Brit Limited Annual Report 2017
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SEEING THE DIFFERENCE MAKES THE DIFFERENCE
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Brit Limited Annual Report 2017
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 2017
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STRATEGIC REPORT
OFFICER STATEMENTS
BRIT AT A GLANCE
OUR UNDERWRITING
UNDERWRITING REVIEW
FINANCIAL PERFORMANCE REVIEW
4
6
8
17
22
FINANCIAL POSITION AND CAPITAL STRENGTH 37
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
40
44
48
50
52
56
66
67
68
CONSOLIDATED STATEMENT OF CASH FLOWS 69
CONSOLIDATED STATEMENT
OF CHANGES IN EQUITY
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
70
72
PARENT COMPANY FINANCIAL STATEMENTS
145
ADDITIONAL INFORMATION
RECONCILIATION OF KEY PERFORMANCE
INDICATORS TO THE FINANCIAL STATEMENTS 154
COMPANY INFORMATION
GLOSSARY
TITLE
158
159
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 2017
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.
8
OUR UNDERWRITING
We discuss our underwriting
philosophy and the Brit offering.
4
OFFICER STATEMENTS
Mark Cloutier, our Group
Executive Chairman, Matthew
Wilson, our Group CEO, and
Mark Allan, our CFO, comment
on the Group’s performance and
business development during
2017 and look ahead to 2018.
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 2018.
17
UNDERWRITING REVIEW
We discuss our 2017 underwriting
performance and business
development.
22
FINANCIAL PERFORMANCE
REVIEW
We set out our key performance
indicators (KPIs). We explain
how we use them to monitor
our business and outline their
performance from 2013 to 2017.
We then provide an analysis of
the performance of our business
during 2017.
37
FINANCIAL POSITION AND
CAPITAL STRENGTH
We review our financial position
at 31 December 2017 and our
balance sheet strength. This
section includes a discussion
of our investment portfolio.
40
PRINCIPAL RISKS AND
UNCERTAINTIES
We set out our risk management
framework and explain how we
will manage the principal risks
facing our business in 2018 to
ensure we deliver our strategic
priorities.
44
EMPLOYEE, SOCIAL,
COMMUNITY AND
ENVIRONMENTAL MATTERS
We provide information on
our people and on social and
community matters, to the extent
that it is necessary to understand
our business.
This Strategic Report was approved by the Board on
14 February 2018.
Matthew Wilson
Group Chief Executive Officer
Mark Allan
Chief Financial Officer
Brit Limited Annual Report 2017
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STRATEGIC REPORT 4
Brit Limited Annual Report 2017
OFFICER STATEMENTS
‘Against the backdrop of
the second most costly
natural catastrophe year on
record and challenging market
conditions, Brit has delivered a
profitable overall performance
in 2017. Our return on
adjusted net tangible assets
before FX, which we see
as a key indicator of our
performance, was a positive 1.1% and we created a total
value of US$24.7m. The impact of the major losses was offset
by a profits from our other underwriting and an excellent
performance from our investment portfolio.
We have continued to focus on our core fundamentals of
leadership, innovation and distribution and have maintained
our strategy of remaining well diversified while adopting
a defensive stance to protect our business and preserve
capital. This approach has served us well and, I believe, will
continue to do so.
We believe that our underlying performance continues to
show that we have the right operating model, underwriting
approach and corporate culture, to not only operate
successfully through the current difficult market conditions
but also to be ready to take full advantage of emerging
opportunities as trading conditions begin to improve.’
Mark Cloutier Group Executive Chairman
14 February 2018
‘2017 was dominated by
the scale and multiplicity
of natural catastrophes from
hurricanes, earthquakes
and wildfires, resulting
in significant human and
economic consequences in
the regions affected. Our
products have responded
to these events, supporting
numerous businesses and individuals to get back on their
feet in these difficult times. Our focus has been on providing
an outstanding claims service and we have been pro-active
in ensuring our customers’ needs have been at the forefront
of our actions. The net impact of these events on Brit was
US$250.0m, or 16.2pps of our 112.4% combined ratio. This
was in line with our expectations given the nature and scale
of the events and our market share.
Market conditions have, as expected, remained difficult
during 2017, with Brit experiencing an overall rate reduction
of 1.3%, albeit lower than the 3.3% reduction in 2016. Against
this backdrop, we have maintained our rigorous risk selection
in the classes experiencing pressure and continue to focus
growth efforts in classes experiencing more favourable rating
conditions. This strategy resulted in a respectable attritional
ratio of 56.4%.
Our premium written grew by 8.2% at constant exchange
rates over 2016, to US$2,057.0m. This was driven by positive
back year premium development, our initiatives to broaden
our distribution base and ongoing development of our core
business. We continue to add specialty underwriting talent
in targeted areas and in 2017 have strengthened our US
program capability, launched a new US cyber and technology
team, and expanded our US Yacht and US Professional Lines
offerings.
During 2017, it was particularly pleasing to see our US
operation, BGSU, reach the milestone of writing over US$1bn
of premium since its formation in 2009. BGSU has reached
this milestone by delivering strong, profitable organic growth
with a focus on niche areas where it has significant expertise
and experience.
The successful launch in 2017 of Brit Syndicate 2988,
together with its increased capacity for 2018, reinforces our
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 Lloyd’s ‘underwriting leader of choice’, building on
our existing strength across underwriting, claims and capital
management and track record of delivering attractive returns
for capital providers.
Brit Limited Annual Report 2017
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The impact of the major losses on market-wide results
highlights the thin margins currently available in the
specialty market and we remain focused on defending our
core business and maintaining a disciplined approach to
underwriting.
We increased the level of reinsurance purchased in 2017,
with spend increasing from 22.6% to 25.6% of premiums
written. Our relationship with the Bermuda domiciled
special purpose reinsurer Versutus Limited has continued to
grow, with the amount of capital deployed to support Brit
increasing to US$187.0m for 2018. We have also expanded
the use of quota shares to manage our net exposure and
have purchased a two year catastrophe protection, which
largely explains the increase in ceded premium in the period.
The events of 2017 have illustrated the benefits of these
protections.
Our balance sheet remains strong, with adjusted net tangible
assets of US$1,043.7m, a small decrease of US$21.1m in the
year, after a dividend payment of US$45.8m. This means that
we hold a surplus of US$395.1m or 36.8% above the Group’s
management capital requirement.
Syndicate 2988, Versutus and Sussex are key to Brit’s strategy
of building long term relationships with the capital markets,
and through these platforms we now have access to over
US$400m of capacity. The support they provide enables us
to strengthen our reinsurance capability and manage our
catastrophe risk exposures whilst offering capital market
investors attractive, non-correlating returns.
While the outlook remains challenging, there are some
positive signs. We believe we are well positioned to navigate
the current climate and take advantage of opportunities as
they arise.’
Mark Allan Group Financial Officer
14 February 2018
In December we launched a new Bermuda-domiciled
collateralised reinsurance platform, Sussex Capital, with
initial funding of US$102.5m. From 2018, Sussex Capital will
write direct collateralised reinsurance while also providing
collateralised reinsurance to Brit’s Syndicate 2987. Its launch
strengthens Brit’s reinsurance capability, provides access to
a diversified source of capital and further enhances our client
and broker proposition.
While the outlook for 2018 is more positive with some
encouraging signs of rate improvements in certain classes,
we remain in a fiercely competitive market environment.
Notwithstanding, we believe that with highly disciplined
underwriting and our strategic focus on market leadership,
innovation in product and process, and the broadening of
local product distribution, we can look to the future with
confidence.’
Matthew Wilson Group Chief Executive Officer
14 February 2018
‘During 2017, Brit
delivered a profit after
tax of US$21.5m, against
a backdrop of significant
catastrophe activity, strong
competition and continued
pricing pressures. Total value
created during the period
was US$24.7m.
Claims arising from the major loss activity totalled US$250.0m,
increasing the combined ratio by 16.2pps to 112.4%.
Our attritional and expense ratios of 56.4% and 40.4%
respectively were relatively stable despite the challenging
market conditions, while reserve releases of US$9.6m after
incorporating the effects of the Ogden rate change continue
to demonstrate our conservative reserving approach.
Our net investment return was an outstanding US$204.2m,
representing a return of 4.9%, driven by gains on our equity
and fund investments. Foreign exchange gains, net of returns
on FX related derivatives, totalled US$12.6m.
6
Brit Limited Annual Report 2017
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 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. 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
Since June 2015, Brit has been a member of the Fairfax
Financial Holdings Limited group (Fairfax), a Canadian company
whose shares are listed on the Toronto Stock Exchange (www.
fairfax.ca). Brit is 72.5% owned by FFHL Group Limited (FFHL),
a Fairfax company, while Brit’s remaining shares are owned by
the Ontario Municipal Employees Retirement System (OMERS),
the pension plan manager for government employees in the
Canadian province of Ontario. FFHL will have the ability to
purchase the shares owned by OMERS over time.
We believe that Fairfax is an excellent partner for Brit,
enabling us to enhance our global product offering. It
provides us with expanded underwriting opportunities
and distribution channels and supports 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,
and Singapore, and are represented on the Lloyd’s China
Platform. This enables us 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 2017 was US$4,316.1m. The portfolio ended
the year defensively positioned with an increased allocation to
cash and cash equivalents (US$1,573.5m), a reduced holding
in fixed income securities (US$1,891.3m) and an equity
allocation of US$820.5m.
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 companies.
Our culture and values
We are passionate about our business, our people and our
customers and we have focused on cultivating a franchise that
is built on delivering exceptional service. Our culture is centred
on achievement and we have established a framework that
identifies and rewards strong performance. 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.
Brit Limited Annual Report 2017
7
Our track record
Since 2009, 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.
Outlook
As expected, 2017 saw further softening of rates, albeit at
a reduced pace, and a continued challenging underwriting
environment, combined with exceptionally low interest rates,
geopolitical uncertainty, global growth concerns and market
volatility.
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 2017, the market experienced a significant level of major
loss activity. This activity contributed 16.2pps to Brit’s 2017
combined ratio of 112.4%, bringing our five year average
combined ratio to 95.1%. However, a 56.4% attritional ratio,
reflecting a solid underlying underwriting performance given
the market backdrop, and an excellent investment return of
4.9%, enabled us to achieve a profit after tax of US$21.5m
and a return on adjusted net tangible assets before foreign
exchange movements (RoNTA) of 1.1%.
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 and
partly-aligned Lloyd’s Syndicate 2988, which benefit 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 2017, we had capital resources equal to
136.8% 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.
There are however some encouraging signs. We have
seen a number of our competitors exit underperforming
classes where they had been showing a lack of discipline.
Furthermore, following the major losses, rates on risks
renewed have shown increases across most affected classes,
with significant rate rises on impacted risks. However, in
certain areas rate increases have been limited by surplus
capacity remaining in the market and we have seen
continued instances of undisciplined behaviour.
The outlook for investment markets, given the stronger
economic growth numbers generated in most economies,
is also more promising than in recent times, especially as
cash rates start to rise for yield starved investors. However,
rich valuations in both equity and credit markets require
caution as the economic outlook evolves through the next
stage of the business cycle.
While there are some encouraging signs, the outlook
remains challenging. However, we maintain focus on our
core fundamentals of underwriting discipline, risk selection
and capital management and continue to make good
progress with the selective expansion of our global
distribution capability, capitalising on our initiatives of recent
years. We have clear thoughts on our expectations on pricing
and appetite post event and remain prepared to walk away
from renewals where terms do not meet our appetite and
rating criteria.
Year
2017
2016
2015
2014
2013
2012
2011
2010
2009
Note 1: Before FX and corporate activity costs
RoNTA1 Combined ratio Attritional ratio
%
%
%
1.1
11.8
9.1
20.7
24.2
18.7
8.5
14.4
17.4
112.4
96.4
91.7
89.5
85.4
93.2
98.0
97.1
94.0
56.4
55.5
55.2
51.0
51.3
51.8
55.4
58.1
64.2
Investment
return
(net of fees)
%
4.9
2.6
0.1
2.9
2.1
2.9
2.4
3.2
4.2
STRATEGIC REPORT
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Brit Limited Annual Report 2017
OUR UNDERWRITING
AT BRIT, LEADERSHIP, INNOVATION AND
ENHANCING OUR PRODUCT DISTRIBUTION
ARE AT THE HEART OF OUR STRATEGY;
UNDERPINNED BY OUR STRONG CULTURE
OF UNDERWRITING AND CLAIMS EXPERTISE.
We also have a longstanding ethos of social responsibility
and we have a strong culture of ‘doing the right thing’; from
volunteering in our local communities to supporting good
causes further afield. The projects we choose align with our
strategic priorities and each year, ten charities are chosen by
our employees for significant support.
Our parent company – Fairfax Financial Holdings Limited –
provides us with the best of both worlds: a strong and stable
base for long-term growth, combined with the freedom to
pursue our own identity, philosophy and ambitions.
Market leading expertise
We have a long and successful track record of leading an
extensive range of insurance and reinsurance programmes,
based on rigorous risk selection and a disciplined approach
to underwriting. We hire the best people and develop
their skills. Combining technical expertise with industry
knowledge, we listen, we share and we collaborate – to
create best-in-class insurance solutions for our clients.
We are an influential and respected presence at Lloyd’s of
London. With one of the largest and most diverse portfolios,
we underwrite exclusively through our Syndicates 2987 and
2988. We are also helping lead Lloyd’s market modernisation
through the Target Operating Model project.
Writing a broad mix of business, and with an initial stamp
capacity of £55m, Syndicate 2988 provides access to an
alternative source of capital. It reflects our desire to increase
our flexibility, improve our relevance to clients and brokers
and reinforce the long-term relationships we have in the
market.
Enduring relationships based on trust
Running through our company is a commitment to provide
a truly exceptional service to our clients, from initial enquiry
through to claim payment. In addition to hiring the very best
people for the job, this means getting the simple things right:
keeping our word, always being accountable and treating
clients how we would wish to be treated.
We are a motivated Group – and we love what we do.
Mindful of our role and responsibilities as a good corporate
citizen, we also direct our energies beyond the everyday
business environment and strive to make a difference in
our wider society. From our sponsorship of Team BRIT, who
aspire to be the first all-disabled motor racing team in the
Le Mans 24 hour endurance race, to our support for the
Kibera Girls Education Fund in Kenya, we are enhancing lives
around the world.
Our vision is to be the leading, most trusted global specialty
insurer – and everything we do is geared toward earning
that trust. The way we approach insurance challenges sets us
apart. We are genuinely proud of the Brit difference.
The Brit difference
Brit is a leading global specialty insurance and reinsurer,
focused on underwriting complex risk. We have a keen
appetite for leadership; leading – or acting as second
agreement party – on approximately 70% of the business
we write.
The breadth of classes we support, the depth of our
experience and commitment to our clients is second to none.
Our drive for innovation – across our products, processes and
people – is relentless. We have created a uniquely stimulating
environment where talented original thinkers flourish, and we
channel this creativity towards meeting real customer needs:
turning smart ideas into cutting-edge insurance solutions.
We are committed to creating lasting relationships with
brokers and clients. Hence we are happy to meet face-to-face
and make ourselves available when others do not.
Group GWP by line of business (%)
Brit Limited Annual Report 2017
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Direct
n Accident and Health 6.4%
n Marine 8.2%
n Property, political risks and
Violance 10.0%
n Property Facilities 13.8%
n Energy 4.1%
n BGSU US Speciality 11.4%
n Professional Lines 11.0%
n Specialist Liability 5.5%
n Speciality Lines 7.9%
n Aviation 3.1%
Reinsurance
n Casualty Treaty 7.4%
n Property Treaty 11.2%
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Group GWP (US$m)
Group combined ratio (%)
Group attritional ratio (%)
2,148.5
1,999.2
1,912.0
2,057.0
1,849.7
2500
2000
1500
1000
500
85.4
89.5
91.7
96.4
112.4
120
100
80
60
40
20
60
50
40
30
20
10
51.3
51.0
55.2
55.5
56.4
0
2013
2014
2015
2016
2017
0
2013
2014
2015
2016
2017
0
2013
2014
2015
2016
2017
Brit Global Specialty Direct
GWP (US$m)
2000
1,743.8
1,634.0
1,546.6
1,675.0
1,408.8
1500
1000
500
Brit Global Specialty Direct
Combined ratio (%)
Brit Global Specialty Direct
Attritional ratio (%)
92.0
96.0
94.4
101.1
117.5
120
100
80
60
40
20
60
50
40
30
20
10
53.1
51.3
55.5
55.5
56.5
0
2013
2014
2015
2016
2017
0
2013
2014
2015
2016
2017
0
2013
2014
2015
2016
2017
Brit Global Specialty Reinsurance
GWP (US$m)
Brit Global Specialty Reinsurance
Combined ratio (%)
Brit Global Specialty Reinsurance
Attritional ratio (%)
438.4
404.7
365.1
365.8
383.3
500
400
300
200
100
65.1
66.8
75.8
73.6
86.8
100
80
60
40
20
60
50
40
30
20
10
46.7
49.4
51.9
52.9
53.2
0
2013
2014
2015
2016
2017
0
2013
2014
2015
2016
2017
0
2013
2014
2015
2016
2017
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Brit Limited Annual Report 2017
OUR UNDERWRITING
Claims excellence
When a customer has a claim, their life or business has been
disrupted, or even put in peril. They expect their insurance
to deliver – and it is our responsibility to fulfil that commitment.
At Brit, we do not treat claims as a process; we see every
claim as an opportunity to help customers move forward with
their lives.
Our team is highly experienced at both senior and adjuster
levels, and has successfully managed claims arising from
some of the market’s most challenging events. We know
when to fast track the simple things – and how best to
address more complex issues. Our claims professionals
work closely with our underwriters. It is this collaborative
approach that gives us real insight into the risks that our
clients face, enabling us to tailor our responses appropriately.
Global reach, local presence
We are proud of our extensive distribution network. We
have strong links with local coverholders, which enable us to
efficiently provide long-term capacity for risks that would not
otherwise reach the Lloyd’s market.
Our cohesive global team takes a unified approach. This
means clients can work with us wherever they are in the
world and receive the same outstanding levels of attention
and service. With headquarters in London, our regional hubs
to manage our business across North and South America,
Bermuda and Asia, providing local knowledge but the same
outstanding service.
In such a competitive industry, we never forget that it is a
privilege to manage someone’s insurance business. Hence
we value and nurture our relationships with brokers and
coverholders; they are integral to our distribution capability.
As the third largest writer of coverholder business at Lloyd’s,
we work with over 700 organisations utilising 1,200 binding
authorities – with Brit leading over 500.
Our specialist delegated underwriting management team
has a reputation for its commitment to excellent customer
service, processing applications in less than a third of the
market average time.
Brit Limited Annual Report 2017
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See the difference
The breadth of classes we support, the depth of our experience and our commitment to our clients differentiates us.
REINSURANCE
CASUALTY
Casualty Treaty
The Casualty team underwrites a
predominantly non-proportional
reinsurance (including retrocession)
account, covering all the principal
casualty classes – as well as Personal Accident and
other accident classes. These include Property Terror,
Products Recall, Credit/Bond/Surety, Political Risks
and Contingency. We underwrite on a worldwide
basis and are a recognised quoting market. We
lead or co-lead more than 75% of our business by
premium.
Capacity: Casualty/Accident – Cat US$35.0m, Risk
US$25.0m, PA/WCA – Cat US$25.0m, Risk US$15.0m
PROPERTY
Property Treaty
Our team of specialist underwriters
provides superior service to brokers
and clients utilising a blend of up-to-
date technical expertise, embedded
modelling capability and real-world market
experience. Our client base represents a significant
and established cross-section of carriers writing
simple homeowner policies through to complex
commercial/industrial risks.
Capacity: Cat US$110.0m, Risk US$25.0m
INTERNATIONAL
USA (BGSU)
Public and Non Profit SIR Package (Excess and
Surplus (E&S))
Public Entity – First Dollar (Admitted)
Criminal Justice Service Operations (E&S)
General Liability (E&S)
Property (E&S)
Inland Marine (E&S)
Marine (US Admitted)
Cyber and Technology
Excess Casualty (E&S)
Miscellaneous Professional Liability (E&S)
Contractors Professional Liability (E&S)
US Property Facultative (Reinsurance)
Programs (Admitted and E&S)
Property Facultative
LATIN AMERICA AND CARIBBEAN
Casualty Treaty and Facultative Reinsurance
Property Facultative Reinsurance
Engineering Reinsurance
BERMUDA
Property Treaty
Casualty Treaty
CHINA
Construction Risks
SINGAPORE
Construction & Engineering
Terrorism & Political Violence
Political & Credit Risk
Marine (Cargo, Hull & War, Fine Art & Specie, Marine
Liability, Yachts)
12
Brit Limited Annual Report 2017
OUR UNDERWRITING
SHORT-TAIL
AVIATION
MARINE
Aerospace
Writing from a lead or support
position, we cover airframe, engine
and component manufacture,
refuelling operations, airport and
Cargo
An experienced and respected team
covering cargo on ships, aircraft or
in warehouses worldwide – as well as
project cargo for construction and
related servicing risks and air traffic control.
Capacity: US$125.0m
inland marine exposures.
Capacity: US$45.0m
Airlines
We are a key player in the international
subscription market, where we write on
a co-insurance basis. We are able to both
lead and support airline placements.
Capacity: Liability US$100.0m, Hull US$15.0m,
Spares US$20.0m
Marine Hull and War
An expert team providing market
leading Hull insurance across the
Lloyd’s platform. Brit insures a range of
commercial bluewater tonnage as well
as specialist operations on a worldwide basis.
Capacity: Hull US$85.0m, War US$50.0m
General Aviation
Providing cover for private and
corporate clients as well as commercial
operators of fixed wing aircraft and
helicopters.
Capacity: Liability US$75.0m, Hull US$6.0m;
Consortium Capacity: Liability US$150.0m, Hull US$10.0m
Marine Liability
Offering specialist cover including
protection and indemnity, charterers’
liability and pollution as well as
energy liability products for upstream
exploration and production.
Capacity: US$50.0m
Space
For over twenty years we have led the
Brit Space Consortium, offering bespoke
wordings for both launch and in-orbit
risks to carefully-selected clients.
Capacity: US$60.0m
ENERGY
Energy
A highly technical class with an
experienced and well respected team
offering coverage for all aspects of
Upstream and Midstream Energy
operations, including renewables.
Capacity: US$100.0m
Yachts
Committed to delivering a truly
outstanding service, our highly
experienced team writes coverage for
most types of craft including mega-
yachts and their associated liabilities.
Capacity: US$60.0m;
Consortium Capacity: US$250.0m
Fine Art and Specie
Broad flexible coverage on an all risks
of physical loss or damage basis for
clients ranging from local jewellers to
world famous museums and the vaults
of multinational banks.
Capacity: US$60.0m
Brit Limited Annual Report 2017
13
I
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A
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G
C
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P
O
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PROPERTY AND TERRORISM
ACCIDENT AND HEALTH (A&H)
Political Risk and Trade Credit
Covers non-payment/performance
of counterparties and confiscation,
expropriation, nationalisation,
deprivation, sequestration or forced
Bloodstock
With over 30 years’ experience, we
create tailor-made cover for all breeds
of horses and some livestock, with
broad cover including mortality risks,
abandonment of overseas assets.
Capacity: US$30.0m out to 10 years
infertility and veterinary fees.
Capacity: US$5.0m
Political Violence
Covers physical damage and business
interruption losses due to perils
including terrorism, strikes, riots, civil
commotion, war on land and nuclear,
Contingency
An established lead market offering
specialist products for diverse risks including
event cancellation, film production, non-
appearance and prize indemnity.
chemical, biological and/or radiological attacks.
Capacity: US$110.0m
Capacity: US$62.5m
Personal Accident and Medical
Expenses
A vibrant, performance-orientated
team, leading across a wide range
of in-demand products. Our focus
is innovative solutions and responsiveness in
partnerships.
Capacity: US$47.5m (US$11.0m any one person)
Worldwide Property
Our technical expertise in the areas of
catastrophe modelling, pricing, policy
wordings and claims has made us a market
of choice for both brokers and clients.
Capacity: US$35.0m
Brit Cyber Attack Plus
A single solution for cyber exposures,
with coverage encompassing physical
damage, business interruption, incident
response, mitigation and legal liability.
Capacity: US$200.0m
Capacity: US$200m
14
Brit Limited Annual Report 2017
OUR UNDERWRITING
SHORT-TAIL (CONTINUED)
PROPERTY FACILITIES
Commercial Property
Our established portfolio insures
homeowners and a range of commercial
property and package risks through
selected coverholders and Lloyd’s
brokers.
Capacity: US$10.0m Property, US$2.0m Liability
Commercial General Liability
A primary focus on premises exposures
and niche classes. Specific contracts
for artisan contractors, truckers’ general
liability and non-trucking liability also
considered.
Capacity: US$1.0m per occurrence, US$2.0m aggregate
High Value Homes
Solutions for owners or occupiers
of high value or unusual residential
property, including primary, secondary,
rental, vacant and under construction
or renovation.
Capacity: US$35.0m
Residential Property Facilities
Coverage for primary, secondary and
vacant dwellings plus condominium
units in US and Canada. Flood,
Earthquake and Landslide available
separately or as a package.
Capacity: US$10.0m
Property Financial
Coverage for financial institutions,
loan servicers and property investors,
including lender-placed hazard
and flood protection. We also offer
mortgage impairment coverage.
Capacity: US$10.0m
Transportation
We insure commercial automobile
physical damage and motor truck
cargo across the US and Canada.
We target smaller fleets and source
business through a network of Lloyd’s brokers and
coverholders.
Capacity: APD US$2.5m, MTC US$0.5m
UK Property
We have a proven track record
of writing and delivering flexible
commercial solutions to address the
precise nature of our customers’
requirements.
Capacity: £50.0m
Engineering
We manage the Brit Engineering
Consortium, incorporating worldwide
risks such as contractors’ plant and
equipment, machinery breakdown and
construction.
Capacity: US$40.0m Single Project CAR/EAR US$50.0m PML
Brit Limited Annual Report 2017
15
LONG-TAIL
PROFESSIONAL LINES
SPECIALTY LINES
North American Professional
Liability
An established leader in this sector,
we provide cover on both an open
market and binding authority basis.
