covered entirely by net tangible assets and long-termdebt. Throughout 2009, this condition was met.
|
Capital resources |
31 December 2009 £m |
31 December 2008 £m |
31 December 2007 £m |
31 December 2006 £m |
31 December 2005 £m |
|
Net tangible assets |
813.4 |
767.6 |
768.4 |
724.3 |
638.4 |
|
Long-term subordinated debt* |
132.8 |
132.7 |
147.3 |
147.2 |
147.1 |
|
Total capital resources |
946.2 |
900.3 |
915.7 |
871.5 |
785.5 |
* Subordinated borrowings which have at leastfive years remaining to maturity or call and are of the types which qualify as regulatorycapital
For each regulated entity, capital is maintainedat the higher of regulatory, rating agency and management capital requirements. Thecurrent ratings for Brit Insurance Limited are A (Strong) with stable outlook fromFitch and A (Excellent) with stable outlook from AM Best. The Group may decide touse short-term debt to cover timing differences, for example 'trapped' profitsin Lloyd's or future dividends from BIL, but this is not permitted to form partof Group-wide management capital.
The Group's capital position is currently inexcess of regulatory requirements. On an ECR (Enhanced Capital Requirement) basisthe Group's coverage at 31 December 2009 was estimated at 1.31 times. The ECR approachuses a common factor-based model to calculate required capital on a risk-by-riskbasis and does not explicitly allow for the potential diversification within an individualcompany or group.
The Group's ICA requirement, however, is basedon the Group's internal model and takes into account the Group's specific portfolioand recent and expected future performance. The Group's coverage of its ICA requirementis estimated at 1.42 times at 31 December 2009.
Managing the level of capital
Managing the level of capital is a key elementin achieving the Group's return on equity target. The Group looks to hold adequatecapital to meet its management capital requirements and to ensure rating agency andregulatory requirements are met for each entity. When capital resources are significantlyabove this level, the Group has a track record of returning excess funds to shareholders.Since it reinstated dividends in 2004, the Group has returned over £310m of equityto shareholders through cash distributions as well as £53m through share buybacks.Over this period the Group has also improved balance sheet efficiency, raising £150mof long-term subordinated debt in December 2005, of which £15m was bought back ata substantial discount in 2008. During 2009 the Group called and fully repaid itsUS$15m floating rate notes issued in June 2004.
Solvency II
In addition to current regulatory and ratingagency requirements, the Group is actively researching and assessing the impact ofanticipated changes to regulations such as Solvency II, thenew capital adequacy regime that will affect all European Insurance companies, includingLloyd's of London syndicates. Solvency II is expected to take effect in 2012.
The Solvency II framework has three main areasor pillars:
· Pillar 1 consistsof the quantitative requirements (for example, the amount of capital an insurer shouldhold).
· Pillar 2 setsout requirements for the governance and risk management of insurers.
· Pillar 3 focuseson public disclosure and regulatory reporting requirements.
Many of the requirements are simply good businesspractice and are already in place, but the Group will use its findings to act asa further catalyst for improvements across the business.
The Group has already participated in a numberof activities with policy makers and regulators in order to prepare for SolvencyII. A number of internal workstreams have been set up to address the requirementsof Solvency II and cover areas such as capital modelling, risk management, assetportfolio management, data management, documentation, external reporting and governance.The framework, however, continues to evolve and the Group will commit extensive resourcesand optimise its work to reduce the risk of any surprises to the business and keystakeholders.
Delivering against the Group's strategic framework
Last year we completed an extensive review ofthe Group's strategy and vision and the core goals and objectives of this strategyare now driving decision making within the organisation.
As part of this process we identified eightlong-term goals that are key to our continued success. At different points in theinsurance cycle, these goals will be assigned different levels of importance. During2009 some of the key areas have been:
· Responsible growth in Brit Reinsuranceand Brit UK, taking advantage of the improved rating environment for both SBUs andleveraging our regional network within Brit UK.
· Extendingspread of reach with the opening of BritInsurance Services USA Inc (BISI) a wholly-owned managing general agent in Chicagoand a representative office in Tokyo, Japan.
· Enhancingmulti-channel distribution through continued successof the Brit Lite proposition in the UK and creating closer links with customers throughour spread of reach programme and our claims hubs in the US and in the UK.
· Talent management is a vital partof our organisation and 2009 was an exceptional year for attracting people who willhelp to drive the business forward. We recruited a number of senior underwritersduring the year, and this has continued into 2010. At the same time we recruitedspecialists in the other key functions including new Heads of Operations, Claims,Investments, Investor Relations and Risk Management. We are constantly striving toimprove the depth of our talent pool to meet the increasing sophistication of ourbusiness.
A relentless focus on RoE
The purpose of our goals and objectives is topromote a relentless focus on improving our return on equity (RoE). Since 2005 ourconsistent focus has been on improving the risk adjusted RoE for our shareholders.
At the start of 2005 we had not grown into ourcapital base and had a relatively inefficient capital structure. The issue of £150mof Tier Two subordinated debt in December 2005 and the return of over £325m of equitycapital to shareholders since 2005 have made the Group's balance sheet more efficientwhilst protecting the Group's external credit ratings.
In March 2009 and following an extensive reviewwe decided to reorganise the Group with a new holding company in the Netherlands.This was completed in December 2009 and the Group now benefits from a corporate structurethat is more aligned to our peer group.
Over the last five years the business has experienceda period of strong growth which has brought improved product and geographic diversification.With a more difficult market outlook we expect this growth phase to slow down and2010 will be a year of consolidation of our leading positions in our chosen markets.
We believe the diversity within our underwritingportfolio is excellent and the next step is to move our underwriting performanceinto the upper quartile of our peer group. In many respects this is a formalisationof a process that has already begun with the portfolio management initiatives inBrit Global Markets over the last two years.
Outlook
There is little doubt that the outlook for thepremium rate environment for 2010 is not as positive as it was 12 months ago. Strongcapital markets in the second half of 2009 and a benign catastrophe season have enabledthe industry to re-capitalise far faster than expected. Furthermore there has beenless retrenchment required by some of the leading players who were experiencing financialtroubles at the end of 2008 and in early 2009. Some of this is due to state supportfor a number of large insurers distorting normal market forces.
With this backdrop we see the rating environmentas finely poised across many of the markets that we operate in. Our focus on portfoliomanagement and risk selection will therefore be vital if we are to outperform ourpeers.
For Brit Global Markets's diverse portfoliowe expect a mixture of pricing trends as demonstrated by an average 0.7% increaseon business renewed in January 2010. 77% of the SBU'sclasses of business experienced flat or improving rates whilst the remainder sawlower premium rates.
Global Markets's portfolio has seen significantchange over the last two years. Although it retains an appetite for casualty riskover the cycle it is likely that the long-tail portfolio will continue to take adefensive position in 2010. Offsetting this, the SBU expects to continue to benefitfrom opportunities arising from recent recruitment within the Property and Marineunderwriting teams. The SBU will continue to focus on active management of the underwritingportfolio, disciplined monitoring of the claims environment and the careful expansionof BISI in the US.
Within Brit Reinsurance, underwriting marginsin 2010 are expected to be broadly stable compared with 2009, and the SBU is notexpecting to see significant changes to its underwriting portfolio. This has beenborne out by renewal rate increases in January 2010 of 1.1%. 2010 should thereforebe a year of reasonable stability with the SBU continuing to focus on expanding itsdistribution relationships and in particular taking advantage of its newly-establishedrepresentative office in Tokyo, Japan.
Notwithstanding the 3.7% price rises achievedby Brit UK in 2009, the UK market continues to remain competitive. In the last quarterof 2009 the SBU witnessed more intense competition for larger risks but continuedto see positive rate movements at the smaller end of the market. It is too earlyto say whether 2010 will bring the premium rate increases that we were expectingor that are needed for much of the UK market as a whole. The SBU will continue tofocus on delivering market leading service with an emphasis on areas where it hasa sustainable advantage.
Consistent with our goal to move towards upperquartile underwriting returns, we do not expect the Group to grow its overall premiumbase in 2010 unless additional premium rate increases are experienced.
With our strong balance sheet, diverse businessfranchise and focus on optimising underwriting returns, we are confident of our abilityto continue to create value for our shareholders.
Brit Global Markets
Vision
Brit Global Markets seeks to be a highly respectedmarket leader delivering underwriting excellence based on market intelligence andinnovation in its chosen fields and disciplines.
About Brit Global Markets
Brit Global Markets has an extensive historyof providing a comprehensive range of insurance products for small to medium-sizedenterprises as well as large corporate customers globally. The SBU is made up ofa number of niche businesses which are expert in their respective fields and bringa broad spread to the portfolio. Business is distributed entirely through intermediaries.The unit accesses business through leading brokers in its main operations in Londonas well as through delegated authorities with selected coverholders who distributeproducts into local markets.
Brit Global Markets's underwriting expertiseand local relationships make it a market leader and it is the lead underwriter on59.1% of the premium it underwrites. This offers excellent market visibility andenhances its ability to manage the underwriting portfolio through the insurance cycle.This underwriting capability is backed up by first class claims handling throughspecialist staff in London and in overseas claims hubs.
|
Financial Performance |
Year ended 31 December 2009 |
Year ended 31 December 2008 |
Year ended 31 December 2007 |
Year ended 31 December 2006 |
Year ended 31 December 2005 |
|
|
£m |
£m |
£m |
£m |
£m |
|
Gross written premium: |
|
|
|
|
|
|
Accident & Health |
87.4 |
144.1 |
143.7 |
140.2 |
93.2 |
|
Aerospace |
22.9 |
20.3 |
16.5 |
23.9 |
11.1 |
|
Specialty Lines |
151.9 |
175.9 |
188.1 |
196.8 |
169.9 |
|
Professional Lines |
161.6 |
132.4 |
88.4 |
71.0 |
53.3 |
|
Marine |
253.8 |
186.5 |
165.9 |
143.4 |
115.7 |
|
Property |
197.7 |
122.1 |
146.6 |
131.6 |
115.4 |
|
Total |
875.3 |
781.3 |
749.2 |
706.9 |
558.6 |
|
|
|
|
|
|
|
|
Business led (%) |
59.1 |
57.7 |
58.8 |
|
|
|
Retention ratio (%) |
71.3 |
76.6 |
80.1 |
|
|
|
|
|
|
|
|
|
|
Net earned premium |
819.9 |
665.9 |
630.4 |
557.5 |
412.1 |
|
Underwriting profit/(loss) |
22.6 |
20.7 |
67.8 |
81.2 |
(0.8) |
|
Profit before tax |
42.8 |
57.6 |
123.7 |
127.5 |
44.2 |
|
Claims ratio (%) |
62.7 |
61.2 |
54.4 |
46.5 |
63.8 |
|
Expense Ratio (%) |
34.2 |
35.2 |
34.9 |
38.9 |
38.2 |
|
Combined Ratio (%) |
96.9 |
96.4 |
89.3 |
85.4 |
102.0 |
Portfolio
In 2009, Brit Global Markets wrote £875.3m ofgross premium across five underwriting divisions. The portfolio is further splitinto two elements with the short-tail portfolio representing 64% and long-tail portfoliorepresenting 36%.
The short-tail portfolio consists of the Property& Space, Marine and Accident & Health divisions and underwrote £561.8m of gross premiumin 2009, a growth of 2.9% at constant currency. This growth arose in both the Property(39.3%) and Marine (16.6%) accounts which experienced a combination of rate increasesand new business wins, offset by a reduction in Accident & Health (-46.1%) due tothe planned withdrawal from US Medical Expenses.
The Property portfolio consists of a broad-basedbook of business with particular strengths in the US through Property Financial (LenderPlaced Property) and other US binding authority arrangements. In particular, volumesin Property Financial rose during the year as economic conditions led to greaterdemand for the product. The Property account has also benefited from a growth inProperty Liability and Package business as a result of employing a specialist underwriterin this arena.
Aerospace business was stable in 2009 with grosspremium of £22.9m. Brit Global Markets runs the leading London Market Aerospace consortiumon behalf of a number of third party insurers. With a line size of US$40m it is alead market globally for both launch and orbit risks.
The Marine portfolio offers a broad array ofcoverages including Hull, Cargo and Energy (upstream and downstream) and Liability.It experienced constant currency growth of 16.6% in 2009 mainly arising from theCargo, Energy (upstream) and Liability accounts.
Accident & Health is the smallest division inthe short-tail portfolio and writes a selection of diverse classes including Bloodstock,Contingency and Personal Accident. Following the withdrawal from US Medical Expenses,premium fell by 46.1% at constant currency, but the remaining book and distributionhas been broadened with the appointment of an additional specialist Personal Accidentunderwriter.
The growth in the short-tail portfolio was offsetby planned reductions in the long-tail portfolio. The SBU continued its policy ofactive portfolio management which saw gross written premium reduce by 7.4% at constantcurrency in total for the long-tail portfolio. Excluding re-estimations of prioryears' premium, the reduction in premium in the long-tail portfolio would have been17.8%. Increased premium rates mean that risk exposure has fallen even further.
The long-tail portfolio is split into two underwritingdivisions - Specialty Lines (which includes Financial Institutions, Directors andOfficers (D&O) and Legal Expenses) and Professional Lines. Over the last two yearsthe SBU has made significant changes to the long-tail portfolio to insulate it frompotential claims developments arising from recent economic uncertainty. Over thisperiod Specialty Lines has seen a 19.5% reduction in gross premium written at constantcurrency.
The Financial Institutions (FI) account sawwritten premium fall at constant currency by 36.2% with the weight of the accountmoving away from Professional Indemnity (PI) and Directors and Officers (D&O) forUS financials and towards Commercial Crime and non-US D&O. On an underwriting yearbasis the FI account has reduced by 50% from 2007 to 2009. Core clients remaininginclude investment managers, commercial banks and stockbrokers.
The D&O portfolio consists of privately-ownedSME risks alongside a well diversified portfolio of larger risks. There are no specificindustry concentrations and in 2009 the US D&O portfolio accounted for only £6m ofpremium.
Within Professional Lines the SBU underwritesProfessional Indemnity on a global basis and Employment Practices Liability for SMEsin the US. Particular areas of strength include law firms, architects & engineersand technology firms. Professional Lines is written in the open market and througha selected network of coverholders.
The majority of the business is written throughthe Group's Lloyd's Syndicate 2987 (72.0%) with the remainder through Brit InsuranceLimited.
Portfolio Management
Brit Global Markets has always been active inallocating capital between its core classes of business. With the introduction ofthe short-tail and long-tail Portfolio Directors, this strategy has been fully embeddedinto the structure of the SBU. The Portfolio Directors report directly to the SBUCEO and have prime responsibility for maximising RoE through portfolio optimisation.
This focus on risk-adjusted returns has ledto a major reweighting of the underwriting portfolio with, on an underwriting yearbasis, short-tail business increasing from 59% of the portfolio in 2007 to 70% in2009. The portfolio management approach led the SBU to exit US Medical Expenses andsome specific European Medical Malpractice insurance where returns were no longerexpected to meet the Group's long-term required rate of return, to reweight theFinancial Institutions account towards Commercial Crime and non-US Directors & Officers/ProfessionalIndemnity and to grow the Energy, Cargo and Property accounts.
In particular by reducing the SBU's exposureto Financial Institutions business the unit believes it has avoided a number of majormarket claims in 2009. Furthermore profitability in the Property division, wherethe Group has increased its exposure, has been strong.
The SBU has made excellent progress in its portfoliomanagement initiatives over the last two years and will continue to make tough decisionswhen allocating capital within its diversified portfolio. At this stage, however,changes to the portfolio in 2010 are expected to be less significant than in 2008and 2009.
Brit Insurance Services USA Inc
Brit Insurance Services USA Inc (BISI) was establishedin Chicago, in May 2009 and represents the SBU's first Group-owned overseas presence.BISI is a Managing General Agent (MGA) which underwrites risks on behalf of BritGlobal Markets using Syndicate 2987 as the insurance carrier. Initially, a £20m bookof Public Entity and Religious package business previously underwritten in Londonwas transferred to BISI and this process is now complete.
BISI now employs nine staff and will expandits product offering to include Facultative Reinsurance for both Property and Casualtyin 2010. BISI is part of the Group's wider strategy to get closer to its underlyingclients whilst continuing to recognise the importance of, and support for, London'sposition as a wholesale insurance market.
Premium and claim developments during 2009
Premium rates began to increase in a numberof classes of business in the fourth quarter of 2008 and this continued through 2009.Rate increases were highest in classes with recent claim activity, namely US Propertyand Financial Institutions, but overall were recorded in over 85% of the classesunderwritten by the SBU.
Premium RatingIndex (Year 2000 as base year)
|
|
January |
Full year |
Full year |
Full year |
Full year |
Full year |
Full year |
Full year |
Full year |
Full year |
Full year |
|
2010 |
2009 |
2008 |
2007 |
2006 |
2005 |
2004 |
2003 |
2002 |
2001 |
2000 |
|
|
Accident & Health |
174 |
172 |
170 |
169 |
164 |
152 |
149 |
142 |
131 |
100 |
n/a |
|
Aerospace |
178 |
188 |
203 |
215 |
254 |
268 |
260 |
237 |
202 |
158 |
100 |
|
Specialty Lines |
267 |
266 |
246 |
240 |
246 |
249 |
252 |
246 |
220 |
140 |
100 |
|
Professional Lines |
290 |
287 |
280 |
294 |
305 |
312 |
302 |
260 |
194 |
120 |
100 |
|
Marine |
192 |
189 |
177 |
181 |
182 |
171 |
160 |
156 |
144 |
112 |
100 |
|
Property |
161 |
161 |
156 |
168 |
171 |
151 |
152 |
155 |
150 |
112 |
100 |
The rate movements should be read with caution.They are based on underwriters' estimates of rate changes, including adjustmentsto terms and conditions. They relate to renewal business only, since this representsthe business for which there is the best year-on-year data.
