Brit Limited
Annual Report 2020
writing the future
If the future was predictable, there would be no risk and if change was linear, there’d be no
need for experts. There’d be no need for the insurance industry.
But the truth is, the world we live in is unpredictable. It’s volatile, uncertain, and subject to change.
At Brit, we believe that the uncertainty of the future should never stand in the way of progress.
That’s why we exist. To help people and businesses face the future and thrive.
Every day, we channel our entrepreneurial expertise to write the most opaque risk that the future holds,
embracing the change faced by our clients by delivering a service that’s open, honest, and fair. One that
invests in the new products and claims delivery they need in a world of complex risk.
We are dedicated to innovation, developing client solutions, efficient capital vehicles and
a technology-led service that not only lead the market, but drive the future.
Investing in distribution so that we can deliver market-leading analytics to further deepen our
relationships with key partners, and investing in our people, so we can amplify the integrity, agility and
innovation that define our shared future.
So if you’re our partner, broker or an employee, we make you this promise: we won’t just react to change,
we’ll create it for the better.
We won’t just write risk, we’ll write the future.
Let’s do it together.
2020 – a year like no other
• We have supported our customers throughout 2020, providing valuable cover as they face difficult and
unexpected challenges. Estimated claims in 2020 relating to the COVID-19 pandemic of US$271m represents
our largest ever Major Loss event, illustrating the true value we bring to our clients across the world.
• Our shareholder, Fairfax, has supported Brit through a difficult period. We are grateful for the strong
support shown and continued faith in our business.
• While 2020 was dominated by COVID-19 and other major losses, there were positives: we saw strong
underlying performance across a number of classes, strong reserve releases and credible investment
return. We have also continued to successfully implement our strategy.
• Our overall combined ratio (CoR) was 112.6%. Excluding COVID related claims, our CoR was 96.7%.
• The underlying performance of most classes has been strong. We delivered a full year attritional ratio
of 52.6%, a 2.4pps improvement over 2019, and is now reaching levels last seen a decade ago.
• We have maintained our record of reserve releases, which amounted to US$61.5m in the year, a 3.6pps
reduction in the CoR.
• Our investment return was US$45.5m, a credible performance given the market turbulence in the year.
• Brit’s capital position remains strong. At 31 December 2020 there was a surplus of US$341.0m or 22.1%.
• Market conditions continue to give cause for optimism. We achieved risk-adjusted rate increases of 10.6%,
bringing the increase since 1 January 2018 to 20.2%.
• We have focussed on our customers and staff in these challenging times. It has been ‘business as usual’
at Brit, and we have received excellent feedback from our clients and brokers.
• We have continued to focus on our ‘Leadership, Innovation, Distribution’ strategy. This has included:
• Launching Ki, the first fully digital and algorithmically-driven Lloyd’s of London syndicate.
• Launching a direct pay claims facility in collaboration with Visa and Vitesse.
• Sponsoring a US$300m catastrophe bond via Sussex Capital UK PCC Limited.
Strategic Report Contents
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 (KPIs) and analyses our financial
performance. It also sets out how we engage with
our people and other stakeholders and includes our
Section 172(1) Statement.
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.
Officer Statements
Brit at a Glance
Our Underwriting
Underwriting Review
Financial Performance Review
Financial Position and Capital Strength
Principal Risks and Uncertainties
Our People, Culture, Social, Community
and Environmental Matters
Stakeholder Engagement
Section 172(1) Statement
4
8
11
20
24
37
40
47
51
57
Directors’ Report
Corporate Governance Report
Modern Slavery and Human Trafficking Statement
62
65
67
Independent Auditor’s Report
Consolidated Income Statement
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
Parent Company Financial Statements
70
80
81
82
83
84
86
167
Reconciliation of Key Performance Indicators
to the Financial Statements
Company Information
176
180
Glossary
181
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.
Brit Limited Annual Report 2020
1
Strategic Report
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 (KPIs)
and analyses our financial performance.
11
Our underwriting
We discuss our
underwriting
philosophy and the
Brit offering.
4
Officer Statements
Matthew Wilson, our
Group CEO, and Mark
Allan, our Group
CFO, comment on the
Group’s performance
and business
developments during
2020 and look ahead
to 2021.
8
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 2021.
20
Underwriting review
We discuss our
2020 performance
and business
developments.