Clients range from small start-ups to the largest
multinationals.
Capacity: US$10.0m
Healthcare Liability
With a wealth of industry expertise,
our team delivers innovative products
backed by exceptional service, focusing
on hospitals, allied health and long-
term care liability.
Capacity: US$15.0m, £10.0m, EUR10.0m
Global Cyber Privacy and
Technology
Providing cutting-edge products that
address the multitude of exposures
from first and third party perspectives
relating to network security, privacy and data
protection risk.
Capacity: US$25.0m, £18.0m, EUR24.0m
Directors’ and Officers’ (D&O)
As recognised experts in the D&O
market, we are renowned for our
underwriting precision, specialising in
tailoring products to precisely match
individual clients’ needs.
Capacity: US$35.0m, £23.0m, EUR34.0m
Financial Institutions
As acknowledged leaders in the
traditional insurance lines, we also
offer exclusive, innovative solutions for
organisations of all sizes across mature
and emerging economies.
Capacity: US$40.0m, £28.0m, EUR39.0m
Legal and Structured Solutions
A leader in BTE and ATE legal expenses
coverage for individuals, companies
and affinity groups worldwide, we
deliver bespoke structured insurance
solutions for financial, contingent and legal risks.
Capacity: £7.0m, US$10.0m, CAN$10.0m, EUR10.0m
SPECIALIST LIABILITY
Specialist Liability
An experienced team with a flexible
approach to UK and international
liability business including Employers,
Public and Products and Environmental
Liability across a range of territories. Our expertise
encompasses construction, transportation, oil and
gas, renewable energy, utilities, infrastructure,
manufacturing and local government – on a primary
and excess basis.
Capacity: UK EL £10.0m, UK & International PL &
Products Liability up to £33.0m or currency equivalent
(US$47.5m, CA$50.5m, AU$45.0m). Environmental
Liability £15.0m or currency equivalent (US$22.5m,
CAN$22.5m, AU$27.0m)
STRATEGIC REPORT 16
Brit Limited Annual Report 2017
UNDERWRITING
REVIEW
Brit Limited Annual Report 2017
17
2017 underwriting review
2017 has been dominated by the extent and scale of natural
catastrophes, with multiple hurricanes, earthquakes and
wildfires, resulting in terrible human impact and significant
economic consequences in the regions affected. The
economic loss estimate from these events is in the region of
US$353bn, while the insured loss is estimated at between
US$134bn and US$140bn, making it the second most costly
year on record after 2011.
Our products are designed to support businesses and
individuals in such difficult times and we have focussed
on providing an outstanding claims service, ensuring our
customers’ needs were met. This claims service has included:
• A focus on responding to our customers, managing the
expected volume pressures and containment of both
indemnity and expense ratios.
• Ongoing monitoring of local resources available to adjust
and report claims, given the severity and the number of
events hitting the US and Caribbean in sequence.
• 24/7 contact with claims third party administrators (TPAs) and
coverholders, managing claims on our behalf, to assess impact
and resourcing and to gauge activity and potential issues.
• Extended deployment of Brit claims adjusters from London
directly into the TPA and coverholder operations in
Texas and Florida, providing an ‘on the ground’ local Brit
presence, ensuring claims were handled in accordance with
Brit’s standards while favourably impacting accessibility and
resolution times.
• Ensuring claims payments were made swiftly by
establishing robustly funded claims loss funds, proactively
making interim or partial payments whenever possible to
support our insureds’ recovery efforts.
• Providing via contract endorsement, a number of select
TPAs and MGAs with additional claims handling authority,
including an increase in the authorised monetary thresholds
and a waiver of proofs of loss.
• Successful adoption of satellite technology to capture high
resolution images of Northern California wildfire affected
Brit insured homes, enabling us to remotely adjust, settle
and pay a number of high severity total losses within days.
The net claims incurred by Brit from these events totalled
US$250.0m (Hurricane Harvey: US$51.5m; Hurricane Irma:
US$110.1m; Hurricane Maria: US$46.4m; Mexico earthquakes:
US$6.8m; California wildfires: US$35.2m), or 16.2pps on the
combined ratio (2016: US$68.4m/4.5pps). This was in line with
our expectations given the nature and scale of the events and
our market share.
Our net exposure has been limited by our extensive
reinsurance programme, purchased specifically with such
extreme events in mind. We continually review our reinsurance
protections to ensure effectiveness and have ceded more
premiums to reinsurers in recent years as the market has
softened. We have increased our use of proportional
reinsurance to manage net appetite in a period of very
challenging market conditions, while maintaining gross scale
and relevance.
Market conditions have, as expected, remained challenging
during 2017. Premium rates continued to experience
reductions, albeit at a lower rate than in 2016, 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.
However, during the year the market did show some
encouraging signs. A number of our competitors exited
underperforming classes, where they had been showing
a lack of discipline. This gave us the opportunity to hold the
line in those areas and outperform our planned premium.
In particular, we were able to retain more premium than
planned in the Casualty Treaty and Commercial Worldwide
Property accounts. In Cyber, one of our key growth classes,
we have continued to support this growth market but
increasing competition has lead us to be cautious on
a number of new and existing accounts.
STRATEGIC REPORT 18
Brit Limited Annual Report 2017
UNDERWRITING REVIEW
Following the major losses in the second half of 2017, rates
on risks renewed increased across most affected classes, with
significant rate rises on impacted risks. Yachts, Cargo, Property
Treaty, Commercial North America Open Market, Commercial
Worldwide, BGSU E&S and BGSU Property Facultative have
benefited from such increases. However, in certain areas
(e.g. Property Treaty, BGSU E&S) rate increases have been
limited by surplus capacity remaining in the market. We have
also seen continued instances of undisciplined behaviour. We
have clear thoughts on our expectations on pricing and appetite
post event and remain prepared to walk away from renewals
where terms do not meet our appetite and rating criteria.
Overall risk adjusted premium rates reduced by 1.3% (2016:
3.3%), with reductions in our direct business of 1.2% (2016:
2.9%) and reductions in our reinsurance portfolio of 1.7%
(2016: 6.9%). Rating pressure was most severe in our direct
energy (4.7% reduction), BGSU Casualty (3.5%), Property
Facultative (2.1%), BGSU Property (2.0%), Property Treaty
(2.0%) and Casualty Treaty (2.0%). These reductions were
partly offset by rate increases of 3.1% in Specialist Liability and
marginal improvements in A&H and Specialty Lines.
Our retention rate for the year was 83.6% (2016: 84.3%) which
reflects our focus on retaining core accounts and pro-active
management of broker relationships. During 2017, 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.
GWP for 2017 totalled US$2,057.0m, an 8.2% increase at
constant exchange rates over 2016. This increase was driven
by prior year premium development (Property Facilities,
Energy, Marine and BGSU), increased contribution from our
recent underwriting initiatives (BGSU Cyber, BGSU Programs,
BGSU Latin America, Engineering and CPE, China/Singapore
and Healthcare) and current year premium growth (A&H,
Cyber, D&O WW, Cargo and Specie, BGSU and BGSB).
Current year premiums also saw reductions in a number of
classes, resulting from active portfolio management (Marine
Liability, PI Non US and Aviation) and from market conditions
(principally Property Financial).
Our ability to lead business, combined with our innovative
approach to underwriting, supports our success in building
long-term and dependable market relationships.
Our distribution strategy remains key, especially during a
period of intense market competition, and we continue to
build and leverage our network. Continued improvement
in relationships with the broker and coverholder community,
with a clear articulation of our strategy and risk appetite,
is a key area of focus.
This 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$234.7m
of premium, 25.0% of growth over 2016 reflecting the
continued development of our US distribution network.
This increase has arisen from both recently launched
classes and from organic growth as we capitalise on market
opportunities.
• 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 equated
to US$83.3m (2016: US$60.5m).
• China and Singapore continue to develop and provide
opportunity and we have seen stable levels of premiums
(2017: US$15.6m; 2016: US$15.5m).
Overall, the combination of strong portfolio management
and underwriting discipline has led to us achieving a 56.4%
attritional ratio in 2017 (2016: 55.5%), a solid underwriting
performance given the market backdrop and testimony
to the strength of our underwriting in such a competitive
environment.
Brit Limited Annual Report 2017
19
Our business developments during 2017
During 2017 we have continued to focus on our underwriting
strategy. Key developments have included:
• Syndicate 2988
Brit’s new syndicate, Syndicate 2988, commenced
underwriting in late 2016, for the 2017 underwriting
year. The new syndicate is managed by Brit’s existing
Lloyd’s managing agent, Brit Syndicates Limited (BSL).
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 first year capacity for Syndicate 2988 was provided
solely by external Names and was £55.0m (US$67.0m).
For the 2018 year of account, this has increased to £98.5m
(US$133.3m), of which £18.2m (US$24.6m) is provided by
Brit’s corporate member, Brit UW Limited.
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.
• Sussex Capital
We announced a new Bermuda-domiciled collateralised
reinsurance platform, Sussex Capital. Sussex Capital
was launched on 1 January 2018 with initial capital of
US$102.5m. Sussex Capital, through Sussex Re, a newly
established Bermuda-domiciled special purpose reinsurer,
writes direct collateralised reinsurance while also providing
collateralised reinsurance to Brit’s Syndicate 2987.
The launch of Sussex Capital is the next step in Brit’s
strategy to build long term relationships with the capital
markets. It strengthens Brit’s reinsurance capability, provides
access to a diversified source of capital to support property
catastrophe risk and further enhances our client and broker
proposition.
• Continued development of BGSU
BGSU milestone – US$1bn written by our US office:
Since it was established in 2009, BGSU has now written
over US$1bn in premium. BGSU has reached this milestone
by delivering strong, profitable organic growth with a
focus on niche areas where it has significant expertise and
experience. A significant strategic investment has also been
made by adding market leading teams and developing
its distribution network and spread of reach. It now offers
insurance and reinsurance, backed by the financial strength
of Brit Syndicate 2987, with a focus on Specialty Package
and Property. Specialties include Public and Non-Profit,
Property Direct and Facultative, and Criminal Justice
Service Operations.
BGSU Cyber and Technology: We announced the
launch of a new Cyber and Technology team, with the
appointment of an experienced Chicago based Senior
Vice President to lead the offering. In October we further
strengthened this team with the appointment of a New
York based Vice President. The launch of a US based Cyber
Team complements and enhances Brit’s current London
based platform by offering local expertise and service
to meet the growing demand for cyber and technology
products in the US SME sector.
US Yacht Portfolio: Brit announced that BGSU has reached
an agreement with XL Catlin for the exclusive renewal rights
for part of its directly written yacht portfolio. BGSU’s Yacht
team will service existing legacy Catlin policies through to
expiration, after which BGSU will provide renewal quotes to
eligible customers. The agreement relates to legacy policies
written by Catlin, prior to its acquisition by XL.
This followed the appointments in 2016 of a Senior Vice
President, Marine and a Vice President, Yacht to expand
BGSU’s marine footprint in the US.
STRATEGIC REPORT 20
Brit Limited Annual Report 2017
UNDERWRITING REVIEW
BGSU Professional Lines: We appointed an Executive Vice
President, Professional Lines, for BGSU, with responsibility
for establishing and developing Brit’s Professional Lines
portfolio in the US, with a focus on
SME business.
BGSU Excess Casualty: BGSU also appointed
a Senior Vice President, Excess Casualty, to focus on writing
excess casualty through wholesale intermediaries.
• Lutine Yacht Consortium
We further strengthened our leading marine offering by
announcing the launch of a new Brit-led Lloyd’s consortium
for Yachts. The consortium has capacity of US$250.0m,
offering 100% Lloyd’s security to insure motor and sailing
vessels valued at over US$10.0m. The consortium also
offers worldwide coverage, has global reach through Lloyd’s
brokers and their agents and clients will be supported by a
24/7 claims service.
• The Brit ‘app’
We launched the new Brit ‘app’, which allows brokers
to see the location and availability of our underwriters
(particularly when at the Lloyd’s ‘box’) as well as product
information for each class of business. Feedback so far has
been excellent.
Strengthened Program Capability: BGSU appointed
a Senior Vice President, Programs, based in Alpharetta,
GA, to focus on writing Property, Casualty, Package and
miscellaneous lines to specialised US based agencies.
With a focus on niche Program Managers, written 100%
on E&S and admitted paper, the approach differs from,
and is complimentary to, Brit’s current London based
MGA capabilities.
• Brit Reinsurance (Bermuda) Limited
Brit completed the relocation of its Gibraltar based
captive reinsurer, Brit Insurance (Gibraltar) PCC Limited,
to Bermuda, following which the company was renamed
Brit Reinsurance (Bermuda) Limited (Brit Re).
This is a natural move as we continue to expand our
Bermuda platform and highly complementary to our
continued focus on the US market. Bermuda is an important
hub for Brit, and its combination of a mature regulatory
environment, including Solvency II equivalence, and access
to highly qualified and experienced people makes it the
right home for Brit Re to support the Group’s longer term
strategy.
• Scion Underwriting Services Inc
The highly experienced US insurance industry veteran
Scott Brock joined Brit as President of Scion Underwriting
Services Inc (Scion). Scion will partner with Brit and other
markets, including third party capital, to support the
insurance needs of several targeted industries, both in
the US and internationally. It will develop new products
that match the needs of those targeted sectors, while
leveraging Brit’s distribution reach and Scott’s proven ability
to effectively build-out new businesses.
Brit Limited Annual Report 2017
21
STRATEGIC REPORT 22
Brit Limited Annual Report 2017
FINANCIAL
PERFORMANCE REVIEW
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.
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 154 and definitions of each of our KPIs are included in the Glossary starting on
page 159.
Overall performance
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.
In 2017, we delivered a RoNTA of
1.1% in a year with significant major
loss events and challenging insurance
and investment market conditions.
This performance, driven by a strong
investment return, resulted in a five
year average RoNTA of 13.4%. RoNTA
for 2017 after foreign exchange
movements was 2.5% (2016: 15.8%).
Track record
%
25
20
15
10
5
0
24.2
20.7
11.8
9.1
1.1
2013
2014
2015
2016
2017
Overall performance
TOTAL VALUE CREATED
The total value created measures
the increase in adjusted NTA (before
distributions) in a year. It reflects
the after tax result recorded in the
income statement and all other value
movements.
In 2017, value creation was US$24.7m
or 2.3% of opening adjusted NTA. The
company has generated a total value
of US$551.7m over the past five years,
an average of US$110.3m per annum.
Track record
US$m
150
200
217.2
100
151.6
139.0
100
50
0
19.2
24.7
2013
2014
2015
2016
2017
Underwriting
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 2017 was
112.4%, including 16.2pps in respect
of major losses and 0.6pps of reserve
releases. Over the past five years, we
have delivered an average combined
ratio of 95.1%.
Investment management
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. Over the past five
years, we have delivered an average
investment return of 2.5%.
Capital management
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 2017, after
dividends paid during the year of
US$45.8m, Group capital resources
totalled US$1,468.5m which equated
to 136.8% of our Group capital
requirement of US$1,073.4m.
Brit Limited Annual Report 2017
23
Track record
%
120
100
80
60
40
20
0
85.4
89.5
91.7
96.4
112.4
2013
2014
2015
2016
2017
I
S
T
R
A
T
E
G
C
R
E
P
O
R
T
Track record
%
5
4
3
2
1
0
4.9
2.9
2.1
2.6
0.1
2013
2014
2015
2016
2017
Track record
%
200
150
100
50
141.0
150.4
128.2 125.6
136.8
0
2013
2014
2015
2016
2017
Operating platform
RATIO OF FRONT OFFICE EMPLOYEES TO BACK OFFICE EMPLOYEES
This measure monitors the efficiency
of our business model by comparing
the number of front office client-
facing revenue generators and service
providers to the number of back office
employees. An increase in the ratio
would suggest that the back office is
becoming more efficient in supporting
the client-facing activities of the front
office.
At 31 December 2017, the ratio
was 163.8%, reflecting that we
had approximately 1.6 front office
employees for every back office
employee.
Track record
%
200
150
149.7
159.8
178.5
180.7
163.8
100
50
0
2013
2014
2015
2016
2017
24
Brit Limited Annual Report 2017
Overview of Results
The Group’s income statement, re-analysed to show the key components of our result, is set out below:
Gross written premium
Net earned premium (Note 1)
Underwriting result (Note 1)
Underwriting result
Return on invested assets, net of fees
Corporate expenses
Finance costs
Other items
(Loss)/profit on ordinary activities before tax, FX and corporate activity costs
FX movements
Corporate activity costs (Note 2)
Profit on ordinary activities before tax
Tax
Discontinued operations
Profit for the year after tax
2017
US$m
2016
US$m
2015
US$m
2014
US$m
2013
US$m
2,057.0
1,540.1
(172.8)
1,912.2
1,515.1
54.6
1,999.2
1,649.6
137.0
2,148.5 1,849.7
1,601.1 1,478.4
215.9
168.3
(172.8)
204.2
(24.0)
(17.1)
2.6
(7.1)
12.6
–
5.5
16.0
–
21.5
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)
(23.8)
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)
15.6
229.3
155.2
Note 1: Excluding the effects of foreign exchange on non-monetary items.
Note 2: Corporate activity costs during 2015 relate to costs incurred as a result of the acquisition of Brit by Fairfax. The 2014 corporate activity costs relate to Brit’s
IPO in April 2014.
Group performance and total value added
Brit’s result for the year ended 31 December 2017 reflects significant major loss activity, a solid attritional performance, a very
strong investment return and favourable FX movements.
The result on ordinary activities for the year before tax, FX and corporate activity costs was a loss of US$7.1m (2016: profit of
US$118.5m), profit before tax was US$5.5m (2016: US$159.8m) and profit after tax was US$21.5m (2016: US$157.6m). Return on
adjusted net tangible assets (RoNTA), excluding the effects of FX on non-monetary items and corporate activity costs, decreased
to 1.1% (2016: 11.8%). RoNTA for 2017 after including foreign exchange movements was 2.5% (2016: 15.8%) and total value
created for the year was US$24.7m (2016: US$139.0m).
Our adjusted net tangible assets at 31 December 2017 totalled US$1,043.7m (2016: US$1,064.8m), after 2017 dividend
payments of US$45.8m.
FINANCIAL PERFORMANCE REVIEW
Brit Limited Annual Report 2017
25
Performance measures
In addition to our 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 result for the year amounted to a loss of US$172.8m (2016: profit of US$54.6m) and our combined ratio, which
excludes the effect of foreign exchange on non-monetary items, was 112.4% (2016: 96.4%). The premiums, claims and expenses
components of this result are examined below.
Premiums written
Premium growth
Brit Global Specialty Direct
Brit Global Specialty Reinsurance
Other underwriting
Group
Premiums by class
Brit Global Specialty Direct
Accident and Health
Marine
Property, Political Risks and Violence (PRV)
Property Facilities
Energy
BGSU US Specialty
Professional Lines
Specialist Liability
Specialty Lines
Aviation
Discontinued
Total Direct
Brit Global Specialty Reinsurance
Short-Tail RI (Property Treaty)
Long-tail RI (Casualty Treaty)
Discontinued lines
Total Reinsurance
Other underwriting
Group total
2017
US$m
2016
US$m
Growth
%
1,675.0
383.3
(1.3)
2,057.0
1,546.6
365.8
(0.2)
1,912.2
8.3
4.8
–
7.6
2017
US$m
Growth at
constant
FX rates
%
9.0
4.6
–
8.2
2016
US$m
132.8
168.5
206.8
283.7
83.9
234.7
226.1
113.3
162.1
64.2
(1.1)
114.2
167.6
195.4
277.3
63.1
187.8
229.8
87.9
152.6
70.6
0.3
1,675.0 1,546.6
152.1
231.2
–
383.3
153.5
212.6
(0.3)
365.8
(1.3)
(0.2)
2,057.0 1,912.2
STRATEGIC REPORT
26
Brit Limited Annual Report 2017
FINANCIAL PERFORMANCE REVIEW
Gross written premium (GWP) increased by 7.6% to US$2,057.0m (2016: US$1,912.2m). At constant exchange rates the increase
was 8.2%. Direct business increased by 8.3% to US$1,675.0m (2016: US$1,546.6m), while reinsurance increased by 4.8% to
US$383.3m (2016: US$365.8m).
The drivers of the 7.6% increase in Group GWP, which was in line with expectations, are as follows:
• Prior year premium development: The book again experienced favourable development on prior years, resulting in an
increase of US$71.2m over 2016. The main contributors were our Property Facilities, Energy, Marine and BGSU divisions.
• Underwriting initiatives: The Group’s underwriting initiatives, launched from 2013 onwards, resulted in a US$42.8m increase
in GWP. The largest increases were seen in BGSU (Cyber, Programs and Latin America business), Engineering and CPE,
China/Singapore and Healthcare.
• Current year premiums: Current year premiums, excluding those derived from the underwriting initiatives highlighted above,
increased by US$41.8m over 2016. Growth was primarily experienced in A&H, Cyber, D&O WW, Cargo and Specie, BGSU
and BGSB. Contraction was seen in a number of classes, resulting from active portfolio management (Marine Liability, PI Non
US and Aviation) and from market conditions (principally Property Financial).
• Foreign exchange: The impact of foreign exchange resulted in a US$11.0m year on year reduction in premium, which reflects
the movement during 2017 of the US dollar against a number of currencies in which the Group writes business.
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 (%)
1
0
-1
-2
-3
-4
-5
0.3
(1.3)
(2.9)
(3.3)
(4.1)
2013
2014
2015
2016
2017
Although we continue to see rate decreases, the overall risk adjusted premium rate decrease for renewal business during
2017 slowed to 1.3% (2016: 3.3%). Direct business decreased by 1.2% (2016: 2.9%) and reinsurance by 1.7% (2016: 4.8%).
The reduction in the rate of decrease was influenced by rate improvements in Q4 2017 across the major loss affected classes,
including Commercial North America Open Market, Commercial Worldwide, BGSU Property Facilities, Cargo, Hull and Treaty
Catastrophe North America.
Brit Limited Annual Report 2017
27
I
S
T
R
A
T
E
G
C
R
E
P
O
R
T
Retention rates
Measure
Commentary
Track record
Retention rate
The retention rate shows the proportion of our business that renews,
on a premium weighted basis, compared to the previous year.
Retention rate (%)
100
80
60
40
20
0
83.0
83.0
82.4
84.3
83.6
2013
2014
2015
2016
2017
Our retention rate for the period was 83.6% (2016: 84.3%). The retention rates we achieved in 2016 and 2017 reflect the
successful renewal of a profitable book of business, following the re-underwriting of the book that occurred between 2008 and
2012, through which we rebalanced our book and non-renewed around half of our underwriting portfolio. The slight reduction in
2017 results from active decisions not to renew underperforming accounts in certain divisions, such as Aviation.
Outwards reinsurance
Our reinsurance expenditure in 2017 was US$526.2m or 25.6% of GWP (2016: US$432.0m/22.6%), an increase of US$94.2m.
This additional expenditure is driven by the increased use of quota shares, increased collateralised reinsurance cessions and
the recognition of the full premium relating to a two year reinsurance contract. These additional protections were purchased to
effectively manage our net exposures in the current soft market conditions and provide additional protection to our capital base.
Net earned premium
Net earned premium (NEP) in 2017, excluding the effects of foreign exchange on non-monetary items, increased by 1.7% to
US$1,540.1m (2016: US$1,515.1m, decrease of 8.2%). At constant exchange rates the increase was 2.2% (2016: decrease of
6.1%). Direct business increased by 0.5% to US$1,214.9m (2016: US$1,208.6m, decrease of 8.9%), while reinsurance increased
by 4.3% to US$297.8m (2016: US$285.5m, decrease of 3.0%).
Growth in the direct portfolio is largely driven by BGSU, partially offset by contractions in the other portfolios, reflecting a
reduction in premiums written over preceding financial years, and by the decision to cede a greater proportion of business.
The increase in the reinsurance portfolio is principally related to BGSB, reflecting year on year premium increases.
28
Brit Limited Annual Report 2017
FINANCIAL PERFORMANCE REVIEW
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 (%)
80
70
60
50
40
30
20
10
0
72.0
48.5
50.0
53.5
56.5
2013
2014
2015
2016
2017
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 (%)
Major claims
ratio
The major claims ratio measures the effect of claims arising from
major losses on our performance and the 2017 ratio reflects the
significant level of major loss activity during the year.
60
50
40
30
20
10
0
51.3
51.0
55.2
55.5
56.4
2013
2014
2015
2016
2017
Major claims ratio (%)
20
15
10
5
0
16.2
3.2
2013
2.3
2014
nil
2015
4.5
2016
2017
Brit Limited Annual Report 2017
29
I
S
T
R
A
T
E
G
C
R
E
P
O
R
T
Measure
Commentary
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.
Track record
Reserve release ratio (%)
0
-1
-2
-3
-4
-5
-6
(0.6)
(1.7)
(3.3)
(3.5)
(6.0)
2013
2014
2015
2016
2017
Our underlying claims experience in 2017 was in line with expectations, with a small increase in our attritional loss ratio to 56.4%
(2016: 55.5%).
2017 saw a significant increase in catastrophe activity and the Group incurred major claims of US$250.0m (2016: US$68.4m), as
set out below. Major claims are defined as claims in excess of US$15.0m, incurred from natural or man-made catastrophes, or from
large single risk loss events (net of reinsurance and allowing for reinstatements).
Major losses
Hurricane Harvey
Hurricane Irma
Hurricane Maria
Mexican earthquake
California wildfires
Alberta wildfires
Louisiana floods
Hurricane Matthew
Other (Note 1)
Group
2017
US$m
2017
CoR%
51.5
110.1
46.4
6.8
35.2
–
–
–
–
3.3
7.2
3.0
0.4
2.3
–
–
–
–
2016
US$m
–
–
–
–
–
19.2
10.9
26.3
12.0
250.0
16.2
68.4
2016
CoR%
–
–
–
–
–
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$9.6m of claims reserves established for prior year claims, the equivalent
of a combined ratio reduction of 0.6pps (2016: US$53.5m/3.5pps). Releases were most significant in Casualty Treaty and Energy,
with releases also seen in Property (Direct and Treaty). These releases were partially offset by a strengthening in Long Tail Direct and
a US$13.1m strengthening as a result of the Ogden rate change, which impacted Specialist Liability and Professional Lines. Our
statement of financial position remains strong and we continue to operate a robust reserving process.