As capital market recovery gathered pace during2009, rate increases stabilised at 4.3% on average for the SBU. Within this certainlines of business, characterised by high returns or supposedly offering diversificationbenefits, came under modest pressure. Within casualty business, lower investmentreturns have yet to push a meaningful re-pricing in the majority of business lines.
2009 did not see a repeat of the catastropheactivity experienced in 2008; however the slowdown in the world economy during theyear may lead to increased claims frequency in certain lines of business over time.The SBU remains vigilant in this regard.
The SBU's claims reserves remained resilientwith a further £13.8m release from prior years.
Financial performance
Premium developments in 2009 were affected bythree main trends: the Group's active portfolio management approach, average rateincreases of 4.3%, and foreign exchange effects. Overall Brit Global Markets's grosspremium rose by 12.0% to £875.3m, but after adjusting for foreign exchange fell by1.0% on a constant currency basis. The SBU experienced positive re-estimation ofpremium from prior years' business and adjusting for this, gross premium writtenon an underlying basis fell by 2.9%.
Brit Global Markets' combined ratio of 96.9%was in line with 2008. The combined ratio benefited from reserve releases of £13.8mequivalent to 1.7 percentage points compared with £22.0m equivalent to 3.3 percentagepoints in 2008.
The SBU's focus on expense control resultedin the expense ratio falling to 34.2% (2008: 35.2%). Acquisition expenses were 0.7percentage points lower whilst non-commission expenses were 0.3 percentage pointslower, partially benefiting from the foreign exchange related growth in net earnedpremium.
Whilst underwriting profit increased by 9.2%,operating profit fell by 25.7%. This reflects lower allocated investment return asa result of the Group's policy to allocate investment return based on risk freerates.
Outlook
The rating outlook looks finely poised and thisis demonstrated by an average 0.7% increase on business renewed in January 2010.77% of the SBU's classes ofbusiness experienced flat or improving rates whilst the remainder saw lower premiumrates.
The portfolio hasseen significant change over the last two years. Although it retains an appetitefor casualty risk over the cycle, it is likely that the long-tail portfolio willcontinue to take a defensive position in 2010. Offsetting this, the SBU expects tocontinue to benefit from opportunities arising from recent recruitment within theProperty and Marine underwriting teams.
Brit Global Markets will continue to focus onactive management of the underwriting portfolio, disciplined monitoring of the claimsenvironment and the careful expansion of BISI in the US.
Brit Reinsurance
Vision
Brit Reinsurance aims to build a diverse andhigh quality multi-class and multi-territory book of business by participating inthis potentially high margin but volatile global business.
About Brit Reinsurance
Brit Reinsurance writes multi-class and multi-territoryreinsurance with a focus on providing excess of loss reinsurance to a broad rangeof clients globally. The Group transacts reinsurance business exclusively throughbroker intermediaries with clients ranging from small local mutual insurers to largewell-known global insurance groups. It offers the capacity to quote and lead business,whilst aiming to deliver a first-class all-round service to customers backed up byits specialist contractual documentation and claims-handling teams.
The SBU accesses global business through itsmain underwriting operation in London and has relationship offices in Denmark andAustralia. In 2009 the Group opened a representative office in Tokyo, Japan, whichwill look to enhance the SBU's profile and business activities in this importantterritory.
|
Financial Performance |
Year ended 31 December 2009 |
Year ended 31 December 2008 |
Year ended 31 December 2007 |
Year ended 31 December 2006 |
Year ended 31 December 2005 |
|
|
£m |
£m |
£m |
£m |
£m |
|
Gross written premium: |
|
|
|
|
|
|
Property Treaty North America |
116.2 |
81.5 |
71.7 |
- |
- |
|
Property Treaty International |
64.0 |
55.3 |
47.8 |
- |
- |
|
Property Treaty |
- |
- |
- |
139.5 |
140.8 |
|
Casualty Treaty |
142.0 |
82.6 |
85.1 |
95.5 |
73.3 |
|
Marine XL |
20.8 |
17.8 |
9.1 |
9.4 |
12.0 |
|
Aviation XL |
8.4 |
16.3 |
25.2 |
15.4 |
39.4 |
|
Reinsurance Other |
12.8 |
7.2 |
0.5 |
1.1 |
63.3 |
|
Total |
364.2 |
260.7 |
239.4 |
260.9 |
328.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business led (%) |
36.0 |
33.9 |
29.6 |
|
|
|
Retention ratio (%) |
87.0 |
82.8 |
87.4 |
|
|
|
|
|
|
|
|
|
|
Net earned premium |
297.6 |
209.9 |
208.3 |
237.0 |
224.2 |
|
Underwriting profit/(loss) |
57.6 |
13.9 |
35.4 |
50.3 |
(103.5) |
|
Profit/(loss) before tax |
66.1 |
30.8 |
61.0 |
76.5 |
(81.1) |
|
Claims ratio (%) |
54.9 |
65.3 |
56.4 |
50.0 |
119.8 |
|
Expense ratio (%) |
25.0 |
26.4 |
26.6 |
28.8 |
28.5 |
|
Combined ratio (%) |
79.9 |
91.7 |
83.0 |
78.8 |
148.3 |
Portfolio
In 2009 the SBU wrote £364.2m of gross premiumacross five main classes of business.
The largest portfolio is Property Treaty whichaccounted for 49.5% of the account in 2009 (2008: 52.5%). This is split into NorthAmerica (64%) and International (36%). Each offers reinsurance cover against catastropheevents or large individual claims arising from either man-made or natural events.Growth in this portfolio of 31.7% was significant in 2009, driven by a combinationof premium rate increases and foreign exchange effects (i.e. the weakness of Sterling).Constant currency growth for the North American portfolio was 21.8%. On the Internationalside growth was more subdued with modest, albeit positive rate increases leadingto constant currency growth of 7.8%.
The unit's second largest portfolio is CasualtyTreaty which accounted for 39.0% of the SBU's premiums in 2009 (2008: 31.7%). TheCasualty Treaty account combines a number of sub-classes including: Personal Accidentcatastrophe; clash and individual per risk protection for General Liability, ProfessionalIndemnity and Directors & Officers; as well as whole account coverage.
The Casualty Treaty portfolio is almost entirelywritten on an excess of loss basis with approximately 45% of the book exposed tocatastrophe type events. When allied to the almost immaterial amount of proportionalreinsurance written, the portfolio is less exposed to potential attrition-type claimsexperienced in economic downturns. Growth in 2009 of 71.8% was boosted by currencyeffects, increased premium rate movements of 6.3% and a positive adjustment in there-estimation of prior years' premium. On a constant currency basis and excludingthe re-estimation of prior years' premium, growth would have been 34.2%.
Other smaller areas of the reinsurance bookinclude Marine and Agriculture. Approximately half of the SBU's business is classifiedas short-tail, with 15.9% medium-tail and 33.1% long-tail.
Brit Reinsurance utilises each of the Group'sinsurance carriers with 60.0% written through the Group's Lloyd's Syndicate 2987and 40.0% in Brit Insurance Limited (BIL). The majority of the SBU's North Americanbusiness is written using Syndicate 2987 paper, making use of the extensive licensesavailable whereas the majority of the International and European business is writtenthrough BIL. The use of two carriers aims to maximise returns on capital and to caterfor client wishes where appropriate.
Risk management
Brit Reinsurance contributes a significant amountof the Group's potential exposure to catastrophe and severity claims. During 2009,the unit was able to increase materially its net Sterling risk appetite and fullybenefit from the growth in premium as a result of the weakness of Sterling versusthe US dollar in late 2008. This was made possible by close monitoring of the Group'sexposure to its key Realistic Disaster Scenarios (RDS) and through continuing theGroup's innovative approach to aggregate management, as evidenced by entering intoa catastrophe swap contract in July 2009, which traded US$50m of US wind exposurefor US$50m of Japanese wind exposure.
Premium and claim developments during 2009
The start of 2009 was characterised by premiumrate increases for property catastrophe-exposed business (8.6% in January 2009) andimproved risk-adjusted returns for casualty reinsurance business. Rates for US catastrophebusiness held steady during 2009 and with little significant catastrophe activityin the US, the account generated good margins during the year. The Internationalaccount saw less upwards rating pressure during 2009 and experienced a number ofattritional claims in territories such as Austria, Australia and France.
Premium Rating Index (Year 2000 as base year)
|
|
January |
Full Year |
Full year |
Full year |
Full year |
Full year |
Full year |
Full year |
Full year |
Full year |
Full year |
|
2010 |
2009 |
2008 |
2007 |
2006 |
2005 |
2004 |
2003 |
2002 |
2001 |
2000 |
|
|
Property Treaty - NA |
240 |
238 |
215 |
234 |
221 |
159 |
155 |
154 |
149 |
110 |
100 |
|
Property Treaty - Int'l |
115 |
113 |
108 |
109 |
107 |
98 |
98 |
100 |
n/a |
n/a |
n/a |
|
Casualty Treaty |
242 |
241 |
226 |
230 |
234 |
228 |
230 |
215 |
182 |
115 |
100 |
|
Marine XL |
344 |
331 |
279 |
288 |
286 |
193 |
183 |
179 |
171 |
115 |
100 |
The rate movements should be read with caution.They are based on underwriters' estimates of rate changes, including adjustmentsto terms and conditions. They relate to renewal business only, since this representsthe business for which there is the best year-on-year data.
The Group continued to monitor its exposureto recessionary type claims during 2009. Strengthened terms and conditions throughoutthe year have served to improve the risk/reward characteristics of the long-tailelement of the Casualty Treaty book.
In 2008 Brit Reinsurance ceased its relationshipwith Augsburg Re, which wrote Aviation excess of loss reinsurance on behalf of theGroup. This decision reduced the Group's exposure to the Air France plane crashin June 2009. The SBU is now materially off-risk for Aviation XL, but continues tomonitor the Aviation Reinsurance market, and will re-enter if conditions are suitable.
Overall the unit released claims reserves of£24.1m during 2009, arising primarily from the Casualty Treaty portfolio.
Financial performance
Gross premium growth of 39.7% to £364.2m arosefrom a combination of premium rate increases, exchange rate effects, and the re-estimationof prior year premium for Casualty Treaty reinsurance. Underlying premium growthon a constant currency basis and excluding re-estimates of prior year premium was13.1%.
Reinsurance spend was £57.4m equivalent to 15.8%of gross premium and was significantly lower than in 2008. Net written premium grewby 47.4% with net earned premium increasing by 41.8%. A proportion of the increasedwritten premium in 2009 will not earn through until 2010.
The SBU's combined ratio of 79.9% was 11.8percentage points better than 2008 as a result of lower US catastrophe claims. Thesewere partially offset by increased attritional claims in the Property Treaty Internationalaccount and the Air France aviation claim. The Air France claim contributed £12mto the large claims recorded by the Group, equivalent to 4.0 percentage points ofthe SBU's net earned premium. The combined ratio benefited from reserve releasesof £24.1m equivalent to 8.1 percentage points of net earned premium compared witha release of £20.1m (9.6 percentage points of net earned premium) in 2008.
The expense ratio fell by 1.4 percentage pointsto 25.0% (2008: 26.4%). Acquisition costs were virtually flat at 17.3% whereas thenon-commission expense ratio fell by 1.3 percentage points as a result of the headlinepremium growth during the year.
The allocated investment return fell significantlyreflecting the Group's policy to allocate such income based on risk free rates bycurrency. Whilst underwriting profit (after catastrophe bond costs) increased byover 300%, operating profit increased by a lower 115%, a strong result for the SBU.
Outlook
With underwriting margins in 2010 expected tobe broadly stable compared with 2009, Brit Reinsurance is not expecting to see significantchanges to its underwriting portfolio. This has been borne out by rate increaseson renewal business in January 2010 of 1.1%. 2010 should therefore be a year of reasonablestability and solid margins with the SBU continuing to focus on expanding its distributionrelationships and taking advantage of its newly-established representative officein Tokyo, Japan.
Brit UK
Vision
Brit UK aims to be a significant player in itschosen markets. Expertise, service and execution skills will differentiate the SBUfrom its peers.
About Brit UK
Brit UK underwrites a diverse book of UK commercialand increasingly specialist personal insurance through a combination of regional,national and international brokers. The SBU's target market focuses on sole tradersthrough to corporates with turnover of up to £300m. Over the last two years the Grouphas been successful in developing online trading solutions for micro-SME business,underwriting commercial insurance with premium values typically less than £2,000per policy. Brit UK has a carefully targeted distribution strategy with 80% of itscommercial business sourced through its top 75 brokers.
|
Financial Performance |
Year ended 31 December 2009 |
Year ended 31 December 2008 |
Year ended 31 December 2007 |
Year ended 31 December 2006 |
Year ended 31 December 2005 |
|
|
£m |
£m |
£m |
£m |
£m |
|
Gross written premium: |
|
|
|
|
|
|
Employers'/Public Liability |
116.7 |
103.5 |
89.8 |
91.4 |
112.8 |
|
Professional Indemnity/D&O |
38.3 |
34.0 |
36.3 |
36.7 |
35.6 |
|
Motor |
115.2 |
87.3 |
63.8 |
91.3 |
89.9 |
|
Property & Commercial Packages |
185.2 |
125.8 |
84.1 |
60.5 |
79.6 |
|
Total |
455.4 |
350.6 |
274.0 |
279.9 |
317.9 |
|
|
|
|
|
|
|
|
Business led (%) |
94.1 |
91.2 |
87.1 |
|
|
|
Retention ratio (%) |
68.6 |
78.0 |
72.3 |
|
|
|
|
|
|
|
|
|
|
Net earned premium |
362.4 |
259.9 |
262.8 |
251.2 |
302.6 |
|
Underwriting profit/(loss) |
0.9 |
1.5 |
(24.3) |
7.7 |
65.7 |
|
Profit before tax |
14.2 |
35.7 |
15.8 |
40.4 |
112.3 |
|
Claims ratio (%) |
66.7 |
66.4 |
76.3 |
69.6 |
55.8 |
|
Expense ratio (%) |
33.0 |
32.9 |
33.0 |
27.3 |
22.6 |
|
Combined ratio (%) |
99.7 |
99.3 |
109.3 |
96.9 |
78.4 |
Portfolio
In 2009, Brit UK underwrote £455.4m of premiumin four main classes of business.
Brit UK's largest class of business is Propertyand Commercial Packages which accounts for 40.7% of the portfolio. The SBU underwritesa wide range of property from shops and offices through to large manufacturing andwarehouse risks as well as high value home insurance. The portfolio is underwrittendirectly through London or regional brokers, or through specialist coverholders suchas Oak (high value home) and Thistle Underwriters, a managing general underwriterowned by Jardine Lloyd Thompson.
The Motor insurance portfolio consists of commercial- haulage, fleet, self-drive hire and taxi, as well as personal motor. Brit UK isone of the leading markets in London for fleet insurance. Motor insurance accountedfor 25.3% of the portfolio in 2009.
Liability, which accounts for 25.6% of the portfolio,is split into Employers' Liability insurance, which is a compulsory purchase inthe UK, and Public Liability. Within this account the SBU underwrites a specialistbook focusing on a number of industries including construction. In addition the SBUhas a strong presence in electronically traded covers and more broadly based riskssourced through its regional network. It also participates on a small number of Internationalprogrammes which collectively represent £40m of premium.
The smallest section of the portfolio relatesto Professional Lines which includes Professional Indemnity (PI) and Directors andOfficers (D&O) insurance. This accounts for 8.4% of the portfolio, with the vastmajority being PI sourced through both London and regional offices. In addition theSBU has recently developed a PI Lite product especially tailored for the micro-SMEmarket.
Brit UK opened its first regional office in2003 and now has eight offices outside London, with the Manchester office celebratingits fifth anniversary during 2009. The regional offices experienced 35% premium growthin 2009 and now represent 26% of the SBU's portfolio, up from 20% two years ago.The regional offices transact business that is placed locally and does not reachthe London market. Without an established regional office network, Brit UK wouldnot be able to access this business. Business written in the regions tends to havea lower average premium than business underwritten in London, but is typically lessvolatile.
Consistency in underwriting in Brit UK is achievedthrough the use of a matrix approach. Each portfolio class, e.g. Property, Liability,Fleet and Financial Lines, has a Portfolio Manager who is responsible for settingunderwriting guidelines across each of the distribution platforms.
In 2009 Brit UK wrote 26.8% of the Group'sgross premium which was split 37.8% short-tail, 25.2% medium-tail and 37.0% long-tail.Brit Insurance Limited (BIL) is the carrier for the majority of the SBU's business(89.4%) with the Group's Lloyd's Syndicate 2987 (10.6%) primarily used for theInternational PL account.
Distribution successes
During 2009, the SBU developed a number of relationshipswith new trading partners and continued to leverage its distribution edge in thesmall commercial and micro-SME insurance market. Reflecting this, the SBU's BritLite proposition won the 'Underwriter of the Year' award at the British InsuranceAwards.
Brit Lite, which focuses on providing commercialinsurance to businesses typically with fewer than 10 employees and insurance spendof less than £2,000, has grown to represent 11% of the SBU's portfolio from a standingstart in 2007. The success of the proposition has been built on providing a flexibleoffering to brokers backed up with experienced referrals support; a comprehensiveproduct range; and rapid speed of execution. Customers can access Brit UK's suiteof products via carefully selected partners either through the traditional brokingchannel or through e-trading. The SBU's largest e-trading relationship is with Xbridge,an on-line insurance broker, via its website simplybusiness.co.uk. The Group hasa 39.2% shareholding in Xbridge.
In 2009 the SBU was approached by a number ofcoverholders and agents looking for access to Brit UK's service-led proposition.The SBU has carefully selected a handful of these arrangements where it feels theinterests of the SBU and the intermediary were fully aligned. One such arrangementis with Thistle Underwriters, a managing general underwriter owned by Jardine LloydThompson, which went live in June 2009.
