TIDM32OW
RNS Number : 0594Q
Brit Limited
15 February 2019
Brit LIMITED
PRESS RELEASE
15 February 2019
Full Year results for the Year ended 31 December 2018
Strong growth in an improving environment
Key points
-- Gross written premiums of US$2,239.1m (2017: US$2,057.0m), an
increase at constant exchange rates of 8.0%.
-- Risk adjusted premium rates on renewal business increased by 3.7% (2017: 1.3% reduction).
-- Combined ratio(1) of 103.3% (2017: 112.4%), including 12.0
percentage points of major losses (2017: 16.2pps), against a long
term expected annual average of 3.9%.
-- Major losses in line with expectations given the nature and
scale of the events (the fourth most costly natural catastrophe
year on record) and our market share.
-- Return on invested assets(2) after fees of -US$82.1 or -2.0% (2017: +US$204.2m or +4.9%).
-- Loss after tax of US$166.5m (2017: profit of US$21.5m) and
RoNTA(3) before FX movements of -14.4% (2017: +1.1%).
-- Strong balance sheet maintained with adjusted net tangible
assets(4) of US$992.9m (2017: US$1,043.7m).
-- Strong capital ratio of 130.4% (2017: 136.8%).
-- Brit managed capacity on new initiatives (Versutus, Sussex
Capital and Syndicate 2988) expanded to over US$400m for 2018.
-- Continued focus on leadership, innovation and distribution,
with continued opportunity-driven considered expansion in a number
of areas including US Professional Lines, US Cyber and Technology,
US Marine, US Casualty, Kidnap and Ransom and Private Clients.
-- Fairfax ownership increased from 72.5% to 88.9%.
Matthew Wilson, Group Chief Executive Officer of Brit Limited,
commented:
'Brit generated strong premium growth in 2018, against a
backdrop of improving rates, whilst taking decisive action in
underperforming areas. Premiums written increased by 8.0% through
the expansion of our US operations and growth in classes where we
have a strong track record. During 2018 both insurance and
investment market conditions remained challenging, with catastrophe
events and unrealised losses on equities and funds heavily
impacting our results. Despite this, our results reflect our
ability to maintain strong underwriting discipline while continuing
to deliver selective growth, particularly through our BGSU and
third-party capital platforms. We therefore enter 2019 with premium
rates trending upwards and believe we are well positioned to
benefit from this improving environment.
2018 again demonstrated the value of our products particularly
in response to catastrophe losses. 2018 was the fourth most costly
natural catastrophe year on record and, with 2017, the most costly
back-to-back years ever. While we achieved overall risk adjusted
rate increases of 3.7%, those increases were lower than initially
anticipated, as available capacity has continued to exceed
demand.
Against this backdrop, our business proved resilient with a
combined ratio of 103.3%, including 12.0 percentage points in
respect of major losses. Our attritional ratio was a solid 57.2%
and we continued to demonstrate our conservative reserving approach
with a reserve release benefitting the combined ratio by
6.1pps.
In 2018 we again saw increased demand for our products. Our
premium written grew to US$2,239.1m, reflecting the favourable
development of prior year premiums, the impact of rate increases,
our investments in Syndicate 2988 and Sussex Capital, partly offset
by reductions in certain classes following the actions outlined
below. It was again pleasing to see an increased contribution from
our initiatives of recent years as we continue to expand our
international presence.
For 2018, Brit's total managed capacity across Versutus, Sussex
Capital and Syndicate 2988 exceeded US$400m. We successfully
launched Sussex Capital in January 2018, the open-ended fund which
writes through Sussex Re, providing collateralised reinsurance
direct to third parties and to Brit. In February, we announced the
fourth annual expansion of Versutus, which now has invested capital
of US$187m, offering access to Brit's strong underwriting
franchise. In addition, Syndicate 2988, which was launched in 2017,
was expanded by 79% to a stamp capacity of GBP98.5m (c.US$130m) for
2018 and now offers broad access to Brit's extensive underwriting
capabilities. These initiatives represent excellent progress as we
continue to develop and enhance our capital markets
participation.
In this challenging market, we have continued to take action to
protect our balance sheet, with the application of rigorous risk
selection criteria in marginal lines of business and the decision
to withdraw from certain classes such as International Professional
Indemnity, Yacht, Contractors Plant & Equipment and
Aviation.
We do however, continue to selectively expand our core
underwriting capabilities, predominantly in the US. This ongoing
success in attracting high-quality talent is helping us expand our
client offering while delivering sustainable, profitable
growth.
Our customers are our priority and our products are designed to
support those businesses and individuals in difficult times. In
2018, we have continued to focus on providing an outstanding claims
service, ensuring our customers' needs are met and our brokers have
commended us for our service excellence, including the expediting
of claims payments wherever appropriate. I was delighted that our
claims team won the Claims Team of the Year at the 2018 Insurance
Day Awards, in recognition of their proactive approach and
commitment to delivering service excellence, and the Lloyd's Market
Association Award for Innovation for their work on loss funds with
the InsureTech firm Vitesse.
Being a member of the Fairfax family has presented us with a
number of opportunities in 2018. We assumed the renewal rights from
Advent of a number of classes accretive to Brit's portfolio, with
21 Advent staff transferring to Brit. We entered into an
arms-length loss portfolio reinsurance contract with RiverStone,
covering a number of legacy classes. We also received further
investment from Fairfax itself, which increased its holding in Brit
from 72.5% to 88.9%.
The combination of continued catastrophe events, market
conditions and the strict Lloyd's planning process for 2019 has
meant the market has seen significant withdrawals from a number of
classes of business and some reductions in appetite. However, the
underwriting environment in general remains competitive and the 1
January 2019 renewal season saw only modest rate increases. While
consistent with our overall expectation, this is disappointing
given the market's operating results.
We remain focused on our core fundamentals of leadership,
innovation and distribution, and believe our underwriting
discipline, risk selection, capital management and the targeted
expansion of our global distribution capability remain key. We
believe this focus will continue to hold us in good stead in the
current economic and regulatory environment, allowing us to operate
successfully through the current difficult market conditions,
whilst being able to take full advantage of emerging opportunities
as they arise.
Finally, Mark Cloutier stepped down from his role as Executive
Chairman of Brit on 31 December 2018. Mark played a pivotal role in
Brit's recent history having been appointed CEO in 2011 and
subsequently Executive Chairman in 2017. We wish him well.'
Mark Allan, Group Chief Financial Officer of Brit Limited,
said:
'2018 was another difficult year for the market, with investment
conditions compounding losses from major catastrophe activity.
Brit's result for the year ended 31 December 2018 reflects
significant claims from major loss activity and volatile investment
markets resulting in significant unrealised losses on equity
holdings, offset by a solid attritional loss ratio performance and
strong prior year reserve releases.
Despite these pressures, our business model has proved resilient
and we enter 2019 with a very strong capital position, having again
demonstrated our ability to meet our commitments to clients in
their time of need.
Against this challenging backdrop, the result on ordinary
activities for the year before tax and FX was a loss of US$181.2m
(2017: loss of US$7.1m) and the loss after tax was US$166.5m (2017:
profit of US$21.5m). Return on adjusted net tangible assets
(RoNTA), excluding the effects of FX, decreased to (14.4)% (2017:
1.1%).
Our capital position was well placed to deal with the
challenging operating environment in 2018 and during the year we
received further capital from our main shareholder, Fairfax, to
ensure that this position is maintained to support our plans in
2019 and beyond. As a result, our balance sheet remains strong,
with adjusted net tangible assets of US$992.9m (2017: US$1,043.7m)
at the year end, after capital contributions, dividends paid and
share buybacks. This represents a surplus of US$328.7m or 30.4%
above the Group's management capital requirement.
Given the severe losses arising from the 2018 US/Japanese Wind
and Californian Wildfire events, our underwriting activities
returned a loss of US$56.9m, which, while disappointing, was a
significant improvement over 2017 (loss of US$172.8m). Claims
arising from the major loss activity totalled US$196.8m (2017:
US$250.0m), increasing the combined ratio by 12.0pps to 103.3%
(2017: 16.2pps/112.4%). Our attritional and expense ratios of 57.2%
and 40.2% respectively were relatively stable despite the
challenging market conditions, while strong reserve releases of
US$99.3m (2017: US$9.6m) continue to demonstrate the benefits of
our conservative reserving approach.
Given equity market volatility and increases in yields during
the year, our net investment return was a loss of US$82.1m (2017:
profit of US$204.2m), representing a return of (2.0)% (2017: 4.9%),
driven by unrealised losses on our equity and fund investments.
