Brit Limited Annual Report 2016
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SEEING THE DIFFERENCE MAKES THE DIFFERENCE
2 Brit Limited Annual Report 2015
SEEING THE DIFFERENCE
AT BRIT WE BELIEVE THAT SEEING THE DIFFERENCE
MAKES THE DIFFERENCE. WE ARE A LLOYD’S INSURER
BUILT AROUND DEEP SPECIALISMS THAT WE DEPLOY
TO PROVIDE DIFFERENTIATED PRODUCTS AND
SOLUTIONS FOR OUR CLIENTS. WE ARE SUCCESSFUL
WHEN OUR CLIENTS SEE THE DIFFERENCE WE MAKE
TO THEIR COMPLEX CHALLENGES, WHICH IN TURN
ALLOWS US TO GENERATE SUSTAINABLE, LONG-
TERM VALUE.
AS A BUSINESS OUR CORE VALUES ARE TO DELIVER
ON OUR COMMITMENTS AND ACTIVELY MANAGE
RISK TO MAXIMISE RESULTS. THESE VALUES
UNDERPIN WHAT WE DO, HOW WE OPERATE AND
FORM THE BASIS OF OUR KEY OBJECTIVE OF
DELIVERING LONG-TERM VALUE CREATION.
STRATEGIC REPORT
The Strategic Report contains information about the
Group, how we make money and how we run the
business. It gives an insight into our markets, approach
to governance, sustainability and risk management. It
provides context for our financial statements, sets out
our key performance indicators and analyses our financial
performance.
GOVERNANCE
This report sets out other information of interest to our
stakeholders. It includes our Directors’ responsibility
statement and our Directors’ statement on going concern.
It also explains our governance framework and contains
our Modern Slavery and Human Trafficking Statement.
FINANCIAL STATEMENTS
This section presents the financial position, performance
and development in accordance with generally accepted
accounting practice for both the Group and the Company.
It also contains the Auditor’s Report.
ADDITIONAL INFORMATION
This section explains how we calculate our KPIs
with reference to data contained within the financial
statements. We also summarise other information relating
to the Company useful to stakeholders.
GLOSSARY
In this section we include definitions of the terms used
in this Annual Report, focusing on terms specific to the
insurance industry and to Brit.
Brit Limited Annual Report 2016 1
STRATEGIC REPORT
OFFICER STATEMENTS
BRIT AT A GLANCE
KEY PERFORMANCE INDICATORS
UNDERWRITING REVIEW
INVESTMENT MANAGEMENT REVIEW
4
6
8
10
19
FINANCIAL POSITION AND CAPITAL STRENGTH 23
FINANCIAL PERFORMANCE REVIEW
PRINCIPAL RISKS AND UNCERTAINTIES
OUR PEOPLE, CULTURE, SOCIAL, COMMUNITY
AND ENVIRONMENTAL MATTERS
GOVERNANCE
DIRECTORS’ REPORT
CORPORATE GOVERNANCE REPORT
MODERN SLAVERY AND HUMAN
TRAFFICKING STATEMENT
FINANCIAL STATEMENTS
INDEPENDENT AUDITOR’S REPORT
CONSOLIDATED INCOME STATEMENT
CONSOLIDATED STATEMENT
OF COMPREHENSIVE INCOME
CONSOLIDATED STATEMENT
OF FINANCIAL POSITION
26
38
42
45
48
50
54
58
59
60
CONSOLIDATED STATEMENT OF CASH FLOWS 61
CONSOLIDATED STATEMENT
OF CHANGES IN EQUITY
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
62
64
PARENT COMPANY FINANCIAL STATEMENTS
135
ADDITIONAL INFORMATION
RECONCILIATION OF KEY PERFORMANCE
INDICATORS TO THE FINANCIAL STATEMENTS 144
COMPANY INFORMATION
GLOSSARY
TITLE
148
149
00
Disclaimer
This document does not constitute or form part of, and should not be construed as, an offer for sale or subscription of, or solicitation of any offer or invitation or
advice or recommendation to subscribe for, underwrite or otherwise acquire or dispose of any securities (including share options and debt instruments) of the
Company nor any other body corporate nor should it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever
which may at any time be entered into by the recipient or any other person, nor does it constitute an invitation or inducement to engage in investment activity under
Section 21 of the Financial Services and Markets Act 2000 (FSMA). This document does not constitute an invitation to effect any transaction with the Company or to
make use of any services provided by the Company. Past performance cannot be relied on as a guide to future performance.
STRATEGIC REPORT
2 Brit Limited Annual Report 2016
STRATEGIC REPORT
THIS STRATEGIC REPORT CONTAINS
INFORMATION ABOUT OUR BUSINESS
AND PROVIDES AN INSIGHT INTO HOW
WE OPERATE AND OUR APPROACH TO
SUSTAINABILITY AND RISK MANAGEMENT.
IT PROVIDES CONTEXT FOR OUR
FINANCIAL STATEMENTS, SETS OUT OUR
KEY PERFORMANCE INDICATORS AND
ANALYSES OUR FINANCIAL PERFORMANCE.
4
OFFICER STATEMENTS
Mark Cloutier, our Group Executive Chairman,
and Matthew Wilson, our Group CEO,
comment on the Group’s performance and
business development during 2016 and look
ahead to 2017.
10
UNDERWRITING REVIEW
We discuss our underwriting performance and
developments during the year.
26
FINANCIAL PERFORMANCE REVIEW
We provide an analysis of the performance
of our business during 2016.
6
BRIT AT A GLANCE
We introduce the Brit Group, explain who
we are and what we do. We examine our
track record, financial strength and look
ahead to 2017.
19
INVESTMENT MANAGEMENT REVIEW
We explore current investment market
conditions and explain our performance and
our portfolio.
38
PRINCIPAL RISKS AND UNCERTAINTIES
We set out our risk management framework
and explain how we managed the principal
risks facing our business in 2016 to ensure we
deliver our strategic priorities.
8
KEY PERFORMANCE INDICATORS
We set out our key performance indicators
(KPIs). We explain how we use them to
monitor our performance and outline their
performance from 2012 to 2016.
23
FINANCIAL POSITION AND
CAPITAL STRENGTH
We review our financial position at
31 December 2016 and our balance sheet
strength.
42
OUR PEOPLE, CULTURE, SOCIAL,
COMMUNITY AND ENVIRONMENTAL
MATTERS
We provide information on our people, social,
community and environmental matters, to the
extent necessary to understand our business.
This Strategic Report was approved by the Board on
15 February 2017.
Matthew Wilson
Group Chief Executive Officer
Mark Allan
Chief Financial Officer
Brit Limited Annual Report 2016 3
STRATEGIC REPORT 4 Brit Limited Annual Report 2016
OFFICER STATEMENTS
with our new Singapore service company starting
to write business in the period and with a significant
strategic investment in Camargue Underwriting Managers,
a Lloyd’s coverholder and one of South Africa’s leading
providers of specialised insurance products. We also
launched Syndicate 2988 for the 2017 underwriting year,
supported by third party capital.
Our investment strategy takes a long term view of markets
and we are pleased this strategy has resulted in a return of
2.6% in the year, primarily driven by contraction in the US
yield curve, giving rise to mark to market gains on our long
dated treasuries. In November, we sold the majority of our
fixed income positions locking in a solid result for the year
and leaving the portfolio defensively positioned with a 25.9%
allocation to cash and cash equivalents.
In December 2016, we announced appointment of
Matthew Wilson to Group Chief Executive Officer, and my
appointment as Group Executive Chairman, effective
1 January 2017. I have worked with Matthew since 2010
and there is no one who knows the business better. He has
the skill-set, market experience and leadership qualities to
successfully take the business forward on the next stage
of its journey. I look forward to continuing to work closely
with Matthew and the entire Brit team in my new role,
and to build upon the market-leading platform we have
created at Brit, through what are likely to be challenging,
but interesting times.’
Mark Cloutier
Group Executive Chairman
15 February 2017
‘Brit has delivered a strong performance in 2016. Our return
on adjusted net tangible assets before FX, which we see
as a key indicator of our performance, increased to 11.8%,
giving a five year average of 16.9%. This was driven by the
combination of a continuing contribution from underwriting
results, under difficult circumstances, and a strong
performance from our investment portfolio. Our RoNTA,
after including foreign exchange movements, increased
significantly to 15.8%.
Market conditions remain challenging as competition
from new entrants and additional capacity from existing
competitors with appetite to grow has put continuing
downward pressure on rates across several major classes of
business. We do not believe these conditions are sustainable
over the longer term and certainly call for a cautious
approach to growth. In this climate, we are determined
to maintain underwriting discipline and have adopted a
defensive stance to protect our business and preserve
capital. Our strategy is to remain well diversified and to focus
on retaining quality business, while contracting the areas of
our book experiencing the most rating pressure. We also
continue to assess cautiously new business and manage
our portfolio mix to target areas of our book with less rating
pressure. We believe that such an approach will enable us
to weather the current environment and position us well for
the future when the ill-discipline reads through to results and
market conditions improve.
This focused and disciplined strategy has resulted in a
combined ratio for 2016 of 96.4%, including 4.5 percentage
points attributable to major losses. Pleasingly, our attritional
ratio remained relatively constant at 55.5%. This is a solid
result in today’s challenging environment and increasingly
complex marketplace.
During 2016, we have maintained our strategy of building
our platform through the addition of specialty underwriting
talent in targeted areas. We have also launched a number
of initiatives, demonstrating our commitment to innovating
new products that address real client needs, both in terms
of the cover we offer and the claims service we provide. Our
international distribution capabilities also continue to expand,
Brit Limited Annual Report 2016 5
demonstration of this objective, and we look forward with
excitement to the resulting expansion of Brit’s presence
at Lloyd’s.
Lastly, I am honoured and excited to lead Brit going
forward and would like to thank Mark who has been
instrumental in the transformation of Brit over the last few
years. Today we are a highly successful business with a clear
strategy, a strong culture and a hugely supportive parent in
Fairfax. I am pleased that Mark will continue to play a crucial
role as Group Executive Chairman, supporting myself and
the senior management team as we look forward to 2017 and
beyond with confidence.’
Matthew Wilson
Group Chief Executive Officer
15 February 2017
‘Market conditions have, as expected, remained difficult
during 2016, with the industry experiencing continued
pressure on premium rates. Against this backdrop with
increased catastrophe activity, we delivered a respectable
combined ratio of 96.4%, including 4.5 percentage points
attributable to major losses.
Brit experienced an expected overall rate reduction of 3.3%,
lower than the 4.1% reduction experienced in 2015. This
reduction was seen across both reinsurance business, which
experienced rate reductions of 4.8%, and direct business,
which experienced rate reductions of 2.9%.
We have looked to balance our portfolio by actively
defending our core business, ensuring rigorous risk
selection in the classes experiencing pressure and modestly
expanding in areas where profitable opportunities exist,
while contracting in areas where it is felt that profit margins
are thinner. We are also managing our net position through
the selective use of additional reinsurance protections, such
as increased cessions on quota shares.
It is pleasing to have seen a number of initiatives successfully
launched during the year, and to see those initiated in recent
years delivering profitable premium growth for the Group. In
the current environment, we believe this proactive approach
and emphasis on innovation is an important complement
to our disciplined underwriting. Looking ahead, we believe
our clearly defined underwriting approach and opportunity
driven growth strategy will allow us to navigate the ongoing
challenging conditions, while leaving us strongly positioned
for any improvements over the longer term.
In September 2016 we announced the launch of Syndicate
2988 which has a capacity of £52m (US$82m) for its first
year of trading. Syndicate 2988 reaffirms our commitment
to the Lloyd’s market and will help us further position Brit
as the specialist underwriter of choice, building on our
existing strength across underwriting, claims and capital
management and track record of delivering attractive returns
for capital providers. Delivering new products, solutions
and perspectives for brokers and clients is at the very heart
of our strategy. The launch of Syndicate 2988 is a powerful
STRATEGIC REPORT 6 Brit Limited Annual Report 2016
BRIT AT A GLANCE
WE ARE A MARKET-LEADING GLOBAL
SPECIALTY (RE)INSURER AND THE LARGEST
BUSINESS THAT TRADES SOLELY ON
THE LLOYD’S OF LONDON PLATFORM,
THE WORLD’S LEADING SPECIALIST
COMMERCIAL INSURANCE MARKET.
Overview
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.
A full history of Brit can be found at
www.britinsurance.com.
The Fairfax Group
FFHL Group Limited (FFHL), a member
of the Fairfax Financial Holdings
Limited group (Fairfax), completed the
acquisition of 97.0% of the then LSE
listed Brit PLC on 5 June 2015 and
acquired the remaining 3.0% on
8 July 2015. Fairfax (www.fairfax.ca) is
a Canadian company whose shares are
listed on the Toronto Stock Exchange.
On 29 June 2015, Fairfax completed
the sale of 29.9% of Brit to Ontario
Municipal Employees Retirement
System (OMERS), the pension plan
manager for government employees in
the Canadian province of Ontario. Brit’s
ordinary shares’ listing on the London
Stock Exchange was cancelled with
effect from 23 June 2015 and Brit PLC
was renamed Brit Limited.
FFHL will have the ability to repurchase
the shares owned by OMERS over time
and on 3 August 2016, FFHL acquired
an additional 2.4% of Brit from OMERS,
bringing its ownership to 72.5%.
We believe that the Fairfax Group 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 the delivery of our strategy
to become a leading global specialty
(re)insurer.
Underwriting
Brit predominantly underwrites complex,
high value insurance and reinsurance
risks. Insurance represents in excess of
80% of our GWP while treaty reinsurance
represents the balance. Our largest
source of business is the US excess and
surplus lines market and the majority of
our premium income is denominated
in US dollars, although the risks
underwritten are distributed globally.
We complement our core classes with
highly specialised niche lines which
provide both diversification and the
potential for high returns. We source our
business through trading relationships with
Lloyd’s brokers, wholesale brokers, retail
agents and reinsurance intermediaries
including the three largest brokers
and from a wide range of middle
tier intermediaries. The majority of
reinsurance business is sourced through
the global reinsurance brokers.
We underwrite primarily in London, but
have developed an extensive network of
local offices in the US, Bermuda, Japan,
China and Singapore to access business
that does not usually reach Lloyd’s. We
lead or are second agreement party
on approximately 70% of the business
we write, underlining our underwriting
strength and expertise.
Our platform and operations
Our strong and efficient capital model
results from our focus on the Lloyd’s
platform. As part of the Fairfax group we
also benefit from the group’s financial
strength. We believe that our efficient,
flexible and scalable operating platform
provides a stable foundation that
enables us to pursue our strategy of
focusing on maximising profitability of
the underwriting business and extending
our global distribution network.
Investment Management
At Brit we have a significant investment
portfolio comprising financial investments,
investments in associates, investment
related derivatives and cash. The value
of our invested assets at 31 December
2016 was US$3,971.5m. During the
fourth quarter of 2016 we undertook
a portfolio rebalancing exercise. Our
concerns around rising rates resulted in
the longer dated, interest rate sensitive
fixed income instruments being sold
and the proceeds being invested into
short dated Treasury bills. Following this
exercise, the portfolio ended the year
defensively positioned with an increased
allocation to cash and cash equivalents
(US$1,027.3m), a reduced holding in
fixed income securities (US$2,439.4m)
and an equity allocation of US$492.0m.
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.
Our culture and values
We are passionate about our business,
our people and our customers and we
Brit Limited Annual Report 2016 7
Outlook
Despite the challenging rating
environment and increased catastrophe
activity, we have returned both a solid
underwriting result and investment
performance in 2016. However, this
profitable underwriting environment
being experienced by the market is
likely to result in further rate softening
in 2017, albeit at reduced rates, and
a continued challenging environment
when combined with exceptionally low
interest rates, geopolitical uncertainty,
global growth concerns and market
volatility. Capital availability continues to
increase from both traditional and non-
traditional sources and we expect this to
create further competition during 2017.
We continue to focus on our core
fundamentals of underwriting discipline,
risk selection and capital management
and are making good progress with
the selective expansion of our global
distribution capability, capitalising on our
initiatives of recent years.
Our position as the largest Lloyd’s-only
insurance business with the right platform
and business mix continues to position us
well in the depressed rating and low yield
environment. Joining the Fairfax group
supports the delivery of our strategy,
enabling us to enhance our global
product offering, opening new distribution
channels while providing us with additional
new business opportunities.
RoNTA1 Combined ratio Attritional ratio
%
%
%
11.8
9.1
20.7
24.2
18.7
8.5
14.4
17.4
96.4
91.7
89.5
85.4
93.2
98.0
97.1
94.0
55.5
55.2
51.0
51.3
51.8
55.4
58.1
64.2
Investment
return
(net of fees)
%
2.6
0.1
2.9
2.1
2.9
2.4
3.2
4.2
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. Each part of our
business has objectives aligned with the
overall Group strategy, so that all of our
employees understand the vital part they
play in our success and value our culture
which we consider to be collaborative,
hardworking, smart, friendly and fun.
Our track record
Over the past eight years, we have
successfully transformed Brit into a
simpler, more focused, more profitable,
more efficient and more dynamic
business, driven by some of the industry’s
best talent. We have been proactive in
delivering the best service for our clients
and attractive returns to shareholders.
Over this period Brit has demonstrated
a strong track record of profitable
underwriting, competitive net investment
returns, growth in core business lines and
disciplined capital management.
In 2016, we continued to build on
our underwriting track record with
a combined ratio of 96.4% and an
underwriting profit of US$54.6m,
bringing our five year average combined
ratio to 91.2%. Our overall 2016 result
was impacted by underwriting market
conditions and an increased incidence
of major losses. Despite this backdrop,
we achieved a profit after tax of
US$157.6m and a return on adjusted net
tangible assets before foreign exchange
movements (RoNTA) of 11.8%. RoNTA
for 2016 after including foreign exchange
movements was 15.8% (2015: 3.8%).
Our financial strength
Our capabilities and ambition are
underpinned by our strong financial
position. Our business is underwritten
exclusively 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.
At 31 December 2016 we had capital
resources equal to 125.6% of the
management capital requirements
needed to support our business. Our
capital strength provides the flexibility to
allow us to cope with major losses while
not deviating from our commitment to
fund profitable expansion and to provide
attractive returns.
Result of the UK referendum on
EU membership
On 23 June 2016, the United Kingdom
voted to leave the EU. While the
medium and long-term ramifications
of Brexit will take time to assess, the
country is now likely to enter a long
phase of negotiation with the EU on
the terms of the country’s exit.
Brit’s focus remains on putting our
clients first. Their needs will remain at
the core of everything we do, and we
will continue to manage our business
with this in mind. Contingency planning
on the potential impact of this outcome
was performed prior to 23 June, and we
will continue to monitor developments
to work to minimise the impact on Brit
and our clients and to take advantage
of opportunities as they arise.
Year
2016
2015
2014
2013
2012
2011
2010
2009
Note 1: Before FX and corporate activity costs
STRATEGIC REPORT
8 Brit Limited Annual Report 2016
KEY PERFORMANCE
INDICATORS
AT BRIT WE MONITOR AND MEASURE
OUR PERFORMANCE BY REFERENCE TO
CERTAIN KEY PERFORMANCE INDICATORS
(KPIS). THESE KPIS ARE USED BY US TO
MANAGE OUR BUSINESS AND ALLOW
US TO SEE AT A GLANCE HOW WE ARE
PERFORMING.
Introduction
Our six KPIs show the returns that we are generating, the
performance of our underwriting activities, the performance
of our investment portfolio, our financial strength and our
efficient, flexible and scalable platform. The development
of our KPIs over the five years set out below reflects our
successful major transformation programme and the
repositioning of our business focusing on a simpler and
more efficient model.
A reconciliation of each KPI to the amounts presented in the
financial statements, where relevant, is included in the Annual
Report and Accounts starting on page 144.
Definitions of each of our KPIs
are included in the Glossary
starting on page 149.
RETURN ON NET TANGIBLE ASSETS BEFORE FX MOVEMENTS AND CORPORATE ACTIVITY COSTS (RoNTA)
Return on net tangible assets before
foreign exchange movements and
corporate activity costs (RoNTA) shows
the return being generated by our
operations compared to the adjusted
net tangible assets deployed in our
business.
Our track record over the past five
years has been very strong with
significant outperformance of our
global peers in both severe and
benign catastrophe years. In 2016,
we delivered a RoNTA of 11.8% in
challenging insurance and investment
market conditions driven by a strong
underwriting performance, resulting in
a five year average RoNTA of 16.9%.
RoNTA for 2016 after including foreign
exchange movements was 15.8%
(2015: 3.8%).
Track record
%
25
20
15
10
5
0
24.2
20.7
18.7
11.8
9.1
2012
2013
2014
2015
2016
TOTAL VALUE CREATED
The total value created measures the
increase in adjusted NTA (including
distributions) in a year. It reflects
the after tax result recorded in the
income statement and all other value
movements.
In 2016, value creation was US$139.0m
or 12.9% of opening adjusted NTA.
The company has generated a total
value of US$719.0m over the past five
years, an average of US$143.8m per
annum.
Track record
US$m
150
200
100
100
50
0
217.2
192.0
151.6
139.0
19.2
2012
2013
2014
2015
2016
COMBINED RATIO
The combined ratio is our key
underwriting metric and measures
the profitability of our underwriting.
It shows how much of every US$1
of premium is spent in the total costs
of sourcing and underwriting the
business and settling claims. A
combined ratio under 100% indicates
underwriting profitability.
Our combined ratio in 2016 was
96.4%, reflecting a solid underwriting
performance in difficult market
conditions. We have consistently
delivered combined ratios below 100%
over the past five years and an average
ratio of 91.2% over that period.
INVESTMENT RETURN
We assess the performance of our
investment portfolio by comparing
the return generated by our invested
assets, net of external investment
related expenses, against the value
of those invested assets.
Our investment strategy takes a
long-term view of markets, which
can lead to significant variations in
our year-on-year return figures.
CAPITAL RATIO
The capital ratio measures the strength
of our balance sheet by comparing
our available capital resources to
the capital we need to hold to meet
our management entity capital
requirements.
Our balance sheet remains strong.
At 31 December 2016, after dividends
paid and share buy-back during the
year of US$148.9m, Group capital
resources totalled US$1,457.3m which
equated to 125.6% of our Group
capital requirement of US$1,160.2m.
Brit Limited Annual Report 2016 9
Track record
%
100
80
60
40
20
0
93.2
85.4
89.5
91.7
96.4
2012
2013
2014
2015
2016
Track record
%
3.0
2.5
2.0
1.5
1.0
0.5
0.0
2.9
2.9
2.6
2.1
2012
2013
2014
2015
2016
0.1
Track record
%
200
150
100
50
141.0
150.4
125.0
128.2 125.6
0
2012
2013
2014
2015
2016
RATIO OF FRONT OFFICE EMPLOYEES TO BACK OFFICE EMPLOYEES
This measure monitors the efficiency
of our business model by comparing
the number of front office client-
facing revenue generators and service
providers to the number of back office
employees. An increase in the ratio
would suggest that the back office is
becoming more efficient in supporting
the client-facing activities of the front
office.
We have monitored this ratio since
2013 following the restructuring of
the Group. At 31 December 2016,
the ratio was 180.7%, reflecting that
we had approximately 1.8 front office
employees for every back office
employee.
Track record
%
200
150
149.7
159.8
178.5
180.7
100
50
0
2013
2014
2015
2016
STRATEGIC REPORT
10 Brit Limited Annual Report 2016
UNDERWRITING
REVIEW
UNDERWRITING PHILOSOPHY
Our underwriting philosophy is simple: we have
developed a best in class specialty underwriting
team wholly focused on writing a broad mix of
profitable business. Our Lloyd’s platform gives
us a significant advantage as the Lloyd’s market
is a specialist in and leader of complex, short-
tail property and energy business. We have
also maintained our position in a broad mix of
casualty lines and our casualty treaty account has
consistently outperformed those of our peers.
In addition, we have continued to enhance our
global distribution channel, launched a number
of innovative products and developed our
professional, customer focused claims function.
CLAIMS MANAGEMENT
Our claims function is one of the key ‘market facing’ parts
of our business, with its professionalism and complex
claims handling experience building a leading reputation.
The way in which claims are handled by an insurer or reinsurer
will often determine whether business will be renewed and
the reputation of the claims function often assists in the
underwriting of new business. A professional claims function
will also drive value for the business in its handling of claims
which in the specialty business will often be complex.
Business developments during 2016
During 2016 we have continued to focus on our underwriting
strategy. Key developments have included:
• Syndicate 2988
In November, Brit received approval from Lloyd’s to launch
a new syndicate, Syndicate 2988, to underwrite risks
attaching on or after 1 January 2017.
Syndicate 2988, which is managed by Brit Syndicates Limited,
has a capacity of £52m (US$82m) for its first year of trading
and is supported by private Lloyd’s members. Underwriting
is undertaken by Brit’s existing teams and the syndicate will
write a well-balanced global portfolio of both insurance
and reinsurance across a broad range of specialty lines in
which Brit already has well established product offerings.
The launch of Syndicate 2988 reinforces Brit’s long-term
commitment to the Lloyd’s market and ambition to use its
infrastructure to expand our current position as the largest
Lloyd’s only insurer. It will also help us further position Brit
as the specialist underwriter of choice, building on our
existing strength across underwriting, claims and capital
management and track record of delivering attractive
returns for capital providers.
• Camargue
On 31 August 2016, following the receipt of all regulatory
approvals, Brit acquired a 50% interest in the South African
company, Camargue Underwriting Managers Proprietary
Limited.
Founded in 2001 and with a strong track record of growth
since inception, Camargue writes a range of specialised
insurance products across the South African market.
A Lloyd’s coverholder, Camargue has a longstanding
relationship with, and is an important trading partner
for, Brit. Camargue is the largest independent provider
of specialist liability solutions in South Africa with gross
written premiums of ZAR215.0m (US$14.4m) for the year
to 31 December 2015.
Brit Limited Annual Report 2016 11
The investment builds on Brit’s strategy of selective
international expansion into niche specialty businesses that
offer well-established distribution networks underpinned
by underwriting expertise. Under the agreement,
Camargue will retain its independence, underwriting on
behalf of Lloyd’s syndicates, international insurers and local
capacity.
• Singapore office
In February we announced the opening of an office in
Singapore. The new office, which operates on the Lloyd’s
Singapore platform, began operations on 1 March 2016,
after receiving approval from both Lloyd’s and MAS
(Monetary Authority of Singapore).
We believe that local markets such as Singapore are
becoming increasingly important as we see both capacity
and insurance penetration continue to grow. By opening
an office in Singapore we’ll be able to offer both on the
ground expertise and local access to decision makers.
•
‘Pay or Explain’ claims initiative
At the Miami Boat Show in February 2016, Brit launched
‘Pay or Explain’, the first product to offer a definitive
timescale to respond to an insurance claim. Aimed at
those buying Marine Yacht insurance cover, the Pay or
Explain policy is a guarantee that, for insurance cover of
up to US$/€150m, we will provide a roadmap to managing
the claim within 30 days of being notified of a loss. As part
of the new product, we have put in place an infrastructure,
which includes on-the-ground consultants, surveyors and
specialist lawyers, dedicated to improving the speed of
managing the claim and, where appropriate, payment
of the claim.
This initiative offers peace of mind and removes the
significant uncertainty often faced by yacht owners around
the time it will take for a claim to be paid. It is also a clear
demonstration of Brit’s commitment to innovating new
products that address real customer needs.
• Conexus
In March, Brit launched a new product targeting the
fine art and specie sector. The product, ‘Conexus’, has
been designed to combine cover for fine art and specie,
property business interruption and general liability into a
single policy. Traditionally, these three elements of cover
would need to have been bought separately, resulting in
an increased level of administration for brokers and clients.
Initially targeting business in North America, we believe
that this combined product offers a far more appealing
and convenient unified product, and demonstrates our
ability to use the wealth of expertise across our business
and willingness to innovate to respond to a market need.
• Aviation consortium
In March, Brit successfully launched a Lloyd’s consortium
for commercial general aviation, the only Lloyd’s consortium
for commercial general aviation. The consortium, which
Brit leads, writes hull risks of up to US$10.0m and provides
liabilities cover of up to US$150.0m. The commercial
general aviation class covers a wide range of specialty
business, from firefighting helicopters to regional aircraft
carriers. Formed in response to market demands for
increasing efficiency, the facility allows brokers to bind fully
through just one underwriter. It demonstrates not only our
strong capabilities within aviation, but also our willingness
to work with the market to develop offerings that truly add
value in a changing and competitive landscape.
• Ambridge Partners LLC
For 2016, Brit has acted as lead partner for Ambridge
Partners LLC (Ambridge) as it increased capacity of its
transactional liability facility to US$175.0m.
This increase in capacity follows Brit’s investment in
Ambridge in September 2015, and provides attractive
exposure to the fast-growing managing general
underwriter and continues Brit’s selective international
expansion into niche specialty businesses with a strong
track record in distribution and underwriting capabilities.
This increased capacity will enable Ambridge to further
cement its position as a leading managing general
underwriter in the transactional liability space and allows
Brit to build on its investment.
STRATEGIC REPORT
12 Brit Limited Annual Report 2016
• US Marine
In May, BGSU appointed a New York based Senior Vice
President Marine to build its presence in the Hull, Liability,
Cargo and Yacht lines. The appointment marked the
strategic evolution of our US based P&C platform into the
Marine market, a space where the wider Brit Group enjoys
a long pedigree and presents us with the opportunity
to deliver dedicated expertise and local service whilst
enhancing our existing appetite in the class.
In October, BGSU announced two appointments to its
newly formed Marine business. First, the appointment of
a Vice President Cargo based in New York and responsible
for building our presence in the US cargo market. Second,
a Vice President Yacht based in Annapolis, Maryland
responsible for developing our presence in the US
recreational marine market. These appointments reflect
our strategy of expanding our regional footprint in the
Americas by building on the agility of the Lloyd’s service
company model with a focus on specialty products that
deliver sustainable and profitable growth.
• Launch of Latin American engineering team
In May, BGSU appointed a Miami based Vice President
Engineering, with responsibility for Latin America and
the Caribbean. This appointment is part of our strategy
to expand our footprint in the Americas, focusing on
specialist areas where we can deliver sustainable and
profitable growth.
• Diamond Processing consortium
In November, Brit announced the launch of a Lloyd’s
consortium for diamond processing. The consortium, led
by Brit and brings additional capacity of up to $50m to
the London market, is Lloyd’s first dedicated to diamond
processing and affirms Brit’s position as market leader in
this class of business.
The Diamond Processing consortium further demonstrates
Brit’s market leading capability in this specialty sub-class,
providing it with a strong strategic position to take
advantage of recent improvements in diamond cutting
technology and risk assessment techniques.
• Brit head office
In February, we completed our move to The Leadenhall
Building on Leadenhall Street, London EC3V. The lease
is for approximately 60,000 sq ft of office space over the
16th, 17th, 18th, 39th and 40th floors.
The five floors include a dedicated broker area, extensive
facilities for employees and client meeting rooms.
The office has been designed to foster conditions for
collaboration, between both employees and clients,
through the creation of various break-out areas and the
construction of two state-of-the-art staircases connecting
different floors. Brit hopes the new office, opposite the
home of the UK insurance market, Lloyd’s, will bring
brokers and underwriters closer together in a modern yet
inviting environment, with unrivalled views of the City.
• Brit’s Lloyd’s underwriting box
In March, we unveiled a new design for our underwriting
box at Lloyd’s. The space has been designed by us to
update and modernise the traditional Lloyd’s box, creating
a more practical and welcoming environment for both
brokers, clients and visitors. Through the introduction of
a broker lounge area and improved use of technology,
we hope to bring brokers and our underwriters closer
together in the heart of the London insurance market.
We were also delighted with the support we had from
Lloyd’s on this project.
Brit Limited Annual Report 2016 13
STRATEGIC REPORT 14 Brit Limited Annual Report 2016
UNDERWRITING REVIEW
MARKET CONDITIONS HAVE, AS EXPECTED, REMAINED
CHALLENGING DURING 2016. THE INSURANCE INDUSTRY
HAS EXPERIENCED CONTINUED PRESSURE ON
PREMIUM RATES, INFLUENCED BY LOW INSTANCES OF
CATASTROPHE LOSSES IN RECENT YEARS, COMPETITION
FROM NEW ENTRANTS AND ADDITIONAL CAPACITY FROM
EXISTING COMPETITORS WITH AN APPETITE TO GROW
DESPITE RATING PRESSURE.
2016 Review
Premium rates continued to experience reductions in 2016,
albeit at a lower rate than in 2015. Overall risk adjusted
premium rates reduced by 3.3% (2015: 4.1%), with reductions
in our direct business of 2.9% (2015: 3.4%) and reductions in
our reinsurance portfolio of 4.8% (2015: 6.9%). Rating pressure
was most severe in our direct energy (10.6% reduction),
aviation (5.7% reduction) and property PRV (8.8% reduction)
divisions, partly offset by improved experience in the specialist
liability and accident and health divisions. Property treaty
reinsurance rates reduced by 5.6% (2015: 9.3%), and casualty
treaty rates reduced by 4.8% (2015: 4.9%). Critically, we
continue to see rating adequacy in many lines.
In response to these conditions, we have continued to take a
defensive position. We have looked to balance the portfolio
by actively defending our core business and modestly
expanding in areas where profitable opportunities exist,
while contracting in areas where it is felt that profit margins
are thinner. Our retention rate for the year was 84.3% (2015:
82.4%) which reflects our focus on retaining core accounts and
pro-active management of broker relationships.
GWP for 2016 totalled US$1,912.2m, a 2.3% decrease at
constant exchange rates over 2015, reflecting the market
environment and the discipline displayed by our underwriters.
It is pleasing to see that our business initiatives launched over
the last few years continue to make a positive contribution to
GWP, resulting in a US$39.1m increase over 2015.
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 is evidenced by the continued contribution from our
overseas offices, allowing us to see business not generally
accessed in London.
• Brit Global Specialty USA (BGSU) has written US$187.8m
of premium, 6.8% of growth over 2015 reflecting the
continued development of our US distribution network.
Recently launched classes, include those launched in 2016,
have added US$16.0m of GWP during the year. We have
also increased volumes through organic growth as we
capitalise on market opportunities, and have seen new
business from retail and wholesale brokers as we continue
to diversify our business sources.
• 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
equate to US$60.5m.
• Our China and Singapore operations continue to develop
and provide opportunity, we have seen measured growth
with overall GWP at US$15.5m. The Singapore office
opened in early 2016 and local markets are becoming
increasingly important as the London market continues to
see intense market competition.
Our ability to lead business, combined with our innovative
approach to underwriting, supports our success in building
long-term and dependable market relationships. This is
reflected in our retention rate, which in 2016 increased to 84%.
Brit Limited Annual Report 2016 15
Group GWP (US$m)
Group combined ratio (%)
Group attritional ratio (%)
2500
2000
1500
1000
500
0
1,825.2
1,849.7
2,148.5
1,999.2
1,912.2
93.2
89.5
91.7
85.4
96.4
100
80
60
40
20
60
50
40
30
20
10
51.8
51.3
51.0
55.2
55.5
2012
2013
2014
2015
2016
0
2012
2013
2014
2015
2016
0
2012
2013
2014
2015
2016
Brit Global Specialty Direct
GWP (US$m)
2000
Brit Global Specialty Direct
Combined ratio (%)
120
1,347.7
1,408.8
1500
1000
500
1,743.8
1,634.0
1,546.6
100
98.1
80
60
40
20
92.0
96.0
94.4
101.1
Brit Global Specialty Direct
Attritional ratio (%)
52.3
53.1
51.3
55.4
55.5
60
50
40
30
20
10
0
2012
2013
2014
2015
2016
0
2012
2013
2014
2015
2016
0
2012
2013
2014
2015
2016
Brit Global Specialty Reinsurance
GWP (US$m)
Brit Global Specialty Reinsurance
Combined ratio (%)
Brit Global Specialty Reinsurance
Attritional ratio (%)
477.0
438.4
404.7
365.1 365.8
500
400
300
200
100
65.1
66.8
75.8
73.6
100
80
82.0
60
40
20
60
50
40
30
20
10
51.1
46.7
49.4
51.9
52.9
0
2012
2013
2014
2015
2016
0
2012
2013
2014
2015
2016
0
2012
2013
2014
2015
2016
STRATEGIC REPORT 16 Brit Limited Annual Report 2016
UNDERWRITING REVIEW
We continually review our reinsurance protections to ensure
effectiveness and have sought to take advantage of the
favourable buying conditions in a soft reinsurance market. We
have increased our use of proportional reinsurance to manage
net appetite in a period of very challenging market conditions
whilst maintaining gross scale and relevance.
Overall, the combination of strong portfolio management and
underwriting discipline has led to us achieving a 96.4% CoR
in 2016, a solid underwriting performance given the market
backdrop and testimony to the strength of our underwriting
in such a competitive environment. Catastrophe losses have
impacted the CoR by 4.5pps. Our treaty reinsurance book’s
performance has remained strong with a CoR of 73.6%, driven
by relatively low catastrophe experience on the property
account, combined with continued good performance from
our leading casualty account. Our direct book returned a CoR
of 101.1%.
We believe our strategy makes our business more resilient
to such pressures and enables us to continue to generate
attractive returns. Brit has the capital strength and the strong
risk management capability to navigate these conditions and,
as a result, we are confident that our strategy and business
model are well-positioned to create long-term value for our
clients and shareholders.
Discipline remains at the core of our underwriting business
with risk selection and capital management remaining
fundamentals of our business. Our underwriting expertise and
agility as an organisation will allow us to meet the continuing
demands ahead. We will continue to focus on retaining core
accounts, be proactive in pursuit of prospective new business
and management of broker relationships, we will also continue
to make good progress with the selective expansion of our
global distribution capability and the launch of innovative new
products that address client needs.
Outlook
The outlook for 2017 remains challenging with Brit and
the industry facing a number of continued adverse trends,
including declining rating adequacy, increased competition,
alternative capital and insurer/broker consolidations all
impacting market conditions. We expect rates to continue to
soften into 2017 but to a lesser extent than in recent years.
Brit Limited Annual Report 2016 17
STRATEGIC REPORT 18 Brit Limited Annual Report 2016
Brit Limited Annual Report 2016 19
INVESTMENT
MANAGEMENT REVIEW
2016 PROVED TO BE ANOTHER CHALLENGING YEAR FOR
INSURERS’ INVESTMENT PORTFOLIOS, AS MARKETS RE-
SPONDED TO CHANGING ECONOMIC ACTIVITY, CENTRAL
BANK INTERVENTION AND POLITICAL UPSET.
Overview
The initial shocks at the beginning of 2016, resulting from
concerns around the level of China’s economic growth, led to
a significant sell off in risk assets and further declines in yields,
as investors sought the safety of government bonds. While
equity markets recovered, the additional shock of Britain’s vote
in favour of exiting the European Union resulted in a further
fall in yields at the half year leading to strong returns in our
defensive long-duration fixed income portfolio.
The second half of the year saw a marked reversal of this
position. As the US electoral process entered its final stages,
the campaign spending promises of both parties and the
increased likelihood of a Republican victory, saw significant
increases in government bonds both in the lead up to election
day and the period immediately afterwards. In anticipation
of this scenario, we sold the majority of our longer dated
government bonds to protect the portfolio against the risk
of capital losses.
Performance and approach
Return on invested assets (net of fees)
Year
2016
2015
2014
2013
2012
%
2.6
0.1
2.9
2.1
2.9
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.
The return on our invested assets was US$102.9m or 2.6%
(2015: US$5.0m/0.1%). This was a combination of US$73.7m
(2015: US$72.7m) of investment income, US$72.3m of
mark-to-market gains (2015: losses of US$50.5m) and return
on associated undertakings of US$3.6m (2015: nil), less losses
on derivatives of US$32.9m (2015: US$5.3m) and fees of
US$13.8m (2015: US$11.9m).
The first three quarters of 2016 saw a very strong investment
result, driven by a contraction in the yield curve, giving rise to
mark-to-market gains on the fixed income portfolio. These
gains were partly offset by losses on equities, loan instruments
and investment related derivatives.
The fourth quarter, however, experienced a significant increase
in yield rates as markets responded to the forthcoming US
election. This increase resulted in losses on our fixed income
book, compared to the Q3 year to date result. As the elections
drew near, we sold the majority of our longer dated fixed
income positions, crystallising the losses for the quarter, but
locking in a solid result for the year.
During 2016 the following types of derivatives were used to
manage the risks in the portfolio:
• Equity put options, purchased in 2015, were used to
protect the broader investment portfolio from a
material reduction in equity markets. These expired
on 31 December 2016;
•
•
Inflation derivatives were held to protect the portfolio from
a sustained period of deflation; and
Interest rate derivative to protect the portfolio against the
impact of further interest rate increases.
• At 31 December 2016, the running yield of our portfolio
was 0.9%, reflecting the holdings in government securities
and the high proportion of our portfolio invested in cash
and cash equivalents.