Premium and claim developments during 2009
Increases in premium rates on renewed businessfor 2009 averaged 3.7%. Within this the Motor portfolio saw the highest rate increasesof 9.7% following a turn in the market in late 2007.
Premium Rating Index (Year 2000 as base year)
|
|
January |
Full Year |
Full year |
Full year |
Full year |
Full year |
Full year |
Full year |
Full year |
Full year |
Full year |
|
2010 |
2009 |
2008 |
2007 |
2006 |
2005 |
2004 |
2003 |
2002 |
2001 |
2000 |
|
|
Employers'/Public Liability |
204 |
205 |
206 |
217 |
237 |
257 |
284 |
286 |
200 |
100 |
n/a |
|
Professional Indemnity/D&O |
108 |
107 |
105 |
111 |
118 |
130 |
132 |
130 |
100 |
n/a |
n/a |
|
Motor |
129 |
118 |
108 |
101 |
104 |
111 |
122 |
120 |
115 |
108 |
100 |
|
Property |
127 |
124 |
121 |
122 |
125 |
130 |
131 |
132 |
123 |
104 |
100 |
The rate movements should be read with caution.They are based on underwriters' estimates of rate changes, including adjustmentsto terms and conditions. They relate to renewal business only, since this representsthe business for which there is the best year-on-year data.
Premium rate movements for the Property andLiability segments were positive or neutral in 2009. This suggested that they hadhit the bottom of the underwriting cycle, but evidence of a sustained improvementdid not materialise during the year.
In 2008, the SBU increased monitoring of potentialfraud and recession-linked claims activity. Following this approach there have beena number of anti-fraud successes and the SBU has not experienced any material changein claims frequency related to recessionary factors across the book. 2009 has seena small number of relatively large losses in the property book, but these have eachbeen investigated and no link or pattern to the recessionary environment was established.
The UK experienced a number of periods of extremeweather in 2009, but from an insured perspective only the November floods were ofnote, the cost of which fell within normal expectations for the size of the event.
Overall the unit released claims reserves of£41.2m during 2009, arising from the Liability and Property portfolios.
Financial performance
Gross premium grew 29.9% to £455.4m, with underlyingpremium growth on a constant currency basis and excluding re-estimates of prior yearpremium of 21.0%. Growth in the portfolio on an underlying basis arose in the Propertyand Motor books as the Group leveraged its distribution model and took advantageof improved pricing.
Reinsurance spend was lower in 2009 as a specificquota share on the Motor book was reduced. Net earned premium rose by 39.4%.
Brit UK's combined ratio of 99.7% was broadlyin line with 2008 (2008: 99.3%). The combined ratio benefited from reserve releasesof £41.2m equivalent to 11.4 percentage points of net earned premium, compared witha release of £38.6m in 2008 equivalent to 14.9 percentage points of net earned premium.
The unit's expense base remained under controlwith the expense ratio broadly unchanged at 33.0%. This masked a 3.0 percentage pointsdecline in the non-commission expense ratio offset by a similar increase in the acquisitionexpense ratio. At 12.6% the non-commission expense ratio is competitive with BritUK's peers.
Investment return fell significantly reflectingthe Group's policy to allocate investment income based on risk free rates and contributedto the fall in operating profit to £14.2m.
Outlook
Notwithstanding the 3.7% price rises achievedby Brit UK in 2009, the UK market continues to remain competitive. In the last quarterof 2009 the SBU witnessed more intense competition for larger risks but continuedto see positive rate movements at the smaller end of the market. It is too earlyto say whether 2010 will bring the premium rate increases that are expected or thatare needed for much of the UK market as a whole. The SBU will continue to focus ondelivering market leading service with an emphasis on areas where it has a sustainableadvantage.
Investments
Strategy
The Group allocates its investment holdingsinto one of three internal portfolios - the liability portfolio, working capitalportfolio and capital portfolio.
The largest portfolio represents funds thatare expected to be called upon to pay claims to policyholders (the liability portfolio).These liabilities are segmented by currency and legal entity, and a benchmark ischosen for each segment that matches the characteristics of the liabilities. Theinvestment objective in the liability portfolio is safety, liquidity and return ofcapital. Assets are primarily allocated to high quality fixed income securities.
The remaining investments, net of cash heldin treasury (the working capital portfolio), are allocated to the capital portfolio.The objective of this portfolio is to support the long-term growth of shareholders'funds by earning a competitive return on capital. The current benchmark for the capitalfund is LIBOR + 3%, which was comfortably exceeded during 2009. Assets are allocatedto all types of fixed income securities (including corporates, mortgages, and index-linkedbonds), equities and alternative assets.
The Group adheres to a detailed set of investmentguidelines that have been approved by the Board of Directors. The guidelines havebeen constructed with the intention of allowing the Group to achieve a competitiveinvestment return while minimising the risk of a meaningful reduction in capitalarising from market volatility. All material decisions regarding the allocation ofassets within the guidelines are taken by the Investment Committee.
One of the tactical objectives of the Groupduring 2009 was the management of counterparty risk in the investment portfolio.Over the course of the year the Group's exposures to individual counterparties werereduced by approximately half. In addition, greater diversification has been achievedin the corporate bond portfolio through an increase in the relative share of non-financialissuers.
Performance
In 2009 the Group's investments produced atotal return for the year of £137.4m (4.2%), compared to a return of £7.4m (0.2%)in 2008.
|
Investment return |
Year ended 31 December 2009 |
Year ended 31 December 2008 |
||
|
|
£m |
% |
£m |
% |
|
Equity securities |
13.8 |
17.5 |
(36.7) |
(24.0) |
|
Debt securities |
92.5 |
4.5 |
89.4 |
4.6 |
|
Specialised investment funds |
17.9 |
19.2 |
(69.9) |
(38.8) |
|
Cash and cash equivalents |
13.2 |
1.5 |
24.6 |
4.6 |
|
Total portfolio |
137.4 |
4.2 |
7.4 |
0.2 |
The fixed income portfolio return of 4.5% wasmarginally lower than last year's 4.6%. Despite a similar outcome, the underlyingperformance could not have been more different from 2008. In 2009 government bondindices of short duration produced only modest returns. In fact, the US Treasury3-5 year index produced a rare negative return. Corporate bonds, in contrast, producedexcellent results in all currencies. The corporate Sterling AA 1-3 year benchmarkproduced a 7% return while a similar index in US dollars produced 8%. Longer-datedcorporate bonds produced double-digit annual gains. Although the Group held corporateexposure at the upper end of its guideline limits throughout the year, the poor performanceof government bonds kept the total portfolio return to the same level as 2008.
Equities and alternative assets performed wellduring the year in absolute terms. The equity portfolio provided a return of 17.5%in 2009, whilst specialised investment funds produced a return of 19.2% in 2009,following a very difficult 2008. Investments in emerging markets and leveraged loansprovided significant gains during the year, while private equity posted a small decline.
Asset Allocation
|
Asset allocation by asset class |
31 December 2009 |
31 December 2008 |
||
|
|
£m |
% |
£m |
% |
|
Equity securities |
102.0 |
2.9 |
117.4 |
3.6 |
|
Debt securities |
2,282.4 |
65.7 |
2,162.5 |
66.9 |
|
Specialised investment funds |
96.7 |
2.8 |
113.1 |
3.5 |
|
Cash and cash equivalents |
994.2 |
28.6 |
840.7 |
26.0 |
|
Total |
3,475.3 |
100.0 |
3,233.7 |
100.0 |
Brit Insurance entered the year with growingcash balances and a high weighting in corporate bonds relative to the range establishedby the Group's investment guidelines. The overweight position in corporate creditdeclined slightly in the middle of the year but was broadly maintained throughout2009 as non-financial corporate issues were added to the portfolio. Cash balancesrose during most of 2009, owing in part to the transition to a new fixed income manager.It is expected that cash holdings will decline during the first half of 2010.
Breakdown of debt securities at 31 December2009
|
£m |
Government |
P-1 |
AAA |
AA |
A |
BBB and lower |
Total |
|
Government issue* |
1,045.5 |
- |
- |
- |
- |
- |
1,045.5 |
|
Corporate bonds |
- |
- |
163.3 |
218.5 |
282.9 |
58.1 |
722.8 |
|
CDs and CPs |
- |
346.9 |
- |
- |
- |
- |
346.9 |
|
Other |
- |
- |
111.1 |
42.7 |
13.4 |
- |
167.2 |
|
|
1,045.5 |
346.9 |
274.4 |
261.2 |
296.3 |
58.1 |
2,282.4 |
* All government issue bonds are from eitherthe US, Canada, UK or eurozone countries.
Breakdown of debt securities at 31 December2008
|
£m |
Government |
P-1 |
AAA |
AA |
A |
BBB and lower |
Total |
|
Government issue* |
753.9 |
- |
- |
- |
- |
- |
753.9 |
|
Corporate bonds |
- |
- |
168.4 |
369.5 |
311.9 |
1.8 |
851.6 |
|
CDs and CPs |
- |
557.0 |
- |
- |
- |
- |
557.0 |
|
Other |
- |
- |
- |
- |
- |
- |
- |
|
|
753.9 |
557.0 |
168.4 |
369.5 |
311.9 |
1.8 |
2,162.5 |
* All government issue bonds are from eitherthe US, Canada, UK or eurozone countries.
Holdings of riskier asset classes remained broadlyunchanged during the year. During the first half of the year, investments were madein European covered bonds and asset-backed securities as well as US mortgage-backedsecurities (MBS). Towards the end of the year the Group added some exposure to UScommercial mortgage-backed securities (CMBS). Several investments in equities andequity funds were sold during the year owing to manager underperformance. In addition,some hedge fund investments were exited during the year as part of manager-led redemptionprogrammes.
|
Investments by currency |
31 December 2009 |
31 December 2008 |
||
|
|
£m |
% |
£m |
% |
|
Sterling |
1,780.2 |
51.2 |
1,564.6 |
48.4 |
|
US dollar |
1,226.6 |
35.3 |
1,217.2 |
37.6 |
|
Euro |
348.1 |
10.0 |
334.9 |
10.4 |
|
Canadian dollar |
120.4 |
3.5 |
117.0 |
3.6 |
|
Total |
3,475.3 |
100.0 |
3,233.7 |
100.0 |
The Group remained conservatively positionedduring 2009 with respect to asset duration. Dollar duration declined during muchof the year but began to increase in the fourth quarter following transition to anew fixed income manager. Duration in the US dollar portfolio ended the year at 1.5years with the duration of the Sterling portfolio at 1.2 years. The duration of bothportfolios is likely to increase during 2010.
|
Debt securities (ex CDs/CPs) |
31 December 2009 |
31 December 2008 |
|
duration |
Years |
Years |
|
Sterling |
1.2 |
1.5 |
|
US dollar |
1.5 |
1.2 |
|
Euro |
1.4 |
1.5 |
|
Canadian dollar |
1.6 |
1.6 |
Outlook
The medium-term outlook for the Group's investmentreturn remains challenging. Interest rates are not only low in absolute terms buthave dipped below the rate of inflation in both the UK and US. Three-year governmentbond yields in the UK and US are both about 1% below the prevailing rate of CPI inflation.This contrasts markedly with the situation enjoyed over much of the past decade,when investors could expect consistently positive real spreads of several percentagepoints. As a result, insurers must either forego income or risk negative returnsshould rates rise quickly. In this environment Brit Insurance believes that highquality corporate bonds remain attractive in relative terms.
Consolidated Income Statement
for the year ended 31 December 2009
|
|
Note |
Year ended 31 December 2009 £m |
Year ended 31 December 2008 £m |
|
Revenue |
|
|
|
|
Gross premiums written |
5 |
1,696.4 |
1,394.6 |
|
Less premiums ceded to reinsurers |
5 |
(225.0) |
(231.3) |
|
Premiums written, net of reinsurance |
|
1,471.4 |
1,163.3 |
|
|
|
|
|
|
Gross amount of change in provision for unearnedpremiums |
|
(0.3) |
(77.2) |
|
Reinsurers' share of change in provision forunearned premiums |
|
(7.2) |
15.7 |
|
Net change in provision for unearned premiums |
|
(7.5) |
(61.5) |
|
Earned premiums, net of reinsurance |
|
1,463.9 |
1,101.8 |
|
|
|
|
|
|
Investment return |
7 |
137.4 |
7.4 |
|
Return on derivative contracts |
|
(4.1) |
(19.1) |
|
Disposal and partial disposal of associated undertakings |
|
4.2 |
4.5 |
|
Net foreign exchange gains |
6 |
- |
124.0 |
|
Other income |
|
1.4 |
1.1 |
|
Total revenue |
|
1,602.8 |
1,219.7 |
|
|
|
|
|
|
Expenses |
|
|
|
|
Claims incurred: |
|
|
|
|
Claims paid: |
|
|
|
|
Gross amount |
|
(792.2) |
(694.3) |
|
Reinsurers' share |
|
110.8 |
90.0 |
|
Claims paid, net of reinsurance |
|
(681.4) |
(604.3) |
|
|
|
|
|
|
Change in the provision for claims: |
|
|
|
|
Gross amount |
|
(262.1) |
(191.8) |
|
Reinsurers' share |
|
12.8 |
68.5 |
|
Net change in the provision for claims |
|
(249.3) |
(123.3) |
|
|
|
|
|
|
Claims incurred, net of reinsurance |
5 |
(930.7) |
(727.6) |
|
Acquisition costs |
|
(396.9) |
(306.1) |
|
Other operating expenses |
|
(111.6) |
(90.4) |
|
Net foreign exchange losses |
6 |
(33.4) |
- |
|
Total expenses excluding finance costs |
|
(1,472.6) |
(1,124.1) |
|
|
|
|
|
|
Operating profit |
|
130.2 |
95.6 |
|
|
|
|
|
|
Finance costs |
|
(11.5) |
(13.1) |
|
Finance income |
|
- |
7.2 |
|
Share of loss after tax of associated undertakings |
|
(2.3) |
(0.5) |
|
Profit on ordinary activities before tax |
|
116.4 |
89.2 |
|
Tax expense |
8(i) |
(28.9) |
(22.6) |
|
Profit attributable to owners of the parent |
|
87.5 |
66.6 |
|
|
|
|
|
|
Basic earnings per share (pence per share) (restated for 25 February 2010 share consolidation) |
9 |
113.2p |
86.0p |
|
Diluted earnings per share (pence per share) (restated for 25 February 2010 share consolidation) |
9 |
113.2p |
86.0p |
|
|
|
|
|
|
Prior to restatement for 25 February 2010 shareconsolidation: |
|
|
|
|
Basic earnings per share (pence per share) |
9 |
28.3p |
21.5p |
|
Diluted earnings per share (pence per share) |
9 |
28.3p |
21.5p |
Consolidated Statement of Comprehensive Income
for the year ended 31 December 2009
|
|
Note |
Year ended 31 December 2009 £m |
Year ended 31 December 2008 £m |
|
|
|
|
|
|
Profit for the year |
|
87.5 |
66.6 |
|
|
|
|
|
|
Other comprehensive income |
|
|
|
|
Actuarial losses on defined benefit pension scheme |
|
(2.5) |
(10.1) |
|
Tax relating to actuarial losses on defined benefitpension scheme |
8(ii) |
0.7 |
2.9 |
|
Foreign exchange differences arising on the revaluationof foreign operations |
|
0.1 |
4.1 |
|
Reversal of foreign exchange translation differencesresulting from the disposal and partial disposal of foreign operations |
|
(4.2) |
1.3 |
|
Effect of associates' capital movements |
|
- |
0.6 |
|
Other comprehensive income for the year netof tax |
|
(5.9) |
(1.2) |
|
|
|
|
|
|
Total comprehensive income for the year |
|
|
|
|
attributable to owners of the parent |
|
81.6 |
65.4 |
Consolidated Statement of Financial Position
at 31 December 2009
|
|
Note |
31 December 2009 £m |
31 December 2008 £m |
|
Assets |
|
|
|
|
Property, plant and equipment |
|
6.0 |
8.0 |
|
Intangible assets |
|
81.2 |
82.1 |
|
Deferred acquisition costs |
|
162.4 |
152.1 |
|
Investments in associated undertakings |
|
15.3 |
29.1 |
|
Current taxation |
|
- |
1.9 |
|
Reinsurance contracts |
10 |
523.5 |
549.6 |
|
Financial investments |
11 |
2,481.1 |
2,393.0 |
|
Derivative contracts |
|
0.6 |
1.4 |
|
Insurance and other receivables |
|
537.0 |
518.4 |
|
Cash and cash equivalents |
12 |
994.2 |
840.7 |
|
|
|
|
|
|
Total assets |
|
4,801.3 |
4,576.3 |
|
|
|
|
|
|
Liabilities and Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
Insurance contracts |
10 |
3,439.4 |
3,344.7 |
|
Employee benefits |
|
4.1 |
1.4 |
|
Borrowings |
13 |
237.6 |
143.1 |
|
Current taxation |
|
4.7 |
- |
|
Deferred taxation |
|
19.0 |
29.5 |
|
Provisions |
|
0.3 |
0.4 |
|
Derivative contracts |
|
0.9 |
5.4 |
|
Insurance and other payables |
|
200.7 |
202.1 |
|
|
|
|
|
|
Total liabilities |
|
3,906.7 |
3,726.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
|
|
|
Called up share capital |
15 |
277.9 |
247.3 |
|
Share premium account |
|
612.0 |
- |
|
Capital redemption reserve |
|
- |
- |
|
Translation reserve |
|
- |
4.1 |
|
Own shares |
|
(10.7) |
(64.2) |
|
Retained earnings |
|
15.4 |
662.5 |
|
|
|
|
|
|
Total equity attributable to owners of the parent |
|
894.6 |
849.7 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity |
|
4,801.3 |
4,576.3 |
Consolidated Statement of Cash Flows
for the year ended 31 December 2009
|
|
Note |
Year ended 31 December 2009 £m |
Year ended 31 December 2008 £m |
|
Cash generated from operations |
|
|
|
|
|
|
|
|
|
Cash flows provided by operating activities |
16 |
73.5 |
36.5 |
|
|
|
|
|
|
Tax paid |
|
(32.1) |
(25.8) |
|
Interest paid |
|
(11.3) |
(11.8) |
|
Interest received |
|
116.0 |
109.3 |
|
Dividends received |
|
2.4 |
4.0 |
|
|
|
|
|
|
Net cash inflows from operating activities |
|
148.5 |
112.2 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
Purchase of property, plant and equipment |
|
(1.0) |
(2.1) |
|
Purchase of intangible assets |
|
(5.5) |
(5.5) |
|
Net proceeds from disposal of property, plantand equipment |
|
- |
0.2 |
|
Net proceeds from disposals and partial disposalsof associated undertakings |
|
15.4 |
22.1 |
|
Movements in associated undertaking loan and preferenceshare balances |
|
(3.8) |
(0.8) |
|
Investment in associated undertakings |
|
- |
(13.2) |
|
|
|
|
|
|
Net cash inflows from investing activities |
|
5.1 |
0.7 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
Equity dividends paid |
|
(46.4) |
(68.2) |
|
Draw down on revolving credit facility |
|
104.8 |
- |
|
Repurchase of Lower Tier Two subordinated debt |
|
- |
(8.4) |
|
Repurchase of 8.5% unsecured subordinated loanstock |
|
- |
(19.7) |
|
Repurchase of US dollar floating rate unsecuredsubordinated loan notes |
|
(9.1) |
- |
|
Acquisition of own shares for employee incentiveschemes |
|
(0.4) |
(0.5) |
|
Repurchase of treasury shares |
|
- |
(1.1) |
|
|
|
|
|
|
Net cash inflows/(outflows) from financing activities |
|
48.9 |
(97.9) |
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
202.5 |
15.0 |
|
Cash and cash equivalents at beginning of theyear |
|
840.7 |
735.3 |
|
Effect of exchange rate fluctuations on cash andcash equivalents |
|
(49.0) |
90.4 |
|
Cash and cash equivalents at the end of theyear |
12 |
994.2 |
840.7 |
Consolidated Statement of Changes in Equity
for the year ended 31 December 2009
|
|
Note |
Called up share capital |
Share premium account |
Capital redemption reserve |
Translation reserve |
Own shares |
Retained earnings |
Total equity attributable to owners of the parent |
|
|
|
£m |
£m |
£m |
£m |
£m |
£m |
£m |
|
At 1 January 2009 |
|
247.3 |
- |
- |
4.1 |
(64.2) |
662.5 |
849.7 |
|
Total comprehensive income for the year |
|
- |
- |
- |
(4.1) |
- |
85.7 |
81.6 |
|
Cancellation of treasury shares |
|
(11.9) |
- |
11.9 |
- |
53.4 |
(53.4) |
- |
|
Equity dividends |
14 |
- |
- |
- |
- |
- |
(46.4) |
(46.4) |
|
Corporate reorganisation |
|
(235.4) |
|
(11.9) |
- |
- |
247.3 |
- |
|
Establishment of Brit Insurance Holdings N.V. |
|
278.7 |
612.0 |
- |
- |
- |
(890.7) |
- |
|
Exchange difference on retranslation of sharecapital |
|
(0.8) |
- |
- |
- |
- |
0.8 |
- |
|
Acquisition of own shares for share schemes |
|
- |
- |
- |
- |
(0.4) |
- |
(0.4) |
|
Vesting of own shares |
|
- |
- |
- |
- |
0.5 |
(0.5) |
- |
|
Share-based payments |
|
- |
- |
- |
- |
- |
10.1 |
10.1 |
|
At 31 December 2009 |
|
277.9 |
612.0 |
- |
- |
(10.7) |
15.4 |
894.6 |
Consolidated Statement of Changes in Equity
for the year ended 31 December 2008
|
|
Note |
Called up share capital |
Share premium account |
Capital redemption reserve |
Translation reserve |
Own shares |
Retained earnings |
Total equity attributable to owners of the parent |
|
|
|
£m |
£m |
£m |
£m |
£m |
£m |
£m |
|
At 1 January 2008 |
|
247.3 |
138.0 |
0.6 |
(1.3) |
(63.1) |
527.4 |
848.9 |
|
Total comprehensive income for the year |
|
- |
- |
- |
5.4 |
- |
60.0 |
65.4 |
|
Purchase of treasury shares |
|
- |
- |
- |
- |
(1.1) |
- |
(1.1) |
|
Equity dividends |
14 |
- |
- |
- |
- |
- |
(68.2) |
(68.2) |
|
Acquisition of own shares for share schemes |
|
- |
- |
- |
- |
(0.5) |
- |
(0.5) |
|
Vesting of own shares |
|
- |
- |
- |
- |
0.5 |
(0.5) |
- |
|
Share-based payments |
|
- |
- |
- |
- |
- |
5.2 |
5.2 |
|
Capital reduction |
|
- |
(138.0) |
(0.6) |
- |
- |
138.6 |
- |
|
At 31 December 2008 |
|
247.3 |
- |
- |
4.1 |
(64.2) |
662.5 |
849.7 |
Notes to the Financial Statements
1 General information
Brit Insurance Holdings N.V. (the Company) wasincorporated and registered in the Netherlands on 22 June 2009 as a public companylimited by shares with registered number 24464323. The address of the registeredoffice is provided in the Company's website at www.britinsurance.com.