30
Brit Limited Annual Report 2017
FINANCIAL PERFORMANCE REVIEW
Underwriting expenses
Our underwriting expense ratio was 40.4% (2016: 39.9%).
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
36.9
39.5
38.2
39.9
40.4
2013
2014
2015
2016
2017
The underwriting expense ratio can be further analysed into its underlying components, as follows:
Measure
Commentary
Track record
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.
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
27.5
26.0
27.2
27.6
24.9
2013
2014
2015
2016
2017
Operating expense ratio (%)
15
12
9
6
3
0
12.0
12.0
12.2
12.7
12.8
2013
2014
2015
2016
2017
Brit Limited Annual Report 2017
31
Commission costs were US$425.9m and the commission expense ratio was 27.6% (2016: US$411.6m/27.2%).
The small increase in the ratio principally reflects changes in business mix and an increase in NEP.
Our operating expenses are analysed below.
Expenses
Our operating expense ratio was stable at 12.8% (2016: 12.7%). Operating expenses for the period were as follows:
Expense analysis
Underlying operating expenses including bonus provisions
Project costs, timing differences and other expense adjustments
Total operating expenses
2017
US$m
2016
US$m
220.0
0.5
220.5
217.1
–
217.1
Underlying operating expenses during 2017 increased by 1.3% to US$220.0m (2016: US$217.1m). The movement at constant
exchange rates was an increase of 7.3%, reflecting our predominantly Sterling expense base. This increase relates to targeted
expansion and investment in growth areas, increased regulatory levies, depreciation charges and IT costs.
As the majority of Brit’s business is in US dollars and the majority of the operating expenses are in Sterling, Brit made the
decision to effectively hedge the Sterling proportion of the Group’s expenses. This decision was driven by the weakness in
Sterling against the US dollar. To effect this, Brit purchased Sterling in the spot and forward market. The benefit of this derivative
contract, US$6.7m, is recognised within the underwriting result, but excluded from the combined ratio.
The allocation of operating expenses within the consolidated income statement and the segmental information is as follows:
Disclosure of operating expenses
Acquisition costs
Other insurance related expenses
Total insurance related expenses
Other operating expenses
Total operating expenses
2017
US$m
2016
US$m
110.6
85.9
196.5
24.0
220.5
112.3
83.5
195.8
21.3
217.1
STRATEGIC REPORT 32
Brit Limited Annual Report 2017
Return on invested assets
The investment portfolio is managed for the most part by Hamblin Watsa Investment Counsel Limited, a Fairfax subsidiary with
an excellent long-term track record, whose sole business is managing investment portfolios of Fairfax group companies. They
are supported by a number of external managers across core fixed income and a small allocation to specialised credit.
The return on our invested assets was US$204.2m or 4.9% (2016: US$102.9m/2.6%). This was a combination of US$48.2m (2016:
US$73.7m) of investment income, US$170.4m of mark-to-market gains (2016: gains of US$72.3m) and return on associated
undertakings of US$5.1m (2016: US$3.6m), less losses on investment related derivatives of US$6.4m (2016: US$32.9m) and fees
of US$13.1m (2016: US$13.8m).
Investment return
Income
Released gains
Unrealised gains
Investment return before fees
Investment management fees
Investment return net of fees
Investment related derivative return
Return on associated undetakings
Total return
Total return
2017
$m
48.2
2.9
167.5
218.6
(13.1)
205.5
(6.4)
5.1
2016
$m
73.7
62.3
10.0
146.0
(13.8)
132.2
(32.9)
3.6
204.2
102.9
4.9%
2.6%
A key driver of return has been the strong growth in equity markets. Over the year, Brit has increased its allocation to equities
which now represents 16.1% of our total portfolio. Holdings within funds, which represent 3.0% of the portfolio, also produced
a very significant return (US$47.3m or 59.6%). The Group’s fixed income investments (governments and corporates), which
represent 44.0% of the portfolio, contributed US$38.7m to the result.
At the start of 2017, markets and investors balanced improving economic conditions with increased focus on political risk.
Scepticism around the US Presidency and the potential longer term impact of the US policies on global trade, growth and
monetary policy resulted in declines in government bond yields combined with equity markets grinding higher as core economic
data improved.
In the second half of the year, greater confidence in the ability to drive US economic policy through the legislative system
resulted in political risks receding and greater focus on the positive data coming through in jobs, consumer confidence and
output across the US and most developed economies, albeit with the UK lagging behind as Brexit anxieties prevailed.
At 31 December 2017, the running yield (expressed as yield as a % of invested assets) of our total portfolio was 1.3% (2016:
0.9%), reflecting the high proportion of our portfolio invested in cash and cash equivalents. This increased over the year as the
US Federal reserve increased the Fed Funds rate for the third time, responding to positive growth data, a fall in unemployment
and the prospect of these factors feeding through to higher levels of inflation, despite the conundrum of lower levels of
productivity.
FINANCIAL PERFORMANCE REVIEW Brit Limited Annual Report 2017
33
The income on our portfolio was lower in 2017, reflecting the decision to move to a short duration, lower yielding allocation in
Q4 2016 to avoid the risk associated with interest rates moving higher as economic growth returned. As a result, our portfolio
generated income of US$48.2m during the year, lower than the previous year where the fixed income portfolio was invested at
the longer part of the curve (2016: US$73.7m).
Our two associated undertakings produced a positive return of US$5.1m (2016: US$3.6m).
• Ambridge Partners LLC, a leading managing general underwriter of transactional insurance products of which Brit has
a 50% share, contributed US$4.4m to this return (2016: US$3.4m); and
• Camargue Underwriting Managers Proprietary Limited, a leading managing general underwriter of a range of specialised
insurance products and specialist liability solutions in South Africa of which a 50% share was acquired on 30 August 2016,
contributed US$0.7m to this return (2016: US$0.2m).
Foreign exchange
As explained on page 39, 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$12.6m in 2017 (2016: gain of US$41.3m),
reflecting the movement of the US dollar against other currencies in which we trade and hold assets. This total foreign exchange
related gain comprised:
• An unrealised revaluation gain of US$1.8m (2016: gain of US$61.2m), 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 weakening of the
US dollar against the core currencies of Sterling, Euro and Canadian dollar, where the gain on our long Canadian dollar
position has largely been offset by losses on short Sterling and Euro positions. In addition, a small gain on revaluation of non-
core currency positions, including Australian dollar, has been recorded;
• Gains of US$4.9m (2016: losses of US$19.9m) on derivative contracts which were entered into to help manage our monetary
FX exposures and therefore should be viewed in conjunction with our monetary FX movements. This excludes the gain on
the derivative contract entered into to effectively hedge the Sterling proportion of the Group’s expenses, as explained on
page 31; and
• Gain of US$5.9m (2016: no overall gain or loss), 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 2017
comprises the un-wind of the credit carried on the balance sheet at 31 December 2016 (US$3.6m), plus the debit balance
established during 2017 (US$2.3m).
STRATEGIC REPORT 34
Brit Limited Annual Report 2017
The allocation of the foreign exchange result within the consolidated income statement is as follows:
Foreign exchange gains and (losses)
Net change in unearned premium provision – non-monetary FX effect
Acquisition costs – non-monetary FX effect
Net foreign exchange losses – non-monetary (Note 1)
Net foreign exchange gains – monetary (Note 1)
Return on derivative contracts – FX related instruments (Note 2)
Total gain/(loss)
2017
US$m
(3.3)
1.3
7.9
5.9
1.8
4.9
6.7
2016
US$m
19.0
(10.0)
(9.0)
–
61.2
(19.9)
41.3
12.6
41.3
Note 1: The sum of these two amounts, US$9.7m (2016: US$52.2m), is the ‘Net foreign exchange gains’ figure per the consolidated income statement.
Note 2: Excludes the gain on the derivative contract entered into to effectively hedge the Sterling proportion of the Group’s expenses, as explained on page 31.
Tax
Our tax on ordinary activities for 2017 resulted in a tax credit of US$16.0m (2016: tax expense US$2.2m), based on a group
profit before tax of US$5.5m (2016: US$159.8m).
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 profits and is a composite tax rate reflecting the mix of tax
rates charged in those jurisdictions.
The 2017 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 underwriting results and investment income arising in Bermuda. An additional
factor is the future reduction in the UK corporation tax rate to 17% in 2020 and its effect on deferred tax liabilities and prior year
adjustments, relating primarily to the syndicate’s underwriting results which are taxed in later years.
In 2017 the effective rate was further distorted by major underwriting losses arising in the UK which are subject to tax on a
declaration basis and so will be tax effected in 2020. This gives rise to a tax credit in the year and a deferred tax asset carried
forward.
FINANCIAL PERFORMANCE REVIEW Brit Limited Annual Report 2017
35
STRATEGIC REPORT 36
Brit Limited Annual Report 2017
FINANCIAL POSITION AND
CAPITAL STRENGTH
Brit Limited Annual Report 2017
37
Financial position
At 31 December 2017 our adjusted net tangible assets
totalled US$1,043.7m (2016: US$1,064.8m).
Summary consolidated statement of financial position
Assets
Intangible assets
Reinsurance contracts
Insurance and other receivables
Financial investments, investment
in associated undertakings and cash
Investment related derivatives
FX related derivatives
Other assets
Total assets
Liabilities
Deferred tax on intangible assets
Insurance contracts
Borrowings
FX related derivatives
Other liabilities
Total liabilities
Net assets
Adjusted net tangible assets
2017
US$m
2016
US$m
97.8
1,349.5
908.3
4,311.4
4.7
13.7
339.6
93.9
884.1
718.3
3,966.0
5.5
7.1
300.7
7,025.0
5,975.6
11.2
5,027.3
219.8
12.5
623.9
10.7
4,243.5
157.5
11.8
404.1
5,894.7 4,827.6
1,130.3 1,148.0
1,043.7 1,064.8
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 and
charges (US$1.6m); changes in unrealised foreign currency
translation losses on foreign operations (US$7.4m gain); share
based payment related amounts (US$0.8m net credit); and
dividends paid during 2017 of US$45.8m.
Capital strength
Our balance sheet remains strong. At 31 December 2017,
Group capital resources totalled US$1,468.5m, giving
surplus management capital of US$395.1m or 36.8% (2016:
US$297.1m/25.6%) over our Group capital requirement of
US$1,073.4m. The position at 31 December is after dividends
paid during the year of US$45.8m.
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 2017 this trend
continued with net releases of US$9.6m (2016: US$53.5m),
after allowing for US$13.1m reserve strengthening as a result
of the Ogden rate change. Maintaining reserves is critical
to safeguard future obligations to policyholders and the
‘conservative best estimate’ approach provides a secure
foundation. It also provides a secure foundation for the pricing
of new business which is particularly critical in a softening
rating environment.
STRATEGIC REPORT 38
Brit Limited Annual Report 2017
Invested assets – look through basis
(US$m)
Investment return (net of fees) (%)
5
4
3
2
1
0
4.9
2.9
2.1
2.6
2013
2014
0.1
2015
2016
2017
n Government debt
securities US$1,259.9m
n Corporate debt
securities US$631.4m
n Alternative
investments US$10.6m
n Cash and cash
equivalents US$1,573.5m
n Structured products US$15.5m
n Equity securities US$820.5m
n Investment related
derivatives US$4.7m
Asset allocation
Brit’s invested assets (financial investments, investment in
associates, cash and cash equivalents and derivative contracts)
at 31 December 2017 were US$4,316.1m (31 December 2016:
US$3,971.5m). This increase reflects favourable exchange rates,
increased premium and the high level of return during 2017.
Our investments in specialised investment funds account for
US$126.6m or 2.9% (2016: US$79.4m/2.0%) of our invested
assets on a statutory reporting basis. The increase in 2017 is
driven by increased allocation to specialist funds and strong
growth on these positions over the year as equity markets
rallied. The remaining specialised funds in this category cover
small allocations to US and European credit.
The Brit portfolio saw limited change in its fixed income
holdings in 2017. The portfolio remained defensively
positioned from both an interest rate and credit perspective,
being short duration to protect against rising rates
combined with low exposure to corporate credit with a focus
on high quality issuers. The year-end allocation reflected
cash and cash equivalents (2017: US$1,573.5m/36.5%;
2016: US$1,027.3m/25.9%) with a reduced holding in
fixed income securities (2017: US$1,891.3m/43.8%; 2016:
US$2,425.4m/61.1%). Brit’s equity allocation increased to
US$820.5m/19.0% (2016: US$492.0m/12.4%) through a
combination of new purchases and strong investment return.
Our asset allocation, on both a look-through basis and
statutory disclosure basis, is set out in the tables below:
The duration of our portfolio at 31 December 2017 was
0.5 years (2016: 1.1 years), which is shorter than the duration
of our liabilities. This positioning is driven by the positive
macro-economic environment and the risk that government
spending plans and fiscal policy in the US could result in
significant increases in yields over the short to medium term.
31 December 2017
Look through basis
Government debt securities
Corporate debt securities
Structured products
Equity securities
Alternative investments
Cash and cash equivalents
Investment related derivatives
Total invested assets (statutory)
31 December 2016
Look through basis
Government debt securities
Corporate debt securities
Structured products
Equity securities
Alternative investments
Cash and cash equivalents
Investment related derivatives
Statutory basis
Equity
securities
US$m
Debt
securities investment funds
US$m
Specialised Cash and cash
equivalents
US$m
US$m
– 1,254.6
631.3
–
0.2
–
–
686.7
–
–
–
–
–
–
5.3
0.1
15.3
93.4
10.6
–
–
–
–
–
1.9 1,571.6
–
–
Associated
undertaking
US$m
Derivative
assets
US$m
Total
invested
assets (look
through)
US$m
–
–
–
40.4
–
–
–
– 1,259.9
631.4
–
15.5
–
820.5
–
–
10.6
– 1,573.5
4.7
4.7
686.7 1,886.1
126.6 1,571.6
40.4
4.7 4,316.1
–
–
–
399.8
–
–
–
1,829.3
594.4
1.0
–
–
–
–
1.6
0.1
13.0
55.6
7.3
1.8
–
–
–
–
–
–
1,025.5
–
–
–
–
36.6
–
–
–
– 1,830.9
594.5
–
14.0
–
492.0
–
–
7.3
– 1,027.3
5.5
5.5
Total invested assets (statutory)
399.8
2,424.7
79.4
1,025.5
36.6
5.5 3,971.5
Brit Limited Annual Report 2017
39
At 31 December 2017, 79.9% of our invested assets were
investment grade quality (2016: 82.7%) with the reduction
reflecting the increased allocation to equity and funds. An
analysis of the credit quality of our invested assets is set out
below:
Foreign exchange management
At 31 December 2017, our US dollar denominated net assets
were 79.3% 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:
Invested assets by rating
Net assets/(liabilities) by currency
AAA
AA
A
BBB
P-1 and P-2
Other
Total
2017
%
40.7
20.3
10.5
4.4
4.0
20.1
2016
%
9.9
56.9
5.3
3.4
7.2
17.3
100.0
100.0
US dollar
Sterling
Euro
Canadian dollar
Australian dollar
Total
2017
%
79.3
16.2
2.7
1.5
0.3
100.0
2016
%
118.3
(5.9)
(8.0)
(0.4)
(4.0)
100.0
Other includes equities and investment related derivatives
Gearing
At 31 December 2017, our gearing ratio was 24.6% (2016:
18.9%).
Our revolving credit facility (RCF) remains at US$360.0m with
an expiry date of 31 December 2020.
Under our capital policy we have identified a maximum of
US$250.0m (2016: US$235.0m) of this facility to form part
of our capital resources, with the balance available for
liquidity funding. At 31 December 2017, the cash drawings
on the facility were US$45.0m (2016: undrawn) and a
US$80.0m uncollateralised letter of credit (LoC) was in place
(31 December 2016: US$80.0m/uncollateralised) to support
our underwriting activities. At the date of this report,
14 February 2018, there were no cash drawings on the facility
and the US$80.0m uncollateralised LoC remained in place.
In addition, we have in issue £135.0m of 6.625% subordinated
debt with a carrying value of 136.7m/US$174.8m
(31 December 2016: £127.5m/US$157.5m). 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.
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.
STRATEGIC REPORT
40
Brit Limited Annual Report 2017
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.
Insurance
Solvency
Liquidity
Underwriting –
pricing
Underwriting –
catastrophe
Underwriting –
reinsurance
Reserving
Investment
Investment market risk
Capital ratio falls below the level targeted by management.
Insufficient financial resources available to meet liabilities as
they fall due.
Emerging experience is inconsistent with the assumptions
and pricing models used.
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 2017
41
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
(2017: decrease of 1.3%; 2016:
decrease of 3.3%).
This risk is particularly relevant in
the current 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 42
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 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 2017
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
850
736
755
737
230
95
100
86
68
294
145
53
European windstorm
233
144
Reserve release ratio (2017:
0.6%; 2016: 3.5%).
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.
The impact of the major loss
events of 2017 was in line with
our expectations given the
nature and scale of the events
and our market share.
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
43
I
S
T
R
A
T
E
G
C
R
E
P
O
R
T
Principal risk
Mitigation tools
Metrics
Status
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.
• Succession and contingency
plans are in place in the
event of the loss of a key
employee.
• Regular monitoring of
employee turnover and
morale.
Return on invested assets,
net of fees (2017: 4.9%; 2016:
2.6%).
Our portfolio at the year
end was highly liquid and
defensively positioned.
Running yield (2017: 1.3%;
2016: 0.9%).
Staff turnover (2017: 6.9%;
2016: 8.8%).
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.
United Kingdom’s exit from the EU (Brexit)
Following the triggering of article 50 of the Treaty of Lisbon on 29 March 2017, we continue to monitor the ensuing negotiations
and other developments. Our focus remains on putting our clients first. We will continue to work to minimise the impact on Brit
and our clients and to take advantage of opportunities as they arise.
Lloyd’s implementation plan for its new Brussels-based European insurer is progressing. It has commenced an on-boarding
programme for managing agents to ensure the necessary operational changes are implemented to allow business to be written
through its Brussels subsidiary from 1 January 2019. Brit is supportive of Lloyd’s proposals and looks forward to participating on
the new platform.
44
Brit Limited Annual Report 2017
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 2017 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 83.6% (2016: 84.3%)
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.
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.
In October 2017, Brit held a ‘celebrate the difference week’,
which provided a focus on individuals making a personal
difference both to themselves and others. It concentrated
on a variety of topics from working inclusively, understanding
the positives that arise from businesses who have diverse
and inclusive employee populations, mental, physical and
emotional well-being, mentoring and a new volunteering
opportunity in Africa. The various sessions, mainly hosted by
external specialists, were well attended and well received.
The 2017 staff turnover rate excluding retirements and
redundancies was 6.9% (2016: 8.8%).
At 31 December 2017, 42.8% (2016: 31.7%) of staff had
completed at least five years of service and 17.2% (2016:
14.7%) 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.
Brit Syndicates Limited has Chartered Insurer status through
the Chartered Insurance Institute. This prestigious designation
During 2017 we again supported ten charities chosen
by employees. The charities selected for 2017 were the
Motor Neurone Disease Association (UK), Blossom Trust
OUR PEOPLE, CULTURE, SOCIAL, COMMUNITY AND ENVIRONMENTAL MATTERS Brit Limited Annual Report 2017
45
carbon emissions data. The sources of these emissions were
as follows:
Emission source
Gas
Electricity
Business air travel
Business travel other
Total carbon footprint
2017
CO2 (tonnes)
2016
CO2 (tonnes)
154
460
2,062
3
2,679
97
537
863
3
1,500
Number of employees at 31 December
excluding NEDs
Carbon footprint per employee
558
4.8
550
2.7
(India), Autistica (UK), Action Duchenne (UK), The Disability
Foundation (UK), Ordinary 2 Extraordinary (UK), Horatio’s
Garden (UK), Rockinghorse (UK), Bountiful Blessings (US) and
Philabundance (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 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 2017, Brit donated US$0.7m (2016: US$0.7m) under
its charitable initiatives. In addition to this, Brit employees
completed 67.0 volunteering days (2016: 77.5 days).
Environmental responsibility
During 2017 we recycled 8.5 tonnes of paper waste (2016:
7.2 tonnes) and we sent 48.1 tonnes of general waste
to energy recycling (2016: 63 tonnes). In 2017, we also
recycled 1.4 tonnes of glass (2016: 10.2 tonnes), 5.2 tonnes
of cardboard (2016: 32.5 tonnes) and 6.1 tonnes of food
waste (2016: 8.2 tonnes). During 2017, in conjunction with
our building managers, we continued to work hard to reduce
waste sent to landfill. At December 2017 we were fully ESOS
compliant.
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 2017
our carbon emissions per employee were 4.8 tonnes (2016:
2.7 tonnes), primarily reflecting increased air travel driven
by our expanding international office network and improved
STRATEGIC REPORT
46 Brit Limited Annual Report 2017
GOVERNANCE
Brit Limited Annual Report 2017 47
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
48
50
52
GOVERNANCE 48 Brit Limited Annual Report 2017
DIRECTORS’ REPORT
The Directors present their report together with the audited
consolidated financial statements for the year ended
31 December 2017.
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.
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.
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 3 March 2017, the Company paid a dividend of US$45.8m
to the holder of its Class A ordinary shares. The Directors do
not recommended a final dividend.
Share capital
The Company’s ordinary issued share capital at 31 December
2017 comprised two classes of ordinary shares, Class A
Ordinary and Class B Ordinary, which are fully paid.
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 the unanimous approval of the Company’s shareholders.
Shareholders
The Company’s two shareholders at the time of this report is
as follows:
Shareholder
Units
Class
% of total
A and B
ordinary
shares
FFHL Group
Limited
OMERS
Administration
Corporation
281,057,706
B Ordinary
72.51
106,550,524
A Ordinary
27.49
Significant agreements
The following agreement which was in force at 31 December
2017, takes effect, alters or terminates on a change of control
of the Company.
Brit Limited Annual Report 2017 49
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.
Auditor
PricewaterhouseCoopers LLP remain in office as the
Company’s auditor.
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 22 to 34. The financial position of the Group, its cash
flows and borrowing facilities are set out on pages 37 to 39.
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 44 to 45.
• Financial instruments
Details of the Group’s risk management framework are set
out on pages 40 to 43.
By order of the Board
Tim Harmer
Company Secretary
14 February 2018
Brit Limited: 8821629
GOVERNANCE 50 Brit Limited Annual Report 2017
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.
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.
Independence of Directors
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
The Board has appointed Richard Ward as the senior
independent non-executive Director of the Company. The
senior independent Director was also responsible for carrying
out the evaluation of the role of the Chairman during the year.
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 2017
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 2017 51
Goverance Structure
Brit Limited
Remuneration
Committee
Audit
Committee
Nomination
Committee
Brit Insurance
Holdings Limited
Executive
Committee
Underwriting
Committee
Brit (Reinsurance)
Bermuda Limited
Brit Syndicates
Limited
Risk Oversight
Committee
Audit
Committee
Audit
Committee
UK Investment
Committee
Risk Oversight
Committee
By order of the Board
Tim Harmer
Company Secretary
14 February 2018
Model
Governance
Committee
GOVERNANCE 52 Brit Limited Annual Report 2017
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 and Singapore and we are represented on
the Lloyd’s China platform.
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
2017 was 562 and profit after tax in 2017 was US$21.5m
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 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.
Our Procurement and Material Outsourcing Policy ensures that
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 whistleblowers. 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 2017 53
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 2017.
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
14 February 2018
GOVERNANCE 54
Brit Limited Annual Report 2017
Brit Limited Annual Report 2017
55
INDEX TO THE FINANCIAL STATEMENTS
INDEPENDENT AUDITOR’S REPORT
TO THE MEMBERS OF BRIT LIMITED
CONSOLIDATED FINANCIAL STATEMENTS
PARENT COMPANY FINANCIAL STATEMENTS
56
66
145
FINANCIAL STATEMENTSCONTENTS 56
Brit Limited Annual Report 2017
INDEPENDENT AUDITOR’S REPORT
TO THE MEMBERS OF BRIT LIMITED
Report on the audit of the financial statements
Opinion
In our opinion:
equity for the year then ended; and the notes to the financial
statements, which include a description of the significant
accounting policies.
Brit Limited’s Group financial statements and Company
financial statements (the financial statements) give a true and
fair view of the state of the Group’s and of the Company’s
affairs as at 31 December 2017 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 IFRSs as adopted by the
European Union;
• The Company financial statements have been properly
prepared in accordance with United Kingdom Generally
Accepted Accounting Practice (United Kingdom
Accounting Standards, comprising FRS 102 ‘The Financial
Reporting Standard applicable in the UK and Republic of
Ireland’, and applicable law); 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.
We have audited the financial statements, included within
the Annual Report, which comprise: the Group and Company
statements of financial position as at 31 December 2017;
the Group income statement, the Group statement of
comprehensive income, the Group statement of cash flows,
and the Group and Company statements of changes in
Our opinion is consistent with our reporting to the
Audit Committee.
Basis for opinion
We conducted our audit in accordance with International
Standards on Auditing (UK) (ISAs (UK)) and applicable law.
Our responsibilities under ISAs (UK) are further described
in the Auditor’s responsibilities for the audit of the financial
statements section of our report. We believe that the audit
evidence we have obtained is sufficient and appropriate to
provide a basis for our opinion.
Independence
We remained independent of the group and company in
accordance with the ethical requirements that are relevant
to our audit of the financial statements in the UK, which
includes the FRC’s Ethical Standard, as applicable to listed
public interest entities, and we have fulfilled our other ethical
responsibilities in accordance with these requirements.
To the best of our knowledge and belief, we declare that non-
audit services prohibited by the FRC’s Ethical Standard were
not provided to the group or the company.
Other than those disclosed in note 13 to the financial
statements, we have provided no non-audit services to the
Group or the Company in the period from 1 January 2017 to
31 December 2017.
Our audit approach
Overview
• Overall Group materiality: US$15.35m, based on the total change in net operating expenses and
net claims incurred that would drive a change in the combined operating ratio (‘COR’) by 1%.
Materiality
• Overall Company materiality: US$11.9m, based on 1% of total assets.