STRATEGIC REPORT 20 Brit Limited Annual Report 2016
Invested assets – look through basis
(US$m)
Investment return (net of fees) (%)
3.0
2.5
2.0
1.5
1.0
0.5
2.9
2.9
2.6
2.1
0.1
0
2012
2013
2014
2015
2016
n Government debt
securities US$1,831m
n Corporate debt
securities US$594.5m
n Structured products US$14.0m
n Loan instruments US$0.0m
n Equity securities
US$492.0m
n Alternative
investments US$7.3m
n Cash and cash
equivalents US$1,027.3m
n Investment related
derivatives US$5.5m
Asset allocation
Brit’s invested assets (financial investments, investment in
associates, cash and cash equivalents and derivative contracts)
at 31 December 2016 were US$3,971.5m (31 December 2015:
US$3,973.9m).
of the proceeds invested into US Treasury bills, the portfolio
at 31 December had a large allocation to cash and cash
equivalents (US$1,027.3m/25.9%) with a reduced holding in
fixed income securities (US$2,425.4m/61.1%). Brit’s equity
allocation was US$492.0m (12.4%).
Following the sale in the fourth quarter of the longer dated
fixed income securities in the portfolio and the investment
Our asset allocation, on both a look-through basis and
statutory disclosure basis, is set out in the tables below:
31 December 2016
Look through basis
Government debt securities
Corporate debt securities
Structured products
Loan instruments
Equity securities
Alternative investments
Cash and cash equivalents
Derivatives
Total invested assets (statutory)
31 December 2015
Look through basis
Government debt securities
Corporate debt securities
Structured products
Loan instruments
Equity securities
Alternative investments
Cash and cash equivalents
Derivatives
Total invested assets (statutory)
Equity
securities
US$m
Debt
securities
US$m
– 1,829.3
594.4
–
1.0
–
–
–
–
399.8
–
–
–
–
–
–
399.8 2,424.7
Statutory basis
Loan
instruments investment funds
US$m
US$m
Specialised Cash and cash
equivalents
US$m
-
–
–
–
–
–
–
–
–
–
1.6
–
0.1
–
13.0
–
–
–
55.6
7.3
–
1.8 1,025.5
–
–
79.4 1,025.5
–
–
–
–
265.5
–
–
–
1,792.0
144.3
19.7
–
–
–
–
–
–
–
–
23.4
–
–
–
–
664.8
259.7
24.9
–
39.9
48.4
56.1
(7.9)
265.5
1,956.0
23.4
1,085.9
–
–
–
–
–
–
581.0
–
581.0
Associated
undertaking
US$m
Derivative
assets
US$m
Total
invested
assets (look
through)
US$m
–
–
–
–
36.6
–
–
–
36.6
–
–
–
–
–
28.6
–
–
28.6
– 1,830.9
594.5
–
14.0
–
–
–
492.0
–
–
7.3
– 1,027.3
5.5
5.5
5.5 3,971.5
– 2,456.8
404.0
–
44.6
–
23.4
–
305.4
–
77.0
–
637.1
–
25.6
33.5
33.5 3,973.9
INVESTMENT MANAGEMENT REVIEW
Brit Limited Annual Report 2016 21
Our investments in specialised investment funds account for
US$79.4m or 2.0% (2015: US$1,085.9m/27.2%) of our invested
assets on a statutory reporting basis. The reduction in 2016 is
driven by the requirement to consolidate for the first time of two
key UCITS funds, following an increase in the control over these
funds exerted by Brit. These funds are predominantly invested
in corporate bonds. The remaining specialised funds in this
category cover small allocations to US & European credit as well
as specialist equity funds.
From an interest rate perspective the duration of our portfolio
at 31 December 2016 was 1.1 years (2015: 6.3 years), which
is shorter than the duration of our liabilities. This positioning
is driven by the uncertain macro environment and the risk that
government spending plans and fiscal policy in the US could
result in significant increases in yields over the short to medium
term.
At 31 December 2016, 82.7% of our invested assets were
investment grade quality (2015: 87.8%) with the reduction as a
result of the increased allocation to equity and funds. An analysis
of the credit quality of our invested assets is set out below:
Invested assets by rating
AAA
AA
A
BBB
P-1 and P-2
Other*
Total
*Other includes equities and investment related derivatives.
2016
%
9.9
56.9
5.3
3.4
7.2
17.3
2015
%
18.3
40.6
7.2
0.5
21.2
12.2
100.0
100.0
STRATEGIC REPORT
22 Brit Limited Annual Report 2016
Brit Limited Annual Report 2016 23
FINANCIAL POSITION AND
CAPITAL STRENGTH
BRIT’S CAPITAL STRENGTH, PROACTIVE CAPITAL AND
RISK MANAGEMENT AND OPERATIONAL EFFICIENCY
ARE KEY DIFFERENTIATORS.
Financial position
At 31 December 2016 our adjusted net tangible assets
totalled US$1,064.8m (2015: US$1,074.7m).
Summary consolidated statement of financial position
Assets
Intangible assets
Reinsurance contracts
Insurance and other receivables
Financial investments, investment
in associate and cash
Investment related derivatives
FX related derivatives
Other assets
Total assets
Liabilities
Deferred tax on intangible assets
Insurance contracts
Borrowings
FX related derivatives
Other liabilities
Total liabilities
Net assets
Adjusted net tangible assets
2016
US$m
2015
US$m
93.9
884.1
718.3
95.1
818.9
691.7
3,966.0
5.5
7.1
300.7
3,940.4
33.5
30.1
311.1
5,975.6
5,920.8
10.7
4,243.5
157.5
11.8
404.1
13.3
4,182.3
185.6
12.5
370.6
4,827.6 4,764.3
1,148.0 1,156.5
1,064.8 1,074.7
In addition to the profit recognised through the consolidated
income statement, the other movements in our net assets
related to defined benefit pension scheme related losses
(US$4.5m); changes in unrealised foreign currency translation
losses on foreign operations (US$13.7m charge); share based
payment related amounts (US$1.0m net credit); and dividends
paid and share buy-back costs during 2016 of US$148.9m.
Further analysis of our financial investments, cash and
investment related derivatives are set out in the Investment
Management Review on page 19.
Reserving policy
Preserving a strong statement of financial position is critical
to the long-term success of an insurance business. The Group
maintains appropriate loss reserves to cover its estimated
future liabilities. Reserves are estimates that involve actuarial
and statistical projections of the expected cost of the ultimate
settlement and administration of claims. The reserving process
is robust and managed by the Chief Risk Officer and Chief
Actuary and under the oversight of the Reserving Committee.
Reserving estimates are prepared quarterly and are based
on facts and circumstances then known, predictions of future
developments, estimates of future trends in claims frequency
and severity and other variable factors such as inflation.
Movement in these reserves forms an integral element of our
operating result.
Our reserving policy is to reserve to a ‘conservative best
estimate’ and carry an explicit risk margin above that
‘conservative best estimate’. This policy has led to a track
record of modest annual reserve releases. In 2016 this trend
continued with net releases of US$53.5m (2015: US$28.6m).
Maintaining reserves is critical to safeguard future obligations
to policyholders and the ‘conservative best estimate’
approach provides a secure foundation. It also provides a
secure foundation for the pricing of new business which is
particularly critical in a softening rating environment.
STRATEGIC REPORT 24 Brit Limited Annual Report 2016
Gearing
At 31 December 2016, our gearing ratio was 18.9%
(2015: 21.1%).
During 2016, we renegotiated our revolving credit facility
(RCF). While the facility size remains at US$360m, it has
been extended until 31 December 2020. The commercial
terms negotiated with the banks have resulted in a significant
improvement in terms with no significant change to covenant
levels.
Under our capital policy we have identified a maximum of
US$235m (2015: US$235m) of the facility to form part of
our capital resources, with the balance available for liquidity
funding. At 31 December 2016, a US$80.0m letter of credit
(LoC) was in place, of which US$4.0m was collateralised
(31 December 2015: US$80.0m/uncollateralised) to support
our underwriting activities. At the date of this report,
16 February 2017, the LoC was fully collateralised. At
31 December 2016 and at 31 December 2015 no other
drawings were outstanding on the facility.
In addition, we have in issue £135.0m of 6.625%
subordinated debt with a carrying value of £127.5m/
US$157.5m (31 December 2015: £124.5m/US$185.6m).
This instrument, which is listed on the London Stock
Exchange, was issued in December 2005, is callable in
whole by Brit on 9 December 2020 and matures in 2030.
Foreign exchange management
At 31 December 2016, our US dollar denominated net assets
were 118% of our total net assets, reflecting the currency
denomination of the majority of the business we write. Our net
assets, analysed by currency, are as follows:
Net assets/(liabilities) by currency
The reporting currency for the Group’s consolidated Financial
Statements is US dollars, as is the functional and reporting
currencies of a number of our subsidiaries, including all of
our underwriting subsidiaries. A portion of our revenues
and expenses, and assets and liabilities, are denominated in
currencies other than US dollars, hence we are exposed to
fluctuations in the values of those currencies against the
US dollar. These fluctuations impact our reported operating
results and our assets and liabilities.
We have sought to reduce the impact on our stakeholders
of the effects of movements in foreign exchange rates
by matching the currencies of our liabilities and capital
requirements with the assets we hold. As a consequence of this,
because we report our results in US dollars, we import some
exchange rate volatility into the income statement through
the revaluation of our net tangible assets. The Group’s NTA
is, however, largely matched against our capital requirement,
protecting our shareholders against the risk of additional capital
being required as a result of FX volatility. Any excess is held in
US dollars.
Capital strength
Our balance sheet remains strong. At 31 December 2016,
Group capital resources totalled US$1,457.3m, giving
surplus management capital of US$297.1m or 25.6% (2015:
US$329.5m/28.2%) over our Group capital requirement of
US$1,160.2m. The position at 31 December is after dividends
paid and share buy–back costs during the year of US$148.9m.
Solvency II
We are in compliance with our regulatory obligations under
Solvency II, which came into force on 1 January 2016.
Solvency II reporting forms an integral part of each quarter’s
close process and we will deliver our reporting obligations at
31 December 2016.
Sterling
US dollar
Euro
Canadian dollar
Australian dollar
Total
2016
%
(5.9)
118.3
(8.0)
(0.4)
(4.0)
100.0
2015
%
6.6
60.7
13.0
22.2
(2.5)
100.0
Brit Limited Annual Report 2016 25
STRATEGIC REPORT 26
Brit Limited Annual Report 2016
Overview of results
The Group’s income statement, re-analysed to show the key components of our result, is set out below:
Gross written premium
Net earned premium (Note 1)
Underwriting profit (Note 1)
Underwriting profit
Return on invested assets, net of fees
Corporate expenses
Finance costs
Other items
Profit on ordinary activities before tax, FX and corporate activity costs
FX movements
Corporate activity costs (Note 2)
Profit on ordinary activities before tax
Tax
Discontinued operations
Profit for the year (after tax)
2016
US$m
2015
US$m
2014
US$m
2013
US$m
2012
US$m
1,912.2
1,515.1
54.6
1,999.2
1,649.6
137.0
2,148.5
1,601.1
168.3
1,849.7 1,852.2
1,478.4 1,499.1
101.3
215.9
54.6
102.9
(21.3)
(18.8)
1.1
118.5
41.3
–
159.8
(2.2)
–
157.6
137.0
5.0
(30.0)
(20.6)
0.3
91.7
(60.2)
(23.6)
7.7
7.9
–
168.3
124.8
(38.8)
(22.3)
0.8
232.8
35.8
(22.6)
246.0
(16.7)
–
215.9
85.3
(23.2)
(23.4)
6.9
261.5
(90.8)
(3.1)
167.5
(10.1)
(2.2)
101.3
139.8
(22.6)
(23.2)
0.8
196.0
(43.6)
–
152.5
(8.3)
37.8
15.6
229.3
155.2
182.1
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
We have delivered a strong result for the year. This result was driven by a solid underwriting return, benefitting from a low
attritional loss ratio, a low but increased level of large losses and favourable reserve development, a strong investment return
and favourable FX movements.
Profit on ordinary activities for the year before tax, FX and corporate activity costs was US$118.5m (2015: US$91.7m), profit
before tax was US$159.8m (2015: US$7.7m) and profit after tax was US$157.6m (2015: US$15.6m). Return on adjusted net
tangible assets (RoNTA), excluding the effects of FX on non-monetary items and corporate activity costs, increased to 11.8%
(2015: 9.1%). RoNTA for 2016 after including foreign exchange movements was 15.8% (2015: 3.8%) and total value created for
the year was US$139.0m (2015: US$19.2m).
Our adjusted net tangible assets at 31 December 2016 totalled US$1,064.8m (2015: US$1,074.7m), after 2016 dividend
payments and share buy-back costs of US$148.9m.
FINANCIAL PERFORMANCE REVIEW
Brit Limited Annual Report 2016
27
Performance measures
Our KPIs are set out on page 8. In addition to these KPIs, we have other measures that offer further insight into the detail
of our performance. These measures are:
• Premium related: Risk adjusted rate change; Retention rate;
• Claims related: Claims ratio; Attritional loss ratio; Major claims ratio; Reserve release ratio; and
• Underwriting expense related: Underwriting expense ratio; Commission ratio; Operating expense ratio.
Underwriting
Overview
Our underwriting profit for the year amounted to US$54.6m (2015: US$137.0m) and our combined ratio, which excludes the
effect of foreign exchange on non-monetary items, was 96.4% (2015: 91.7%). The premiums, claims and expenses components
of this result are examined below.
Premiums written
Premium growth
Brit Global Specialty Direct
Brit Global Specialty Reinsurance
Other underwriting
Group
2016
US$m
2015
US$m
Growth
%
1,546.6 1,634.0
365.1
0.1
365.8
(0.2)
1,912.2
1,999.2
(5.3)
0.2
–
(4.4)
Growth at
constant
FX rates
%
(3.1)
1.3
–
(2.3)
STRATEGIC REPORT
28
Brit Limited Annual Report 2016
Premiums by class
Brit Global Specialty Direct
Accident & health
Marine
Property, political risks & violence (PRV)
Property facilities
Energy
BGSU US specialty
Professional lines
Specialist liability
Specialty lines
Aviation
Discontinued
Total direct
Brit Global Specialty Reinsurance
Short-tail RI (property treaty)
Long-tail RI (casualty treaty)
Discontinued lines
Total reinsurance
Other underwriting
Group total
2016
US$m
2015
US$m
114.2
167.6
195.4
277.3
63.1
187.8
229.8
87.9
152.6
70.6
0.3
102.0
182.7
194.6
292.9
93.5
175.1
207.4
105.5
179.1
101.1
0.1
1,546.6 1,634.0
153.5
212.6
(0.3)
365.8
159.1
213.6
(7.5)
365.1
(0.2)
0.1
1,912.2 1,999.2
Gross written premium (GWP) decreased by 4.4% over the
same period in 2015 to US$1,912.2m (2015: US$1,999.2m).
At constant exchange rates the decrease was 2.3%. Direct
business decreased by 5.3% to US$1,546.6m (2015:
US$1,634.0m), while reinsurance remained constant at
US$365.8m (2015: US$365.1m).
The drivers of the 4.4% decrease in Group GWP, which was in
line with expectations, are as follows:
• Underwriting initiatives: The Group’s underwriting
initiatives, launched in 2013, 2014, 2015 and 2016
resulted in a US$39.1m increase in GWP. The main
contributors were our professional lines (including cyber
and healthcare) and our A&H divisions.
FINANCIAL PERFORMANCE REVIEW
Brit Limited Annual Report 2016
29
• Prior year premium development: The book again
experienced favourable development on prior years.
However, 2016 saw lower levels of favourable development,
resulting in a reduction of US$55.3m over 2015.
and strong discipline from underwriters, offset by growth in
new teams and areas where rates remain attractive. These
reductions were partly offset by growth in specialty lines,
professional lines and BGSU.
• Current year premiums: Current year premiums,
excluding those derived from the underwriting initiatives
highlighted above, reduced by US$29.4m over 2015. This
was driven by the challenging rating environment (primarily
in energy, property PRV, specialist liability and reinsurance)
• Foreign exchange: The impact of foreign exchange
resulted in a US$41.4m year on year reduction, which
reflects the strengthening during 2016 of the US dollar
against a number of currencies in which the Group writes
business.
FX
US$(41.4)m
Underwriting
initiatives
US$39.1m
Current year
premium
US$(29.4)m
Prior year
premium
US$(55.3)m
2015
GWP
US$1,999.2m
2016
GWP
US$1,912.2m
STRATEGIC REPORT
30
Brit Limited Annual Report 2016
Premium ratings
Measure
Commentary
Risk adjusted
rate change
The risk adjusted rate change shows whether premium rates are
increasing, reflecting a hardening market, or decreasing, reflecting
a softening market. A hardening market indicates increasing
profitability.
Track record
Risk adjusted rate change (%)
4
3
2
1
0
-1
-2
-3
-4
-5
3.4
0.3
(2.9)
(3.3)
(4.1)
2012
2013
2014
2015
2016
Overall risk adjusted premium rates for renewal business decreased by 3.3% during 2015 (2015: 4.1%). This reduction was
strongly influenced by reinsurance business which experienced rate reductions of 4.8%, driven by a 5.6% rate reduction in
property treaty. Rates for direct business fell by 2.9% in the year, with the principal movements being decreases in energy,
property, aviation and BGSU specialty. These were partly offset by increases in specialist liability and accident and health.
Retention rates
Measure
Commentary
Track record
Retention rate
The retention rate shows the proportion of our business that renews,
on a risk adjusted basis, compared to the previous year.
Retention rate (%)
100
80
60
40
20
0
83.0
83.0
82.4
84.3
76.0
2012
2013
2014
2015
2016
Our retention rate for the period was 84.3% (2015: 82.4%). The retention rates we achieved in 2015 and 2016 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.
FINANCIAL PERFORMANCE REVIEW Brit Limited Annual Report 2016
31
Outwards reinsurance
Our reinsurance expenditure in 2016 was US$432.0m or 22.6% of GWP (2015: US$369.4m/18.5%), an increase of US$62.6m.
The increase in expenditure is principally driven by the increased use of quota shares to manage our net exposure in the current
soft market conditions, partially offset by savings on other areas of the programme.
Net earned premium
Net earned premium (NEP) in 2016, excluding the effects of foreign exchange on non-monetary items, decreased by 8.2% to
US$1,515.1m (2015: US$1,649.6m, increase of 3.0%). At constant exchange rates the decrease was 6.1% (2015: increase of 2.2%).
The 2015 growth was impacted by a US$70.8m reinsurance premium paid in 2014 in respect of a specific one-off outwards
reinsurance contract entered into to provide adverse development cover for a discontinued professional lines account with
exposure to Italian medical malpractice. An effect of this contract was to reduce our 2014 attritional ratio by 1.9 percentage points
and increase our 2014 underwriting expense ratio by 1.7 percentage points. It did not materially impact our combined ratio.
Direct business decreased by 8.9% to US$1,208.6m (2015: US$1,327.4m, increase of 6.4%), while reinsurance decreased by
3.0% to US$285.5m (2015: US$294.2m, increase of 11.4%).
Claims
Measure
Claims ratio
Commentary
The claims ratio measures the performance of the whole
underwriting book, encompassing risks written in the current year
and in prior years.
Track record
Claims ratio (%)
60
50
40
30
20
10
0
56.2
48.5
50.0
53.5
56.5
2012
2013
2014
2015
2016
STRATEGIC REPORT
32
Brit Limited Annual Report 2016
The claims ratio can be further analysed into its underlying components, as follows:
Measure
Commentary
Attritional loss
ratio
The attritional loss ratio measures the performance of the underlying
underwriting book by measuring the effect of attritional claims.
Track record
Attritional loss ratio (%)
60
50
40
30
20
10
0
51.8
51.3
51.0
55.2
55.5
2012
2013
2014
2015
2016
Major claims
ratio
The major claims ratio measures the effect of claims arising from
major losses on our performance and the 2016 ratio reflects the
increased level of major loss activity during the year.
Major claims ratio (%)
Reserve release
ratio
The reserve release ratio measures the performance of reserves
held on the statement of financial position at the start of the year.
A negative ratio indicates an overall net release, which means that
prior year claims are performing better than estimated at the start of
the year. A positive ratio indicates that over the course of the year
the amount required to meet those prior year claims has increased.
7
6
5
4
3
2
1
0
6.1
4.5
4.5
3.2
2.3
2012
2013
2014
nil
2015
2016
Reserve release ratio (%)
0
-1
-2
-3
-4
-5
-6
(1.7)
(1.7)
(3.3)
(3.5)
(6.0)
2012
2013
2014
2015
2016
FINANCIAL PERFORMANCE REVIEW Brit Limited Annual Report 2016
33
Our underlying claims experience in 2016 was in line with expectations. The 2016 attritional loss was stable at 55.5% (2015: 55.2%).
2016 saw an increase in catastrophe activity and the Group incurred major claims of US$68.4m (2015: US$nil), as set out below.
Major claims are defined as claims in excess, incurred from natural or man-made catastrophes, or from large single risk loss
events of US$10.0m (net of reinsurance and allowing for reinstatements).
Major losses
Alberta wildfires
Louisiana floods
Hurricane Matthew
Other (Note 1)
2016
US$m
2016
CoR%
19.2
10.9
26.3
12.0
68.4
1.3
0.7
1.7
0.8
4.5
Note 1: ‘Other’ includes Japan earthquake, Houston floods and Gatlinburg wildfire.
As part of our standard reserving process, we released US$53.5m of claims reserves established for prior year claims, the equivalent
of a combined ratio reduction of 3.5% (2015: US$28.6m/1.7%). The main drivers of this release were marine, casualty treaty,
property treaty, energy, property PRV and specialist liability, partly offset by strengthening in our professional lines and property
facilities divisions. Our statement of financial position remains strong and we continue to operate a robust reserving process.
Underwriting expenses
Our underwriting expense ratio was 39.9% (2015: 38.2%).
Measure
Commentary
Track record
Underwriting
expense ratio
The underwriting expense ratio measures the cost we incur to
acquire every US$1 of premium. There are two key components
to this – commission costs and operating expenses.
Underwriting expense ratio (%)
40
35
30
25
20
15
10
5
0
37.0
36.9
39.5
38.2
39.9
2012
2013
2014
2015
2016
STRATEGIC REPORT
34
Brit Limited Annual Report 2016
The underwriting expense ratio can be further analysed into its underlying components, as follows:
Measure
Commentary
Commission
ratio
The commission ratio measures our distribution costs and shows
how much of every US$1 of premium is paid to acquire our business.
Track record
Commission ratio (%)
Operating
expense ratio
The operating expense ratio helps us understand how much it costs
us to support the underwriting activities. This ratio shows how much
of every US$1 of premium we spend supporting our underwriting
activities.
30
25
20
15
10
5
0
25.7
24.9
27.5
26.0
27.2
2012
2013
2014
2015
2016
Operating expense ratio (%)
15
12
9
6
3
0
12.0
12.0
12.2
12.7
11.4
2012
2013
2014
2015
2016
Commission costs were US$411.6m and the commission expense ratio was 27.2% (2015: US$429.2m/26.0%). The ratio was
affected principally by changes in business mix, a general increment in acquisitions costs (including business arrangement fees)
and reduction in NEP due to increased use of proportional treaties due to the soft market conditions.
Our operating expenses are analysed below.
FINANCIAL PERFORMANCE REVIEW Brit Limited Annual Report 2016
35
Expenses
Our operating expense ratio increased to 12.7% (2015: 12.2%). Operating expenses for the period were as follows:
Expense analysis
Underlying operating expenses including bonus provisions
Project costs, timing differences and other expense adjustments
Expenses before corporate activity related costs
Corporate activity related costs (Note 1)
Total operating expenses
2016
US$m
2015
US$m
217.1
–
217.1
–
217.1
231.8
0.1
231.9
23.8
255.7
Note 1: Corporate activity costs during 2015 relate to costs incurred as a result of the acquisition of Brit by Fairfax.
Underlying operating expenses during 2016 decreased by 6.3% to US$217.1m (2015: US$231.9m). The movement at constant
exchange rates was an increase of 4.1%, reflecting our predominately Sterling expense base. This increase related to targeted
expansion and investment in growth areas, increased regulatory levies and increased IT costs, partly offset by a decrease in
amortisation changes.
The allocation of operating expenses within the Consolidated Income Statement and the Segmental Information is as follows:
Disclosure of operating expenses
Acquisition costs
Other insurance related expenses
Total insurance related expenses
Other operating expenses
Total operating expenses
2016
US$m
2015
US$m
112.3
83.5
195.8
21.3
217.1
100.1
101.8
201.9
53.8
255.7
STRATEGIC REPORT
36
Brit Limited Annual Report 2016
Investment return
The return on our invested assets after deducting external fees was US$102.9m or 2.6% (2015: US$5.0m/0.1%). Our invested
assets at 31 December 2016 amounted to US$3,971.6m (2015: US$3,973.9m).
Investment return
Income
Released gains
Unrealised gains/(losses)
Investment return before fees
Investment management fees
Investment return net of fees
Investment related derivative return
Return on associated undetakings
Total return
Total return
2016
$m
73.7
62.3
10.0
146.0
(13.8)
132.2
(32.9)
3.6
102.9
2015
$m
72.7
58.0
(108.5)
22.2
(11.9)
10.3
(5.3)
–
5.0
2.6%
0.1%
Our income producing assets performed well and we generated income of US$73.7m during the year, representing a running
yield of 0.9% (2015: US$72.7m/1.6%).
Our two associated undertakings produced a positive first year return of US$3.6m.
• Ambridge Partners LLC, a leading managing general underwriter of transactional insurance products of which a 50% share
was acquired on 8 December 2015, contributed US$3.4m to this return; 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$0.2m to this return.
Further discussion of our investment performance and portfolio is included in the Investment Management Review section
of this Strategic Report, commencing on page 19.
Foreign exchange
As explained on page 24, 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 gain of US$41.3m in 2016 (2015: loss of US$60.2m),
reflecting the movement of the US dollar against other currencies in which we trade and hold assets. This total foreign exchange
related loss comprised:
• An unrealised revaluation gain of US$61.2m (2015: loss of US$85.4m), primarily relating to the mark to market of the capital
we hold in non-US dollar currencies to match our risk exposures. The gain primarily results from the strengthening of the
US dollar against Sterling (in which we have a short position) and the weakening of the US dollar against the Canadian dollar
(long position), partly offset by the strengthening of the US dollar against the Euro (long position);
FINANCIAL PERFORMANCE REVIEW
Brit Limited Annual Report 2016
37
• Losses of US$19.9m (2015: gain of US$45.0m) 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; and
• No overall gain or loss (2015: loss of US$19.8m), 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 2016
comprises the un-wind of the credit carried on the balance sheet at 31 December 2015 (US$3.6m), plus the credit balance
established during 2016 (US$3.6m).
The allocation of the FX result within the Consolidated Income Statement is as follows:
Foreign exchange gains and (losses)
Net change in unearned premium provision – non-monetary FX effect
Acquisition costs – non-monetary FX effect
Net foreign exchange losses – non-monetary (Note 1)
Net foreign exchange gains/(losses) – monetary (Note 1)
Return on derivative contracts – FX related instruments
Total gain/(loss)
2016
US$m
2015
US$m
19.0
(10.0)
(9.0)
–
61.2
(19.9)
41.3
(11.5)
2.2)
(10.5)
(19.8)
(85.4)
45.0
(40.0)
41.3
(60.2)
Note 1: The sum of these two amounts, US$52.2m, is the ‘Net foreign exchange gains’ figure per the Consolidated Income Statement (2015: US$95.9m ‘Net foreign
exchange losses’).
Tax
Our tax on ordinary activities for 2016 resulted in a tax expense of US$2.2m (2015: tax income of US$7.9m), based on a group
profit before tax of US$159.8m (2015: US$7.7m).
The Group is liable to taxes on its corporate income in a number of jurisdictions, in particular the UK, Gibraltar and the US,
where its companies carry on business. A tax charge is calculated in each legal entity across the Group and then consolidated.
Therefore, the Group’s 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 2016 Group rate varies from the weighted average rate in those jurisdictions for a number of factors. The principal factor
is the impact of income not subject to tax such as the syndicate’s dividend income. An additional factor is the future reduction
in the UK corporation tax rate and its effect on deferred tax liabilities and prior year adjustments, relating primarily to the
syndicate’s underwriting results. The effective tax rate is further influenced by non-UK taxes arising in our Lloyd’s syndicate.
STRATEGIC REPORT 38
Brit Limited Annual Report 2016
Overview
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, operational and group.
The key risks and uncertainties are set out in the following table and the principal risks in the current environment are further
described below.
Risk category Risk
Description
Principal risk
Overarching
Earnings
Unexpected earnings volatility leads to unexpected losses.
Solvency
Liquidity
Capital ratio falls below the level targeted by management.
Insufficient financial resources available to meet liabilities as
they fall due.
Insurance
Underwriting –
pricing
Emerging experience is inconsistent with the assumptions
and pricing models used.
Underwriting –
catastrophe
Underwriting –
reinsurance
Reserving
Investment
Investment market risk
Premiums are insufficient to meet the long-term profitability
expected.
Failure to obtain reinsurance on attractive terms, or failure to
recover under reinsurance arrangements.
Prior year reserves are insufficient to cover claims (net of
reinsurance).
Invested assets adversely affected by changes in economic
variables, such as interest rates, bond yields, equity returns,
credit spreads, credit ratings.
Currency
Exchange rate fluctuations materially impact our financial
performance.
Credit
Counterparty risk
Operational
and Group
People
Deterioration in the creditworthiness of, defaults by, or
reputational issues related to, reinsurers or other third parties
with whom we transact business.
Failure to attract, motivate and retain key Directors, senior
underwriters, senior management and other key personnel,
on whom our future success is substantially dependent.
Outsourcing
arrangements
Failure on the part of any third party to perform agreed
outsourced services, on which we are heavily reliant.
PRINCIPAL RISKS AND UNCERTAINTIES Brit Limited Annual Report 2016
39
Principal risks
The table below provides additional information on the principal risks in the current environment and how we manage them.
Principal risk
Mitigation tools
Metrics
Status
Risk adjusted rate change
(2016: decrease of 3.3%; 2015:
decrease of 4.1%).
This risk is particularly relevant
in the current softening rating
environment.
Active rebalancing of the
portfolio is a key focus for
management.
Underwriting – pricing
Inadequate pricing
could have a
material adverse
effect on our results
for underwriting
operations and
financial condition.
• Strategic focus on
underwriting performance
rather than on top line
growth.
• Strong governance processes
around strategy and
planning.
• Pricing discipline is
maintained through strict
underwriting guidelines,
monitoring of the delegated
authorities and enforcement
of the technical pricing
framework.
• Efficient use of the outwards
reinsurance programme.
STRATEGIC REPORT
40
Brit Limited Annual Report 2015
PRINCIPAL RISKS AND UNCERTAINTIES
Principal risk
Mitigation tools
Metrics
Status
Underwriting – catastrophe
A catastrophic event
or catastrophic events
could result in large
insured losses that
adversely impact our
financial results and
potentially our capital
position.
• Diverse portfolio of risks
written between lines of
business and geographic
location.
• Regular monitoring against
the Board catastrophe risk
appetite by our exposure
management team.
• Effective outwards
reinsurance programme
in place, with particular
emphasis on managing
accumulation of risks.
• Clear limits are set for
key accumulations and
conservative use of line
size by our underwriters.
• Conservative best estimate
reserving philosophy with
track record of releases.
• Actuarial team recommend
reserves independently
from underwriting division
using established actuarial
techniques.
• Independent external review
of reserving is performed
annually.
Reserving
Estimating insurance
reserves is inherently
uncertain and, if
insufficient, may
have a material
adverse effect on our
results and financial
condition.
Largest realistic disaster
scenarios (1 October 2016
estimated loss in US$m):
Event
Gross Net
Gulf of Mexico windstorm
Florida Miami windstorm
US North East windstorm
San Francisco earthquake
Japan earthquake
Japan windstorm
829
654
748
716
237
92
191
168
156
282
156
58
European windstorm
228
163
An aggregate catastrophe
excess of loss cover is in place
to protect the Group against
combined property claims
from multiple policies resulting
from catastrophe events. This
is supplemented by specific
covers for peril regions,
catastrophe swaps and industry
loss warranties where they are
a cost-efficient means to ensure
that the Group remains within
its catastrophe risk appetite.
Reserve release ratio (2016:
3.5%; 2015: 1.7%).
Reserves are held at a
‘conservative best estimate’
and we also carry an explicit
risk margin.
No change in approach from
prior years.
Brit Limited Annual Report 2015
41
I
S
T
R
A
T
E
G
C
R
E
P
O
R
T
Principal risk
Mitigation tools
Metrics
Status
Return on invested assets,
net of fees (2016: 2.6%; 2015:
0.1%).
Running yield (2016: 0.9%;
2015: 1.6%).
Investment risk
Invested assets
are susceptible to
changes in economic
conditions. A
decrease in the value
of our invested assets
may have a material
adverse effect on
our results, financial
condition and
liquidity.
People
• Strong governance processes
around investment strategy.
• Regular monitoring against
the Board investment risk
appetite which includes
defined limits for solvency,
earnings risk and liquidity risk.
• Investment guidelines in
place for individual asset
classes and monitored
regularly.
We could be
adversely affected
by the loss of one or
more key employees
or by an inability to
attract and retain
qualified personnel.
• Our remuneration strategy
(including share-based
remuneration) is designed to
reward talent and success.
We have a proven track
record in being able to retain
high-performing staff.
Staff turnover (2016: 8.8%;
2015: 7.0%).
• Succession and contingency
plans are in place in the
event of the loss of a key
employee.
• Regular monitoring of
employee turnover and
morale.
In the fourth quarter of 2016,
following a significant increase
in yield rates as markets
responded to the forthcoming
US election, we sold the
majority of our fixed income
positions, crystallising the losses
for the quarter, but locking in a
solid result for the year.
Our portfolio at the year
end was highly liquid and
defensively positioned.
The current environment
remains competitive with a
number of our peers actively
seeking talented staff.
We actively manage our
remuneration and HR policies
to ensure we continue to retain
and attract the best staff.
42
Brit Limited Annual Report 2016
Introduction
In order to generate value, we recognise that our people,
culture, social and community strategies must be both
sustainable and aligned to the long-term interests of all our
stakeholders. We seek to make both a positive contribution
to society and to be aware of the long-term consequences
of our actions. We also seek to generate new commercial
opportunities by developing strong stakeholder relationships
and by recruiting and retaining a highly skilled, engaged and
motivated workforce.
Our people and culture
Our people are our greatest asset and managing our talent
appropriately contributes significantly to our success.
During 2016 we continued to strengthen our highly committed
team. Through the attraction and recruitment of new talent and
the ongoing development of existing expertise, we continued
to embed a culture of achievement in the organisation. This
has resulted in employees feeling valued for their contribution
as part of a team working towards the same goals.
Brit is focused on the FCA’s six consumer outcomes and the
fair treatment of customers is at the heart of our business
model. We believe our retention rate of 84.3% (2015: 82.4%)
demonstrates a high level of customer satisfaction.
Our culture is communicated and lived through an established
framework that identifies and rewards strong performance.
Business plan goals are aligned to our Group vision and
used to determine individuals’ objectives, ensuring that all
employees understand the part they play in the Group’s
success.
We are committed to developing the technical, behavioural,
management and leadership skills required for our teams to
outperform – both individually and collectively. We continue
to invest in the future of Brit through our leadership, graduate
and intern programmes and our bi-annual succession and
talent mapping exercise, all of which aim to grow expertise
from within and ensure robust succession plans.
Brit Syndicates Limited has Chartered Insurer status through
the Chartered Insurance Institute. This prestigious designation
signifies to our customers – and the market – that we are
committed to the pursuit of the highest standards and
demonstrates our adherence to ethical good practice.
Brit’s cross-functional Social Committee continued to organise
a range of social, community and charitable events for
employees during the year. In addition to the social committee
events, employees were also invited to participate in sailing
events in the Solent during which more than 60 employees
from around the world learned how to sail and race against
each other. This developed their team and communication
skills and was a fantastic opportunity for employees to mix
together and meet people from other offices.
The 2016 staff turnover rate excluding retirements and
redundancies was 8.8% (2015: 7.0%).
At 31 December 2016, 31.7% (2015: 33.7%) of staff had
completed at least five years of service and 14.7% (2015:
14.2%) had served at least ten years.
Social and community
We are committed to supporting the communities in which we
operate and charities that are meaningful to employees. Our
objective is to select charitable giving and community projects
based on three criteria: projects should be for a good cause
and operate in an area relevant to us, financial involvement
should be for the benefit of the good cause, and projects
should offer alignment with our strategic priorities.
During 2016 we again supported ten charities chosen by
employees. The charities selected for 2016 were the Gibraltar
Disability Society (Gibraltar), the Royal Hospital Chelsea
(UK), Small Steps (UK), Help for Heroes (UK), Vital Project
(Columbia), Mind (UK), British Blind Sport (UK), the Children’s
Medical & Research Foundation (Ireland), Friends of the
Elderly (UK) and the Naomi Berrie Diabetes Center (US). We
donated a sum of money to each charity at the start of the
year and continued with fund raising activities through the
year, including a well-attended quiz night.
OUR PEOPLE, CULTURE, SOCIAL, COMMUNITY AND ENVIRONMENTAL MATTERS Brit Limited Annual Report 2016
43
We continue to use a business dining and internal hospitality
provider that is committed to the principles of sustainable
food procurement. It recognises that it is important to the
future wellbeing of the UK that farming communities are
supported and able to contribute to their supply chains.
We measure and monitor our carbon footprint. In 2016 our
carbon emissions per employee reduced by 22.9% to
2.7 tonnes (2015: 3.5 tonnes). The sources of these emissions
were as follows:
Emission source
Gas
Electricity
Business air travel
Business travel other
Total carbon footprint
2016
CO2 (tonnes)
2015
CO2 (tonnes)
97
537
863
3
5
890
874
7
1,500
1,776
Number of employees at 31 December
excluding all non-executive directors
Carbon footprint per employee
550
2.7
507
3.5
We also supported three international charities supporting
children’s education programmes:
• Decoda: A Canadian charity working to increase the literacy
and learning skills of children in foster care. Brit is donating
CAD$100k over three years.
• The Kibera Girls Education Fund: A Kenya based charity
working to rescue girls from the perils of sexual assault and
early pregnancy. Brit donated US$200k in 2016.
• Creative Corrections Education Foundation: A US charity
helping the children of incarcerated parents through
education. Brit donated US$50k in 2016.
Our Social Committee also organised a number of
volunteering days in the local community. We further
promote staff involvement in the community by granting
every employee two additional days of paid leave a year to
volunteer their time to a registered local charity.
We also run a payroll giving scheme and match any money
raised by employees participating in charitable events.
During 2016, Brit donated US$0.7m (2015: US$0.3m) under
its charitable initiatives. In addition to this, Brit employees
completed 77.5 volunteering days (2015: 66 days).
Environmental responsibility
During 2016 we recycled 7.2 tonnes of paper waste (2015:
28.5 tonnes) and we sent 63 tonnes of general waste to
energy recycling (2015: 144.7 tonnes). These changes reflect
recycling activities conducted in 2015 ahead of the move
to our new head office and reflect reduced waste in 2016
resulting from more efficient working practices. In 2016 we
also recycled 10.2 tonnes of glass (2015: 8.4 tonnes), 32.5
tonnes of cardboard (2015: 28.4 tonnes) and 8.2 tonnes of
food waste (2015: 2.7 tonnes). During 2016, in conjunction
with our new building managers, we continued to work hard
to reduce waste sent to landfill and this work culminated in the
building being awarded ISO14001. At December 2016, in line
with government legislation, we were fully ESOS compliant
after undertaking a stringent audit.
STRATEGIC REPORT
44
Brit Limited Annual Report 2016
GOVERNANCE
Directors’ Report
This report sets out other information of interest to shareholders.
It includes information on our significant shareholders, the Directors’
responsibility statement and Directors’ statement on going concern.
Corporate Governance Report
This report explains our governance framework.
Modern Slavery and Human Trafficking Statement
This statement sets out the steps taken by us to ensure that slavery
and human trafficking are not taking place in our supply chains or in
any part of our business.
GOVERNANCE
DIRECTORS’ REPORT
CORPORATE GOVERNANCE REPORT
MODERN SLAVERY AND HUMAN
TRAFFICKING STATEMENT
45
48
50
DIRECTORS’ REPORT
Brit Limited Annual Report 2016 45
The Directors present their report together with the audited consolidated financial statements for the year ended
31 December 2016.
Principal activities, review of business and other disclosure
Details of the Company’s principal activities and a review of the business are included in the strategic report.
Significant changes and events
On 3 August 2016, the Company repurchased 13,449,476 Class A Ordinary Shares from OMERS Administration Corporation
at a cost of US$58.1m. These shares were subsequently cancelled.