2 Accounting policies
The preliminary results have been prepared inaccordance with International Financial Reporting Standards (IFRS) as endorsed bythe European Union (EU).
This preliminary announcement is prepared onthe same basis as set out in the previous year's annual accounts with the exceptionof the following:
During the year the Group has adopted IFRS 8:'Operating segments', Amendment to IFRS 2: 'Share based payment: Vesting Conditionsand Cancellations', Improving Disclosures and Financial Instruments (Amendment toIFRS 7) and IAS 27 'Consolidated and Separate Financial Statements', IAS 32 'FinancialInstruments: Presentation' and IAS 1 'Presentation of Financial Statements - PuttableFinancial Instruments and Obligations Arising on Liquidation' and IFRIC 16 'Hedgesof a Net Investment in a Foreign Operation'. The adoption of these standards hashad no effect on the preliminary results for the year ended 31 December 2009 exceptfor the adoption of IFRS 8. The effects of IFRS 8 are explained in Note 5.
Corporate reorganisation
On 12 November 2009, the former ultimate holdingcompany of the Brit Insurance Group, Brit Insurance Holdings PLC, announced proposalsfor the establishment of a Netherlands holding company for the Group.
Following approval by the shareholders of BritInsurance Holdings PLC, the approval by the High Court of Justice of a scheme ofarrangement under sections 895 to 899 of the UK Companies Act 2006 (the 'Scheme')and the Scheme becoming effective on 21 December 2009, the Company became the newholding company of the Group.
Under the Scheme, all of the shares of BritInsurance Holdings PLC were cancelled. In consideration of the cancellation of theseshares, the holders received one share in Brit Insurance Holdings N.V. in returnfor each share in Brit Insurance Holdings PLC.
The Company's ordinary shares were admittedto trading on the London Stock Exchange on 21 December 2009.
On the basis that the transaction was effectedby creating a new parent that is not itself a business, the transaction is consideredto be outside the scope of IFRS 3. It has therefore been accounted for using thepooling of interests method as a continuation of the existing Group. The result ofthis is that the preliminary results of Brit Insurance Holdings N.V. will be thesame as those previously presented by Brit Insurance Holdings PLC, except for theshare capital being that of Brit Insurance Holdings N.V. There is no requirementto restate the prior period comparatives.
The Group continues to present its consolidatedfinancial statements in pounds Sterling which is the functional currency of the Company.
Basis of preparation
The preliminary results have been prepared inaccordance with IFRS and Part 9 of Book 2 of the Netherlands Civil Code. IFRS comprisesstandards issued by the International Accounting Standards Board (IASB) and interpretationsissued by the International Financial Reporting Interpretations Committee (IFRIC)and as endorsed by the EU.
At the date of authorisation of these financialstatements, the following standards which have not been applied in these financialstatements were in issue but not yet effective:
|
Standard |
|
Effective |
|
|
|
|
|
IFRS 9 Financial Instruments |
|
Periods commencing on or after 1 January 2013 |
|
IFRS 3R Business Combinations |
|
Periods commencing on or after 1 July 2009 |
|
IAS 24R Related Party Disclosures |
|
Periods commencing on or after 1 January 2011 |
|
IAS 27R Consolidated and Separate FinancialStatements |
|
Periods commencing on or after 1 July 2009 |
|
IFRIC 17 Distributions of Non-Cash Assets toOwners |
|
Periods commencing on or after 1 July 2009 |
|
IFRIC 18 Transfers of Assets from Customers |
|
Transactions on or after 1 July 2009 |
The impact of IFRS 9 is still being evaluated.
The Directors anticipate that the adoption ofthe other standards in future periods will have no material impact on the financialstatements of the Group.
In accordance with IFRS 4, 'Insurance Contracts',the Group continues to comply with the recommendations of the Statement of RecommendedPractice on Accounting for Insurance Businesses issued by the Association of BritishInsurers in December 2005 (as revised in December 2006). However the Group has theoption to make improvements to its policies if the changes make the financial statementsmore relevant and no less reliable to decision making needs of the users.
Certain amounts recorded in the financial informationinclude estimates and assumptions made by management, particularly about insuranceliability reserves, investment valuations, interest rates and other factors. Actualresults may differ from the estimates made. For further information on the use ofestimates and judgements, refer to Note 3.
3 Critical accounting estimates andjudgements in applying accounting policies
The Group makes estimates and assumptions thataffect the reported amounts of assets and liabilities. Estimates and judgementsare continually evaluated and based on historical experience and other factors, includingexpectations of future events that are believed to be reasonable under the circumstances.
i) The ultimate liability arising from claimsmade under insurance contracts
The estimation of the ultimate liability arisingfrom claims made under insurance contracts is the Group's most critical accountingestimate. There are several sources of uncertainty that need to be considered inthe estimate of the amounts that the Group will ultimately pay to settle such claims.
Significant areas requiring estimation and judgementinclude:
a) estimates of the amount of any liabilityin respect of claims notified but not settled and incurred but not reported claimsprovisions (IBNR) included within provisions for insurance and reinsurance contracts.
b) the corresponding estimate of the amountof reinsurance recoveries which will become due as a result of these estimated claims.
c) the recoverability of amounts due from reinsurers.
d) estimates of the proportion of exposure whichhas expired in the period as represented by the earned proportion of premiums written.
The assumptions used and the manner in whichthese estimates and judgements are made are set out below:
a) quarterly statistical data is produced inrespect of gross and net premiums and claims (paid and incurred).
b) projections are produced by an internal actuarialdepartment, with appropriate adjustment for specific claims made by management wheredeemed appropriate.
c) the resulting projections are discussed withexperienced underwriting and claims personnel and claims provision recommendationsmade to an internal reserving committee consisting of senior underwriters, claimsmanagers and finance staff.
d) claims provisions are subject to independentexternal actuarial review at least annually.
e) some classes of business have characteristicswhich do not necessarily lend themselves easily to statistical estimation techniques. These classes would include Financial Risk, Casualty Treaty, Catastrophe Retrocessionaland Mortgage Indemnity Guarantee business. In these cases review is carried outon a policy-by-policy basis to support statistical estimates.
f) in the event of catastrophe losses and priorto detailed claims information becoming available, claims provision estimates arecompiled using a combination of specific recognised modelling software and reviewsof material contracts exposed to the event in question.
Overall the objectives of the estimates andjudgements applied to claims provisions seek to state such provisions on a best estimate,undiscounted basis.
In addition to claims provisions, the reservefor future loss adjustment expenses is also subject to estimation. In arriving atthis estimate, regard is had to the levels of internal and third pary loss adjustingexpenses incurred annually. The estimated loss adjustment expenses are expressedas a percentage of net claims reserves and are benchmarked to assess the reasonablenessof the estimate.
Further judgements are made as to the recoverabilityof amounts due from reinsurers. Provisions for bad debts are made specifically,based on the solvency of reinsurers, internal and external ratings, payment experiencewith them and any disputes of which the Group is aware.
The carrying value at the date of the statementof financial position of gross claims reported and loss adjustment expenses and claimsincurred but not reported were £2,752.1m (2008: £2,657.7m). The amount of reinsurancerecoveries estimated at that date is £460.4m (2008: £479.2m).
ii) Impairment of goodwill
Determining whether goodwill is impaired requiresan estimation of the value in use of the cash-generating units to which goodwillhas been allocated. The value in use calculation requires the Group to estimate thefuture cash flows expected to arise from the cash-generating unit and a suitablediscount rate in order to calculate present value, both of which are material sourcesof uncertainty.
The carrying amount of goodwill at the dateof the statement of financial position was £63.7m (2008: £63.7m).
iii) Financial Investments
Financial investments are carried in the statementof financial position at fair value. The carrying amount of financial investmentsat the date of the statement of financial position was £2,481.1m (2008: £2,393.0m).Determining the fair value of certain investments requires estimation.
4 Risk management policies
The Group's activities expose the businessto a number of key risks which have the potential to affect its ability to achieveits business objectives. The following describes the Group's financial and insurancerisk management from a quantitative and qualitative perspective.
The Board is responsible for the Group's systemsof internal control and for reviewing their effectiveness. The systems of internalcontrol are designed to manage rather than eliminate risk and aim to provide reasonableand not absolute assurance. Group underwriting activities are co-ordinated througha system of strategic business unit management committees as well as the ExecutiveManagement Committee and the Boards for the regulated entities. Investment riskis managed in accordance with investment frameworks which are set by the InvestmentCommittee which meets monthly.
Financial Risk
(i) Credit risk
This is the risk that one party to a financialarrangement will fail to discharge an obligation and cause the other party to incura financial loss. The following is an overview of how the Group manages its significantcredit risk exposures.
Reinsurance
Reinsurance is placed in line with policy guidelinesand concentration of risk is managed by reference to counterparties' limits thatare set each year and are subject to regular reviews. On a regular basis managementperforms assessments of creditworthiness of reinsurers to update reinsurance purchasestrategy and to ascertain suitable allowance for impairment of reinsurance assets.
Financial investments and cash and cash equivalents
Credit risk relating to financial investmentsis monitored by the Investment Committee. The Group's investment guidelines specifythe maximum percentage of the portfolios that can be invested in or with any singlecounterparty - these limits are determined using the Moody's or other recognisedcredit rating of each asset. In addition the Group's Investment Committee will fromtime to time impose special limits on assets that are deemed more at risk than therating agencies currently imply.
Insurance receivables
The Group credit risk is in respect of balanceswith customers, intermediaries and reinsurers. The Group seeks to reduce its creditexposure to intermediaries through application of its internal credit vetting processesand its active credit control procedures. Wherever possible, the Group includes premiumpayment warranties in its terms and conditions which gives it the right to cancelpolicies in the event of non-payment. Insurance receivables are made up of debtorsarising out of direct and reinsurance operations.
Derivative products
The Group may use derivatives from time to time,with prior approval from the Investment Committee. The four main derivative classesare credit derivatives, foreign exchange forwards and options, interest rate derivativesand equity index options. Derivatives are only used for the purposes of efficientportfolio management, reduction in investment risk and to mitigate the credit riskof certain reinsurance counterparties.
Credit risk with respect to derivatives, wheredeemed necessary, is controlled with the implementation of collateral agreementswith derivative counterparties that put a finite limit on the credit risk of eachtransaction.
The following credit risk table in respect ofmonetary assets and derivatives provides information regarding the credit risk exposureof the Group by classifying the assets according to credit ratings of the counterparties. Ratings in respect of financial investments and cash and cash equivalents are fromthe Moody's rating scale and ratings in respect of reinsurance assets are from theStandard and Poor rating scale. These amounts represent the maximum credit risk exposure.
31 December 2009
|
|
|
Government £m |
AAA £m |
AA £m |
A £m |
P-1 £m |
BBB and below £m |
Collateralised £m |
Equities £m |
Not rated £m |
Total
£m |
|
Reinsurance assets |
(a) |
- |
7.7 |
178.7 |
176.3 |
|
4.0 |
75.4 |
- |
18.3 |
460.4 |
|
Financial investments |
(b) |
1,045.5 |
274.4 |
261.2 |
296.3 |
346.9 |
58.1 |
- |
102.0 |
96.7 |
2,481.1 |
|
Derivative contracts |
|
- |
- |
- |
- |
- |
- |
- |
- |
0.6 |
0.6 |
|
Insurance receivables |
(c) |
- |
- |
- |
- |
- |
- |
- |
- |
493.4 |
493.4 |
|
Cash and cash equivalents |
(d) |
- |
613.3 |
63.1 |
138.7 |
33.6 |
145.5 |
- |
- |
- |
994.2 |
|
|
|
1,045.5 |
895.4 |
503.0 |
611.3 |
380.5 |
207.6 |
75.4 |
102.0 |
609.0 |
4,429.7 |
31 December 2008
|
|
|
Government £m |
AAA £m |
AA £m |
A £m |
P-1 £m |
BBB and below £m |
Collateralised £m |
Equities £m |
Not rated £m |
Total
£m |
|
Reinsurance assets |
(a) |
- |
8.8 |
229.1 |
149.8 |
- |
3.9 |
77.8 |
- |
9.8 |
479.2 |
|
Financial investments |
(b) |
753.9 |
168.4 |
369.5 |
311.9 |
557.0 |
1.8 |
- |
117.4 |
113.1 |
2,393.0 |
|
Derivative contracts |
|
- |
- |
- |
- |
- |
- |
- |
- |
1.4 |
1.4 |
|
Insurance receivables |
(c) |
- |
- |
- |
- |
- |
- |
- |
- |
458.7 |
458.7 |
|
Cash and cash equivalents |
(d) |
- |
435.7 |
156.7 |
108.4 |
139.9 |
- |
- |
- |
- |
840.7 |
|
|
|
753.9 |
612.9 |
755.3 |
570.1 |
696.9 |
5.7 |
77.8 |
117.4 |
583.0 |
4,173.0 |
a Amounts recoverable from reinsurers on claimsreported and loss adjustment expenses and claims incurred
b Financial investments categorised as government,are bonds issued by the governments of Eurozone countries, the UK, Canada and theUS.
c Insurance receivables arising out of directand reinsurance operations.
d Insurance receivables are generally due fromcustomers and intermediaries who are unlikely to seek ratings as part of their normalcourse of business.