Syndicate 2988, Versutus and Sussex are key to Brit's strategy
of building long term relationships with the capital markets, and
through these platforms we now have access to over US$400m of
capacity. The support they provide enables us to strengthen our
market position and provide Brit capacity to support our clients
whilst offering capital market investors attractive,
non-correlating returns.
We manage our currency exposures to mitigate their impact on
solvency rather than to achieve a short-term impact on earnings.
While we reported a total foreign exchange loss of US$9.1m through
the income statement in the period, foreign exchange movements
reduced our management capital requirements by US$21.0m, favourably
impacting our solvency position.
The underwriting outlook has shown modest rate improvement but
remains challenging. Lloyd's has expressed its support for
innovation and growth in well performing lines, while reinforcing
through the 2019 planning process that perennially unprofitable
areas must demonstrate a credible plan to return to profit. We
welcome these actions and anticipate that they will help drive
improvement in market conditions as the market focuses on
sustainable underwriting. We believe we are well positioned and
have the right strategy to prosper in the market.'
Notes
1 The combined ratio excludes the effect of foreign exchange on non-monetary
items.
2 Return on invested assets includes return on investment related derivatives
and share of net profit of associates and is after deducting investment
management fees.
3 RoNTA is based on adjusted net tangible assets.
4 Adjusted net tangible assets are defined as total equity, less intangible
assets net of the deferred tax liability on those intangible assets.
For further information, please contact:
+44 (0) 20 3857
Antony E Usher, Group Financial Controller, Brit Limited 0000
+44 (0) 20 3727
Edward Berry, FTI Consulting 1046
+44 (0) 20 3727
Tom Blackwell, FTI Consulting 1051
About Brit Limited
Brit Limited is a market-leading global specialty insurer and
reinsurer, focused on underwriting complex risks. It has a major
presence in Lloyd's of London, the world's specialist insurance
market provider, with significant US and international reach. We
underwrite a broad class of commercial specialty insurance with a
strong focus on property, casualty and energy business. Our
capabilities are underpinned by strong financials.
Brit is a member of the Fairfax Financial Holdings Limited group
of companies (Fairfax). The Fairfax financial result for the year
ended 31 December 2018, which included the Brit Limited financial
result, was published on 14 February 2019.
www.britinsurance.com
Disclaimer
This press release does not constitute or form part of, and
should not be construed as, an offer for sale or subscription of,
or solicitation of any offer or invitation or advice or
recommendation to subscribe for, underwrite or otherwise acquire or
dispose of any securities (including share options and debt
instruments) of the Company nor any other body corporate nor should
it or any part of it form the basis of, or be relied on in
connection with, any contract or commitment whatsoever which may at
any time be entered into by the recipient or any other person, nor
does it constitute an invitation or inducement to engage in
investment activity under Section 21 of the Financial Services and
Markets Act 2000 (FSMA). This document does not constitute an
invitation to effect any transaction with the Company or to make
use of any services provided by the Company. Past performance
cannot be relied on as a guide to future performance.
Brit at a Glance
We are a market-leading global specialty (re)insurer and the
largest business that trades primarily on the Lloyd's of London
platform, the world's leading specialist commercial insurance
market. We provide highly specialised insurance products to support
our clients across a broad range of complex risks, with a strong
focus on property, energy and casualty business.
We operate globally via a combination of our own international
distribution network that benefits from Lloyd's global licences and
our broker partners. Our underwriting capabilities are underpinned
by a strong financial position and our commitment to deliver
superior returns to our shareholders.
At Brit, LEADERSHIP, INNOVATION and enhancing our product
DISTRIBUTION are at the heart of our strategy, underpinned by our
strong underwriting and claims expertise.
We have a strong track record and are passionate about our
business, our people and our customers and we have focused on
cultivating a franchise that is built on delivering exceptional
service. Our culture is centred on achievement and we have
established a framework that identifies and rewards strong
performance.
The Fairfax Group
Since June 2015, Brit has been a member of the Fairfax Financial
Holdings Limited group (Fairfax), a Canadian company whose shares
are listed on the Toronto Stock Exchange (www.fairfax.ca). Brit is
88.9% owned by FFHL Group Limited (FFHL), a Fairfax company, while
Brit's remaining shares are owned by the Ontario Municipal
Employees Retirement System (OMERS), the pension plan manager for
government employees in the Canadian province of Ontario. FFHL will
have the ability to purchase the shares owned by OMERS over
time.
We believe that Fairfax is an excellent partner for Brit,
enabling us to enhance our global product offering. It provides us
with expanded underwriting opportunities and distribution channels
and supports our ability to be a leading global specialty
(re)insurer.
2018 underwriting review
2018 has been another year of significant natural catastrophe
activity, with multiple hurricanes, typhoons and wildfires having a
devastating impact on people's lives, homes and businesses, and
resulting in an estimated economic loss of approximately
US$225bn.
Insured losses arising from these events are estimated to be in
the region of US$90bn, the fourth largest year on record. Following
on from 2017, it has created the most costly back-to-back years on
record, with insured losses for all events estimated at
US$237bn.
The net impact to Brit of the claims incurred from 2018
catastrophe events, before reinstatements, is US$196.8m, or 12.0pps
on the combined ratio (2017: US$250m/16.2pps). These losses were
within our expectations, given the scale and nature of the events.
While we have once again benefitted from the protection of our
extensive reinsurance programme, the reduced size of the events has
meant that our higher level protections triggered in 2017 were not
triggered in 2018.
Our customers are our priority and our products are designed to
support those businesses and individuals in such difficult times.
We have focussed on providing an outstanding claims service,
ensuring our customers' needs were met. This claims service has
included:
-- A focus on responding to our customers, managing the expected
volume pressures and containment of both indemnity and expense
ratios.
-- Ongoing monitoring of local resources available to adjust and report claims.
-- 24/7 contact with claims third party administrators (TPAs)
and coverholders, managing claims on our behalf, to assess impact
and resourcing and to gauge activity and potential issues.
-- Extended deployment of Brit claims adjusters from London
directly into the TPA and coverholder operations in Florida and the
Northeast of the United States, providing an 'on the ground' local
Brit presence, ensuring claims were handled in accordance with
Brit's standards while favourably impacting accessibility and
resolution times.
-- Swiftly establishing dedicated loss funds for our TPAs and
coverholders in order to expedite claims payments, proactively
making interim or partial payments whenever possible to support our
insureds' recovery efforts.
-- Providing via contract endorsement, a number of select TPAs
and MGAs with additional claims handling authority, including an
increase in the authorised monetary thresholds and a waiver of
proofs of loss.
-- Utilised Geo Intel technology to capture high resolution
images of California wildfire affected Brit insured homes. Total
losses were immediately referred to our TPAs for payment.
While 2018 has seen material rate increases over 2017, reversing
the trend of rate reductions in the previous four years, market
conditions have continued to be challenging. Brit achieved risk
adjusted overall increases of 3.7%, with increases experienced
across most classes, much improved over the movements experienced
in 2017 (a reduction of 1.3%). However, rates remain lower than
anticipated following the 2017 major loss events, as capacity has
continued to be available as brokers move business to new carriers
at current or reduced rates.
Our retention ratio at 80.2% was lower than in 2017 (83.6%), as
we non-renewed certain accounts due to unsustainable pricing levels
and exited our worst performing classes, namely Yacht, Aviation,
Non-US Professional Indemnity and Contractors' Plant &
Equipment. Across all lines we have retained our underwriting
discipline and are prepared to discontinue accounts that we believe
are inadequately priced or outside of our appetite.
Overall GWP for 2018 was US$2,239.1m, an increase of 8.9% over
2017 (US$2,057.0m), or 8.0% at constant rates of exchange. This
increase was mainly driven by growth from BGSU's underwriting
initiatives (Programs, Professional Liability, Cyber and Excess
Casualty), an increase in prior year premium development (Marine
and Property Facilities) and growth in our core classes (Property
Treaty, Long Tail Direct and Property, Political Risks and
Violence).
Our ability to lead business, combined with our innovative
approach to underwriting, supports our success in building
long-term and dependable market relationships.
Our distribution strategy remains key, especially during a
period of intense market competition, and we continue to build and
leverage our network. Continued improvement in relationships with
the broker and coverholder community, with a clear articulation of
our strategy and risk appetite, is a key area of focus.
This continues to be evidenced by the increasing contribution
from our overseas offices, allowing us to see business not
generally accessed in London.