Directors
On 1 January 2017, Richard Ward stepped down from his role as Chairman, but remains on the Board as Senior Independent
Director. On the same date, Mark Cloutier, formerly Group Chief Executive Officer, became Group Executive Chairman, with
Matthew Wilson replacing him as Group Chief Executive Officer, and Gordon Campbell joined the Board as a non-executive
Director. Ipe Jacob and Bijan Khosrowshahi resigned as directors with effect from 31 December 2016.
The following directors held office at the date of this report:
Mark Cloutier
Matthew Wilson
Mark Allan
Richard Ward
Andrew Barnard
Gordon Campbell
Jeremy Ehrlich
Statement of Directors’ responsibilities
The Directors are responsible for preparing the Directors’ Report and the financial statements in accordance with applicable law
and regulations.
Company law requires that the Directors prepare financial statements for each financial year. Under company law the directors
must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of
the Company and of the profit and loss of the Company for that period. In preparing these financial statements, the Directors
are required to:
• Select suitable accounting policies and then apply them consistently;
• Make judgements and accounting estimates that are reasonable and prudent; and
• Prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will
continue in business.
The Directors confirm that, to the best of their knowledge:
• The consolidated financial statements, 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 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.
Dividends
On 29 April 2016, the Company paid a dividend of US$26.2 million to the holder of its Class A ordinary shares together with
a further dividend of US$3.4m on 3 August. On 21 December 2016, the Company paid a dividend of US$61.3 million to the
holder of its Class B ordinary shares.
A further dividend to class A shareholders for 2016 of US$0.43 per share amounting to US$45.8m was proposed and agreed at
the 15 February 2017 Brit Limited Board Meeting.
Share capital
The Company’s ordinary issued share capital at 31 December 2016 comprised two classes of ordinary shares, Class A Ordinary
and Class B Ordinary, which are fully paid.
GOVERNANCE 46 Brit Limited Annual Report 2016
DIRECTORS’ REPORT
Voting rights
The Company’s articles of association provide that a resolution put to the vote of a general meeting must be decided on a show
of hands unless a poll is duly demanded in accordance with the articles.
Articles of Association
The Company’s articles of association may only be amended by a special resolution of shareholders.
Shareholders
The Company’s two shareholders at the time of this report is as follows:
Shareholder
FFHL Group Limited
OMERS Administration Corporation
Units
281,057,706
106,550,524
Class
B Ordinary
A Ordinary
% of total A and B
ordinary shares
72.51
27.49
Significant agreements
The following agreement which was in force at 31 December 2016, takes effect, alters or terminates on a change of control of
the Company.
Revolving Credit Facility
The Group has a syndicated revolving credit facility (RCF) which provides for US$360.0m of committed multi-currency financing.
Amounts under the RCF can be drawn until 30 November 2020, and the RCF terminates on 31 December 2020, on which date
all outstanding facilities must be repaid.
The RCF also contains a change of control provision under which, upon the occurrence of a change of control, the lenders
may refuse to fund utilisation requests under the RCF, cancel their commitments and demand immediate repayment of all
outstanding amounts.
Employment
Brit is an equal opportunities employer. This means we will not unlawfully discriminate against any person on grounds of colour,
religion or belief, race or ethnic origin, nationality or national origin, sex or sexual orientation, marital status, disability, age,
pregnancy or maternity, or gender reassignment. We have established policies to ensure that there is no discrimination against
applicants for a job or whilst in employment.
The Company is committed to ensuring equal opportunities in relation to job advertisements, recruitment and selection,
assessment of work performance or conduct, disciplinary and grievance procedures, conditions of service, promotion and
training, pay and benefits and termination of employment.
In the event of employees becoming disabled, every effort is made to ensure their employment with the Group continues and
appropriate training arranged. So far as possible, the Company ensures that the training, career development and promotion of
any disabled person is identical to that of a colleague who does not suffer from such a disability.
The Company maintains procedures by which all employees are systematically encouraged to express matters that may affect
them and are provided with information on matters of concern.
The Employee Share Scheme, as well as other means provide an opportunity for staff involvement in the Company’s
performance.
Political donations
Neither the Company nor any of its subsidiaries made any political donations during the year.
Disclosure of information to the Company’s auditor
In accordance with the provisions of section 418 of the Companies Act 2006, each of the persons who are Directors of the
Company at the date of approval of this report confirms that:
• So far as the Director is aware, there is no relevant audit information (as defined in the Companies Act 2006) of which the
Company’s auditor is unaware; and
• The Director has taken all the steps that he/she ought to have taken as a Director to make himself/herself aware of any
relevant audit information (as defined) and to establish that the Company’s auditor is aware of that information.
Brit Limited Annual Report 2016 47
Auditor
On 16 May 2016, Ernst & Young LLP (EY) tendered its resignation as auditor of Brit Limited and confirmed there were no
circumstances relating to their resignation to bring to the Board’s attention. On 14 June 2016, PricewaterhouseCoopers LLP was
appointed as EY’s successor.
Post Balance Sheet Events
The Company has no post balance sheet events requiring disclosure.
Going concern
A review of the financial performance of the Group is set out on pages 26 to 37. The financial position of the Group, its cash
flows and borrowing facilities are set out on pages 19 to 24. After reviewing the Group’s budgets and medium term plans, the
Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the
foreseeable future. For this reason they continue to adopt the going concern basis in preparing the accounts.
Information included in the Strategic Report
The below information is not shown in the directors’ report because it is shown in the strategic report instead under s414C(11).
• Charitable donations
Disclosures regarding charitable donations can be found on pages 42 to 43.
• Financial instruments
Details of the Group’s risk management framework are set out on pages 38 to 41.
By order of the Board
Tim Harmer
Company Secretary
15 February 2017
Brit Limited: 8821629
GOVERNANCE 48 Brit Limited Annual Report 2016
CORPORATE GOVERNANCE REPORT
Introduction
The Company has in place a memorandum of Corporate
Governance that sets out the Corporate Governance
principles of the Group based on the UK Corporate
Governance Code.
Board of Directors
The Board currently has seven directors and the full board
meets on a regular basis.
Independence of Directors
Before his resignation as a director with effect from
31 December 2016, the Board considered Ipe Jacob to be
an independent non-executive Director of the Company,
within the meaning of the Code. Ipe Jacob continues to
serve as an independent non-executive director on the
board of Brit Syndicates Limited and as chair of the UK audit
committee. Mr Jacob also continues as a member of the UK
Risk Oversight Committee.
The Board considers Richard Ward to be an independent non-
executive Director of the Company, within the meaning of the
Code. Richard Ward also serves as chair of the board of Brit
Syndicates Limited and was appointed chair of the Company’s
audit committee with effect from 1 January 2017. Mr Ward is
also chair of the Company’s Nomination and Remuneration
committees.
Gordon Campbell, non-executive Director, was independent
on his appointment as a Director of the Company in January
2017 and remains independent.
Group Executive Chairman
The Group Executive Chairman is responsible for leadership
of the Board ensuring its effectiveness on all aspects of its
role and setting its agenda. The Group Executive Chairman is
responsible for setting the agenda for Board deliberations,
with the help of the executive Directors and the Company
Secretary, to be primarily focused on strategy, performance,
value creation and accountability, and ensure that issues
relevant to these areas are reserved for Board decision. The
Group Executive Chairman, in conjunction with the Company
Secretary, ensures that the Board members receive accurate
and timely information.
Group Chief Executive Officer
The Group Chief Executive Officer is responsible for
implementing and executing the strategy of the Group and
for generally running the Group’s business.
Senior independent non-executive Director
During 2016 Ipe Jacob was the senior independent non-
executive Director of the Company. Following his resignation
on 31 December 2016, Richard Ward was appointed to
this position. The senior independent Director was also
responsible for carrying out the evaluation of the role of the
Chairman during the year.
Conflicts of Interest
Under the Companies Act 2006, all Directors must seek
authorisation before taking up any position with another
company that conflicts or may possibly conflict with the
Company’s interests. The Directors are required to notify the
Company of any conflicts so that they can be considered and
if appropriate authorised by the Board. The Board carries out
an annual review of conflicts of interest and each authorisation
is set out in the conflicts register.
Committees of the Board
The Board has delegated specific responsibilities to Board
committees, notably the Brit Limited Audit, Nomination and
Remuneration Committees.
Brit Governance Structure as at 31 December 2016
The Governance structure, shown overleaf, is deeply
embedded within the business. The Company’s main
operating subsidiaries have in place governance principles
in accordance with the Group’s Memorandum of Corporate
Governance.
Audit Committee
The Audit Committee is responsible for overseeing the
Group’s financial reporting processes, internal control and risk
management framework and the work undertaken by the
external auditor. Regular updates are provided to the Board
by the committee chair.
Remuneration Committee
The Remuneration Committee is responsible for setting the
Group’s remuneration policy. The company aims to reward
employees fairly. The Committee is also responsible for setting
the remuneration of all executive directors.
Nomination Committee
The Composition of the Board is reviewed regularly by
the Nomination Committee. In considering the Board’s
composition, the Committee is mindful of the need to
maintain a well-balanced Board in terms of skills, knowledge,
experience and background. The appointment of all new
Directors is led by the Nominations Committee.
Brit Limited Annual Report 2016 49
Goverance Structure
Brit Limited
Remuneration
Committee
Brit Insurance
Holdings Limited
Audit
Committee
Nomination
Committee
Executive
Committee
Underwriting
Committee
Brit Insurance
(Gibraltar) PCC
Limited
Brit Syndicates
Limited
BIG Risk Oversight
Committee
BIG Audit
Committee
BIG Investment
Committee
Audit Commitee
UK Investment
Committee
Risk Oversight
Committee
By order of the Board
Tim Harmer
Company Secretary
15 February 2017
GOVERNANCE 50 Brit Limited Annual Report 2016
MODERN SLAVERY AND
HUMAN TRAFFICKING STATEMENT
Introduction
This statement sets out the steps taken by Brit Limited (Brit) to
ensure that slavery and human trafficking are not taking place
in our supply chains or in any part of our business. Slavery
and human trafficking can occur in many forms, such as forced
labour, child labour, domestic servitude, sex trafficking and
workplace abuse. Given the nature of the work that we do, we
believe that there is a low risk of slavery or human trafficking
having any connection with our business. We must, however,
not be complacent, and all staff have a responsibility to be
aware of any risks in our business and in our wider supply
chains and report any concerns to senior management.
Our business
At Brit, we provide highly specialised insurance products to
support our clients across a broad range of complex risks.
We have a strong focus on the property, energy and casualty
sectors. We have a major presence in Lloyd’s of London, the
world’s specialist insurance market provider, and a significant
US and international reach. We have local offices in the US,
Bermuda, Japan, Singapore and China.
We operate globally via our own international distribution
network and broker partners. Insurance represents over 80%
of our gross written premium, with the remainder coming from
treaty reinsurance.
The average number of employees working at Brit during
2016 was 539 and profit after tax in 2016 was US$157.6m
Our supply chains
We source our business through trading relationships
with Lloyd’s brokers, wholesale brokers, retail agents and
reinsurance intermediaries. Most of our reinsurance business
is sourced through global reinsurance brokers.
We require that all contractual agreements with third party
suppliers to contain obligations to ensure compliance with the
Modern Slavery Act 2015.
As part of any due diligence exercise during supplier on-
boarding or at regular intervals, potential slavery concerns
must be assessed and addressed.
We have updated both our Procurement and Outsourcing
policies to ensure information around our requirements is
detailed and available to our wider business.
Our policies on slavery and human trafficking
We are committed to ensuring that there is no modern slavery
or human trafficking in our supply chains or in any part of our
business. We believe in paying people fairly and properly
for their work. This policy reflects our commitment to acting
ethically and with integrity in all our business relationships and
to implementing and enforcing effective systems and controls
to ensure slavery and human trafficking is not taking place
anywhere in our supply chains.
Due diligence processes for slavery and human trafficking
As part of our initiative to identify and mitigate risk we have in
place systems to:
• Identify and assess potential risk areas in our supply chains.
We give all suppliers a copy of this statement and request
a copy of their statement (if they are required to have one).
• Mitigate the risk of slavery and human trafficking occurring
in our supply chains. We set clear expectations for our
suppliers by informing them of our Code of Conduct, which
states ‘Brit does not tolerate modern slavery or any form of
human trafficking within its business or supply chains. Brit
does not allow harsh or inhumane treatment and we expect
our suppliers to share our values.’
• Monitor potential risk areas in our supply chains. Staff are
encouraged to report any concerns to senior management
and there is a risk register operated by the Operational Risk
Manager to record any such concerns.
• Ensure appropriate recruitment practices are carried out,
using reputable employment agencies. We verify the
practices of any new recruitment agency as part of our
terms of business with them and before accepting any
workers from that agency. We also request a copy of the
agency’s modern slavery statement (if it is required to have
one). We ask any agency supplying us with staff to conduct
verification checks on those staff (including verification of
identity, references, evidence of qualifications and criminal
and financial checks). We also carry out the same checks on
direct hires.
• Protect whistle blowers. At Brit, workers, customers and
suppliers are encouraged to report any concerns related to
our activities or supply chains. This includes circumstances
which may give rise to increased risk of slavery or human
trafficking. Our whistleblowing procedure is designed to
make it easy for people to make disclosures without fear
of retaliation.
Brit Limited Annual Report 2016 51
Training
To ensure a high level of understanding of the risks of modern
slavery and human trafficking in our supply chains and our
business, we will be providing training to appropriate members
of staff.
Our commitment
This statement is made pursuant to section 54(1) of the Modern
Slavery Act 2015 and constitutes our Group’s slavery and human
trafficking statement for the financial year ending 2016.
Following its initial adoption, this Modern Slavery and Human
Trafficking Statement will be reviewed by Brit’s Board of
Directors at least annually and may be amended from time
to time.
By order of the Board
Tim Harmer
Company Secretary
15 February 2017
GOVERNANCE 52
Brit Limited Annual Report 2016
CONTENTS Brit Limited Annual Report 2016
53
INDEX TO THE FINANCIAL STATEMENTS
INDEPENDENT AUDITOR’S REPORT
TO THE MEMBERS OF BRIT LIMITED
CONSOLIDATED FINANCIAL STATEMENTS
PARENT COMPANY FINANCIAL STATEMENTS
54
56
135
CONTENTSFINANCIAL STATEMENTS 54
Brit Limited Annual Report 2016
Report on the financial statements
Our opinion
In our opinion:
• Brit Limited’s group financial statements and parent
company financial statements (the “financial statements”)
give a true and fair view of the state of the Group’s and
of the parent company’s affairs as at 31 December 2016
and of the group’s profit and cash flows for the year
then ended;
• the group financial statements have been properly
prepared in accordance with International Financial
Reporting Standards (“IFRSs”) as adopted by the
European Union;
• the parent company financial statements have been
properly prepared in accordance with United Kingdom
Generally Accepted Accounting Practice; and
• the financial statements have been prepared in accordance
with the requirements of the Companies Act 2006 and,
as regards the group financial statements, Article 4 of the
IAS Regulation.
What we have audited
The financial statements, included within the Annual
Report, comprise:
• the consolidated statement of financial position as at
31 December 2016;
• the statement of financial position as at
31 December 2016;
• the consolidated income statement and consolidated
statement of comprehensive income for the year
then ended;
• the consolidated statement of cash flows for the year
then ended;
• the consolidated statement of changes in equity for the
year then ended;
• the statement of changes in equity for the year then
ended; and
• the notes to the financial statements, which include a
summary of significant accounting policies and other
explanatory information.
The financial reporting framework that has been applied in
the preparation of the group financial statements is IFRSs as
adopted by the European Union, and applicable law. The
financial reporting framework that has been applied in the
preparation of the parent company financial statements is
United Kingdom Accounting Standards, comprising FRS 102
“The Financial Reporting Standard applicable in the UK and
Republic of Ireland” (United Kingdom Generally Accepted
Accounting Practice), and applicable law.
In applying the financial reporting framework, the directors
have made a number of subjective judgements, for example
in respect of significant accounting estimates. In making such
estimates, they have made assumptions and considered
future events.
Opinions on other matters prescribed by the
Companies Act 2006
In our opinion, based on the work undertaken in the course
of the audit:
• the information given in the Strategic Report and the
Directors’ Report for the financial year for which the
financial statements are prepared is consistent with the
financial statements;
• the Strategic Report and the Directors’ Report have been
prepared in accordance with applicable legal requirements.
In addition, in light of the knowledge and understanding
of the Group, the parent company and their environment
obtained in the course of the audit, we are required to
report if we have identified any material misstatements in the
Strategic Report and the Directors’ Report. We have nothing
to report in this respect.
Other matters on which we are required
to report by exception
Adequacy of accounting records and information
and explanations received
Under the Companies Act 2006 we are required to report
to you if, in our opinion:
• we have not received all the information and explanations
we require for our audit; or
• adequate accounting records have not been kept by the
parent company, or returns adequate for our audit have
not been received from branches not visited by us; or
• the parent company financial statements are not in
agreement with the accounting records and returns.
We have no exceptions to report arising from
this responsibility.
INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF BRIT LIMITED Brit Limited Annual Report 2016
55
Directors’ remuneration
Under the Companies Act 2006 we are required to report
to you if, in our opinion, certain disclosures of directors’
remuneration specified by law are not made. We have no
exceptions to report arising from this responsibility.
We test and examine information, using sampling and other
auditing techniques, to the extent we consider necessary to
provide a reasonable basis for us to draw conclusions. We
obtain audit evidence through testing the effectiveness of
controls, substantive procedures or a combination of both.
In addition, we read all the financial and non‑financial
information in the Annual Report to identify material
inconsistencies with the audited financial statements and to
identify any information that is apparently materially incorrect
based on, or materially inconsistent with, the knowledge
acquired by us in the course of performing the audit. If we
become aware of any apparent material misstatements or
inconsistencies we consider the implications for our report.
With respect to the Strategic Report and Directors’ Report,
we consider whether those reports include the disclosures
required by applicable legal requirements.
Mark Bolton (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
15 February 2017
Notes:
1. The maintenance and integrity of the Brit Limited website
is the responsibility of the Directors; the work carried
out by the auditors does not involve consideration of
these matters and, accordingly, the auditors accept no
responsibility for any changes that may have occurred to
the financial statements since they were initially presented
on the website.
2. Legislation in the United Kingdom governing the
preparation and dissemination of financial statements may
differ from legislation in other jurisdiction.
Responsibilities for the financial statements
and the audit
Our responsibilities and those of the directors
As explained more fully in the Statement of Directors’
Responsibilities set out on page 45, the directors are
responsible for the preparation of the financial statements
and for being satisfied that they give a true and fair view.
Our responsibility is to audit and express an opinion on the
financial statements in accordance with applicable law and
International Standards on Auditing (UK and Ireland) (“ISAs
(UK & Ireland)”). Those standards require us to comply with
the Auditing Practices Board’s Ethical Standards for Auditors.
This report, including the opinions, has been prepared for
and only for the parent company’s members as a body in
accordance with Chapter 3 of Part 16 of the Companies
Act 2006 and for no other purpose. We do not, in giving
these opinions, accept or assume responsibility for any other
purpose or to any other person to whom this report is shown
or into whose hands it may come save where expressly
agreed by our prior consent in writing.
What an audit of financial statements involves
We conducted our audit in accordance with ISAs
(UK & Ireland). An audit involves obtaining evidence about
the amounts and disclosures in the financial statements
sufficient to give reasonable assurance that the financial
statements are free from material misstatement, whether
caused by fraud or error. This includes an assessment of:
• whether the accounting policies are appropriate to the
group’s and the parent company’s circumstances and have
been consistently applied and adequately disclosed;
• the reasonableness of significant accounting estimates
made by the directors; and
• the overall presentation of the financial statements.
We primarily focus our work in these areas by assessing the
directors’ judgements against available evidence, forming
our own judgements, and evaluating the disclosures in the
financial statements.
FINANCIAL STATEMENTS
56
Brit Limited Annual Report 2016
INTRODUCTION TO THE PRIMARY STATEMENTS
Consolidated income statement
The income statement shows income earned and expenses incurred by all the companies of Brit. Other items are shown
in the statement of comprehensive income. The numbers in brackets are costs or losses incurred.
Consolidated statement of comprehensive income
As well as the profit or loss reported in the income statement, there are a number of other items not reported in the income
statement which are instead shown here. These are gains and losses in the Group’s pension scheme, any tax associated
with these gains or losses and foreign exchange gains and losses on the translation of foreign operations into US dollars.
The statement starts from profit or loss reported in the income statement and adjusts for any gains and losses arising as
a result of the pension scheme and foreign operations to show the overall result.
Consolidated statement of financial position
The statement of financial position is a summary of assets and how the assets have been funded through liabilities and
equity investment by shareholders.
Consolidated statement of cash flows
The cash flow statement shows how we generate cash through our operating activities, how we have spent cash
(investing activities) and how we have borrowed or spent cash to fund our business for all the companies in the Group.
Consolidated statement of changes in equity
The statement of changes in equity shows how the various lines in the equity section of the Group’s statement of financial
position have moved during the year.
CONTENTS Brit Limited Annual Report 2016
57
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED INCOME STATEMENT
58
NOTE 14
TAX EXPENSE
CONSOLIDATED STATEMENT
OF COMPREHENSIVE INCOME
CONSOLIDATED STATEMENT
OF FINANCIAL POSITION
CONSOLIDATED STATEMENT OF CASH FLOWS
CONSOLIDATED STATEMENT
OF CHANGES IN EQUITY
NOTES TO THE FINANCIAL STATEMENTS:
NOTE 1
GENERAL INFORMATION
NOTE 2
NOTE 3
ACCOUNTING POLICIES AND BASIS
OF PREPARATION
CRITICAL ACCOUNTING ESTIMATES
AND JUDGEMENTS IN APPLYING
ACCOUNTING POLICIES
NOTE 4
RISK MANAGEMENT POLICIES
NOTE 5
SEGMENTAL INFORMATION
NOTE 6
INVESTMENT RETURN
NOTE 7
RETURN ON DERIVATIVE CONTRACTS
NOTE 8
NOTE 9
NET FOREIGN EXCHANGE
GAINS/(LOSSES)
ACQUISITION COSTS AND
OTHER OPERATING EXPENSES
NOTE 10
STAFF COSTS
NOTE 11
FINANCE COSTS
NOTE 12
AUDITOR’S REMUNERATION
NOTE 13
INVESTMENTS IN ASSOCIATED
UNDERTAKINGS
59
60
61
62
64
64
64
74
76
93
97
97
98
99
99
100
100
101
NOTE 15
INTANGIBLE ASSETS
NOTE 16
PROPERTY, PLANT AND EQUIPMENT
NOTE 17
DEFERRED ACQUISITION COSTS
NOTE 18
DEFERRED TAXATION
NOTE 19
INSURANCE AND REINSURANCE
CONTRACTS
NOTE 20
EMPLOYEE BENEFITS
NOTE 21
FINANCIAL INVESTMENTS
NOTE 22
DERIVATIVE CONTRACTS
NOTE 23
INSURANCE AND OTHER RECEIVABLES
NOTE 24
CASH AND CASH EQUIVALENTS
NOTE 25
BORROWINGS
NOTE 26
INSURANCE AND OTHER PAYABLES
NOTE 27
CALLED UP SHARE CAPITAL
NOTE 28
DIVIDENDS
NOTE 29
COMMITMENTS
NOTE 30
CASH FLOWS PROVIDED
BY OPERATING ACTIVITIES
NOTE 31
SHARE‑BASED PAYMENTS
NOTE 32
INTERESTS IN STRUCTURED ENTITIES
NOTE 33
ACQUISITION OF STRUCTURED ENTITIES
NOTE 34
CONSOLIDATED ENTITIES
NOTE 35
RELATED PARTY TRANSACTIONS AND
ULTIMATE PARENT COMPANY
NOTE 36
GUARANTEES AND
CONTINGENT LIABILITIES
102
103
105
106
106
107
111
115
119
121
121
122
122
123
123
124
124
125
128
129
131
132
134
CONTENTSFINANCIAL STATEMENTS 58
Brit Limited Annual Report 2016
CONSOLIDATED INCOME
STATEMENT
For the year ended 31 December 2016
Revenue
Gross premiums written
Less premiums ceded to reinsurers
Premiums written, net of reinsurance
Gross amount of change in provision for unearned premiums
Reinsurers’ share of change in provision for unearned premiums
Net change in provision for unearned premiums
Earned premiums, net of reinsurance
Investment return
Return on derivative contracts
Other income
Net foreign exchange gains
Total revenue
Expenses
Claims incurred:
Claims paid:
Gross amount
Reinsurers’ share
Claims paid, net of reinsurance
Change in the provision for claims:
Gross amount
Reinsurers’ share
Net change in the provision for claims
Claims incurred, net of reinsurance
Acquisition costs
Other operating expenses
Net foreign exchange losses
Total expenses excluding finance costs
Operating profit
Finance costs
Share of net profit of associates
Profit on ordinary activities before tax
Tax (expense)/income
Profit for the year
All profits arise from continuing operations.
The accompanying Notes are an integral part of the annual accounts.
Note
5
5
6
7
8
5
9
9
8
11
14(a)
Year ended
31 December
2016
US$m
1,912.2
(432.0)
1,480.2
21.4
32.5
53.9
Year ended
31 December
2015
US$m
1,999.2
(369.4)
1,629.8
(5.8)
14.1
8.3
1,534.1
1,638.1
132.2
(52.8)
1.1
52.2
10.3
39.7
0.3
–
1,666.8
1,688.4
(874.9)
140.7
(734.2)
(183.9)
62.0
(121.9)
(856.1)
(530.9)
(104.8)
–
(871.5)
191.1
(680.4)
(211.0)
9.4
(201.6)
(882.0)
(526.6)
(155.6)
(95.9)
(1,491.8)
(1,660.1)
175.0
(18.8)
3.6
159.8
(2.2)
157.6
28.3
(20.6)
–
7.7
7.9
15.6
CONSOLIDATED STATEMENT
OF COMPREHENSIVE INCOME
For the year ended 31 December 2016
Brit Limited Annual Report 2016
59
Profit attributable to owners of the parent
Other comprehensive income
Items not to be reclassified to profit or loss in subsequent periods:
Actuarial (losses)/gains on defined benefit pension scheme
Deferred tax gain/(charge) relating to actuarial gains on defined benefit
pension scheme
Items that may be reclassified to profit or loss in subsequent periods:
Change in unrealised foreign currency translation losses on foreign operations
Total other comprehensive income
Total comprehensive income recognised for the year
The accompanying Notes are an integral part of the annual accounts.
Note
20
14(b)
Year ended
31 December
2016
US$m
157.6
Year ended
31 December
2015
US$m
15.6
(5.4)
0.9
(13.7)
(18.2)
139.4
3.0
(0.5)
(4.9)
(2.4)
13.2
FINANCIAL STATEMENTS
60
Brit Limited Annual Report 2016
CONSOLIDATED STATEMENT
OF FINANCIAL POSITION
At 31 December 2016
Assets
Intangible assets
Property, plant and equipment
Deferred acquisition costs
Investments in associated undertakings
Reinsurance contracts
Employee benefits
Deferred taxation
Current taxation
Financial investments
Derivative contracts
Insurance and other receivables
Cash and cash equivalents
Total assets
Liabilities and Equity
Liabilities
Insurance contracts
Borrowings
Deferred taxation
Provisions
Current taxation
Derivative contracts
Insurance and other payables
Total liabilities
Equity
Called up share capital
Capital redemption reserve
Foreign currency translation reserve
Retained earnings
Total equity attributable to owners of the parent
Total liabilities and equity
Note
15
16
17
13
19
20
18
21
22
23
24
19
25
18
22
26
27
31 December
2016
US$m
31 December
2015
US$m
93.9
22.9
219.6
36.6
884.1
42.5
0.4
15.3
2,903.9
12.6
718.3
1,025.5
5,975.6
4,243.5
157.5
25.8
2.4
4.6
11.8
382.0
4,827.6
6.4
0.2
(91.0)
1,232.4
1,148.0
5,975.6
95.1
21.1
222.6
28.6
818.9
52.1
–
15.3
3,330.8
63.6
691.7
581.0
5,920.8
4,182.3
185.6
27.4
3.3
3.2
12.5
350.0
4,764.3
6.6
–
(77.3)
1,227.2
1,156.5
5,920.8
The accompanying Notes are an integral part of the annual accounts.
These financial statements were approved by the Board of Directors on 15 February 2016 and were signed on its behalf by:
Matthew Wilson
Group Chief Executive Officer
Mark Allan
Chief Financial Officer
CONSOLIDATED STATEMENT
OF CASH FLOWS
For the year ended 31 December 2016
Note
30
15
16
Cash flows from operating activities
Cash generated from operations
Tax paid
Interest received
Dividends received
Net cash inflows from operating activities
Cash flows from investing activities
Purchase of intangible assets
Purchase of property, plant and equipment
Investment in associated undertaking
Net cash outflows from investing activities
Cash flows from financing activities
Purchase of class A shares for cancellation
Purchase of shares for share‑based payment schemes
Interest paid
Dividends paid
Net cash outflows from financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of the year
Effect of exchange rate fluctuations on cash and cash equivalents
Brit Limited Annual Report 2016
61
Year ended
31 December
2016
US$m
Year ended
31 December
2015
US$m
579.1
(3.4)
57.8
17.5
651.0
(6.3)
(8.3)
(4.9)
(19.5)
(58.1)
(3.1)
(15.4)
(90.8)
(167.4)
464.1
581.0
(19.6)
262.0
(0.7)
40.6
30.1
332.0
(7.7)
(18.6)
(28.6)
(54.9)
–
(10.7)
(15.6)
(154.1)
(180.4)
96.7
501.4
(17.1)
581.0
Cash and cash equivalents at the end of the year
24
1,025.5
The accompanying Notes are an integral part of the annual accounts.
FINANCIAL STATEMENTS
62
Brit Limited Annual Report 2016
CONSOLIDATED STATEMENT
OF CHANGES IN EQUITY
For the year ended 31 December 2016
At 1 January 2016
Total comprehensive income recognised
Repurchase of class A shares
Cancellation of share capital
Share‑based payments
Dividend
At 31 December 2016
The accompanying Notes are an integral part of the annual accounts.
Called up
share
capital
US$m
Capital
redemption
reserve
US$m
Note
Foreign
currency
translation
reserve
US$m
Retained
earnings
US$m
Total
equity
US$m
6.6
–
–
(0.2)
–
–
6.4
–
–
–
0.2
–
–
0.2
(77.3) 1,227.2 1,156.5
(13.7)
–
–
–
–
153.1
(58.1)
–
1.0
(90.8)
139.4
(58.1)
–
1.0
(90.8)
(91.0) 1,232.4 1,148.0
31
28
CONSOLIDATED STATEMENT
OF CHANGES IN EQUITY
For the year ended 31 December 2015
Brit Limited Annual Report 2016
63
At 1 January 2015
Total comprehensive income recognised
Transfer to profit on liquidation of subsidiaries
Vesting of own shares
Share‑based payments
Purchase of shares for share‑based payments
Dividend
At 31 December 2015
Nature and Purpose of Group Reserves
Called up
share
capital
US$m
Note
Foreign
currency
translation
reserve
US$m
Own
shares
US$m
Retained
earnings
US$m
Total
equity
US$m
6.6
(1.5)
(77.6) 1,363.7
1,291.2
–
–
–
–
–
–
6.6
–
–
1.5
–
–
–
–
(4.9)
5.2
–
–
–
–
18.1
–
(1.5)
4.9
(3.9)
(154.1)
13.2
5.2
–
4.9
(3.9)
(154.1)
(77.3) 1,227.2
1,156.5
31
31
28
Own shares: Own shares represents the cost of shares held in trust for settling share‑based payments and shares
held in treasury.
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.
The accompanying Notes are an integral part of the annual accounts.
FINANCIAL STATEMENTS
64
Brit Limited Annual Report 2016
The first three Notes provide details of the basis of preparation and accounting policies applied in producing these financial
statements and the critical accounting estimates and judgements therein.
1 GENERAL INFORMATION
The consolidated financial statements of Brit Limited and its subsidiaries (collectively, the Group) for the year ended
31 December 2016 were authorised for issue in accordance with a resolution of the Directors on 15 February 2017. The Group’s
principal activity is the underwriting of general insurance and reinsurance business.
Brit Limited (the Company) is a limited company, incorporated and domiciled in England and Wales. Brit Limited was acquired
by FFHL Group Limited, a subsidiary of Fairfax Financial Holdings Limited (FFHL), on 5 June 2015. The shares of the Company
were delisted from the official list of the London Stock Exchange on 23 June 2015. The Company was re‑registered from a
public limited company to a private limited company on 29 June 2015 and the name of the Company changed accordingly.
2 ACCOUNTING POLICIES AND BASIS OF PREPARATION
2.1 Basis of preparation
The consolidated financial statements for the year ended 31 December 2016 have been prepared in accordance with
International Financial Reporting Standards (IFRS) as adopted by the European Union (EU). The accounting policies of the Group
have been applied consistently to all years presented, unless otherwise stated.
The Group has adopted the following amendments to standards with a date of initial application of 1 January 2016:
(a) Presentation of Financial Statements – Amendments to IAS 1
These amendments clarify rather than significantly change existing IAS 1 requirements. The amendments clarify:
• materiality requirements;
• how specific line items in the statement of profit or loss and other comprehensive income (OCI) and the statement of financial
position may be disaggregated;
• that entities have flexibility as to the order in which they present the notes to financial statements; and
• that the share of OCI of associates and joint ventures accounted for using the equity method must be presented in aggregate
as a single line item, and classified between those items that will or will not be subsequently reclassified to profit or loss.
These amendments have no impact on the Group.
(b) Equity method in separate financial statements – Amendments to IAS 27
This amends IAS 27 to allow the equity method of accounting in separate financial statements. This amendment has no impact
on the Group.
(c) Clarification of acceptable methods of depreciation and amortisation – Amendments to IAS 16 and IAS 38
This amends IAS 16 to prohibit the use of revenue‑based depreciation methods for PPE. IAS 38 is amended to introduce
a rebuttable presumption that revenue is not an appropriate basis for amortisation of an intangible asset. These amendments
have no impact on the Group.
(d) Accounting for acquisitions of interests in joint operations – Amendments to IFRS 11
The amendments add new guidance to IFRS 11 on accounting for the acquisition of an interest in a joint operation in which the
activity of the joint operation constitutes a business, as defined in IFRS 3. Acquirers of such interests are to apply the relevant
principles on business combination accounting, as well as disclosing the relevant information specified in these standards for
business combinations. These amendments have no impact on the Group.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Brit Limited Annual Report 2016
65
(e) Consolidated financial statements – Amendments to IFRS 10
These amendments have no impact on the Group.
(f) IFRS annual improvements cycle 2012‑2014
Various minor clarifications and amendments to IFRS. These amendments have no impact on the Group.
The consolidated financial statements have been prepared on a historical cost basis, except for financial investments and
derivative contracts which have been measured at fair value. The consolidated financial statements are presented in US dollars
and all values are rounded to the nearest US$0.1m except where otherwise indicated.
Certain amounts recorded in the financial information include estimates and assumptions made by management, particularly
about insurance liability reserves, investment valuations, interest rates and other factors. Actual results may differ from the
estimates made.
The consolidated financial statements include the results of the Company and all its subsidiary undertakings (collectively, the
Group) made up to the same accounting date.
At the date of authorisation of these financial statements, the following standards which have not been applied in these financial
statements were in issue but not yet effective:
Standard
IAS 7
IAS 12
IFRS 2
Statement of Cash Flows (amendments)
Recognition of deferred tax assets for unrealised
losses (amendments to IAS 12 Income Taxes)
Classification and measurement of share‑based
Effective
Periods commencing on or after 1 January 2017
Periods commencing on or after 1 January 2017
payment transactions (amendments to IFRS 2
Share‑based Payment)
Applying IFRS 9 with IFRS 4 (amendments)
Financial Instruments (2014)
IFRS 4
IFRS 9
IFRS 10, 12, and IAS 28 Investment entities – applying the consolidation
exception (amendments)
Revenue From Contracts With Customers (2014)
Leases (2016)
IFRS 15
IFRS 16
Periods commencing on or after 1 January 2018
Periods commencing on or after 1 January 2018
Periods commencing on or after 1 January 2018
Periods commencing on or after 1 January 2018
Periods commencing on or after 1 January 2018
Periods commencing on or after 1 January 2019
In July 2014, the IASB issued the final version of IFRS 9 ‘Financial Instruments’ that replaces IAS 39 ‘Financial Instruments:
Recognition and Measurement’ and all previous versions of IFRS 9. IFRS 9 (2014) addresses all three aspects of the IASB’s
accounting for financial instruments project, including classification and measurement, impairment and hedge accounting.
IFRS 9 is effective for annual periods beginning on or after 1 January 2018, with early application permitted. This standard
has not yet been endorsed by the EU. The Group is considering the impact of this standard on its financial statements along
with the amendments to IFRS 4 issued in September 2016, which are relevant to determining the date at which IFRS 9 will
become effective for the Group. These amendments provide for two approaches for insurers to applying the requirements of
IFRS 9, including an optional temporary exemption from applying IFRS 9 until 2021 for those companies whose activities are
predominantly connected with insurance.
The Group also continues to monitor developments at the IASB in respect of a replacement to IFRS 4 ‘Insurance Contracts’, the
issue date of which has not yet been confirmed by the IASB.
The Directors anticipate that the adoption of the other standards in future periods will have no material impact on the financial
statements of the Group.
FINANCIAL STATEMENTS 66
Brit Limited Annual Report 2016
2 ACCOUNTING POLICIES AND BASIS OF PREPARATION (continued)
2.2 Basis of consolidation
The consolidated accounts include the accounts of the Company, its subsidiaries and associates and the Group’s participation
in Lloyd’s syndicates’ assets, liabilities, revenues and expenses. Subsidiaries are those entities (including structured entities) that
an investor controls, when it is exposed, or has rights, to variable returns from its involvement with the investee and has the
ability to affect those returns through its power over the investee. The financial statements of subsidiaries are prepared up to
31 December each year. Consolidation adjustments are made to convert subsidiary accounts from local GAAP into IFRS so as to
remove any dissimilar accounting policies that may exist. Subsidiaries are consolidated from the date control is transferred to the
Group and cease to be consolidated from the date control is transferred from the Group. All inter‑company balances, profits and
transactions are eliminated.
Associates are those entities over which the Group has the power to exercise significant influence but not control. The Group’s
investment in associated undertakings is accounted for under the equity method of accounting whereby associated undertakings
are carried in the statement of financial position at cost plus post‑acquisition changes in the Group’s share of net assets of the
associate, less any impairment in value. The Group’s investment in associated undertakings also includes goodwill identified
on acquisition less any accumulated impairment loss. The income statement reflects the Group‘s share of the post‑acquisition
results of operations of the associated undertaking and the statement of comprehensive income reflects the Group’s share of the
comprehensive income of the associated undertaking. The financial statements of associated undertakings are prepared up to
31 December each year.
2.3 Product classification
Insurance contracts are those contracts that transfer significant insurance risk. The significance of insurance risk is dependent
on both the probability of an insured event and the magnitude of its potential effect to the policyholder.
Once a contract has been classified as an insurance contract, it remains an insurance contract for the remainder of its lifetime,
even if the insurance risk reduces significantly during this period.
Where the Group has issued financial guarantee contracts these have been regarded as insurance contracts and have been
accounted for in accordance with IFRS 4 ‘Insurance Contracts’.
2.4 Other accounting policies
2.4.1 Insurance contracts
(a) Premiums
Premiums written relate to business incepted during the year, together with any differences between booked premiums for prior
years and those previously accrued, and include estimates of premiums due but not yet receivable or notified, less an allowance
for cancellations. Premiums are accreted to the income statement on a pro rata basis over the term of the related policy, except
for those contracts where the period of risk differs significantly from the contract period. In these circumstances, premiums are
recognised over the period of risk in proportion to the amount of insurance protection provided. Reinstatement premiums are
accreted to the income statement on a pro rata basis over the term of the original policy to which it relates. Premiums are shown
net of premium taxes and other levies on premiums. Pipeline premium estimates are typically based on using standard actuarial
projection techniques (e.g. Basic Chain Ladder) on the key assumption that historical development of premiums is representative
of future development.
(b) Profit commissions receivable
Profit commission income arising from whole account quota share contracts is recognised when the economic benefits are highly
probable. They are netted off commission costs which are included within the ‘acquisition cost’ line in the income statement.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Brit Limited Annual Report 2016
67
(c) Deferred acquisition costs
Commission and other acquisition costs incurred during the financial period that are related to securing new insurance contracts
and/or renewing existing insurance contracts, but which relate to subsequent financial periods, are deferred to the extent that
they are recoverable out of future revenue margins. Deferred acquisition costs are capitalised and amortised over the life of the
policy to which they relate on a basis consistent with the earnings pattern of that policy.
(d) Claims incurred
Claims incurred comprise claims and claims handling costs paid in the year and changes in the outstanding claims provisions,
including provisions for claims incurred but not reported and related expenses, together with any adjustments to claims from
prior years. Claims handling costs are mainly external costs related to the negotiation and settlement of claims.