Impairment
The Group considers reinsurer ratings, notifieddisputes and collection experience in determining which assets should be impaired.
The following table shows the movements in impairmentprovisions during the year.
|
|
Impairment provision against reinsurance assets |
Impairment provision against insurance receivables |
||
|
|
31 December 2009 £m |
31 December 2008 £m |
31 December 2009 £m |
31 December 2008 £m |
|
1 January |
15.5 |
11.2 |
5.1 |
5.1 |
|
(Release)/strengthening for the year |
(2.2) |
2.1 |
1.2 |
- |
|
Net foreign exchange differences |
(0.9) |
2.2 |
- |
- |
|
31 December |
12.4 |
15.5 |
6.3 |
5.1 |
The following table shows a breakdown of the impairmentprovision against reinsurance assets.
|
|
|
31 December 2009 £m |
31 December 2008 £m |
|
AAA |
|
0.2 |
0.3 |
|
AA |
|
5.8 |
8.8 |
|
A |
|
5.7 |
5.8 |
|
BBB and below |
|
0.1 |
0.2 |
|
Not rated |
|
0.6 |
0.4 |
|
Total |
|
12.4 |
15.5 |
The following table shows the amount of insurancereceivables that were past due but not impaired at the end of the year.
|
|
|
31 December 2009 £m |
31 December 2008 £m |
|
0-3 months past due |
|
20.3 |
25.7 |
|
4-6 months past due |
|
2.7 |
2.2 |
|
7-9 months post due |
|
0.5 |
1.6 |
|
10-12 months past due |
|
0.3 |
0.6 |
|
More than 12 months past due |
|
1.9 |
- |
|
Total |
|
25.7 |
30.1 |
(ii) Liquidity Risk
This is the risk that the Group will encounterdifficulty in meeting obligations associated with financial liabilities that aresettled by cash or another financial asset.
The most significant liquidity risk confrontingthe Group is the daily calls on its available cash resources in respect of claimsarising from insurance contracts. This liquidity risk is increased by the requirementto collateralise funds in respect of US and Canadian regulated business.
The Group manages this risk by maintaining sufficientliquid assets or assets that can be translated into liquid assets at short noticeto meet the expected cash flow requirements. The Group's Investment Guidelines alsoset out various short term cash balances to be held by external fund managers.
The Group has determined the minimum proportionof funds required to ensure that the Group has sufficient liquid assets to withstandclaim scenarios at the extreme end of business plan projections by reference to modelledRealistic Disaster Scenario events.
The table below analyses the fair value of monetaryassets and the undiscounted value of monetary liabilities of the Group into theirrelevant maturing groups based on the remaining period at the end of the year totheir contractual maturities or expected repayment dates
31 December 2009
|
|
|
|
Fair values |
|||||
|
Assets |
|
Statement of Financial Position |
Up to a year |
1-3 years |
3-5 years |
Over 5 years |
Equities |
Total |
|
|
|
£m |
£m |
£m |
£m |
£m |
£m |
£m |
|
Reinsurance assets |
|
460.4 |
164.0 |
122.2 |
74.0 |
100.2 |
- |
460.4 |
|
Financial investments |
|
2,481.1 |
767.4 |
1,194.2 |
242.3 |
175.2 |
102.0 |
2,481.1 |
|
Derivative contracts |
|
0.6 |
- |
- |
- |
- |
- |
- |
|
Insurance receivables |
|
493.4 |
493.4 |
- |
- |
- |
- |
493.4 |
|
Cash and cash equivalents |
|
994.2 |
994.2 |
- |
- |
- |
- |
994.2 |
|
|
|
4,429.7 |
2,419.0 |
1,316.4 |
316.3 |
275.4 |
102.0 |
4,429.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undiscounted values |
|||||
|
Liabilities |
|
Statement of Financial Position |
Up to a year |
1-3 years |
3-5 years |
Over 5 years |
|
Total |
|
|
|
£m |
£m |
£m |
£m |
£m |
|
£m |
|
Insurance contract liabilities |
|
2,752.1 |
980.1 |
730.2 |
442.5 |
599.3 |
|
2,752.1 |
|
Derivative contracts |
|
0.9 |
2.4 |
- |
- |
- |
|
2.4 |
|
Borrowings |
|
237.6 |
13.1 |
132.4 |
17.9 |
188.7 |
|
352.1 |
|
Insurance and other payables |
|
200.7 |
200.7 |
- |
- |
- |
|
200.7 |
|
|
|
3,191.3 |
1,196.3 |
862.6 |
460.4 |
788.0 |
|
3,307.3 |
31 December 2008
|
|
|
|
Fair values |
|||||
|
Assets |
|
Statement of Financial Position |
Up to a year |
1-3 years |
3-5 years |
Over 5 years |
Equities |
Total |
|
|
|
£m |
£m |
£m |
£m |
£m |
£m |
£m |
|
Reinsurance assets |
|
479.2 |
135.6 |
130.9 |
85.0 |
127.7 |
- |
479.2 |
|
Financial investments |
|
2,393.0 |
783.3 |
1,089.5 |
390.2 |
12.6 |
117.4 |
2,393.0 |
|
Derivative contracts |
|
1.4 |
0.3 |
- |
- |
- |
- |
0.3 |
|
Insurance receivables |
|
458.7 |
458.7 |
- |
- |
- |
- |
458.7 |
|
Cash and cash equivalents |
|
840.7 |
840.7 |
- |
- |
- |
- |
840.7 |
|
|
|
4,173.0 |
2,218.6 |
1,220.4 |
475.2 |
140.3 |
117.4 |
4,171.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undiscounted values |
|||||
|
Liabilities |
|
Statement of Financial Position |
Up to a year |
1-3 years |
3-5 years |
Over 5 years |
|
Total |
|
|
|
£m |
£m |
£m |
£m |
£m |
|
£m |
|
Insurance contract liabilities |
|
2,657.7 |
752.1 |
725.9 |
471.3 |
708.4 |
|
2,657.7 |
|
Derivative contracts |
|
5.4 |
6.9 |
2.5 |
- |
- |
|
9.4 |
|
Borrowings |
|
143.1 |
19.9 |
17.9 |
17.9 |
197.6 |
|
253.3 |
|
Insurance and other payables |
|
202.1 |
202.1 |
- |
- |
- |
|
202.1 |
|
|
|
3,008.3 |
981.0 |
746.3 |
489.2 |
906.0 |
|
3,122.5 |
The nature of insurance is that the requirementsof funding cannot be predicted with absolute certainty and therefore the theory ofprobability is applied to insurance contracts to ascertain the likely provision andthe time period when such liabilities will require settlement. The amounts and maturitiesin respect of insurance liabilities are thus based on management's best estimatebased on statistical techniques and past experience.
Collateral
Part of the Group's underwriting is carriedout through its syndicate, Syndicate 2987 at Lloyd's. This syndicate writes regulatedbusiness in a number of countries, including USA and Canada. As a result the syndicateis required to collateralise a number of Lloyd's trust funds in respect of outstandingclaims relating to this business. Collateral is provided in the form of cash andapproved investments in accordance with the terms of the trust deed. The total amountof collateral provided at 31 December 2009 was £615.8m (2008: £490.4m).
In addition, Brit Insurance Limited maintainsletters of credit (LOC) facilities in respect of its US regulated business. The companyis obliged to collateralise any LOCs issued under these facilities. The total amountof collateral provided at 31 December 2009 was US$ 94.8m (2008: US$ 85.0m).
(iii) Market Risk
Market risk is the risk that the fair valueor future cash flows of a financial instrument will fluctuate because of changesin market prices. Market risk comprises three types of risk: currency risk, interestrate risk and price risk.
Market risk can be caused by factors specificto the individual instrument or its issuer or factors affecting all instruments tradedin the market.
a Currency Risk
The Group writes a significant proportion ofits insurance business in currencies other than Sterling.
Currency risk is mitigated by the Group mainlymaintaining financial assets denominated in the same currencies as its liabilitieswhich is demonstrated in the table below. This is monitored by reviewing the Group'scurrency statement of financial position on a quarterly basis.
31 December 2009
|
|
Sterling equivalent |
|
|||
|
Assets
|
US dollars £m |
Canadian dollars £m |
Euros £m |
Sterling and others £m |
Total £m |
|
|
|
|
|
|
|
|
Reinsurance assets |
248.4 |
7.6 |
31.1 |
173.3 |
460.4 |
|
Financial investments |
827.4 |
93.4 |
242.4 |
1,317.9 |
2,481.1 |
|
Derivative contracts |
(0.6) |
- |
- |
1.2 |
0.6 |
|
Insurance receivables |
226.0 |
25.8 |
32.6 |
209.0 |
493.4 |
|
Cash and cash equivalents |
399.2 |
27.0 |
105.8 |
462.2 |
994.2 |
|
Total monetary assets |
1,700.4 |
153.8 |
411.9 |
2,163.6 |
4,429.7 |
|
Non-monetary assets |
88.4 |
14.6 |
22.1 |
246.5 |
371.6 |
|
Total assets |
1,788.8 |
168.4 |
434.0 |
2,410.1 |
4,801.3 |
|
|
|
|
|
|
|
|
Liabilities
|
US dollars £m |
Canadian dollars £m |
Euros £m |
Sterling and others £m |
Total £m |
|
|
|
|
|
|
|
|
Insurance contract liabilities |
1,246.5 |
95.8 |
359.0 |
1,050.8 |
2,752.1 |
|
Derivative contracts |
- |
- |
- |
0.9 |
0.9 |
|
Borrowings |
- |
- |
- |
237.6 |
237.6 |
|
Insurance and other payables |
65.5 |
2.1 |
12.3 |
120.8 |
200.7 |
|
Total monetary liabilities |
1,312.0 |
97.9 |
371.3 |
1,410.1 |
3,191.3 |
|
Non-monetary liabilities |
275.2 |
17.4 |
57.6 |
365.2 |
715.4 |
|
Total liabilities |
1,587.2 |
115.3 |
428.9 |
1,775.3 |
3,906.7 |
|
|
|
|
|
|
|
|
Net assets and liabilities |
201.6 |
53.1 |
5.1 |
634.8 |
894.6 |
31 December 2008
|
|
Sterling equivalent |
|
|||
|
Assets
|
US dollars £m |
Canadian dollars £m |
Euros £m |
Sterling and others £m |
Total £m |
|
|
|
|
|
|
|
|
Reinsurance assets |
300.2 |
6.5 |
26.0 |
146.5 |
479.2 |
|
Financial investments |
836.9 |
93.8 |
222.4 |
1,239.9 |
2,393.0 |
|
Derivative contracts |
(1.7) |
- |
- |
3.1 |
1.4 |
|
Insurance receivables |
262.2 |
16.1 |
44.9 |
135.5 |
458.7 |
|
Cash and cash equivalents |
380.3 |
23.2 |
112.5 |
324.7 |
840.7 |
|
Total monetary assets |
1,777.9 |
139.6 |
405.8 |
1,849.7 |
4,173.0 |
|
Non-monetary assets |
118.3 |
11.9 |
21.0 |
252.1 |
403.3 |
|
Total assets |
1,896.2 |
151.5 |
426.8 |
2,101.8 |
4,576.3 |
|
|
|
|
|
|
|
|
Liabilities
|
US dollars £m |
Canadian dollars £m |
Euros £m |
Sterling and others £m |
Total £m |
|
Insurance contract liabilities |
1,365.2 |
74.6 |
316.4 |
901.5 |
2,657.7 |
|
Derivative contracts |
- |
- |
- |
5.4 |
5.4 |
|
Borrowings |
10.4 |
- |
- |
132.7 |
143.1 |
|
Insurance and other payables |
85.5 |
8.4 |
14.9 |
93.3 |
202.1 |
|
Total monetary liabilities |
1,461.1 |
83.0 |
331.3 |
1,132.9 |
3,008.3 |
|
Non-monetary liabilities |
296.2 |
20.6 |
58.7 |
342.8 |
718.3 |
|
Total liabilities |
1,757.3 |
103.6 |
390.0 |
1,475.7 |
3,726.6 |
|
|
|
|
|
|
|
|
Net assets and liabilities |
138.9 |
47.9 |
36.8 |
626.1 |
849.7 |
The matching of assets and liabilities preventseconomic exposure to currency risk but it does not prevent exposure to exchange gainsor losses recorded in the income statement created as a result of the IFRS accountingtreatment of certain assets and liabilities. IFRS requires that gross and reinsurersunearned premium reserves and deferred acquisition costs are translated at historicaltransaction rate rather than closing rate. This means that these amounts in the statementof financial position are carried at a different exchange rate to the remaining assetsand liabilities with the resulting exchange differences that are created being recognisedin the income statement.
A strengthening of the following currenciesrelative to Sterling by 10% would have resulted in a net gain/(loss) before tax inthe income statement as set out below which is made up of foreign exchange gains/(losses)less (losses)/gains on forward hedges.
|
|
Year ended 31 December 2009 £m |
Year ended 31 December 2008 £m |
|
|
|
|
|
US dollars |
44.8 |
39.5 |
|
Canadian dollars |
8.1 |
6.7 |
|
Euros |
5.2 |
5.1 |
b Interest rate risk and price risk
The Group is exposed to interest rate and pricerisk on its investment portfolio. Interest rate risk is the risk that the value andfuture cash flows of a financial instrument will fluctuate because of changes ininterest rates. Price risk is the risk that the value of investments decreases dueto market factors.
In order to manage interest rate and price riskthe Group uses Value at Risk (VaR) methodology with the objective of minimising therisk taken on the investment portfolio in targeting a desired return. This is performedby examining the asset allocation of the portfolio and modelling the portfolio'sexpected return and associated risk. Different asset combinations are then modelledto examine the effect of the changes on risk, determining which combination of changesis expected to minimise risk.
The model uses assumptions of risks, correlationsand expected returns for each asset class. Interest rate risk, price risk and currencyrisk are all included in the model both independently and in their interaction witheach other. Assumptions for future market returns, volatilities and correlationsare provided by independent investment consultants.
A principal measure of risk produced by themodel is one year VaR. One year VaR measures the minimum amount by which the assetsshould be expected to underperform the expected annual return of the portfolio witha one in twenty probability.
The model used by the Group estimates the VaRand the tracking error. The tracking error measures annual volatility as the standarddeviation of the asset returns relative to the expected return. Whereas VaR expressesa 1 in 20 probability of the portfolio returns being reduced by at least that amountin one year, the tracking error is the expected deviation above or below the expectedreturn.
|
|
31 December 2009 |
31 December 2008 |
|
|
|
|
|
Value at Risk 95% |
2.01% |
3.44% |
|
Tracking Error |
1.33% |
2.17% |
As an illustration of the above information,if the expected return as at 31 December 2009 for the following year was 5.0%, thenthere would be a 1 in 20 probability that if the asset portfolio remained unaltered,the actual return for the following year would underperform the 5.0% expected returnby at least 2.01% i.e. a 2.99% return or less.
The model is designed to illustrate the futurerange of returns stemming from different asset classes and their inter-relationship.The assumptions have incorporated a degree of subjective judgement to complementthe information provided by historical returns and current conditions.
(iv) Capital risk management
The total amount of capital of the Group is£946.2m (2008: £900.3m) consisting of net tangible assets amounting to £813.4m (2008:£767.6m) and long-term subordinated debt amounting to £132.8m (2008: £132.7m).
The Capital Committee is responsible for reviewingthe capital position on an ongoing basis to ensure compliance with the capital policy.
The capital policy requires that the Group alwaysholds long term capital in excess of the Management Capital requirement (derivedfrom a risk-based internal stochastic model) and that the appropriate level of capitalis held at individual insurance entity level with reference to the various regulatoryor rating agency requirements.
The capital policy also requires that the appropriatemix of debt and equity is used to fund the Group and that adequate liquidity is availableat all times.
The most significant entities within the Groupsubject to externally imposed capital requirements are Brit Insurance Limited, BritInsurance (Gibraltar) PCC Ltd and the Lloyd's corporate member, Brit UW Limited,which provides the entire capacity of Syndicate 2987.
Brit Insurance Limited is regulated by the FinancialServices Authority (FSA) which has provided the company with capital guidance basedon the Enhanced Capital Requirements return (ECR). The ECR, which takes into accountthe premiums written and outstanding reserves on a class of business basis, seeksto ensure that the company has at least the minimum amount and type of capital tomeet future expected claims obligations. Brit Insurance Limited holds capital inexcess of the FSA requirement in order to maintain a strong 'A' credit rating.
The Lloyd's corporate member is required tohold capital at Lloyd's which is held in trust and known as Funds at Lloyd's (FAL).These funds are intended primarily to cover circumstances where syndicate assetsprove insufficient to meet participating members' underwriting liabilities. FALis determined by a risk based capital assessment based upon the syndicate's specificcircumstances and results in an individual capital assessment (ICA).
Brit Insurance (Gibraltar) PCC Ltd is regulatedby the Financial Services Commission of Gibraltar which sets a capital requirementbased on the Solvency I Minimum Capital Requirement (MCR). The MCR is a factor basedcalulation based on premiums written and earned during the year.
All externally imposed capital requirementshave been complied with during the year.
Insurance risk
(i) Introduction
The risk under any one insurance contract isthe possibility that an insured event occurs and a claim results. By the very natureof an insurance contract, risk is based on fortuity and is therefore unpredictable.
The principal risks that the Group faces underits insurance contracts are that the business will be under-priced, under-reservedor subject to catastrophe claims.