-- Brit Global Specialty USA (BGSU) has written US$287.8m of
premium, 22.6% of growth over 2017 reflecting the continued
development of our US distribution network. This increase has
arisen from both recently launched classes and from organic growth
as we capitalise on market opportunities.
-- In addition, US$5.4m of premium was generated for BGSU by
Scion Underwriting Services Inc., our US MGA with a team of nine,
headed by Scott Brock, in its first year of operations.
-- Our Bermuda operation, established in late 2013, has
selectively written reinsurance business in lines and markets that
we believe remain well rated, particularly Casualty Treaty.
Premiums generated by our Bermuda office in 2018 equated to
US$91.5m (2017: US$83.3m).
Our combined ratio in 2018 was 103.3%, including 12.0pps in
respect of major losses and 6.1pps of reserve releases. Over the
past five years, we have delivered an average combined ratio of
98.7%.
Overall, the combination of strong portfolio management and
underwriting discipline has led to us achieving a 57.2% attritional
ratio in 2018 (2017: 56.4%), a solid underwriting performance given
the market backdrop and testimony to the strength of our
underwriting in such an ongoing competitive environment.
As part of our standard reserving process, we released US$99.3m
of net reserves established for prior year claims, the equivalent
of a combined ratio reduction of 6.1pps (2017: US$9.6m/0.6pps).
These releases reflected the additional reinsurance protection on
the Non-US Professional Indemnity (2014 and prior), Employers'
Liability UK / Professional Liability UK and legacy classes
afforded by the loss portfolio reinsurance with RiverStone Managing
Agency Limited (for and on behalf of Lloyd's syndicate 3500),
together with better than anticipated loss experience on Energy,
Property and Casualty Treaty including favourable movements on the
2017 major losses.
Business developments during 2018
During 2018 we have continued to focus on our underwriting
strategy. Key developments have included:
-- Brit managed capacity on new initiatives expanded to over US$400m for 2018
Brit's total managed capacity across Versutus, Sussex Capital
and Syndicate 2988 is now over US$400m.
In February, Brit announced the completion and expansion of the
Versutus 2018 Series Notes, the fourth annual renewal and continued
expansion of this vehicle. Versutus Ltd (Versutus) now has invested
capital of US$187m, offering access to Brit's strong underwriting
franchise.
This transaction followed the launch of Sussex Capital at 1
January 2018, the open-ended fund which writes through Sussex Re,
providing direct collateralised reinsurance and collateralised
reinsurance to Brit's reinsurance portfolio.
In addition, Syndicate 2988, which was launched in 2017, was
expanded to a stamp capacity of GBP98.5m (c.US$130m) for 2018 and
now offers broader access to Brit's extensive underwriting
capabilities with over 20 lines of business for 2018.
These developments continue our successful strategy of managing
capital for third parties by offering access to Brit's leading
underwriting capabilities, deep client relationships and extensive
distribution network. Taken together, these initiatives represent
excellent progress as we continue to develop and enhance our
capital markets participation.
-- Loss portfolio reinsurance
On 30 November 2018, the Group entered into a loss portfolio
reinsurance contract with RiverStone Managing Agency Limited (for
and on behalf of Lloyd's syndicate 3500), another subsidiary of the
Fairfax group. The agreement covered the Group's Non-US
Professional Indemnity (2014 and prior), Employers' Liability UK /
Professional Liability UK and legacy books of business, for a
premium of US$186.3m.
-- Continued development of BGSU
BGSU Professional Lines
In January, BGSU appointed a SVP, Construction Professional.
This role, based in BGSU's New York office, has responsibility for
building and developing a Construction Professional book and builds
strongly on the progress we have been making in developing and
growing our US Professional Lines offering.
In May, BGSU appointed a Glastonbury, Connecticut based SVP,
Miscellaneous Professional Liability and a New York based AVP,
Construction Professional. We are pleased by the rapid progress
being made by BGSU's Professional Lines team since it was
established in 2017, with these appointments further strengthening
our depth of talent as well as demonstrating our continued
successful growth strategy for BGSU.
BGSU Marine
In February, BGSU further expanded its Marine offering with two
new hires. First, an AVP based in our Hartford, Connecticut office,
responsible for the underwriting of BGSU's growing Yacht portfolio,
and secondly, a VP, Cargo, based in our Newport Beach, California
office to focus on developing BGSU's Cargo book on the West Coast.
These appointments follow the launch of BGSU's Marine business in
2016 and are part of Brit's strategy to expand its regional
footprint in the Americas with a focus on specialty products that
deliver sustainable and profitable growth.
BGSU Cyber and Technology
In October 2018, we appointed a SVP, Cyber and Technology to
grow the BGSU Cyber book of business, team and outward brand
recognition in the SME marketplace.
BGSU Casualty
In July, we announced the appointment of a SVP, General
Liability for BGSU. This hire follows the appointment of a SVP,
Excess Casualty in August 2017 and the development of BGSU's
Professional Lines offering.
BGSU Chief Underwriting Officer
In October, we announced the appointment of a Chief Underwriting
Officer for BGSU. Our US business has seen continued development
over the last year and this appointment will further complement the
significant progress being made on the ambitious strategy we have
for our US platform.
-- Advent Capital Holdings Limited - Syndicate 780
On 11 July, Advent Capital Holdings Limited, a fellow Fairfax
company, and Brit Limited announced a potential combination of some
of their Lloyd's business. As a result, 21 Advent staff transferred
to Brit and Brit assumed the renewal rights to Advent's business in
Property Facilities, Casualty Treaty and Terrorism, amounting to
approximately US$100m of GWP. We believe these classes will be
accretive to Brit's portfolio.
-- Kidnap and Ransom
In July, we appointed a senior Kidnap and Ransom underwriter,
strengthening our well-regarded A&H team.
In the fourth quarter of 2018, we announced an exclusive
partnership with Schillings Critical Risk, part of Schillings (the
international issues and crisis law firm), to create a
comprehensive kidnap for ransom offering. Brit and Schillings'
joint vision is to help clients navigate an ever changing
environment and to protect people, assets and reputations from the
risks they may face.
-- Private Clients
In July, we also announced the appointment of an experienced
Head of Private Clients to establish a high net worth offering at
Brit. This market continues to see strong demand and the
appointment will help us expand our capabilities and capitalise on
the opportunities in this area.
2019 business planning
-- Syndicate 2987
Syndicate 2987, Brit's wholly aligned Syndicate, has planned
gross net written premium growth of 8.8% for 2019, despite Brit
withdrawing from Aviation and Yacht business during 2018. We have
added new lines of business from Private Client and Kidnap and
Ransom, and expect growth in Cyber and from our US MGA, Scion
Underwriting Services Inc., together with the renewal of certain
profitable lines transferred from Advent Syndicate 780.
-- Syndicate 2988
Syndicate 2988, was established at the end of 2016, writes
business predominantly on behalf of third party capital. The 2019
year of account has a planned gross written premium of US$158.7m,
an increase of 11.9% over 2018. The syndicate is fully third-party
capitalised for 2019, with three new capital partners introduced.
We have continued to build out our infrastructure and operations to
support the continued growth of the Syndicate, which helps position
Brit as the specialist underwriter of choice and largest Lloyd's
only insurer.
-- Sussex and Versutus
The fundraising for our ILS platforms took place in a markedly
more difficult environment than previous years. Against this
backdrop, we were pleased that we were able to grow the capital
base and secure two new US institutional investors for 2019, which
we hope to develop into deeper relations in the future. Our track
record has continued to be enhanced by our relative performance in
2017 and 2018 which has continued to underpin investor demand for
our vehicles.
Financial Review
Overview of Results
The Group's income statement, re-analysed to show the key
components of our result, is set out below:
2018 2017 2016 2015 2014
US$m US$m US$m US$m US$m
Gross written premium 2,239.1 2,057.0 1,912.2 1,999.2 2,148.5
Net earned premium (Note
1) 1,466.1 1,540.1 1,515.1 1,649.6 1,601.1
Underwriting result (Note
1) (56.9) (172.8) 54.6 137.0 168.3
Underwriting result (56.9) (172.8) 54.6 137.0 168.3
Return on invested assets,
net of fees (82.1) 204.2 102.9 5.0 124.8
Corporate expenses (20.0) (24.0) (21.3) (30.0) (38.8)
Finance costs (18.8) (17.1) (18.8) (20.6) (22.3)
Other items (3.4) 2.6 1.1 0.3 0.8
-------- -------- -------- -------- --------
(Loss)/profit on ordinary
activities before tax, FX
and corporate activity costs (181.2) (7.1) 118.5 91.7 232.8
FX movements (9.1) 12.6 41.3 (60.2) 35.8
Corporate activity costs
(Note 2) - - - (23.8) (22.6)
-------- -------- -------- -------- --------
(Loss)/profit on ordinary
activities before tax (190.3) 5.5 159.8 7.7 246.0
Tax 23.8 16.0 (2.2) 7.9 (16.7)
(Loss)/profit for the year
after tax (166.5) 21.5 157.6 15.6 229.3
Note 1: Excluding the effects of foreign exchange on
non-monetary items.