• We performed audit procedures over material balances/transactions in active operations/
subsidiaries in the UK for the purpose of the Group audit.
Audit scope
• We have performed the majority of the work for the purpose of the Group audit on Brit Global
Specialty Singapore Pte. Ltd. and Brit Reinsurance (Bermuda) Limited (formerly Brit Insurance
(Gibraltar) PCC Limited), as the Group maintains its accounting records in the UK.
Key audit
matters
• Appropriateness of methodologies and assumptions applied in the valuation of claims incurred
but not reported (IBNR) component of insurance contracts liabilities.
• Risk of inappropriate revenue recognition (including fraud risk).
• Valuation of investments with valuations modelled using unobservable inputs.
PwC
Brit Limited Annual Report 2017
57
Scope of our audit
As part of designing our audit, we determined materiality
and assessed the risks of material misstatement in the
financial statements. In particular, we looked at where the
Directors made subjective judgements, for example in respect
of significant accounting estimates that involved making
assumptions and considering future events that are inherently
uncertain. As in all of our audits we also addressed the risk
of management override of internal controls, including
evaluating whether there was evidence of bias by the
directors that represented a risk of material misstatement due
to fraud.
Key audit matters
Key audit matters are those matters that, in the auditor’s
professional judgement, were of most significance in the audit
of the financial statements of the current period and include
the most significant assessed risks of material misstatement
(whether or not due to fraud) identified by the auditor,
including those which had the greatest effect on: the overall
audit strategy; the allocation of resources in the audit; and
directing the efforts of the engagement team. These matters,
and any comments we make on the results of our procedures
thereon, were addressed in the context of our audit of the
financial statements as a whole, and in forming our opinion
thereon, and we do not provide a separate opinion on these
matters. This is not a complete list of all risks identified by
our audit.
Key audit matter
How our audit addressed the key audit matter
Appropriateness of methodologies and
assumptions applied in the valuation
of the IBNR component of insurance
contracts liabilities
See notes 2.4, 3.2, 4.1.3 and 20 of the
consolidated financial statements for
disclosures of related accounting policies,
judgments and estimates.
The IBNR component of insurance contract
liabilities are a material balance within the
financial statements (US$1,693.8m as at
31 December 2017) which are also highly
judgemental and complex to calculate.
These are a best estimate of all claims
incurred but not settled at a given date,
regardless of whether these have been
reported to the Group.
There are varying methods which can be
adopted in the estimation of IBNR which
are underpinned by a series of assumptions
selected by the Group. These can rely on
a large degree of judgement and relatively
small changes in these assumptions can lead
to significant movements in IBNR.
Our core team with actuarial specialists have performed the following:
• We understood, assessed and tested the design and operational
effectiveness of key controls over the Group’s estimation of IBNR, which
included controls over the extraction of data from the underlying systems
and the review and approval of the IBNR.
• We tested on a sample basis the underlying source data being claims
incurred and claims payments to supporting documentation; no material
exceptions were found.
• We developed a point estimate of IBNR on both a gross and net basis
and we compared our estimate to those booked by management,
and in all those cases where significant differences were identified, we
obtained satisfactory responses, concluding on the reasonableness of
management’s estimates.
• In relation to catastrophe events, we understood the approach used to
set the booked reserves and consistency of its application. For a sample
of individual claims balances, we traced the booked reserves back to
supporting documentation. Further, we compared booked reserves to
PwC’s market view for each event and in all those cases where significant
differences were identified we obtained satisfactory responses and
concluded on the reasonableness of management estimates; no material
exceptions were found.
Based on the work performed, the recorded IBNR is consistent with the
evidence obtained.
FINANCIAL STATEMENTS 58
Brit Limited Annual Report 2017
Key audit matter
How our audit addressed the key audit matter
Risk of inappropriate revenue recognition
(including fraud risk)
Our testing procedures over pipeline premiums estimates and non-standard
earning patterns included:
• We understood, assessed and tested the design and operating
effectiveness of the governance and controls over the monitoring
of pipeline premiums estimates. In particular we have focused on
management’s monitoring controls of pipeline premium forecasts
and signed premiums to date. No material exceptions were found.
• We have reviewed the methodology adopted in the calculation of pipeline
premiums estimates including recalculation of development factors; no
material issues were found.
• We have understood a sample of material adjustments made to
development factors in the determination of pipeline premiums estimates
and considered whether these have been made appropriately. No material
exceptions were noted.
• We have obtained and reviewed management accounting paper, which
concluded that the straight line basis of earning premium revenue is a
materially appropriate approximation of incidence of risk and we concur
with the management assessment.
Based on the above procedures we note that no material exceptions were
identified in relation to revenue.
See notes 2.4, 3.3, and 5 of the
consolidated financial statements for
disclosures of related accounting policies,
judgments and estimates.
Auditing standards assume a rebuttable
presumption, that there is a significant
risk of fraud in revenue recognition in all
businesses. We have not rebutted the risk
of fraud in revenue recognition and we
determined the key risks of fraud in this area
to be around the judgmental aspects of
revenue which include appropriate premium
earnings profiles applied to the various
contracts/lines of business and accrued
pipeline premium.
The Group recognises a material amount
of pipeline premiums estimates in its
financial statements using an actuarial
technique to historic written premium
data in order to derive written premium
development factors. For certain lines of
business, judgemental adjustments are
made to the derived written premium
development factors.
The Group is recognising revenue mainly
on straight line basis over the term of the
policies as they are of the view that this
approximate to incidence of the risk.
INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF BRIT LIMITED Brit Limited Annual Report 2017
59
Key audit matter
How our audit addressed the key audit matter
Valuation of investments with valuations
modelled using unobservable inputs
We coordinated with our internal valuation specialists based in Toronto who
centrally test the valuation of all investments.
See notes 2.4, 3.5 and 22 of the
consolidated financial statements for
disclosures of related accounting policies,
judgments and estimates.
The Group investment portfolio contain
some investments measured at fair value,
whose fair value is determined using
unobservable inputs. Fair values for
these investments can only be calculated
using estimates or risk-adjusted value
ranges (Level 3 portfolio investments) and
accordingly these investments require some
additional audit focus as they require a
greater degree of judgement to value.
We have performed the following for a sample of Level 3
portfolio investments:
• Reviewed appropriateness of models and assumptions.
• Reviewed and re-performed the fair value calculations.
• Concluded on the reasonableness of the valuation models.
Based on the above procedures, no material exceptions were found.
We determined that there were no key audit matters
applicable to the company to communicate in our report.
How we tailored the audit scope
As part of designing our audit, we determined materiality
and assessed the risks of material misstatement in the
financial statements. In particular, we looked at where the
Directors made subjective judgements, for example in
respect of significant accounting estimates that involved
making assumptions and considering future events that are
inherently uncertain. We gained an understanding of the
legal and regulatory framework applicable to the Group and
Company and the industry in which it operates, and
considered the risk of acts by the Group and Company
which were contrary to applicable laws and regulations,
including fraud. We designed audit procedures to respond
to the risk, recognising that the risk of not detecting a
material misstatement due to fraud is higher than the risk
of not detecting one resulting from error, as fraud may
involve deliberate concealment by, for example, forgery or
intentional misrepresentations, or through collusion. We
designed audit procedures that focused on the risk of non-
compliance with the Companies Act 2006, the Council of
Lloyd’s regulations, the Financial Conduct Authority’s and the
Prudential Regulation Authority’s regulations applicable to
insurance companies and UK tax legislation that could give
rise to a material misstatement in the financial statements.
For compliance with laws and regulations our tests included
review of the financial statements disclosures to underlying
supporting documentation and for consistency with our
review of correspondence with the regulators, enquiries with
management, enquiries of the Group Director of Legal and
Compliance, and review of all internal audit reports in so far
as they relate to the financial statements.
There are inherent limitations in the audit procedures
described above and the further removed non-compliance
with laws and regulations is from the events and transactions
reflected in the financial statements, the less likely we would
become aware of it.
We did not identify any key audit matters relating to
irregularities, including fraud. As in all of our audits, we
also addressed the risk of management override of internal
controls, including testing journals and evaluating whether
there was evidence of bias by the directors that represented a
risk of material misstatement due to fraud.
Brit is a global specialty insurer and reinsurer, present in
Lloyd’s of London and has operations in the United States
of America, Singapore, and Bermuda, and writes insurance
business internationally. We have scoped in active operations/
subsidiaries in the UK for the purpose of the Group audit
and performed audit procedures over material balances/
transactions. Further, for subsidiaries in Singapore (Brit Global
Specialty Singapore Pte. Ltd.) and Bermuda (Brit Reinsurance
(Bermuda) Limited), we have performed the majority of the
work for the purpose of the Group audit, as the financial
records and supporting information is maintained in the
Group’s London headquarters.
FINANCIAL STATEMENTS 60
Brit Limited Annual Report 2017
Materiality
The scope of our audit was influenced by our application
of materiality. We set certain quantitative thresholds for
materiality. These, together with qualitative considerations,
helped us to determine the scope of our audit and the
nature, timing and extent of our audit procedures on the
individual financial statement line items and disclosures and in
evaluating the effect of misstatements, both individually and
in aggregate on the financial statements as a whole.
Based on our professional judgement, we determined
materiality for the financial statements as a whole as follows:
Group financial statements
Company financial statements
Overall materiality
US$15.35m
How we determined it
Rationale for benchmark applied
This represents the total by which
net operating expenses and
net claims incurred would have
to fluctuate to move the COR
by 1%.
Materiality for the consolidated
financial statements is based
on 1% change in combined
operating ratio. The benchmark
to determine materiality for
the Group has been chosen as
the combined operating ratio
which is a primary performance
measure for Brit.
US$11.90m
1% of total assets.
We believe that due to nature of operations of
parent Company which is a holding company, total
assets is an appropriate and generally accepted
auditing benchmark.
For each component in the scope of our Group audit, we
allocated a materiality that is less than our overall Group
materiality. The range of materiality allocated across
components was between US$5.82m and US$15.35m.
All significant components were audited to a local statutory
audit materiality that was also less than our overall
Group materiality.
We agreed with the Audit Committee that we would report
to them misstatements identified during our audit above
US$0.76m (Group audit) and US$0.60m (Company audit) as
well as misstatements below those amounts that, in our view,
warranted reporting for qualitative reasons.
Conclusions relating to going concern
We have nothing to report in respect of the following matters
in relation to which ISAs (UK) require us to report to you when:
• the Directors’ use of the going concern basis of accounting
in the preparation of the financial statements is not
appropriate; or
• the Directors have not disclosed in the financial statements
any identified material uncertainties that may cast
significant doubt about the Group’s and Company’s
ability to continue to adopt the going concern basis of
accounting for a period of at least twelve months from the
date when the financial statements are authorised for issue.
However, because not all future events or conditions can be
predicted, this statement is not a guarantee as to the Group’s
and Company’s ability to continue as a going concern.
INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF BRIT LIMITED Brit Limited Annual Report 2017
61
Reporting on other information
The other information comprises all of the information in the
Annual Report other than the financial statements and our
auditor’s report thereon. The Directors are responsible for the
other information. Our opinion on the financial statements
does not cover the other information and, accordingly, we
do not express an audit opinion or, except to the extent
otherwise explicitly stated in this report, any form of
assurance thereon.
In connection with our audit of the financial statements, our
responsibility is to read the other information and, in doing
so, consider whether the other information is materially
inconsistent with the financial statements or our knowledge
obtained in the audit, or otherwise appears to be materially
misstated. If we identify an apparent material inconsistency or
material misstatement, we are required to perform procedures
to conclude whether there is a material misstatement of the
financial statements or a material misstatement of the other
information. If, based on the work we have performed, we
conclude that there is a material misstatement of this other
information, we are required to report that fact. We have
nothing to report based on these responsibilities.
With respect to the Strategic Report and Directors’ Report,
we also considered whether the disclosures required by the
UK Companies Act 2006 have been included.
Based on the responsibilities described above and our
work undertaken in the course of the audit, ISAs (UK)
require us also to report certain opinions and matters as
described below.
Strategic Report And Directors’ Report
In our opinion, based on the work undertaken in the course
of the audit, the information given in the Strategic Report
and Directors’ Report for the year ended 31 December 2017
is consistent with the financial statements and has been
prepared in accordance with applicable legal requirements.
In light of the knowledge and understanding of the group and
company and their environment obtained in the course of the
audit, we did not identify any material misstatements in the
Strategic Report and Directors’ Report.
Responsibilities for the financial statements
and the audit
Responsibilities of the Directors for the
financial statements
As explained more fully in the Statement of Directors’
Responsibilities set out on page 48, the Directors are
responsible for the preparation of the financial statements
in accordance with the applicable framework and for being
satisfied that they give a true and fair view. The Directors are
also responsible for such internal control as they determine is
necessary to enable the preparation of financial statements
that are free from material misstatement, whether due to
fraud or error.
In preparing the financial statements, the Directors are
responsible for assessing the Group’s and the Company’s
ability to continue as a going concern, disclosing as
applicable, matters related to going concern and using the
going concern basis of accounting unless the Directors either
intend to liquidate the Group or the Company or to cease
operations, or have no realistic alternative but to do so.
Auditor’s responsibilities for the audit of the
financial statements
Our objectives are to obtain reasonable assurance about
whether the financial statements as a whole are free from
material misstatement, whether due to fraud or error,
and to issue an auditor’s report that includes our opinion.
Reasonable assurance is a high level of assurance, but is
not a guarantee that an audit conducted in accordance
with ISAs (UK) will always detect a material misstatement
when it exists. Misstatements can arise from fraud or
error and are considered material if, individually or in the
aggregate, they could reasonably be expected to influence
the economic decisions of users taken on the basis of these
financial statements.
A further description of our responsibilities for the audit of
the financial statements is located on the FRC’s website at:
www.frc.org.uk/auditorsresponsibilities. This description forms
part of our auditor’s report.
Use of this report
This report, including the opinions, has been prepared for and
only for the 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.
FINANCIAL STATEMENTS 62
Brit Limited Annual Report 2017
INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF BRIT LIMITED
Other required reporting
Companies Act 2006 exception reporting
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
company, or returns adequate for our audit have not been
received from branches not visited by us; or
• certain disclosures of Directors’ remuneration specified by
law are not made; or
• the Company financial statements are not in agreement
with the accounting records and returns.
We have no exceptions to report arising from
this responsibility.
Appointment
Following the recommendation of the Audit Committee,
we were appointed by the members on 14 June 2016
to audit the financial statements for the year ended
31 December 2016 and subsequent financial periods.
The period of total uninterrupted engagement is two
years, covering the years ended 31 December 2016 to
31 December 2017.
Mark Bolton (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
15 February 2018
Notes:
The maintenance and integrity of the Brit Limited website is the responsibility of the Directors; the work carried out by the auditor 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.
Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Brit Limited Annual Report 2017
63
64
Brit Limited Annual Report 2017
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 2017
65
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED INCOME STATEMENT
66
NOTE 14
CONSOLIDATED STATEMENT
OF COMPREHENSIVE INCOME
CONSOLIDATED STATEMENT
OF FINANCIAL POSITION
CONSOLIDATED STATEMENT
OF CASH FLOWS
CONSOLIDATED STATEMENT
OF CHANGES IN EQUITY
NOTES TO THE CONSOLIDATED
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
OTHER INCOME
NOTE 9
NET FOREIGN EXCHANGE GAINS
NOTE 10
ACQUISITION COSTS AND OTHER
OPERATING EXPENSES
NOTE 11
STAFF COSTS
NOTE 12
FINANCE COSTS
NOTE 13
AUDITOR’S REMUNERATION
INVESTMENTS IN ASSOCIATED
UNDERTAKINGS
67
NOTE 15
TAX EXPENSE
NOTE 16
INTANGIBLE ASSETS
68
69
70
72
72
72
82
85
102
106
106
107
107
108
108
109
109
NOTE 17
PROPERTY, PLANT AND EQUIPMENT
NOTE 18
DEFERRED ACQUISITION COSTS
NOTE 19
DEFERRED TAXATION
NOTE 20
INSURANCE AND REINSURANCE
CONTRACTS
NOTE 21
EMPLOYEE BENEFITS
NOTE 22
FINANCIAL INVESTMENTS
NOTE 23
DERIVATIVE CONTRACTS
NOTE 24
INSURANCE AND OTHER RECEIVABLES
NOTE 25
CASH AND CASH EQUIVALENTS
NOTE 26
BORROWINGS
NOTE 27
OTHER FINANCIAL LIABILITIES
NOTE 28
INSURANCE AND OTHER PAYABLES
NOTE 29
CALLED UP SHARE CAPITAL
NOTE 30
DIVIDENDS
NOTE 31
COMMITMENTS
NOTE 32
CASH FLOWS PROVIDED
BY OPERATING ACTIVITIES
NOTE 33
SHARE‑BASED PAYMENTS
NOTE 34
CONSOLIDATED ENTITIES
NOTE 35
RELATED PARTY TRANSACTIONS
AND ULTIMATE PARENT COMPANY
NOTE 36
GUARANTEES AND
CONTINGENT LIABILITIES
110
111
113
115
116
116
118
122
126
130
132
132
133
133
134
134
135
135
136
137
139
140
143
FINANCIAL STATEMENTSCONTENTS 66
Brit Limited Annual Report 2017
CONSOLIDATED INCOME
STATEMENT
For the year ended 31 December 2017
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
Total expenses excluding finance costs
Operating profit
Finance costs
Share of net profit of associates
Profit on ordinary activities before tax
Tax income/(expense)
Profit for the year
All profits arise from continuing operations.
The accompanying Notes are an integral part of the financial statements.
Note
5
5
6
7
8
9
5
10
10
12
15(a)
Year ended
31 December
2017
US$m
2,057.0
(526.2)
1,530.8
(54.3)
60.3
6.0
Year ended
31 December
2016
US$m
1,912.2
(432.0)
1,480.2
21.4
32.5
53.9
1,536.8
1,534.1
205.5
5.2
13.9
9.7
132.2
(52.8)
1.1
52.2
1,771.1
1,666.8
(1,068.4)
206.7
(861.7)
(619.0)
372.4
(246.6)
(1,108.3)
(535.4)
(109.9)
(1,753.6)
17.5
(17.1)
5.1
5.5
16.0
21.5
(874.9)
140.7
(734.2)
(183.9)
62.0
(121.9)
(856.1)
(530.9)
(104.8)
(1,491.8)
175.0
(18.8)
3.6
159.8
(2.2)
157.6
CONSOLIDATED STATEMENT
OF COMPREHENSIVE INCOME
For the year ended 31 December 2017
Brit Limited Annual Report 2017
67
Profit attributable to owners of the parent
Other comprehensive income
Items not to be reclassified to profit or loss in subsequent periods:
Actuarial losses on defined benefit pension scheme
Deferred tax gain relating to actuarial gains on defined benefit
pension scheme
Items that may be reclassified to profit or loss in subsequent periods:
Change in unrealised foreign currency translation losses on foreign operations
Total other comprehensive income
Total comprehensive income recognised for the year
The accompanying Notes are an integral part of the financial statements.
Note
21
15(b)
Year ended
31 December
2017
US$m
21.5
Year ended
31 December
2016
US$m
157.6
(1.9)
0.3
7.4
5.8
27.3
(5.4)
0.9
(13.7)
(18.2)
139.4
FINANCIAL STATEMENTS
68
Brit Limited Annual Report 2017
CONSOLIDATED STATEMENT
OF FINANCIAL POSITION
At 31 December 2017
Assets
Intangible assets
Property, plant and equipment
Deferred acquisition costs
Investments in associated undertakings
Reinsurance contracts
Employee benefits
Deferred taxation
Current taxation
Financial investments
Derivative contracts
Insurance and other receivables
Cash and cash equivalents
Total assets
Liabilities and Equity
Liabilities
Insurance contracts
Borrowings
Other financial liabilities
Deferred taxation
Provisions
Current taxation
Derivative contracts
Insurance and other payables
Total liabilities
Equity
Called up share capital
Capital redemption reserve
Foreign currency translation reserve
Retained earnings
Total equity attributable to owners of the parent
Total liabilities and equity
Note
16
17
18
14
20
21
19
22
23
24
25
20
26
27
19
23
28
29
31 December
2017
US$m
31 December
2016
US$m
97.8
21.3
235.7
40.4
1,349.5
48.6
20.4
13.7
2,699.4
18.3
908.3
1,571.6
7,025.0
5,027.3
219.8
82.1
–
2.4
21.1
12.5
529.5
5,894.7
6.4
0.2
(83.6)
1,207.3
1,130.3
7,025.0
93.9
22.9
219.6
36.6
884.1
42.5
0.4
15.3
2,903.9
12.6
718.3
1,025.5
5,975.6
4,243.5
157.5
–
25.8
2.4
4.6
11.8
382.0
4,827.6
6.4
0.2
(91.0)
1,232.4
1,148.0
5,975.6
The accompanying Notes are an integral part of the financial statements.
These financial statements were approved by the Board of Directors on 14 February 2018 and were signed on its behalf by:
Matthew Wilson
Group Chief Executive Officer
Mark Allan
Chief Financial Officer
CONSOLIDATED STATEMENT
OF CASH FLOWS
For the year ended 31 December 2017
Note
32
16
17
Cash flows from operating activities
Cash generated from operations
Tax paid
Interest received
Dividend received
Net cash inflows from operating activities
Cash flows from investing activities
Purchase of intangible assets
Purchase of property, plant and equipment
Investment in associated undertaking
Net cash outflows from investing activities
Cash flows from financing activities
Drawdown on revolving credit facility
Purchase of class A shares for cancellation
Purchase of shares for share-based payment schemes
Interest paid
Dividend paid
Net cash outflows from financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of the year
Effect of exchange rate fluctuations on cash and cash equivalents
Brit Limited Annual Report 2017
69
Year ended
31 December
2017
US$m
Year ended
31 December
2016
US$m
532.3
(12.0)
42.3
6.4
569.0
(7.4)
(0.9)
1.6
(6.7)
45.0
–
(11.6)
(13.6)
(45.8)
(26.0)
536.3
1,025.5
9.8
579.4
(3.4)
57.8
17.5
651.3
(6.3)
(8.3)
(4.9)
(19.5)
–
(58.1)
(3.4)
(15.4)
(90.8)
(167.7)
464.1
581.0
(19.6)
1,025.5
Cash and cash equivalents at the end of the year
25
1,571.6
The accompanying Notes are an integral part of the financial statements.
FINANCIAL STATEMENTS
70
Brit Limited Annual Report 2017
CONSOLIDATED STATEMENT
OF CHANGES IN EQUITY
For the year ended 31 December 2017
At 1 January 2017
Total comprehensive income recognised
Share-based payments
Dividend
At 31 December 2017
Called up
share
capital
US$m
Capital
redemption
reserve
US$m
Foreign
currency
translation
reserve
US$m
Retained
earnings
US$m
Total
equity
US$m
6.4
0.2
(91.0) 1,232.4 1,148.0
–
–
–
–
–
–
7.4
–
–
19.9
0.8
(45.8)
27.3
0.8
(45.8)
6.4
0.2
(83.6) 1,207.3 1,130.3
Note
33
30
The accompanying Notes are an integral part of the financial statements.
CONSOLIDATED STATEMENT
OF CHANGES IN EQUITY
For the year ended 31 December 2016
Brit Limited Annual Report 2017
71
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
Nature and Purpose of Group Reserves
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
33
30
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 financial statements.
FINANCIAL STATEMENTS
72
Brit Limited Annual Report 2017
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
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 2017 were authorised for issue in accordance with a resolution of the Directors on 14 February 2018. 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 2017 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 the years presented, unless otherwise stated.
The consolidated financial statements have been prepared on a historical cost basis, except for financial investments, derivative
contracts and other financial liabilities 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. Further details on estimates and assumptions are included within Note 3 to the consolidated
financial statements.
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.
The Group has adopted the following amendments to standards with a date of initial application of 1 January 2017:
(a) Statement of Cash Flows – Amendments to IAS 7
These amendments require an entity to provide disclosures that enable users of financial statements to evaluate changes in
liabilities arising from financing activities. These amendments include:
• providing a reconciliation about changes in liabilities arising from financing activities;
• providing a specific policy on which instruments meet the definition of cash and cash equivalents; and
• disclosing any cash and cash equivalents that are not available for use by the Group.
These amendments have resulted in enhanced disclosures but have had no impact on the Group’s financial position
or performance.
(b) Recognition of deferred tax assets for unrealised losses – Amendments to IAS 12
These amendments have no impact on the Group.
Brit Limited Annual Report 2017
73
(c) IFRS annual improvements cycle 2014 ‑ 2016
Various minor amendments to IFRS. These amendments have no impact on the Group.
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
IFRS 2
IFRS 4
IFRS 9
IFRS 15
IFRS 16
IFRS 17
Effective
Classification and measurement of share-based
payment transactions (amendments to IFRS 2
Share-based Payment)
Applying IFRS 9 with IFRS 4 (amendments)
Financial Instruments (2014)
Revenue from Contracts with Customers (2014)
Leases (2016)
Insurance Contracts (2017)
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
Periods commencing on or after 1 January 2021
IFRS 17 ‘Insurance Contracts’
In May 2017, the IASB issued IFRS 17 which will have the effect of introducing fundamental changes to the statutory
reporting of insurance entities. IFRS 17 replaces the existing insurance contracts accounting standard, IFRS 4, and is effective
for annual periods beginning on or after 1 January 2021, with early application permitted. This standard has not yet been
endorsed by the EU.
Brit has initiated an implementation project which is currently assessing the impact of adopting IFRS 17 on its financial
statements and which will determine both the operational and reporting effects upon the business. The project aims to ensure
that the standard is fully embedded within the business before it becomes effective on 1 January 2021.
IFRS 9 ‘Financial Instruments’
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. Currently, the
Group’s investment and derivatives portfolios are recorded at fair value through profit or loss under IAS 39. Brit expects to
continue to be able to record these items at fair value through profit or loss under IFRS 9.
In September 2016 the IASB issued amendments to IFRS 4 that provided 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. Brit will be taking advantage of this temporary exemption and will adopt
IFRS 9 from 1 January 2021.