Experience shows that the larger the portfolioof similar insurance contracts, the smaller the relative variability about the expectedoutcome will be. In addition, a more diversified portfolio is less likely to be affectedacross the board by a change in any subset of the portfolio. The Group has developedits insurance underwriting strategy to diversify the type of insurance risks acceptedto achieve a sufficiently large population of risks to reduce the variability ofthe expected outcome.
The Group has developed underwriting guidelines,limits of authority and business plans which are binding upon all staff authorisedto underwrite. These are detailed and specific to underwriters and classes of businessas well as establishing more general principles and conditions. A proportion of theGroup's insurance risks are written by third parties under delegated underwritingauthorities. The third parties are closely vetted in advance and are subject to tightreporting requirements. In addition the performance of these contracts is closelymonitored by underwriters and regular audits are carried out.
Compliance is checked through both a peer reviewprocess and, periodically, by the Group's internal audit department which is entirelyindependent of the underwriting units.
In order to limit risk, the number of reinstatementsper policy is limited, deductibles are imposed, policy exclusions are applied andwhenever allowed by statute, maximum indemnity limits are put in place per insuredevent.
The Group carries out an annual business planningprocess for each of its underwriting units. The resulting plans set out premium,territorial and aggregate limits for all classes of business. Performance againstthe plans is monitored on a regular basis through a system of underwriting committeesas well as regularly by the Executive Management Committee and the Boards for theregulated entities.
(ii) Concentrations of risk
The concentration of insurance risk before andafter reinsurance by the location of the underlying risk is summarised below:
Year ended 31 December 2009
|
|
Gross written premium |
Premium ceded to reinsurers |
Net written premium |
|
|
£m |
£m |
£m |
|
UK |
491.0 |
(77.5) |
413.5 |
|
Europe |
128.7 |
(15.4) |
113.3 |
|
US |
416.2 |
(64.2) |
352.0 |
|
Other (including worldwide) |
660.5 |
(67.9) |
592.6 |
|
|
1,696.4 |
(225.0) |
1,471.4 |
Year ended 31 December 2008
|
|
Gross written premium |
Premium ceded to reinsurers |
Net written premium |
|
|
£m |
£m |
£m |
|
UK |
403.5 |
(83.3) |
320.2 |
|
Europe |
100.9 |
(16.8) |
84.1 |
|
US |
348.5 |
(65.0) |
283.5 |
|
Other (including worldwide) |
541.7 |
(66.2) |
475.5 |
|
|
1,394.6 |
(231.3) |
1,163.3 |
The Group is organised into three Strategic BusinessUnits, details of which are set out in Note 5.
(iii) Reinsurance
The Group purchases reinsurance to limit itsexposure to individual risks and aggregation of risks arising from individual largeclaims and catastrophe events. The types of reinsurance purchased were as follows:
· facultativereinsurance purchased to reduce risk relating to an individual specific inwards contract.
· risk excessof loss reinsurance purchased to protect a range of individual inwards contractswhich could give rise to individual large claims.
· general excessof loss reinsurance purchased to provide protection from the aggregation of claims,possibly arising from catastrophe events.
· pro rata reinsurancepurchased to provide protection against claims arising either from individual largeclaims or aggregations.
All of the Group's reinsurance purchasing isapproved by the Portfolio Management Committee, a sub-committee of the ExecutiveManagement Committee. Decisions are supported by historical underwriting experienceand actuarial analysis.
(iv) Aggregate exposure management
The Group's Realistic Disaster Scenario Committeemonitors and controls the accumulation of risk for over thirty key Realistic DisasterScenario (RDS) events. These RDSs reflect the diversity of the Group's exposures. There are specific scenarios for elemental, man-made and economic disasters, andfor different business classes such as marine, aerospace, casualty and property. The RDSs are regularly reviewed in light of Group exposures and environmental factors.
The Group's RDS Committee reviews each scenarioquarterly, with more frequent reviews of the peak zone natural peril catastropheRDSs which present the greatest exposure to the Group.
Aggregate claims tolerance
The Group's tolerance for catastrophe riskis a function of expected profitability and available capital. This tolerance isexpressed as the maximum net claims acceptable under a number of scenarios.
Exposure and compliance with the severity bandmatrix is formally reviewed on a quarterly basis, with informal reviews being conductedmore frequently. The Board may decide to increase or decrease the maximum tolerancesbased on market conditions and other factors.
The tolerance for catastrophe risk is set usingindustry claims bandings. For example for US Windstorm, tolerance is set for sevenseparate industry claims bands 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 periland territory. For instance, a US$20bn US windstorm is expected to occur much morefrequently than a US$20bn Japanese earthquake. Therefore, in terms of risk appetiteand claims tolerance, it is not appropriate to treat these events equally.
The severity bands show the industry claims foreach peril which are probabilistically equivalent. An example band is shown below.
|
US windstorm |
US$70bn-US$100bn |
|
California earthquake |
US$30bn-US$40bn |
|
European windstorm |
US$10bn-US$15bn |
|
Japanese earthquake |
US$20bn-US$30bn |
|
Japanese typhoon |
US$10bn-US$15bn |
The portfolio contains a mix of business andtherefore given an industry event there will be a large range of possible aggregateclaims to the Group. To capture this claim distribution whilst being able to measurecompliance, the measure used is a weighted 75th percentile of the claimdistribution within a particular band. Ultimately, the size of a probable maximumloss (PML) arising from an event or series of events will always remain judgementalfor Brit Insurance and others in the industry.
The Group uses its own and commercially availableproprietary risk management software. However, there is always a risk that the assumptionsand techniques used in these models are unreliable or that claims arising from anunmodelled event are greater than those arising from a modelled event.
As a further guide to the level of catastropheexposure written by the Group, the table below shows hypothetical claims as at 1January 2010 for various RDSs.
|
Event |
Modelled industry claims US$m
|
Brit Insurance gross claims £m
|
Brit Insurance net claims £m
|
Comments |
|
Florida hurricane - Tampa Bay |
125,000 |
259 |
117 |
Category 4 storm on the SS Scale, landfallingin Tampa. Brit Insurance claims estimates include demand surge, flood associatedwith the hurricane, and non-property exposures. |
|
Florida hurricane - Miami |
125,000 |
248 |
87 |
Category 5 storm on the SS Scale, landfallingin Miami. Brit Insurance claims estimates include demand surge, flood associatedwith the hurricane, and non-property exposures. |
|
US north east coast hurricane - New York State |
78,000 |
225 |
116 |
Category 4 storm on the SS Scale, landfallingin Suffolk County, New York State. Brit Insurance claims estimates include demandsurge, flood associated with the hurricane, and non-property exposures. |
|
California earthquake - Los Angeles |
78,000 |
269 |
84 |
Magnitude 7.2 earthquake on the MMI scale, onthe Elsinore fault in Los Angeles. Brit Insurance claims estimates include demandsurge, fire following the earthquake, and non-property exposures. |
|
California earthquake -San Francisco |
78,000 |
279 |
89 |
Magnitude 7.4 earthquake on the MMI scale, onthe San Andreas Fault in San Francisco. Brit Insurance claims estimates includedemand surge, fire following the earthquake, and non-property exposures. |
|
Europe windstorm - Western Europe |
31,000 |
232 |
108 |
A winter storm with peak gusts in excess of 112mphresulting in a broad swath of damage across southern England, France, Belgium, Netherlands,Luxembourg, Germany and Denmark. Brit Insurance claims estimates include demandsurge and UK coastal flood. |
|
Japan earthquake - Tokyo |
51,000 |
153 |
75 |
Based on a repeat of the Great Kanto event in1923, a magnitude 7.9 earthquake in the Tokyo Metropolitan Area. |
Source: RMS/Lloyd's/Brit Insurance
v) Sensitivity
The Group profit on ordinary activities beforetax is sensitive to an independent 1% change in the net claims ratio (excluding theeffect of foreign exchange on non-monetary items) for each class of business as follows:
|
Strategic business unit
|
Class |
Year ended 31 December 2009 £m |
Year ended 31 December 2008 £m |
|
|
|
|
|
|
Global Markets |
Accident & Health |
1.1 |
1.5 |
|
|
Aerospace |
0.2 |
0.2 |
|
|
Speciality lines |
1.6 |
1.4 |
|
|
Professional lines |
1.3 |
1.0 |
|
|
Marine |
2.3 |
1.5 |
|
|
Property |
1.7 |
1.1 |
|
|
|
8.2 |
6.7 |
|
|
|
|
|
|
|
|
|
|
|
Reinsurance |
Property Treaty North America |
0.9 |
0.6 |
|
|
Property Treaty International |
0.5 |
0.4 |
|
|
Casualty Treaty |
1.3 |
0.8 |
|
|
Marine XL |
0.2 |
0.1 |
|
|
Aviation XL |
0.1 |
0.2 |
|
|
|
3.0 |
2.1 |
|
|
|
|
|
|
|
|
|
|
|
UK |
Employers'/Public Liability |
1.0 |
0.9 |
|
|
Professional Indemnity/D&O |
0.3 |
0.2 |
|
|
Motor |
0.7 |
0.6 |
|
|
Property and Commercial Combined (Packages) |
1.6 |
0.9 |
|
|
|
3.6 |
2.6 |
|
|
|
|
|
|
Other underwriting |
|
0.2 |
0.1 |
|
|
|
|
|
|
Total |
|
15.0 |
11.5 |
|
|
|
|
|
|
|
|
|
|
Subject to taxation, the impact on equity wouldbe the same as that on profit following a change in the net claims ratio.
5 Segmental Information
The Group has adopted International FinancialReporting Standard 8 'Operating Segments' (IFRS 8) in the current period. IFRS8 requires that segments represent the level at which financial information is reportedto the Board, being the chief operating decision maker as defined in IFRS 8. Followingthe adoption of IFRS 8, quota share reinsurance ceded by the insurance entities (BritInsurance Limited and Syndicate 2987) to the Brit Insurance (Gibraltar) PCC Limited(formerly Rockhampton PCC Limited ) cell is no longer reflected in the Brit GlobalMarkets, Brit Reinsurance and Brit UK strategic business unit (SBU) reportable segments.Consequently, the Brit Insurance (Gibraltar) PCC Limited cell segment consists solelyof Excess of Loss reinsurance ceded from the SBUs and based on quantitative thresholdsthis segment has been included within 'Other underwriting'. In addition, on theadoption of IFRS 8, foreign exchange differences on non-monetary items are no longerreflected in the SBU reportable segments but are instead separately disclosed. Thisprovides a fairer representation of the claims ratios and financial performance ofthe SBUs which would otherwise be distorted by the mismatch arising from IFRSs wherebyunearned premium, reinsurers share of unearned premium and deferred acquisition costsare treated as non-monetary items and claims reserves are treated as monetary items.Non-monetary items are carried at historic exchange rates, while monetary items aretranslated at closing rates.
The reportable segments have been identified asfollows:
Brit Global Markets SBU which underwrites Brit'sinternational and US business other than reinsurance. In the main, Global Marketsdeals with wholesale buyers of insurance, not individuals. Risks are large and usuallysyndicated by several underwriters - the subscription market.
Brit Reinsurance SBU which underwrites reinsurancebusiness which is essentially the insurance of insurance and reinsurance companiesand includes 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.
Brit UK SBU which is developing business opportunitieswithin the UK general commercial insurance markets through both wholesale and retailbrokers and has opened offices in key locations across the UK. '
'Other underwriting' which is made up of Excessof Loss reinsurance ceded from the SBUs to the Brit Insurance (Gibraltar) PCC Limitedcell, Syndicate 389 (Life - final year of account 2003) and historic participationson external managed syndicates in run off (final year of account 2000).
'Other corporate' which is made up of residualincome and expenditure not allocated to other segments.
The Group investment return is managed centrallyand an allocation is made to each of the SBUs based on the average risk free interestrate for the period being applied to the insurance funds of each Unit.
The annualised average risk free rate appliedto insurance funds was 1.66% for the year ended 31 December 2009 (31 December 2008:3.9%).
Information regarding the Group's reportablesegments is presented below. Comparative information has been restated to reflectthe adoption of IFRS 8.
12 months ended 31 December 2009
|
|
Brit Global Markets £m |
Brit Reinsurance £m |
Brit UK £m |
Other underwriting £m |
Intra Group £m |
Total underwriting excluding the effect of foreign exchange on non-monetary items £m |
Effect of foreign exchange on non-monetary items £m |
Total underwriting after the effect of foreign exchange on non-monetary items £m |
Other corporate £m |
Total £m |
|
Gross premiums written |
875.3 |
364.2 |
455.4 |
16.5 |
(15.0) |
1,696.4 |
- |
1,696.4 |
- |
1,696.4 |
|
Less premiums ceded to reinsurers |
(116.8) |
(57.4) |
(64.9) |
(0.9) |
15.0 |
(225.0) |
- |
(225.0) |
- |
(225.0) |
|
Premiums written, net of reinsurance |
758.5 |
306.8 |
390.5 |
15.6 |
- |
1,471.4 |
- |
1,471.4 |
- |
1,471.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross earned premiums |
944.4 |
354.5 |
430.1 |
16.4 |
(15.0) |
1,730.4 |
(34.3) |
1,696.1 |
- |
1,696.1 |
|
Reinsurers' share |
(124.5) |
(56.9) |
(67.7) |
(0.8) |
15.0 |
(234.9) |
2.7 |
(232.2) |
- |
(232.2) |
|
Earned premiums, net of reinsurance |
819.9 |
297.6 |
362.4 |
15.6 |
- |
1,495.5 |
(31.6) |
1,463.9 |
- |
1,463.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment return |
20.2 |
8.5 |
13.3 |
0.1 |
- |
42.1 |
- |
42.1 |
95.3 |
137.4 |
|
Return on derivative contracts |
(2.3) |
(2.2) |
(0.3) |
- |
- |
(4.8) |
- |
(4.8) |
0.7 |
(4.1) |
|
Disposal and partial disposal of associated undertaking |
- |
- |
- |
- |
- |
- |
- |
- |
4.2 |
4.2 |
|
Other income |
- |
- |
- |
- |
- |
- |
- |
- |
1.4 |
1.4 |
|
Total revenue |
837.8 |
303.9 |
375.4 |
15.7 |
- |
1,532.8 |
(31.6) |
1,501.2 |
101.6 |
1,602.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross claims incurred |
(582.7) |
(180.5) |
(290.8) |
(13.0) |
12.7 |
(1,054.3) |
- |
(1,054.3) |
- |
(1,054.3) |
|
Reinsurers' share |
68.5 |
17.1 |
49.2 |
1.5 |
(12.7) |
123.6 |
- |
123.6 |
- |
123.6 |
|
Claims incurred, net of reinsurance |
(514.2) |
(163.4) |
(241.6) |
(11.5) |
- |
(930.7) |
- |
(930.7) |
- |
(930.7) |
|
Acquisition costs - commission |
(220.2) |
(51.6) |
(73.9) |
0.6 |
- |
(345.1) |
6.8 |
(338.3) |
- |
(338.3) |
|
Acquisition costs - other |
(29.6) |
(9.3) |
(18.1) |
(1.6) |
- |
(58.6) |
- |
(58.6) |
- |
(58.6) |
|
Other insurance related expenses |
(31.0) |
(13.5) |
(27.6) |
- |
- |
(72.1) |
- |
(72.1) |
- |
(72.1) |
|
Other expenses |
- |
- |
|
- |
- |
- |
- |
- |
(39.5) |
(39.5) |
|
Net foreign exchange gains |
- |
- |
- |
- |
- |
- |
(30.1) |
(30.1) |
(3.3) |
(33.4) |
|
Total expenses excluding finance costs |
(795.0) |
(237.8) |
(361.2) |
(12.5) |
- |
(1,406.5) |
(23.3) |
(1,429.8) |
(42.8) |
(1,472.6) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit/(loss) |
42.8 |
66.1 |
14.2 |
3.2 |
- |
126.3 |
(54.9) |
71.4 |
58.8 |
130.2 |
|
Finance costs |
|
|
|
|
|
|
|
|
|
(11.5) |
|
Share of loss of associated undertakings |
|
|
|
|
|
|
|
|
|
(2.3) |
|
Profit on ordinary activities before tax |
|
|
|
|
|
|
|
|
|
116.4 |
|
Tax expense |
|
|
|
|
|
|
|
|
|
(28.9) |
|
Profit attributable to owners of the parent |
|
|
|
|
|
|
|
|
|
87.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims ratio |
62.7% |
54.9% |
66.7% |
73.7% |
|
62.2% |
|
63.6% |
|
|
|
Expense ratio |
34.2% |
25.0% |
33.0% |
6.4% |
|
31.8% |
|
32.0% |
|
|
|
Combined ratio |
96.9% |
79.9% |
99.7% |
80.1% |
|
94.0% |
|
95.6% |
|
|
12 months ended 31 December 2008
|
|
Brit Global Markets £m |
Brit Reinsurance £m |
Brit UK £m |
Other underwriting £m |
Intra Group £m |
Total underwriting excluding the effect of foreign exchange on non-monetary items £m |
Effect of foreign exchange on non-monetary items £m |
Total underwriting after the effect of foreign exchange on non-monetary items £m |
Other corporate £m |
Total £m |
|
Gross premiums written |
781.3 |
260.7 |
350.6 |
14.9 |
(12.9) |
1,394.6 |
- |
1,394.6 |
- |
1,394.6 |
|
Less premiums ceded to reinsurers |
(123.1) |
(52.6) |
(68.0) |
(0.5) |
12.9 |
(231.3) |
- |
(231.3) |
- |
(231.3) |
|
Premiums written, net of reinsurance |
658.2 |
208.1 |
282.6 |
14.4 |
- |
1,163.3 |
- |
1,163.3 |
- |
1,163.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross earned premiums |
789.7 |
259.2 |
313.6 |
10.4 |
(8.3) |
1,364.6 |
(47.2) |
1,317.4 |
- |
1,317.4 |
|
Reinsurers' share |
(123.8) |
(49.3) |
(53.7) |
(0.5) |
8.3 |
(219.0) |
3.4 |
(215.6) |
- |
(215.6) |
|
Earned premiums, net of reinsurance |
665.9 |
209.9 |
259.9 |
9.9 |
- |
1,145.6 |
(43.8) |
1,101.8 |
- |
1,101.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment return |
36.9 |
16.9 |
34.2 |
1.7 |
- |
89.7 |
- |
89.7 |
(82.3) |
7.4 |
|
Return on derivative contracts |
(3.5) |
(3.5) |
(0.4) |
- |
- |
(7.4) |
- |
(7.4) |
(11.7) |
(19.1) |
|
Disposal and partial disposal of associated undertaking |
- |
- |
- |
- |
- |
- |
- |
- |
4.5 |
4.5 |
|
Net foreign exchange gains |
- |
- |
- |
- |
- |
- |
84.1 |
84.1 |
39.9 |
124.0 |
|
Other income |
- |
- |
- |
1.0 |
- |
1.0 |
- |
1.0 |
0.1 |
1.1 |
|
Total revenue |
699.3 |
223.3 |
293.7 |
12.6 |
- |
1,228.9 |
40.3 |
1,269.2 |
(49.5) |
1,219.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross claims incurred |
(529.1) |
(144.2) |
(211.7) |
(10.6) |
9.5 |
(886.1) |
- |
(886.1) |
- |
(886.1) |
|
Reinsurers' share |
121.9 |
7.1 |
39.1 |
(0.1) |
(9.5) |
158.5 |
- |
158.5 |
- |
158.5 |
|
Claims incurred, net of reinsurance |
(407.2) |
(137.1) |
(172.6) |
(10.7) |
- |
(727.6) |
- |
(727.6) |
- |
(727.6) |
|
Acquisition costs - commission |
(183.5) |
(36.6) |
(44.8) |
(0.3) |
- |
(265.2) |
9.3 |
(255.9) |
- |
(255.9) |
|
Acquisition costs - other |
(24.5) |
(9.2) |
(15.1) |
(1.4) |
- |
(50.2) |
- |
(50.2) |
- |
(50.2) |
|
Other insurance related expenses |
(26.5) |
(9.6) |
(25.5) |
- |
- |
(61.6) |
- |
(61.6) |
- |
(61.6) |
|
Other expenses |
- |
- |
- |
- |
- |
- |
- |
- |
(28.8) |
(28.8) |
|
Total expenses excluding finance costs |
(641.7) |
(192.5) |
(258.0) |
(12.4) |
- |
(1,104.6) |
9.3 |
(1,095.3) |
(28.8) |
(1,124.1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit/(loss) |
57.6 |
30.8 |
35.7 |
0.2 |
- |
124.3 |
49.6 |
173.9 |
(78.3) |
95.6 |
|
Finance costs |
|
|
|
|
|
|
|
|
|
(13.1) |
|
Finance income |
|
|
|
|
|
|
|
|
|
7.2 |
|
Share of loss of associated undertakings |
|
|
|
|
|
|
|
|
|
(0.5) |
|
Profit on ordinary activities before tax |
|
|
|
|
|
|
|
|
|
89.2 |
|
Tax expense |
|
|
|
|
|
|
|
|
|
(22.6) |
|
Profit attributable to owners of the parent |
|
|
|
|
|
|
|
|
|
66.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims ratio |
61.2% |
65.3% |
66.4% |
108.1% |
|
63.5% |
|
66.0% |
|
|
|
Expense ratio |
35.2% |
26.4% |
32.9% |
17.2% |
|
32.9% |
|
33.4% |
|
|
|
Combined ratio |
96.4% |
91.7% |
99.3% |
125.3% |
|
96.4% |
|
99.4% |
|
|
6 Net foreign exchange losses/(gains)
The Group recognised foreign exchange lossesof £33.4m (31 December 2008: gain of £124.0m) in the income statement in the period.