Note 2: Corporate activity costs during 2015 relate to costs
incurred as a result of the acquisition of Brit by Fairfax. The
2014 corporate activity costs relate to Brit's IPO in April
2014.
Group performance and total value added
Brit's result for the year ended 31 December 2018 reflects
considerable major loss activity, volatile investment markets
resulting in significant negative returns on equity holdings, a
solid attritional loss ratio performance and strong prior year
reserve releases.
The result on ordinary activities for the year before tax, FX
and corporate activity costs was a loss of US$181.2m (2017: loss of
US$7.1m), loss before tax was US$190.3m (2017: profit before tax of
US$5.5m) and loss after tax was US$166.5m (2017: profit after tax
of US$21.5m). Return on adjusted net tangible assets (RoNTA),
excluding the effects of FX and corporate activity costs, decreased
to (14.4)% (2017: 1.1%). RoNTA for 2018 after including foreign
exchange movements was (15.4)% (2017: 2.5%) and total value created
for the year was a negative US$175.6m (2017: US$24.7m
positive).
Our adjusted net tangible assets at 31 December 2018 totalled
US$992.9m (2017: US$1,043.7m).
We measure our performance using our key performance indicators
(KPIs).
2018 2017
Return on net tangible assets before FX movements
(RoNTA) (14.4)% 1.1%
Total value created US$(175.6)m US$24.7m
Combined ratio 103.3% 112.4%
Investment return (net of external investment
related expenses) (2.0)% 4.9%
Capital ratio 130.4% 136.8%
Ratio of front office employees to back office
employees 155.5% 163.8%
------------ ---------
In 2018, our RoNTA was (14.4)% (2017: 1.1% positive), reflecting
significant major loss events and challenging insurance and
investment market conditions. This return resulted in a five year
average RoNTA of 5.7%. RoNTA for 2018 after foreign exchange
movements was (15.4)% (2017: 2.5% positive).
The combined ratio is our key underwriting metric. Our combined
ratio in 2018 was 103.3% (2017: 112.4%), including 12.0pps (2017:
16.2pps) in respect of major losses and 6.1pps (2017: 0.6pps) of
reserve releases. Over the past five years, we have delivered an
average combined ratio of 98.7%.
The return on our invested assets was a negative US$82.1m or
(2.0)% (2017: positive US$204.2m / 4.9%). This was a combination of
US$75.5m (2017: US$48.2m) of investment income, US$39.6m of
realised gains (2017: US$2.9m), US$203.4m of mark-to-market
unrealised losses (2017: gains of US$167.5m), return on associated
undertakings of US$6.5m (2017: US$5.1m) and gains on investment
related derivatives of US$0.1m (2017: losses of US$6.4m), less fees
of US$12.9m (2017: US$13.1m). Our 2018 return also includes a
positive adjustment of US$12.5m, which represents the share of our
consolidated investment vehicles owned by third parties.
Our investment strategy takes a long-term view of markets, which
can lead to significant variations in our year-on-year return
figures. Over the past five years, we have delivered an average
investment return of 1.7%, against a backdrop of some very
challenging market conditions.
Our statement of financial position remains strong. At 31
December 2018, following a capital injection from Fairfax of
US$126.0m, Group capital resources totalled US$1,409.8m which
equated to 130.4% of our Group capital requirement of
US$1,081.1m.
At 31 December 2018, the ratio of front office employees to back
office employees was 155.5% (2017: 163.8%), reflecting that we had
approximately 1.6 front office employees for every back office
employee. The reduction in the ratio over 2018 primarily reflects
the relative increased back office staff to support our overseas
growth initiatives, third party capital management and regulatory
requirements.
In addition to our KPIs, we have other measures that offer
further insight into the detail of our performance. These measures
include:
-- Premium related: Risk adjusted rate change; Retention rate;
-- Claims related: Claims ratio; Attritional loss ratio; Major
claims ratio; Reserve release ratio; and
-- Underwriting expense related: Underwriting expense ratio;
Commission ratio; Operating expense ratio.
Underwriting
Our underwriting result for the year was a loss of US$56.9m
(2017: loss of US$172.8m) and our combined ratio, which excludes
the effect of foreign exchange on non-monetary items, was 103.3%
(2017: 112.4%). The premiums, claims and expenses components of
this result are examined below.
Premiums written
Premium growth Growth at
constant
2018 2017 Growth FX rates
US$m US$m % %
-------- -------- -------
Brit Global Specialty Direct 1,758.0 1,675.0 5.0% 4.1%
Brit Global Specialty Reinsurance 451.7 383.3 17.8% 17.7%
Other underwriting 29.4 (1.3) - -
Group 2,239.1 2,057.0 8.9% 8.0%
Gross written premium (GWP) increased by 8.9% to US$2,239.1m
(2017: US$2,057.0m). At constant exchange rates the increase was
8.0%. Direct business increased by 5.0% to US$1,758.0m (2017:
US$1,675.0m), while reinsurance increased by 17.8% to US$451.7m
(2017: US$383.3m).
The drivers of the 8.9% increase in Group GWP, which was in line
with expectations, are as follows:
-- Current year premiums: Current year premiums, excluding those
derived from the underwriting initiatives referred to below,
increased by US$67.2m over 2017. Growth was primarily driven by
Brit's share of Syndicate 2988 and Sussex Re. Growth from the Core
book was driven by the Reinsurance, Long Tail Direct, and Property,
Political Risks and Violence portfolios, offset by reductions in
the Short Tail Direct portfolio, mainly from the Marine and
Aviation classes.
-- Underwriting initiatives: The Group's underwriting
initiatives, launched over the last five years, resulted in a
US$66.9m increase in GWP. The largest increases were seen in BGSU
(Cyber, Programs and Professional Liability and Excess Casualty),
China/Singapore and Healthcare.
-- Prior year premium development: The book again experienced
favourable development on prior years, resulting in an increase of
US$31.1m over 2017. The main contributors were our Property
Facilities, Energy, Marine and BGSU divisions.
-- Foreign exchange: The impact of foreign exchange resulted in
a US$16.9m year on year gain in premium, which reflects the
movement during 2018 of the US dollar against a number of
currencies in which the Group writes business.
Premium ratings
Measure Commentary Track record
Risk adjusted The risk adjusted rate change shows whether premium 2018 3.7%
rate change rates are increasing, reflecting a hardening market, 2017 (1.3)%
or decreasing, reflecting a softening market. A 2016 (3.3)%
hardening market indicates increasing profitability. 2015 (4.1)%
2014 (2.9)%
------------------------------------------------------ -------------
2018 was the first year for five years where we have experienced
overall rate increases, with an increase of 3.7% across the
portfolio (2017: 1.3% decrease). Direct business increased by 3.8%
(2017: 1.2% decrease) and reinsurance by 3.0% (2017: 1.7%
decrease). The drivers of the rate increases were Property,
Political Risks and Violence, BGSU Property, Marine, Property
Treaty, Energy, Aviation, Specialist Liability, BGSB, Property
Facilities, Specialty Lines and BGSU Casualty.
Retention rates
Measure Commentary Track record
Retention The retention rate shows the proportion of our 2018 80.2%
rate business that renews, on a premium weighted basis, 2017 83.6%
compared to the previous year. 2016 84.3%
2015 82.4%
2014 83.0%
---------------------------------------------------- -------------
Our retention rate for the period was 80.2% (2017: 83.6%). The
retention rates we achieved in 2017 and 2018 reflect the successful
renewal of a profitable book of business, following the
re-underwriting of the book that occurred between 2008 and 2012,
through which we rebalanced our book and non-renewed around half of
our underwriting portfolio. The slight reduction in 2018 results
arises from active decisions not to renew certain underperforming
or unsustainably priced accounts and the exit from certain classes
such as Aviation.