IFRS 15 ‘Revenue from Contracts with Customers’
IFRS 15 was issued in 2014, replacing IAS 18, IAS 11 and a number of revenue related interpretations. IFRS 15 applies to annual
reporting periods beginning on or after 1 January 2018. The standard introduced a simple, five step principles-based model
to be applied to the accounting of contracts with customers that fall within the scope of the standard. Revenue from insurance
contracts and financial instruments is outside the scope of IFRS 15.
Brit has completed an initial assessment of the potential impact of adopting IFRS 15, focussing on fees and commission income,
and has concluded that there will not be a significant impact for the Group, which intends to apply the requirements of the new
standard retrospectively.
FINANCIAL STATEMENTS 74
Brit Limited Annual Report 2017
2 ACCOUNTING POLICIES AND BASIS OF PREPARATION (continued)
IFRS 16 ‘Leases’
In January 2016, the IASB issued IFRS 16 which replaces the current lease accounting standard, IAS 17. IFRS 16 eliminates
the classification of leases as either operating or finance leases for lessees. Instead, lessees will be required to recognise both
a right of use asset and a lease liability on balance sheet for all leases. The standard will apply to reporting periods beginning
on or after 1 January 2019. The Group’s preliminary assessment of the impact of this standard is that it is not expected to have
a significant impact on the Group’s financial statements.
The Directors anticipate that the adoption of the other standards in future periods will not have a material impact on the financial
statements of the Group.
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 the 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.
Included within the accounts of the Group are structured entities where under the requirements of IFRS 10 Consolidated
Financial Statements it has been determined that control exists. The third-party investment in these entities is recognised
as a financial liability in accordance with IAS 32.
Underwriting members at Lloyd’s have several but not joint liability for the transactions of the syndicates in which they
participate. Therefore, for each managed syndicate on which the Group participates, only the relevant proportion of the
transactions, assets and liabilities of those syndicates are reflected in the consolidated financial statements. Syndicate assets
are held subject to trust deeds for the benefit of the syndicate’s insurance creditors. As at 31 December 2017 Brit UW Limited,
a subsidiary of the Group, provided 100% of the capital for Syndicate 2987 and therefore all transactions, assets and liabilities
of Syndicate 2987 have been included in the Group’s financial statements. The Group managed the underwriting of, but did not
participate as a member of, Syndicate 2988 at Lloyd’s and consequently, the financial position and performance (or proportions
thereof) of that syndicate are not included in the Group’s financial statements.
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 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’.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Brit Limited Annual Report 2017
75
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 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
Profit commission income arising from whole account quota share contracts is recognised when the economic benefits are
highly probable. They are netted off against commission costs which are included within the ‘acquisition costs’ line in the
income statement.
(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.
FINANCIAL STATEMENTS 76
Brit Limited Annual Report 2017
2 ACCOUNTING POLICIES AND BASIS OF PREPARATION (continued)
(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.
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.
2.4.2 Revenue recognition
(a) Fee and commission income
Fee and commission income consists mainly of administration and broking fees charged to non-aligned syndicates. 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.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Brit Limited Annual Report 2017
77
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.
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 recognised, which represents their cost. They are subsequently remeasured at their fair value, with
movements in this value recognised 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.
FINANCIAL STATEMENTS 78
Brit Limited Annual Report 2017
2 ACCOUNTING POLICIES AND BASIS OF PREPARATION (continued)
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.
(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 head office premises during 2016, useful lives were revised to reflect the useful economic lives of new
assets acquired.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Brit Limited Annual Report 2017
79
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.
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
Where relevant 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.
FINANCIAL STATEMENTS 80
Brit Limited Annual Report 2017
2 ACCOUNTING POLICIES AND BASIS OF PREPARATION (continued)
2.4.11 Employee benefits
The Group operates a defined contribution group personal pension plan and one other defined contribution scheme. 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.
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, bonus plans and long service cash awards 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.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Brit Limited Annual Report 2017
81
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.
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 Other financial liabilities
The Group has designated its financial liabilities in respect of third party investments in consolidated structured entities at fair
value through profit or loss (FVTPL). The fair value of the investments by independent third parties is determined by reference
to the net assets of those entities, which may also require reference to the underlying net assets of reinsurance vehicles in which
those entities have invested. Gains or losses in respect to change in fair value is recognised through the income statement.
2.4.19 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.
2.4.20 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, less provision for impairment. Individual receivables known to be
uncollectible are written off by reducing the carrying amount directly. Other receivables are assessed collectively to determine
whether there is objective evidence that an impairment has occurred but not yet been identified and, where necessary, the
estimated impairment losses are recognised in a separate provision for impairment.
FINANCIAL STATEMENTS 82
Brit Limited Annual Report 2017
2 ACCOUNTING POLICIES AND BASIS OF PREPARATION (continued)
2.4.21 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.
2.4.22 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.
2.4.23 Collateral
The Group receives collateral from certain reinsurers and pledges collateral where required for regulatory purposes and other
funding arrangements. 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.
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.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Brit Limited Annual Report 2017
83
• 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, 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.
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$4,136.1m (2016: US$3,406.7m) as set out in Note 20 to the accounts. The amount of
reinsurance recoveries estimated at that date is US$1,116.2m (2016: US$711.1m).
3.3 Pipeline premiums
Written premiums include pipeline premiums of US$540.5m (2016: US$459.4m) 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 (2016: US$70.8m). For further information, refer to Note 16.
FINANCIAL STATEMENTS 84
Brit Limited Annual Report 2017
3 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
IN APPLYING ACCOUNTING POLICIES (continued)
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$2,699.4m (2016: US$2,903.9m). 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). To the extent that valuation is based on models or inputs that
are unobservable in the market, the determination of fair value requires more judgement and accordingly, those instruments
included in level three will require a greater degree of judgement to be exercised during valuation than for those included in
level two or level one. At 31 December 2017, financial investments amounting to US$282.7m (2016: US$164.2m) 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 22.
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$48.6m (2016: US$42.5m).
For further information, refer to Note 21.
3.7 Consolidation of structured entities
During the year, the Group made minority investments in two Bermuda-domiciled special purposes vehicles, Versutus Limited
and Sussex Capital Limited (which is the sole investor in another special purpose vehicle, Sussex Re Limited). The Group is
therefore required to determine whether these entities (or segregated accounts thereof) meet the criteria for consolidation as
defined in IFRS 10, for which the exercise of judgement is required. In particular, the Group considered the following factors to
determine whether it is acting as an agent or a principal for these entities: (i) the power the Group has over them and the ability
to direct relevant activities; (ii) the rights of the Group to variable returns from the Group’s involvement with the entities; and the
ability to use that power to affect the amount of the Group’s returns.
The fee income from services provided to the entities and the Group’s direct investments expose it to variability of returns from
the activities of these entities. As at 31 December, that exposure was of a significance that it indicates that the Group is acting as
a principal when considered alongside additional factors including the design of the structures in which those entities have been
established, their business models, and a range of other qualitative factors in determining whether the criteria for consolidation
are met. Consequently, the Group has consolidated these entities (or relevant segregated accounts thereof) from the date of its
investments therein.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Brit Limited Annual Report 2017
85
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.
(b) Controls over underwriting strategy
The Board sets the Group’s underwriting strategy for accepting and managing underwriting risk. The 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.
FINANCIAL STATEMENTS 86
Brit Limited Annual Report 2017
4 RISK MANAGEMENT POLICIES (continued)
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 84% of the GWP of the Group in 2017 was sourced in London. The other
business written by the syndicate is sourced through a wholly-owned service company in the United States, the business of
which accounted for 11.4% of the Group’s annual GWP in 2017. The Group also writes business from its office in Bermuda, with
BGSB accounting for 4.0% of the Group’s annual GWP in 2017, its Singapore office and through the Lloyd’s China Platform.
In 2017, 33.8% of the Group’s GWP was reinsured to third parties.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Brit Limited Annual Report 2017
87
(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, United Kingdom and Europe. The concentration of insurance premium before and
after reinsurance by the location of the underlying risk is summarised below:
2017
United States
United Kingdom
Europe (excluding UK)
Other (including worldwide)
2016
United States
United Kingdom
Europe (excluding UK)
Other (including worldwide)
Gross
premiums
written
US$m
Net
premiums
written
US$m
896.0
107.2
103.3
950.5
642.0
76.8
68.7
743.3
2,057.0 1,530.8
843.1
106.7
110.8
851.6
656.4
100.4
73.8
649.6
1,912.2
1,480.2
The nature of the London Market business is such that the insureds and reinsureds are often operating on a multi-territory or
worldwide basis and hence coverage is often provided on a worldwide basis. Premiums written on a multi-territory or worldwide
basis are included in ‘Other’ in the table above.
(e) Portfolio mix
The Group’s third party underwriting takes place through the syndicate underwriting business in a wide variety of business lines.
The business lines can be broken down into four principal categories: (i) short-tail direct insurance; (ii) long-tail direct insurance;
(iii) short-tail reinsurance; and (iv) long-tail reinsurance.
The breakdown of premium before reinsurance by principal lines of business is summarised below:
Short-tail direct insurance
Long-tail direct insurance
Short-tail reinsurance
Long-tail reinsurance
Property, Marine, Energy, Accident and Health, BGSU
US Speciality, Aviation, Terrorism and Political
Professional Lines, Specialty Lines, Specialist Liability
Property Treaty
Casualty Treaty
2017
Gross
premiums
written
%
US$m
57%
25%
7%
11%
1,076.1
470.3
153.2
212.6
2016
Gross
premiums
written
%
56%
25%
8%
11%
US$m
1,172.2
501.5
151.5
231.8
2,057.0
100%
1,912.2
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 35.6% of the portfolio at 31 December 2017 (2016: 35.7%) and delegated underwriting represents 42.1%
(2016: 41.5%). Underwriting risk is mainly driven by the syndicate’s US catastrophe exposure. Casualty Treaty is also a driver due
to its long-tail exposure.
FINANCIAL STATEMENTS
88
Brit Limited Annual Report 2017
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
4 RISK MANAGEMENT POLICIES (continued)
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 seven principal lines of business:
Property
Marine
Energy
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.
BGSU US Specialty
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.
Brit Limited Annual Report 2017
89
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
The Group’s long-tail reinsurance business centres around Casualty Treaty. Core lines of business include Officers’, Workers’
Compensation, Medical Malpractice, Accident and Health, and other accident classes including Property Terror.
Casualty treaty Casualty and Accident Treaty reinsurance. Worldwide portfolio, presently written on an 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 potential large claims from natural catastrophe events. The Group’s catastrophe risk tolerance is
defined in the Syndicate 2987 and Brit Reinsurance (Bermuda) Limited catastrophe risk appetite framework. These are reviewed
and set by the boards on an annual basis. The last review of catastrophe risk tolerances was in March 2017.
Overall, the Group, for major catastrophe events (as defined by World Wide All Perils 1-in-30 Aggregate Exceedance Probability
(AEP)) has a tolerance of 25% of Brit Limited Group net tangible assets. This equates to a maximum acceptable 1-in-30 AEP loss
(after all reinsurance) of US$266.2m at 31 December 2017. This is in addition to other tolerances set within the catastrophe risk
appetite framework.
The Group closely monitors aggregation of exposure to natural catastrophe events against agreed risk appetites using stochastic
catastrophe modelling tools, along with knowledge of the business, historical loss information, and geographical accumulations.
Analysis and monitoring also measures the effectiveness of the Group’s reinsurance programmes. Stress and scenario tests are
also run, such as Lloyd’s and internally developed Realistic Disaster Scenarios (RDS). Below are the key RDS losses to the Group
for all classes combined (unaudited):
Gulf of Mexico windstorm
Florida Miami windstorm
US North East windstorm
San Francisco earthquake
Japan earthquake
Japan windstorm
European windstorm
Note 1: At 31 December 2017 foreign exchange rates.
Estimated
industry loss
US$m
113,500
128,250
80,500
87,750
46,066
13,731
28,852
Modelled
Group loss at
1 October 2017
(Note 1)
Net
US$m
Gross
US$m
850
736
755
737
230
95
233
100
86
68
294
145
53
144
Modelled
Group loss at
1 October 2016
(Note 1)
Net
US$m
191
168
156
282
160
60
183
Gross
US$m
829
654
748
716
244
95
257
FINANCIAL STATEMENTS
90
Brit Limited Annual Report 2017
4 RISK MANAGEMENT POLICIES (continued)
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 2017
%
US$m
Movement in profit
year ended
31 December 2016
%
US$m
9.1
3.0
0.8
2.2
0.3
59%
20%
5%
14%
2%
9.0
3.1
0.8
2.1
0.2
59%
20%
5%
14%
2%
15.4
100%
15.2
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.
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
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Brit Limited Annual Report 2017
91
Group CEO, Chief Financial Officer and Chief Underwriting Officer propose reinsurance arrangements with Brit Reinsurance
(Bermuda) Limited. 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 2017 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 Brit Reinsurance (Bermuda) Limited
Management Committee performs a similar function for Brit Reinsurance (Bermuda) Limited.
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 20.
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 Reinsurance (Bermuda) Limited 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 auditor.
FINANCIAL STATEMENTS 92
Brit Limited Annual Report 2017
4 RISK MANAGEMENT POLICIES (continued)
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 20.
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 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 and individual entities within 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
outsourced investment management agreements, which is in line with prevailing regulations, with Hamblin Watsa Investment
Counsel Ltd (HWIC) and a range of third party investment managers.
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 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 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.
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
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Brit Limited Annual Report 2017
93
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 to 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 2017
Cash and cash equivalents
Financial investments
At 31 December 2016
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
1,571.6
1,432.5
3,004.1
1,025.5
1,888.8
2,914.3
–
281.9
281.9
–
181.7
181.7
–
162.9
162.9
–
132.7
132.7
–
135.4
135.4
–
300.9
300.9
– 1,571.6
686.7 2,699.4
686.7 4,271.0
–
399.8
1,025.5
2,903.9
399.8
3,929.4
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.
FINANCIAL STATEMENTS
94
Brit Limited Annual Report 2017
4 RISK MANAGEMENT POLICIES (continued)
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 2017.
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
2017
US$m
2016
US$m
(5.1)
(10.1)
(20.2)
5.1
10.1
20.2
(10.0)
(20.0)
(40.0)
10.0
20.0
40.0
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 2017
Total assets
Total liabilities
USD
US$m
GBP
conv. US$m
CAD $
conv. US$m
EUR €
conv. US$m
AUS $
conv. US$m
Total
conv. US$m
4,871.7 1,150.9
3,982.4 1,162.0
615.8
289.7
316.1
339.4
70.5 7,025.0
121.2 5,894.7
Net assets/(liabilities) excluding the effect of currency derivatives
889.3
(11.1)
326.1
(23.3)
(50.7) 1,130.3
6.9
194.8
(309.3)
896.2
183.7
16.8
53.6
30.3
54.0
–
3.3 1,130.3
Adjustment for foreign exchange derivatives
Adjusted net assets/(liabilities)
At 31 December 2016
Total assets
Total liabilities
Net assets/(liabilities) excluding the effect of currency derivatives
1,103.6
(120.3)
253.0
Adjusted for foreign exchange derivatives
Adjusted net assets/(liabilities)
254.3
52.8
(257.3)
1,357.9
(67.5)
(4.3)
4,298.9
3,195.3
830.3
950.6
522.1
269.1
259.7
301.6
(41.9)
(49.8)
(91.7)
64.6
111.0
5,975.6
4,827.6
(46.4) 1,148.0
–
–
(46.4) 1,148.0
The non-US dollar denominated 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 derivatives to manage the risk of reported losses due to changes in foreign exchange
rates. The details of all foreign currency derivative contracts entered into are given in Note 23.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Brit Limited Annual Report 2017
95
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. The degree to which derivatives are used is dependent on the prevailing costs versus the
perceived benefit to shareholder value from reducing the chance of a reported loss due to changes in foreign 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 2017.
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
2017
US$m
2016
US$m
(23.4)
(46.8)
(38.6)
(77.3)
23.4
46.8
38.6
77.3
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.
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.
FINANCIAL STATEMENTS 96
Brit Limited Annual Report 2017
4 RISK MANAGEMENT POLICIES (continued)
Sensitivity to changes in other price risk
The sensitivity of the profit to the changes in the prices of equity is set out in the table below. The analysis is based on the
information at 31 December 2017.
Impact on profit before tax
Increase in fair value
10%
20%
30%
Decrease in fair value
10%
20%
30%
2017
US$m
2016
US$m
81.3
162.7
244.0
47.9
95.8
143.7
(81.3)
(162.7)
(244.0)
(47.9)
(95.8)
(143.7)
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 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.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Brit Limited Annual Report 2017
97
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 2017
Financial investments
Derivative contracts
Cash and cash equivalents
At 31 December 2016
Financial investments
Derivative contracts
Cash and cash equivalents
AAA
US$m
AA
US$m
A
US$m
P-1
US$m
P-2
US$m
1,163.1
–
581.0
1,744.1
286.0
–
583.8
869.8
206.2
–
187.5
1,706.2
–
552.8
393.7
2,259.0
216.4
–
233.4
449.8
212.4
–
–
212.4
–
–
135.2
135.2
–
–
236.8
236.8
–
–
38.2
38.2
–
–
48.4
48.4
BBB and
below
US$m
188.6
–
–
188.6
191.9
–
–
191.9
Equities
US$m
Not rated
US$m
Total
US$m
686.7
–
–
686.7
399.8
–
–
399.8
158.6 2,699.4
18.3
– 1,571.6
18.3
176.9 4,289.3
187.4
12.6
–
2,903.9
12.6
1,025.5
200.0
3,942.0
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 Panel chaired by the Head of Treasury and Investments.
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 Panel. 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.
FINANCIAL STATEMENTS
98
Brit Limited Annual Report 2017
4 RISK MANAGEMENT POLICIES (continued)
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 2017
Reinsurance assets
Insurance receivables
At 31 December 2016
Reinsurance assets
Insurance receivables
AAA
US$m
AA
US$m
A
US$m
Collateral
US$m
Not rated
US$m
Total
US$m
1.5
–
1.5
1.9
–
1.9
681.9
–
681.9
406.2
–
406.2
222.2
–
222.2
166.7
–
166.7
160.8
–
160.8
102.4
–
102.4
49.8 1,116.2
862.1
862.1
911.9 1,978.3
33.9
678.7
711.1
678.7
712.6
1,389.8
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 2017, collateral of US$563.3m (2016: US$382.9m) 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$160.8m (2016: US$102.4m) had been drawn against reinsurance assets at 31 December 2017.
The following table shows movements in impairment provisions during the year:
2017
Opening provision at 1 January
Release for the year
Net foreign exchange differences
Closing provision at 31 December
2016
Opening provision at 1 January
Release for the year
Net foreign exchange differences
Closing provision at 31 December
Impairment
provision
against
reinsurance
assets
US$m
Impairment
provision
against
insurance
receivables
US$m
0.7
–
–
0.7
1.0
–
(0.3)
0.7
11.6
(0.5)
0.2
11.3
12.9
(1.2)
(0.1)
11.6
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Brit Limited Annual Report 2017
99
The following table shows the amount of insurance receivables past due but not impaired at the end of the year.
0-3 months past due
4-6 months past due
7-9 months past due
10-12 months past due
More than 12 months past due
2017
US$m
15.4
8.0
0.1
–
0.8
24.3
2016
US$m
14.7
1.9
1.6
1.7
1.9
21.8
4.5 Liquidity risk
Liquidity risk is the risk that the Group may encounter difficulty in meeting obligations associated with financial liabilities that
are settled by delivering cash or another financial asset. The predominant liquidity risk the Group faces is the daily calls on its
available cash resources in respect of claims arising from insurance contracts.
The Group monitors the levels of cash and cash equivalents on a daily basis, ensuring adequate liquidity to meet the expected
cash flow requirements due over the short-term.
The Group also limits the amount of investment in illiquid securities in line with the liquidity policy set by the Board. This
involves ensuring sufficient liquidity to withstand claim scenarios at the extreme end of business plan projections, by reference
to modelled realistic disaster scenarios. Contingent liquidity also exists in the form of a Group revolving credit facility.
The tables below present the fair value of monetary assets and the undiscounted value of monetary liabilities of the Group into
their relevant maturing groups based on the remaining period at the end of the year to their contractual maturities or expected
repayment dates. Borrowings are stated at their nominal value at maturity.
31 December 2017
Assets
Reinsurance assets
Financial investments
Derivative contracts
Insurance receivables
Cash and cash equivalents
31 December 2017
Liabilities
Insurance contract liabilities
Derivative contracts
Borrowings
Other financial liabilities
Insurance and other payables
Statement
of financial
position
US$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
331.7
1,116.2
2,699.4 1,432.5
18.3
862.1
1,571.6 1,571.6
18.3
862.1
376.4
281.9
–
–
–
178.2
162.9
–
–
–
229.9
135.4
–
–
–
–
1,116.2
686.7 2,699.4
18.3
–
–
862.1
– 1,571.6
6,267.6 4,216.2
658.3
341.1
365.3
686.7 6,267.6
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$m
4,136.1 1,097.5 1,287.4
–
–
–
–
12.5
219.8
82.1
529.5
12.5
45.0
–
529.5
712.1 1,039.1
–
197.6
–
–
–
–
–
–
–
–
–
82.1
–
4,136.1
12.5
242.6
82.1
529.5
4,980.0 1,684.5 1,287.4
712.1 1,236.7
82.1 5,002.8
FINANCIAL STATEMENTS
100 Brit Limited Annual Report 2017
4 RISK MANAGEMENT POLICIES (continued)
31 December 2016
Assets
Reinsurance assets
Financial investments
Derivative contracts
Insurance receivables
Cash and cash equivalents
31 December 2016
Liabilities
Insurance contract liabilities
Derivative contracts
Borrowings
Insurance and other payables
Statement
of financial
position
US$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
2,903.9
12.6
678.7
1,025.5
199.0
1,888.8
12.6
678.7
1,025.5
5,331.8
3,804.6
233.3
181.7
–
–
–
415.0
117.4
132.7
–
–
–
250.1
161.4
300.9
–
–
–
462.3
Undiscounted values
–
399.8
–
–
–
711.1
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
Statement
of financial
position
US$m
3,406.7
11.8
157.5
382.0
857.4
11.8
–
382.0
1,023.7
–
–
–
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
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 Operations Committee, chaired by the Chief Operating Officer, is a key governance committee reporting to the Executive
Committee. The Operations Committee is responsible for providing oversight and direction to the Operational Risk Working
Group (ORWG) and together they provide dedicated forums 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. The ORWG
reports to the Operations 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.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Brit Limited Annual Report 2017 101
4.7 Political risk
The United Kingdom’s exit from the EU (Brexit)
Following the triggering of article 50 of the Treaty of Lisbon on 29 March 2017, Brit continues to monitor the ensuing
negotiations and other developments. Brit will continue to work to minimise the impact on itself and its clients and to take
advantage of opportunities as they arise.
Lloyd’s implementation plan for its new Brussels-based European insurer is progressing. It has commenced an on-boarding
programme for managing agents to ensure the necessary operational changes are implemented to allow business to be written
through its Brussels subsidiary from 1 January 2019. Brit is supportive of Lloyd’s proposals and looks forward to participating on
the new platform.
4.8 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 while optimising
risk adjusted returns.
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$1,468.5m as at 31 December 2017. This represented a surplus of US$395.1m 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 2017, 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.
FINANCIAL STATEMENTS 102 Brit Limited Annual Report 2017
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 2017, 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 Brit Reinsurance
(Bermuda) Limited and the share of underwriting performance relating to the consolidation of structured reinsurance vehicles.
• ‘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 2017
(31 December 2016: 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.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS I
I
F
N
A
N
C
A
L
S
T
A
T
E
M
E
N
T
S
Brit Limited Annual Report 2017 103
Information regarding the Group’s reportable segments is presented below.