Foreign exchange gains and losses result fromthe translation of the balance sheet to closing exchange rates and the income statementto average exchange rates. However, as an exception to this, International AccountingStandard 21 'The Effects of Changes in Foreign Exchange Rates' requires that netunearned premiums and deferred acquisition costs (UPR/DAC), being non-monetary items,remain at historic exchange rates. This creates a foreign exchange mismatch, thefinancial effects of which are shown in the table below.
|
|
Year ended 31 December 2009 £m |
Year ended 31 December 2008 £m |
|
|
|
|
|
(Losses)/gains on foreign exchange arising from: |
|
|
|
Translation of the balance sheet and income statement |
(3.3) |
39.9 |
|
Maintaining UPR/DAC items in the balance sheetat historic rates |
(54.9) |
49.6 |
|
Maintaining UPR/DAC items in the income statementat historic rates
|
24.8 |
34.5 |
|
Net foreignexchange (losses)/gains |
(33.4) |
124.0 |
Included within foreign exchange (losses)/gainsare exchange losses of £103.6m (2008: gains of £278.8m) arising on the retranslationof monetary items that are classified as fair value through profit or loss.
Principal exchange rates applied are set outin the table below.
|
|
Year ended 31 December 2009 |
Year ended 31 December 2008 |
||
|
|
Average |
Closing |
Average |
Closing |
|
|
|
|
|
|
|
US dollar |
1.57 |
1.61 |
1.85 |
1.44 |
|
Canadian dollar |
1.78 |
1.69 |
1.96 |
1.77 |
|
Euro |
1.12 |
1.13 |
1.26 |
1.03 |
In accordance with International Accounting Standard1 'Presentation of Financial statements', exchange gains and losses are presentedon a net basis.
They are reported within revenue where they resultin a net gain and within expenses where they result in a net loss.
7 Investment return
|
|
Year ended 31 December 2009 |
|||
|
|
Investment income £m |
Net realised gains/(losses) £m |
Net unrealised gains/(losses) £m |
Total investment return £m |
|
|
|
|
|
|
|
Equity securities |
2.4 |
6.7 |
4.7 |
13.8 |
|
Debt securities |
81.2 |
6.6 |
4.7 |
92.5 |
|
Specialised investment funds |
2.6 |
(12.3) |
27.6 |
17.9 |
|
Cash and cash equivalents |
13.2 |
- |
- |
13.2 |
|
|
99.4 |
1.0 |
37.0 |
137.4 |
|
|
Year ended 31 December 2008 |
|||
|
|
Investment income £m |
Net realised gains/(losses) £m |
Net unrealised gains/(losses) £m |
Total investment return £m |
|
|
|
|
|
|
|
Equity securities |
1.6 |
6.3 |
(44.6) |
(36.7) |
|
Debt securities |
100.0 |
(12.3) |
1.7 |
89.4 |
|
Specialised investment funds |
2.4 |
(3.9) |
(68.4) |
(69.9) |
|
Cash and cash equivalents |
24.6 |
- |
- |
24.6 |
|
|
128.6 |
(9.9) |
(111.3) |
7.4 |
8 Tax expense
(i) Tax charged to income statement
|
|
Year ended 31 December 2009 £m |
Year ended 31 December 2008 £m |
|
Current tax: |
|
|
|
For the year |
(44.5) |
(12.0) |
|
Adjustments in respect of prior years |
5.8 |
0.4 |
|
Total current tax |
(38.7) |
(11.6) |
|
|
|
|
|
Deferred tax: |
|
|
|
Origination and reversal of temporary differences |
9.9 |
(13.9) |
|
Adjustments in respect of prior years |
(0.1) |
2.9 |
|
Total deferred tax |
9.8 |
(11.0) |
|
|
|
|
|
Total tax charged to income statement |
(28.9) |
(22.6) |
No tax relating to associated companies has beencharged to the income statement within the Group's share of profit after tax ofassociated undertakings in 2009 or 2008.
(ii) Tax relating to components of othercomprehensive income
|
|
Year ended 31 December 2009 £m |
Year ended 31 December 2008 £m |
|
Deferred tax on actuarial losses on defined benefitpension scheme |
0.7 |
2.9 |
(iii) Tax reconciliation
The tax on the Group's profits before tax differsfrom the theoretical amount that would arise from using the current standard ratefor corporation tax applicable in the UK of 28.0% (2008: 28.5%) as follows:
|
|
Year ended 31 December 2009 £m |
Year ended 31 December 2008 £m |
|
Profit on ordinary activities before tax |
116.4 |
89.2 |
|
|
|
|
|
Tax calculated at standard rate for corporationtax |
(32.6) |
(25.4) |
|
Expenses not deductible for tax purposes |
(2.4) |
(1.6) |
|
Equity dividends not subject to corporation tax |
0.1 |
0.6 |
|
Group entities subject to tax rates differentfrom 28.0% (2008: 28.5%) |
(2.5) |
(0.1) |
|
Profit on sale and unrealised gain on substantialshareholdings |
0.4 |
3.8 |
|
Effect of temporary differences not recognisedin previous year |
3.0 |
(3.8) |
|
Tax effect of share of results of associated undertakings |
(0.6) |
(0.1) |
|
Other adjustments to tax charge in respect ofprior years |
5.7 |
3.4 |
|
Effect of future tax rate changes |
- |
0.6 |
|
|
(28.9) |
(22.6) |
9 Earnings and net assets per share
Subsequent to the balance sheet date, on 25February 2010, the Company undertook a consolidation of its share capital, such thatthe shareholders received one ordinary €4 share for every four ordinary €1 sharesowned as at that date.
Basic and diluted earnings per share, after adjustingfor the share consolidation, are as follows :
|
|
Year ended 31 December 2009 £m |
Year ended 31 December 2008 £m |
|
|
|
|
|
|
|
|
|
Profit on ordinary activities after tax |
87.5 |
66.6 |
|
|
|
|
|
|
Year ended 31 December 2009 Number in millions |
Year ended 31 December 2008 Number in millions |
|
|
||
|
|
||
|
|
|
|
|
|
|
|
|
Basic weighted average number of shares |
77.3 |
77.3 |
|
Employee share options |
- |
- |
|
Diluted weighted average number of shares |
77.3 |
77.3 |
|
|
|
|
|
Basic earnings per share (pence per share) |
113.2 |
86.0 |
|
Diluted earnings per share (pence per share) |
113.2 |
86.0 |
Net assets and net tangible assets per share,after adjusting for the share consolidation, are as follows:
|
|
31 December 2009 £m |
31 December 2008 £m |
|
|
|
|
|
Net assets |
894.6 |
849.7 |
|
Intangible assets |
(81.2) |
(82.1) |
|
Net tangible assets |
813.4 |
767.6 |
|
|
31 December 2009 Number in millions |
31 December 2008 Number in millions |
|
|
|
|
|
Number of shares in issue at end of period |
78.5 |
82.4 |
|
Own shares |
(1.2) |
(5.1) |
|
Number of shares in issue less own shares |
77.3 |
77.3 |
|
|
|
|
|
Net assets per share (pence per share) |
1,156.8 |
1,099.2 |
|
Net tangible net assets per share (pence per share) |
1,052.0 |
992.8 |
The earnings and net assets per share on a basisprior to the share consolidation are as follows:
|
|
Year ended 31 December 2009 |
Year ended 31 December 2008 |
|
|
|
|
|
Basic earnings per share (pence per share) |
28.3 |
21.5 |
|
Diluted earnings per share (pence per share) |
28.3 |
21.5 |
|
|
31 December 2009 |
31 December 2008 |
|
|
|
|
|
Net assets per share (pence per share) |
289.2 |
274.8 |
|
Net tangible net assets per share (pence per share) |
263.0 |
248.2 |
10 Insurance and reinsurance contracts
(i) Balances on insuranceand reinsurance contracts
|
|
31 December 2009 £m |
31 December 2008 £m |
|
Gross |
|
|
|
Insurance contracts |
|
|
|
Claims reported and loss adjustment expenses |
1,511.7 |
1,439.2 |
|
Claims incurred but not reported |
1,240.4 |
1,218.5 |
|
|
2,752.1 |
2,657.7 |
|
Unearned premiums |
687.3 |
687.0 |
|
Total insurance contracts |
3,439.4 |
3,344.7 |
|
|
|
|
|
|
|
|
|
Recoverable from reinsurers |
|
|
|
Reinsurance contracts |
|
|
|
Claims reported and loss adjustment expenses |
284.5 |
274.9 |
|
Claims incurred but not reported |
188.3 |
219.8 |
|
Impairment provision |
(12.4) |
(15.5) |
|
|
460.4 |
479.2 |
|
Unearned premiums |
63.1 |
70.4 |
|
Total reinsurance contracts |
523.5 |
549.6 |
|
|
|
|
|
|
|
|
|
Net |
|
|
|
Claims reported and loss adjustment expenses |
1,227.2 |
1,164.3 |
|
Claims incurred but not reported |
1,052.1 |
998.7 |
|
Impairment provision |
12.4 |
15.5 |
|
|
2,291.7 |
2,178.5 |
|
Unearned premiums |
624.2 |
616.6 |
|
Net insurance and reinsurance contracts |
2,915.9 |
2,795.1 |
Insurance contracts - assumptions and changesin assumptions
Process used to decide on assumptions required
The risks associated with these insurance contractsand in particular with casualty insurance contracts are complex and subject to anumber of variables that complicate quantitative sensitivity analysis.
The Group uses several statistical methods toincorporate the various assumptions made in order to estimate the ultimate costsof claims. The two methods 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 the analysis ofhistorical claims development factors and the selection of estimated developmentfactors based on this historical pattern. The selected development factors are thenapplied to cumulative claims data for each accident year that is not yet fully developedto produce an estimated ultimate claims cost for each accident year.
Chain-ladder techniques are most appropriatefor mature classes of business that have a relatively stable development pattern. Chain-ladder techniques are less suitable in cases in which the insurer does nothave a developed claims history for a particular class of business.
The Bornhuetter-Ferguson method uses a combinationof a benchmark or market-based estimate and an estimate based on claims experience. The former is based on a measure of exposure such as premiums; the latter is basedon the paid or incurred claims to date. The two estimates are combined using a formulathat gives more weight to the experience-based estimate as time passes. This techniqueis used in situations in which developed claims experience are not available forthe projection (recent accident years or new classes of business).
The choice of selected results for each yearof each class of business depends on an assessment of the technique that has beenmost appropriate to observed historical developments. In certain instances, thishas meant that different techniques or combination of techniques have been selectedfor the individual accident year or groups of accident years within the same classof business.
Claims for a number of classes of business,including Financial Risk, Mortgage Indemnity Guarantee, Catastrophe Retrocessionand Casualty Treaty, do not always conform to the statistical distribution expected. For these classes claims reserves are additionally reviewed on a policy by policybasis by underwriters and claims managers and these reviews take account of marketintelligence in addition to notified claims.
In addition to the estimation of claims reservescertain estimates are produced for unearned premiums. For open market business earnedpremium is calculated at policy level. However, premium derived from delegated underwritingauthorities is calculated by applying the 1/144ths method to estimated premiums appliedto the master policy. This assumes that attachments to master policies arise evenlythroughout the period of that master policy.
Reinsurance outwards premiums are earned accordingto the nature of the cover. "Losses occurring during" policies are earned evenlyover the policy period. "Risks attaching" policies are earned on the same basisas the inwards business being protected.
Changes in assumptions
The Group did not change its estimation techniquesfor the insurance contracts disclosed in this note during the year.
Claims development tables
The tables below show the development of claimsover a period of time on a gross and net of reinsurance basis. The claims developmenttables have been presented on an underwriting year basis. In previous years financialstatements, they have been presented on an accident year basis.
The tables show the cumulative incurred claims,including both notified and IBNR claims, for each successive underwriting year atthe end of each year, together with cumulative paid claims as at the end of the currentyear.
The claims have been adjusted to make them comparableon a year by year basis.
They have been grossed up to include 100% ofthe managed syndicate claims rather than the claims that reflects the Brit Insurancepercentage ownership of each syndicates' capacity during the respective underwritingyears.
In addition, claims in currencies other thansterling have been retranslated at 31 December 2009 exchange rates.