Outwards reinsurance
Our reinsurance expenditure in 2018 was US$756.7m or 33.8% of
GWP (2017: US$526.2m/25.6%), an increase of US$230.5m.
This increase primarily reflects a loss portfolio reinsurance
contract with RiverStone Managing Agency Limited (for and on behalf
of Lloyd's syndicate 3500), a Fairfax sister company. Under the
terms of this reinsurance the Group ceded its Non-US PI, 2014 and
prior EL UK/PL UK and legacy books of business for a premium of
US$186.3m.
Excluding this transaction, reinsurance expenditure was
US$570.4m or 25.4% of GWP, representing an increase of US$44.2m
over 2017. This increase was driven by additional Risk XL premium
ceded to third parties rather than being retained within the Group,
together with our increased purchase of proportional treaty
reinsurance.
Net earned premium
Net earned premium (NEP) in 2018, excluding the effects of
foreign exchange on non-monetary items, decreased by 4.8% to
US$1,466.1m (2017: US$1,540.1m, increase of 1.7%). Direct business
decreased by 10.3% to US$1,089.5m (2017: US$1,214.9m, increase of
0.5%), while reinsurance increased by 11.9% to US$333.2m (2017:
US$297.8m, increase of 4.3%).
Excluding the impact of the loss portfolio reinsurance contract,
NEP increased by 7.3%, to US$1,652.4m, with the direct portfolio
NEP increasing by 5.0% to US$1,275.8m, driven by BGSU and the
short-tail direct classes. The increase in the reinsurance
portfolio is principally related to short-tail RI, reflecting year
on year premium increases.
Claims
The claims ratio and its components are set out below:
Year Attritional Major claims Reserve release Claims
loss ratio ratio ratio
ratio
2018 57.2% 12.0% (6.1)% 63.1%
2017 56.4% 16.2% (0.6)% 72.0%
2016 55.5% 4.5% (3.5)% 56.5%
2015 55.2% - (1.7)% 53.5%
2014 51.0% 2.3% (3.3)% 50.0%
------------ ------------- ---------------- -------
Our underlying claims experience in 2018 was in line with
expectations, with a small increase in our attritional loss ratio
to 57.2% (2017: 56.4%).
Catastrophe activity was again significant in 2018, albeit
reduced from 2017 levels. The Group incurred major claims, before
reinstatements, of US$196.8m (2017: US$250.0m), as set out below.
Major claims are defined as claims in excess of US$15.0m, incurred
from natural or man-made catastrophes, or from large single risk
loss events (net of reinsurance and allowing for
reinstatements).
Major losses 2018 2017
US$m US$m
-------------------------------- -------
Typhoon Jebi 26.0 -
Hurricane Florence 27.1 -
Typhoon Mangkhut 7.0 -
Hurricane Michael 56.3 -
Hurricane Harvey - 51.5
Hurricane Irma - 110.1
Hurricane Maria - 46.4
Mexican earthquake - 6.8
California wildfires 98.1 35.2
----------------------------------
Total before third party share 214.5 250.0
Third party investors share of (17.7) -
major losses (Note 1)
Total 196.8 250.0
---------------------------------- ------- ------
CoR 12.0% 16.2%
---------------------------------- ------- ------
Note 1: Accounting rules require Brit to consolidate Sussex
Capital and Versutus II which have third party investors. This
adjustment eliminates the third party share of major losses, which
is included in the Group's consolidated income statement within
'gains on other financial liabilities'.
As part of our standard reserving process, we released US$99.3m
of net reserves established for prior year claims, the equivalent
of a combined ratio reduction of 6.1pps (2017: US$9.6m/0.6pps).
These releases reflected the additional reinsurance protection on
the Non-US Professional Indemnity and Employers' Liability UK /
Professional Liability UK classes afforded by the loss portfolio
reinsurance with RiverStone Managing Agency Limited, together with
better than anticipated loss experience on Energy, Property and
Casualty Treaty. These releases were partially offset by a
strengthening in Short Tail Direct from the Marine class of
business. Our statement of financial position remains strong and we
continue to operate a robust reserving process.
Underwriting expenses
Our underwriting expense ratio was 40.2% (2017: 40.4%). Its
components are set out below:
Year Commission Operating expense Underwriting expense
ratio ratio ratio
2018 27.8% 12.4% 40.2%
2017 27.6% 12.8% 40.4%
2016 27.2% 12.7% 39.9%
2015 26.0% 12.2% 38.2%
2014 27.5% 12.0% 39.5%
----------- ------------------ ---------------------
Commission costs were US$456.1m and the commission expense ratio
was 27.8% (2017: US$425.9m/27.6%). The increase in the ratio
principally reflects changes in business mix.
Our operating expenses are analysed below.
Expenses
Our operating expense ratio was slightly reduced to 12.4% (2017:
12.8%). Operating expenses for the period were as follows:
Expense analysis 2018 2017
US$m US$m
Underlying operating expenses including bonus
provisions 231.6 220.0
Project costs, timing differences and other expense
adjustments (Note 1) 5.1 0.5
------ ------
Total operating expenses 236.7 220.5
------ ------
Note 1: Includes minority share of expenses incurred by
consolidated vehicles
Underlying operating expenses during 2018 increased by 5.3% to
US$231.6m (2017: US$220.0m). The movement at constant exchange
rates was an increase of 1.2%, reflecting our predominantly
Sterling expense base. This increase relates to targeted expansion
and investment in growth areas, increased regulatory levies,
depreciation charges and IT costs.
As the majority of Brit's business is in US dollars and the
majority of the operating expenses are in Sterling, Brit made the
decision to effectively hedge the Sterling proportion of the
Group's expenses. This decision was driven by the weakness in
Sterling against the US dollar. To effect this, Brit purchased
Sterling in the spot and forward market. The effect of this
derivative contract, US$2.2m loss (2017: US$6.7m gain), is
recognised within the underwriting result, but excluded from the
combined ratio.
The allocation of operating expenses within the Consolidated
Income Statement and the Segmental Information is as follows:
Disclosure of operating expenses 2018 2017
US$m US$m
Acquisition costs 116.2 110.6
Other insurance related expenses 100.5 85.9
------ ------
Total insurance related expenses 216.7 196.5
Other operating expenses 20.0 24.0
Total operating expenses 236.7 220.5
Other income
Other income totalled US$10.6m (2017: US$9.9m), as set out
below.
Other income 2018 2017
US$m US$m
Fee and commission income (Note 1) 14.0 8.3
Change in value of parent company shares (Note
2) (3.4) 1.6
------ ------
Total other income 10.6 9.9
------ ------
Note 1: Total fee and commission income is included within our
underwriting result and our combined and expense ratios.
Note 2: Change in value of parent company shares is included
within our corporate result.
Fees and commissions generated by the Group's underwriting
management activities have continued to increase in 2018, totalling
US$14.0m, an increase of 68.7% (2017: US$8.3m/492.9%).
Gains on other financial liabilities
The statement of financial position of the Group includes
liabilities representing third party investors' share in structured
undertakings consolidated by the Group. These structured
undertakings are Sussex Capital, Versutus II and an equity UCITS.
Changes in the value of these liabilities during a year are
recorded in the Group's consolidated income statement as 'Gains on
other financial liabilites', as follows:
Gains on other financial liabilities 2018 2017
US$m US$m
Underwriting vehicle related (Note 1) 4.9 4.0
Investment vehicle related (Note 2) 12.5 -
------ ------
Total gains on other financial liabilities 17.4 4.0
------ ------
Note 1: Allocated to the Group's underwriting result as it
represents the third party share of the underwriting result.
Note 2: Allocated to the Group's investment result as it
represents the third party share of the investment result.
Return on invested assets
The investment portfolio is managed for the most part by Hamblin
Watsa Investment Counsel Limited, a Fairfax subsidiary with an
excellent long-term track record, whose sole business is managing
investment portfolios of Fairfax group companies. They are
supported by a number of external managers across core fixed income
and a small allocation to specialised credit.
The return on our invested assets was a negative US$82.1m or
(2.0)% (2017: positive US$204.2m/4.9%). This result is analysed
below:
Investment return 2018 2017
US$m US$m
Income 75.5 48.2
Realised gains 39.6 2.9
Unrealised (losses)/gains (203.4) 167.5
-------- -------
Investment return before fees (88.3) 218.6
Investment management fees (12.9) (13.1)
-------- -------
Investment return net of fees (101.2) 205.5
Investment related derivative return 0.1 (6.4)
Third party investors share of investment return 12.5 -
(Note 1)
Return on associated undertakings 6.5 5.1
-------- -------
Total return (82.1) 204.2
-------- -------
Total return (2.0)% 4.9%
-------- -------
Note 1: Accounting rules require Brit to consolidate the return
on a UCITS which has third party investors. This adjustment
eliminates the third party share of that return included in
'Investment return net of fees'. This amount is included in the
Group's consolidated income statement within 'Gains on other
financial liabilities'.