24
Financial performance
review
We set out our KPIs.
We explain how we
use them to monitor
our performance
and outline their
performance from
2016 to 2020. We then
provide an analysis of
the performance of
our business during
2020.
37
Financial position and
capital strength
We review our
financial position at
31 December 2020
and our statement
of financial position
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 2021 to ensure we
deliver our strategic
priorities. We also
consider emerging
risks including climate
related risk.
47
Our people, culture,
social, community
and environmental
matters
We provide information
on our people
(including how we
engage with them) and
on social, community
and environmental
matters, to the extent
that it is necessary
to understand our
business.
51
Stakeholder
engagement
We set out our key
stakeholders, as
identified by the Board,
together with why and
how we engage with
them and the outcomes
of that engagement.
57
Section 172(1)
statement
We set out how the
Directors promote
the success of
the Company and
discharge their
responsibilities under
Section 172(1) of the
Companies Act.
This Strategic Report was approved by the Board on 16 February 2021.
Matthew Wilson
Group Chief Executive Officer
Mark Allan
Group Chief Financial Officer
2
Brit Limited Annual Report 2020
Strategic Report Brit Limited Annual Report 2020
3
Strategic Report
officer statements
‘At a time when the global
pandemic is still ravaging
communities, we spare a
thought for our colleagues, brokers
and clients who have had to deal
with the ultimate tragedy of losing
a loved one through COVID-19. It is
clearly a year that many will wish
to forget, albeit ironically it will
probably be one of the most memorable of the 21st century.
The challenges brought about by COVID-19 have been on a
global scale not seen since the second world war. The human
cost, the economic impact and the toll on mental welfare
has been at a level no one could have foreseen as we began
the year.
The excellence of any group of people, a team or a company,
is seldom measured during the best of times, it is exhibited
during the worst of times. We must never forget that
the primary aim of business is to service its customers
and reward its shareholders, and with significant COVID
underwriting losses, we must acknowledge that we have not
achieved the latter. That said, I am so very proud of the way
in which everyone in Brit has responded to the challenge that
has impacted every aspect of life, and not only managed to
service our clients, but to excel in doing so.
Our immediate priorities as the crisis emerged were to
ensure the safety of our employees and continuity of our
service to our clients and brokers. All our offices were
quickly and successfully able to move to remote working
using our robust IT estate and systems and have maintained
a continuity of service to our clients, remaining fully open
for business throughout the year. Our underwriters have
been actively engaging with clients and brokers, delivering
market-leading responsiveness. Our Claims team continues to
service our policyholders in these challenging circumstances,
proactively working with our third-party adjusters to ensure
claims continue to be handled promptly and to our usual high
standards. It was pleasing that in 2020, Marsh and Lockton
rated Brit the number one carrier for service provided in
the London Market, while AJG ranked us third in the London
Market and Aon ranked us third out of 34 carriers.
The crisis has impacted many of our clients. Our products
are designed to support businesses and individuals in such
difficult times and we have focussed on responding to claims
as they have been notified. We have stood tall with respect
to valid COVID-19 claims and the financial impact on Brit
has been significant, with claims of US$270.7m related to
COVID-19 being reported within Major Losses in the period.
COVID-19 has predominantly impacted our Contingency (Event
Cancellation) and Casualty Treaty books. These losses have
driven an increase of 15.9 percentage points (pps) in our
combined ratio, bringing the overall combined ratio to 112.6%.
4
Brit Limited Annual Report 2020
2020 was also a very active year for catastrophe events,
being the fifth-costliest on record. The net impact to Brit
of these events, before reinstatements, was US$132.5m, or
7.8pps on the combined ratio (2019: US$58.4m/3.6pps).
The pandemic has also severely impacted investment
markets. The first quarter of 2020 saw markets suffer their
worst period since the 2008 financial crisis, as investors
priced in the short-term impact of the shutdown and
potential longer term impact of a global recession, while
the remainder of the year witnessed a recovery. Brit’s
investment return for the year was a positive US$45.5m,
driven by the performance of our fixed income portfolio.
Our overall operating result before FX movements was
a loss of US$233.7m and our result after tax was a loss
of US$232.0m.