(a) Statement of profit or loss by segment
Year ended 31 December 2017
Brit Global
Specialty
Direct
US$m
Brit Global
Specialty
Other
Reinsurance Underwriting
US$m
US$m
Total
underwriting
excluding
the effect
of foreign
exchange on
Total
underwriting
after the
effect of
foreign
exchange on
Intra non-monetary non-monetary non-monetary
items
US$m
Effect of
foreign
exchange on
items
US$m
items
US$m
Group
US$m
1,675.0
383.3
25.1
(26.4) 2,057.0
(462.6)
(92.3)
2.3
26.4
(526.2)
–
–
2,057.0
(526.2)
1,212.4
1,633.6
(418.7)
291.0
375.0
(77.2)
27.4
29.2
(1.8)
–
1,530.8
(30.6) 2,007.2
(467.1)
30.6
–
1,530.8
(4.0) 2,003.2
(466.4)
0.7
Other
corporate
US$m
–
–
–
–
–
Total
US$m
2,057.0
(526.2)
1,530.8
2,003.2
(466.4)
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
1,214.9
28.6
5.5
6.3
–
297.8
10.5
1.2
1.0
–
Total revenue
1,255.3
310.5
27.4
0.6
–
4.0
–
32.0
–
–
–
–
–
–
1,540.1
39.7
6.7
11.3
–
1,597.8
(3.3) 1,536.8
39.7
6.7
11.3
7.9
–
–
–
7.9
–
165.8
(1.5)
2.6
1.8
1,536.8
205.5
5.2
13.9
9.7
4.6 1,602.4
168.7 1,771.1
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
(1,466.8)
564.6
(226.9)
62.1
(38.9)
(2.4)
45.2
(45.2)
(1,687.4)
579.1
– (1,687.4)
579.1
–
– (1,687.4)
579.1
–
(902.2)
(366.0)
(91.5)
(164.8)
(59.5)
(18.3)
(41.3)
(0.4)
(1.0)
– (1,108.3)
(425.9)
–
(110.8)
–
– (1,108.3)
(424.8)
(110.6)
1.1
0.2
– (1,108.3)
(424.8)
–
(110.6)
–
(67.4)
(16.1)
–
–
(2.4)
–
–
–
(85.9)
–
–
–
(85.9)
–
–
(24.0)
(85.9)
(24.0)
(1,427.1)
(258.7)
(45.1)
– (1,730.9)
1.3
(1,729.6)
(24.0) (1,753.6)
Operating (loss)/profit
(171.8)
51.8
(13.1)
–
(133.1)
5.9
(127.2)
144.7
Finance costs
Share of net profit of associates
Profit on ordinary activities before tax
Tax income
Profit for the year
Claims ratio
Expense ratio
Combined ratio
74.3%
43.2%
117.5%
55.3% 150.7%
31.5%
13.9%
86.8% 164.6%
72.0%
40.4%
112.4%
72.1%
40.4%
112.5%
17.5
(17.1)
5.1
5.5
16.0
21.5
104 Brit Limited Annual Report 2017
5 SEGMENTAL INFORMATION (continued)
Year ended 31 December 2016
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
(losses)/gains
Total revenue
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
Other
corporate
US$m
–
–
–
–
–
Total
US$m
1,912.2
(432.0)
1,480.2
1,933.6
(399.5)
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$m
1,912.2
(432.0)
1,168.7
1,548.4
(339.8)
289.5
361.6
(76.1)
1,208.6
27.5
–
–
285.5
10.5
–
–
–
–
1,236.1
296.0
(918.9)
210.7
(138.0)
14.5
(708.2)
(360.3)
(88.9)
(123.5)
(51.1)
(19.4)
(64.9)
(16.1)
–
–
22.0
25.2
(4.2)
21.0
–
–
–
–
21.0
(24.1)
(0.3)
(24.4)
(0.2)
(1.0)
(2.5)
–
–
1,480.2
(25.4) 1,909.8
(394.7)
25.4
–
23.8
(4.8)
1,480.2
1,933.6
(399.5)
–
–
–
–
–
–
1,515.1
38.0
–
–
19.0
–
–
–
1,534.1
38.0
–
–
–
94.2
(52.8)
1.1
1,534.1
132.2
(52.8)
1.1
–
(9.0)
(9.0)
61.2
52.2
1,553.1
10.0
1,563.1
103.7
1,666.8
22.2
(22.2)
(1,058.8)
202.7
–
–
(1,058.8)
202.7
–
–
–
–
–
(1,058.8)
202.7
(856.1)
(418.6)
(112.3)
–
(7.0)
(3.0)
(856.1)
(418.6)
(112.3)
–
–
(83.5)
–
–
(21.3)
(83.5)
(21.3)
(1,460.5)
(10.0)
(1,470.5)
(21.3)
(1,491.8)
92.6
–
92.6
82.4
175.0
(856.1)
(411.6)
(109.3)
(83.5)
–
–
–
–
–
–
–
–
finance costs
(1,222.3)
(210.1)
(28.1)
Operating profit/(loss)
13.8
85.9
(7.1)
Finance costs
Share of net profit of associates
Profit on ordinary activities before tax
Tax expense
Profit for the year
Claims ratio
Expense ratio
Combined ratio
58.6%
42.5%
101.1%
43.3%
30.3%
73.6%
116.2%
17.6%
133.8%
56.5%
39.9%
96.4%
55.8%
39.9%
95.7%
(18.8)
3.6
159.8
(2.2)
157.6
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Brit Limited Annual Report 2017 105
Brit Global
Specialty
Direct
US$m
Brit Global
Specialty
Reinsurance
US$m
3.7
3.9
6.6
0.7
1.0
1.7
Brit Global
Specialty
Direct
US$m
Brit Global
Specialty
Reinsurance
US$m
3.0
4.2
11.8
0.6
1.0
2.8
Total
US$m
4.4
4.9
8.3
Total
US$m
3.6
5.2
14.6
b) Depreciation, amortisation, impairment and capital expenditure by segment
Year ended 31 December 2017
Depreciation of property, plant and equipment
Amortisation of intangibles
Capital expenditure
Year ended 31 December 2016
Depreciation of property, plant and equipment
Amortisation of intangibles
Capital expenditure
Capital expenditure consists of additions of property, plant and equipment and intangible assets but excludes assets recognised
on business combinations.
c) Geographical information
The Group’s strategic business units operate mainly in four geographical areas, though the business is managed on a
worldwide basis.
The segmental split shown below is based on the location of the underlying risk.
Gross premiums written
United States
United Kingdom
Europe (excluding UK)
Other (including worldwide)
Year ended
31 December
2017
US$m
Year ended
31 December
2016
US$m
896.0
107.2
103.3
950.5
843.1
106.7
110.8
851.6
2,057.0
1,912.2
The nature of the London Market business is such that the insureds and reinsureds are often operating on a multi-territory or
worldwide basis and hence coverage is often provided on a worldwide basis. Premiums written on a multi-territory or worldwide
basis are included in ‘Other’ in the table above.
FINANCIAL STATEMENTS
106 Brit Limited Annual Report 2017
6 INVESTMENT RETURN
This Note shows the income we have generated through investing our funds. It also shows the gains and losses that we have
generated on various types of investment assets as a result of the movement in their market values.
Year ended 31 December 2017
Equity securities
Debt securities
Specialised investment funds
Cash and cash equivalents
Total investment return before expenses
Investment management expenses
Total investment return
Year ended 31 December 2016
Equity securities
Debt securities
Specialised investment funds
Cash and cash equivalents
Total investment return before expenses
Investment management expenses
Total investment return
Investment
Net
realised
income gains/(losses)
US$m
US$m
Net
unrealised
gains
US$m
Total
investment
return
US$m
6.5
34.3
–
7.4
48.2
(13.1)
35.1
13.1
(10.1)
(0.1)
–
2.9
–
2.9
105.6
14.5
47.4
–
167.5
–
167.5
125.2
38.7
47.3
7.4
218.6
(13.1)
205.5
Investment
income
US$m
Net
realised
(losses)/gains
US$m
Net
unrealised
(losses)/gains
US$m
Total
investment
return
US$m
5.1
66.8
1.1
0.7
73.7
(13.8)
59.9
(4.9)
64.1
3.1
–
62.3
–
62.3
(39.7)
45.8
3.9
–
10.0
–
10.0
(39.5)
176.7
8.1
0.7
146.0
(13.8)
132.2
7 RETURN ON DERIVATIVE CONTRACTS
This Note shows the effect on the income statement of derivative contracts we were party to during the year. The main reason
we entered into these derivative contracts was to help manage our exposure to fluctuations in interest rates and foreign
exchange rates. Derivatives are shown analysed between investment related derivatives and currency related derivatives,
reflecting the way we manage our business.
Interest rate swaps
Non-currency options
Investment related derivatives
Currency forwards
Currency related derivatives
Return on derivative contracts
Year ended
31 December
2017
US$m
Year ended
31 December
2016
US$m
–
(6.4)
(6.4)
11.6
11.6
5.2
0.8
(33.7)
(32.9)
(19.9)
(19.9)
(52.8)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Brit Limited Annual Report 2017 107
8 OTHER INCOME
This Note shows the analysis of other income generated in the year ended 31 December 2017
Fees and commission from non-aligned syndicate
Change in value of other financial liabilities*
Change in value of parent company shares held by Brit
Other
Total
Year ended
31 December
2017
US$m
Year ended
31 December
2016
US$m
7.0
4.0
1.6
1.3
13.9
–
–
(0.3)
1.4
1.1
*Other financial liabilities includes the investments made by external investors in structured entities consolidated by the Group.
9 NET FOREIGN EXCHANGE GAINS
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$9.7m (2016: US$52.2m) in the income statement in the year.
Foreign exchange gains and losses result from the translation of the statement of financial position to closing exchange rates
and the income statement to average exchange rates. However, as an exception to this, IAS 21 ‘The Effects of Changes in
Foreign Exchange Rates’ requires that net unearned premiums and deferred acquisition costs (UPR/DAC), being non-monetary
items, remain at historic exchange rates. This creates a foreign exchange mismatch, the financial effects of which are shown in
the table below.
Gains/(losses) on foreign exchange arising from:
Translation of the statement of financial position and income statement
Maintaining UPR/DAC items in the income statement at historic rates
Net foreign exchange gains
Principal exchange rates applied are set out in the table below.
Year ended
31 December
2017
US$m
Year ended
31 December
2016
US$m
1.8
7.9
9.7
61.1
(8.9)
52.2
Year ended
31 December 2017
US$m
Closing
Average
Year ended
31 December 2016
US$m
Closing
Average
Sterling
Canadian dollar
Euro
Australian dollar
In accordance with IAS 1 ‘Presentation of Financial Statements’, exchange gains and losses are presented on a net basis. They
are reported within revenue where they result in a net gain and within expenses where they result in a net loss.
0.738
1.323
0.903
1.343
0.739
1.253
0.833
1.279
0.776
1.297
0.885
1.304
0.809
1.341
0.948
1.381
FINANCIAL STATEMENTS
108 Brit Limited Annual Report 2017
10 ACQUISITION COSTS AND OTHER OPERATING EXPENSES
This Note shows the analysis of costs incurred in acquiring and underwriting insurance contracts and the running costs of our
business during the year. We have separated out the more material costs in order to provide a more detailed insight into our
cost base.
Salary, pension and social security costs (Note 11)
Other staff related costs
Accommodation costs
Legal and professional charges
IT costs
Travel and entertaining
Marketing and communications
Amortisation and impairment of intangible assets
Depreciation and impairment of property, plant and equipment
Regulatory levies and charges
Other
Expenses before commissions
Commission costs
Total acquisition costs and other operating expenses
11 STAFF COSTS
Year ended 31 December 2017
Year ended 31 December 2016
Acquisition
costs
US$m
Other
operating
expenses
US$m
53.7
2.8
6.5
1.7
1.1
4.1
0.4
0.1
0.4
40.1
(0.3)
51.1
10.5
6.5
4.9
19.3
3.1
1.6
4.8
3.9
–
4.2
110.6
424.8
535.4
109.9
–
109.9
Acquisition
costs
US$m
Other
operating
expenses
US$m
56.0
2.0
6.8
1.5
1.1
4.2
0.3
0.1
0.4
38.1
1.8
47.3
8.9
6.9
5.7
19.3
2.8
1.2
4.9
3.2
–
4.6
112.3
418.6
530.9
104.8
–
104.8
Total
US$m
104.8
13.3
13.0
6.6
20.4
7.2
2.0
4.9
4.3
40.1
3.9
220.5
424.8
645.3
Total
US$m
103.3
10.9
13.7
7.2
20.4
7.0
1.5
5.0
3.6
38.1
6.4
217.1
418.6
635.7
This Note gives a breakdown of the total cost of employing our staff (including executive and non-executive Directors) and gives
the average number of people employed by the Group during the year.
Wages and salaries
Social security costs
Pension costs
Total staff costs
Year ended
31 December
2017
US$m
Year ended
31 December
2016
US$m
89.5
10.7
4.6
88.3
10.1
4.9
104.8
103.3
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Brit Limited Annual Report 2017 109
The average number of employees during the year, including executive and non-executive Directors, was as follows:
Front office staff
Underwriters
Claims staff
Other underwriting and direct support staff
Total front office staff
Back office staff
Management
Administration
Total back office staff
Total employees
Year ended
31 December
2017
Number
Year ended
31 December
2016
Number
180
54
115
349
82
131
213
562
175
56
116
347
75
117
192
539
‘Management’ includes non-executive Directors and employees who have other members of staff reporting to them.
12 FINANCE COSTS
Finance costs arise from interest due on moneys borrowed by the Group and any other amounts payable in respect of
those borrowings or borrowing facilities. The Group’s borrowings consist of a revolving credit facility and listed unsecured
subordinated debt, details of which are set out in Note 26.
Revolving credit facility and other bank borrowings
Subordinated debt
Total finance costs
13 AUDITOR’S REMUNERATION
The Group engages PricewaterhouseCoopers LLP to perform the audit of the Group.
The remuneration of the auditor or its associates is analysed as follows:
Audit of the Group and company financial statements
Fees payable for the audit of subsidiaries
Total audit
Other services
Total non‑audit services
Total audit and non‑audit services
Year ended
31 December
2017
US$m
Year ended
31 December
2016
US$m
3.4
13.7
17.1
4.6
14.2
18.8
Year ended
31 December
2017
US$m
Year ended
31 December
2016
US$m
0.4
0.9
1.3
0.1
0.1
1.4
0.5
0.9
1.4
–
–
1.4
FINANCIAL STATEMENTS
110 Brit Limited Annual Report 2017
14 INVESTMENTS IN ASSOCIATED UNDERTAKINGS
This Note describes the investments made in associated undertakings and provides summarised income statements and
statements of financial position of those 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$4.9m) and entered into a call and a put option to
purchase the remaining 50% in 2021. The investment in Camargue is measured using the equity accounting method. The
principal place of business of Camargue is South Africa. Camargue is a leading managing general underwriter of a range
of specialised insurance products and specialist liability solutions in South Africa and is an important trading partner for Brit.
The summarised statement of financial position of Camargue and reconciliation to the carrying amount is as follows:
Statement of financial position
Current assets
Non-current assets
Total assets
Current liabilities
Non-current liabilities
Total liabilities
Net assets
50% not owned by Brit
Acquisition fair value, result since acquisition and other adjustments
Carrying value
Income statement
Commission revenue
Operating expenses
Net profit
50% not owned by Brit
Share of net profit of associate
Year ended
31 December
2017
US$m
Year ended
31 December
2016
US$m
2.8
1.7
4.5
(2.2)
–
(2.2)
2.3
(1.2)
4.4
5.5
2.1
1.4
3.5
(2.0)
(0.1)
(2.1)
1.4
(0.7)
4.5
5.2
Year ended
31 December
2017
US$m
Year ended
31 December
2016
US$m
5.4
(4.0)
1.4
(0.7)
0.7
3.9
(3.2)
0.7
(0.4)
0.3
Ambridge Partners LLC
On 8 December 2015, the Group acquired 50% of the members’ interests of Ambridge Partners LLC for US$28.6m and entered
into a call and a put option to purchase the remaining 50% in 2019. The investment in Ambridge Partners LLC is measured
using the equity accounting method. The principal place of business of Ambridge Partners LLC is the United States. Ambridge
Partners LLC is a leading managing general underwriter of transactional insurance products, writing business on behalf of
a broad consortium of Lloyd’s of London syndicates and international insurers including Brit. The summarised statement of
financial position of Ambridge Partners LLC and reconciliation to the carrying amount is as follows:
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Brit Limited Annual Report 2017 111
31 December
2017
US$m
31 December
2016
US$m
54.5
1.4
55.9
(38.4)
(38.4)
17.5
(8.8)
26.2
34.9
40.9
1.3
42.2
(31.9)
(31.9)
10.3
(5.2)
26.3
31.4
Year ended
31 December
2017
US$m
Year ended
31 December
2016
US$m
26.2
(17.5)
8.7
(4.3)
4.4
21.2
(14.5)
6.7
(3.4)
3.3
Statement of financial position
Current assets
Non-current assets
Total assets
Current liabilities
Total liabilities
Net assets
50% not owned by Brit
Acquisition fair value, result since acquisition and other adjustments
Carrying value
Income statement
Commission revenue
Operating expenses
Net profit
50% not owned by Brit
Share of net profit of associate
15 TAX EXPENSE
Income tax is tax charged on our trading activities during the year. This Note shows the breakdown of tax payable in the current
period (current tax) and also tax that may become payable sometime in the future (deferred tax).
(a) Tax credited/(charged) to income statement
Current tax:
Current taxes on income for the year
Overseas tax on income for the year
Double tax relief
Adjustments in respect of prior years
Total current tax
Deferred tax:
Relating to the origination and reversal of temporary differences
Adjustments in respect of prior years
Total deferred tax
Total tax credited/(charged) to income statement
Year ended
31 December
2017
US$m
Year ended
31 December
2016
US$m
(28.4)
(3.5)
(31.9)
0.7
1.0
(30.2)
44.8
1.4
46.2
16.0
(4.0)
(4.0)
(8.0)
3.1
2.0
(2.9)
(5.2)
5.9
0.7
(2.2)
Overseas tax and double tax relief principally arise from taxes suffered as a result of the Group’s operations at Lloyd’s. Double
tax relief is effectively limited to an amount equal to the tax due at the UK tax rate on the same source of income.
FINANCIAL STATEMENTS
112 Brit Limited Annual Report 2017
15 TAX EXPENSE (continued)
(b) Tax charged to other comprehensive income
Deferred tax charge on actuarial gains on defined benefit pension scheme
Year ended
31 December
2017
US$m
Year ended
31 December
2016
US$m
0.3
0.9
(c) Tax reconciliation
The tax on the Group’s profit before tax differs from the theoretical amount that would arise based on the weighted average rate
of tax as follows:
Profit on continuing ordinary activities before tax
Tax calculated at weighted average rate of tax on income
Non-deductible and non-taxable items
Taxes on income at rates in excess of the domestic rate and where credit is unavailable
Effect of temporary differences not recognised
Effect of revaluation of deferred tax following change in rate of tax
Other items
Adjustments to tax charge in respect of prior years
Total tax credited/(charged) to income statement
Year ended
31 December
2017
US$m
Year ended
31 December
2016
US$m
5.5
10.6
10.2
(1.6)
–
(5.3)
(0.3)
2.4
16.0
159.8
(24.0)
6.6
(0.1)
4.7
3.0
(0.3)
7.9
(2.2)
The weighted average rate of tax is based on the geographic split of profit across Group entities in jurisdictions with differing tax
rates. As the mix of taxable profits changes, so will the weighted average rate of tax.
(d) Effect of post balance sheet rate changes
UK legislation was substantively enacted on 9 September 2016 to reduce the main rate of UK corporation tax from 20% to 19%
from 1 April 2017 and to 17% from 1 April 2020.
The reductions in rate from 20% to 19% and then to 17% have been used in the calculation of the UK’s deferred tax assets and
liabilities as at 31 December 2017.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Brit Limited Annual Report 2017 113
16 INTANGIBLE ASSETS
An intangible asset is an asset without any physical substance but which has long-term value to our business. Brit’s intangible
assets relate to contracts to sell our products through independent brokers and agents (distribution channels) our brand names
(trade names), our relationship with our customer base (renewal rights), our rights to underwrite policies at Lloyd’s (syndicate
participations) and our internally developed software.
With the exception of our syndicate participation rights at Lloyd’s, which we classify as an indefinite life asset, we reduce the
value of these assets according to their useful life by way of amortisation. Amortisation is included as an expense in the income
statement.
Distribution
channels
US$m
Trade
Syndicate
names participations
US$m
US$m
Renewal
rights
US$m
Software
US$m
Total
US$m
Cost:
At 1 January 2016
Additions
Disposals
Foreign exchange effect
At 31 December 2016
At 1 January 2017
Additions
Disposals
Foreign exchange effect
At 31 December 2017
Amortisation:
At 1 January 2016
Charge for the year
Disposals
Foreign exchange effect
At 31 December 2016
At 1 January 2017
Charge for the year
Disposals
Foreign exchange effect
At 31 December 2017
Carrying amount:
At 31 December 2016
At 31 December 2017
9.8
–
–
–
9.8
9.8
–
–
–
9.8
3.1
0.7
–
–
3.8
3.8
0.7
–
–
4.5
6.0
5.3
18.9
–
–
–
18.9
18.9
–
–
–
18.9
18.4
0.5
–
–
18.9
18.9
–
–
–
18.9
70.8
–
–
–
70.8
70.8
–
–
–
70.8
–
–
–
–
–
–
–
–
–
–
5.8
–
–
–
5.8
5.8
–
–
–
5.8
4.9
0.9
–
–
5.8
5.8
–
–
–
5.8
28.8
6.3
(2.1)
(4.4)
28.6
28.6
7.4
(0.2)
2.7
38.5
12.6
3.1
(2.1)
(2.1)
11.5
11.5
4.2
(0.2)
1.3
16.8
134.1
6.3
(2.1)
(4.4)
133.9
133.9
7.4
(0.2)
2.7
143.8
39.0
5.2
(2.1)
(2.1)
40.0
40.0
4.9
(0.2)
1.3
46.0
–
–
70.8
70.8
–
–
17.1
21.7
93.9
97.8
FINANCIAL STATEMENTS
114 Brit Limited Annual Report 2017
16 INTANGIBLE ASSETS (continued)
Additional information
The gross cost of software fully amortised but still in use is US$6.9m (2016: US$5.1m).
All software additions in 2017 and 2016 were internally developed.
The software amortisation charge for the year of US$4.2m (2016: US$3.1m) is included in the ‘other operating expenses’ line in
the income statement.
There were no impairments to software in 2017 (2016: nil)
Assets not yet in use with a total cost of US$3.7m (2016: US$4.8m) are included in software.
Further information is given in Note 5(b).
Impairment tests for syndicate participations
Syndicate participations are indefinite life intangible assets and are therefore reviewed annually for impairment. They have been
allocated to cash-generating units (CGUs) as follows:
Global Specialty Direct
Global Specialty Reinsurance
31 December
2017
US$m
31 December
2016
US$m
52.7
18.1
70.8
52.7
18.1
70.8
These CGU’s are based upon operating segments which earn revenues and incur expenses and whose results are regularly
reviewed by management.
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% (2016: 8.9%). 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 2017 115
17 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 2016
Additions
Disposals
Foreign exchange effect
At 31 December 2016
At 1 January 2017
Additions
Disposals
Foreign exchange effect
At 31 December 2017
Depreciation:
At 1 January 2016
Charge for the year
Disposals
Foreign exchange effect
At 31 December 2016
At 1 January 2017
Charge for the year
Disposals
Foreign exchange effect
At 31 December 2017
Carrying amount:
At 31 December 2016
At 31 December 2017
Computers
and office
machinery,
furniture and
equipment
US$m
Office
refurbishment
US$m
23.2
5.3
(7.0)
(2.5)
19.0
19.0
0.4
–
1.7
21.1
8.3
1.6
(7.0)
(0.3)
2.6
2.6
1.7
–
0.2
4.5
12.4
3.0
(2.9)
(1.2)
11.3
11.3
0.5
(0.7)
0.9
12.0
6.2
2.0
(2.9)
(0.5)
4.8
4.8
2.7
(0.7)
0.5
7.3
Total
US$m
35.6
8.3
(9.9)
(3.7)
30.3
30.3
0.9
(0.7)
2.6
33.1
14.5
3.6
(9.9)
(0.8)
7.4
7.4
4.4
(0.7)
0.7
11.8
16.4
16.6
6.5
4.7
22.9
21.3
The gross cost of property, plant and equipment fully depreciated but still in use is US$2.0m (2016: US$1.7m).
The depreciation charge for the year of US$4.4m (2016: US$3.6m) is included in the ‘other operating expenses’ line in the
income statement.
There were no impairments to property, plant and equipment in the year (2016: nil)
Further information is given in Note 5(b).
A dilapidations provision of US$2.3m (2016: US$2.3m) has been set up in respect of the refurbishment of rented property.
FINANCIAL STATEMENTS
116 Brit Limited Annual Report 2017
18 DEFERRED ACQUISITION COSTS
Acquisition costs are costs incurred in underwriting insurance risks and include commissions paid to third parties and some
internally generated costs such as underwriter salaries. These costs are deferred and are charged to the income statement over
the duration of the contract. We show the movement in these deferred costs and releases to the income statement in this Note.
At 1 January
Costs deferred during the year
Amortisation charge for the year
At 31 December
19 DEFERRED TAXATION
2017
US$m
2016
US$m
219.6
551.5
(535.4)
222.6
527.9
(530.9)
235.7
219.6
This Note describes the tax that we may have to pay/recover in the future. Deferred tax arises from differences in the way that
tax is calculated for accounting purposes and tax purposes.
The deferred tax asset is attributable to temporary differences arising on the following:
At 1 January 2016
Movements in the year:
Charged to income statement
Foreign exchange effect
At 31 December 2016
Set-off of deferred tax liabilities pursuant to set-off provisions
Net deferred tax asset at 31 December 2016
At 1 January 2017
Movements in the year:
(Charged)/credited to income statement
Foreign exchange effect
At 31 December 2017
Set-off of deferred tax liabilities pursuant to set-off provisions
Net deferred tax asset at 31 December 2017
Intangible
assets Underwriting
US$m
US$m
2.9
46.1
(0.1)
(0.5)
2.3
(1.8)
–
44.3
Other
US$m
9.3
(2.5)
(1.0)
5.8
Total
US$m
58.3
(4.4)
(1.5)
52.4
(52.0)
0.4
2.3
44.3
5.8
52.4
(0.2)
0.2
2.3
16.8
–
61.1
(2.2)
0.6
4.2
14.4
0.8
67.6
(47.2)
20.4
Deferred tax assets, all of which arise in the United Kingdom, are considered recoverable where it is expected that there will be
future taxable income based on the approved business plans and budgets of the Group. The net deferred tax asset recorded
in the year arises from significant catastrophe-related activity, which is not expected to recur. The losses can be carried forward
indefinitely and have no expiry date.
Deferred tax assets arising on decelerated capital allowances of US$0.5m (2016: US$0.5m) have not been provided for due to
uncertainty over the timing of their utilisation.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Brit Limited Annual Report 2017 117
Deferred tax has not been set up in respect of certain losses carried forward of US$92.0m (2016: US$87.0m) as it is not
considered probable that they can be utilised in the foreseeable future.
Deferred tax has not been provided in respect of the profits of subsidiaries in the Group as tax exemptions, for example the
participation exemption, are expected to apply.
The deferred tax liability is attributable to temporary differences arising on the following:
At 1 January 2016
Movements in the year:
(Charged)/credited to income statement
Tax relating to components of other comprehensive income (Note 15(b))
Foreign exchange effect
At 31 December 2016
Set-off of deferred tax assets pursuant to set-off provisions
Net deferred tax liability at 31 December 2016
Intangible
Pensions
US$m
assets Underwriting
US$m
US$m
Other
US$m
Total
US$m
(9.4)
(16.1)
(56.8)
(3.4)
(85.7)
(0.2)
0.9
1.5
(7.2)
3.0
–
0.1
1.1
–
–
1.2
–
0.3
5.1
0.9
1.9
(13.0)
(55.7)
(1.9)
(77.8)
52.0
(25.8)
At 1 January 2017
Movements in the year:
(Charged)/credited to income statement
Tax relating to components of other comprehensive income (Note 15(b))
Foreign exchange effect
At 31 December 2017
(7.2)
(13.0)
(55.7)
(1.9)
(77.8)
(0.7)
0.3
(0.7)
(0.5)
–
–
33.4
–
(0.8)
(0.4)
–
–
31.8
0.3
(1.5)
(8.3)
(13.5)
(23.1)
(2.3)
(47.2)
Set-off of deferred tax assets pursuant to set-off provisions
Net deferred tax liability at 31 December 2017
47.2
–
Deferred tax has not been set up in respect of losses carried forward of US$92.0m (2016: US$87.0m) as it is not considered
probable that they can be utilised in the foreseeable future.