Return on invested assets
(net of fees)
Year %
------------- --------------
2018 (2.0)
2017 4.9
2016 2.6
2015 0.1
2014 2.9
--------------
The yield on our fixed income portfolio has continued to
increase, giving a total portfolio income return for the year of
US$75.5m or 1.9%. Given the active management within the corporate
bond portfolio and the selected opportunities to add duration in
the government bonds, this represented a meaningful source of
return for 2018 and a balance to the portfolio going forward into
2019.
The return on cash has also continued to increase. Our approach
to management of cash during the year has (and continues to be) to
limit the amount of operational cash held within bank accounts and
to maximise the amounts held within short term government bills,
avoiding where possible exposure to European paper where the yield
is negative.
However, the positive return on cash and fixed income was
outweighed by the performance of equities and funds:
-- The key driver of our equity return has been the volatility
in equity markets and the negative performance across most major
markets in 2018, with the year end position representing a low
point for many indices. Unrealised losses in our equity portfolio
arising from the broader market sell-off over the year totalled
US$169.9m (2017: gain of US$105.6m), with a number of our holdings
seeing a reversal of the strong gains they recorded in 2017. This
outweighed the income (US$11.5m) and realised gains (US$32.3m) we
received from equities.
-- The return on funds was also negative for the year, with a
loss of US$15.2m. We reduced our exposure to funds in the first
quarter of 2018, which did result in some realised gains. However,
these were offset by unrealised losses on a number of our positions
in the second half of 2018.
At 31 December 2018, Brit's allocation to equities and
investment funds totalled 16.8% of the portfolio (2017: 19.8%).
At 31 December 2018, the running yield (expressed as yield as a
percentage of invested assets) of our total portfolio was 2.3%
(2017: 1.3%). This has increased over 2018 in line with the rise in
base rates in the US as well as an increase in our allocation to
corporate bonds from 14.6% to 23.3% primarily in investment grade
US credit.
Our two associated undertakings produced a positive return of
US$6.5m (2017: US$5.1m).
-- Ambridge Partners LLC, a leading managing general underwriter
of transactional insurance products of which Brit has a 50% share,
contributed US$5.9m to this return (2017: US$4.4m); and
-- Camargue Underwriting Managers Proprietary Limited, a leading
managing general underwriter of a range of specialised insurance
products and specialist liability solutions in South Africa of
which a 50% share was acquired on 30 August 2016, contributed
US$0.6m to this return (2017: US$0.7m).
Foreign exchange
We manage our currency exposures to mitigate the impact on
solvency rather than to achieve a short-term impact on earnings. We
experienced a total foreign exchange loss of US$9.1m in 2018 (2017:
gain of US$12.6m), reflecting the movement of the US dollar against
other currencies in which we trade and hold assets. This total
foreign exchange related gain comprised:
-- An unrealised revaluation loss of US$12.7m (2017: gain of
US$1.8m), primarily relating to the mark to market of the capital
we hold in non-US dollar currencies to match our risk exposures.
The loss primarily results from the strengthening of the US dollar
which gave rise to a significant loss on our long Canadian dollar
position, which was only partly offset by gains on our short
Sterling and Euro positions;
-- Gains of US$8.4m (2017: gains of US$4.9m) on derivative
contracts which were entered into to help manage our monetary FX
exposures and therefore should be viewed in conjunction with our
monetary FX movements. This excludes the gain on the derivative
contract entered into to effectively hedge the Sterling proportion
of the Group's expenses; and
-- Losses of US$4.8m (2017: gains of US$5.9m), as a result of
the IFRS requirement to recognise non-monetary assets and
liabilities at historic exchange rates. This adjustment is
essentially a timing difference. The adjustment for the full year
2018 comprises the un-wind of the debit carried on the statement of
financial position at 31 December 2017 (US$2.3m), plus the credit
balance established during 2018 (US$2.5m).
The allocation of the FX result within the Consolidated Income
Statement is as follows:
Foreign exchange gains and (losses) 2018 2017
US$m US$m
Net change in unearned premium provision - non-monetary
FX effect 1.9 (3.3)
Acquisition costs - non-monetary FX effect (0.8) 1.3
Net foreign exchange (losses)/gains - non-monetary
(Note 1) (5.9) 7.9
------- ------
(4.8) 5.9
------- ------
Net foreign exchange (losses)/gains - monetary
(Note 1) (12.7) 1.8
Return on derivative contracts - FX related instruments
(Note 2) 8.4 4.9
------- ------
(4.3) 6.7
------- ------
Total (loss)/gain (9.1) 12.6
------- ------
Note 1: The sum of these two amounts, US$18.6m, is the 'Net
foreign exchange losses' figure per the Consolidated Income
Statement (2017: US$9.7m 'Net foreign exchange gains').
Note 2: Excludes the loss of US$2.2m (2017: gain of US$6.7m) on
the derivative contract entered into to effectively hedge the
Sterling proportion of the Group's expenses.
Tax
Our tax on ordinary activities for 2018 resulted in a tax credit
of US$23.8m (2017: tax credit US$16.0m), based on a group loss
before tax of US$190.3m (2017: profit before tax of US$5.5m).
The Group is liable to taxes on its corporate income in a number
of jurisdictions where its companies carry on business, most
notably the UK, the US, Australia and Singapore. Corporate profits
and losses in Bermuda are exempt from tax. The tax charge is
calculated in each legal entity across the Group and then
consolidated. Therefore the Group effective rate is sensitive to
the location of taxable profits and is a composite tax rate
reflecting the mix of tax rates charged in those jurisdictions.
The 2018 Group rate varies from the weighted average rate in
those jurisdictions due to a number of factors, the principal
factors being unrecognised deferred tax assets of US$8.7m in
respect of undeclared Lloyd's syndicate year of account losses and
a prior year credit of US$3.8m in respect of 2016 and 2017 US tax
losses. The rate is further influenced by the impact of exempt
income, such as dividend income, and by non-UK taxes arising in our
Lloyd's syndicates.
Financial position and capital Strength
Overview
Our business is underwritten principally through our
wholly-aligned Lloyd's Syndicate 2987, which benefits from Lloyd's
ratings of A (Excellent) from A.M. Best, AA- (Very Strong) from
Fitch and A+ (Strong) from Standard & Poor's.
Our capabilities and ambition are underpinned by our strong
financial position. At 31 December 2018 our adjusted net tangible
assets totalled US$992.9m (2017: US$1,043.7m). At 31 December 2018,
Group capital resources totalled US$1,409.8m, giving surplus
management capital of US$328.7m or 30.4% (2017: US$395.1m/36.8%)
over our Group capital requirement of US$1,081.1m.
Brit has in place a revolving credit facility (RCF). During the
period, the RCF was renegotiated, increasing from US$360m to
US$450m, with the term extending by two years to 31 December 2022.
Under our capital policy we have identified a maximum of US$250.0m
(2017: US$250.0m) of this facility to form part of our capital
resources, with the balance available for liquidity funding. At 31
December 2018, the cash drawings on the facility were US$8.0m
(2017: US$45.0m) and a US$80.0m uncollateralised letter of credit
(LoC) was in place (31 December 2017: US$80.0m/uncollateralised) to
support our underwriting activities. At the date of this report,
there were no cash drawings on the facility and the US$80.0m
uncollateralised LoC remained in place.
At 31 December 2018, our gearing ratio was 22.0% (2017:
24.6%).
Asset allocation
Brit's invested assets (financial investments, investments in
associates, cash and cash equivalents and derivative contracts) at
31 December 2018 were US$4,009.6m (31 December 2017: US$4,316.1m).
This decrease reflects a higher level of claims settlements in 2018
arising from the 2017 major losses, the settlement of the premium
in respect of the loss portfolio reinsurance and the losses on the
investment portfolio.