(e) Outstanding claims provisions
Outstanding claims represent the estimated ultimate cost of settling all claims (including direct and indirect claims settlement
costs) arising from events which have occurred up to the date of the statement of financial position, including provision for
claims incurred but not reported, less any amounts paid in respect of those claims. The Group does not discount its liabilities
for unpaid claims, the ultimate cost of which cannot be known with certainty at the date of the statement of financial position.
(f) Provision for unearned premiums
The proportion of written premiums that relate to unexpired terms of policies in force at the date of the statement of financial
position is deferred as a provision for unearned premiums, generally calculated on a time apportioned basis. The movement in
the provision is taken to the income statement in order that revenue is recognised over the period of the risk.
(g) Liability adequacy tests
At the date of each statement of financial position, liability adequacy tests are performed, to ensure the adequacy of unearned
premiums net of related deferred acquisition costs, employing the current estimates of future cash flows under its insurance
contracts. If as a result of these tests, the carrying amount of the Group’s insurance liabilities is found to be inadequate in
comparison to the value of these future cash flows, the deficiency is charged to the income statement for the period by
establishing an unexpired risk provision. The tests are performed at a whole account and portfolio level at the statement of
financial position date to ensure the estimated costs of future claims and related deferred acquisition costs do not exceed the
unearned premium provision.
(h) Reinsurance
The Group assumes and cedes reinsurance in the normal course of business. Premiums and claims on reinsurance assumed
are recognised in the income statement along the same basis as direct business, taking into account the product classification.
Reinsurance premiums ceded and reinsurance recoveries on claims incurred are included in the respective expense and income
accounts. Reinsurance outwards premiums are earned according to the nature of the cover. ‘Losses occurring during’ policies are
earned evenly over the policy period. ‘Risks attaching’ policies are expensed on the same basis as the inwards business being
protected. Reinstatement premiums on both inwards and outwards business are accreted to the income statement on a pro rata
basis over the term of the original policy to which they relate.
Reinsurance assets include amounts recoverable from reinsurance companies for paid and unpaid losses and loss adjustment
expenses, and ceded unearned premiums. Amounts recoverable from reinsurers are calculated with reference to the claims
liability associated with the reinsured risks. Revenues and expenses arising from reinsurance agreements are therefore
recognised in accordance with the underlying risk of the business reinsured.
Gains or losses on buying reinsurance are recognised immediately in the income statement.
If a reinsurance asset is impaired, the Group reduces its carrying amount accordingly, and will immediately recognise the
impairment loss in the income statement. A reinsurance asset will be deemed to be impaired if there is objective evidence,
as a result of an event that occurred after initial recognition of the asset, that the Group may not receive all amounts due to it
under the terms of the contract, and that the event has a reliably measurable impact on the amounts that the Group will receive
from the reinsurer.
FINANCIAL STATEMENTS 68
Brit Limited Annual Report 2016
2 ACCOUNTING POLICIES AND BASIS OF PREPARATION (continued)
Gains or losses on buying retroactive reinsurance are recognised immediately in the income statement and are not amortised.
Premiums ceded and claims reimbursed are presented on a gross basis in the consolidated income statement and statement
of financial position as appropriate.
(i) Syndicate assets and liabilities
For each managed syndicate on which the Group participates, the Group’s proportion of the syndicate’s assets and liabilities has
been reflected in its consolidated statement of financial position. Syndicate assets are held subject to trust deeds for the benefit
of the syndicate’s insurance creditors.
2.4.2 Revenue recognition
(a) Fee and commission income
Fee and commission income consists mainly of administration and broking fees charged to third parties. It is recognised in the
accounting period in which the service is rendered by reference to completion of the specific transaction, assessed on the basis
of the actual service provided as a proportion of the total services to be provided.
(b) Investment return
Investment income comprises all interest and dividend income and realised and unrealised gains and losses less investment
management fees. Interest income is recognised using the effective interest method. Dividend income is recognised when the
shareholders’ right to receive the payment is established.
Realised gains and losses on investments are calculated as the difference between net sales proceeds and cost and are
recognised when the sale transaction occurs.
Unrealised gains and losses on investments are calculated as the difference between the valuation at the date of the statement
of financial position and the valuation at the last statement of financial position or purchase price, if acquired during the year.
Unrealised investment gains and losses include adjustments in respect of unrealised gains and losses recorded in prior years
which have been realised during the year and are reported as realised gains and losses in the current year’s income statement.
2.4.3 Recognition and derecognition of financial assets and financial liabilities
Financial assets and financial liabilities are recognised when the Group becomes a party to the contractual provisions of the
contract. A financial asset is derecognised when either the contractual rights to the asset’s cash flows expire, or the asset is
transferred and the transfer qualifies for derecognition under a combination of risks and rewards and control tests. A financial
liability is derecognised when it is extinguished which is when the obligation in the contract is discharged, cancelled or expired.
All ‘regular way purchases and sales’ of financial assets are recognised on the trade date, i.e. the date that the Group commits to
purchase or sell the asset. Regular way purchases and sales are purchases and sales of financial assets that require delivery
of assets within the time frame generally established by regulation or convention in the marketplace.
2.4.4 Investments
The Group has designated on initial recognition its financial assets held for investment purposes (investments) at fair value
through profit or loss (FVTPL). This is in accordance with the Group’s documented investment strategy and consistent with
investment risk being assessed on a portfolio basis. Information relating to investments is provided internally to the Group’s
Directors and key managers on a fair value basis.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. The fair value of financial assets and liabilities traded in active markets (which
are the principal markets or the most advantageous markets that maximise the amount that would be received to sell the asset
or minimises the amount that would be paid to transfer the liability) are based on quoted market bid and ask price for both
financial assets and financial liabilities respectively.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Brit Limited Annual Report 2016
69
The fair value of financial assets and liabilities that are not traded in an active market, including over‑the‑counter derivatives, is
determined using valuation techniques. The Group uses a variety of methods and makes assumptions that are based on market
conditions existing at each reporting date. Valuation techniques include the use of comparable recent arm’s length transactions,
reference to other instruments that are substantially the same, discounted cash flow analysis, option pricing models and others
commonly used by market participants and which make the maximum use of observable inputs.
Gains and losses on investments designated as FVTPL are recognised through the income statement. Interest income from
investments in bonds and short‑term investments is recognised at the effective interest rate. Interest receivable is shown
separately in the statement of financial position based on the debt instruments’ stated rates of interest.
2.4.5 Derivatives
Derivative financial instruments include foreign exchange contracts, forward rate agreements, interest rate futures, currency and
interest rate swaps and other financial instruments that derive their value mainly from underlying interest rates, foreign exchange
rates, credit indices, commodity values or equity instruments. All derivatives are initially recognised in the statement of financial
position at their fair value, which represents their cost. They are subsequently remeasured at their fair value, with the method of
recognising movements in this value in the income statement. Fair values are obtained from quoted market prices or, if these are
not available, by using valuation techniques such as discounted cash flow models or option pricing models.
All derivatives are carried as assets when the fair values are positive and as liabilities when the fair values are negative. Derivative
contracts may be traded on an exchange or over‑the‑counter (OTC). Exchange‑traded derivatives are standardised and include
certain futures and option contracts. OTC derivative contracts are individually negotiated between contracting parties and
include forwards and swaps.
Derivatives are subject to various risks including market, liquidity and credit risk, similar to those related to the underlying
financial instruments. Many OTC transactions are contracted and documented under International Swaps and Derivatives
Association (ISDA) master agreements or their equivalent, which are designed to provide legally enforceable set‑off in the event
of default, reducing the Group’s exposure to credit risk. The notional or contractual amounts associated with derivative financial
instruments are not recorded as assets or liabilities on the statement of financial position as they do not represent the fair value
of these transactions.
2.4.6 Intangible assets
(a) Syndicate participation rights
Lloyd’s syndicate participation rights that have been acquired on acquisition of a subsidiary are initially recognised at fair
value. They are considered to have an indefinite useful life as they will provide benefits over an indefinite future period and
are therefore not subject to an annual amortisation charge. The continuing value of the underwriting capacity is reviewed for
impairment annually by reference to the expected future profit streams to be earned from the respective syndicate, with any
impairment in value being charged to the income statement.
(b) Computer software
Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring into use the specific
software. Internal development costs that are directly associated with the production of identifiable and unique software
products controlled by the Group are also capitalised where the cost can be measured reliably, the Group intends to and has
adequate resources to complete development and the computer software will generate future economic benefits.
All computer software costs are finite life assets and amortised on a straight‑line basis over their expected useful lives,
not exceeding a period of five years.
FINANCIAL STATEMENTS 70
Brit Limited Annual Report 2016
2 ACCOUNTING POLICIES AND BASIS OF PREPARATION (continued)
(c) Trade names and distribution channels
Trade names and distribution channels that have been acquired on acquisition of a subsidiary are initially recognised at fair
value. They are deemed to be finite life assets and amortised on a straight‑line basis over their expected useful economic
lives, as follows:
Trade names
Distribution channels
5 years
15 years
(d) Renewal rights
Renewal rights are recognised at fair value upon acquisition and amortised straight line over their expected useful lives which
varies between two and four years.
2.4.7 Property, plant and equipment
Property, plant and equipment are carried at cost, less accumulated depreciation and any impairment in value. Depreciation
is calculated so as to write‑off the cost over their estimated useful economic lives on a straight‑line basis having regard to the
residual value of each asset, as follows:
Office refurbishment costs, office machinery, furniture and equipment
Computers, servers, data storage devices, networks and other IT infrastructure
5‑15 years
3‑5 years
The assets’ residual values and useful lives are reviewed at the date of each statement of financial position and adjusted
if appropriate.
An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected to
arise from the continued use of the asset. Gains and losses on the disposal of property, plant and equipment are determined
by comparing proceeds with the carrying amount of the asset and are included in the income statement. Costs for repairs and
maintenance are expensed as incurred.
Following a change in premises during 2016, useful lives have been revised to reflect the useful economic lives of new
assets acquired.
2.4.8 Impairment
Syndicate participation rights are not subjected to amortisation but are tested annually for impairment as they are an asset with
an indefinite useful life. Other assets, except for assets arising from insurance contracts, are tested for impairment whenever
events or changes in circumstances indicate that the carrying amount may not be recoverable.
If the carrying value of an asset is impaired, it is reduced to the recoverable amount by an immediate charge to the income
statement. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use.
Value in use is based on discounting cash flows at the Group’s weighted average cost of capital which is loaded where
significant uncertainties exist. Assets are grouped at the lowest levels for which there are separately identifiable cash flows
(cash‑generating units).
Impairment reviews are made by comparing carrying value to recoverable amount.
2.4.9 Cash and cash equivalents
Cash and cash equivalents in the statement of financial position include cash in hand, deposits held at call with banks and other
short‑term, highly liquid investments with a maturity of three months or less at the date of acquisition.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Brit Limited Annual Report 2016
71
2.4.10 Income taxes
Income tax comprises current and deferred tax. Income tax is recognised in the income statement except where it relates
to an item which is recognised in equity.
(a) Current income tax
Current income tax is the expected tax payable on the taxable profit for the period using tax rates (and laws) enacted or
substantively enacted at the date of the statement of financial position and any adjustment to the tax payable in respect
of previous periods. The Group calculates current income tax using current income tax rates.
(b) Deferred income tax
Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of
assets and liabilities and their carrying amounts in the consolidated financial statements. However, if the deferred income tax
arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the
transaction affects neither accounting nor taxable profit or loss, it is not recognised.
Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the date of the
statement of financial position and are expected to apply when the related deferred income tax asset is realised or the deferred
income tax liability is settled.
Deferred income tax assets are recognised to the extent that it is probable that future taxable profit will be available against
which the temporary differences can be utilised.
Deferred income tax relating to items recognised in other comprehensive income is also recognised in other
comprehensive income.
Deferred income tax is provided on temporary differences arising on investments in subsidiaries and associates, except where
the Group controls the timing of the reversal of the temporary difference and it is probable that the temporary difference will
not reverse in the foreseeable future.
Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against
current tax liabilities and when the deferred income taxes relate to the same fiscal authority.
Deferred tax assets and liabilities are not discounted.
2.4.11 Employee benefits
The Group operates a defined contribution group personal pension plan and several other defined contribution schemes.
It also makes payments into a number of personal money purchase pension plans. Contributions in respect of these schemes
are charged to the income statement in the period to which they relate.
The Group also operates a defined benefit pension scheme. The asset recognised in the statement of financial position in
respect of the defined benefit scheme is the fair value of the scheme assets less the present value of the defined benefit
obligation which is determined by discounting the estimated future cash outflows. The discount rate is based on market yields
at the reporting date of high‑quality corporate bonds that have terms to maturity which approximate to those of the related
pension liability. An asset is recognised only to the extent that it is considered available in the form of future refunds from the
plan, in particular taking into consideration any minimum funding requirements that apply to the plan.
Actuarial gains and losses are recognised immediately through other comprehensive income.
The Group determines the net interest expense/income on the net defined benefit liability/asset for the period by applying the
discount rate used to measure the defined benefit obligation at the beginning of the annual period to the net defined benefit
liability/asset.
FINANCIAL STATEMENTS 72
Brit Limited Annual Report 2016
2 ACCOUNTING POLICIES AND BASIS OF PREPARATION (continued)
Past service costs arising in the period are recognised as an expense at the earlier of the date when the plan amendment or
curtailment occurs and the date when the Group recognises related restructuring costs or termination benefits.
The Group recognises an accrual in respect of profit‑sharing and bonus plans where a contractual obligation to employees exists
or where there is a past practice that has created a constructive obligation.
2.4.12 Share‑based payments
The fair value of equity instruments granted under share‑based payment plans are recognised as an expense and spread over
the vesting period of the instrument. The total amount to be expensed is determined by reference to the fair value of the awards
made at the grant date.
At the date of each statement of financial position, the Group revises its estimate of the number of equity instruments that
are expected to become exercisable and it recognises the impact of the revision of original estimates, if any, in the income
statement. Where the awards have been granted by a parent company and are therefore treated as equity settled
a corresponding adjustment is made to equity over the remaining vesting period.
Where the awards have been granted by the Company and are therefore treated as cash‑settled, a liability is provided for
settlement of the awards. The corresponding adjustment arising on a revision of the original estimate is made to that liability.
In addition, the fair value of the award and ultimate expense are adjusted on a change in the market share price of the
underlying shares or at the valuation date.
2.4.13 Own shares
Where the Company purchases its own share capital, the consideration paid is shown as a deduction from total shareholders’
equity. No gain or loss is recognised in the income statement on the purchase, sale, issue or cancellation of own shares and any
consideration paid or received is recognised directly in equity.
2.4.14 Provisions and contingencies
Provisions are liabilities with uncertainties in the amount or timing of payments. Provisions are recognised if there is a present
obligation as a result of past events, it is probable that an outflow of resources embodying economic benefits will be required
to settle the obligation, and a reliable estimate of the amount of the obligation can be made at the date of the statement of
financial position.
A contingent liability is a possible obligation that arises from past events or a present obligation that is not recognised as it is not
probable that an outflow of resources will be required to settle the obligation or the amount of obligation cannot be measured
with sufficient reliability. A contingent liability is disclosed but not recognised.
2.4.15 Leased assets
Where the Group enters into an operating lease, the payments (net of any incentives received from the lessor) are charged
to the income statement on a straight‑line basis over the lease term. An operating lease is one in which the risks and rewards
remain with the lessor.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Brit Limited Annual Report 2016
73
2.4.16 Foreign currency translation
Items included in the financial statements of the parent and subsidiaries are measured using the functional currency which is
the primary economic environment in which the entity operates. The Group presents its consolidated financial statements in
US Dollars which is the functional currency of the parent.
Foreign currency transactions are recorded in the functional currency for each entity using the exchange rates prevailing at the
dates of the transactions or at the average rate for the period when this is a reasonable approximation. Substantially all of the
Group’s operations have US dollars as their functional currency. Monetary assets and liabilities denominated in foreign currencies
are translated at period end exchange rates. The resulting exchange differences on translation are recorded in the income
statement. Non‑monetary assets and liabilities that are measured at historical cost denominated in a foreign currency
are not retranslated.
The functional currencies of some of the company’s subsidiaries differ from the consolidated group US Dollar presentation
currency. As a result, the assets and liabilities of these subsidiaries are translated on consolidation at the rates of exchange
prevailing at the balance sheet date. Revenue and expenses are translated at the average rate of exchange for the period.
The unrealised gain or loss resulting from this translation is recognised in other comprehensive income and transferred to a
foreign currency translation reserve.
2.4.17 Borrowings
Borrowings are initially recognised at fair value, net of transaction costs incurred and subsequently stated at amortised cost.
Fair value is normally determined by reference to the fair value of the proceeds received. Any difference between the initial
carrying amount and the redemption value is recognised in the income statement over the period of the borrowings using the
effective interest rate method.
2.4.18 Segmental reporting
An operating segment is a component of an entity that engages in business activities from which it may earn revenues and incur
expenses, whose operating results are regularly reviewed by the entity’s chief operating decision maker and for which discrete
financial information is available.
2.4.19 Loans and receivables
Loans and receivables are financial assets with fixed or determinable payments. Loans and receivables are measured
at amortised cost, using the effective interest rate method.
2.4.20 Offsetting of financial instruments
Financial assets and liabilities are offset and the net amount reported in the statement of financial position only when there
is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the
assets and settle the liability simultaneously.
2.4.21 Dividend and capital distributions
Dividend and capital distributions to the Company’s shareholders are recognised in the Group’s financial statements in the
period in which they are declared and appropriately approved.
2.4.22 Collateral
The Group receives collateral from certain reinsurers and pledges collateral where required for regulatory purposes. Collateral
received in the form of cash is recognised as an asset on the statement of financial position with a corresponding liability for
the repayment. Non‑cash collateral received is not recognised on the statement of financial position. Collateral pledged is not
derecognised from the statement of financial position unless the Group defaults on its obligations under the relevant agreement.
FINANCIAL STATEMENTS 74
Brit Limited Annual Report 2016
3 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
IN APPLYING ACCOUNTING POLICIES
3.1 Introduction
The Group makes various assumptions that affect the reported amounts of assets and liabilities. Estimates and judgements are
regularly re‑evaluated and are based on a combination of historical experience and other factors, including exposure analysis,
expectations of future experience and expert judgement.
3.2 The ultimate liability arising from claims made under insurance contracts
The estimation of the ultimate liability arising from claims made under insurance contracts is the Group’s most critical accounting
estimate. There are several sources of uncertainty that need to be considered in the estimate of the amounts that the Group will
ultimately pay to settle such claims. Significant areas requiring estimation and judgement include:
• Estimates of the amount of any liability in respect of claims notified but not settled and incurred but not reported claims
(IBNR) to be included within provisions for inwards insurance and reinsurance contracts;
• The corresponding estimate of the amount of outwards reinsurance recoveries which will become due as a result of the
estimated claims on inwards business;
• The recoverability of amounts due from reinsurers; and
• Estimates of the proportion of exposure which has expired in the period as represented by the earned proportion
of premiums written.
The assumptions used and the manner in which these estimates and judgements are made are set out below, including the
reserving process for the estimation of gross, and net of reinsurance, ultimate premiums and claims:
• Quarterly statistical data is produced in respect of gross and net premiums and claims (paid and incurred);
• Projections of ultimate premiums, reinstatement premiums and claims are produced by the internal actuarial department
using standard actuarial projection techniques (e.g. Basic Chain Ladder, Bornhuetter‑Ferguson, Initial Expected Loss Ratio).
The Basic Chain Ladder and Bornhuetter‑Ferguson projection methods are based on the key assumption that historical
development of premiums and claims is representative of future development. Claims inflation is taken into account in the
Initial Expected Loss Ratio selections but is otherwise assumed to be in line with historical inflation trends, unless explicit
adjustments for other drivers of inflation such as legislative developments are deemed appropriate.
• Some classes of business have characteristics which do not necessarily lend themselves easily to statistical estimation
techniques e.g. due to low data volumes. In such cases, for example, a policy‑by‑policy review may also be carried out to
supplement statistical estimates;
• In the event of catastrophe losses, and prior to detailed claims information becoming available, claims provision estimates
are compiled using a combination of output from specific recognised modelling software and detailed reviews of contracts
exposed to the event in question;
• The initial ultimate selections derived by the actuarial department, along with the underlying key assumptions and
methodology, are discussed with class underwriters, divisional underwriting directors and the claims team at ‘Pre‑Committee’
meetings. The actuarial department may make adjustments to the initial ultimates following these meetings;
• Following the completion of the ‘Pre‑Committee’ meetings and peer review process within the actuarial department,
the ultimate selections (actuarial estimate), assumptions, methodology and uncertainties are presented to the Reserving
Committee for discussion and debate;
• Following review of the actuarial estimate, the Reserving Committee recommends the committee estimate to be adopted
in the financial statements; and
• As part of their audit engagement, claims provisions are subject to external actuarial review by Brit’s auditor.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Brit Limited Annual Report 2016
75
The results of the external actuarial review by Brit’s auditor is presented to both the Reserving Committee and the Audit
Committee with key assumptions, methodologies and uncertainties also highlighted. The purpose of the external review is to
provide both committees with an independent actuarial view of reserve requirements compared to the recommendations of the
internal actuarial department.
The estimates and judgements are applied in line with the overall reserving philosophy and seek to state the claims provisions
on a best estimate, undiscounted basis. A management risk margin is also applied over and above the actuarial best estimate
to allow for the inherent uncertainty within the best estimate reserve position.
In addition to claims provisions, the reserve for future loss adjustment expenses is also subject to estimation with consideration
being given to the level of internal and third party loss adjustment expenses incurred annually. The estimated loss adjustment
expenses are expressed as a percentage of gross claims reserves and the reasonableness of the estimate is assessed through
benchmarking. Further judgements are made as to the recoverability of amounts due from reinsurers. Provisions for bad debts
are made specifically, based on the solvency of reinsurers, internal and external ratings, payment experience with them and any
disputes of which the Group is aware.
The carrying value at the date of the statement of financial position of gross claims reported and loss adjustment expenses and
claims incurred but not reported were US$3,406.7m (2015: US$3,324.1m) as set out in Note 19 to the accounts. The amount
of reinsurance recoveries estimated at that date is US$711.1m (2015: US$678.4m).
3.3 Pipeline premiums
Written premiums include pipeline premiums of US$459.4m (2015: US$486.8m) which represent future premiums receivable
on in‑force insurance contracts. Pipeline premium estimates are typically based on standard actuarial projection techniques
(e.g. Basic Chain Ladder) on the key assumption that historical development of premiums is representative of
future development.
3.4 Intangible assets
Intangible assets with indefinite useful lives are tested for impairment on an annual basis in accordance with IAS 36 ‘Impairment
of Assets’. Determining the assumptions used in the test requires estimation. The indefinite useful life intangible assets of the
Group consist of syndicate participation rights and their carrying amount at the date of the statement of financial position was
US$70.8m (2015: US$70.8m). For further information, refer to Note 15.
3.5 Financial investments
Financial investments are carried in the statement of financial position at fair value. The carrying amount of financial investments
at the date of the statement of financial position was US$2,903.9m (2015: US$3,330.8m). Determining the fair value of certain
investments requires estimation.
The Group value investments using designated methodologies, estimations and assumptions. These securities, which are
reported at fair value on the consolidated statement of financial position, represent the majority of the invested assets. The
measurement basis for assets carried at fair value is categorised into a ‘fair value hierarchy’ in accordance with the valuation
inputs and consistent with IFRS 13 ‘Fair Value Measurement’. The fair value hierarchy gives the highest priority to quoted prices
in active markets for identical assets or liabilities (level one); the middle priority to fair values other than quoted prices based
on observable market information (level two); and the lowest priority to unobservable inputs that reflect the assumptions that
we consider market participants would normally use (level three). At 31 December 2016, financial investments amounting to
US$164.2m (2015: US$61.5m) were classified as level three.
The classification within the fair value hierarchy is based on the lowest level of significant input to its valuation. Any change
to investment valuations may affect our results of operations and reported financial condition. For further information,
refer to Note 21.
FINANCIAL STATEMENTS 76
Brit Limited Annual Report 2016
3 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
IN APPLYING ACCOUNTING POLICIES (continued)
3.6 Defined benefit plans
The amounts recognised in the consolidated financial statements in respect of the Group’s defined benefit pension plan are
determined using actuarial valuations, which involves making assumptions that may differ from actual developments in the
future. These include the determination of the discount rate, inflation, mortality rates and future pension increases. Due to the
complexities involved in the valuation and its long‑term nature, a defined benefit obligation is highly sensitive to changes in
these assumptions. All assumptions are reviewed at each reporting date.
The carrying amount of the pension asset at the date of the statement of financial position was US$42.5m (2015: US$52.1m).
For further information, refer to Note 20.
4 RISK MANAGEMENT POLICIES
This Note provides details of key risks that the Group is exposed to and explains the Group’s strategies and the role of
management in mitigating these risks.
4.1 Insurance risk
Insurance risk arises from the possibility of an adverse financial result due to actual experience being different from that
expected when an insurance product was designed and priced. The actual performance of insurance contracts is subject to the
inherent uncertainty in the occurrence, timing and amount of the final insurance liabilities. This is the principal risk the Group is
exposed to as the Group’s primary function is to underwrite insurance contracts. The risk arises due to the possibility of insurance
contracts being under‑priced, under‑reserved or subject to unforeseen catastrophe claims.
The areas of insurance risk discussed below include underwriting (including aggregate exposure management), reinsurance
and reserving.
4.1.1 Underwriting risk
(a) Introduction
This is the risk that insurance premiums will not be sufficient to cover the future losses and associated expenses. It arises from
the fluctuations in the frequency and severity of financial losses incurred through the underwriting process by the Group as a
result of unpredictable events.
The Group is also exposed to the risks resulting from its underwriters accepting risks for premiums which are insufficient to
cover the ultimate claims which result from such policies. This risk is considered to be heightened in the current competitive
underwriting environment which is resulting in significant downwards pressure on premium rates. This trend in premium rates
has been factored into the Group’s pricing models and risk management tools and is continually monitored to assess whether
any corrective action is required. Additional controls over the underwriting strategy are described in the section below.
The Group writes all of its business through Lloyd’s and therefore can take advantage of Lloyd’s centralised infrastructure and
service support. Lloyd’s also has an established global distribution framework, with extensive licensing agreements providing the
Group access to over 200 territories. Exclusively using the Lloyd’s platform subjects the Group to a number of underwriting risks.
The Group relies on the efficient functioning of the Lloyd’s market and if for any reason, Brit Syndicates Limited (BSL) is restricted
or otherwise unable to write insurance through the Lloyd’s market, this would have a material adverse effect on the Group’s
business and results of operations. In particular, any damage to the brand or reputation of Lloyd’s, increase in tax levies imposed
on Lloyd’s participants or deterioration in Lloyd’s asset base when compared with its liabilities may have a material adverse effect
on the Group’s ability to write new business.
BSL also benefits from the ability to write business based on the Lloyd’s financial rating, which allows the Group to write
more business as part of the Lloyd’s platform. A downgrade in Lloyd’s financial strength ratings may have an adverse effect
on the Group.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Brit Limited Annual Report 2016
77
(b) Controls over underwriting strategy
The Board sets the Group’s underwriting strategy for accepting and managing underwriting risk. The UK Underwriting
Committee meets monthly to drive the underwriting strategy and to monitor performance against the plans. The assessment
of underwriting performance is all‑encompassing applying underwriting key performance indicators (KPIs), technical pricing
management information (MI), premium monitoring, delegated underwriting operations and claims. The risks are managed by
the committee in line with the underwriting risk policy and within the risk tolerance set by the Board. The underwriting risk policy
also sets out a number of controls, which are summarised below.
The Group carries out a detailed annual business planning process for each of its underwriting units. The resulting plans set
out premium, territorial and aggregate limits and reinsurance protection thresholds for all classes of business and represent
a key tool in managing concentration risk. Performance against the plans is monitored on a regular basis by the Underwriting
Committee as well as by the Boards of the regulated entities. A dedicated Exposure Management Team also performs Realistic
Disaster Scenario (RDS) analysis on a regular basis to ensure that the Group’s net losses remain within its risk appetite.
The Group has developed underwriting guidelines, limits of authority and business plans which are binding upon all staff
authorised to underwrite. These are detailed and specific to underwriters and classes of business. Gross and net line size limits
are in place for each class of business with additional restrictions in place on catastrophe exposed business.
A proportion of the Group’s insurance risks are written by third parties under delegated underwriting authorities, with the
remaining being written through individual risk acceptances or through reinsurance treaties. The third parties are closely vetted
in advance and are subject to tight reporting requirements. In addition, the performance of these contracts is closely monitored
by underwriters and regular audits are carried out.
The technical pricing framework ensures that the pricing process in the Group is appropriate. It ensures pricing methodologies
are demonstrable and transparent and that technical (or benchmark) prices are assessed for each risk. The underwriting and
actuarial functions work together to maintain the pricing models and assess the difference between technical price and actual
price. The framework also ensures that sufficient data is recorded and checked by underwriters to enable the Group to maintain
an effective rate monitoring process.
Compliance is checked through both a peer review process and, periodically, by the Group’s internal audit department which is
entirely independent of the underwriting units.
In order to limit risk, the number of reinstatements per policy is limited, deductibles are imposed, policy exclusions are applied
and whenever allowed by statute, maximum indemnity limits are put in place per insured event.
(c) Underwriting risk profile
The core insurance portfolio of property, aviation, marine, energy and casualty covers a variety of largely uncorrelated events
and also provides some protection against the underwriting cycle as different classes are at different points in the underwriting
cycle. The underwriting portfolio is managed to target top quartile underwriting performance and the mix of business is
continually adjusted based on the current environment (including the current pricing strength of each class). This assessment
is conducted as part of the business planning and strategy process which operates annually and uses inputs from the technical
pricing framework. The business plan is approved by the Board and is monitored monthly.
The Group underwrites a well‑diversified portfolio across multiple regions and classes. While underlying risk and the policyholder
may be situated anywhere in the world, more than 86% of the GWP of the Group in 2016 was sourced in London. The other
business written by the syndicate is sourced through a wholly‑owned service company in the United States, which business
accounted for 9.8% of the Group’s annual GWP in 2016. The Group also writes business from its office in Bermuda, with BGSB
accounting for 3.2% of the Group’s annual GWP in 2016, and through the Lloyd’s China Platform and the recently established
Singapore office. In 2016, 18.5% of the Group’s GWP was reinsured to third parties.
FINANCIAL STATEMENTS 78
Brit Limited Annual Report 2016
(d) Geographical concentration of premium
The Group enters into policies with policyholders from all over the world, with the underlying risk relating to premiums spread
worldwide. This allows the Group to benefit from a wide geographic diversification of risk. The three principal locations of the
Group’s policyholders are the United States, UK and Ireland and mainland Europe. The concentration of insurance premium
before and after reinsurance by the location of the underlying risk is summarised below:
2016
United States
United Kingdom
Europe (excluding UK)
Other (including worldwide)
2015
United States
United Kingdom
Europe (excluding UK)
Other (including worldwide)
Gross
premiums
written
US$m
Net
premiums
written
US$m
843.1
106.7
110.8
851.6
656.4
100.4
73.8
649.6
1,912.2 1,480.2
857.5
120.3
121.3
900.1
675.3
102.4
83.3
768.8
1,999.2
1,629.8
The nature of the London Market business is such that the insureds and reinsureds are often operating on a multi‑territory or
worldwide basis and hence coverage is often provided on a worldwide basis. Premiums written on a multi‑territory or worldwide
basis are included in ‘other’ in the table above.
(e) Portfolio mix
The Group’s third party underwriting takes place through the syndicate underwriting business in a wide variety of business lines.
The business lines can be broken down into four principal categories: (i) short‑tail direct insurance; (ii) long‑tail direct insurance;
(iii) short‑tail reinsurance; and (iv) long‑tail reinsurance.
The breakdown of premium before reinsurance by principal lines of business is summarised below:
Short‑tail direct insurance
Long‑tail direct insurance
Short‑tail reinsurance
Long‑tail reinsurance
Other
Property, marine, energy, accident and health,
BGSU, aerospace, terrorism and political
Professional lines, specialty lines, specialist liability
Property treaty
Casualty treaty
Other underwriting and other corporate
2016
Gross
premiums
written
%
US$m
56%
25%
8%
11%
–
1,141.8
492.1
151.5
213.6
0.2
2015
Gross
premiums
written
%
57%
24%
8%
11%
<1%
US$m
1,076.1
470.3
153.2
212.6
–
1,912.2
100%
1,999.2
100%
The Group underwrites a business mix of both insurance and reinsurance, long and short‑tail business across a number of
geographic areas which results in a diversification of the Group’s portfolio. The business mix is monitored on an ongoing basis
with particular focus on the short‑tail vs. long‑tail split and the proportion of delegated underwriting business. Long‑tail business
makes up 35.7% of the portfolio at 31 December 2016 (2015: 35.3%) and delegated underwriting represents 41.5% (2015:
40.4%). Underwriting risk is mainly driven by the syndicate’s US catastrophe exposure. Casualty treaty is also a driver due to its
long‑tail exposure.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Brit Limited Annual Report 2016
79
(i) Short‑tail direct insurance
Short‑tail insurance generally refers to lines of business where the claims are typically settled within a short time of the claim
being made; therefore, they are typically classes where a large element of the claims is property damage.
The Group’s short‑tail business consists of six principal lines of business:
Property
Marine
Energy
US specialty
Property coverage including business interruption on a worldwide basis and delegated
underwriting business predominantly in North America.
Coverage for cargo (including specie and fine art), hull (including yacht) and marine liability.
Coverage for upstream (offshore) and midstream activities related to oil and
gas production.
Public and non‑profit package on both a self‑insured retention (SIR) and first dollar basis;
property and liability package business for US criminal justice service operations; property
direct and facultative reinsurance.
Accident and health
Coverage for personal accident (including kidnap and ransom), bloodstock
and contingency
Terrorism and political
Coverage for terrorism, political and credit risks, and cyber terrorism.
Aviation
Coverage for aviation risks, including airlines, general aviation and satellites at both launch
and in orbit
The key risks on short‑tail business are exposures to catastrophe claims, particularly US windstorms, earthquakes, floods and
terrorist events.
The property lines are also exposed to an increased frequency of fire and weather related events. Coverage on energy is
provided in respect of physical damage and business interruption/loss of income and would be exposed to large individual
claims and extreme catastrophe losses. Within US specialty, the syndicate writes business in property direct and facultative
reinsurance exposed to wind, earthquake and flood catastrophe claims as well as expanding in a number of niche casualty
lines. Accident and health offers further diversification due to low correlation with other business lines. Personal accident has
the potential to suffer from large losses due to a high concentration of multiple deaths from a catastrophe or large claims from
highly valued insured individuals. Medical expense claims are subject to high inflationary costs and may experience a high claim
frequency. Both bloodstock and contingency classes have exposure to multiple claims from a single event/location. Terrorism,
aerospace and political classes have key exposures to single catastrophe events and terrorist events or a series of losses.
(ii) Long‑tail direct insurance
Long‑tail insurance refers to insurance where on average the claims are not settled for several years after the expiry of the policy.
The long‑tail direct insurance business can be categorised into two principal lines of business:
Casualty
Includes cover for financial institutions, legal expenses, directors’ and officers’, and professional lines as
well as Cyber, Privacy and Technology.
Specialist liability
Cover for employers’ liability and public liability both in the UK and internationally but excluding the US.
Key exposures on casualty lines lie with increasing claim frequency due to global recessionary events or international systemic
malpractice, as well as an increasing prevalence of cyber risk. The specialist liability portfolio is subject to large losses resulting
in bodily injury claims. This portfolio is also exposed to the risk of latent claims arising from risks that were not envisaged at the
time of writing the policy.
FINANCIAL STATEMENTS 80
Brit Limited Annual Report 2016
4 RISK MANAGEMENT POLICIES (continued)
(iii) Short‑tail reinsurance
The Group’s short‑tail reinsurance business centres around property treaty written in both London and Bermuda. This typically
covers catastrophic loss accumulation or individual large loss ceded by insurance and reinsurance company clients. The
key exposures which property treaty is exposed to are US windstorms and Californian earthquakes. Property treaty also has
exposures to Japanese earthquakes and European windstorms.
Property treaty
Catastrophe excess of loss, risk excess of loss reinsurance and retrocession.
(iv) Long‑tail reinsurance
Introduction
The Group’s long‑tail reinsurance business centres around casualty treaty. Core lines of business include officers’, workers’
compensation, medical malpractice, accident & health, and other accident classes including property terror.
Casualty treaty
Casualty and accident treaty reinsurance. Worldwide portfolio, presently written on excess of loss
basis. The largest regional block is the US and Canada. The account is a mix of risk, catastrophe and
clash business.
The key risks this division is exposed to include exposure to man‑made catastrophe claims such as terrorism, increased claim
activity in the event of an economic downturn and the potential for latent claims which were not foreseen at the time the policies
were underwritten. This division contains the longest tailed liabilities the Group holds, i.e. there can be a significant delay
between the notification and final settlement of a claim. This delay can result in the final settlement being subject to significant
claims inflation.
(v) Aggregate exposure management
The Group is exposed to the potential of large claims from natural catastrophe events. The Group’s catastrophe risk tolerance
is reviewed and set by the Board on an annual basis. The Board has last reviewed its natural and non‑natural catastrophe risk
tolerances in April 2016.
Overall, the Group has a maximum catastrophe risk tolerance for major catastrophe events (as measured through world wide all
perils 1‑in‑30 AEP) of 25% of Brit Limited Group level net tangible assets. This equates to a maximum acceptable loss (after all
reinsurance) of US$268.7m at 31 December 2016.
The Group closely monitors aggregation of exposure to natural catastrophe events against agreed risk appetites using stochastic
catastrophe modelling tools, along with knowledge of the business, historical loss information, and geographical accumulations.
Analysis and monitoring also measures the effectiveness of the Group’s reinsurance programmes. Stress and scenario tests are
also run, such as Lloyd’s and internally developed Realistic Disaster Scenarios (RDS). The selection of the RDS is adjusted with
development of the business. Below are the key RDS losses to the Group for all classes combined (unaudited):
Gulf of Mexico windstorm
Florida Miami windstorm
US North East windstorm
San Francisco earthquake
Japan earthquake
Japan windstorm
European windstorm
Estimated
industry loss
US$m
113,500
128,250
80,500
87,750
44,716
13,329
25,595
Modelled
Group loss at
1 October 2016
(Note 1)
Net
US$m
Gross
US$m
829
654
748
716
237
92
228
191
168
156
282
156
58
163
Modelled
Group loss at
1 October 2015
(Note 1)
Net
US$m
174
149
155
222
150
52
127
Gross
US$m
813
601
737
716
207
79
190
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Brit Limited Annual Report 2016
81
Note 1: At 31 December 2016 foreign exchange rates.
Actual results may differ materially from the losses above given the significant uncertainties within model assumptions,
techniques and simulations applied to calculate these event loss estimates. There could also be unmodelled losses which result
in actual losses exceeding these figures. Moreover, the portfolio of insured risks changes dynamically over time.
(vi) Sensitivity to changes in net claims ratio
The Group profit on ordinary activities before tax is sensitive to an independent 1% change in the net claims ratio (excluding the
effect of foreign exchange on non‑monetary items) for each class of business as follows:
Short‑tail direct insurance
Long‑tail direct insurance
Short‑tail reinsurance
Long‑tail reinsurance
Other
Movement in profit
year ended
31 December 2016
%
US$m
Movement in profit
year ended
31 December 2015
%
US$m
9.0
3.1
0.8
2.1
0.2
59%
20%
5%
14%
2%
9.5
3.8
0.8
2.1
0.3
57%
23%
5%
13%
2%
15.2
100%
16.5
100%
Subject to taxation, the impact on shareholders’ equity would be the same as that on profit following a change in the
net claims ratio.
4.1.2 Reinsurance
The Group purchases reinsurance to manage its exposure to individual risks and aggregation of risks arising from individual large
claims and catastrophe events. This allows the Group to mitigate exposure to insurance losses against the risk appetite, reduce
volatility of reported results and protect capital.
Proportional quota share reinsurance is purchased to provide protection against claims arising either from individual large
claims or aggregation of losses. Quota share reinsurance is also used to manage the Group’s net exposure to classes of business
where the Group’s risk appetite is lower than the efficient operating scale of the class of business on a gross of reinsurance basis.
These placements are reviewed on the basis of market conditions.
The Group also has in place a comprehensive programme of excess of loss reinsurances to protect itself from severe size
or frequency of losses:
• Facultative reinsurance is used to reduce risk relating to individual contracts. The amount of cover bought varies by class
of business. Facultative reinsurance is also used as a tool to manage the net line size on individual risks to within tolerance.
• Risk excess of loss reinsurance is used to protect a range of individual inwards contracts which could give rise to individual
large claims. The optimal net retention per risk is assessed for each class of business given the Group’s risk appetite during
the business planning exercise.