Despite the backdrop of COVID-19, there were a number
of positives in the period. We achieved risk adjusted rate
increases of 10.6%, with almost all classes contributing
to the increase. This gives a total overall increase since
1 January 2018 of 20.2%. In this positive rate environment,
we continued to grow our written premium to US$2,424.4m,
an increase of 5.6% at constant exchange rates.
During the period we delivered an attritional claims ratio of
52.6%, an improvement of 2.4pps, reflecting underwriting
discipline, rigorous risk selection, and rate increases. We have
also maintained our long-standing track record of prior year
reserve releases, improving the combined ratio by 3.6pps
(US$61.5m).
Brit’s brand purpose is ‘writing the future’. In May, we were
proud to announce plans to launch Ki, a standalone business
and the first fully digital and algorithmically-driven Lloyd’s
of London syndicate, in collaboration with Google Cloud.
Ki Syndicate 1618, with backing from Blackstone and Fairfax,
commenced underwriting for the 2021 year of account in
November 2020. We believe Ki will redefine the commercial
insurance market and places Brit at the forefront of
innovation in our sector.
We strive to ensure equal opportunity is part of how we
conduct ourselves as a business and as a team. The simple
message is that discrimination in all its forms will not be
tolerated at Brit. We continue to work hard on inclusion and
are committed to proactively addressing its challenges.
We have formed an Inclusion and Diversity Committee and
launched the Brit People Forum, so we can listen to and learn
from the personal stories of the widest spectrum of the
Brit community and come together to make inclusion and
diversity ‘business as usual’ for Brit.
During 2020, we have received continued support from our
owner, Fairfax. This support has enabled us to continue to
focus on our strategy and to position ourselves well for the
opportunities as they arise.
Strategic Report In September, we appointed Mark Allan as CEO of Ki, and
as such he will be stepping down from his role as Group
CFO, once his successor has started. Mark has made a
significant contribution to Brit over the last ten years and
will remain both on the Brit Executive and on the Brit Ltd and
Brit Syndicates Ltd Boards as an Executive Director. I am
delighted that Gavin Wilkinson will be joining in May 2021 as
Group CFO, subject to regulatory approval.
Looking ahead to 2021 and beyond, significant uncertainty
still surrounds COVID-19 and the timeframes over which
vaccination programmes will allow lockdowns to be eased.
We also face the consequences of the economic support
measures taken by governments driving yields down to record
lows and the likely impact on the economy, with recessionary
risks heightened.
However, against this challenging backdrop there are a
number of indicators to give us cause for optimism, including
rate increases, the withdrawal of capacity in the market
from certain classes and our improving attritional claims
ratio. In this environment, our clear strategy of embracing
data driven underwriting discipline, rigorous risk selection and
planned targeted growth for 2021, coupled with innovative
capital management solutions and continued investment in
distribution, positions us well to respond to
the opportunities and challenges ahead.’
Matthew Wilson Group Chief Executive Officer
Brit Limited Annual Report 2020
5
Strategic Report
Ki has raised US$500m of committed capital from two
backers, funds managed by Blackstone Tactical Opportunities
and Fairfax. It has also onboarded its first trading partners,
a leading group of Lloyd’s brokers, giving their clients access
to our valuable capacity and sustainable business model. In
October 2020, Ki Syndicate 1618 achieved ‘permission to
underwrite’ from Lloyd’s, and in November it bound its first
risk, with the line having been generated by Ki’s proprietary
algorithm, a first in the Lloyd’s market.
In December, we sponsored our first 144A catastrophe
bond issuance, via Sussex Capital UK PCC Limited. The
bond provides US$300m of multi-year named storm and
earthquake protection for a risk period of four years to
31 December 2024. Structured on an annual aggregate state-
weighted basis, the proceeds from the bond will be used to
collateralize a reinsurance agreement with Brit Syndicates
Limited, acting on behalf of Syndicate 2987, and Sussex
Capital UK PCC Limited. This is the first time a protected cell
of a UK domiciled multi-arrangement risk transformation
vehicle has issued a 144A catastrophe bond and provides Brit
with valuable catastrophe protection over the next four years
to complement our traditional reinsurance programme.
While we have seen some positive market developments in
2020, the year has been defined by COVID-19. In 2021, the
world faces ongoing uncertainty and challenge arising from
the pandemic. However, our strategy, discipline and plans for
2021 position us well against the significant macro-economic
challenges that lie ahead.’