Deferred tax has not been provided in respect of the profits of subsidiaries in the Group as tax exemptions, for example the
participation exemption, are expected to apply.
Deferred tax assets arising on decelerated capital allowances of US$0.5m (2016: US$0.5m) have not been provided for due
to uncertainty over the timing of their utilisation.
FINANCIAL STATEMENTS
118 Brit Limited Annual Report 2017
20 INSURANCE AND REINSURANCE CONTRACTS
This Note deals with balances carried in respect of insurance contracts (liabilities) and reinsurance contracts (assets). It examines
the statement of financial position, splitting both insurance and reinsurance balances into their component parts, and explains
the assumptions applied in arriving at these figures. The Note also shows how our claims have developed over a period (before
and after the effects of reinsurance) of time by setting out the cumulative development at the end of each calendar year in
respect of claims arising from business written in a particular underwriting year. It ends by analysing the movements in insurance
and reinsurance contracts during the year.
(a) Balances on insurance and reinsurance contracts
Gross
Claims reported and loss adjustment expenses
Claims incurred but not reported
Unearned premiums
Total gross liabilities
Recoverable from reinsurers
Claims reported and loss adjustment expenses
Claims incurred but not reported
Impairment provision
Unearned premiums
Total reinsurers’ share of liabilities
Net
Claims reported and loss adjustment expenses
Claims incurred but not reported
Impairment provision
Unearned premiums
Total net insurance liabilities
31 December
2017
US$m
31 December
2016
US$m
1,706.4
2,429.7
4,136.1
891.2
1,377.7
2,029.0
3,406.7
836.8
5,027.3
4,243.5
381.0
735.9
(0.7)
1,116.2
233.3
1,349.5
318.6
393.2
(0.7)
711.1
173.0
884.1
1,325.4
1,693.8
0.7
3,019.9
657.9
1,059.1
1,635.8
0.7
2,695.6
663.8
3,677.8
3,359.4
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.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
I
I
F
N
A
N
C
A
L
S
T
A
T
E
M
E
N
T
S
Brit Limited Annual Report 2017 119
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 2017 exchange rates.
120 Brit Limited Annual Report 2017
20 INSURANCE AND REINSURANCE CONTRACTS (continued)
Ultimate gross claims
2008
and prior
years
2009
2010
2011
2012
2013
2014
2015
2016
Intra Group
and other
underwriting
2017 adjustments
Total
90.5% 73.7% 75.9% 80.9% 76.1% 70.0% 70.2% 70.6% 76.7% 100.7%
90.2% 75.8% 86.6% 78.3% 71.7% 70.1% 73.6% 71.4% 85.5%
92.9% 72.7% 90.6% 78.6% 72.4% 70.2% 73.3% 73.5%
96.7% 74.4% 91.0% 78.3% 70.5% 69.9% 74.6%
97.9% 75.0% 89.9% 78.9% 73.2% 71.3%
97.7% 75.9% 87.7% 77.4% 74.1%
99.5% 75.2% 87.4% 76.5%
99.8% 76.4% 85.8%
100.4% 77.0%
99.7%
US$m
US$m
US$m
US$m
US$m
US$m
US$m
US$m
US$m
US$m
US$m
US$m
Underwriting year
At end of
underwriting year
One year later
Two years later
Three years later
Four years later
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Total ultimate
gross claims at
31 December 2017 7,715.3 770.3 898.5 854.5 987.8 1,013.9 1,156.3 1,079.2 1,288.3 1,527.9
– 17,292.0
Less accumulated
gross paid claims
Unearned premium
portion of gross
ultimate claims
Claims handling
(7,404.6) (658.1) (807.0)
(708.2)
(694.2)
(652.0)
(662.4)
(460.5)
(350.5)
(140.4)
– (12,537.9)
–
–
–
–
–
–
–
–
(51.4)
(624.2)
–
(675.6)
provision and other
corporate adjustments
4.3
1.7
1.2
2.2
4.2
5.4
7.4
9.3
11.8
6.9
3.2
57.6
Total outstanding
gross claims at
31 December 2017
315.0 113.9
92.7 148.5 297.8 367.3 501.3 628.0 898.2 770.2
3.2 4,136.1
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Brit Limited Annual Report 2017 121
Ultimate net claims
Underwriting year
At end of
underwriting year
One year later
Two years later
Three years later
Four years later
Five years later
Six years later
Seven years later
Eight years later
Nine years later
2008
and prior
years
2009
2010
2011
2012
2013
2014
2015
2016
Intra Group
and other
underwriting
2017 adjustments
Total
96.2% 79.5% 79.5% 86.6% 82.4% 75.4% 76.1% 77.6% 83.1% 99.3%
96.3% 78.8% 87.8% 84.0% 78.1% 76.8% 79.3% 80.4% 90.3%
96.8% 75.9% 89.8% 83.2% 77.8% 76.4% 78.3% 81.1%
100.1% 74.4% 89.9% 81.3% 75.6% 76.4% 79.1%
102.0% 74.7% 87.8% 81.4% 76.6% 77.1%
101.0% 76.2% 86.7% 79.9% 76.7%
101.5% 76.2% 86.5% 78.7%
99.1% 76.8% 84.4%
99.1% 76.5%
98.6%
US$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 2017 5,603.0 618.4 707.1 705.3 796.8 820.5 924.0 875.1 923.3 1,012.8
– 12,986.3
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 2017
(5,429.1) (538.2) (634.6)
(588.9)
(581.6)
(537.6)
(551.7)
(380.3)
(297.1)
(134.5)
–
(9,673.6)
–
–
–
–
–
–
–
–
(37.1)
(441.4)
–
(478.5)
4.3
1.7
1.2
2.2
4.2
5.4
7.4
9.3
11.8
6.9 131.3
185.7
178.2
81.9
73.7 118.6 219.4 288.3 379.7 504.1 600.9 443.8 131.3 3,019.9
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 2016
year of account includes the impact of natural catastrophes occurring in 2017 which attached to policies incepting in the 2016
year of account.
During 2017, the net aggregate reserve releases from prior years amounted to US$9.5m, which included a strengthening of
US$21.1m in respect of 2016 and a reserve release of US$30.6m (322.1% of the net aggregate reserve release) derived from
the 2015 and prior underwriting years (2016: US$75.0m/140.2% from the 2014 and prior underwriting years). Reserves in Brit
Global Specialty Direct experienced a strengthening of US$29.0m (2016: releases of US$11.4m) and Brit Global Specialty
Reinsurance experienced releases of US$39.4m (2016: US$47.5m) with a strengthening of US$0.9m (2016: US$5.4m) within
Other Underwriting.
FINANCIAL STATEMENTS
122 Brit Limited Annual Report 2017
20 INSURANCE AND REINSURANCE CONTRACTS (continued)
(b) Movements in insurance and reinsurance contracts
(i) Claims and loss adjustment expenses
As at 1 January
Cash paid for claims settled in the year
Increase in liabilities
Net foreign exchange differences
As at 31 December
(ii) Unearned premiums
As at 1 January
Premiums written in the year
Premiums earned during the year
As at 31 December
21 EMPLOYEE BENEFITS
31 December 2017
31 December 2016
Gross
US$m
Reinsurance
US$m
Net
US$m
Gross
US$m
Reinsurance
US$m
Net
US$m
3,406.7
(1,068.4)
1,687.4
110.4
(711.1) 2,695.6
206.7
(861.7)
(579.1) 1,108.3
77.7
(32.7)
3,324.1
(875.0)
1,058.8
(101.2)
(678.4) 2,645.7
(734.4)
140.6
856.1
(202.7)
(71.8)
29.4
4,136.1
(1,116.2) 3,019.9
3,406.7
(711.1) 2,695.6
31 December 2017
31 December 2016
Gross
US$m
Reinsurance
US$m
Net
US$m
Gross
US$m
Reinsurance
US$m
Net
US$m
836.8
2,057.0
(2,002.6)
(173.0)
663.8
(526.2) 1,530.8
(1,536.7)
465.9
858.2
1,912.2
(1,933.6)
(140.5)
717.7
(432.0) 1,480.2
(1,534.1)
399.5
891.2
(233.3)
657.9
836.8
(173.0)
663.8
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 17 years (2016: 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 scheme’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 a cross-company guarantee from
Brit Insurance Holdings Limited.
If there is a shortfall against the funding target, then the Company and Trustee will agree on deficit contributions to meet this
deficit over a period. There is a risk to the Company that adverse experience could lead to a requirement for the Company to
make additional contributions in excess of those above to recover any deficit that arises.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Brit Limited Annual Report 2017 123
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
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
2017
US$m
31 December
2016
US$m
(211.1)
259.7
(193.0)
235.5
48.6
42.5
31 December
2017
US$m
31 December
2016
US$m
42.5
1.3
4.1
(1.9)
2.6
48.6
52.1
1.9
(8.3)
(5.4)
2.2
42.5
A net pension asset is recognised on the statement of financial position as there is an unconditional right of the Group to be
refunded the surplus in the scheme. The measurement of the net pension asset is impacted by a number of factors, including
the actuarial assumptions used, the effects of changes in foreign exchange rates, and the contributions paid to the scheme
by the Group. The Group expects to realise the economic benefit of the net pension asset as the obligations and funding
requirements change over the life of the scheme. Deferred tax related to the net pension asset is measured using the tax rates
expected to apply to the periods during which the asset is recovered, and is presented within the deferred tax line of the
statement of financial position.
Net credit recognised in the income statement comprised:
Net interest on net defined benefit asset
Year ended
31 December
2017
US$m
Year ended
31 December
2016
US$m
(1.3)
(1.9)
This credit has been recognised in the ‘other operating expenses’ line in the income statement. Contributions to the Group’s
defined contribution pension arrangements are in addition to those set out in this note and are charged directly to the
income statement.
The allocation of the scheme’s assets was as follows:
Equities
Index-linked UK government bonds
Other debt securities
UK fixed interest government bonds
Cash and net current assets
Gold and gold mining equities
Other scheme assets
Fair value of scheme assets
31 December
2017
US$m
31 December
2016
US$m
46.7
135.8
67.3
–
7.4
1.6
0.9
259.7
56.4
130.0
8.4
11.6
24.6
2.6
1.9
235.5
All scheme assets have quoted prices in active markets. The scheme does not invest directly in property occupied by the Group
or in financial securities issued by the Group.
FINANCIAL STATEMENTS
124 Brit Limited Annual Report 2017
21 EMPLOYEE BENEFITS (continued)
Investment strategy
The Trustee determines the scheme’s investment strategy after taking appropriate advice from their investment consultants.
The management of the assets is delegated to State Street Global Advisors Limited, Ruffer LLP and Insight Investment
Management (Globe) Limited. The Trustee’s investment objective are to ensure that the scheme has adequate resources to meet
the members’ entitlements under the Trust Deed and Rules as they fall due, and thereafter to minimise long-term costs of the
scheme by maximising the return on the assets. Investment risk is managed by diversifying the assets across asset classes whose
return patterns are not highly correlated, and by periodically rebalancing asset classes. The assets include a portfolio of UK
index-linked government bonds which aim to match a significant part of the scheme’s inflation-linked benefits and therefore help
to reduce the Group’s exposure to investment and inflation risks.
Movements in the present value of the defined benefit obligation were as follows:
Opening defined benefit obligation
Interest on defined benefit obligation
Remeasurements due to:
Changes in financial assumptions
Changes in demographic assumptions
Experience on benefit obligations
Foreign exchange effect
Benefits paid
Closing defined benefit obligation
Movements in the fair value of the scheme assets were as follows:
Opening fair value of scheme assets
Interest income
Actual return excluding interest income
Foreign exchange effect
Contributions by the employer
Benefits paid
Closing fair value of scheme assets
31 December
2017
US$m
31 December
2016
US$m
193.0
5.5
190.9
6.5
5.6
2.7
(0.6)
18.2
(13.3)
39.3
–
(0.5)
(34.0)
(9.2)
211.1
193.0
31 December
2017
US$m
31 December
2016
US$m
235.5
6.7
5.8
22.4
2.6
(13.3)
259.7
243.0
8.4
33.4
(42.3)
2.2
(9.2)
235.5
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
2017
31 December
2016
2.55%
3.30%
2.30%
3.10%
2.80%
3.40%
2.40%
3.20%
28.0 years
30.3 years
29.9 years
32.2 years
27.9 years
30.2 years
29.7 years
32.1 years
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Brit Limited Annual Report 2017 125
The assumptions used to determine end-of-year benefit obligations are also used to calculate the following year’s cost.
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 the year
Increase by US$19.8m
Increase by US$15.1m
Increase by US$3.7m
Increase by US$8.3m
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$5.2m
(2016: US$6.1m).
At 31 December 2017 no contributions were payable to the fund (2016: US$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 (2016: US$0.5m).
At 31 December 2017 no contributions were payable to the fund (2016: US$nil).
FINANCIAL STATEMENTS 126 Brit Limited Annual Report 2017
22 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
Specialised investment funds
Total
31 December
2017
US$m
31 December
2016
US$m
686.7
1,886.1
126.6
399.8
2,424.7
79.4
2,699.4
2,903.9
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.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Brit Limited Annual Report 2017 127
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.
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 US and in the UK
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.
Level two common stocks are priced using a combination of independent pricing service providers and internal valuation
models that rely on directly or indirectly observable inputs.
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.
FINANCIAL STATEMENTS
128 Brit Limited Annual Report 2017
22 FINANCIAL INVESTMENTS (continued)
Disclosures of fair values in accordance with the fair value hierarchy
31 December 2017
Equity securities
Debt securities
Specialised investment funds
Total
31 December 2016
Equity securities
Debt securities
Specialised investment funds
Total
Level one
US$m
Level two
US$m
Level three
US$m
Total
US$m
359.8
1,126.3
–
135.8
684.2
110.6
191.1
686.7
75.6 1,886.1
126.6
16.0
1,486.1
930.6
282.7 2,699.4
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
26.2
14.8
399.8
2,424.7
79.4
1,664.2
1,075.5
164.2
2,903.9
All unrealised gains of US$167.5m (2016: gains of US$10.0m) and realised gains of US$2.9m (2016: gains of US$62.3m)
on financial investments held during the year, 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 (2016: nil) and no equities (2016: nil) were transferred from level one to level two during 2017.
Transfers from level two to level one
No fixed income investments, equities or funds (2016: nil) were transferred from level two to level one during 2017.
Transfers from level two to level three
US$49.8m worth of fixed income investments (2016: nil) were transferred from level two to level three during 2017 due to their
inputs becoming unobservable during 2017.
Transfers from level three to level two
No fixed income investments, equities or funds (2016: nil) were transferred from level three to level two during 2017.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Brit Limited Annual Report 2017 129
Reconciliation of movements in level three financial investments measured at fair value
At 1 January 2016
Transfers to level one and level two
Total gains/(losses) recognised in the income statement
Purchases
Sales proceeds
Foreign exchange losses
At 31 December 2016
Transfers from level two to level three
Total gains recognised in the income statement
Purchases
Sales proceeds
Foreign exchange gains
At 31 December 2017
Equity
securities
US$m
17.6
–
4.6
102.3
–
(1.3)
123.2
–
23.8
120.2
(78.8)
2.8
191.2
Debt
securities
US$m
43.9
(1.9)
0.8
4.3
(20.1)
(0.8)
26.2
49.8
2.7
24.8
(30.8)
2.9
75.6
Specialised
investment
funds
US$m
–
–
(0.2)
15.0
–
–
14.8
–
1.2
–
–
–
Total
US$m
61.5
(1.9)
5.2
121.6
(20.1)
(2.1)
164.2
49.8
27.7
145.0
(109.6)
5.7
16.0
282.8
Total net gains recognised in the income statement under ‘investment return’ in respect of level three financial investments for
the period amounted to US$27.7m (2016: US$5.2m). Included in this balance are US$37.9m of unrealised gains (2016: US$5.2m)
attributable to assets still held at the end of the year.
Sensitivity of level three financial investments measured at fair value to changes in key assumptions
The following table shows the sensitivity of the fair value of level three financial investments to changes in key assumptions.
Equity securities
Debt securities
Specialised investment funds
Total
31 December 2017
31 December 2016
Effect of
possible
alternative
assumptions
(+/–)
US$m
3.4
0.8
0.4
Carrying
amount
US$m
191.1
75.7
16.0
282.8
Effect of
possible
alternative
assumptions
(+/–)
US$m
4.6
0.9
0.1
Carrying
amount
US$m
123.2
26.2
14.8
164.2
In order to determine reasonably possible alternative assumptions, the Group monitored the price of the securities invested
to changes on a month by month basis since acquisition or during 2017.
FINANCIAL STATEMENTS
130 Brit Limited Annual Report 2017
23 DERIVATIVE CONTRACTS
This Note summarises the total value of the derivative contracts of the Group. It also explains how each derivative contract is
categorised under three different levels of hierarchy, the valuation methods used to value derivative contracts and amounts
transferred between levels. At 31 December 2017 and 31 December 2016, the options formed part of our investment
management strategy, while the currency forwards formed part of our foreign exchange management strategy.
The disclosure provided in the tables below include derivatives recorded in the Group’s statement of financial position.
Derivative contract assets
31 December 2017
Currency forwards
Options
Treasury lock
Call and put option over Ambridge Partners LLC
Call and put option over Camargue
Total
31 December 2016
Currency forwards
Options
Call and put option over Ambridge Partners LLC
Call and put option over Camargue
Total
Derivative contract liabilities
31 December 2017
Currency forwards
31 December 2016
Currency forwards
Gross amounts of
receivables on derivative
contract assets
US$m
Gross amounts of
payables on derivative
contract assets
US$m
Derivatives contract
assets presented
in the statement
of financial position
US$m
677.7
1.2
–
31.0
10.2
720.1
(664.0)
–
(0.1)
(27.5)
(10.2)
(701.8)
13.7
1.2
(0.1)
3.5
–
18.3
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$m
686.9
5.5
51.3
4.8
748.5
(679.8)
–
(51.3)
(4.8)
(735.9)
7.1
5.5
–
–
12.6
Gross amounts of
payables on derivative
contract liabilities
US$m
Gross amounts of
receivables on derivative
contract liabilities
US$m
Derivatives contract
liabilities presented
in the statement
of financial position
US$m
(686.0)
673.5
(12.5)
Gross amounts of
payables on derivative
contract liabilities
US$m
Gross amounts of
receivables on derivative
contract liabilities
US$m
Derivatives contract
liabilities presented
in the statement
of financial position
US$m
(623.5)
611.7
(11.8)
Disclosures of fair values in accordance with the fair value hierarchy
31 December 2017
Derivative contract assets
Derivative contract liabilities
31 December 2016
Derivative contract assets
Derivative contract liabilities
Level two
US$m
Level three
US$m
Total
US$m
13.6
(12.5)
4.7
–
Level two
US$m
Level three
US$m
7.1
(11.8)
5.5
–
18.3
(12.5)
Total
US$m
12.6
(11.8)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Brit Limited Annual Report 2017 131
Valuation techniques
Level two
The fair value of the vast majority of the Group’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.
The put and call options the Group has in respect of its associated undertakings have been classified as level three as the
valuation of the options is derived from unobservable inputs which is linked to EBITDA calculations.
Reconciliation of movements in level three derivative contracts measured at fair value
At 1 January 2016
Purchases
Total losses recognised in the income statement
Sale proceeds
Foreign exchange gains
At 31 December 2016
Purchases
Total losses recognised in the income statement
Sale proceeds
Foreign exchange gains
At 31 December 2017
Put options
US$m
20.4
11.3
(32.9)
–
6.7
5.5
2.6
(6.5)
(3.6)
6.7
4.7
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 2017
31 December 2016
Effect of
possible
alternatives
assumptions
(+/‑)
US$m
1.4
Carrying
amount
US$m
4.7
Effect of
possible
alternatives
assumptions
(+/-)
US$m
Carrying
amount
US$m
5.5
1.7
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 2017) and credit risk inputs (used to
measure put options over an unlisted investment held by the Group in 2017 and 2016).
FINANCIAL STATEMENTS
132 Brit Limited Annual Report 2017
24 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
2017
US$m
31 December
2016
US$m
473.1
389.0
9.7
6.2
0.8
22.9
6.6
908.3
373.8
304.9
9.1
6.8
1.5
9.9
12.3
718.3
Other assets relates to shares purchased to settle share-based payment awards. For further information, refer to Note 33.
25 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.
Total
31 December
2017
US$m
31 December
2016
US$m
376.9
1,194.7
469.3
556.2
1,571.6
1,025.5
31 December
2017
US$m
31 December
2016
US$m
1,248.1
737.5
41.2
31.5
282.3
238.1
–
18.4
1,571.6
1,025.5
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Brit Limited Annual Report 2017 133
26 BORROWINGS
This Note describes the main sources of borrowing available to the Group and the amounts currently borrowed from each of
those sources.
Maturity
Call
Effective
interest rate
31 December 2017
31 December 2016
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
Non‑current
Subordinated debt
Revolving credit facility
2030 2020
–
2020
8.3%
LIBOR +1.5%
2.8
14.7
17.5
174.8
45.0
219.8
197.6
45.0
242.6
2.8
14.7
17.5
157.5
–
167.9
–
157.5
167.9
As at 31 December 2017 and 31 December 2016, 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 22.
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 (2016: US$360.0m) revolving credit facility which expires on 31 December 2020.
At 31 December 2017, a US$80.0m (2016: US$80.0m) letter of credit had been utilised. In addition, there was a cash drawing
of US$45.0m.
27 OTHER FINANCIAL LIABILITIES
This Note sets out the amount of financial liabilities owing to external investors in respect of structured entities consolidated by
the Group.
During 2017, the Group entered into a new reinsurance arrangement, effective 1 January 2017, with a segregated account of
Versutus Limited, a Bermuda-domiciled special purpose reinsurer with which the Group has an established relationship. As at
31 December 2017, Brit has a 48% investment in this segregated account, which has been consolidated within the financial
statements of the Group.
In December 2017, the Group announced a new Bermuda-domiciled collateralised reinsurance platform, Sussex Capital
Limited. Sussex Capital Limited was launched on 1 January 2018 with initial capital of US$102.5m. Sussex Capital Limited,
through Sussex Re, a newly established Bermuda-domiciled special purpose reinsurer, writes direct collateralised reinsurance
while also providing collateralised reinsurance to the Group’s Syndicate 2987. The Group has a 29.3% investment in Sussex
Capital Limited, which was funded on 29 December 2017. Both Sussex vehicles have been consolidated by the Group as at
31 December 2017.
FINANCIAL STATEMENTS
134 Brit Limited Annual Report 2017
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
27 OTHER FINANCIAL LIABILITIES (continued)
Investments by independent third parties in the consolidated Versutus and Sussex vehicles have been presented in the Group’s statement
of financial position as ‘Other financial liabilities’. The value of those investments includes both the initial contributions by the investors
and any returns accruing thereto. As at 31 December 2017, the Group has recorded other financial liabilities of US$82.1m.
Other financial liabilities have been designated as held at fair value through the consolidated income statement. As at
31 December 2017, the fair value of the investments by independent third parties was determined by reference to the
underlying net assets of the reinsurance vehicles and was therefore categorised as level three in the fair value hierarchy.
Further information relating to the Group’s approach to fair value measurement is available in Note 22.
28 INSURANCE AND OTHER PAYABLES
This Note sets out the various categories of amounts which are owed by the Group.
Arising out of direct insurance operations
Arising out of reinsurance operations
Other taxes and social security costs
Accruals and deferred income
Outstanding settlements on investments
Other creditors
Total
31 December
2017
US$m
31 December
2016
US$m
17.7
432.4
2.2
68.1
0.3
8.8
529.5
10.8
291.5
2.2
50.6
12.7
14.2
382.0
The carrying amounts disclosed above reasonably approximate fair values as all amounts are payable within one year of the date
of the statement of financial position.
29 CALLED UP SHARE CAPITAL
This Note sets out the number of shares we have in issue and their nominal value.
Ordinary shares:
Allotted, issued and fully paid
At 1 January 2016
Purchase and cancellation of own shares
At 31 December 2016
At 1 January 2017
Purchase and cancellation of own shares
At 31 December 2017
31 December
2017
US$m
31 December
2016
US$m
31 December
2017
1p each
Number
31 December
2016
1p each
Number
6.4
6.4
387,608,230
387,608,230
US$m
Number
6.6
(0.2)
401,057,706
(13,449,476)
6.4
387,608,230
6.4 387,608,230
–
–
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.
Brit Limited Annual Report 2017 135
The Group’s ultimate parent, Fairfax Financial Holdings Limited (Fairfax), is permitted on an annual basis to purchase a set
number of shares from OMERS Administration Corporation (OMERS), the minority shareholder of class A shares in Brit Limited.
There were no share purchases or cancellations during 2017.
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 was made, following the repurchase of shares from OMERS, being the nominal value of
13.4m shares at 1p each, and a capital redemption reserve of the same amount was created. The distribution of US$61.5m was
set against distributable reserves (‘cost of share buy-back’) in accordance with UK Company Law. As a result, Fairfax increased its
percentage shareholding from 69.99% to 72.51%.
30 DIVIDENDS
This Note gives details of the amount we have paid to our shareholders during 2017 and 2016 by way of dividends.
Dividend paid in respect of prior year
Dividend paid in respect of share buy back
Interim dividend paid on 21 December
Total
2017 US$
2016 US$
2017 US$m
2016 US$m
0.43
–
–
0.43
0.43
0.43
45.8
–
–
45.8
26.2
3.4
61.3
90.8
A dividend to class A shareholders for 2016 of US$0.43 per share amounting to US$45.8m was paid on 3 March 2017 in
accordance with the shareholders’ agreement.
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
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.
31 COMMITMENTS
The Group has various financial commitments resulting from various contracts 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.
FINANCIAL STATEMENTS
136 Brit Limited Annual Report 2017
31 COMMITMENTS (continued)
Operating lease payments recognised in the consolidated income statement during 2017 were US$6.5m (2016: US$7.3m).