• An aggregate catastrophe excess of loss cover is in place to protect the Group against combined property claims from
multiple policies resulting from catastrophe events. This is supplemented by specific covers for peril regions, catastrophe
swaps and industry loss warranties where they are a cost‑efficient means to ensure that the Group remains within its
catastrophe risk appetite.
FINANCIAL STATEMENTS
82
Brit Limited Annual Report 2016
4 RISK MANAGEMENT POLICIES (continued)
Given the fundamental importance of reinsurance protection to the Group’s risk management, the Group has in place internal
controls and processes to ensure that the reinsurance arrangements provide appropriate protection of capital and maintain our
ability to meet policyholder obligations. The Head of Outwards Reinsurance, the Group CEO, Chief Underwriting Officer and
Chief Risk Officer propose external reinsurance arrangements with input from class underwriters for class level reinsurance. The
Group CEO, Chief Financial Officer and Chief Underwriting Officer propose reinsurance arrangements with BIG. All reinsurance
purchases must be signed off by the Group’s Underwriting Committee. The Head of Outwards Reinsurance monitors and
reports on the placement of reinsurance protections.
The Group remains exposed to a number of risks relating to its reinsurance programme:
• It is possible for extremely severe catastrophe losses to exhaust the reinsurance purchased. Any losses exceeding the
reinsurance protection would be borne by the Group.
• Some parts of the programme have limited reinstatements which limit the amount that may be recovered from second
or subsequent claims. If the entirety of the cover is exhausted, it may not be possible to purchase additional reinsurance
at a reasonable price.
• A dispute may arise with a reinsurer which may mean the recoveries received are lower than anticipated.
These risks are managed through a combination of techniques and controls including exposure management, capital modelling
and internal actuarial review of outward reinsurance costs. The counterparty risk in relation to reinsurance purchased is managed
by the Credit Committee. This is further discussed in the Credit risk section below.
4.1.3 Reserving risk
Reserving risk arises as the actual cost of losses for policyholder obligations incurred before 31 December 2016 from the
established reserves due to inaccurate assumptions or unforeseen circumstances. This is a key risk for the Group as the reserves
for unpaid losses represent the largest component of the Group’s liabilities and are inherently uncertain. The BSL Reserving
Committee is responsible for the management of Syndicate 2987’s reserving risk, and the BIG Management Committee
performs a similar function for BIG.
The Group has a rigorous process for establishing reserves for insurance claim liabilities and a number of controls are used to
mitigate reserving risk. The reserving process starts with controls over claims data which ensure complete and accurate recording
of all paid and notified claims. Claims adjusters validate policy terms and conditions, adjust claims and investigate suspicious or
disputed claims in accordance with the Group’s claims policy. Case reserves are set for notified claims using the experience of
specialist claims adjusters, underwriters and external experts where necessary.
Whilst the case reserve is expected to be sufficient to meet the claims amount when it is settled, incurred but not reported
(IBNR) claims require additional reserves. This is particularly the case for the longest tailed classes of business where the final
settlement can occur several years after the claim occurred. Actuarial triangulation techniques are employed by the Group’s
experienced actuaries to establish the IBNR reserve. These techniques project IBNR reserves based on historical development
of paid and incurred claims by underwriting year. For the most uncertain claims, the triangulation techniques are supplemented
by additional methods to ensure the established reserve is appropriate. The actuarial team work closely with other business
functions such as underwriting, claims and exposure management to ensure that they have a full understanding of the emerging
claims experience across the Group. Further details on the actuarial methods used can be found in Note 19.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Brit Limited Annual Report 2016
83
The Group’s reserving policy sets out the approach to estimating claims provisions and is designed to produce accurate
and reliable estimates that are consistent over time and across classes of business. The actuarial best estimate set out in the
policy is subject to Reserving Committee and Brit Insurance Gibraltar Management Committee sign‑off as part of the formal
governance arrangements for the Group. The estimate agreed by the committees is used as a basis for the consolidated
financial statements. A management risk margin is also applied over and above the actuarial best estimate to allow for the
inherent uncertainty within the best estimate reserve position and wider inherent uncertainty across the economic and insurance
environment. Finally, the reserves in the financial statements are presented to the Audit Committee for recommendation to the
Board who are responsible for the final sign‑off. As part of their audit engagement, reserves are subject to external actuarial
review by Brit’s auditors.
The reserves can be more or less than is required to meet the claims arising from earned business. The level of uncertainty
varies significantly between the classes written by the Group but typically is highest for those classes where there are significant
delays in the settlement of the final claim amount. More specifically, the key areas of uncertainty within the Group’s reserves
are considered to be claims from the long‑tailed direct and long‑tailed reinsurance classes. The issues contributing to this
heightened uncertainty are common to all entities which write such business.
Further details on the reserve profile and claims development tables can be found in Note 19.
4.2 Investment risk management
4.2.1 Introduction
This section describes the Group’s approach to managing its investment risk, from both a quantitative and a qualitative
perspective. Investment risk includes market risk (which is covered in section 4.3), investment credit risk (which is covered in
section 4.4) and liquidity risk (which is covered in section 4.5).
4.2.2 Investment governance framework
Investment risk is managed in line with the elements of the Group Risk Management Framework (RMF) – identification,
measurement and management. The Board has overall responsibility for determining the investment strategy, including defining
the risk tolerance. This is achieved through investment policies and guidelines, which reflect the risk appetite and the business
strategy of the Group.
The entity Investment Committees have been mandated to review, advise and make recommendations to the respective Boards
on investment strategy with a view to optimising investment performance. The Investment strategy is executed through an
outsourced investment management agreement, which is in line with prevailing regulations, with Hamblin Watsa Investment
Counsel Ltd. (HWIC).
The Risk Oversight Committee ensures that the investment risk is managed within the framework and also reports to the Board.
An Investment Operations Committee oversees the operational risk that is relevant to the investment management function.
Information is provided at least quarterly covering portfolio composition, performance, forecasting and the results of stress and
scenario tests. Any operational issues and breaches to the risk appetite framework are reported to the Risk Oversight Committee
and the Board.
4.2.3 Risk tolerance
Investment risk tolerances are set by the Board, defining the Group’s appetite to investments, solvency risk, concentration risk,
credit quality, currency risk and liquidity risk. The appetite to these elements of investment risk is derived from the overall risk
appetite and business strategy of the Group and reflects a number of factors, including the current and expected economic
climate, capital management strategy, liquidity needs and asset liability matching (ALM) policy. The investment risk tolerance
helps determine the strategic asset allocation.
Risk metrics are monitored and reported on regularly to ensure that performance is within the Board‑approved levels, and limits
continue to remain appropriate, within the governance framework highlighted above.
FINANCIAL STATEMENTS 84
Brit Limited Annual Report 2016
4 RISK MANAGEMENT POLICIES (continued)
4.2.4 Solvency matching
Assets are considered by both currency and duration profile in relation to the liabilities thereby managing the impact of foreign
exchange and interest rate risk on the solvency position.
Under this strategy, the total assets of each Group underwriting entity are sought to be held in proportion to the currencies
of that entity’s technical provisions. For each Group underwriting entity, a solvency matched benchmark is calculated.
This benchmark is the cashflow profile for investments which would minimise the sensitivity of the Group’s solvency position
to changes in interest and exchange rates. The Group seeks to implement this through the use of cash, investments and foreign
exchange forward contracts in the respective currencies. The investment guidelines for each entity stipulate duration limits and
the positioning and sensitivity for both the asset and solvency position is reported quarterly.
4.2.5 Investment management
The investment management strategy is delivered, at the entity level, through outsourced investment management Agreements
(IMAs) with HWIC and a range of other third party investment managers. The IMAs prescribe the investment parameters within
which HWIC are permitted to make asset allocation decisions on behalf of the respective entities.
Each of the Group’s investing entities is governed by separate investment policies; these detail the parameters, roles and
responsibilities relating the management of each entity’s investment portfolio.
4.3 Market risk
4.3.1 Introduction
Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market
prices. Market risk comprises three types of risk: interest rate risk, currency risk and other price risk. Credit risk on financial
investments and cash is covered in the credit risk section.
4.3.2 Interest Rate Risk
Introduction
Interest rate risk is the risk that the fair value and/or future cash flows of a financial instrument will fluctuate because of changes
in interest rates. The Group is exposed to interest rate risk through its investment portfolio, borrowings and cash and cash
equivalents. The sensitivity of the price of these financial exposures is indicated by their respective durations. This is defined as
the modified duration which is the change in the price of the security subject to a 100 basis points parallel shift in interest rates.
The greater the duration of a security, the greater the possible price volatility.
The banded durations of the Group’s financial investments and cash and cash equivalents sensitive to interest rate risk are shown
in the table below:
Duration
At 31 December 2016
Cash and cash equivalents
Financial Investments
At 31 December 2015
Cash and cash equivalents
Financial Investments
1 year or less
US$m
1 to 3 years
US$m
3 to 5 years
US$m
Over 5 years
US$m
Equities
US$m
Total
US$m
1,025.5
1,888.8
2,914.3
581.0
1,913.2
2,494.2
–
181.7
181.7
–
257.4
257.4
–
132.7
132.7
–
77.9
77.9
–
300.9
300.9
–
816.8
816.8
– 1,025.5
399.8 2,903.9
399.8 3,929.4
–
265.5
581.0
3,330.8
265.5
3,911.8
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Brit Limited Annual Report 2016
85
The duration of the investment portfolio is set within an allowable range relative to the targeted duration and monitored on a
quarterly basis.
As the claims liabilities are measured on an undiscounted basis, the reported liabilities are not sensitive to changes in interest
rates. Therefore there is a balance to be struck between targeting a longer duration to protect the solvency position against
movements in interest rates, whilst targeting a shorter duration will reduce the possible volatility around the income statement.
Sensitivity to changes in investment yields
The sensitivity of the profit to the changes in investment yields is set out in the table below. The analysis is based on the
information at 31 December 2016.
Impact on profit before tax
Increase
25 basis points
50 basis points
100 basis points
Decrease
25 basis points
50 basis points
100 basis points
2016
US$m
2015
US$m
(10.0)
(20.0)
(40.0)
(61.1)
(122.1)
(244.3)
10.0
20.0
40.0
61.1
122.1
244.3
Subject to taxation, the effect on shareholders’ equity would be the same as the effect on profit.
4.3.3 Currency risk
Introduction
Currency risk is the risk that movements in exchange rates impact the financial performance or solvency position of the Group.
The Group matches assets to liabilities for each of the main currencies. Group capital is held in proportion to the liabilities, to
minimise the impact on solvency and distributable earnings from movements in exchange rates. The split of assets and liabilities
for each of the Group’s main currencies, converted to US dollars, is set out in the tables below:
At 31 December 2016
Total assets
Total liabilities
Net assets
At 31 December 2015
Total assets
Total liabilities
Net assets
USD
US$m
GBP.
conv. US$m
CAD
$ conv. US$m
EUR
€ conv. US$m
AUS
$ conv. US$m
Total
conv. US$m
4,553.2
3,195.3
883.1
950.6
264.8
269.1
209.9
301.6
64.6 5,975.6
111.0 4,827.6
1,357.9
(67.5)
(4.3)
(91.7)
(46.4) 1,148.0
3,743.0
3,040.7
1,111.6
1,035.9
702.3
75.7
467.8
211.0
256.8
462.4
311.9
150.5
136.0
164.8
5,920.8
4,764.3
(28.8) 1,156.5
FINANCIAL STATEMENTS
86
Brit Limited Annual Report 2016
4 RISK MANAGEMENT POLICIES (continued)
The non‑US dollar net assets of the Group may lead to profits or losses (depending on the mix relative to the liabilities), should
the US dollar vary relative to these currencies.
Foreign currency forward contracts may be used to achieve the desired exposure to each currency. From time to time the Group
may also choose to utilise foreign currency options to manage the risk of reported losses due to changes in foreign exchange
rates. The details of all foreign currency derivatives contracts entered into are given in Note 22.
As a result of the accounting treatment for non‑monetary items, the Group may also experience volatility in its income statement
due to fluctuations in exchange rates. In accordance with IFRS, non‑monetary items are recorded at original transaction rates
and are not re‑valued at the reporting date. These items include unearned premiums, deferred acquisition costs and reinsurers’
share of unearned premiums. This means these amounts in the statement of financial position are carried at a different exchange
rate to the remaining assets and liabilities, with the resulting exchange differences that are created being recognised in the
income statement. The Group considers this to be a timing issue which can cause volatility in the income statement.
Sensitivity to changes in foreign exchange rates
The table below gives an indication of the impact on profit of a percentage movement in the relative strength of the US dollar
against the value of Sterling, Canadian dollar, Australian dollar and Euro simultaneously, after taking into consideration the effect
of hedged positions. The analysis is based on the information at 31 December 2016.
Impact on profit before tax
US dollar weakens
10% against other currencies
20% against other currencies
US dollar strengthens
10% against other currencies
20% against other currencies
2016
US$m
2015
US$m
(38.6)
(77.3)
83.6
167.1
38.6
77.3
(83.6)
(167.1)
Subject to taxation, the effect on shareholders’ equity would be the same as the effect on profit.
4.3.4 Other price risk
Introduction
This is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market
prices (other than those arising from interest rate risk or currency risk), whether those changes are caused by factors specific
to the individual financial instrument or its issuer, or factors affecting all similar financial instruments traded in the market.
Financial assets and derivatives that are recognised at their fair value are susceptible to losses due to adverse changes
in their prices. This is known as price risk.
Listed investments are recognised in the financial statements at quoted bid price. If the market for the investment is not
considered to be active, then the Group establishes fair valuation techniques. This includes using recent arm’s length
transactions, reference to current fair value of other similar investments, discounted cash flow models and other valuation
techniques that are commonly used by market participants.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Brit Limited Annual Report 2016
87
The prices of fixed and floating rate income securities are predominantly impacted by currency, interest rate and credit risks.
Credit risk on investments is discussed in the following section of this Note.
The Group invests a proportion of its assets in equities and residential mortgage‑backed securities (RMBS) and Undertaking
for Collective Investment in Transferable Securities (UCITS). These investments are limited within the investment guidelines
to a diverse, small and manageable part of the Group investment portfolio.
Sensitivity to changes in other price risk
The sensitivity of the profit to the changes in the prices of equity, residential mortgage‑backed securities (RMBS) and UCITS
investments is set out in the table below. The analysis is based on the information at 31 December 2016.
Impact on profit before tax
Increase in fair value
10%
20%
30%
Decrease in fair value
10%
20%
30%
2016
US$m
2015
US$m
47.9
95.8
143.7
35.8
71.7
107.5
(47.9)
(95.8)
(143.7)
(35.8)
(71.7)
(107.5)
Subject to taxation, the effect on shareholders’ equity would be the same as the effect on profit.
4.4 Credit risk
This is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an
obligation in a timely manner. The main sources of credit risk relate to:
• Reinsurers: through the failure to pay valid claims against a reinsurance contract held by the Group.
• Brokers and coverholders: where counterparties fail to pass on premiums or claims collected or paid on behalf of the Group.
• Investments through the issuer default of all or part of the value of a financial instrument or the market value
of that instrument.
• Cash and cash equivalents: through the default of the banks holding the cash and cash equivalents.
The insurance and non‑insurance related counterparty credit risks are managed separately by the Group.
4.4.1 Investment credit risk
Investment credit risk management process
The Investment Committee chaired by Simon Lee, a Non‑Executive Director of Brit Syndicates Limited, is responsible for
the management of investment credit risk. The investment guidelines and investment policy set out clear limits and controls
around the level of investment credit risk. The Group has established concentration guidelines that restrict the exposure to
any individual counterparty. The investment guidelines further limit the type, credit quality and maturity profile of both the
Group’s cash and investments. In addition, the investment risk framework further limits potential exposure to credit risk through
aggregate investment risk limits.
FINANCIAL STATEMENTS
88
Brit Limited Annual Report 2016
4 RISK MANAGEMENT POLICIES (continued)
Investment credit risk profile
The summary of the investment credit risk exposures for the Group is set out in the tables below:
At 31 December 2016
Financial investments
Derivative contracts
Cash and cash equivalents
At 31 December 2015
Financial investments
Derivative contracts
Cash and cash equivalents
AAA
US$m
AA
US$m
A
US$m
P‑1
US$m
P‑2
US$m
206.2 1,706.2
–
552.8
–
187.5
212.4
–
–
–
–
236.8
393.7 2,259.0
212.4
236.8
298.9
–
428.8
1,612.1
–
–
727.7
1,612.1
288.1
–
–
288.1
692.3
–
30.4
722.7
–
–
48.4
48.4
–
–
121.8
121.8
BBB and
below
US$m
191.9
–
–
191.9
63.2
–
–
63.2
Equities
US$m
Not rated
US$m
Total
US$m
399.8
–
–
399.8
265.5
–
–
265.5
187.4 2,903.9
12.6
– 1,025.5
12.6
200.0 3,942.0
110.7
63.6
–
3,330.8
63.6
581.0
174.3
3,975.4
The table above gives an indication of the level of credit worthiness of assets that are most exposed to credit risk. The ratings
are mainly sourced from Standard & Poor’s and where these are not available an equivalent rating agency.
4.4.2 Insurance credit risk
Insurance credit risk management process
The Credit Committee chaired by the Chief Financial Officer is responsible for the management of credit risk arising from
insurance activities. Some responsibilities for reinsurance related credit decisions have been delegated to the Reinsurance
Security Committee chaired by the Head of Group Financial Performance.
Reinsurer credit risk is managed by transacting only with reinsurance counterparties that satisfy a minimum level of financial
strength or provide appropriate levels of collateral, and have been approved for use by the Reinsurance Security Committee.
The reinsurer security list, which sets out the list of approved reinsurance counterparties, is reviewed at least annually and
following any significant change in risk profile, which includes any changes to reinsurers’ financial ratings. Credit risk appetite
limits are set for reinsurance entities and groups to limit accumulations of risk. These positions are monitored quarterly against
current balance sheet exposures and in relation to a number of extreme loss scenarios.
Reinsurance aged debt is monitored and managed against the management risk appetite limits set by the Credit Committee.
A bad debt provision is held against all non‑rated reinsurers or any reinsurer where there is deemed to be a specific risk of
non‑payment.
Any breaches of credit risk tolerance and/or appetite are reported to the Risk Oversight Committee and the Board at
least quarterly.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Brit Limited Annual Report 2016
89
Insurance credit risk profile
The summary of the insurance credit risk exposures for the Group is set out in the tables below:
At 31 December 2016
Reinsurance assets
Insurance receivables
At 31 December 2015
Reinsurance assets
Insurance receivables
AAA
US$m
AA
US$m
A
US$m
Collateral
US$m
Not rated
US$m
Total
US$m
1.9
–
1.9
1.2
–
1.2
406.2
–
406.2
313.9
–
313.9
166.7
–
166.7
201.6
–
201.6
102.4
–
102.4
106.0
–
106.0
33.9
678.7
711.1
678.7
712.6 1,389.8
55.7
638.1
678.4
638.1
693.8
1,316.5
Insurance credit risk arises primarily from reinsurers (whereby reinsurers fail to pay recoveries due to the Group in a timely
manner) and brokers and coverholders (whereby intermediaries fail to pass on premiums due to the Group in a timely manner).
As at 31 December 2016, collateral of US$382.9m (2015: US$416.2m) is held in third party trust accounts or as a letter of credit
(LOC) to guarantee Syndicate 2987 against reinsurance counterparties and is available for immediate drawdown in the event of
a default. Of this amount, US$102.4m (2015: US$106.0m) had been drawn against reinsurance assets at 31 December 2016.
The following table shows movements in impairment provisions during the year:
Impairment
provision
against
reinsurance
assets
US$m
Impairment
provision
against
insurance
receivables
US$m
2016
Opening provision at 1 January
Release for the year
Net foreign exchange differences
Closing provision at 31 December
2015
Opening provision at 1 January
Strengthening/(release) for the year
Net foreign exchange differences
Closing provision at 31 December
The following table shows the amount of insurance receivables past due but not impaired at the end of the year.
0‑3 months past due
4‑6 months past due
7‑9 months past due
10‑12 months past due
More than 12 months past due
1.0
–
(0.3)
0.7
0.9
0.1
–
1.0
2016
US$m
14.7
1.9
1.6
1.7
1.9
21.8
12.9
(1.2)
(0.1)
11.6
13.7
(1.5)
0.7
12.9
2015
US$m
22.4
2.1
1.5
2.0
2.3
30.3
FINANCIAL STATEMENTS
90
Brit Limited Annual Report 2016
4 RISK MANAGEMENT POLICIES (continued)
4.5 Liquidity risk
Liquidity risk is the risk that the Group may encounter difficulty in meeting obligations associated with financial liabilities
that are settled by delivering cash or another financial asset. The predominant liquidity risk the Group faces is the daily calls
on its available cash resources in respect of claims arising from insurance contracts.
The Group monitors the levels of cash and cash equivalents on a daily basis, ensuring adequate liquidity to meet the expected
cash flow requirements due over the short‑term.
The Group also limits the amount of investment in illiquid securities in line with the liquidity policy set by the Board. This involves
ensuring sufficient liquidity to withstand claim scenarios at the extreme end of business plan projections, by reference
to modelled realistic disaster scenarios. Contingent liquidity also exists in the form of a Group revolving credit facility.
The tables below present the fair value of monetary assets and the undiscounted value of monetary liabilities of the Group into
their relevant maturing groups based on the remaining period at the end of the year to their contractual maturities or expected
repayment dates. Borrowings are stated at their nominal value at maturity.
31 December 2016
Assets
Reinsurance assets
Financial investments
Derivative contracts
Insurance receivables
Cash and cash equivalents
31 December 2016
Liabilities
Insurance contract liabilities
Derivative contracts
Borrowings
Insurance and other payables
31 December 2015
Assets
Reinsurance assets
Financial investments
Derivative contracts
Insurance receivables
Cash and cash equivalents
Statement
of financial
position
US$m
Fair values
<1 year
US$m
1 to 3 years
US$m
3 to 5 years
US$m
>5 years
US$m
Equities
US$m
Total
US$m
711.1
199.0
2,903.9 1,888.8
12.6
678.7
1,025.5 1,025.5
12.6
678.7
5,331.8 3,804.6
Statement
of financial
position
US$m
233.3
181.7
–
–
–
415.0
117.4
132.7
–
–
–
250.1
161.4
300.9
–
–
–
462.3
Undiscounted values
–
711.1
399.8 2,903.9
12.6
–
–
678.7
– 1,025.5
399.8 5,331.8
<1 year
US$m
1 to 3 years
US$m
3 to 5 years
US$m
>5 years
US$m
Equities
US$m
Total
US$m
3,406.7
11.8
157.5
382.0
857.4 1,023.7
–
–
–
11.8
–
382.0
597.8
–
–
–
927.8
–
166.8
–
3,958.0 1,251.2 1,023.7
597.8 1,094.6
–
–
–
–
–
3,406.7
11.8
166.8
382.0
3,967.3
Statement
of financial
position
US$m
Fair values
<1 year
US$m
1 to 3 years
US$m
3 to 5 years
US$m
>5 years
US$m
Equities
US$m
Total
US$m
678.4
3,330.8
63.6
638.1
581.0
183.1
1,913.2
63.6
638.1
581.0
5,291.9
3,379.0
222.3
257.4
–
–
–
479.7
119.9
77.9
–
–
–
197.8
153.1
816.8
–
–
–
969.9
–
265.5
–
–
–
678.4
3,330.8
63.6
638.1
581.0
265.5
5,291.9
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Brit Limited Annual Report 2016
91
31 December 2015
Liabilities
Insurance contract liabilities
Derivative contracts
Borrowings
Insurance and other payables
Statement
of financial
position
US$m
Undiscounted values
<1 year
US$m
1 to 3 years
US$m
3 to 5 years
US$m
>5 years
US$m
Equities
US$m
Total
US$m
3,324.1
12.5
185.6
350.0
777.1
12.5
–
350.0
3,872.2
1,139.6
990.0
–
–
–
990.0
592.6
–
–
–
964.4
–
199.0
–
592.6
1,163.4
–
–
–
–
–
3,324.1
12.5
199.0
350.0
3,885.6
4.6 Operational risk
Operational risk is the potential for loss arising from the failure of people, process or technology or the impact of external
events. The nature of operational risk means that it is dispersed across all functional areas of Brit. Operational risk exposures are
managed through a consistent set of management processes that drive risk identification, assessment, control and monitoring.
The Chief Operating Officer chairs the Operational Risk Working Group (ORWG) that provides a dedicated forum for managing
operational risk in line with the Operational Risk policy and the risk tolerance and management appetite limits set by the
Board and management respectively. This group reports to the Executive Committee and each individual risk committee where
it is augmented by operational risk owners within executive management who actively manage operational risk within their
respective areas (such as Underwriting, Claims, Investments and Finance).
An operational risk management framework is in place to ensure an appropriate standard approach is taken to managing
operational risk across the Group. The key elements of this framework are:
• Allocation of responsibility for the identification and assessment of operational risk. Standard tools are used
to facilitate these assessments;
• Definition of standard elements of sound operating controls that are expected to be in place to address
all identified operational risks;
• A process that integrates with Brit’s internal model to support the setting and monitoring of operational
risk appetite and tolerances;
• Governance, reporting and escalation for operational risk;
• Infrastructure supporting the operational risk management framework; and
• Operational risk management training and awareness.
4.7 Capital management
Brit defines management entity capital as the amount of capital that the board of each underwriting entity determines that
it should hold, taking into account the requirements of shareholders, regulators, policyholders, and the Boards’ solvency risk
appetite. The capital policy is set by the entity and Group Boards. Management entity capital requirements are in excess of
capital requirements under the Solvency II capital regime, which became effective on 1 January 2016.
The capital requirements are based on the output of the internal model which reflects the risk profile of the business. The capital
policy requires capital to be held well in excess of regulatory minimum requirements, underpinning Brit’s financial strength.
The policy ensures the capital adequacy of the Group as a whole, and each entity, through an efficient capital structure. Brit
proactively responds to developments in the financial environment to ensure its capital strength is maintained whilst optimising
risk adjusted returns.
FINANCIAL STATEMENTS
92
Brit Limited Annual Report 2016
4 RISK MANAGEMENT POLICIES (continued)
In addition to the management capital requirements, the Group Board has determined that the Group should maintain a
minimum surplus, in excess of the entity management capital requirements, to withstand short‑term shocks without requiring a
capital injection. The minimum surplus is calibrated to a 1‑in‑20 one‑year VaR (i.e. it is sufficient to protect against losses over a
one‑year period in 19 out of 20 years whilst maintaining management capital). The Group minimum surplus is set with reference
to the internal model.
The Group’s available capital consists of net tangible assets, subordinated debt, letters of credit and contingent funding. This
amounted to US$1,457.3m as at 31 December 2016. This represented a surplus of US$297.0m over the management capital
requirements, compared to the Group’s minimum surplus of US$200.0m.
All regulatory capital requirements have been complied with during the year by the Group’s individual insurance subsidiaries.
The Lloyd’s market is subject to the solvency and capital adequacy requirements of the Prudential Regulation Authority (PRA).
Any regulatory intervention by the PRA in respect of Lloyd’s may adversely affect the Group. The PRA may impose more
stringent requirements on Lloyd’s which may result in higher capital requirements or a restriction on trading activities for entities
within the Group. If Lloyd’s fails to satisfy its solvency test in any year, the PRA may require Lloyd’s to cease trading and/or its
members to cease or reduce their underwriting exposure, which may result in a material adverse effect to the Group’s reputation,
financial condition and results of operations.
During 2016, Brit Global Specialty solely underwrote through the Group’s wholly‑aligned Lloyd’s Syndicate 2987 which benefits
from the Lloyd’s credit ratings of A (Excellent) from A.M. Best, AA – (Very Strong) from Fitch and A+ (Strong) from Standard &
Poor’s. Any downgrade in Lloyd’s financial strength ratings may have an adverse effect on the Group.
The Group’s business plan and underwriting capacity for the Syndicate may be affected by a decrease in the value of the Group’s
Funds at Lloyd’s or by recommendations from the Lloyd’s Franchise Board. The Group is also reliant upon the compliance of
Lloyd’s with US regulations, including the maintenance by Lloyd’s of its trading licences and approvals in the US.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Brit Limited Annual Report 2016
93
5 SEGMENTAL INFORMATION
This Note breaks down the operating results summarised in the income statement into the main business areas of the Group.
It also shows how our revenue is split globally. This analysis is designed to help you understand how each segment of our
business has performed and how we have allocated our shareholders’ capital.
As at 31 December 2016, the reportable segments identified were as follows:
• ‘Brit Global Specialty Direct’, which underwrites the Group’s international and US business, other than treaty reinsurance.
In the main, Brit Global Specialty Direct deals with wholesale buyers of insurance, rather than individuals. Risks are large and
usually syndicated by several underwriters by means of the subscription market.
• ‘Brit Global Specialty Reinsurance’, which underwrites reinsurance business (essentially the insurance of insurance and
reinsurance companies) and includes writing non‑proportional cover for major events such as earthquakes or hurricanes.
These insurance and reinsurance companies calculate how much risk they want to retain and then pass on their remaining
exposure to reinsurers in return for a premium.
• ‘Other underwriting’, which comprises excess of loss reinsurance ceded from the strategic business units to a cell of Brit
Insurance (Gibraltar) PCC Limited.
• ‘Other corporate’, which is made up of residual income and expenditure not allocated to other segments.
Foreign exchange differences on non‑monetary items are separately disclosed. This provides a fairer representation of the claims
ratios and financial performance of the strategic business units (SBUs) which would otherwise be distorted by the mismatch
arising from IFRSs whereby unearned premium, reinsurer’s share of unearned premium and deferred acquisition costs are treated
as non‑monetary items and the majority of other assets and liabilities are treated as monetary items. Non‑monetary items are
carried at historic exchange rates, while monetary items are translated at closing rates.
The Group investment return is managed centrally and an allocation is made to each of the strategic business units based
on the average risk free interest rate for the period being applied to the opening insurance funds of each strategic business
unit. The annualised average risk free rate applied to insurance funds was 1.5% for the year ended 31 December 2016
(31 December 2015: 1.5%).
The ratios set out in the segmental analysis are calculated as follows:
• The claims ratio is calculated as claims incurred, net of reinsurance divided by earned premiums, net of reinsurance.
• The expense ratio is calculated as acquisition costs and other insurance related expenses divided by earned premiums,
net of reinsurance.
• The combined ratio is the sum of the claims and expense ratios.
FINANCIAL STATEMENTS 94
Brit Limited Annual Report 2016
5 SEGMENTAL INFORMATION (continued)
Information regarding the Group’s reportable segments is presented below.
(a) Statement of profit or loss by segment
Year ended 31 December 2016
Brit Global
Specialty
Direct
US$m
Brit Global
Specialty
Reinsurance
US$m
Other
Underwriting
US$m
Intra
Group
US$m
Total
underwriting
excluding
the effect
of foreign
exchange on
non‑monetary
items
US$m
Effect of
foreign
exchange on
non‑monetary
items
US$m
1,546.6
365.8
27.3
(27.5) 1,912.2
(377.9)
(76.3)
(5.3)
27.5
(432.0)
–
–
Total
underwriting
after the
effect of
foreign
exchange on
non‑monetary
items
US$m
1,912.2
(432.0)
1,168.7
1,548.4
(339.8)
289.5
361.6
(76.1)
22.0
25.2
(4.2)
–
1,480.2
(25.4) 1,909.8
(394.7)
25.4
–
1,480.2
23.8 1,933.6
(399.5)
(4.8)
Other
corporate
US$m
–
–
–
–
–
Total
US$m
1,912.2
(432.0)
1,480.2
1,933.6
(399.5)
Gross premiums written
Less premiums ceded
to reinsurers
Premiums written,
net of reinsurance
Gross earned premiums
Reinsurers’ share
Earned premiums, net of
reinsurance
Investment return
Return on derivative contracts
Other income
Net foreign exchange gains
1,208.6
27.5
–
–
–
285.5
10.5
–
–
–
Total revenue
1,236.1
296.0
21.0
–
–
–
–
21.0
–
–
–
–
–
–
1,515.1
38.0
–
–
–
19.0 1,534.1
38.0
–
–
(9.0)
–
–
–
(9.0)
–
94.2
(52.8)
1.1
61.2
1,534.1
132.2
(52.8)
1.1
52.2
1,553.1
10.0 1,563.1
103.7 1,666.8
Gross claims incurred
Reinsurers’ share
Claims incurred, net
of reinsurance
Acquisition costs – commission
Acquisition costs – other
Other insurance related
expenses
Other expenses
Total expenses excluding
finance costs
(918.9)
210.7
(138.0)
14.5
(24.1)
(0.3)
22.2
(22.2)
(1,058.8)
202.7
– (1,058.8)
202.7
–
– (1,058.8)
202.7
–
(708.2)
(360.3)
(88.9)
(123.5)
(51.1)
(19.4)
(24.4)
(0.2)
(1.0)
(64.9)
(16.1)
–
–
(2.5)
–
–
–
–
–
–
(856.1)
(411.6)
(109.3)
(83.5)
–
–
(7.0)
(3.0)
(856.1)
(418.6)
(112.3)
–
–
(83.5)
–
–
–
–
–
(21.3)
(856.1)
(418.6)
(112.3)
(83.5)
(21.3)
(1,222.3)
(210.1)
(28.1)
–
(1,460.5)
(10.0) (1,470.5)
(21.3) (1,491.8)
Operating profit/(loss)
13.8
85.9
(7.1)
–
92.6
–
92.6
82.4
175.0
Finance costs
Share of
prnet ofit of associate
s
Profit on ordinary activities before tax
Tax income
Profit for the year
Claims ratio
Expense ratio
Combined ratio
58.6%
42.5%
101.1%
43.3% 116.2%
30.3%
17.6%
73.6% 133.8%
56.5%
39.9%
96.4%
55.8%
39.9%
95.7%
(18.8)
3.6
159.8
(2.2)
157.6
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Brit Limited Annual Report 2016
95
Year ended 31 December 2015
Gross premiums written
Less premiums ceded
to reinsurers
Premiums written,
net of reinsurance
Gross earned premiums
Reinsurers’ share
Earned premiums,
net of reinsurance
Investment return
Return on derivative contracts
Other income
Total revenue
Gross claims incurred
Reinsurers’ share
Claims incurred,
net of reinsurance
Acquisition costs – commission
Acquisition costs – other
Other insurance
Brit Global
Specialty
Direct
US$m
Brit Global
Specialty
Reinsurance
US$m
Other
Underwriting
US$m
Intra
Group
US$m
Total
underwriting
excluding
the effect
of foreign
exchange on
non‑monetary
items
US$m
1,634.0
365.1
26.0
(25.9) 1,999.2
(319.6)
(74.8)
(0.9)
25.9
(369.4)
Total
underwriting
after the
effect of
foreign
exchange on
non‑monetary
items
US$m
1,999.2
(369.4)
Effect of
foreign
exchange on
non‑monetary
items
US$m
–
–
1,314.4
1,636.6
(309.2)
290.3
370.4
(76.2)
1,327.4
26.0
–
–
1,353.4
294.2
10.3
–
–
304.5
25.1
29.3
(1.3)
28.0
–
–
–
28.0
–
1,629.8
(29.2) 2,007.1
(357.5)
29.2
–
1,629.8
(13.7) 1,993.4
(355.3)
2.2
1,649.6
36.3
–
–
(11.5) 1,638.1
36.3
–
–
–
–
–
(954.4)
235.7
(125.0)
(4.3)
(33.4)
(0.6)
30.3
(30.3)
(1,082.5)
200.5
–
–
(1,082.5)
200.5
1,685.9
(11.5) 1,674.4
14.0
1,688.4
Other
corporate
US$m
–
–
–
–
–
–
(26.0)
39.7
0.3
Total
US$m
1,999.2
(369.4)
1,629.8
1,993.4
(355.3)
1,638.1
10.3
39.7
0.3
–
–
–
–
–
(1,082.5)
200.5
(882.0)
(426.5)
(100.1)
(101.8)
(53.8)
(95.9)
(718.7)
(376.8)
(79.0)
(129.3)
(55.3)
(15.3)
(34.0)
2.9
(5.3)
related expenses
(79.2)
(22.6)
Other expenses
Net foreign exchange losses
Total expenses excluding
–
–
–
–
–
–
–
finance costs
(1,253.7)
(222.5)
(36.4)
Operating profit/(loss)
99.7
82.0
(8.4)
Finance costs
Profit on ordinary activities before tax
Tax income
Profit for the year
(882.0)
(429.2)
(99.6)
(101.8)
–
–
–
2.7
(0.5)
(882.0)
(426.5)
(100.1)
–
–
(10.5)
(101.8)
–
(10.5)
–
(53.8)
(85.4)
(1,512.6)
(8.3)
(1,520.9)
(139.2)
(1,660.1)
173.3
(19.8)
153.5
(125.2)
28.3
(20.6)
7.7
7.9
15.6
Claims ratio
Expense ratio
Combined ratio
54.1%
40.3%
94.4%
43.9%
31.9%
75.8%
121.4%
8.6%
130.0%
53.5%
38.2%
91.7%
53.8%
38.4%
92.2%
–
–
–
–
–
–
–
–
–
–
–
–
–
FINANCIAL STATEMENTS
96
Brit Limited Annual Report 2016
5 SEGMENTAL INFORMATION (continued)
(b) Depreciation, amortisation, impairment and capital expenditure by segment
Year ended 31 December 2016
Depreciation of property, plant and equipment
Amortisation of intangibles
Capital expenditure
Year ended 31 December 2015
Depreciation of property, plant and equipment
Impairment of property, plant and equipment
Amortisation of intangibles
Impairment of intangibles
Capital expenditure
Brit Global
Specialty
Direct
US$m
Brit Global
Specialty
Reinsurance
US$m
3.0
4.2
11.8
0.6
1.0
2.8
Brit Global
Specialty
Direct
US$m
Brit Global
Specialty
Reinsurance
US$m
2.3
1.4
6.7
0.5
21.0
0.6
0.4
1.7
0.1
5.3
Total
US$m
3.6
5.2
14.6
Total
US$m
2.9
1.8
8.4
0.6
26.3
Capital expenditure consists of additions of property, plant and equipment and intangible assets but excludes assets recognised
on business combinations.
(c) Geographical information
The Group’s strategic business units operate mainly in four geographical areas, though the business is managed
on a worldwide basis.
The segmental split shown below is based on the location of the underlying risk.
Gross premiums written
United States
United Kingdom
Europe (excluding UK)
Other (including worldwide)
Year ended
31 December
2016
US$m
Year ended
31 December
2015
US$m
843.1
106.7
110.8
851.6
857.5
120.3
121.3
900.1
1,912.2
1,999.2
The nature of the London Market business is such that the insureds and reinsureds are often operating on a multi‑territory or
worldwide basis and hence coverage is often provided on a worldwide basis. Premiums written on a multi‑territory or worldwide
basis are included in ‘Other’ in the table above.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Brit Limited Annual Report 2016
97
6 INVESTMENT RETURN
This Note shows the income we have generated through investing our funds. It also shows the gains and losses that we have
generated on various types of investment assets as a result of the movement in their market values.
Year ended 31 December 2016
Equity securities
Debt securities
Loan instruments
Specialised investment funds
Cash and cash equivalents
Total investment return before expenses
Investment management expenses
Total investment return
Year ended 31 December 2015
Equity securities
Debt securities
Loan instruments
Specialised investment funds
Cash and cash equivalents
Total investment return before expenses
Investment management expenses
Total investment return
Investment
income
US$m
Net
realised
Net
unrealised
gains gains/(losses)
US$m
US$m
Total
investment
return
US$m
5.1
66.8
–
1.1
0.7
73.7
(13.8)
59.9
(4.9)
64.1
–
3.1
–
62.3
–
62.3
(39.7)
45.8
–
3.9
–
10.0
–
10.0
(39.5)
176.7
–
8.1
0.7
146.0
(13.8)
132.2
Investment
income
US$m
Net
realised
gains
US$m
Net
unrealised
gains/(losses)
US$m
Total
investment
return
US$m
0.6
34.8
7.2
29.5
0.6
72.7
(11.9)
60.8
2.0
3.7
1.5
50.8
–
58.0
–
58.0
2.9
(32.5)
(16.8)
(62.1)
–
(108.5)
–
(108.5)
5.5
6.0
(8.1)
18.2
0.6
22.2
(11.9)
10.3
7 RETURN ON DERIVATIVE CONTRACTS
This Note shows the effect on the income statement of derivative contracts we were party to during the year. The main reason
we entered into these derivative contracts was to help manage our exposure to fluctuations in interest rates and foreign
exchange rates. Derivatives are shown analysed between investment related derivatives and currency related derivatives,
reflecting the way we manage our business.