Mark Allan Group Chief Financial Officer
officer statements
‘For Brit and the wider
insurance market, 2020
has proved to be very
challenging, with results heavily
impacted by the COVID-19 pandemic
and its impact on insurance,
investment and currency markets,
and other major loss events.
Brit’s operating result before
FX movements for 2020 was a loss of US$233.7m (2019:
profit of US$183.0m), while the post-tax result was a loss
of US$232.0m (2019: profit of US$179.9m).
Our underwriting loss of US$215.0m and combined ratio of
112.6% included major losses of US$403.2m (or 23.7pps of
the combined ratio), resulting from COVID-19 related claims
(US$270.7m), Hurricane Laura (US$65.4m), Hurricane
Sally (US$27.1m), Hurricane Zeta (US$15.5m), the Nashville
Tornadoes (US$13.7m) and US Civil Unrest (US$11.7m).
However, we were pleased with the attritional ratio of 52.6%,
an improvement of 2.4pps, and to continue our long-standing
track record of prior year reserve releases (US$61.5m),
benefiting our combined ratio by 3.6pps.
In the first quarter of 2020 investment markets sold off
due to fears around the financial impact of the coronavirus
pandemic, before staging a partial recovery over the
remainder of the year. Our investment return for the year,
net of fees, was US$45.5m or 1.0%, driven by gains in our
fixed income portfolio of US$141.3m, partly offset by losses
in our equity (US$42.5m) and fund (US$32.8m) portfolios.
Preserving a strong financial position is critical to the long-
term success of an insurance business. Our statement
of financial position remains strong as we maintain our
‘conservative best estimate’ reserving policy which
provides us with a secure foundation. During the period,
our management capital requirement increased from
US$1,227.7m to US$1,540.3m, primarily reflecting the
dramatic fall in interest rates in response to COVID-19,
but also reflecting our investments alongside partners in
Ki, Syndicate 2988 and Sussex. We raised capital from our
parent, Fairfax, amounting to US$524.0m during the period
to ensure we trade into 2021 with a strong capital position.
At the end of the period our adjusted net tangible assets
totalled US$1,436.8m (31 December 2019: US$1,150.4m),
after payment of a US$20.6m dividend, and our capital
surplus was US$341.0m (31 December 2019: US$348.9m).
We are very excited about the prospects for our new
digital business, Ki, that brings together the best of Lloyd’s
underwriting with the latest technology and data science.
This cutting-edge business is a first for the market and
has a fundamentally different operating model, designed
to dramatically improve the broker experience for follow
capacity in Lloyd’s. We are delighted to have worked with
world-class partners in Google Cloud and University College
London on the launch.
6
Brit Limited Annual Report 2020
Strategic Report Brit Limited Annual Report 2020
7
Strategic Report
Brit at a glance
Overview
We are a market-leading global specialty (re)insurer and
the largest business that trades primarily on the Lloyd’s of
London platform, the world’s leading specialist commercial
insurance market. We provide highly specialised insurance
products to support our clients across a broad range of
complex risks, with a strong focus on property, energy and
casualty business.
We care deeply about our clients’ needs, ensuring that we not
only surround them with – and invest in – the best talent in the
industry, but also combine the depth of our experience with
the latest technology to deliver a relentless innovation agenda.
Acting in open, honest partnership, our clients can be sure
that with Brit by their side the future isn’t something to be
feared, it’s something to be seized.
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). At the start of 2020, Brit was
89.3% owned by FFHL Group Limited (FFHL), a Fairfax
company, while Brit’s remaining shares were owned by the
Ontario Municipal Employees Retirement System (OMERS),
the pension plan manager for government employees in the
Canadian province of Ontario. On 28 August 2020, FFHL
purchased all 48,000,000 Class A shares from OMERS,
thereby increasing Fairfax’s ownership of the Brit Group
to 100.0%.
We believe that Fairfax is an excellent partner for Brit,
enabling us to enhance our global product offering. It provides
us with expanded underwriting opportunities and distribution
channels and supports our ability to be a leading global
specialty (re)insurer.
Underwriting
Brit has 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 and, in Syndicate
2987, we have one of the largest and most diverse portfolios.
We predominantly underwrite complex, high value insurance
and reinsurance risks. Insurance represents 76.3% 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.