The future minimum lease payments under non-cancellable operating leases were as follows:
Not later than one year
Later than one year and not later than five years
Later than five years
Total
31 December
2017
US$m
31 December
2016
US$m
7.4
28.5
47.7
83.6
6.9
26.2
46.7
79.8
Other commitments
On 26 October 2017, a stock purchase agreement was entered into to acquire 100% of the share capital of a dormant insurance
entity, for cash consideration of approximately US$18.0m. This acquisition, which is subject to regulatory approval, is expected
to complete in the first quarter of 2018.
32 CASH FLOWS PROVIDED BY OPERATING ACTIVITIES
The table below shows how our profit for the year translates into cash flows generated from our operating activities.
Profit on ordinary activities before tax
Adjustments for non‑cash movements:
Realised and unrealised gains on investments
Realised and unrealised (gains)/losses on derivatives
Unreaslised (gains)/losses on shares held for share based payment
Amortisation of intangible assets
Depreciation of property, plant and equipment
Foreign exchange (gains)/losses on cash and cash equivalents
Share of profit after tax of associated undertakings
Charges in respect of share-based payment schemes
Interest income
Dividend income
Finance costs on borrowing
Changes in working capital:
Deferred acquisition costs
Insurance and other receivables excluding accrued income
Insurance and reinsurance contracts
Financial investments
Derivative contracts
Insurance and other payables
Employee benefits
Provisions
Cash flows provided by operating activities
Year ended
31 December
2017
US$m
Year ended
31 December
2016
US$m
5.5
159.8
(170.4)
(5.2)
(1.4)
4.4
4.9
(9.1)
(5.1)
0.8
(41.7)
(6.4)
17.1
(16.1)
(174.1)
318.4
374.9
0.2
239.7
(3.9)
(0.2)
532.3
(72.3)
52.8
0.3
5.2
3.6
17.8
(3.1)
0.9
(56.4)
(17.5)
18.8
3.0
(28.0)
(4.0)
499.3
(2.5)
6.1
(4.0)
(0.4)
579.4
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Brit Limited Annual Report 2017 137
Reconciliation of liabilities arising from financing activities
The table below shows a reconciliation of our liabilities arising from financing activities.
31 December 2017
Long‑term borrowings
Subordinated debt
Short‑term borrowings
Revolving credit facility
Total liabilities from financing activities
31 December 2016
Long‑term borrowings
Subordinated debt
Short‑term borrowings
Revolving credit facility
Total liabilities from financing activities
33 SHARE‑BASED PAYMENTS
Non‑cash changes
Year ended
31 December
2016
US$m
Cashflows
US$m
Foreign
exchange
movement
US$m
Year ended
Other 31 December
2017
US$m
changes
US$m
157.5
(11.6)
15.1
13.8
174.8
–
157.5
42.9
31.3
–
2.1
45.0
15.1
15.9
219.8
Non-cash changes
Year ended
31 December
2015
US$m
Foreign
exchange
movement
US$m
Other
changes
US$m
Year ended
31 December
2016
US$m
Cashflows
US$m
185.6
(12.1)
(30.2)
14.2
157.5
–
(3.3)
–
3.3
–
185.6
(15.4)
(30.2)
17.5
157.5
The Group rewards its employees through various share-based incentive schemes. This Note explains the different schemes
used to facilitate those share-based payments and the charge recognised in the consolidated income statement in respect of
these schemes.
The compensation cost recognised in the income statement under IFRS ‘Share-based Payments’ for the Group’s share-based
payments arrangements are shown below:
Equity‑settled plans
Long-Term Incentive Plan (Performance Share Plan replacement)
Employee Share Ownership Plan
Cash‑settled plans
Long-Term Incentive Plan
Total
Year ended
31 December
2017
US$m
Year ended
31 December
2016
US$m
1.0
1.3
3.0
5.3
1.0
1.0
1.7
3.7
The total liability in respect of cash-settled plans at 31 December 2017 was US$3.0m (2016: US$1.7m). In regard to the
Long-Term Incentive Plan, US$0.8m (2016: US$1.0m) is included in the consolidated statement of changes in Equity in respect
of equity settled plans and US$0.2m is included within other creditors in respect of national insurance contributions on these
shares. A further US$1.3m (2016: 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 consolidated statement of changes in equity.
FINANCIAL STATEMENTS
138 Brit Limited Annual Report 2017
33 SHARE‑BASED PAYMENTS (continued)
(a) 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 Fairfax
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 Fairfax 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 fair value of the awards are determined by the market price of the underlying shares at the valuation date. 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
Forfeited
Outstanding at 31 December
Year ended
31 December
2017
Number
of awards
Year ended
31 December
2016
Number
of awards
7,712
(312)
7,400
7,865
(153)
7,712
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. 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. There
were no additional shares purchased for this scheme in 2016 and 2017.
(b) Long Term Incentive Plan
The Company awards selected employees’ options to acquire shares in Fairfax 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 fair value of the awards are determined by the market price of the underlying shares at the valuation date 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
2017
Number
of awards
Year ended
31 December
2016
Number
of awards
20,306
9,697
(407)
13,503
7,119
(316)
29,596
20,306
The weighted average fair value at date of grant for awards granted during 2017 was US$516.13 (2016: US$490.17).
In order to settle share-based payment awards, in 2016 the Group purchased US$11.6m (2016: US$3.4m) of preference shares in
FFHL Share Option 1 Corp and that company has purchased shares in Fairfax. This 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.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Brit Limited Annual Report 2017 139
(c) 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 Fairfax in an amount up to 10% of their annual base salary. The Company purchases, on the employee’s behalf,
a number of Fairfax’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 employees and
matched by the Company, during the year ended 31 December 2017, the Company purchased a total of 7,754 common shares
in Fairfax (2016: 6,428) at an average price of US$487.28 (2016: US$528.80) in respect of this plan.
34 CONSOLIDATED ENTITIES
This Note set out all the 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.
All subsidiaries of the Company are 100% owned apart from the Group’s special purpose vehicles. For these vehicles, funding
is provided through preference share capital issuances. The Group holds 48% of the preference share capital issued by the
Versutus segregated account consolidated by Brit, and 29% of Sussex Capital Limited. The issued preference share capital of
Sussex Re Limited is owned 100% by Sussex Capital Limited.
The subsidiaries of the company at 31 December 2017, 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
Grade Credit Fund
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
Investment management
PIMCO Select Funds Plc, Styne House,
Upper Hatch Street, Dublin
United States of America
Brit Insurance Services USA Inc.
Service company
Brit Insurance USA Holdings Inc.
Intermediate holding company
Scion Underwriting Services Inc.
Service company
161 N. Clark Street, Suite 3200,
Chicago, IL, 60601
161 N. Clark Street, Suite 3200,
Chicago, IL, 60601
161 N. Clark Street, Suite 3200,
Chicago, IL, 60601
FINANCIAL STATEMENTS 140 Brit Limited Annual Report 2017
34 CONSOLIDATED ENTITIES (continued)
Bermuda
North America Property Insurance
Series 2017 Account A-3 (a segregated
account within Versutus Limited)
Sussex Capital Management Limited
Service company
Special purpose vehicle
Clarendon House, 2 Church Street,
Hamilton HM 11, Bermuda
Sussex Capital Limited
Special purpose vehicle
Sussex Re Limited
Special purpose vehicle
Brit Reinsurance (Bermuda) Limited
Insurance company
Gibraltar
Brit Group Finance (Gibraltar) Limited
Service company
Ground Floor Chesney House,
The Waterfront, 96 Pitts Bay Road,
Pembroke, HM 08, Bermuda
Wessex House, 3rd Floor, 45 Reid Street,
Hamilton HM 12, Bermuda
Wessex House, 3rd Floor, 45 Reid Street,
Hamilton HM 12, Bermuda
Ground Floor Chesney House,
The Waterfront, 96 Pitts Bay Road,
Pembroke, HM 08, Bermuda
Unit 2A, 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
Henderson Horizon Core Credit Fund,
2 Rue de Bitbourg L-1273
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.
The Group carries out a number of transactions with related parties which include, paying management fees, carrying out
insurance and reinsurance activities with affiliates of the ultimate parent company, Fairfax Financial Holdings Limited, and trading
with its associates. All the transactions with related parties are undertaken at an arm’s-length basis.
(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 (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.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Brit Limited Annual Report 2017 141
(b) Fairfax Financial Holdings Limited
In June 2015, Hamblin Watsa Investment Counsel Limited (HWIC), an affiliate of Fairfax, was appointed as an investment
manager to a number of Group companies. During the year ended 31 December 2017, the Group incurred and paid investment
management fees to HWIC of US$10.3m (2016: US$11.2m).
The Group has historically entered into various reinsurance arrangements with affiliates of Fairfax.
In respect of insurance and ceded outwards reinsurance activity, the amounts included in the income statement relating to
trading with affiliates of Fairfax were as follows:
Gross premiums written
Less premiums ceded to reinsurers
Premiums written, net of reinsurance
Gross amount of change in provision for unearned premiums
Reinsurers’ share of change in provision for unearned premiums
Net change in provision for unearned premiums
Earned premiums, net of reinsurance
Gross claims paid
Reinsurers’ share of claims paid
Claims paid, net of reinsurance
Gross change in the provision for claims
Reinsurers’ share of change in the provision for claims
Net change in the provision for claims
Commission income
Commission expense
Year ended
31 December
2017
US$m
Year ended
31 December
2016
US$m
8.9
(11.8)
(2.9)
3.2
(0.7)
2.5
(0.4)
(14.5)
20.2
5.7
6.9
(9.6)
(2.7)
(0.8)
(2.4)
7.9
(2.1)
5.8
(0.5)
(2.5)
(3.0)
2.8
(5.0)
5.1
0.1
–
(8.2)
(8.2)
1.8
(1.2)
The amounts included in the statement of financial position outstanding with affiliates of Fairfax and its affiliates as at
31 December 2017 were as follows:
Debtors arising out of direct insurance and reinsurance operations:
Insurance premium receivable
Recoverable from reinsurers
Creditors arising out of direct insurance and reinsurance operations:
Payable to reinsurers
Unpaid claims liabilities
Deferred acquisition costs
Gross unearned premiums
Unearned premium recoverable from reinsurers
Year ended
31 December
2017
US$m
Year ended
31 December
2016
US$m
7.0
47.5
3.6
50.7
(1.6)
(43.4)
(2.4)
(44.8)
2.0
(7.3)
0.6
0.9
(5.6)
1.0
FINANCIAL STATEMENTS
142 Brit Limited Annual Report 2017
35 RELATED PARTY TRANSACTIONS AND ULTIMATE PARENT COMPANY (continued)
(c) Associated undertakings
Ambridge Partners LLC
On 8 December 2015, the Group acquired 50% of the members’ interests of Ambridge Partners LLC and 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 2017 included commission for
introducing insurance business of US$5.5m (2016: US$4.3m).
The amount of premiums net of commission in the statement of financial position outstanding from Ambridge Partners LLC as at
31 December 2017 was US$8.3m (2016: US$7.4m).
The amount of fees in the statement of financial position payable to Ambridge Partners LLC as at 31 December 2017 was
US$0.1m (2016: 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 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 year ended 31 December 2017 included commission for introducing insurance
business of US$1.1m (period from 30 August to 31 December 2016: US$0.2m).
Amounts recorded in the statement of financial position in respect of premium net of commissions due from, and fees payable
to, Camargue as at 31 December 2017 and 2016 were not material.
(d) Key management compensation
The amount of the emoluments granted in respect of the financial year to the members of the administrative, managerial and
supervisory bodies by reason of their responsibilities, and any commitments arising or entered into in respect of retirement
pension for former members of those bodies, are broken down as follows:
Salaries and other short-term employee benefits
Post-employment benefits
Share-based payments
Termination benefits
Total compensation
Year ended
31 December
2017
US$m
Year ended
31 December
2016
US$m
6.4
–
1.3
0.6
8.3
7.3
0.2
1.2
0.7
9.4
For the purposes of IAS 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.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Brit Limited Annual Report 2017 143
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 2017 the Funds at Lloyd’s requirement amounted to US$896.8m
(2016: US$794.6m).
(b) Revolving credit facility
The Group has a US$360.0m (2016: US$360.0m) revolving credit facility which expires on 31 December 2020.
At 31 December 2017, a US$80.0m (2016: US$80.0m) letter of credit had been utilised. In addition, there was a cash drawing
of US$45.0m.
(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.
FINANCIAL STATEMENTS 144 Brit Limited Annual Report 2017
Brit Limited Annual Report 2017 145
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
146
147
148
148
149
149
149
150
150
150
151
152
152
152
153
153
153
FINANCIAL STATEMENTSCONTENTS 146 Brit Limited Annual Report 2017
STATEMENT OF FINANCIAL POSITION
At 31 December 2017
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
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
2017
US$m
31 December
2016
US$m
3
4
5
6
7
8
1,050.5
139.5
1,190.0
9.5
1.2
10.7
(101.5)
(90.8)
1,099.2
(184.2)
915.0
6.4
0.2
908.4
915.0
1,050.5
127.4
1,177.9
18.6
0.1
18.7
(107.5)
(88.8)
1,089.1
(168.7)
920.4
6.4
0.2
913.8
920.4
The accompanying Notes are an integral part of these financial statements.
These financial statements were approved by the Board of Directors on 14 February 2018 and were signed on its behalf by:
Matthew Wilson
Group Chief Executive Officer
Mark Allan
Chief Financial Officer
STATEMENT OF CHANGES IN EQUITY
For the year ended 31 December 2017
Brit Limited Annual Report 2017 147
1 January 2017
Total comprehensive income for the year
Dividend
At 31 December 2017
For the year ended 31 December 2016
1 January 2016
Total comprehensive income for the year
Repurchase of class A shares
Cancellation of share capital
Dividend
At 31 December 2016
Note
11
11
Called up
Share
capital
US$m
6.4
–
–
6.4
Note
6.6
–
–
(0.2)
–
6.4
Capital
redemption
reserve
US$m
0.2
–
–
0.2
Called up
Share
capital
US$m
–
–
–
0.2
–
0.2
Retained
earnings
US$m
913.8
40.4
(45.8)
908.4
Retained
earnings
US$m
1,003.5
59.2
(58.1)
–
(90.8)
913.8
Total
equity
US$m
920.4
40.4
(45.8)
915.0
Total
equity
US$m
1,010.1
59.2
(58.1)
–
(90.8)
920.4
FINANCIAL STATEMENTS
148 Brit Limited Annual Report 2017
NOTES TO THE FINANCIAL
STATEMENTS
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$40.4m (2016: US$59.2m).
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) and
subsequently measured at 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.
Brit Limited Annual Report 2017 149
(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
asset/(liability) shall be recognised. The amount attributed to goodwill is adjusted by the amount of the deferred tax asset
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 (2016: US$15,000).
3 SHARES IN GROUP UNDERTAKINGS
This Note explains the direct shareholdings of the Company in other Group entities.
Investment in Brit Insurance Holdings Limited
There was no movement in shares in Group undertakings in the period.
31 December
2017
US$m
31 December
2016
US$m
1,050.5
1,050.5
The subsidiaries of the Company at 31 December 2017, and their principal activities, are disclosed in the Brit Limited
consolidated financial statements.
4 LOANS TO GROUP UNDERTAKINGS
This Note sets out moneys lent by the Company to other Group companies.
Loans to Group undertakings
31 December
2017
US$m
31 December
2016
US$m
139.5
127.4
On 8 September 2014, a long-term loan to another Group Company was novated to Brit Limited at fair value. The agreement
expires on 9 December 2020 and carries interest at an annual interest rate of 7.05%.
FINANCIAL STATEMENTS
150 Brit Limited Annual Report 2017
NOTES TO THE FINANCIAL STATEMENTS
5 DEBTORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
This Note sets out moneys owed to the Company that are due before 31 December 2018.
Interest receivable on loans to Group undertakings
Amounts owed by Group undertakings
Prepayments
Tax receivable
Total
6 CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
This Note sets out moneys owed by the Company that are due before 31 December 2018.
Amounts owed to Group undertakings
Accruals and deferred income
Total
31 December
2017
US$m
31 December
2016
US$m
–
8.6
0.8
0.1
9.5
17.8
–
0.8
–
18.6
31 December
2017
US$m
31 December
2016
US$m
100.8
0.7
101.5
106.8
0.7
107.5
7 CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
This Note sets out moneys owed by the Company that are due after 31 December 2018.
Maturity
Call
Effective
interest rate
Amortised
cost
US$m
Fair value
US$m
Amortised
cost
US$m
Fair value
US$m
31 December 2017
31 December 2016
Subordinated debt
2030
2020
6.29%
184.2
197.6
168.7
167.9
The fair value of the subordinated debt has been determined by reference to trading market values on recognised exchanges
and is categorised as level one in the fair value hierarchy.
The subordinated debt was novated to the Company from another Group company on 8 September 2014 at fair value.
The subordinated debt is listed and callable in whole by the Company on 9 December 2020. Following this date the interest
rate resets to the higher of:
i) 3.4% above the gross redemption yield of the 4.75% Treasury Gilt due 2030 quoted on the reset date; or
ii) 3.4% above the gross redemption yield of the 8% Treasury Stock due 2021 quoted on the reset date.
The effective interest rate method of accounting has been applied over the term up to the call date.
Brit Limited Annual Report 2017 151
8 CALLED UP SHARE CAPITAL
This Note sets out the number of shares we have in issue and their nominal value.
Ordinary shares:
Allotted, issued and fully paid
At 1 January 2016
Purchase and cancellation of own shares
At 31 December 2016
At 1 January 2017
Purchase and cancellation of own shares
At 31 December 2017
31 December
2017
US$m
31 December
2016
US$m
31 December
2017
1p each
Number
31 December
2016
1p each
Number
6.4
6.4 387,608,230
387,608,230
US$m
Number
6.6
(0.2)
401,057,706
(13,449,476)
6.4
387,608,230
6.4 387,608,230
–
–
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.
There were no share purchases or cancellations during 2017.
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 was 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$61.5m was set against distributable reserves
(‘cost of share buy-back’) in accordance with UK Company Law. As a result, Fairfax increased its percentage shareholding from
69.99% to 72.51%.
FINANCIAL STATEMENTS
152 Brit Limited Annual Report 2017
9 DIRECTORS’ EMOLUMENTS
This Note gives a breakdown of emoluments paid to directors both in total and in respect of the highest paid director.
Aggregate remuneration
Aggregate contributions to money purchase pension schemes
Total
31 December
2017
US$m
31 December
2016
US$m
6.2
0.1
6.3
5.8
0.1
5.9
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
2.0
2.0
Number
Number
1
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, 2016 and 2017.
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 (2016: US$360.0m) revolving credit facility. Guarantees have been made by Brit
Limited and a subsidiary Company to the syndicated banks providing the facility.
11 DIVIDENDS
This Note gives details of the amount we have paid to our shareholders during 2017 and 2016 by way of dividends
Dividend paid in respect of prior year
Dividend paid in respect of share buy back
Interim dividend paid on 21 December
Total
2017
US$
0.43
–
–
2016
US$
0.43
0.43
0.43
2017
US$m
45.8
–
–
45.8
2016
US$m
26.2
3.4
61.3
90.8
A dividend to class A shareholders for 2016 of US$0.43 per share amounting to US$45.8m was paid on 3 March 2017 in
accordance with the shareholders’ agreement.
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.
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.
NOTES TO THE FINANCIAL STATEMENTS
Brit Limited Annual Report 2017 153
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.
Further detail in respect of the Group’s share-based schemes can be found in Note 33 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.
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 154 Brit Limited Annual Report 2017
RECONCILIATION OF KEY
PERFORMANCE INDICATORS TO
THE FINANCIAL STATEMENTS
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.
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.
2017
US$m
21.5
3.9
(14.1)
0.0
11.3
2016
US$m
157.6
5.0
(40.6)
0.0
122.0
1,064.8
1,074.6
(38.2)
(44.4)
1,026.6
1,030.2
1.1%
11.8%
Total value created
The total value created measures the increase in adjusted NTA (including distributions) in a year. It reflects the after tax result
recorded in the income statement and all other value movements.
Total equity attributable to owners of the parent
Less: Intangible assets
Consolidated statement of financial position
Consolidated statement of financial position
Net tangible assets
Add back deferred tax liability on intangible assets Note 19: Deferred tax
Comment / financial statements reference
Adjusted net tangible assets
Adjusted NTA at end of year
Less: Adjusted NTA at start of year
Movement in adjusted NTA
Add: Distributions (dividends and share purchases) Consolidated statement of changes in equity
Total value created
2017
US$m
2016
US$m
1,130.3
(97.8)
1,148.0
(93.9)
1,032.5
11.2
1,054.1
10.7
1,043.7
1,064.8
1,043.7
(1,064.8)
1,064.8
(1,074.7)
(21.1)
45.8
24.7
(9.9)
148.9
139.0
Brit Limited Annual Report 2017 155
Combined ratio
The combined ratio is our key underwriting metric and measures the profitability of our underwriting. It shows how much of
every US$1 of premium is spent in the total costs of sourcing and underwriting the business and settling claims. A combined
ratio under 100% indicates underwriting profitability.
Earned premium, net of reinsurance
Note 5: Segmental information
Comment / financial statements reference
Attritional losses
Major claims
Reserve releases
Claims incurred, net of reinsurance
Note 5: Segmental information
Note 5: Segmental information
Note 5: Segmental information
Acquisition costs – commissions
Acquisition costs – other and Other insurance
related expenses
Underwriting expenses
Underwriting (loss)/profit
Attritional loss ratio
Major claims ratio
Reserve release ratio
Claims ratio
Commission ratio
Operating expense ratio
Attritional losses / Earned premium,
net of reinsurance
Major claims / Earned premium, net of reinsurance
Reserve releases / Earned premium, net of reinsurance
Note 5: Segmental information
Acquisition costs – commissions
Acquisition costs – other and Other insurance
related expenses
2017
US$m
2016
US$m
1,540.1
1,515.1
(867.9)
(250.0)
9.6
(841.2)
(68.4)
53.5
(1,108.3)
(856.1)
(425.9)
(411.6)
(196.7)
(192.8)
(622.6)
(604.4)
(190.8)
54.6
56.4%
16.2%
(0.6%)
55.5%
4.5%
(3.5)%
72.0%
56.5%
27.6%
27.2%
12.8%
12.7%
40.4%
39.9%
Underwriting expense ratio
Note 5: Segmental information
Combined ratio
Claims ratio + Underwriting expense ratio;
Note 5: Segmental information
112.4%
96.4%
ADDITIONAL INFORMATION
156 Brit Limited Annual Report 2017
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
Return on investment related derivatives
Return on invested assets
Comment / financial statements reference
Note 14: Investment in associated undertakings
Note 6: Investment return
Note 7: Return on derivative contracts
Investment in associated undertakings
Financial investments
Derivative contracts (investment related)
Cash and cash equivalents
Note 14: Investment in associated undertakings
Note 22: Financial investments
Note 23: Derivative contracts
Note 25: Cash and cash equivalents
Invested assets
Opening invested assets
Closing invested assets
Average invested assets
Return (%)
Return on invested assets / Average invested assets
4.9%
2.6%
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
Less: Intangible assets
Consolidated statement of financial position
Consolidated statement of financial position
Comment / financial statements reference
Net tangible assets
Add: Deferred tax liability on intangible assets
Adjusted net tangible assets
Note 19: Deferred tax
Subordinated debt
Note 26: Borrowings
2017
US$m
2016
US$m
1,130.3
(97.8)
1,148.0
(93.9)
1,032.5
1,054.1
11.2
1,043.7
10.7
1,064.8
174.8
157.5
Letters of credit / contingent funding
Total available capital resources
Management entity capital requirements
Excess of resources over management entity
capital requirements
Capital ratio
Under our capital policy we have identified a maximum
of US$250.0m of our revolving credit facility to form
part of our capital resources.
250.0
235.0
1,468.5
1,457.3
The capital required by an entity for business strategy
and regulatory requirements.
(1,073.4)
(1,160.2)
395.1
297.1
136.8%
125.6%
2017
US$m
5.1
2016
US$m
3.6
205.5
(6.4)
204.2
132.2
(32.9)
102.9
40.4
2,699.4
4.7
1,571.6
36.6
2,903.9
5.5
1,025.5
4,316.1
3,971.5
3,972.7
4,316.1
4,144.4
3,973.9
3,971.5
3,972.7
RECONCILIATION OF KEY PERFORMANCE INDICATORS TO THE FINANCIAL STATEMENTS
Brit Limited Annual Report 2017 157
Ratio of front office employees to back office employees
This measure monitors the efficiency of our business model by comparing the number of front office client-facing revenue
generators and service providers to the number of back office employees. An increase in the ratio would suggest that the back
office is becoming more efficient in supporting the client-facing activities of the front office.
Total front office staff
Total back office staff
Total employees
Ratio of front office employees
to back office employees
Comment / financial statements reference
Note 11: Staff costs
Note 11: Staff costs
Note 11: Staff costs
2017
US$m
349
213
562
2016
US$m
347
192
539
Total front office staff / Total back office staff
163.8%
180.7%
ADDITIONAL INFORMATION
158 Brit Limited Annual Report 2017
COMPANY INFORMATION
Directors
Mr Mark Cloutier – Group Executive Chairman
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 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
COMPANY INFORMATION GLOSSARY
Brit Limited Annual Report 2017 159
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.
Brit Re: Brit Reinsurance (Bermuda) Limited.
BMA: Bermuda Monetary Authority, the integrated regulator
of financial services in Bermuda, established under the
Bermuda Monetary Authority Act 1969.
Broker: An intermediary who negotiates contracts of
insurance or reinsurance, receiving a commission for
placement and other services rendered.
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 foreign
exchange 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.
GLOSSARY 160 Brit Limited Annual Report 2017
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.
GLOSSARY Brit Limited Annual Report 2017 161
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.
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/Major losses: Claims in excess of US$15.0m
(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.
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.
GLOSSARY 162 Brit Limited Annual Report 2017
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).
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 came
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.
GLOSSARY Brit Limited Annual Report 2017 163
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.
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 Brit Limited
The Leadenhall Building, 122 Leadenhall Street, London, EC3V 4AB, UK
www.britinsurance.com
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SEEING THE DIFFERENCE MAKES THE DIFFERENCE