Interest rate swaps
Futures
Non‑currency options
Investment related derivatives
Currency forwards
Currency options
Currency related derivatives
Return on derivative contracts
Year ended
31 December
2016
US$m
Year ended
31 December
2015
US$m
0.8
–
(33.7)
(32.9)
(19.9)
–
(19.9)
(52.8)
(0.7)
0.1
(4.7)
(5.3)
45.0
–
45.0
39.7
FINANCIAL STATEMENTS
98
Brit Limited Annual Report 2016
8 NET FOREIGN EXCHANGE GAINS/(LOSSES)
The Group operates in multiple countries and currencies and is exposed to gains and losses arising as a result of movement in
various foreign currency exchange rates. This Note explains the foreign exchange gains or losses as a result of converting the
income, expenses, assets and liabilities from foreign currencies to US dollars.
The Group recognised foreign exchange gains of US$52.2m (2015: losses of US$95.9m) in the income statement in the period.
Foreign exchange gains and losses result from the translation of the Statement of Financial Position to closing exchange rates
and the income statement to average exchange rates. However, as an exception to this, IAS 21 ‘The Effects of Changes in
Foreign Exchange Rates’ requires that net unearned premiums and deferred acquisition costs (UPR/DAC), being non‑monetary
items, remain at historic exchange rates. This creates a foreign exchange mismatch, the financial effects of which are shown in
the table below.
Gains/(losses) on foreign exchange arising from:
Translation of the statement of financial position and income statement
Maintaining UPR/DAC items in the statement of financial position at historic rates
Maintaining UPR/DAC items in the income statement at historic rates
Net foreign exchange gains/(losses)
Principal exchange rates applied are set out in the table below.
Sterling
Canadian dollar
Euro
Australian dollar
Year ended
31 December
2016
US$m
Year ended
31 December
2015
US$m
61.1
–
(8.9)
52.2
(85.4)
(19.8)
9.3
(95.9)
Year ended
31 December
2016
Closing
0.809
1.341
0.948
1.381
Average
0.738
1.323
0.903
1.343
Year ended
31 December
2015
Closing
0.678
1.389
0.921
1.374
Average
0.654
1.277
0.902
1.330
In accordance with IAS 1 ‘Presentation of Financial statements’, exchange gains and losses are presented on a net basis.
They are reported within revenue where they result in a net gain and within expenses where they result in a net loss.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Brit Limited Annual Report 2016
99
9 ACQUISITION COSTS AND OTHER OPERATING EXPENSES
This Note shows the analysis of costs incurred in acquiring and underwriting insurance contracts and the running costs of
our business during the year. We have separated out the more material costs in order to provide a more detailed insight into
our cost base.
Salary, pension and social security costs (Note 10)
Other staff related costs
Accommodation costs
Legal and professional charges
IT costs
Travel and entertaining
Marketing and communications
Amortisation and impairment of intangible assets
Depreciation and impairment of property,
plant and equipment
Regulatory levies and charges
Costs relating to acquisition by FFHL Group Limited
Other
Expenses before commissions
Commission costs
Total acquisition costs and other operating expenses
Year ended 31 December 2016
Year ended 31 December 2015
Acquisition
costs
US$m
Other
operating
expenses
US$m
56.0
2.0
6.8
1.5
1.1
4.2
0.3
0.1
0.4
38.1
–
1.8
47.3
8.9
6.9
5.7
19.3
2.8
1.2
4.9
3.2
–
–
4.6
112.3
418.6
530.9
104.8
–
104.8
Acquisition
costs
US$m
Other
operating
expenses
US$m
45.0
2.0
7.6
2.0
0.9
4.4
0.3
0.4
0.6
36.4
–
0.5
77.5
7.1
7.7
8.7
19.0
3.1
2.0
8.6
4.1
–
14.2
3.6
100.1
426.5
526.6
155.6
–
155.6
Total
US$m
103.3
10.9
13.7
7.2
20.4
7.0
1.5
5.0
3.6
38.1
–
6.4
217.1
418.6
635.7
Total
US$m
122.5
9.1
15.3
10.7
19.9
7.5
2.3
9.0
4.7
36.4
14.2
4.1
255.7
426.5
682.2
Salary, pension and social security costs for the year‑ended 31 December 2015 included a further US$9.6m relating to the
acquisition by FFHL Group Limited, bringing the total corporate activity costs to US$23.8m.
10 STAFF COSTS
This Note gives a breakdown of the total cost of employing our staff (including executive and non‑executive Directors) and gives
the average number of people employed by the Group during the year.
Wages and salaries
Social security costs
Pension costs
Total staff costs
Year ended
31 December
2016
US$m
Year ended
31 December
2015
US$m
88.3
10.1
4.9
103.3
103.9
12.3
6.3
122.5
FINANCIAL STATEMENTS
100 Brit Limited Annual Report 2016
10 STAFF COSTS (continued)
The average number of employees during the year, including executive and non‑executive Directors, was as follows:
Front office staff
Underwriters
Claims staff
Other underwriting and direct support staff
Total front office staff
Back office staff
Management
Administration
Total back office staff
Total employees
Year ended
31 December
2016
Number
Year ended
31 December
2015
Number
175
56
116
347
75
117
192
539
155
55
113
323
71
110
181
504
‘Management’ includes non‑executive Directors and employees who have other members of staff reporting to them.
11 FINANCE COSTS
Finance costs arise from interest due on moneys borrowed by the Group and any other amounts payable in respect of
those borrowings or borrowing facilities. The Group’s borrowings consist of a revolving credit facility and listed unsecured
subordinated debt, details of which are set out in Note 25.
Revolving credit facility and other bank borrowings
Subordinated debt
Total finance costs
12 AUDITOR’S REMUNERATION
Year ended
31 December
2016
US$m
Year ended
31 December
2015
US$m
4.6
14.2
18.8
4.7
15.9
20.6
The Group engages PricewaterhouseCoopers LLP to perform the audit of the Group. The Group’s auditor has not been
engaged to perform additional work.
During 2016 PricewaterhouseCoopers LLP replaced Ernst & Young LLP as the Group’s auditors. The remuneration of the auditor
or its associates is analysed as follows:
Audit of the Group and company financial statements
Fees payable for the audit of subsidiaries
Total audit
Audit related assurance services
Total non‑audit services
Total audit and non‑audit services
Year ended
31 December
2016
US$m
Year ended
31 December
2015
US$m
0.5
0.9
1.4
–
–
1.4
0.7
0.5
1.2
0.6
0.6
1.8
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Brit Limited Annual Report 2016 101
13 INVESTMENTS IN ASSOCIATED UNDERTAKINGS
This Note describes the investments in associates made in 2015 and 2016 and provides the summarised statement of financial
positions of the associates.
Camargue Underwriting Managers Proprietary Limited
On 30 August 2016, the Group acquired 50% of the share capital of the South African company, Camargue Underwriting
Managers Proprietary Limited (Camargue) for ZAR65.5m plus £0.3m (US$4.9m) and also entered into a call and a put option
to purchase the remaining 50% in 2021. The investment in Camargue is measured using the equity accounting method.
The principal place of business of Camargue is the South Africa. Camargue is a leading managing general underwriter of
a range of specialised insurance products and specialist liability solutions in South Africa and is an important trading partner
for Brit. The summarised statement of financial position of Camargue and reconciliation to the carrying amount is as follows:
Statement of financial position
Current assets
Non‑current assets
Total assets
Current liabilities
Non‑current liabilities
Total liabilities
Net assets
50% not owned by Brit
Acquisition fair value, result since acquisition and other adjustments
Carrying value
Ambridge Partners LLC
31 December
2016
US$m
2.1
1.4
3.5
(2.0)
(0.1)
(2.1)
1.4
(0.7)
4.5
5.2
On 8 December 2015, the Group acquired 50% of the members’ interests of Ambridge Partners LLC for US$28.6m and
also entered into a call and a put option to purchase the remaining 50% in 2019. The investment in Ambridge Partners LLC
is measured using the equity accounting method. The principal place of business of Ambridge Partners LLC is the United
States. Ambridge Partners LLC is a leading managing general underwriter of transactional insurance products, writing business
on behalf of a broad consortium of Lloyd’s of London syndicates and international insurers including Brit. The summarised
statement of financial position of Ambridge Partners LLC and reconciliation to the carrying amount is as follows:
Statement of financial position
Current assets
Non‑current assets
Total assets
Current liabilities
Total liabilities
Net assets
50% not owned by Brit
Acquisition fair value, result since acquisition and other adjustments
Carrying value
31 December
2016
US$m
31 December
2015
US$m
40.9
1.3
42.2
(31.9)
(31.9)
10.3
(5.2)
26.3
31.4
33.6
0.2
33.8
(30.6)
(30.6)
3.2
(1.6)
27.0
28.6
FINANCIAL STATEMENTS
102 Brit Limited Annual Report 2016
14 TAX EXPENSE
Income tax is tax charged on our trading activities during the year. This Note shows the breakdown of tax payable in in the
current period (current tax) and also tax that may become payable sometime in the future (deferred tax).
(a) Tax (charged)/credited to income statement
Current tax:
Current taxes on income for the year
Overseas tax on income for the year
Double tax relief
Adjustments in respect of prior years
Total current tax
Deferred tax:
Relating to the origination and reversal of temporary differences
Adjustments in respect of prior years
Total deferred tax
Total tax (charged)/credited to income statement
Year ended
31 December
2016
US$m
Year ended
31 December
2015
US$m
(4.0)
(4.0)
(8.0)
3.1
2.0
(2.9)
(5.2)
5.9
0.7
(2.2)
(2.0)
(6.3)
(8.3)
5.3
2.5
(0.5)
6.9
1.5
8.4
7.9
Overseas tax and double tax relief principally arise from taxes suffered as a result of the Group’s operations at Lloyd’s. Double
tax relief is effectively limited to an amount equal to the tax due at the UK tax rate on the same source of income.
(b) Tax charged to other comprehensive income
Deferred tax charge on actuarial gains on defined benefit pension scheme
Year ended
31 December
2016
US$m
Year ended
31 December
2015
US$m
0.9
(0.5)
(c) Tax reconciliation
The tax on the Group’s profits before tax differs from the theoretical amount that would arise based on the weighted average
rate of tax as follows:
Profit on continuing ordinary activities before tax
Tax calculated at weighted average rate of tax on income
Non‑deductible and non‑taxable items
Taxes on income at rates in excess of the domestic rate and where credit is unavailable
Effect of temporary differences not recognised
Effect of revaluation of deferred tax following change in rate of tax
Other items
Adjustments to tax charge in respect of prior years
Total tax (charged)/credited to income statement
Year ended
31 December
2016
US$m
Year ended
31 December
2015
US$m
159.8
(24.0)
6.6
(0.1)
4.7
3.0
(0.3)
7.9
(2.2)
7.7
4.2
(0.1)
(1.0)
(1.0)
2.3
(0.5)
4.0
7.9
The weighted average rate of tax is based on the geographic split of profit across Group entities in jurisdictions with differing tax
rates. As the mix of taxable profits changes, so will the weighted average rate of tax.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Brit Limited Annual Report 2016 103
(d) Effect of post balance sheet rate changes
UK legislation was substantively enacted on 26 October 2015 to reduce the main rate of UK corporation tax from 20% to 19%
from 1 April 2017 and to 18% from 1 April 2020.
As legislated in the Finance Act 2016, which was substantively enacted on 9 September 2016, the UK corporation tax rate
will reduce further to 17% from 1 April 2020. The reductions in rate from 20% to 19% and then to 17% have been used in the
calculation of the UK’s deferred tax assets and liabilities as at 31 December 2016.
The effect of the reduction rate from 18% to 17% on deferred tax liabilities is a reduction of approximately US$1.4m.
15 INTANGIBLE ASSETS
An intangible asset is an asset without any physical substance but which has long‑term value to our business. Brit’s intangible
assets relate to contracts to sell our products through independent brokers and agents (distribution channels) our brand names
(trade names), our relationship with our customer base (renewal rights), our rights to underwrite policies at Lloyd’s (syndicate
participations) and our internally developed software.
With the exception of our syndicate participation rights at Lloyd’s, which we classify as an indefinite life asset, we reduce the value
of these assets according to their useful life by way of amortisation. Amortisation is included as an expense in the income statement.
Distribution
channels
US$m
Trade
names
US$m
Syndicate
participations
US$m
Renewal
rights
US$m
Software
US$m
Total
US$m
Cost:
At 1 January 2015
Additions
Disposals
Foreign exchange effect
At 31 December 2015
At 1 January 2016
Additions
Disposals
Foreign exchange effect
At 31 December 2016
Amortisation:
At 1 January 2015
Charge for the year
Impairment
Disposals
Foreign exchange effect
At 31 December 2015
At 1 January 2016
Charge for the year
Disposals
Foreign exchange effect
At 31 December 2016
Carrying amount:
At 31 December 2015
At 31 December 2016
9.8
–
–
–
9.8
9.8
–
–
–
9.8
2.4
0.7
–
–
–
3.1
3.1
0.7
–
–
3.8
6.7
6.0
18.9
–
–
–
18.9
18.9
–
–
–
18.9
15.7
2.7
–
–
–
18.4
18.4
0.5
–
–
18.9
70.8
–
–
–
70.8
70.8
–
–
–
70.8
–
–
–
–
–
–
–
–
–
–
–
0.5
–
70.8
70.8
5.8
–
–
–
5.8
5.8
–
–
–
5.8
2.8
2.1
–
–
–
4.9
4.9
0.9
–
–
5.8
0.9
–
29.0
7.7
(6.7)
(1.2)
28.8
28.8
6.3
(2.1)
(4.4)
28.6
16.4
2.9
0.6
(6.7)
(0.6)
12.6
12.6
3.1
(2.1)
(2.1)
11.5
134.3
7.7
(6.7)
(1.2)
134.1
134.1
6.3
(2.1)
(4.4)
133.9
37.3
8.4
0.6
(6.7)
(0.6)
39.0
39.0
5.2
(2.1)
(2.1)
40.0
16.2
17.1
95.1
93.9
FINANCIAL STATEMENTS
104 Brit Limited Annual Report 2016
15 INTANGIBLE ASSETS (continued)
Additional information
The gross cost of software fully amortised but still in use is US$5.1m (2015: US$7.6m).
All software additions in 2016 and 2015 were internally developed.
The software amortisation charge for the year of US$3.1m (2015: US$2.9m) is included in the ‘other operating expenses’ line
in the income statement.
There were no impairments to software in 2016 due to obsolescence (2015: US$0.6m). In 2015, this cost was included in the
other operating expenses’ line in the income statement.
Assets not yet in use with a total cost of US$4.8m (2015: US$6.1m) are included in software.
Further information is given in Note 5(b).
Impairment tests for syndicate participations
Syndicate participations are indefinite life intangible assets and are therefore reviewed annually for impairment. They have been
allocated to cash‑generating units (CGUs) as follows:
Global Specialty Direct
Global Specialty Reinsurance
31 December
2016
US$m
31 December
2015
US$m
52.7
18.1
70.8
52.7
18.1
70.8
The recoverable amounts of the CGUs have been determined using a value in use calculation.
Each value in use calculation uses pre‑tax cash flow projections based on business plans approved by senior management
covering a three year period and subsequent cash flows which assume a nil growth rate. These cash flows have been discounted
using a risk adjusted pre‑tax discount rate of 8.9% (2015: 10.2%). In each syndicate participation impairment review, the
recoverable amount significantly exceeds the carrying value of the CGU including its associated syndicate participations and it
is considered that a reasonably possible change in key assumptions will not cause the carrying value of the CGU to exceed its
recoverable amount.
The key assumptions used for the impairment calculations were that cash flows and profit levels will mainly depend on the level
of premiums written by each strategic business unit, the rates at which these premiums are written and the claims activity on
both prior and future underwriting years. The business plans reflect senior management’s best estimates based on historical
experience, growth rates for the respective insurance industry sector, the insurance pricing cycle and expected results from
ongoing and future strategic business unit product and distribution strategies.
Commissions and other insurance related expenses are assumed to remain materially in line with current amounts relative
to premium levels.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Brit Limited Annual Report 2016 105
16 PROPERTY, PLANT AND EQUIPMENT
This Note gives a breakdown of the type of assets in use in our offices such as computer equipment, office fixtures and fittings
and furniture. We reduce the value of these assets according to their useful life by way of depreciation. Depreciation is included
as an expense in the income statement. We also carry out an annual assessment of the carrying value of these assets and, if
necessary, make an impairment charge to the income statement.
Cost:
At 1 January 2015
Additions
Disposals
Foreign exchange effect
At 31 December 2015
At 1 January 2016
Additions
Disposals
Foreign exchange effect
At 31 December 2016
Depreciation:
At 1 January 2015
Charge for the year
Impairment
Disposals
Foreign exchange effect
At 31 December 2015
At 1 January 2016
Charge for the year
Disposals
Foreign exchange effect
At 31 December 2016
Carrying amount:
At 31 December 2015
At 31 December 2016
Computers
and office
machinery,
furniture and
equipment
US$m
Office
refurbishment
US$m
9.0
14.7
(0.1)
(0.4)
23.2
23.2
5.3
(7.0)
(2.5)
19.0
5.6
1.6
1.6
(0.1)
(0.4)
8.3
8.3
1.6
(7.0)
(0.3)
2.6
11.7
3.9
(2.5)
(0.7)
12.4
12.4
3.0
(2.9)
(1.2)
11.3
7.8
1.3
0.2
(2.5)
(0.6)
6.2
6.2
2.0
(2.9)
(0.5)
4.8
Total
US$m
20.7
18.6
(2.6)
(1.1)
35.6
35.6
8.3
(9.9)
(3.7)
30.3
13.4
2.9
1.8
(2.6)
(1.0)
14.5
14.5
3.6
(9.9)
(0.8)
7.4
14.9
16.4
6.2
6.5
21.1
22.9
The gross cost of property, plant and equipment fully depreciated but still in use is US$1.7m (2015: US$7.1m).
The depreciation charge for the year of US$3.6m (2015: US$2.9m) is included in the ‘other operating expenses’ line in the
income statement.
There were no impairments to property, plant and equipment in the period (2015: US$1.8m relating to the London office
relocation which took place in 2016, included in the ‘other operating expenses’ line in the income statement).
Further information is given in Note 5(b).
A dilapidations provision of US$2.3m (2015: US$3.3m) has been set up in respect of the refurbishment of rented property.
FINANCIAL STATEMENTS
106 Brit Limited Annual Report 2016
17 DEFERRED ACQUISITION COSTS
Acquisition costs are costs incurred in underwriting insurance risks and include commissions paid to third parties and some
internally generated costs such as underwriter salaries. These costs are deferred and are charged to the income statement over
the duration of the contract. We show the movement in these deferred costs and releases to the income statement in this Note.
At 1 January
Costs deferred during the year
Amortisation charge for the year
At 31 December
18 DEFERRED TAXATION
2016
US$m
2015
US$m
222.6
527.9
(530.9)
209.5
539.7
(526.6)
219.6
222.6
This Note describes the tax that we may have to pay in the future. Deferred tax arises from differences in the way that tax is
calculated for accounting purposes and tax purposes.
At 1 January 2015
Movements in the year:
(Charged)/credited to income statement
Tax relating to components of other comprehensive income (Note 14(b))
Foreign exchange effect
At 31 December 2015
At 1 January 2016
Movements in the year:
(Charged)/credited to income statement
Tax relating to components of other comprehensive income (Note 14(b))
Foreign exchange effect
At 31 December 2016
Pensions
US$m
Intangible
assets
US$m
Underwriting
US$m
Other
US$m
Total
US$m
(8.9)
(15.4)
(11.9)
0.6
(35.6)
(0.5)
(0.5)
0.5
(9.4)
2.2
–
–
1.2
–
–
(13.2)
(10.7)
5.5
–
(0.2)
5.9
8.4
(0.5)
0.3
(27.4)
(9.4)
(13.2)
(10.7)
5.9
(27.4)
(0.2)
0.9
1.5
(7.2)
2.9
–
(0.4)
(0.7)
–
–
(10.7)
(11.4)
(1.3)
–
(0.7)
3.9
0.7
0.9
0.4
(25.4)
Deferred tax has not been set up in respect of losses carried forward of US$87.0m (2015: US$86.0m) as it is not considered
probable that they can be utilised in the foreseeable future.
Deferred tax has not been provided in respect of investments in subsidiaries ad associates as no further tax is expected to be
payable on dividend distributions of their profits.
Deferred tax assets arising on decelerated capital allowances of US$0.5m (2015: US$20.2m) have not been provided for due
to uncertainty over the timing of their utilisation.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Brit Limited Annual Report 2016 107
19 INSURANCE AND REINSURANCE CONTRACTS
This Note deals with balances carried in respect of insurance contracts (liabilities) and reinsurance contracts (assets). It examines
the statement of financial position, splitting both insurance and reinsurance balances into their component parts, and explains
the assumptions applied in arriving at these figures. The Note also shows how our claims have developed over a period (before
and after the effects of reinsurance) of time by setting out the cumulative development at the end of each calendar year in
respect of claims arising from business written in a particular underwriting year. It ends by analysing the movements in insurance
and reinsurance contracts during the year.
(a) Balances on insurance and reinsurance contracts
Gross
Claims reported and loss adjustment expenses
Claims incurred but not reported
Unearned premiums
Total gross liabilities
Recoverable from reinsurers
Claims reported and loss adjustment expenses
Claims incurred but not reported
Impairment provision
Unearned premiums
Total reinsurers’ share of liabilities
Net
Claims reported and loss adjustment expenses
Claims incurred but not reported
Impairment provision
Unearned premiums
Total net insurance liabilities
31 December
2016
US$m
31 December
2015
US$m
1,377.7
2,029.0
3,406.7
836.8
1,401.4
1,922.7
3,324.1
858.2
4,243.5
4,182.3
318.6
393.2
(0.7)
711.1
173.0
884.1
326.0
353.4
(1.0)
678.4
140.5
818.9
1,059.1
1,635.8
0.7
2,695.6
663.8
1,075.4
1,569.3
1.0
2,645.7
717.7
3,359.4
3,363.4
Insurance contracts – assumptions and changes in assumptions
Process used to decide on assumptions required
The risks associated with these insurance liabilities and in particular with casualty insurance liabilities are complex and subject
to a number of variables that complicate quantitative analysis.
The Group uses several statistical methods to incorporate the various assumptions made in order to estimate the ultimate costs
of claims. The two methods more commonly used are the chain‑ladder and the Bornhuetter‑Ferguson methods.
Chain‑ladder methods may be applied to premiums, paid claims or incurred claims (i.e. paid claims plus case estimates).
The basic technique involves the analysis of historical claims development factors and the selection of estimated development
factors based on these historical patterns. The selected development factors are then applied to cumulative claims data for
each underwriting year that is not yet fully developed to produce an estimated ultimate claims cost for each underwriting year.
FINANCIAL STATEMENTS
108 Brit Limited Annual Report 2016
19 INSURANCE AND REINSURANCE CONTRACTS (continued)
Chain‑ladder techniques are most appropriate for mature classes of business that have a relatively stable development pattern.
Chain‑ladder techniques are less suitable in cases in which the insurer does not have a developed claims history for a particular
class of business or for underwriting years at early stages of development where the outcome is still highly uncertain.
The Bornhuetter‑Ferguson method uses a combination of a benchmark or market‑based estimate and an estimate based on
claims experience. The former is based on a measure of exposure such as premiums; the latter is based on the paid or incurred
claims to date. The two estimates are combined using a formula that gives more weight to the experience‑based estimate
as time passes. This technique is used in situations in which developed claims experience are not available for the projection
(recent underwriting years or new classes of business).
The choice of selected results for each year of each class of business depends on an assessment of the technique that has
been most appropriate to observed historical developments. In certain instances, this has meant that different techniques or
combination of techniques have been selected for the individual underwriting year or groups of underwriting years within the
same class of business.
Standard statistical techniques may not be solely appropriate for assessing ultimate claims for a number of classes of business
(e.g. casualty treaty) and particular events (e.g. natural catastrophes), therefore alternative methodologies may be employed
to add additional rigour to the process. Examples include reviewing potential exposure on a policy by policy basis and taking
account of market intelligence to determine Brit’s share of the loss.
In addition to the estimation of claims reserves certain estimates are produced for unearned premiums. For open market
business earned premium is calculated at policy level. However, premium derived from delegated underwriting authorities is
calculated by applying the 144ths method to estimated premiums applied to the master policy. This assumes that attachments
to master policies arise evenly throughout the period of that master policy.
Reinsurance outwards premiums are earned according to the nature of the cover. ‘Losses occurring during’ policies are earned
evenly over the policy period. ‘Risks attaching’ policies are earned on the same basis as the inwards business being protected.
Changes in assumptions
The Group did not change its estimation techniques for the insurance contracts disclosed in this Note during the year.
Claims development tables
The tables below show the development of claims over a period of time on a gross and net of reinsurance basis.
The claims development tables have been presented on an underwriting year basis.
The tables show the cumulative incurred claims, including both notified and IBNR claims, for each successive underwriting year
at the end of each year, together with cumulative paid claims at the end of the current year.
The claims have been adjusted to make them comparable on a year by year basis.
They have been grossed up to include 100% of the managed syndicate claims rather than the claims that reflects the Group
percentage ownership of each syndicate’s underwriting capacity during the respective underwriting years. In addition, claims
in currencies other than US dollars have been retranslated at 31 December 2016 exchange rates.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Brit Limited Annual Report 2016 109
Ultimate gross claims
Underwriting year
At end of
underwriting year
One year later
Two years later
Three years later
Four years later
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Total ultimate
2007
and prior
years
2008
2009
2010
2011
2012
2013
2014
2015
Intra Group
and other
underwriting
2016 adjustments
Total
84.9% 90.7% 73.6% 75.7% 80.5% 76.2% 69.8% 70.1% 70.4% 76.6%
87.1% 90.4% 75.6% 85.7% 78.2% 71.6% 69.8% 73.5% 71.4%
85.9% 93.0% 72.4% 89.9% 78.5% 72.4% 69.7% 73.2%
93.6% 96.6% 74.1% 90.2% 78.2% 70.5% 69.6%
95.9% 97.5% 74.6% 89.0% 78.7% 73.0%
95.9% 97.3% 75.4% 86.8% 77.2%
96.5% 99.1% 74.8% 86.5%
96.3% 99.4% 75.8%
95.8% 100.0%
93.7%
US$m
US$m
US$m
US$m
US$m
US$m
US$m
US$m
US$m
US$m
US$m
US$m
gross claims at
31 December 2016 6,522.9 988.0 738.4 881.5 843.6 947.5 962.8 1,111.6 1,027.4 1,091.3
– 15,115.0
Less accumulated
gross paid claims
Unearned premium
portion of gross
ultimate claims
Claims handling
(6,315.5) (831.4) (622.9)
(757.7)
(647.0)
(614.8)
(550.2)
(486.8)
(250.5)
(66.0)
– (11,142.8)
–
–
–
–
–
–
–
–
(48.2)
(574.2)
–
(622.4)
provision and other
corporate adjustments
3.2
2.4
1.8
1.9
3.0
5.0
6.2
9.4
10.9
6.7
6.4
56.9
Total outstanding
gross claims at
31 December 2016
Ultimate net claims
Underwriting year
At end of
underwriting year
One year later
Two years later
Three years later
Four years later
Five years later
Six years later
Seven years later
Eight years later
Nine years later
210.6 159.0 117.3 125.7 199.6 337.7 418.8 634.2 739.6 457.8
6.4 3,406.7
2007
and prior
years
2008
2009
2010
2011
2012
2013
2014
2015
Intra Group
and other
underwriting
2016 adjustments
Total
87.3% 96.4% 79.5% 79.3% 86.4% 82.6% 75.3% 76.1% 77.6% 83.1%
83.0% 96.5% 78.6% 87.1% 83.9% 78.0% 76.6% 79.3% 80.5%
83.4% 96.9% 75.7% 89.1% 83.1% 77.8% 76.1% 78.3%
87.9% 99.9% 74.1% 89.2% 81.3% 75.7% 76.3%
89.7% 101.6% 74.3% 87.0% 81.4% 76.5%
89.9% 100.7% 75.8% 85.8% 79.8%
90.3% 101.1% 75.8% 85.6%
90.6% 98.7% 76.3%
90.2% 98.6%
88.8%
FINANCIAL STATEMENTS
110 Brit Limited Annual Report 2016
19 INSURANCE AND REINSURANCE CONTRACTS (continued)
US$m
US$m
US$m
US$m
US$m
US$m
US$m
US$m
US$m
US$m
US$m
US$m
Total ultimate
net claims at
31 December 2016 4,687.8 755.1 599.7 697.9 700.5 773.0 790.0 895.3 849.0 812.8
– 11,561.1
Less accumulated
gross paid claims
Unearned premium
portion of gross
ultimate claims
Claims handling
provision, bad debt
provision and other
corporate
adjustments
Total outstanding
net claims at
31 December 2016
(4,550.8) (679.7) (511.3)
(592.7)
(543.9)
(513.2)
(457.0)
(418.0)
(217.3)
(60.3)
–
(8,544.2)
–
–
–
–
–
–
–
0.1
(37.9)
(417.0)
–
(454.8)
2.8
2.4
1.9
3.2
3.0
5.0
6.2
9.4
10.8
6.6 82.2
133.5
139.8
77.8
90.3 108.4 159.6 264.8 339.2 486.8 604.6 342.1 82.2 2,695.6
The percentages in the gross and net triangles are shown on an ultimate loss basis inclusive of catastrophe losses
by year of account.
The development of the 2008 year of account was impacted by exposure to the financial crisis which resulted in reserving
action which has subsequently led to stability in the ratios for a number of years. The 2010 year of account includes the impact
of natural catastrophes occurring in 2011 which attached back to policies incepting in the 2010 year of account. Likewise, the
2015 year of account includes the impact of natural catastrophes occurring in 2016 which attached to policies incepting in
the 2015 year of account.
During 2016, the net aggregate reserve releases from prior years amounted to US$53.5m, which included a strengthening of
US$21.5m in respect of 2015 and a reserve release of US$75.0m (140.2% of the net aggregate reserve release) derived from the
2013 and prior underwriting years (2015: US$67.8m/236.9% from the 2012 and prior underwriting years). Reserves in Brit Global
Specialty Direct and Brit Global Specialty Reinsurance experienced releases of US$11.4m (2015: releases of US$17.1m) and
US$47.5m (2015: releases of US$23.3m) respectively with a strengthening of US$5.4m (2015: strengthening of US$11.8m) within
Other Underwriting.
(b) Movements in insurance and reinsurance contracts
(i) Claims and loss adjustment expenses
As at 1 January
Cash paid for claims settled in the year
Increase in liabilities
Net foreign exchange differences
As at 31 December
31 December 2016
31 December 2015
Gross
US$m
Reinsurance
US$m
Net
US$m
Gross
US$m
Reinsurance
US$m
Net
US$m
3,324.1
(875.0)
1,058.8
(101.2)
(678.4) 2,645.7
(734.4)
140.6
856.1
(202.7)
(71.8)
29.4
3,210.3
(871.5)
1,082.5
(97.2)
(694.8) 2,515.5
(680.4)
191.1
882.0
(200.5)
(71.4)
25.8
3,406.7
(711.1) 2,695.6
3,324.1
(678.4) 2,645.7
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Brit Limited Annual Report 2016 111
(ii) Unearned premiums
As at 1 January
Premiums written in the year
Premiums earned during the year
As at 31 December
20 EMPLOYEE BENEFITS
31 December 2016
31 December 2015
Gross
US$m
Reinsurance
US$m
Net
US$m
Gross
US$m
Reinsurance
US$m
Net
US$m
858.2
1,912.2
(1,933.6)
(140.5)
717.7
(432.0) 1,480.2
(1,534.1)
399.5
852.4
1,999.2
(1,993.4)
(126.4)
726.0
(369.4) 1,629.8
(1,638.1)
355.3
836.8
(173.0)
663.8
858.2
(140.5)
717.7
This Note explains the pension schemes operated by the Group for its employees. For the Group’s defined benefit scheme
(in which no further benefits are being accrued), it sets out the amount carried on the Group statement of financial position,
gains and losses incurred during the year, amounts paid into the scheme, together with further information about the scheme.
For the Group’s two defined contribution schemes, it sets out the costs incurred during the year.
(a) Brit Group Services Limited – Defined Benefit Pension Scheme
Through Brit Group Services Limited, the Group operates a funded defined benefit pension scheme providing pensions
benefits to its members. The scheme closed to new entrants on 4 October 2001 and closed to future accrual of benefits on
31 December 2011. All active members of the defined benefit scheme joined the defined contribution plan for future service.
Following closure to future accrual, benefits now increase broadly in line with inflation. The weighted average duration to
payment of the scheme’s expected cash flows is 18 years (2015:18 years).
The scheme is approved by HMRC for tax purposes, and is operated separately from the Group and managed by an
independent Trustee. The Trustee is responsible for payment of the benefits and management of the plan’s assets. The scheme
is subject to UK regulations overseen by the Pensions Regulator, which require the Group and Trustee to agree a funding
strategy and contribution schedule for the scheme every three years. The most recent triennial review of the scheme was
undertaken as at 31 July 2015 and identified a funding surplus of £7.1m. The Group agreed to continue to pay the remainder
of the recovery plan agreed following the previous actuarial valuation, namely a contribution of £1.6m on 31 July 2016.
The Group has also committed to pay further contributions to the scheme of at least £2.0m a year on each 31 July
from 2017 to 2024. These contributions are payable by Brit Group Services Limited and backed‑up by cross‑company
guarantees from both Brit Insurance Holdings Limited and Brit Overseas Holdings S.à R.L.
Net amount recognised in the statement of financial position for the scheme:
Present value of defined benefit obligation
Fair value of scheme assets
Net pension asset
31 December
2016
US$m
31 December
2015
US$m
(193.0)
235.5
(190.9)
243.0
42.5
52.1
FINANCIAL STATEMENTS
112 Brit Limited Annual Report 2016
20 EMPLOYEE BENEFITS (continued)
Changes in the net pension asset recognised in the statement of financial position:
Opening statement of financial position
Credit to income statement
Foreign exchange effect
Amount recognised outside income statement
Contributions paid
Closing statement of financial position
31 December
2016
US$m
31 December
2015
US$m
52.1
1.9
(8.3)
(5.4)
2.2
42.5
43.4
1.6
(2.8)
3.0
6.9
52.1
A net pension asset is recognised on the balance sheet as there is an unconditional right of the Group to be refunded the
surplus in the scheme. The measurement of the net pension asset is impacted by a number of factors, including the actuarial
assumptions used, the effects of changes in foreign exchange rates, and the contributions paid to the scheme by the Group.
The Group expects to realise the economic benefit of the net pension asset as the obligations and funding requirements change
over the life of the scheme. Deferred tax related to the net pension asset is measured using the tax rates expected to apply to
the periods during which the asset is recovered, and is presented within the deferred tax line of the balance sheet.
Net credit recognised in the income statement comprised:
Net interest on net defined benefit asset
Year ended
31 December
2016
US$m
Year ended
31 December
2015
US$m
(1.9)
(1.6)
This credit has been recognised in the ‘other operating expenses’ line in the income statement. Contributions to the
Group’s defined contribution pension arrangements are in addition to those set out in this note and are charged directly
to the income statement.
The allocation of the scheme’s assets was as follows:
Equities
Index‑linked UK government bonds
Non‑UK index‑linked bonds
Fixed interest government bonds
Cash and net current assets
Gold and gold mining equities
Other scheme assets
Fair value of scheme assets
31 December
2016
US$m
31 December
2015
US$m
56.4
130.0
8.4
11.6
24.6
2.6
1.9
235.5
76.3
123.5
13.8
12.2
10.7
2.9
3.6
243.0
All scheme assets have quoted prices in active markets. The scheme does not invest directly in property occupied by the Group
or in financial securities issued by the Group.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Brit Limited Annual Report 2016 113
Investment strategy
The trustees determine the scheme’s investment strategy after taking appropriate advice from their investment consultants.
The management of the assets is delegated to State Street Global Advisors and Ruffer LLP. The Trustee’s investment objective
is to ensure that the scheme has adequate resources to meet its liabilities and thereafter to maximise the long‑term total rate
of return on the assets. Investment risk is managed by diversifying the assets across asset classes whose return patterns are not
highly correlated, and by periodically rebalancing asset classes. The assets include a portfolio of UK index‑linked government
bonds which aim to match a significant part of the scheme’s inflation‑linked benefits and therefore help to reduce the Group’s
exposure to investment and inflation risks.
Movements in the present value of the defined benefit obligation were as follows:
Opening defined benefit obligation
Interest on defined benefit obligation
Remeasurements due to:
Changes in financial assumptions
Changes in demographic assumptions
Experience on benefit obligations
Foreign exchange effect
Benefits paid
Closing defined benefit obligation
Movements in the fair value of the scheme assets were as follows:
Opening fair value of scheme assets
Interest income
Actual return excluding interest income
Foreign exchange effect
Contributions by the employer
Benefits paid
Closing fair value of scheme assets
The principal actuarial assumptions at the year‑end were:
Discount rate
Retail Prices Index (RPI) inflation
Consumer Prices Index (CPI) inflation
Pension increases in payment
Mortality assumptions:
Life expectancy of male aged 60 at statement of financial position date
Life expectancy of female aged 60 at statement of financial position date
Life expectancy of male age 60 retiring in 20 years’ time
Life expectancy of female age 60 retiring in 20 years’ time
31 December
2016
US$m
31 December
2015
US$m
190.9
6.5
219.6
7.6
39.3
–
(0.5)
(34.0)
(9.2)
(6.8)
0.9
(6.7)
(11.6)
(12.1)
193.0
190.9
31 December
2016
US$m
31 December
2015
US$m
243.0
8.4
33.4
(42.3)
2.2
(9.2)
235.5
263.0
9.2
(9.6)
(14.4)
6.9
(12.1)
243.0
31 December
2016
31 December
2015
2.8%
3.4%
2.4%
3.2%
27.9 years
30.2 years
29.7 years
32.1 years
3.8%
3.2%
2.2%
3.1%
27.8 years
30.1 years
29.6 years
32.0 years
The assumptions used to determine end‑of‑year benefit obligations are also used to calculate the following year’s cost.
FINANCIAL STATEMENTS
114 Brit Limited Annual Report 2016
20 EMPLOYEE BENEFITS (continued)
Sensitivity analysis:
Assumption
Change in assumption
Discount rate
Future RPI inflation increases
Future CPI inflation increases
Assumed life expectancy at age 60
Decrease by 0.5%
Increase by 0.5%
Increase by 0.5%
Increase by 1 year
Change in defined benefit
obligation at end of period
Increase by US$18.5m
Increase by US$13.9m
Increase by US$3.5m
Increase by US$5.4m
The calculations in this section have been carried out using the same method and data as the Group’s pensions and accounting
figures with each assumption adjusted as shown above. Each assumption has been varied individually and a combination of
changes in assumptions could produce a different result.
Risks:
The Group is exposed to a number of risks in relation to its defined benefit scheme, the most significant of which are
detailed below:
Risk
Investment strategy
Changes in asset values are not matched by changes in the scheme’s defined benefit
obligations. For example, if equity values fall with no changes in corporate bond yields,
the net pension asset would reduce.
Investment returns
Future investment returns are lower than anticipated and so additional contributions are
required from the Group to pay all the benefits promised.
Improvements in life expectancy
Scheme members live longer and so benefits are payable for longer than anticipated.
Inflation
Regulatory
Actual inflation is higher and so benefit payments are higher than anticipated.
In future the scheme may have backdated claims or liabilities arising from future legislation,
emerging practice or court judgments.
(b) Brit Group Services Limited – Defined Contribution Personal Pension Plan
Brit Group Services Limited operates a defined contribution group personal pension plan. The assets of the scheme are held
separately from those of the Group in an independently administered fund.
The pension cost charge represents contributions payable by Brit Group Services Limited to the fund and amounted to US$6.1m
(2015: US$7.4m).
At 31 December 2016 no contributions were payable to the fund (2015: US$nil).
(c) Brit Insurance Services USA Inc. – 401(k) Safe Harbor Plan
Brit Insurance Services USA Inc. operates a ‘401(k) Safe Harbor Plan’. The assets of the scheme are held separately from those
of the Group in an independently administered fund.
The pension cost charge represents contributions payable by Brit Insurance Services USA Inc. to the fund and amounted
to US$0.5m (2015: US$0.3m).
At 31 December 2016 no contributions were payable to the fund (2015: US$nil).
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Brit Limited Annual Report 2016 115
21 FINANCIAL INVESTMENTS
This Note summarises the total value of the financial assets of the Group and shows how much we have invested in each class
of asset. It also explains how each asset is categorised under three different levels of hierarchy, the methods used to value assets
within each level and assets transferred between levels.
Equity securities
Debt securities
Loan instruments
Specialised investment funds
31 December
2016
US$m
31 December
2015
US$m
399.8
2,424.7
–
79.4
265.5
1,956.0
23.4
1,085.9
2,903.9
3,330.8
All financial investments have been designated as held at fair value through profit or loss.