Through Ki, Syndicate 2988, Versutus and Sussex Re, we
provide over US$856.6m of underwriting capacity. These
underwriting platforms, backed by diversified sources of
capital, reflect our desire to increase our flexibility, enhance
our relevance to clients and brokers and reinforce the long-
term relationships we have in the market.
We underwrite primarily in London, but have developed
an extensive network of local offices in the US and have a
presence in Bermuda and Japan. 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 2020 was US$4,857.1m. The portfolio, on a
look-through basis, ended the year with an increased holding
in fixed income securities (US$3,421.5m) and reduced
allocations to cash and cash equivalents (US$781.3m) and
equities and funds (US$628.4m). Other invested assets
totalled US$25.9m.
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.
8
Brit Limited Annual Report 2020
Strategic Report Our culture, values and people
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 with four key tenets:
delivering on commitments and ensuring the same from
others; managing risk actively to optimise reward; focusing
efforts to maximise results; living a distinct ethos. In addition,
we encourage enthusiasm for improvement, be it changes
to process, policy or working practices, we encourage new
thinking, and we encourage collective working and open and
honest communication.
Our values are:
• Absolute precision: The pursuit of excellence in every
aspect of our business, setting high standards for
ourselves and ensuring accuracy of execution. Getting it
right the first time;
• Respect: Build and maintain respectful relationships both
internally and externally. Treat people the way we’d like to
be treated. Behave with integrity with brokers, clients and
other stakeholders. Our success depends on their success;
•
Innovation: Exceed the expectations of our brokers,
clients and other stakeholders through innovation and
collaboration. Act with speed and diligence; and
• Pride: Having attracted the best talent, take time and
effort to recognise success and excellence. Foster a
culture of achievement, encourage and instil a sense
of pride in everything we do.
We are change-makers enabled by a global workforce who
collaborate to deliver a risk service. A team empowered not
only to survive the risks we face, but to stay on the front
foot and keep moving forward. We believe the uncertainty
of tomorrow isn’t something to fear but to seize; that it’s full
of potential. Not only for our customers but our employees
too. Our people are valued for the unique perspective they
bring to our business, no matter their age, race, religion or
background. It’s about doing our best work; our passion and
dedication.
Our track record
Since 2009, we have successfully transformed Brit into
a more focused, more profitable, more efficient and more
dynamic business, driven by some of the industry’s best
talent. We have been proactive in delivering the best service
for our clients and attractive returns to shareholders.
Over this period, Brit has demonstrated a strong track record
of profitable underwriting, competitive net investment returns,
growth in core business lines and disciplined capital management.
In 2020, the insurance market was dominated by COVID-19.
2020 was also the fifth-costliest year on record for
non-COVID related natural catastrophes and man-made
events. Together, this activity totalled US$403.2m and
contributed 23.7pps to Brit’s 2020 combined ratio. The impact
of these events was partly offset by a strong attritional loss
ratio of 52.6% and reserve releases of US$61.5m (3.6pps),
resulting in a combined ratio of 112.6%. Our five-year average
combined ratio is 104.1%, despite the impact of COVID-19 and
the extreme catastrophe years of 2017 and 2018. Excluding
the impact of COVID-19 related claims, our 2020 combined
ratio was 96.7% and our five-year average is 100.9%. This
year’s net investment gain, after fees, of US$45.5m or 1.0%,
resulting in a five-year average investment return of 2.0%.
Brit’s result after tax was a loss of US$232.0m and return on
adjusted net tangible assets before FX was (19.6)%.
Our financial strength
Our capabilities and ambition are underpinned by our strong
financial position. Our business is underwritten primarily
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.
During 2020, A.M. Best reaffirmed a Financial Strength Rating
of A (Excellent), with a ‘stable’ outlook, to Brit Reinsurance
(Bermuda) Limited (Brit Re). This rating reflects Brit Re’s
statement of financial position strength, which A.M Best
assesses as ‘very strong’, and the positive impact of having
Fairfax as its ultimate parent.
At 31 December 2020, we had capital resources equal to
122.1% of the management capital requirements needed
to support our business and Fairfax has supported our
continued capital strength allowing us to take advantage of
business opportunities as they arise. 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.