Our asset allocation, on both a look-through basis and statutory
disclosure basis, is set out in the tables below:
31 December 2018 Total
invested
assets
(look
Statutory basis through)
Equity Debt Specialised Cash and Associated Investment
securities securities investment cash undertakings Derivatives
funds equivalents (net)
US$m US$m US$m US$m US$m US$m US$m
------------- --------------- --------------- ------------- -------------- ---------------
Look Government
through debt
basis securities - 1,577.1 0.2 - - - 1,577.3
Corporate debt
securities - 935.9 - - - 935.9
Structured products - 0.1 16.7 - - - 16.8
Equity securities 575.8 - 29.5 - 43.0 - 648.3
Alternative
investments - - 8.7 - - - 8.7
Cash and cash
equivalents - - 1.1 818.2 - - 819.3
Investment related
derivatives - - - - - 3.3 3.3
-------------- ---------------
Total invested assets
(statutory) 575.8 2,513.1 56.2 818.2 43.0 3.3 4,009.6
------------- --------------- --------------- ------------- -------------- ---------------
31 December 2017 Total
invested
assets
(look
Statutory basis through)
Equity Debt Specialised Cash and Associated Investment
securities securities investment cash undertakings Derivatives
funds equivalents (net)
US$m US$m US$m US$m US$m US$m US$m
----------- ----------- ----------- ------------ ------------- ------------
Look Government
through debt
basis securities - 1,254.6 5.3 - - - 1,259.9
Corporate debt
securities - 631.3 0.1 - - - 631.4
Structured products - 0.2 15.3 - - - 15.5
Equity securities 686.7 - 93.4 - 40.4 - 820.5
Alternative investments - - 10.6 - - - 10.6
Cash and cash
equivalents - - 1.9 1,571.6 - - 1,573.5
Investment related
derivatives - - - - - 4.7 4.7
------------- ------------
Total invested assets
(statutory) 686.7 1,886.1 126.6 1,571.6 40.4 4.7 4,316.1
----------- ----------- ----------- ------------ ------------- ------------
The portfolio's tactical positioning remains broadly consistent
with 2017, with a short duration position to protect against the
impact of rising rates. For the limited allocation to credit risk,
the exposure is primarily defensive, focused on high quality,
investment grade non-cyclical companies. Equity allocations are
invested in a portfolio of both listed and private (non-listed)
equities and funds.
The assets remain primarily invested in cash and fixed income
securities (31 December 2018: US$3,331.2m or 83.1% of the
portfolio). The fixed income portfolio is short dated, with a
majority allocation to government bills. Corporate bonds represent
23.3% of the total portfolio with 2.2pps of this figure being below
investment grade.
The exposure to equities and funds has decreased over 2018
(2018: US$675.0m or 16.8% of the portfolio; 2017: US$853.7m/19.8%).
This reduction primarily reflects the settlement of the loss
portfolio reinsurance premium which was part funded with equities
and funds and the unrealised losses on equities.
The duration of our portfolio at 31 December 2018 was 0.9 years
(2017: 0.5 years), which is shorter than the duration of our
liabilities. This positioning is driven by the positive
macro-economic environment and the potential that strong growth in
the US combined with low capacity could result in increases in
yields over the short to medium term.
At 31 December 2018, 82.5% of our invested assets were
investment grade quality (2017: 79.9%) with the increase reflecting
the decreased allocation to equity and funds.
Outlook
2018 has seen some movement back towards a more profitable
underlying underwriting environment. However, both the underwriting
and investment markets remain challenging.
The combination of continued catastrophe events, market
conditions and the strict Lloyd's planning process for 2019 has
meant the market has seen significant withdrawals from a number of
classes of business and some reductions in appetite. However, the
underwriting environment in general remains competitive and the 1
January 2019 renewal season saw only modest rate increases. This is
consistent with our overall expectation but is disappointing given
the market's operating results.
Lloyd's has expressed its support for innovation and good
business growth within the market, while reinforcing through the
2019 approval process that perennially unprofitable areas must
demonstrate a return to profit. We anticipate that these actions
will help drive improvement in market conditions as the market
focuses on sustainable underwriting.
The outlook for the investment market continues to be
challenging. 2018 saw increased volatility in financial markets as
investors responded to the start of a programme of gradual
withdrawal of central bank stimuli, combined with heightened
sensitivity to trade relations between the US and China. This was
balanced against a robust outlook for global growth, especially in
the US. These trends show no signs of abating as we go into
2019.
We maintain focus on our core fundamentals of underwriting
discipline, risk selection, capital management and targeted
expansion of our global distribution capability. We believe this
focus will continue to hold us in good stead in the current
economic and regulatory environment.
Directorate Changes
On 31 August 2018, Andrea Welsch was appointed a non-executive
Director.
On 31 December 2018, Mark Cloutier stepped down from his role as
Group Executive Chairman and from his position on the Board. On the
same date, Gordon Campbell, an existing non-executive Director,
became Chairman of the Board pending regulatory approval.
Principal risks
Overview
There are a number of risks and uncertainties which could impact
the Group's future performance.
The Board monitors the key risks that the Company is exposed to
against its tolerance level through the quarterly 'own risk and
solvency assessment' (ORSA) process. This includes both the
qualitative assessment of the risk control environment and capital
assessment using a stochastic model.
The key categories of risk include:
-- Overarching risk: earnings, solvency and liquidity; and
-- Individual risk categories: insurance, market, credit and operational and group.
The key risks and uncertainties are set out in the following
table and the principal risks in the current environment are set
out below.
Risk category Risk Description
Insurance Underwriting - pricing Emerging experience is inconsistent
with the assumptions and pricing models
used.
--------------------------- ---------------------------------------------
Underwriting - catastrophe Premiums are insufficient to meet the
long-term profitability expected.
--------------------------- ---------------------------------------------
Reserving Prior year reserves are insufficient
to cover claims (net of reinsurance).
--------------------------- ---------------------------------------------
Investment Investment market Invested assets adversely affected by
risk changes in economic variables, such
as interest rates, bond yields, equity
returns, credit spreads, credit ratings.
--------------------------- ---------------------------------------------
Operational and People Failure to attract, motivate and retain
group key Directors, senior underwriters,
senior management and other key personnel,
on whom our future success is substantially
dependent.
--------------------------- ---------------------------------------------
United Kingdom's exit from the EU (Brexit)
We have continued to work to minimise the impact of Brexit on
Brit and our clients. While direct European business is not
material for Brit, our multi-disciplinary working group has
continued to evaluate the associated risks and implement the
process and business changes required to write business onto
Lloyd's new Brussels-based European insurance company (LBS), of
which we are fully supportive.
The majority of the known work required is complete and our new
processes are now operational. We commenced writing business via
LBS in the fourth quarter of 2018, for risks incepting on or after
1 January 2019. The placement process is more onerous than for
non-European business, however, the solution in place is the most
effective approach given that the UK will potentially lose its
passporting rights.
With significant uncertainties still surrounding Brexit and with
potentially unknown economic and political implications for the UK,
we continue to monitor developments closely.
Financial information and availability of accounts
The financial information set out above does not constitute the
Company's statutory accounts for the year ended 31 December 2018 or
2017, but is derived from those accounts. Statutory accounts for
2017 have been delivered to the Registrar of Companies and the
statutory accounts for 2018 will be delivered following the
Company's annual general meeting. The auditor has reported on those
accounts; their reports were unqualified and did not contain
statements under Section 498(2) or (3) of the Companies Act
2006.
The audited Annual Report and Accounts for 2018 are expected to
be available on the Company's website no later than 15 March 2019.
An announcement will be made when they are available.
The preliminary results were approved by the Board on 13
February 2019.
Responsibility statement of the Directors
The Directors confirm that, to the best of their knowledge:
-- The consolidated financial statements, contained within the
2018 Company's statutory accounts, which have been prepared in
accordance with International Financial Reporting Standards (IFRS)
as adopted by the European Union, give a true and fair view of the
assets, liabilities, financial position, and profit or loss of the
Group; and
-- The Strategic Report, contained within the 2018 Company's
statutory accounts, includes a fair review of the development and
performance of the business and the position of the Group, together
with a description of the principal risks and uncertainties that it
faces.