Ultimate gross claims
|
Underwriting year |
2001 and prior years £m |
2002 £m |
2003 £m |
2004 £m |
2005 £m |
2006 £m |
2007 £m |
2008 £m |
2009 £m |
Intra Group and other underwriting adjustments £m |
Total £m |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At end of underwriting year |
2,116.9 |
355.4 |
595.2 |
831.6 |
1,320.7 |
817.4 |
1,008.5 |
1,060.5 |
962.0 |
|
|
|
One year later |
2,172.9 |
353.7 |
563.3 |
788.1 |
1,352.5 |
831.9 |
1,077.8 |
1,166.3 |
|
|
|
|
Two years later |
2,198.8 |
341.4 |
507.1 |
748.8 |
1,366.4 |
828.0 |
1,089.5 |
|
|
|
|
|
Three years later |
2,200.5 |
340.2 |
482.0 |
730.9 |
1,340.1 |
796.3 |
|
|
|
|
|
|
Four years later |
2,207.1 |
324.8 |
471.3 |
712.2 |
1,310.9 |
|
|
|
|
|
|
|
Five years later |
2,164.0 |
318.9 |
460.7 |
697.7 |
|
|
|
|
|
|
|
|
Six years later |
2,177.1 |
316.5 |
447.0 |
|
|
|
|
|
|
|
|
|
Seven years later |
2,170.3 |
316.2 |
|
|
|
|
|
|
|
|
|
|
Eight years later |
2,168.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ultimate gross claims at 31 December 2009 |
2,168.2 |
316.2 |
447.0 |
697.7 |
1,310.9 |
796.3 |
1,089.5 |
1,166.3 |
962.0 |
|
8,954.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less accumulated gross paid claims |
(1,987.6) |
(276.1) |
(356.3) |
(571.9) |
(1,071.6) |
(462.1) |
(500.8) |
(365.2) |
(68.6) |
- |
(5,660.2) |
|
Unearned portion of gross ultimate claims |
- |
- |
- |
(0.7) |
(5.5) |
(7.4) |
(8.5) |
(68.4) |
(497.6) |
- |
(588.1) |
|
Claims handling provision |
2.2 |
0.5 |
1.4 |
2.0 |
4.0 |
5.3 |
9.3 |
12.2 |
6.5 |
- |
43.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding gross claims at 31 December 2009 |
182.8 |
40.6 |
92.1 |
127.1 |
237.8 |
332.1 |
589.5 |
744.9 |
402.3 |
- |
2,749.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other corporate adjustments |
- |
- |
- |
- |
- |
- |
- |
- |
- |
2.9 |
2.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total outstanding gross claims at 31 December2009 |
182.8 |
40.6 |
92.1 |
127.1 |
237.8 |
332.1 |
589.5 |
744.9 |
402.3 |
2.9 |
2,752.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ultimate movement in gross claims during 2009calendar year |
(2.1) |
(0.3) |
(13.7) |
(14.5) |
(29.2) |
(31.7) |
11.7 |
105.8 |
- |
- |
26.0 |
|
of which relates to re-estimation of ultimatepremium |
0.3 |
(0.2) |
(0.2) |
(0.4) |
(2.6) |
2.3 |
22.4 |
57.2 |
- |
- |
78.8 |
|
of which relates to re-estimation of gross ultimateclaims |
(2.4) |
(0.1) |
(13.5) |
(14.1) |
(26.6) |
(34.0) |
(10.7) |
48.6 |
- |
- |
(52.8) |
Ultimate net claims
|
Underwriting year |
2001 and prior years £m |
2002 £m |
2003 £m |
2004 £m |
2005 £m |
2006 £m |
2007 £m |
2008 £m |
2009 £m |
Intra Group and other underwriting adjustments £m |
Total £m |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At end of underwriting year |
1,402.6 |
299.6 |
540.3 |
703.4 |
931.8 |
729.8 |
870.7 |
902.1 |
826.2 |
|
|
|
One year later |
1,478.7 |
294.6 |
498.8 |
620.1 |
928.5 |
757.7 |
919.1 |
1,002.4 |
|
|
|
|
Two years later |
1,496.3 |
277.0 |
439.1 |
585.4 |
935.9 |
733.7 |
940.0 |
|
|
|
|
|
Three years later |
1,488.6 |
260.1 |
418.5 |
576.4 |
910.9 |
706.6 |
|
|
|
|
|
|
Four years later |
1,491.6 |
252.5 |
397.3 |
561.7 |
885.1 |
|
|
|
|
|
|
|
Five years later |
1,468.5 |
247.0 |
381.0 |
547.3 |
|
|
|
|
|
|
|
|
Six years later |
1,476.1 |
240.9 |
367.6 |
|
|
|
|
|
|
|
|
|
Seven years later |
1,463.9 |
240.0 |
|
|
|
|
|
|
|
|
|
|
Eight years later |
1,454.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ultimate net claims at 31 December 2009 |
1,454.9 |
240.0 |
367.6 |
547.3 |
885.1 |
706.6 |
940.0 |
1,002.4 |
826.2 |
|
6,970.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less accumulated net paid claims |
(1,346.0) |
(208.9) |
(303.0) |
(447.6) |
(680.2) |
(427.7) |
(457.6) |
(315.3) |
(59.1) |
- |
(4,245.4) |
|
Unearned portion of net ultimate claims |
- |
- |
- |
(0.7) |
(5.5) |
(7.4) |
(8.5) |
(64.4) |
(425.0) |
- |
(511.5) |
|
Claims handling provision |
2.2 |
0.5 |
1.4 |
2.0 |
4.0 |
5.3 |
9.3 |
12.2 |
6.5 |
- |
43.4 |
|
Bad debt provision |
2.1 |
0.5 |
0.8 |
0.5 |
1.6 |
1.8 |
3.0 |
1.3 |
0.7 |
- |
12.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding net claims at 31 December 2009 |
113.2 |
32.1 |
66.8 |
101.5 |
205.0 |
278.6 |
486.2 |
636.2 |
349.3 |
- |
2,268.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other corporate adjustments |
- |
- |
- |
- |
- |
- |
- |
- |
- |
22.7 |
22.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total outstanding net claims at 31 December 2009 |
113.2 |
32.1 |
66.8 |
101.5 |
205.0 |
278.6 |
486.2 |
636.2 |
349.3 |
22.7 |
2,291.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ultimate movement in net claims during 2009 calendaryear |
(9.0) |
(0.9) |
(13.4) |
(14.4) |
(25.8) |
(27.1) |
20.9 |
100.3 |
- |
- |
30.6 |
|
of which relates to re-estimation of ultimatepremium |
2.0 |
(0.3) |
(0.7) |
0.6 |
(2.8) |
3.7 |
19.0 |
62.5 |
- |
- |
84.0 |
|
of which relates to re-estimation of ultimatenet claims |
(11.0) |
(0.6) |
(12.7) |
(15.0) |
(23.0) |
(30.8) |
1.9 |
37.8 |
- |
- |
(53.4) |
Material surpluses released
The net aggregate reserve releases from prioryears amounted to £81.2m (2008: £79.1m). In part this arises from the Group's reservingphilosophy which aims to make the most recent years, with the greatest uncertaintyof result, prudently reserved leaving a potential for subsequent release.
This differs from the £53.4m stated in the tableabove as the table above is on an underwriting year basis and the surpluses in thisnarrative are on an annually accounted basis. The reconciling items are the 2008underwriting year not being fully earned and the Air France loss which is a 2009accident year loss but relates to 2008 underwriting year policies.
Releases have been made in the Brit Global MarketsSBU of £13.8m (2008: £22.0m), Brit Reinsurance SBU of £24.1m (2008: £20.1m), BritUK SBU of £41.2m (2008: £38.6m) and Other Underwriting of £2.1m (2008: strengtheningof £1.6m).
(ii) Movements ininsurance and reinsurance contracts
a) Claims and lossadjustment expenses
|
|
31 December 2009 |
31 December 2008 |
||||
|
|
Gross £m |
Reinsurance £m |
Net £m |
Gross £m |
Reinsurance £m |
Net £m |
|
|
||||||
|
As at 1 January |
2,657.7 |
(479.2) |
2,178.5 |
2,013.2 |
(326.1) |
1,687.1 |
|
Cash paid for claims settled in the year |
(792.2) |
110.8 |
(681.4) |
(694.3) |
90.0 |
(604.3) |
|
Increase in liabilities |
1,054.3 |
(123.6) |
930.7 |
886.1 |
(158.5) |
727.6 |
|
Net foreign exchange differences |
(167.7) |
31.6 |
(136.1) |
452.7 |
(84.6) |
368.1 |
|
As at 31 December |
2,752.1 |
(460.4) |
2,291.7 |
2,657.7 |
(479.2) |
2,178.5 |
b) Unearned premiums
|
|
31 December 2009 |
31 December 2008 |
||||
|
|
Gross £m |
Reinsurance £m |
Net £m |
Gross £m |
Reinsurance £m |
Net £m |
|
As at 1 January |
687.0 |
(70.4) |
616.6 |
609.8 |
(54.7) |
555.1 |
|
Premiums written in the year |
1,696.4 |
(225.0) |
1,471.4 |
1,394.6 |
(231.3) |
1,163.3 |
|
Premiums earned during the year |
(1,696.1) |
232.2 |
(1,463.9) |
(1,317.4) |
215.6 |
(1,101.8) |
|
As at 31 December |
687.3 |
(63.2) |
624.1 |
687.0 |
(70.4) |
616.6 |
11 Financial investments
|
|
31 December 2009 £m |
31 December 2008 £m |
|
Equity securities : |
|
|
|
Listed |
100.7 |
116.0 |
|
Unlisted |
1.3 |
1.4 |
|
|
102.0 |
117.4 |
|
|
|
|
|
Debt securities : |
|
|
|
Listed |
1,628.0 |
1,431.0 |
|
Unlisted |
307.5 |
109.4 |
|
Certificates of deposit |
346.9 |
622.1 |
|
|
2,282.4 |
2,162.5 |
|
|
|
|
|
Specialised investment funds |
96.7 |
113.1 |
|
|
|
|
|
|
2,481.1 |
2,393.0 |
US debt securities including treasury bills, notesand bonds and mortgage backed securities are shown as unlisted in the table above.
All financial investments have been designatedas held at fair value through profit or loss.
12 Cash and cash equivalents
|
|
31 December 2009 £m |
31 December 2008 £m |
|
Cash at bank and on deposit |
949.2 |
840.1 |
|
Cash equivalents |
45.0 |
0.6 |
|
|
994.2 |
840.7 |
The carrying amounts disclosed above reasonablyapproximate fair values.
Included in cash and cash equivalents are amountstotalling £357.8m (2008: £418.2m) not available for use by the Group which are heldwithin the Lloyd's syndicates or as Funds at Lloyd's.
13 Borrowings
|
|
|
|
|
|
|
31 December 2009 |
|
31 December 2008 |
|
|
Maturity |
Call |
Effective interest rate % |
Initial capitalised borrowing costs £m |
Amortised cost £m |
Fair value £m |
Amortised cost £m |
Fair value £m |
|
Non-current |
|
|
|
|
|
|
|
|
|
US dollar floating rate unsecured subordinatedloan notes |
2034 |
2009 |
US dollar 3 month LIBOR + 3.5 |
0.3 |
- |
- |
10.4 |
10.4 |
|
Lower Tier Two subordinated debt |
2030 |
2020 |
6.84 |
1.8 |
132.8 |
95.6 |
132.7 |
97.9 |
|
Revolving credit facility |
2012 |
- |
LIBOR + 3.25 |
2.2 |
104.8 |
107.0 |
- |
- |
|
|
|
|
|
4.3 |
237.6 |
202.6 |
143.1 |
108.3 |
The fair value of the Lower Tier Two subordinateddebt represents trading market values on recognised exchanges.
The US dollar floating rate unsecured subordinatedloan notes were not liquid and hence their fair value has been estimated by referenceto spreads, maturity and credit risk.
US dollar floating rate unsecured subordinatedloan notes
The US dollar floating rate unsecured subordinatedloan notes were called during 2009.
Lower Tier Two subordinated debt
The Lower Tier Two subordinated debt is callablein whole by the Group on 9 December 2020. Following this date the interest rate resetsto 3.4% above the 10-year gilt rate prevailing at the time. The effective interestrate method of accounting has been applied over the term up to the call date.
On 28 October 2008, the Group repurchased 14,998,000£1 units and subsequently cancelled this debt.
Revolving credit facility
On 9 November 2009, the Group entered into athree year revolving credit facility for £175m syndicated to three banks.
On 22 December 2009, the Group cancelled a fiveyear revolving credit facility for £150m and repaid amounts outstanding on that facility.
14 Equity dividends
|
Dividend paid |
Amount (pence per ordinary share) |
31 December 2009 £m |
31 December 2008 £m |
|
Final 2007 |
7.5 |
- |
23.3 |
|
Special 2007 |
7.0 |
- |
21.7 |
|
Interim 2008 |
7.5 |
- |
23.2 |
|
Final 2008 |
7.5 |
23.2 |
- |
|
Interim 2009 |
7.5 |
23.2 |
- |
|
|
|
46.4 |
68.2 |
Following the corporate reorganisation effectivefrom 21 December 2009, it is anticipated that, for an initial period, the Companyis unlikely to pay dividends but instead will make distributions to shareholdersby way of reductions of the par value of the Company shares.
The amounts of pence per ordinary share statedabove are based on the number of shares in issue prior to the share consolidationon 25 February 2010.
15 Share capital
|
|
31 December 2009 |
On incorporation |
31 December 2009 |
On incorporation |
31 December 2009 |
On incorporation |
|
|
£m |
£m |
€m |
€m |
Number in millions |
Number in millions |
|
|
|
|
|
|
|
|
|
Authorised: |
|
|
|
|
|
|
|
Ordinary shares of €1 each |
885.0 |
0.2 |
1,000.0 |
0.2 |
1,000.0 |
0.2 |
|
|
|
|
|
|
|
|
|
Allotted, issued and fully paid: |
|
|
|
|
|
|
|
Ordinary shares of €1 each |
277.9 |
- |
314.0 |
- |
314.0 |
- |
The number of shares reported is for Brit InsuranceHoldings N.V., the ultimate parent of the Group.
Share capital has been translated from Eurosinto Sterling using an exchange rate of 1.13 as at the end of the year.
Brit Insurance Holdings N.V. was incorporatedon 22 June 2009.
The authorised share capital was increased from0.2m shares of €1 each to 1,000.0m shares of €1 each as part of the corporate reorganisationwhich was effective from 21 December 2009.
|
|
Number in millions of €1 ordinary shares in issue |
|
As at 31 December 2008 |
- |
|
Issue of ordinary shares on incorporation |
- |
|
Issue of ordinary shares on corporate reorganisation |
314.0 |
|
As at 31 December 2009 |
314.0 |
There were no shares reserved for issue underoptions as at 31 December 2009 or on incorporation.
Subsequent to the date of the consolidated statementof financial position, on 25 February 2010, the Company undertook a consolidationof its share capital, such that the shareholders received one ordinary €4 share forevery four ordinary €1
shares owned as at that date.
16 Cash flows provided by operating activities
|
|
Year ended 31 December 2009 £m |
Year ended 31 December 2008 £m |
|
Profit on ordinary activities before tax |
116.4 |
89.2 |
|
|
|
|
|
Adjustments for non-cash movements: |
|
|
|
Realised and unrealised (gains)/losses on investments |
(38.0) |
121.2 |
|
Realised and unrealised losses on derivatives |
4.1 |
19.1 |
|
Loss on sale of property, plant and equipment |
0.1 |
0.8 |
|
Amortisation of software |
4.2 |
3.9 |
|
Impairment of software |
2.2 |
- |
|
Depreciation of property, plant and equipment |
2.9 |
3.1 |
|
Foreign exchange (gains)/losses on financing items |
(1.4) |
2.9 |
|
Foreign exchange losses/(gains) on cash and cashequivalents |
49.0 |
(90.4) |
|
Share of loss after tax of associated undertakings |
2.3 |
0.5 |
|
Charges in respect of employee share schemes |
10.1 |
5.2 |
|
Cash contributions in excess of charges in respectof defined benefit pension scheme |
0.2 |
(13.8) |
|
Interest income |
(97.1) |
(124.6) |
|
Dividend income |
(2.4) |
(4.0) |
|
Finance costs on borrowing |
11.5 |
13.1 |
|
Finance income |
- |
(7.2) |
|
Profit on disposal and partial disposal of associatedundertakings |
(4.2) |
(4.5) |
|
|
|
|
|
Changes in working capital: |
|
|
|
Deferred acquisition costs |
(10.3) |
(19.9) |
|
Insurance and other receivables excluding accruedincome |
(37.5) |
(35.6) |
|
Insurance and reinsurance contracts |
120.8 |
552.9 |
|
Financial investments |
(50.1) |
(515.7) |
|
Derivative contracts |
(7.8) |
(14.6) |
|
Insurance and other payables |
(1.4) |
54.9 |
|
Provisions |
(0.1) |
- |
|
Cash flows provided by operating activities |
73.5 |
36.5 |
17 Financial Information and postingof accounts
The financial information set out above doesnot constitute the Company's statutory accounts for the year ended 31 December 2008or 2009, but is derived from those accounts. Statutory accounts for 2008 have beendelivered to the United Kingdom Registrar of Companies. The auditor has reportedon the statutory accounts for 2008 in accordance with Section 235 of the CompaniesAct 1985; their reports were unqualified and did not contain statements under Section237(2) or (3).
The auditor has reported on the statutory accountsfor 2009 in accordance with article 293 sub 5 of the Netherlands Civil Code. Thereport of the auditor is unqualified. Statutory accounts for 2009 will be deliveredto the Dutch Chamber of Commerce by no later than 14 May 2010.
The audited Annual Report and Accounts for 2009are expected to be posted to shareholders by no later than 22 March 2010. Copiesof the Report may be obtained from that date by writing to Brit Insurance HoldingsN.V., PO Box 79083, 1070 NC, Amsterdam, The Netherlands. The Annual General Meetingof the Company will be held in the Netherlands at 3.00pm Central European Time onThursday 6 May 2010.
The Preliminary Results were approved by theBoard on 25 February 2010.
Company Information
|
The Board: Robert John Orr Barton (John) Chairman
Kenneth Culley CBE Non-Executive Director
Dane Jonathan Douetil CBE Chief Executive Officer
Peter Frank Hazell Non-Executive Director
Joseph Patrick MacHale Non-Executive Director
Matthew Scales Finance Director
Drs Cornelis Antonius Carolus Maria Schrauwers (Cees) Senior Independent Director
Michael Gordon Smith Non-Executive Director
Willem Frans Casimir Stevens Non-Executive Director
|
Useful details: Investor Relations Neil Manser T: +44 (0) 20 7098 6980
Media Queries Brit Insurance T: +44 (0) 20 7098 6626
Haggie Financial T: +44 (0) 20 7417 8989
Registered Office Floor 13, ITO Tower, Gustav Mahlerplein 82 1082 MA Amsterdam The Netherlands Registered under No. 24464323 with the Trade Registerof the Chambers of Commerce in the Netherlands Tel: +31 (0) 20 719 1100 W: www.britinsurance.com
Registrars Computershare Investor Services PLC The Pavilions Bridgwater Road Bristol BS13 8AE United Kingdom T: +44 (0) 871 495 0102* W: www.computershare.com
*Calls to this number are charged at 8p per minutefrom a BT landline. Other telephony providers' charges may vary.
Corporate Brokers JP Morgan Securities Limited 125 London Wall London EC2Y 5AS United Kingdom
Numis Securities Limited 10 Paternoster Square London EC4M 7LT United Kingdom
Auditor Ernst & Young Accountants LLPPO Box 906362509LP The HagueThe Netherlands
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