Basis for determining the fair value hierarchy of financial instruments
The Group has classified the fair value measurements using a fair value hierarchy that reflects the significance of the inputs used
in making those measurements. The fair value hierarchy comprises the following levels:
(a) Level one – quoted prices (unadjusted) in active markets for identical assets;
(b) Level two – inputs other than quoted prices included within level one that are observable for the asset, either directly
(i.e. as prices) or indirectly (i.e. derived from prices); and
(c) Level three – inputs for the assets that are not based on observable market data (unobservable inputs).
Assets are categorised as level one where fair values determined in whole directly by reference to an active market relate to
prices which are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory
agency and those prices represent actual and regularly occurring market transactions on an arm’s length basis, i.e. the market
is still active.
For assets and liabilities that are recognised at fair value on a recurring basis, the Group determines whether transfers have
occurred between levels in the hierarchy by reassessing categorisation (based on the lowest level of input that is significant
to the fair value measurement as a whole) at the end of each reporting period.
Fair values for level two and level three assets include:
• Values provided at the request of the Group by pricing services and which are not publicly available or values provided
by external parties which are readily available but relate to assets for which the market is not always active; and
• Assets measured on the basis of valuation techniques including a varying degree of assumptions supported by market
transactions and observable data.
For all assets not quoted in an active market or for which there is no active market, the availability of financial data can vary and
is affected by a wide variety of factors, including the type of financial instrument, whether it is new and not yet established in
the marketplace, and other characteristics specific to each transaction. To the extent that valuation is based on the models or
inputs that are unobservable in the market, the determination of fair value requires more judgement. Accordingly, the degree
of judgement exercised is higher for instruments classified in level three and the classification between level two and level three
depends highly on the proportion of assumptions used, supported by market transactions and observable data.
FINANCIAL STATEMENTS
116 Brit Limited Annual Report 2016
21 FINANCIAL INVESTMENTS (continued)
Valuation techniques
Level one
Inputs represent unadjusted quoted prices for identical instruments exchanged in active markets (where transactions occur with
sufficient frequency and volume). The fair values of securities sold short and the majority of the company’s equities are based
on published quotes in active markets. These also include government bonds and treasury bills issued in Canada and in the US.
Level two
Inputs include directly or indirectly observable inputs (other than Level one inputs) such as quoted prices for similar financial
instruments exchanged in active markets, quoted prices for identical or similar financial instruments exchanged in inactive
markets and other market observable inputs.
Level two securities contain certain investments in US and non‑US government agency securities, US and non‑US Corporate
debt securities and specialised investment funds. US government agency securities are priced using valuations from
independent pricing vendors who use discounted cash flow models supplemented with market and credit research to gather
specific information. Market observable inputs for these investments may include broker‑dealer quotes, reported trades,
issuer spreads and available bids. Non US government agency securities are priced with OTC quotes or broker‑dealer quotes.
Other market observable inputs include benchmark yields and reported trades. Issuer spreads are also available for these
types of investments
Preferred stocks are priced using a combination of independent pricing service providers and internal valuation models that
rely on directly or indirectly observable inputs. The fair values of investments in certain limited partnerships classified as equities
on the consolidated balance sheet are based on the net asset values received from the general partner, adjusted for liquidity
as required and are classified as Level two when they may be liquidated or redeemed within three months or less of providing
notice to the general partner. Otherwise, such investments in limited partnerships are classified as Level three.
Level three
Level three equities include investments in limited partnerships where the fund’s underlying investments are not traded/quoted
in an active market. In some instances, limited partnerships are classified as level three because they may require at least three
months of notice to liquidate.
Level three debt instruments include corporate loans with unobservable inputs used in the measurement of financial instruments.
Management is required to use its own assumptions regarding unobservable inputs as there is little, if any, market activity in
these instruments or related observable inputs that can be corroborated at the measurement date.
Level three specialised investment funds include securities that are valued using techniques appropriate to each specific
investment. The valuation techniques include fair value by reference to net asset values (NAVs) adjusted and issued by fund
managers based on their knowledge of underlying investments and credit spreads of counterparties. In some instances, certain
investment funds are classified as Level three because they may require at least three months’ notice to liquidate.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Brit Limited Annual Report 2016 117
Level one
US$m
Level two
US$m
Level three
US$m
Total
US$m
201.3
1,462.9
–
–
75.3
935.6
–
64.6
123.2
399.8
26.2 2,424.7
–
79.4
–
14.8
1,664.2 1,075.5
164.2 2,903.9
Level one
US$m
Level two
US$m
Level three
US$m
Total
US$m
195.6
754.0
–
–
52.3
1,158.1
23.4
1,085.9
17.6
43.9
–
–
265.5
1,956.0
23.4
1,085.9
949.6
2,319.7
61.5
3,330.8
Disclosures of fair values in accordance with the fair value hierarchy
31 December 2016
Equity securities
Debt securities
Loan instruments
Specialised investment funds
31 December 2015
Equity securities
Debt securities
Loan instruments
Specialised investment funds
All unrealised gains of US$10.0m (2015: losses of US$108.5m) and realised gains of US$62.3m (2015: gains of US$58.0m)
on financial investments held during the period, are presented in investment return in the consolidated income statement.
Transfers between Fair Value Levels
Fair values are classified as level one when the financial instrument or derivative is actively traded and a quoted price is available.
In accordance with the Group’s policy if an instrument classified as level one subsequently ceases to be actively traded, it
is immediately transferred out of level one. In such cases, instruments are classified into level two, unless the measurement
of its fair value requires the use of significant unobservable inputs, in which case it is classified as level three. All fair value
measurements above are recurring as they are required to be measured and recognised at the end of each reporting period.
Transfers from level one to level two
No fixed income investments (2015: US$37.7m) and no funds (2015: US$638.3m) were transferred from level one to level two
during 2016. The funds were transferred in 2015 due to only limited or no trading taking place during 2015 and therefore they
were no longer deemed to be actively traded.
Transfers from level two to level one
No fixed income investments (2015: US$0.8m) were transferred from level two to level one during 2016.
Transfers from level two to level three
No fixed income investments (2015: US$1.0m) were transferred from level two to level three during 2016.
Transfers from level three to level two
A total of US$1.9m of fixed income investments (2015: US$0.5m) and no funds were transferred from level three to level two
during 2016 (2015: US$7.0m). These fair value hierarchy movements were principally due to additional observable inputs
becoming available for their valuation during 2015 and 2016.
FINANCIAL STATEMENTS
118 Brit Limited Annual Report 2016
21 FINANCIAL INVESTMENTS (continued)
Reconciliation of movements in level three financial investments measured at fair value
At 1 January 2015
Transfers from/(to) level one and level two
Total gains recognised in the income statement
Purchases
Sales proceeds
Foreign exchange losses
At 31 December 2015
Transfers to level one and level two
Total gains/(losses) recognised in the income statement
Purchases
Sales proceeds
Foreign exchange losses
At 31 December 2016
Equity
securities
US$m
Debt
securities
US$m
Loan
instruments
US$m
Specialised
investment
funds
US$m
–
–
0.6
17.5
–
(0.5)
17.6
–
4.6
102.3
–
(1.3)
123.2
218.4
0.5
0.4
47.4
(221.0)
(1.8)
43.9
(1.9)
0.8
4.3
(20.1)
(0.8)
26.2
6.4
–
–
–
(6.4)
–
–
–
–
–
–
–
–
91.3
(7.0)
1.1
–
(85.4)
–
–
–
(0.2)
15.0
–
–
14.8
Total
US$m
316.1
(6.5)
2.1
64.9
(312.8)
(2.3)
61.5
(1.9)
5.2
121.6
(20.1)
(2.1)
164.2
Total net gains recognised in the income statement under ‘investment return’ in respect of level three financial investments for
the period amounted to US$5.2m (2015: US$2.1m). Included in this balance are US$5.2m of unrealised gains (2015: losses of
US$7.2m) attributable to assets still held at the end of the year.
Sensitivity of level three financial investments measured at fair value to changes in key assumptions
The following table shows the sensitivity of the fair value of level three financial investments to changes in key assumptions.
Equity securities
Debt securities
Specialised investment funds
31 December 2016
31 December 2015
Effect of
possible
alternative
assumptions
(+/–)
US$m
4.6
0.9
0.1
Carrying
amount
US$m
123.2
26.2
14.8
164.2
Effect of
possible
alternative
assumptions
(+/–)
US$m
0.7
1.3
–
Carrying
amount
US$m
17.6
43.9
–
61.5
In order to determine reasonably possible alternative assumptions, the Group monitored the price of the securities invested
to changes on a month by month basis since acquisition or during 2016.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Brit Limited Annual Report 2016 119
22 DERIVATIVE CONTRACTS
This Note summarises the total value of the derivative contracts of the Group. It also explains how each derivative contract is
categorised under three different levels of hierarchy, the valuation methods used to value derivative contracts and amounts
transferred between levels. At 31 December 2016 and 31 December 2015, the options and interest rate swaps formed part of
our investment management strategy, while the currency forwards formed part of our foreign exchange management strategy.
The disclosure provided in the tables below include derivatives recorded in the Group’s statement of financial position.
Derivative contract assets
31 December 2016
Currency forwards
Options
Call and put option over Ambridge Partners LLC
Call and put option over Camargue
Total
31 December 2015
Currency forwards
Options
Call and put option over Ambridge Partners LLC
Total
Derivative contract liabilities
31 December 2016
Currency forwards
31 December 2015
Currency forwards
Gross amounts of
receivables on derivative
contract assets
US$m
Gross amounts of
payables on derivative
contract assets
US$m
Derivatives contract
assets presented
in the statement
of financial position
US$m
686.9
5.5
51.3
4.8
748.5
(679.8)
–
(51.3)
(4.8)
(735.9)
Gross amounts of
receivables on derivative
contract assets
US$m
Gross amounts of
payables on derivative
contract assets
US$m
830.3
33.5
51.3
915.1
(800.2)
–
(51.3)
(851.5)
Gross amounts of
payables on derivative
contract liabilities
US$m
Gross amounts of
receivables on derivative
contract liabilities
US$m
7.1
5.5
–
–
12.6
Derivatives contract
assets presented
in the statement
of financial position
US$m
30.1
33.5
–
63.6
Derivative contract
liabilities presented
in the statement
of financial position
US$m
(623.5)
611.7
(11.8)
Gross amounts of
payables on derivative
contract liabilities
US$m
Gross amounts of
receivables on derivative
contract liabilities
US$m
Derivative contract
liabilities presented
in the statement
of financial position
US$m
(352.7)
340.2
(12.5)
Disclosures of fair values in accordance with the fair value hierarchy
31 December 2016
Derivative contract assets
Derivative contract liabilities
31 December 2015
Derivative contract assets
Derivative contract liabilities
Level two
US$m
Level three
US$m
Total
US$m
7.1
(11.8)
5.5
–
Level two
US$m
Level three
US$m
43.2
(12.5)
20.4
–
12.6
(11.8)
Total
US$m
63.6
(12.5)
FINANCIAL STATEMENTS
120 Brit Limited Annual Report 2016
22 DERIVATIVE CONTRACTS (continued)
Valuation techniques
Level two
The fair value of the vast majority of the company’s derivative contracts are based primarily on non‑binding third party
broker‑dealer quotes that are prepared using Level two inputs. Where third party broker‑dealer quotes are used, typically one
quote is obtained from a broker‑dealer with particular expertise in the instrument being priced.
The valuation technique used to determine the fair value of currency forwards is derived from observable inputs such as active
foreign‑exchange and interest‑rate markets that may require adjustments for certain unobservable inputs.
Level three
CPI‑linked derivatives are classified as Level three and valued using broker‑dealer quotes which management has determined
utilize market observable inputs except for the inflation volatility input which is not market observable. The reasonableness
of the fair values of CPI‑linked derivative contracts are assessed by comparing the fair values received from third party
broker‑dealers to recent market transactions where available and values determined using third party pricing software based on
the Black‑Scholes option pricing model for European‑style options that incorporates market observable and unobservable inputs
such as the current value of the relevant CPI underlying the derivative, the inflation swap rate, nominal swap rate and inflation
volatility. The fair values of CPI‑linked derivative contracts are sensitive to assumptions such as market expectations of future
rates of inflation and related inflation volatilities.
Reconciliation of movements in level three derivative contracts measured at fair value
At 1 January 2015
Purchases
Total gains recognised in the income statement
Foreign exchange losses
At 31 December 2015
Purchases
Total losses recognised in the income statement
Foreign exchange gains
At 31 December 2016
Put options
US$m
3.7
14.7
2.6
(0.6)
20.4
11.3
(32.9)
6.7
5.5
Sensitivity of level three derivatives measured at fair value to changes in key assumptions
The following table shows the sensitivity of the fair value of level three derivatives to changes in key assumptions.
Put options
31 December 2016
31 December 2015
Effect of
possible
alternatives
assumptions
(+/‑)
US$m
Carrying
amount
US$m
Effect of
possible
alternatives
assumptions
(+/‑)
US$m
Carrying
amount
US$m
5.5
1.7
20.4
5.9
In order to determine reasonably possible alternative assumptions, the Group adjusted key unobservable model inputs,
including inflation volatility inputs (used to measure inflation‑related put options recorded in 2016) and credit risk inputs
(used to measure put options over an unlisted investment held by the Group in 2016 and 2015).
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Brit Limited Annual Report 2016 121
23 INSURANCE AND OTHER RECEIVABLES
This Note sets out the various categories of amounts which are owed to the Group.
Arising out of direct insurance operations
Arising out of reinsurance operations
Prepayments
Accrued income
Outstanding settlements on investments
Other assets
Other debtors
Total
31 December
2016
US$m
31 December
2015
US$m
373.8
304.9
9.1
6.8
1.5
9.9
12.3
718.3
357.4
280.7
10.4
8.2
7.6
6.8
20.6
691.7
Other assets relates to shares purchased to settle share‑based payment awards. For further information, refer to Note 31(d).
24 CASH AND CASH EQUIVALENTS
This Note analyses the amounts of cash and cash equivalents. Cash equivalents are investment instruments with less than
90 days left to maturity when purchased by the Group. We have also provided some additional analysis which explains where
our cash and cash equivalents are held and why we are holding them.
Cash at bank and on deposit
Cash equivalents
Total
The carrying amounts disclosed above, reasonably approximate fair values.
The source of these amounts can be further analysed as follows:
Classification
Definition
Cash within segregated fund mandates
Lloyd’s Trust Funds
Self‑managed cash
Short‑term investment funds, money market funds,
treasury bills or cash held within segregated mandates.
Cash within the Lloyd’s Overseas Deposits Trust Funds
held to meet regulatory requirements.
Highly liquid instruments held to meet on‑going
working capital requirements.
Letter of credit cash collateral
Cash held as collateral for letters of credit.
Derivative operating cash
Total
Cash within segregated accounts held to meet margin
calls and to enable derivative positions to be rolled.
31 December
2016
US$m
31 December
2015
US$m
469.3
556.2
1,025.5
522.3
58.7
581.0
31 December
2016
US$m
31 December
2015
US$m
737.5
170.4
31.5
27.6
238.1
359.6
18.4
14.5
–
8.9
1,025.5
581.0
FINANCIAL STATEMENTS
122 Brit Limited Annual Report 2016
25 BORROWINGS
This Note describes the main sources of borrowing available to the Group and the amounts currently borrowed from each of
those sources.
Non‑current
Subordinated debt
Revolving credit facility
Maturity
Call
Effective
interest rate
2030 2020
–
2020
8.3%
LIBOR +1.5%
31 December 2016
31 December 2015
Initial
capitalised
borrowing
costs
US$m
Amortised
cost
US$m
Fair value
US$m
Initial
capitalised
borrowing
costs
US$m
Amortised
cost
US$m
Fair value
US$m
2.8
14.7
17.5
157.5
–
157.5
167.9
–
167.9
2.8
14.7
17.5
185.6
–
206.2
–
185.6
206.2
As at 31 December 2016 and 31 December 2015, the fair value of the subordinated debt was determined by reference to
trading market values on recognised exchanges and was therefore categorised as a level one measurement in the fair value
hierarchy. For further information relating to the fair value hierarchy, refer to Note 21.
Subordinated debt
The subordinated debt is callable in whole by the Group on 9 December 2020. Following this date the interest rate resets
to the higher of:
i) 3.4% above the gross redemption yield of the 4.75% Treasury Gilt due 2030 quoted on the reset date; or
ii) 3.4% above the gross redemption yield of the 8% Treasury Stock due 2021 quoted on the reset date.
The effective interest rate method of accounting has been applied over the term up to the call date.
Revolving credit facility
The Group has a US$360.0m (2015: US$ 360.0m) revolving credit facility which expires on 31 December 2020. The facility was
renegotiated during the year; prior to this change the facility carried an interest rate of LIBOR+2.3% and an expiry date of
31 December 2018.
At 31 December 2016, a US$80.0m (2015: US$80.0m), letter of credit had been put in place under the facility while the
remainder was undrawn. At 31 December 2016, US$4.0m was collateralised (2015: US$80.0m uncollateralised).
26 INSURANCE AND OTHER PAYABLES
This Note sets out the various categories of amounts which are owed by the Group.
Arising out of direct insurance operations
Arising out of reinsurance operations
Other taxes and social security costs
Accruals and deferred income
Outstanding settlements on investments
Other creditors
31 December
2016
US$m
31 December
2015
US$m
10.8
291.5
2.2
50.6
12.7
14.2
382.0
1.5
204.6
2.5
56.0
79.3
6.1
350.0
The carrying amounts disclosed above reasonably approximate fair values as all amounts are payable within one year of the date
of the statement of financial position.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Brit Limited Annual Report 2016 123
27 CALLED UP SHARE CAPITAL
This Note sets out the number of shares we have in issue and their nominal value.
Ordinary shares:
Allotted, issued and fully paid
As at 31 December 2015
Purchase and cancellation of own shares
As at 31 December 2016
31 December
2016
US$m
31 December
2015
US$m
31 December
2016
1p each
Number
31 December
2015
1p each
Number
6.4
6.6
387,608,230
401,057,706
US$m
Number
6.6
(0.2)
401,057,706
(13,449,476)
6.4 387,608,230
106,550,524 shares are class A shares and the remainder are class B shares. The class A and B shares rank pari passu except that
on a distribution of profits by the Company, the class A shareholders are entitled to a cumulative annual dividend which must be
settled ahead of any equivalent distribution to class B shareholders.
The number of shares reported is for Brit Limited, the parent of the Group.
The Group’s ultimate parent, Fairfax, is permitted on an annual basis to purchase a set number of shares from OMERS, the
minority shareholder of class A shares in Brit Limited. In August 2016 instead of a B class share dividend being made by Brit
Limited to Fairfax, Fairfax assigned the purchase of 13,449,476 A class shares to Brit Limited. A distribution of US$61.5m from
reserves for the purchase of 13,449,476 shares from OMERS for cancellation was made on 3 August 2016. The distribution of
US$61.5m included the repurchase cost of the shares of US$57.8m, a US$3.4m payment in respect of the pro‑rata accrued
dividend on the shares, and stamp duty charges of US$0.3m.
A reduction in share capital of £134,495 has been made, being the nominal value of 13.4m shares at 1p each, and a capital
redemption reserve of the same amount has been created. The distribution of US$61.5m has been set against distributable
reserves (‘cost of share buy‑back’) in accordance with UK Company Law. As a result, Fairfax has increased its percentage
shareholding from 69.99% to 72.51%.
28 DIVIDENDS
This Note gives details of the amount we have paid to our shareholders during 2016 by way of dividends.
A final ordinary dividend of 12.5p per share and a special dividend of 12.5p per share amounting to US$154.1m was delared by
the Group in respect of 2014 and paid during 2015.
A US$26.2m dividend in respect of the year‑ended 31 December 2015 was paid to the class A shareholders on 29 April 2016
in accordance with the shareholders’ agreement at an amount equal to US$0.43 per share (2015: US$ nil).
As part of the share‑buy back transaction a US$3.4m dividend was paid to the class A shareholders on 3 August 2016,
representing the pro‑rata accrued dividend outstanding on the shares repurchased in respect of the 2016 accounting period,
and based on a dividend entitlement for the full year equal to US$0.43 per share.
A US$61.3m dividend was paid to the class B shareholders on 21 December 2016 in accordance with the shareholders’
agreement at an amount equal to US$0.43 per share (2015: nil).
A further dividend to class A shareholders for 2016 of US$0.43 per share amounting to US$45.8m was proposed and agreed
at the 15 February 2017 Brit Limited Board meeting.
FINANCIAL STATEMENTS 124 Brit Limited Annual Report 2016
29 COMMITMENTS
The Group has various financial commitments resulting from lease arrangements it has entered into. These amounts, which
are not provided for on the consolidated statement of financial position, are set out in this Note.
Operating lease commitments
The Group has entered into a number of operating lease arrangements to lease properties and office equipment. Property
leases typically have rent reviews every five years where the lease payments could be increased to reflect market rates.
Operating lease payments recognised in the consolidated income statement during 2016 were US$7.3m (2015: US$9.0m).
The future minimum lease payments under non‑cancellable operating leases were as follows:
Not later than one year
Later than one year and not later than five years
Later than five years
31 December
2016
US$m
31 December
2015
US$m
6.9
26.2
46.7
79.8
8.5
28.8
64.1
101.4
30 CASH FLOWS PROVIDED BY OPERATING ACTIVITIES
The table below shows how our profit for the year translates into cash flows generated from our operating activities.
Profit on ordinary activities before tax
Adjustments for non‑cash movements:
Realised and unrealised (gains)/losses on investments
Realised and unrealised losses/(gains) on derivatives
Amortisation of intangible assets
Impairment of intangible assets
Depreciation of property, plant and equipment
Impairment of property, plant and equipment
Foreign exchange losses on cash and cash equivalents
Share of profit after tax of associated undertakings
Charges in respect of share‑based payment schemes
Interest income
Dividend income
Foreign currency translation reserve transferred to profit on liquidation of subsidiaries
Finance costs on borrowing
Changes in working capital:
Deferred acquisition costs
Insurance and other receivables excluding accrued income
Insurance and reinsurance contracts
Financial investments
Derivative contracts
Insurance and other payables
Employee benefits
Provisions
Cash flows provided by operating activities
Year ended
31 December
2016
US$m
Year ended
31 December
2015
US$m
159.8
7.7
(72.3)
52.8
5.2
–
3.6
–
17.8
(3.1)
0.9
(56.4)
(17.5)
–
18.8
3.0
(28.0)
(4.0)
499.3
(2.5)
6.1
(4.0)
(0.4)
579.1
50.5
(39.7)
8.4
0.6
2.9
1.8
15.8
–
4.9
(42.6)
(30.1)
5.2
20.6
(13.1)
20.6
121.9
143.7
(3.4)
(5.7)
(8.5)
0.5
262.0
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Brit Limited Annual Report 2016 125
31 SHARE‑BASED PAYMENTS
The Group rewards its employees through various share‑based incentive schemes. This Note explains the different schemes
used to facilitate those share‑based payments and the charge recognised in the consolidated income statement in respect
of these schemes.
The compensation cost recognised in the income statement under International Financial Reporting Standard 2 ‘Share‑based
Payments’ for the Group’s share‑based payments arrangements are shown below:
Equity‑settled plans
Performance Share Plan
Brit All‑Employee Share Plan
Long‑Term Incentive Plan (Performance Share Plan replacement)
Employee Share Ownership Plan
Cash‑settled plans
Performance Share Plan dividend equivalents settled in cash
Long‑Term Incentive Plan
Total
Year ended
31 December
2016
US$m
Year ended
31 December
2015
US$m
–
–
1.0
1.0
–
1.7
3.7
2.6
1.5
0.7
0.1
0.2
0.1
5.2
The total liability in respect of cash‑settled plans at 31 December 2016 was US$1.8m (2015: US$0.1m). Also, included in the
Statement of Changes in Equity is US$1.0m (2015: US$4.9m) in respect of equity settled plans. A further US$1.0m of charges
relating to the Employee Share Ownership Plan are equity settled in nature but physically settled in cash and so were not
recorded in the Statement of Changes in Equity.
(a) Performance Share Plan (PSP)
During 2014, selected employees in the senior management team were awarded the right to acquire a defined number of
Brit Limited shares at no cost to the employee. On the Fairfax acquisition of Brit Limited, 35% of the shares vested and the
remainder were replaced with awards under the Long‑Term Incentive Plan (Performance Share Plan replacement).
Reconciliation of movement in the number of awards
Outstanding at 1 January
Forfeited
Vested
Lapsed
Transferred to Long Term Incentive Plan (Performance Share Plan Replacement)
Outstanding at 31 December
The weighted average share price at date of vesting during 2015 was 280p.
Year ended
31 December
2016
Number
of awards
Year ended
31 December
2015
Number
of awards
– 2,596,365
–
(40,477)
–
(894,519)
–
(163,428)
– (1,497,941)
–
–
FINANCIAL STATEMENTS
126 Brit Limited Annual Report 2016
31 SHARE‑BASED PAYMENTS (continued)
(b) Brit All‑Employee Share Plan
The Brit All‑Employee Share Plan provided for the award of Brit Limited free shares, partnership shares, matching shares and
dividend shares. On the Fairfax acquisition of Brit Limited, all of the awards vested.
Reconciliation of movement in the number of awards
Outstanding at 1 January
Forfeited
Vested
Outstanding at 31 December
Year ended
31 December
2016
Number
of awards
Year ended
31 December
2015
Number
of awards
–
502,542
–
(17,781)
– (484,761)
–
–
The weighted average share price at date of vesting during 2015 was 280p.
(c) Long‑Term Incentive Plan (Performance Share Plan replacement)
On the Fairfax acquisition of Brit Limited, the 65% of PSP awards that did not immediately vest were converted by FFHL
into awards under this scheme. The conversion terms allowed for 60% of the 280p Brit Limited acquisition share price to be
converted into the equivalent value of options to acquire shares in FFHL at a nil exercise price. Subject to continued service,
the options vest in November 2018 and there are a further seven years to exercise the options.
The calculation of the compensation cost recognised in the income statement in respect of these awards assumes forfeitures
due to employee turnover of 5% per annum prior to vesting, with subsequent adjustments to reflect actual experience.
Reconciliation of movement in the number of awards
Outstanding at 1 January
Granted
Forfeited
Outstanding at 31 December
Year ended
31 December
2016
Number
of awards
Year ended
31 December
2015
Number
of awards
7,865
–
(153)
7,712
–
7,865
–
7,865
The weighted average fair value at date of grant for awards granted during 2016 was US$490.17 (2015: US$491.15).
In order to settle share‑based payment awards, in 2015 the Group purchased US$10.7m of preference shares in FFHL Share
Option 1 Corp and that company has purchased shares in Fairfax Financial Holdings Limited. Of the purchase, US$3.9m related
to this scheme and was recorded within equity so as to offset the share‑based payment charges recorded in equity on exercise
of the awards.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Brit Limited Annual Report 2016 127
(d) Long Term Incentive Plan
During 2015 and 2016 the Company awarded selected employees options to acquire shares in FFHL at a nil exercise price.
Subject to continued service, the options vest five years after the grant date and there are a further five years to exercise
the options.
The calculation of the compensation cost recognised in the income statement in respect of these awards assumes forfeitures
due to employee turnover of 5% per annum prior to vesting, with subsequent adjustments to reflect actual experience.
Reconciliation of movement in the number of awards
Outstanding at 1 January
Granted
Forfeited
Outstanding at 31 December
There were no options exercisable at the end of the year.
Year ended
31 December
2016
Number
of awards
Year ended
31 December
2015
Number
of awards
13,503
7,119
(316)
–
13,503
–
20,306
13,503
The weighted average fair value at date of grant for awards granted during 2016 was US$490.17 (2015: US$491.15).
In order to settle share‑based payment awards, in 2016 the Group purchased US$3.4m (2015: US$10.7m) of preference shares
in FFHL Share Option 1 Corp and that company has purchased shares in Fairfax Financial Holdings Limited. Of the purchase,
US$3.4m (2015: US$6.8m) related to this scheme and has been recorded within Other Assets so as to offset the share‑based
payment recorded as a liability within Other Creditors on exercise of the awards.
(e) Employee Share Ownership Plan
Under the terms of the ESOP which was established in 2015, eligible employees are given the election to purchase common
shares in FFHL in an amount up to 10% of their annual base salary. The Company purchases, on the employee’s behalf, a
number of FFHL’s common shares equal in value to 30% of the employee’s contribution. In the event that the Company achieves
certain performance targets, additional shares are purchased by the Company for the employee’s benefit, to an amount equal
in value to 20% of the employee’s contribution during that year. In respect of both shares purchased by the employees and
matched by the Company, during the year ended 31 December 2016, the Company purchased a total of 6,428 common shares
in FFHL (2015: 1,137) at an average price of US$528.80 (2015: US$485.15) in respect of this plan.
FINANCIAL STATEMENTS
128 Brit Limited Annual Report 2016
32 INTERESTS IN STRUCTURED ENTITIES
This Note defines a structured entity and sets out the Group’s interests in such vehicles and how we account for them.
A structured entity is defined as an entity that has been designed so that voting or similar rights are not the dominant factor in
deciding who controls the entity, such as when any voting rights relate to administrative tasks only, or when the relevant activities
are directed by means of contractual arrangements.
As part of its investment activities, the Group has the following interests in unconsolidated structured entities:
Undertakings for Collective Investments in Transferable Securities (UCITS)
Mortgage backed securities
Other asset backed structures
Year ended
31 December
2016
US$m
Year ended
31 December
2015
US$m
–
1.0
–
1.0
999.5
18.2
1.5
1,019.2
These assets are included within the debt securities in Note 21 and form part of Financial Investments on the Group statement
of financial position. They are carried at fair value.
As at 31 December 2015 the Group held investments in three UCITS. From 1 January 2016 the two principal UCITS in which
Brit invests have been consolidated by the Group. The Group divested the remaining UCITS investment during the year.
The risk that the Group faces in respect of the investments in structured entities is similar to the risk it faces in respect of other
financial investments held on the statement of financial position in that the fair value is determined by market supply and
demand. This is in turn driven by investor evaluation of the credit risk of the structure and changes in the term structure of
interest rates which might change investor expectation of the cash flows associated with the instrument and therefore its value
in the market.
The maximum exposure to loss in respect of these structured entities would be the carrying value of the instruments that the
Group holds. Generally, default rates would have to increase substantially from their current level before the Group would suffer
a loss and this assessment is made prior to investing and continually through the holding period for the security. The Group
does not invest in securities which have a contingent liability to the borrowers or structures that provide any type of guarantee,
revolving credit facility, callable loans or liquidity arrangement facilities to third parties such as overdrafts.
The Group has received investment returns from structured products (mortgage backed securities) during 2016 amounting
to US$0.2m (2015: US$6.8m) comprised of capital gains only (2015: US$3.4m of interest and $3.4m of capital gains).
The Group has provided no financial or other support, other than through the normal purchase of tradeable securities, to
structured entities either held at the date of the statement of financial position or held during 2015 or 2016 and has no current
intention to do so.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Brit Limited Annual Report 2016 129
33 ACQUISITION OF STRUCTURED ENTITIES
This Note sets out the Group’s acquisition of specific structured vehicles in which it previously had a holding and the consequent
impact on the Group’s financial statements.
Acquisition of Undertakings for Collective Investments in Transferable Securities (UCITS)
The Group has significant investments in two Undertakings for Collective Investments in Transferable Securities (UCITS), Pimco
Dynamic Global Investment Grade Credit Fund (Pimco) and Henderson Horizon Core Credit Fund (Henderson). Previously the
Group concluded that it did not exercise control over these funds due to the fund manager having sufficient autonomy to direct
the activities of the UCITS.
During 2015 changes were made to the investment management agreements of these UCITS, effective from 1 January 2016,
giving the Group power to be directly involved in the decision‑making of the funds including in respect of the investment
decisions. These changes have reduced the level of autonomy of the fund manager and significantly increased the level of
control exerted by the Group.
Consequently, both UCITS have been consolidated from 1 January 2016. As the Group was the sole investor in these funds in
2015 and the resulting investments were carried at fair value on the Group’s balance sheet, there was no impact on net assets as
a result of the consolidation of these funds and no goodwill arises.
Of the US$999.5m of UCITS investments recorded by the Group at 31 December 2015 (and referred to in note 32 above),
US$772.1m related to Henderson and US$173.1m related to Pimco.
The fair value of the identifiable assets and liabilities of the UCITS at 1 January 2016 were as follows:
Assets
Trade investments
Derivative assets
Interest and dividends receivable
Cash and cash equivalents
Liabilities
Payables on investments
Taxes and expenses payable
Derivative liabilities
Interest and dividends payable
Net assets
Henderson
1 January 2016
US$m
Pimco
1 January 2016
US$m
737.7
1.2
5.1
85.8
829.8
40.1
0.8
7.4
4.4
52.7
172.6
3.1
1.3
0.6
177.6
1.1
–
3.4
–
4.5
772.1
173.1
FINANCIAL STATEMENTS
130 Brit Limited Annual Report 2016
33 ACQUISITION OF STRUCTURED ENTITIES (continued)
The presentational impact on the financial statements of consolidating the UCITS at 31 December 2016 is as follows:
Statement of financial position
Assets
Trade investments
Derivative assets
Accrued income
Cash at bank
Liabilities
Payable for investments purchased
Derivative liabilities
Interest and dividends payable
Net assets
Income statement
Net foreign exchange gains
Investment return
Return on derivative contracts
Income
As at
31 December
2016
US$m
(17.9)
1.3
3.5
31.4
18.3
10.0
7.6
0.7
18.3
–
Year ended
31 December
2016
US$m
32.8
2.7
(35.5)
–
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Brit Limited Annual Report 2016 131
34 CONSOLIDATED ENTITIES
The principal entities which are members of the Brit Limited Group and whose results and financial positions are consolidated to
produce the Group result and financial position are set out in this Note.
All subsidiaries of the Company are 100% owned. The subsidiaries of the company at 31 December 2016, together with their
main function, are listed below by country of incorporation. The registered address and principal place of business of each entity
is The Leadenhall Building, 122 Leadenhall Street, London, EC3V 4AB unless otherwise stated.
Subsidiary
Principal activity
Registered address and principal place of business
United Kingdom
Brit Insurance Holdings Limited
Brit Syndicates Limited
Brit UW Limited
Brit Insurance Services Limited
Brit Investment Holdings Limited
Brit Group Services Limited
Brit Group Finance Limited
BGS Services (Bermuda) Limited
Brit Pension Trustee Limited
Brit Corporate Services Limited
Brit Corporate Secretaries Limited
Republic of Ireland
Pimco Dynamic Global Investment
Intermediate holding company
Lloyd’s managing agent
Lloyd’s corporate member
Service company
Service company
Group services company
Group services company
Service company
Group services company (Dormant)
Group services company (Dormant)
Group services company (Dormant)
The Leadenhall Building
The Leadenhall Building
The Leadenhall Building
The Leadenhall Building
The Leadenhall Building
The Leadenhall Building
The Leadenhall Building
The Leadenhall Building
The Leadenhall Building
The Leadenhall Building
The Leadenhall Building
Grade Credit Fund
Investment management
PIMCO Select Funds Plc, Styne House,
Upper Hatch Street, Dublin
United States of America
Brit Insurance Services USA Inc.
Service company
Gibraltar
Brit Insurance (Gibraltar) PCC Limited
Insurance company
Brit Group Finance (Gibraltar) Limited
Service company
161 N. Clark Street, Suite 3200,
Chicago, IL, 60601
Unit 2Aa, Leisure Island Business Centre,
23 Ocean Village Promenade, Ocean Village
Unit 2Aa, Leisure Island Business Centre,
23 Ocean Village Promenade, Ocean Village
Singapore
Brit Global Specialty Singapore Pte. Ltd. Service company
138 Market St., #04‑03 CapitaGreen, 048946
The Netherlands
Brit Insurance Holdings B.V.
Former holding company
The Leadenhall Building
Luxembourg
Brit Overseas Holdings S.à R.L.
Henderson Horizon Core Credit Fund
Former holding company
Investment management
6 Rue Eugene Ruppert, L‑2453, Luxembourg
Henderson Horizon Core Credit Fund,
2 Rue de Bitbourg L‑1273
FINANCIAL STATEMENTS 132 Brit Limited Annual Report 2016
35 RELATED PARTY TRANSACTIONS AND ULTIMATE PARENT COMPANY
The Group has a number of related parties which includes its principal investors and its Directors. Sometimes it transacts
business with these related parties. This Note sets out those transactions.
(a) Ultimate Parent Company
The ultimate parent company and controlling entity, and the largest group of which the Group is a member, is Fairfax Financial
Holdings Limited (FFHL) which is registered in Canada and listed on the Toronto Stock Exchange. The consolidated financial
statements for Fairfax are publicly available and can be obtained from the Corporate Secretary, 95 Wellington Street West, Suite
800, Toronto, Ontario, Canada, M5J 2N7 or from the website at www.fairfax.ca.
(b) Fairfax Financial Holdings Limited
In June 2015, Hamblin Watsa Investment Counsel Limited (HWIC), an affiliate of FFHL, was appointed as an investment
manager to a number of Group companies. During the year ended 31 December 2016, the Group incurred and paid investment
management fees to HWIC of US$11.2m (period from 5 June to 31 December 2015: US$5.7m).
The Group has historically entered into various reinsurance arrangements with affiliates of FFHL.
In respect of insurance and ceded outwards reinsurance activity, the amounts included in the income statement relating to
trading with affiliates of FFHL were as follows:
Gross premiums written
Less premiums ceded to reinsurers
Premiums written, net of reinsurance
Gross amount of change in provision for unearned premiums
Reinsurers’ share of change in provision for unearned premiums
Net change in provision for unearned premiums
Earned premiums, net of reinsurance
Gross claims paid
Reinsurers’ share of claims paid
Claims paid, net of reinsurance
Gross change in the provision for claims
Reinsurers’ share of change in the provision for claims
Net change in the provision for claims
Commission income
Commission expense
Year ended
31 December
2016
US$m
Period fro
5 June to
31 December
2015
US$m
7.9
(2.1)
5.8
(0.5)
(2.5)
(3.0)
2.8
(5.0)
5.1
0.1
–
(8.2)
(8.2)
1.8
(1.2)
6.8
(3.5)
3.3
3.1
(4.7)
(1.6)
1.7
(6.9)
10.5
3.6
2.8
(9.1)
(6.3)
2.3
(1.2)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Brit Limited Annual Report 2016 133
The amounts included in the statement of financial position outstanding with affiliates of FFHL and its affiliates
as at 31 December 2016 were as follows:
Debtors arising out of direct insurance and reinsurance operations:
Insurance premium receivable
Recoverable from reinsurers
Creditors arising out of direct insurance and reinsurance operations:
Payable to reinsurers
Unpaid claims liabilities
Deferred acquisition costs
Gross unearned premiums
Unearned premium recoverable from reinsurers
(c) Associated undertakings
Year ended
31 December
2016
US$m
Year ended
31 December
2015
US$m
3.6
50.7
5.9
59.6
(2.4)
(44.8)
(4.1)
(45.9)
0.9
(5.6)
1.0
1.0
(5.2)
3.5
Ambridge Partners LLC
On 8 December 2015, the Group acquired 50% of the members’ interests of Ambridge Partners LLC and also entered into
a call and a put option to purchase the remaining 50% in 2019. Ambridge Partners LLC is a managing general underwriter
of transactional insurance products, writing business on behalf of a range of insurers including Brit.
Trading with Ambridge Partners LLC is undertaken on an arm’s‑length basis and is settled in cash. The amounts in the income
statement relating to trading with Ambridge Partners LLC for the year to 31 December 2016 included commission for
introducing insurance business of US$4.3m (period from 8 December 2015 to 31 December 2015: US$0.4m.)
The amount of premiums net of commission in the statement of financial position outstanding from Ambridge Partners LLC
as at 31 December 2016 was US$7.4m (2015: US$6.4m).
The amount of fees in the statement of financial position payable to Ambridge Partners LLC as at 31 December 2016 was
US$0.2m (2015: US$0.2m).
Camargue Underwriting Managers Proprietary Limited
On 30 August 2016, the Group acquired 50% of the share capital of the South African company, Camargue Underwriting
Managers Proprietary Limited (Camargue) and also entered into a call and a put option to purchase the remaining 50% in 2021.
Camargue is a leading managing general underwriter of a range of specialised insurance products and specialist liability
solutions in South Africa and is an important trading partner for, Brit.
Trading with Camargue is undertaken on an arm’s‑length basis and is settled in cash. The amounts in the income statement
relating to trading with Camargue for the period from 30 August to 31 December 2016 included commission for introducing
insurance business of US$0.2m.
Amounts recorded in the statement of financial position in respect of premium net of commissions due from, and fees payable
to, Camargue as at 31 December 2016 were not material.