Matthew Wilson Mark Allan
Group Chief Executive Officer Group Chief Financial Officer
13 February 2019 13 February 2019
Consolidated Income Statement
For the year ended 31 December 2018
Year ended Year ended
31 December 31 December
2018 2017
US$m US$m
-------------------------------------------------- -------------- -----------------
Revenue
Gross premiums written 2,239.1 2,057.0
Less premiums ceded to reinsurers (756.7) (526.2)
---------------------------------------------------- -------------- -----------------
Premiums written, net of reinsurance 1,482.4 1,530.8
Gross amount of change in provision for unearned
premiums (34.4) (54.3)
Reinsurers' share of change in provision
for unearned premiums 20.0 60.3
Net change in provision for unearned premiums (14.4) 6.0
Earned premiums, net of reinsurance 1,468.0 1,536.8
---------------------------------------------------- -------------- -----------------
Investment return (101.2) 205.5
Return on derivative contracts 6.3 5.2
Other income 10.6 9.9
Gains on other financial liabilities 17.4 4.0
Net foreign exchange gains - 9.7
Total revenue 1,401.1 1,771.1
---------------------------------------------------- -------------- -----------------
Expenses
Claims incurred:
Claims paid:
Gross amount (1,345.5) (1,068.4)
Reinsurers' share 407.3 206.7
---------------------------------------------------- -------------- -----------------
Claims paid, net of reinsurance (938.2) (861.7)
Change in the provision for claims:
Gross amount (290.0) (619.0)
Reinsurers' share 361.2 372.4
---------------------------------------------------- -------------- -----------------
Net change in the provision for claims 71.2 (246.6)
Claims incurred, net of reinsurance (867.0) (1,108.3)
Acquisition costs (573.0) (535.4)
Other operating expenses (120.5) (109.9)
Net foreign exchange losses (18.6) -
Total expenses excluding finance costs (1,579.1) (1,753.6)
---------------------------------------------------- -------------- -----------------
Operating (loss)/profit (178.0) 17.5
Finance costs (18.8) (17.1)
Share of net profit of associates 6.5 5.1
(Loss)/profit on ordinary activities before
tax (190.3) 5.5
Tax income 23.8 16.0
(Loss)/profit for the year (166.5) 21.5
---------------------------------------------------- -------------- -----------------
All (losses)/profits arise from continuing operations.
Consolidated Statement of Comprehensive Income
For the year ended 31 December 2018
Year ended Year ended
31 December 31 December
2018 2017
US$m US$m
--------------------------------------------------- -------------- -----------------
(Loss)/profit attributable to owners of the
parent (166.5) 21.5
Other comprehensive income
Items not to be reclassified to profit or
loss in subsequent periods:
Actuarial gains/(losses) on defined benefit
pension scheme 3.8 (1.9)
Deferred tax (loss)/gain relating to actuarial
gains/(losses) on defined benefit pension
scheme (0.6) 0.3
Items that may be reclassified to profit
or loss in subsequent periods:
Change in unrealised foreign currency translation
losses on foreign operations (6.1) 7.4
Total other comprehensive income (2.9) 5.8
----------------------------------------------------- -------------- -----------------
Total comprehensive income recognised for
the year (169.4) 27.3
----------------------------------------------------- -------------- -----------------
Consolidated Statement of Financial Position
At 31 December 2018
31 December 31 December
2018 2017
US$m US$m
---------------------------------------- -------------- --------------
Assets
Intangible assets 104.4 97.8
Property, plant and equipment 17.4 21.3
Deferred acquisition costs 244.1 235.7
Investments in associated undertakings 43.0 40.4
Reinsurance contracts 1,699.8 1,349.5
Employee benefits 53.1 48.6
Deferred taxation 56.1 20.4
Current taxation 8.3 13.7
Financial investments 3,145.1 2,699.4
Derivative contracts 17.4 18.3
Insurance and other receivables 1,008.8 908.3
Cash and cash equivalents 818.2 1,571.6
Total assets 7,215.7 7,025.0
------------------------------------------- -------------- --------------
Liabilities and Equity
Liabilities
Insurance contracts 5,274.1 5,027.3
Borrowings 174.9 219.8
Other financial liabilities 241.8 82.1
Provisions 2.2 2.4
Current taxation 1.4 21.1
Derivative contracts 14.1 12.5
Insurance and other payables 422.2 529.5
Total liabilities 6,130.7 5,894.7
------------------------------------------- -------------- --------------
Equity
Called up share capital 6.8 6.4
Share premium 435.1 -
Capital redemption reserve 1.0 0.2
Foreign currency translation reserve (89.7) (83.6)
Retained earnings 731.8 1,207.3
Total equity attributable to owners
of the parent 1,085.0 1,130.3
------------------------------------------- -------------- --------------
Total liabilities and equity 7,215.7 7,025.0
------------------------------------------- -------------- --------------
Approved by the Board of Directors on 13 February 2019 and were
signed on its behalf by:
Matthew Wilson Mark Allan
Group Chief Executive Officer Group Chief Financial Officer
Consolidated Statement of Cash Flows
For the year ended 31 December 2018
Year ended Year ended
31 December 31 December
2018 2017
US$m US$m
---------------------------------------------- -------------- --------------
Cash flows from operating activities
Cash (used in)/provided from operations (822.2) 532.3
Tax paid (25.6) (12.0)
Interest received 45.1 42.3
Dividend received 11.4 6.4
Net cash (outflows)/inflows from operating
activities (791.3) 569.0
------------------------------------------------ -------------- --------------
Cash flows from investing activities
Purchase of intangible assets (6.4) (7.4)
Purchase of property, plant and equipment (1.4) (0.9)
Acquisition of subsidiary undertaking (15.5) -
Dividends from associated undertaking 3.7 1.6
Net cash outflows from investing activities (19.6) (6.7)
------------------------------------------------ -------------- --------------
Cash flows from financing activities
Proceeds from issue of shares 436.3 -
(Repayment)/drawdown on revolving credit
facility (37.0) 45.0
Purchase of class A shares for cancellation (252.9) -
Purchase of shares for share-based payment
schemes (11.2) (11.6)
Interest paid (12.7) (13.6)
Dividends paid (58.6) (45.8)
Net cash inflows/(outflows) from financing
activities 63.9 (26.0)
------------------------------------------------ -------------- --------------
Net (decrease)/increase in cash and cash
equivalents (747.0) 536.3
Cash and cash equivalents at beginning of
the year 1,571.6 1,025.5
Effect of exchange rate fluctuations on cash
and cash equivalents (6.4) 9.8
-------------- --------------
Cash and cash equivalents at the end of the
year 818.2 1,571.6
------------------------------------------------ -------------- --------------
Consolidated Statement of Changes in Equity
For the year ended 31 December 2018
Foreign
Called up Capital currency
share Share redemption translation Retained Total
capital premium reserve reserve earnings equity
US$m US$m US$m US$m US$m US$m
---------- ---------- ------------- ------------- ---------- --------
At 1 January 2018 6.4 - 0.2 (83.6) 1,207.3 1,130.3
---------------------------------------- ---------- ---------- ------------- ------------- ---------- --------
Total comprehensive income recognised - - - (6.1) (163.3) (169.4)
Share-based payments - - - - (0.7) (0.7)
Issuance of share capital 1.2 435.1 - - - 436.3
Repurchase of class A shares - - - - (252.9) (252.9)
Cancellation of share capital (0.8) - 0.8 - - -
Dividend - - - - (58.6) (58.6)
---------------------------------------- ---------- ---------- ------------- ------------- ---------- --------
At 31 December 2018 6.8 435.1 1.0 (89.7) 731.8 1,085.0
---------------------------------------- ---------- ---------- ------------- ------------- ---------- --------
Foreign
Called up Capital currency
share Share redemption translation Retained Total
capital premium reserve reserve earnings equity
US$m US$m US$m US$m US$m US$m
---------- ---------- ------------- ------------- ---------- --------
At 1 January 2017 6.4 - 0.2 (91.0) 1,232.4 1,148.0
---------------------------------------- ---------- ---------- ------------- ------------- ---------- --------
Total comprehensive income recognised - - - 7.4 19.9 27.3
Share-based payments - - - - 0.8 0.8
Dividend - - - - (45.8) (45.8)
---------------------------------------- ---------- ---------- ------------- ------------- ---------- --------
At 31 December 2017 6.4 - 0.2 (83.6) 1,207.3 1,130.3
---------------------------------------- ---------- ---------- ------------- ------------- ---------- --------
Nature and Purpose of Group Reserves
Share premium: The balance represents the difference between the price at which shares are issued
and their nominal value, less any distributions made from this account.
Capital redemption reserve: The balance represents the amount by which share capital is diminished
in the event of a share cancellation and is required to be recognised in a legal reserve so as to
maintain the Group's capital.
Foreign currency translation reserve: The balance on this reserve represents the foreign exchange
differences arising from the translation of financial statement information of entities within the
Group from functional currencies to the presentational currency of the Group.
Retained earnings: Retained earnings represents the cumulative comprehensive income retained by the
Group after taxation and after any distributions made from this account.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR BSGDDRBBBGCS
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