FINANCIAL STATEMENTS
134 Brit Limited Annual Report 2016
(d) Key management compensation
The amount of the emoluments granted in respect of the financial year to the members of the administrative, managerial and
supervisory bodies by reason of their responsibilities, and any commitments arising or entered into in respect of retirement
pension for former members of those bodies, are broken down as follows:
Salaries and other short‑term employee benefits
Post‑employment benefits
Share‑based payments
Termination benefits
Total compensation
Year ended
31 December
2016
US$m
Year ended
31 December
2015
US$m
7.3
0.2
1.2
0.7
9.4
19.7
0.9
2.1
2.1
24.8
For the purposes of International Accounting Standard 24, ‘Related Party Disclosures’, key managers are defined as the
Board of Directors and members of the Executive Committee which is the primary vehicle for implementing Board decisions
in respect of UK‑managed operations.
36 GUARANTEES AND CONTINGENT LIABILITIES
This Note explains guarantees issued by Group companies and any contingent liabilities they may be exposed to.
(a) Lloyd’s
Assets have been pledged, as Funds at Lloyd’s, by way of deposits and fixed and floating charges for Brit UW Limited,
the corporate member of the Group. As at 31 December 2016 the Funds at Lloyd’s requirement amounted to US$794.6m
(2015: US$806.5m).
(b) Revolving credit facility
The Group has access to a US$360.0m revolving credit facility. For further information, refer to Note 25. Guarantees have been
made by Brit Limited and Brit Insurance Holdings Limited to the syndicated banks providing the facility.
As at 31 December 2016, a US$80.0m letter of credit had been provided to Lloyd’s (2015: US$80.0m). At 31 December 2016,
US$4.0m this letter of credit was collateralised (2015: uncollateralised).
(c) Taxation
The Group operates in a wide variety of jurisdictions around the world through its Lloyd’s syndicate and uncertainties therefore
exist with respect to the interpretation of complex tax laws and practices of those territories. The Group establishes provisions
for taxes other than current and deferred income taxes, based upon various factors which are continually evaluated, if there is
a present obligation as a result of past events, it is probable that an outflow of resources embodying economic benefits will be
required to settle the obligation and a reliable estimate of the amount of the obligation can be made.
Income taxes are provided for as set out in accounting policy Note 2.4.10.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Brit Limited Annual Report 2016 135
INTRODUCTION TO THE PARENT COMPANY
FINANCIAL STATEMENTS
INDEX TO THE PARENT COMPANY FINANCIAL
STATEMENTS
Statement of financial position
The statement of financial position is a summary of assets
and how the assets have been funded through liabilities
and equity investment by shareholders.
Statement of changes in equity
The statement of changes in equity shows how the various
lines in the equity section of the Company’s statement of
financial position have moved during the year.
STATEMENT OF FINANCIAL POSITION
STATEMENT OF CHANGES IN EQUITY
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1
ACCOUNTING POLICIES AND BASIS
OF PREPARATION
NOTE 2
AUDITOR’S REMUNERATION
NOTE 3
SHARES IN GROUP UNDERTAKINGS
NOTE 4
LOANS TO GROUP UNDERTAKINGS
NOTE 5
NOTE 6
NOTE 7
DEBTORS: AMOUNTS FALLING
DUE WITHIN ONE YEAR
CREDITORS: AMOUNTS FALLING
DUE WITHIN ONE YEAR
CREDITORS: AMOUNTS FALLING
DUE AFTER MORE THAN ONE YEAR
NOTE 8
CALLED UP SHARE CAPITAL
NOTE 9
DIRECTORS’ EMOLUMENTS
NOTE 10
GUARANTEES AND CONTINGENT
LIABILITIES
NOTE 11
DIVIDENDS
NOTE 12
SHARE–BASED PAYMENTS
NOTE 13
DISCLOSURE EXEMPTIONS
NOTE 14
ULTIMATE PARENT COMPANY
136
137
138
138
139
139
139
140
140
141
141
142
142
142
142
142
143
CONTENTSFINANCIAL STATEMENTS 136 Brit Limited Annual Report 2016
STATEMENT OF FINANCIAL POSITION
At 31 December 2016
Fixed assets
Investments:
Shares in group undertakings
Loans to group undertakings
Current assets
Debtors: Amounts falling due within one year
Cash at bank and in hand
Current liabilities:
Creditors: Amounts falling due within one year
Net current (liabilities)/assets
Total assets less current liabilities
Creditors: amounts falling due after more than one year
Net assets
Capital and reserves
Called up share capital
Capital redemption reserve
Retained earnings
Total equity
Note
31 December
2016
US$m
31 December
2015
US$m
3
4
5
6
7
8
1,050.5
127.4
1,177.9
18.6
0.1
18.7
(107.5)
(88.8)
1,089.1
(168.7)
920.4
6.4
0.2
913.8
920.4
1,050.5
151.9
1,202.4
33.5
0.1
33.6
(24.1)
9.5
1,211.9
(201.8)
1,010.1
6.6
–
1,003.5
1,010.1
The accompanying Notes are an integral part of these financial statements.
These financial statements were approved by the Board of Directors on 15 February 2017 and were signed on its behalf by:
Matthew Wilson
Group Chief Executive Officer
Mark Allan
Chief Financial Officer
STATEMENT OF CHANGES IN EQUITY
For the year ended 31 December 2016
Brit Limited Annual Report 2016 137
Called up
Share
capital
US$m
Note
Capital
redemption
reserve
US$m
1 January 2016
Total comprehensive income for the period
Repurchase of class A shares
Cancellation of share capital
Dividend
At 31 December 2016
11
For the period ended 31 December 2015
1 January 2015
Total comprehensive income for the period
Dividend
At 31 December 2015
6.6
–
–
(0.2)
–
6.4
Note
11
–
–
–
0.2
–
0.2
Called up
Share
capital
US$m
6.6
–
–
6.6
Retained
earnings
US$m
1,003.5
59.2
(58.1)
–
(90.8)
913.8
Retained
earnings
US$m
1,188.7
(31.1)
(154.1)
1,003.5
Total
equity
US$m
1,010.1
59.2
(58.1)
–
(90.8)
920.4
Total
equity
US$m
1,195.3
(31.1)
(154.1)
1,010.1
FINANCIAL STATEMENTS
138 Brit Limited Annual Report 2016
1 ACCOUNTING POLICIES AND BASIS OF PREPARATION
This Note provides details of the basis of preparation and accounting policies applied in producing these parent company
financial statements.
1.1 Basis of preparation
The Company financial statements present the information about the company as a separate entity. The Company is
incorporated and registered in England and Wales with registration number 8821629. The registered office of the company
at the date of this report is The Leadenhall Building, 122 Leadenhall Street, London EC3V 4AB.
The Company has prepared its financial statements in accordance with Financial Reporting Standard ‘FRS 102’, the
Financial Reporting Standard applicable in the United Kingdom and republic of Ireland and provisions of Section 396 of the
Companies Act 2006.
No individual income statement is presented for the Company, as permitted by Section 408 of the Act. The comprehensive
income dealt with in the accounts of the parent company was US$59.2m (2015: US$31.1m).
The Company financial statements are presented in US dollars and all values are rounded to the nearest US$0.1m except where
otherwise indicated.
1.2 Accounting policies
(a) Investments
Investments in subsidiary undertakings are stated at cost less provisions for any impairment.
(b) Income from fixed asset investments
Dividend income is recognised when the shareholders’ right to receive the payment is established.
(c) Long term debt
Long term debt is recognised initially at transaction price which is the fair value. It is subsequently measured at amortised
cost using the effective interest rate method, in accordance with section 11 of FRS 102 (Basic Financial Instruments).
Interest payable is recognised using the effective interest rate method.
(d) Loans to group undertakings
Loans to group undertakings are recognised initially at transaction price which is the fair value, (including transaction costs
incurred except in the initial measurement of financial liabilities that are measured at fair value through profit or loss) less
amortised cost using effective interest rate method, in accordance with section 11 of FRS 102 (Basic Financial Instruments).
Interest receivable is recognised using the effective interest rate method.
(e) Expenses
All expenses are accounted for on an accruals basis.
(f) Foreign currencies
Transactions in foreign currencies other than US dollars are converted at the rate of exchange ruling at the date the transaction
is processed. Unless otherwise stated, transactions are converted at the average rates of the exchange for the period. Assets and
liabilities in currencies other than Sterling are converted at the rate of exchange ruling at 31 December of each year. Exchange
differences arising on conversion are dealt with in the income statement.
NOTES TO THE FINANCIAL STATEMENTS Brit Limited Annual Report 2016 139
(g) Deferred taxation
Deferred tax is recognised in respect of all timing differences which are differences between taxable profits and total
comprehensive income that arise from the inclusion of income and expenses in tax assessments in periods different from
those in which they are recognised in the financial statements, except that:
• Provision is made for deferred tax that would arise on remittance of the retained earnings of overseas subsidiaries,
associates and joint ventures only to the extent that, at the Statement of Financial Position date, dividends have
been accrued as receivable;
• Where there are differences between amounts that can be deducted for tax for assets (other than goodwill) and liabilities
compared with the amounts that are recognised for those assets and liabilities in a business combination a deferred tax
liability/(asset) shall be recognised. The amount attributed to goodwill is adjusted by the amount of the deferred tax
recognised; and
• Unrelieved tax losses and other deferred tax assets are recognised only to the extent that the directors consider that
it is probable that they will be recovered against the reversal of deferred tax liabilities or other future taxable profits.
Deferred tax is measured on an undiscounted basis at the tax rates that are expected to apply in the periods in which timing
differences reverse, based on tax rates and laws enacted or substantively enacted at the statement of financial position date.
2 AUDITOR’S REMUNERATION
This Note sets out the fees paid in respect of the annual audit performed on the Company.
Audit fees borne by the Company amounted to US$15,000 (2015: US$15,000).
3 SHARES IN GROUP UNDERTAKINGS
This Note explains the direct shareholdings of the Company in other Group entities.
Investment in Brit Insurance Holdings Limited
There was no movement in shares in group undertakings in the period.
31 December
2016
US$m
31 December
2015
US$m
1,050.5
1,050.5
The subsidiaries of the Company at 31 December 2016, and their principal activities, are disclosed in the Brit Limited
Consolidated Financial Statements.
4 LOANS TO GROUP UNDERTAKINGS
This note sets out moneys lent by the Company to other Group companies.
Loans to Group undertakings
31 December
2016
US$m
31 December
2015
US$m
127.4
151.9
On 8 September 2014, a long‑term loan to another Group Company was novated to Brit Limited at fair value. The agreement
expires on 9 December 2020 and carries interest at an annual interest rate of 7.05%.
FINANCIAL STATEMENTS
140 Brit Limited Annual Report 2016
5 DEBTORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
This note sets out moneys owed to the Company that are due before 31 December 2017.
Interest receivable on loans to Group undertakings
Amounts owed by Group undertakings
Prepayments
6 CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
This note sets out moneys owed by the Company that are due before 31 December 2017.
Amounts owed to Group undertakings
Accruals and deferred income
31 December
2016
US$m
31 December
2015
US$m
17.8
–
0.8
18.6
32.2
0.3
1.0
33.5
31 December
2016
US$m
31 December
2015
US$m
106.8
0.7
107.5
22.6
1.5
24.1
7 CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
This note sets out moneys owed by the Company that are due after 31 December 2017.
Maturity
Call
Effective
interest rate
%
Amortised
cost
US$m
Fair value
US$m
Amortised
cost
US$m
Fair value
US$m
31 December 2016
31 December 2015
Subordinated debt
2030
2020
6.29%
168.7
167.9
201.8
206.2
The fair value of the subordinated debt has been determined by reference to trading market values on recognised exchanges
and is categorised as Level one in the fair value hierarchy.
The subordinated debt was novated to the Company from another Group company on 8 September 2014 at fair value.
The subordinated debt is listed and callable in whole by the Company on 9 December 2020. Following this date the interest
rate resets to the higher of:
i) 3.4% above the gross redemption yield of the 4.75% Treasury Gilt due 2030 quoted on the reset date; or
ii) 3.4% above the gross redemption yield of the 8% Treasury Stock due 2021 quoted on the reset date.
The effective interest rate method of accounting has been applied over the term up to the call date.
NOTES TO THE FINANCIAL STATEMENTS
Brit Limited Annual Report 2016 141
8 CALLED UP SHARE CAPITAL
This Note sets out the number of shares we have in issue and their nominal value.
Ordinary shares:
Allotted, Issued and fully paid
As at 31 December 2015
Purchase and cancellation of own shares
As at 31 December 2016
31 December
2016
US$m
31 December
2015
US$m
31 December
2016
1p each
Number
31 December
2015
1p each
Number
6.4
6.6 387,608,230
401,057,706
US$m
Number
6.6
(0.2)
401,057,706
(13,449,476)
6.4
387,608,230
106,550,524 shares are class A shares and the remainder are class B shares. The class A and B shares rank pari passu except that
on a distribution of profits by the Company, the class A shareholders are entitled to a cumulative annual dividend which must be
settled ahead of any equivalent distribution to class B shareholders.
The Group’s ultimate parent, Fairfax, is permitted on an annual basis to purchase a set number of shares from OMERS, (the
minority shareholder of class A shares in Brit Limited). In August 2016, instead of a B class share dividend being made by Brit
Limited to Fairfax, Fairfax assigned the purchase of 13,449,476 A class shares to Brit Limited. A distribution of US$61.5m from
reserves for the purchase of 13,449,476 shares from OMERS for cancellation was made on 3 August 2016.
A reduction in share capital of £134,495 has been made, being the nominal value of 13.4m shares at 1p each and a capital
redemption reserve of the same amount has been created. The distribution of US$61.5m has been set against distributable
reserves (‘cost of share buy‑back’) in accordance with UK Company Law. As a result, Fairfax has increased its percentage
shareholding from 69.99% to 72.51%.
9 DIRECTORS’ EMOLUMENTS
This Note gives a breakdown of emoluments paid to directors both in total and in respect of the highest paid director.
Aggregate remuneration
Aggregate contributions to money purchase pension schemes
Total
The Directors’ remuneration disclosed above includes the following amounts
paid to the highest paid director:
Aggregate remuneration
Number of Directors with benefits accruing under money purchase pension schemes
Number of Directors in respect of whose qualifying services, shares were received
or receivable under long term incentive schemes
31 December
2016
US$m
31 December
2015
US$m
5.8
0.1
5.9
9.4
0.1
9.5
2.0
6.5
Number
Number
2
3
2
3
Shares were received or receivable by the highest paid director in respect of qualifying services under a long‑term incentive
scheme during 2015 and 2016.
FINANCIAL STATEMENTS
142 Brit Limited Annual Report 2016
10 GUARANTEES AND CONTINGENT LIABILITIES
This Note explains guarantees issued by the company. The company has no contingent liabilities.
The Company has access to a US$360.0m (2015: US$360.0m) revolving credit facility. Guarantees have been made by
Brit Limited and a subsidiary Company to the syndicated banks providing the facility.
11 DIVIDENDS
A final ordinary dividend of 12.5p per share and a special dividend of 12.5p per share amounting to US$154.1m was declared
by the Group in respect of 2014 and paid during 2015.
A US$26.2m dividend in respect of the year‑ended 31 December 2015 was paid to the class A shareholders on 29 April 2016
in accordance with the shareholders’ agreement at an amount equal to US$0.43 per share (2015: US$ nil).
As part of the share‑buy back transaction a US$3.4m dividend was paid to the class A shareholders on 3 August 2016,
representing the pro‑rata accrued dividend outstanding on the shares repurchased in respect of the 2016 accounting period,
and based on a dividend entitlement for the full year equal to US$0.43 per share.
A US$61.3m dividend was paid to the class B shareholders on 21 December 2016 in accordance with the shareholders’
agreement at an amount equal to US$0.43 per share (2015: nil).
A further dividend to class A shareholders for 2016 of US$0.43 per share amounting to US$45.8m was proposed and agreed
at the 15 February 2017 Brit Limited Board meeting.
12 SHARE–BASED PAYMENTS
The Company rewards its employees through various share‑based incentive schemes. This Note explains the different schemes
used to facilitate those share‑based payments.
During 2015, shares in the Company were used to settle a number of share‑based payment incentive schemes.
Further detail in respect of these schemes can be found in Note 31 of the notes accompanying the Brit Limited Group
consolidated Financial Statements.
13 DISCLOSURE EXEMPTIONS
This Note explains the Company’s approach to qualifying exemptions available in FRS 102.
The Company has taken advantage of the disclosure exemptions provided by paragraph 1.12 of FRS 102. Accordingly, these
financial statements do not include the following:
• Statement of cash flows;
• A reconciliation of shares outstanding at the beginning and end of the period;
• Specific information relating to financial instruments that is included within equivalent disclosures for the Group;
• Specific information relating to share‑based payments that is included within equivalent disclosures for the Group; and
• Disclosure of key management personnel compensation.
The Brit Limited consolidated Financial Statements and accompanying notes provide further detail in respect of these areas.
NOTES TO THE FINANCIAL STATEMENTS Brit Limited Annual Report 2016 143
14 ULTIMATE PARENT COMPANY
The ultimate parent company and controlling entity, and the largest group of which the Group is a member, is Fairfax Financial
Holdings Limited (Fairfax) which is registered in Canada and listed on the Toronto Stock Exchange. The consolidated financial
statements for Fairfax are publicly available and can be obtained from the Corporate Secretary, 95 Wellington Street West,
Suite 800, Toronto, Ontario, Canada, M5J 2N7 or from the website at www.fairfax.ca.
FINANCIAL STATEMENTS 144 Brit Limited Annual Report 2016
Return on net tangible assets before FX movements and corporate activity costs (RoNTA)
Return on net tangible assets before foreign exchange movements and corporate activity costs (RoNTA) shows the return being
generated by our operations compared to the adjusted net tangible assets deployed in our business.
Tax rate
PAT
Add back: Tax adjusted amortisation
Add back: Tax adjusted FX
Add back: Tax adjusted deal costs
PAT, adjusted for RoNTA calculation
Adjusted NTA at start of year
External distribution
NTA, adjusted for RoNTA calculation
RoNTA
Comment / financial statements reference
Consolidated income statement
Amortisation of intangibles, adjusted by the tax rate
FX effect for the year, adjusted by the tax rate
Corporate activity costs, adjusted by the tax rate
See ‘Total Value Created’ section below.
Weighted adjustment to reflect distributions
during the year.
2016
US$m
2015
US$m
1.4%
8.0%
157.6
5.0
(40.6)
–
15.6
7.7
55.5
22.0
122.0
100.8
1,074.6
1,209.6
(44.4)
(103.4)
1,030.2 1,106.2
11.8%
9.1%
Total value created
The total value created measures the increase in adjusted NTA (including distributions) in a year. It reflects the after tax result
recorded in the income statement and all other value movements.
Total equity attributable to owners of the parent
Less: Intangible assets
Consolidated statement of financial position
Consolidated statement of financial position
Net tangible assets
Add back deferred tax liability on intangible assets Note 18: Deferred tax
Comment / financial statements reference
Adjusted net tangible assets
Adjusted NTA at end of year
Less: Adjusted NTA at start of year
Movement in adjusted NTA
Add: Distributions (dividends and share purchases) Consolidated statement of changes in equity
Total value created
2016
US$m
2015
US$m
1,148.0
(93.9)
1,156.5
(95.1)
1,054.1
10.7
1,061.4
13.3
1,064.8
1,074.7
1,064.8
(1,074.7)
1,074.7
(1,209.6)
(9.9)
148.9
139.0
(134.9)
154.1
19.2
RECONCILIATION OF KEY PERFORMANCE INDICATORS TO THE FINANCIAL STATEMENTS
Brit Limited Annual Report 2016 145
Combined ratio
The combined ratio is our key underwriting metric and measures the profitability of our underwriting. It shows how much of
every US$1 of premium is spent in the total costs of sourcing and underwriting the business and settling claims. A combined
ratio under 100% indicates underwriting profitability.
Earned premium, net of reinsurance
Note 5: Segmental information
Comment / financial statements reference
Attritional losses
Major claims
Reserve releases
Claims incurred, net of reinsurance
Note 5: Segmental information
Acquisition costs – commissions
Acquisition costs – other and Other insurance
related expenses
Underwriting expenses
Underwriting profit
Attritional loss ratio
Major claims ratio
Reserve release ratio
Claims ratio
Commission ratio
Operating expense ratio
Note 5: Segmental information
Note 5: Segmental information
Attritional losses / Earned premium, net of reinsurance
Major claims / Earned premium, net of reinsurance
Reserve releases / Earned premium, net of reinsurance
Note 5: Segmental information
Acquisition costs – commissions
Acquisition costs – other and Other insurance
related expenses
Underwriting expense ratio
Note 5: Segmental information
Combined ratio
Claims ratio + Underwriting expense ratio;
Note 5: Segmental information
2016
US$m
2015
US$m
1,515.1
1,649.6
(841.2)
(68.4)
53.5
(910.6)
–
28.6
(856.1)
(882.0)
(411.6)
(429.2)
(192.8)
(201.4)
(604.4)
(630.6)
54.6
137.0
55.5%
4.5%
–3.5%
56.5%
55.2%
0.0%
–1.7%
53.5%
27.2%
26.0%
12.7%
39.9%
12.2%
38.2%
96.4%
91.7%
ADDITIONAL INFORMATION
146 Brit Limited Annual Report 2016
Investment return
We assess the performance of our investment portfolio by comparing the return generated by our invested assets, net of
external investment related expenses, against the value of those invested assets.
Share of net profit of associates
Return on financial investments and cash and
cash equivalents
Comment / financial statements reference
Note 13: Investment in associated undertakings
Note 6: Investment return
Return on investment related derivatives
Note 7: Return on derivative contracts
Return on invested assets
Investment in associated undertakings
Financial investments
Derivative contracts (investment related)
Cash and cash equivalents
Note 13: Investment in associated undertakings
Note 21: Financial investments
Note 22: Derivative contracts
Note 24: Cash and cash equivalents
2016
US$m
3.6
132.2
(32.9)
102.9
2015
US$m
–
10.3
(5.3)
5.0
36.6
2,903.9
5.5
1,025.5
28.6
3,330.8
33.5
581.0
3,971.5
3,973.9
3,973.9
3,971.5
3,972.7
4,028.4
3,973.9
4,001.2
Invested assets
Opening invested assets
Closing invested assets
Average invested assets
Return (%)
Return on invested assets / Average invested assets
2.6%
0.1%
Capital ratio
The capital ratio measures the strength of our balance sheet by comparing our available capital resources to the capital we need
to hold to meet our management entity capital requirements. It is calculated as follows:
Total equity attributable to owners of the parent
Consolidated statement of financial position
1,148.0
1,156.5
Comment / financial statements reference
2016
US$m
2015
US$m
Less: Intangible assets
Consolidated statement of financial position
(93.9)
(95.1)
Net tangible assets
Add: Deferred tax liability on intangible assets
Note 18: Deferred tax
Adjusted net tangible assets
Subordinated debt
Letters of credit / contingent funding
Total available capital resources
Management entity capital requirements
Excess of resources over management entity
capital requirements
Capital ratio
Consolidated statement of financial position
Under our capital policy we have identified
a maximum of US$235.0m of our revolving credit
facility to form part of our capital resources.
The capital required by an entity for business
strategy and regulatory requirements.
1,054.1
10.7
1,064.8
157.5
1,061.4
13.2
1,074.6
185.6
235.0
235.0
1,457.3
1,495.2
(1,160.2)
(1,165.7)
297.1
329.5
125.6%
128.2%
RECONCILIATION OF KEY PERFORMANCE INDICATORS TO THE FINANCIAL STATEMENTS
Brit Limited Annual Report 2016 147
Ratio of front office employees to back office employees
This measure monitors the efficiency of our business model by comparing the number of front office client‑facing revenue
generators and service providers to the number of back office employees. An increase in the ratio would suggest that the back
office is becoming more efficient in supporting the client‑facing activities of the front office.
Total front office staff
Total back office staff
Total employees
Ratio of front office employees to back
Comment / financial statements reference
Note 10: Staff costs
Note 10: Staff costs
Note 10: Staff costs
2016
Number
2015
Number
347
192
539
323
181
504
office employees
Total front office staff / Total back office staff
180.7%
178.5%
ADDITIONAL INFORMATION 148 Brit Limited Annual Report 2016
COMPANY INFORMATION
Directors
Mr Mark Cloutier – Group Executive Chairman
Mr Ipe Jacob – Senior independent non‑executive Director (resigned 31 December 2016)
Mr Matthew Wilson – Group Chief Executive Officer
Mr Mark Allan – Chief Financial Officer
Dr Richard Ward – Senior independent non‑executive Director
Mr Andrew Barnard – Non‑executive Director
Mr Bijan Khosrowshahi – Non‑executive Director (resigned 31 December 2016)
Mr Jeremy Ehrlich – Non‑executive Director
Mr Gordon Campbell – Non‑executive Director (appointed 1 January 2017)
Company Secretary
Mr Tim Harmer
Registered Office
The Leadenhall Building
122 Leadenhall Street
London EC3V 4AB
UK
Telephone: +44 (0) 20 3857 0000
Website
www.britinsurance.com
The Company website provides
information about Brit Limited
including information on the business,
annual reports, half yearly reports
and announcements to the London
Stock Exchange.
Registered Number
8821629
Auditor
PricewaterhouseCoopers LLP
7 More London Riverside
London
SE1 2RT
A
Acquisition costs: Costs incurred in the course of writing
business and issuing policies including commissions paid
to intermediaries and related internal expenses such as
underwriter related costs.
Adjusted net tangible assets or adjusted NTA: Total equity,
less intangible assets net of the deferred tax liability on those
intangible assets.
Adjusted net tangible assets per share: Calculated as
closing adjusted net tangible assets divided by the number of
shares in issue at the balance sheet date less own shares.
Aggregate exposure: The expected maximum total of claims
that could be incurred by an insurer in respect of any event or
series of similar events. Also see ‘realistic disaster scenarios’.
Asset allocation: The allocation of our investments across
different kinds of asset classes, such as equities, bonds, and
cash, in order to achieve a balance between return and risk.
Attritional losses: Common losses, as opposed to major or
catastrophe losses, incurred from ordinary insurance and/or
reinsurance operations.
Attritional loss ratio: Attritional losses incurred expressed as
a percentage of net earned premiums (excluding the effect of
foreign exchange movements on non‑monetary items).
Available capital resources: Adjusted net tangible assets,
subordinated debt and Letters of credit / contingent funding.
B
BGSB: Brit Global Specialty Bermuda, the business of the
Group operating in Bermuda.
BGSS: Brit Global Specialty Singapore Pte. Ltd., the business
of the Group operating in Singapore.
BGSU: Brit Global Specialty USA, the business of the Group
operating in the United States, of which BISI is the managing
general agent.
BIG: Brit Insurance (Gibraltar) PCC Limited, the Group’s
captive reinsurer incorporated in Gibraltar.
Binder business: Business conducted by a coverholder acting
under a binding authority.
Binding authority: See ‘delegated underwriting authority’.
BISI: Brit Insurance Services USA, Inc., a company
incorporated in Illinois, USA.
Broker: An intermediary who negotiates contracts
of insurance or reinsurance, receiving a commission for
placement and other services rendered.
Brit Limited Annual Report 2016 149
C
Capital ratio: Available capital resources expressed as
a percentage of management entity capital requirement.
Captive: An entity that provides risk‑mitigation services
for other entities within the same Group only.
Catastrophe or Cat: Perils including earthquakes, hurricanes,
hailstorms, severe winter weather, floods, fires, tornadoes,
explosions and other natural or man‑made disasters.
Catastrophe losses may also arise from acts of war, acts of
terrorism and political instability.
Claims: Moneys demanded by an insured for indemnity under
an insurance contract.
Claims development triangles: Tabulations of claims
development data, set out with underwriting years along one
axis and calendar years of development along the other.
Claims incurred: Claims arising from events that have
occurred, regardless of whether or not they have been
reported to the insurer.
Claims ratio: Calculated as total claims incurred expressed as
a percentage of net earned premiums (excluding the effect
of foreign exchange movements on non‑monetary items).
The claims ratio is the aggregate of the reserve release ratio,
major claims ratio and the attritional loss ratio.
Combined ratio or CoR: Calculated as total claims incurred
and total expenses incurred by the underwriting divisions,
expressed as a percentage of net earned premiums
(excluding the effect of foreign exchange movements on
non‑monetary items). The combined ratio is the aggregate of
the claims ratio and the expense ratio.
Commission ratio: Commission expense incurred by the
underwriting division expressed as a percentage of net
earned premiums (excluding the effect of foreign exchange
movements on non‑monetary items).
Constant FX rates: An increase or decrease in figures
between two years after eliminating the effect of FX
rate movements.
Corporate member: A company providing the capital to
support the underwriting activity of a syndicate at Lloyd’s.
Brit’s corporate member is Brit UW Limited.
Coverholder: An entity authorised by an insurer to enter into
a contract of insurance on its behalf.
D
Deferred acquisition costs or DAC: Costs incurred for
the acquisition or renewal of insurance policies which are
capitalised and amortised over the term of those policies.
Delegated underwriting authority: An authority granted by
an underwriter to an agent (known as a coverholder) whereby
that agent is entitled to accept, within certain limits, insurance
business on behalf of the underwriter. The coverholder has
full power to commit the underwriter within the terms of
the authority.
GLOSSARYGLOSSARY 150 Brit Limited Annual Report 2016
E
Earned premium: That proportion of a premium which
relates to the portion of a risk which has expired during a
given period.
Excess and Surplus or E&S: A generic US regulatory
classification referring to insurance coverage not ordinarily
written by insurers fully admitted in various states. The E&S
lines business is largely unregulated as to rate and form but
insurers must be authorised to write such business in a state
by the local regulator.
Excess of loss or XL: A type of reinsurance that covers
specified losses incurred by the reinsured party in excess of
a stated amount (the excess) up to a higher amount of limit,
for example US$5m excess of US$1m. Such coverage can
operate on a per loss basis or an aggregate basis.
Executive Committee or EC: A committee at Brit consisting
of the senior management and the CEO.
Expense ratio: Calculated as total expenses incurred by
the underwriting divisions expressed as a percentage of net
earned premiums (excluding the effect of foreign exchange
movements on non‑monetary items). The expense ratio is
the aggregate of the commission ratio and the operating
expense ratio.
F
FCA: The UK Financial Conduct Authority, established
pursuant to the Financial Services Act 2012 and responsible
for, among other things, the conduct regulation of all firms
authorised and regulated under FSMA and the prudential
regulation of firms which are not regulated by the PRA.
First Dollar: An insurance policy written with low excess and
deductible, and written in the admitted market.
FSC: The Financial Services Commission of Gibraltar, a
statutory corporate body established by the 1989 Financial
Services Commission Ordinance (since replaced by the
Financial Services Commission Act 2007), responsible for
regulating the financial services industry in Gibraltar.
Funds at Lloyd’s or FAL: Funds held in trust at Lloyd’s
to support a Lloyd’s underwriter’s underwriting activities.
G
Gearing ratio: Calculated as total borrowings (subordinated
debt, revolving credit facility cash drawdowns and
uncollateralised drawn letters of credit) divided by adjusted
net tangible assets and subordinated debt.
Gross written premium or gross premiums written
or GWP: Amounts payable by the insured, including any
brokerage or commission deducted by intermediaries but
excluding any taxes or duties levied on the premium.
H
Hardening or hard market: An insurance market where
prevalent prices are high, with more restrictive terms and
conditions offered by insurers.
HMRC: Her Majesty’s Revenue and Customs.
I
Incurred but not reported or IBNR: Claims incurred but
not reported, including claims which are incurred but not
enough reported (i.e. where the amount of the notification
is insufficient).
International Accounting Standards or IAS:
See ‘International Financial Reporting Standards’.
International Financial Reporting Standards or IFRS:
Accounting and reporting Standards established by the
International Accounting Standards Board, as adopted by
the European Commission for use in the European Union. UK
listed entities have reported on an IFRS basis since 2005.
Invested assets: Financial investments, investment in
associated undertakings, cash and cash equivalents and
investment related derivatives.
Investment related derivatives: Includes options and
interest rate swaps. Excludes currency forwards.
Investment return: Income, net realised and unrealised gains
and losses on financial investments, cash and cash equivalents
and investment related derivatives (net of investment
management fees).
Investment return percentage: Investment return expressed
as a percentage of average invested assets, calculated on a
month by month basis.
L
Lead underwriter or lead: A lead underwriter (usually a
specialist in the field of the insurance concerned) is the first
underwriter to take a portion of a risk, quote an appropriate
rate of premium and set terms and conditions.
Letter of credit or LoC: A written undertaking by a financial
institution to provide funding if required.
LIBOR: The daily London Interbank Offered Rate set by the
British Banking Association.
Line size: The proportion of an insurance or reinsurance risk
that is accepted by an underwriter or which an underwriter is
willing to accept.
Lloyd’s China Platform: The branch of Lloyd’s in Shanghai
in the People’s Republic of China operated through Lloyd’s
Insurance Company (China) Limited, on which certain Lloyd’s
syndicates have representation.
Lloyd’s of London: The Society of Lloyd’s and Corporation of
Lloyd’s created and governed by the Lloyd’s Acts 1871‑1982,
including the Council of Lloyd’s (and its delegates and other
persons through whom the Council may act), as the context
may require.
GLOSSARY London Market: The London insurance market, which
includes the Lloyd’s market.
Long‑tail: The term used to describe business where the
difference between the timing of the average premium
receipt and the timing of the average claim payment is over
three years.
M
Major claims: Claims in excess of US$10.0m (net of
reinsurance and allowing for reinstatement), incurred from
natural or man‑made catastrophes, or from large single risk
loss events.
Major claims ratio: Major claims incurred expressed as a
percentage of net earned premiums (excluding the effect
of foreign exchange movements on non‑monetary items).
Management entity capital requirement: The
capital required by an entity for business strategy and
regulatory requirements.
N
Net earned premium or NEP: The net written premium
adjusted by the change in net unearned premium (i.e. the
premium for which insurance exposure has yet to be incurred)
for a year.
Net tangible assets or NTA: The total assets of a company,
minus any intangible assets, less all liabilities.
Net written premiums or NWP: Gross premiums written
during a specified period less outwards reinsurance
premiums ceded.
O
Operating expense ratio: Calculated as operating expenses
incurred by the underwriting divisions expressed as a
percentage of net earned premiums (excluding the effect of
foreign exchange movements on non‑monetary items).
Outstanding claims: Claims which have been notified at the
balance sheet date but not settled.
Own risk and solvency assessment or ORSA: The name
given to the entirety of the processes and procedures
employed by an insurer to identify, assess, monitor, manage
and report the short and long term risks it faces or may face
and to determine the capital necessary to ensure that the
insurer’s overall solvency needs are met at all times.
Brit Limited Annual Report 2016 151
P
PRA: The UK Prudential Regulation Authority established
pursuant to the Financial Services Act 2012 and responsible
for the prudential regulation and supervision of banks,
building societies, credit unions, insurers and major
investment firms.
Protected cell company or PCC: A company that has been
separated into legally distinct portions or cells. The revenue
streams, assets and liabilities of each cell are kept separate
from all other cells. Each cell has its own separate portion
of the PCC’s overall share capital, allowing shareholders to
maintain sole ownership of an entire cell.
Q
Quota share or QS: A type of reinsurance which provides
that the reassured shall cede to the reinsurer a specified
percentage of all the premiums that it receives in respect of a
given section or of all of its underwriting account for a given
period in return for which the reinsurer is obliged to pay the
same percentage of any claims and specified expenses arising
on the reinsured business.
R
Ratio of front office employees to back office employees:
Calculated as the average number of front office staff divided
by the average number of back office staff employed during
the year. Front office employees are defined as underwriters,
other underwriting staff, claims staff and direct support staff.
The balance of employees are classified as back office.
Realistic Disaster Scenarios or RDS: Specific scenarios which
the Group uses to test its ability to settle claims arising from
certain types of disaster.
Reinsurance: The transfer of some or all of an insurance risk
to another insurer. The company transferring the risk is called
the ‘ceding company’ and the company assuming the risk is
called the ‘assuming company’ or the ‘reinsurer’.
Representative office: An office established by Brit
to conduct marketing and other non‑transactional
operations overseas.
Reserves: Outstanding claims and claims incurred but
not reported.
Reserve releases: The amount of the reserves at the end
of the previous period determined as being excess to
requirements at the end of the current period.
Reserve release ratio: The amount of reserve releases
expressed as a percentage of net earned premiums
(excluding the effect of foreign exchange movements
on non‑monetary items).
Retention rate: The ratio, in percent, of the value of
premiums relating to risks written in one year renewed in the
following year. The data used is risk adjusted (i.e. it allows for
changes to terms and conditions).
GLOSSARY
152 Brit Limited Annual Report 2016
Return on equity or RoE: See ‘Return on net tangible assets
or RoNTA’.
Return on net tangible assets before foreign exchange
movements and corporate activity costs or RoNTA: Profit
after tax before the effects of foreign exchange movements
on monetary and non‑monetary items, before the return
on currency related derivative contracts, before charges in
respect of intangible assets and before costs incurred in
respect of corporate activity, expressed as a percentage of
adjusted opening net tangible assets. The adjusted opening
net tangible assets are also modified on a weighted average
basis for capital distributions, share buybacks or share issues
during the period.
Risk adjusted rate change: Change in premium rates
during the year expressed as a percentage of opening
premium rates. The data reflects internal estimates by
Brit’s underwriters, based on available year‑on year
underlying renewal data after allowing for changes to terms
and conditions.
Risk management framework or RMF: The Group’s own
internal framework for risk management.
Running yield: The income return, expressed either as
a percentage or a monetary amount, on invested assets.
S
Service companies: Subsidiary companies set up to operate
a binding authority on behalf of the Syndicate to write
business from non‑Lloyd’s brokers or direct from policymakers.
Short‑tail: The term used to describe business where the
difference between the timing of the average premium
receipt and the timing of the average claim payment is under
three years.
Softening or soft market: An insurance market where
prevalent prices are low, and terms and conditions offered by
insurers are less restrictive.
Solvency capital requirement or SCR: The higher of the
two capital levels required by Solvency II. The SCR is the
prudent amount of assets to be held in excess of liabilities
and functions as an early warning mechanism if it is breached.
The SCR is calculated using either the standard formula or an
approved internal model.
Solvency matched: The matching of the currencies of
the Group’s liabilities and management entity capital
requirements with the currencies of the assets held by
the Group.
Solvency II: A combination of several EU Directives that
codify and harmonise EU insurance regulation, primarily
concerning the amount of capital that EU insurance
companies must hold to reduce the risk of insolvency.
Principal components are Directive 2009/138/EC on the
taking‑up and pursuit of the business of insurance and
reinsurance and Directive 2012/23/EU on the financial
position of insurance undertakings. Solvency II will come into
force in all EU member states on 1 January 2016.
Strategic asset allocation or SAA: The Group’s strategic
asset allocation defines the overall Group investment strategy
and reflects entity‑level considerations and governance
matters. See ‘asset allocation’.
Syndicate: A group of underwriting members of Lloyd’s or
a single corporate member managed as a unit to underwrite
insurance business at Lloyd’s to which a particular syndicate
number is assigned by or with the authority of Lloyd’s of
London. Brit operates through
Lloyd’s Syndicate 2987.
T
Tail: See ‘short‑tail’ and ‘long‑tail’.
Technical price: The price for the risk which is expected
to produce the long‑term required return on capital for
the Group.
The Company: Brit Limited.
The Group: Brit Limited and its subsidiaries.
The Syndicate: Brit Syndicate 2987.
Total available resources: Sum of the closing adjusted net
tangible assets, subordinated debt and letters of credit/
contingent funding.
Total invested assets: See ‘invested assets’.
Total operating expenses: These represent all expenses
incurred by the Group, excluding commission costs.
Total value created: Calculated as closing adjusted net
tangible assets plus dividends paid during the year, less
opening adjusted net tangible assets.
Treaty: A reinsurance contract pursuant to which the
reinsurer is obliged to accept, within agreed limits, all risks
underwritten by the reinsured within specified classes of
business in a given time period.
GLOSSARY Brit Limited Annual Report 2016 153
U
Ultimate claims: The total forecast claims expected to arise
from a policy or class of business. Ultimate claims include
those losses paid, those notified and IBNR.
Underlying operating expenses: Calculated as Total
operating expenses less project costs and other timing
differences. Underlying operating expenses include
bonus costs.
Underwriting capacity: The maximum premium income
which a Lloyd’s syndicate is permitted to underwrite.
A capacity figure is assigned to each underwriting year and
the relevant premium income is defined as gross written
premiums less commissions payable.
Underwriting profit: Operating profit generated by our
underwriting segments less investment return.
Unearned premium reserve or UPR: The portion of premium
income written in the calendar year that is attributable to
periods after the balance sheet date. It is accounted for as
unearned premiums in the underwriting provisions.
Unrealised gains or Unrealised losses:
Gains or losses that are yet to be crystallised in the form
of a cash movement from disposals of invested assets.
GLOSSARY Designed and produced by Bruce Associates
Brit Limited
The Leadenhall Building, 122 Leadenhall Street, London, EC3V 4AB, UK
www.britinsurance.com
SEEING THE DIFFERENCE MAKES THE DIFFERENCE