Year
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
RoNTA1
%
(19.6)
18.1
(14.4)
1.1
11.8
9.1
20.7
24.2
18.7
8.5
Combined ratio
%
Attritional ratio
%
Investment return (net
of fees)
%
112.6
95.8
103.3
112.4
96.4
91.7
89.5
85.4
93.2
98.0
52.6
55.0
57.2
56.4
55.5
55.2
51.0
51.3
51.8
55.4
1.0
3.6
(2.0)
4.9
2.6
0.1
2.9
2.1
2.9
2.4
Note 1: Before FX and corporate activity costs
Brit Limited Annual Report 2020
9
Strategic Report
Brit at a glance
Outlook
Looking ahead to 2021 and beyond, significant uncertainty
exists for the insurance industry.
• Significant uncertainty still surrounds COVID-19 and the
timeframes over which vaccination programmes will allow
lockdowns to be eased. We also face the consequences of
the measures taken by governments driving yields down
to record lows and the likely impact on the economy, with
recessionary risks heightened.
• The frequency of major events and magnitude of the
resulting claims, with 2020’s experience following on from
those of 2017 and 2018, the most costly back-to-back
years on record;
• The impact of medium loss events, with commentators
attributing an increase in the frequency and severity of
such events to climate change and other factors such as
population growth and increasing insured values;
• Further pressures on attritional ratios continue, largely
driven by the soft market years of 2017 and 2018 and by
social inflation in the US Casualty market;
• The cost of doing business in the London market remains
elevated. The market needs to become more efficient in
processing and work with distribution partners to become
more competitive in local markets;
• Despite the welcome withdrawal of some capacity, available
capacity continues to exceed demand;
•
In a number of markets where we operate, we see
increasing competition from local carriers; and
• We continue to face political and economic uncertainty
and challenges. 2020 saw continued volatility in
financial markets and experienced weakening growth,
recession fears, falling yields, heightened tension around
international trade and loose monetary policy. These
trends show no signs of abating as we go into 2021 and the
resulting outlook for the investment market continues to be
challenging.
However, against this challenging backdrop there are a
number of indicators to give us cause for optimism, including
rate increases, the withdrawal of capacity in the market from
certain classes and our improving attritional claims ratio. In
this environment, our clear strategy of embracing data driven
underwriting discipline, and rigorous risk selection, coupled
with innovative capital management solutions and continued
investment in distribution, positions us well to respond to the
opportunities and challenges ahead.
• Preserving a strong financial position is critical to the long-
term success of an insurance business. Our statement
of financial position remains strong as we maintain our
‘conservative best estimate’ reserving policy which
provides us with a secure foundation. We also benefit
from the financial strength of our ultimate parent, Fairfax,
and from our relationships with our capital partners
supporting Ki, Syndicate 2988 and the Sussex vehicles.
• We also continue to take action to improve our
performance and maintain our underwriting discipline and
rigorous risk selection criteria in all areas of the business.
• Leadership – We strive to provide direction and authority
within our business and to our industry. We are supportive
of the Future at Lloyd’s Blueprint and are proud to have
worked with Lloyd’s to be the first Lloyd’s Syndicate to
use ILS capacity to back our capital at Lloyd’s, a landmark
achievement.
•
Innovation – Our purpose is to help our clients and partners
thrive in an uncertain world and drive the industry
forward in terms of products, services and technology,
and innovation is at the heart of our strategy. BritX, our
Innovation team, was launched in 2019 to create real
change and action, and was the driving force behind Ki. It is
aimed at targeting opportunities to disrupt our market and
has identified a number of opportunities of real potential.
• Distribution – Our strategy is to deliver our products to
our customers in a more efficient manner. This includes
increased digital distribution and positioning ourselves
closer to our customers. We have an established local
distribution platform in the US, our largest market, and
now have an established Bermuda operation, which houses
Brit Re (our captive reinsurer and A-rated reinsurance
carrier), Sussex Re (our ILS vehicle) and BGSB (our
reinsurance service company).
We are ready to face the future with optimism.
10
Brit Limited Annual Report 2020
Strategic Report our underwriting
writing the future
The world we live in is unpredictable. It’s volatile, uncertain, and subject to change. At Brit,
we believe that the uncertainty of the future should never stand in the way of progress.
That’s why we exist. To provide a risk service and help people and businesses face the future
and thrive.
Our vision
A world where uncertainty never stands in the way of
progress. Because we believe the uncertainty of tomorrow
isn’t something to fear, but something to seize.
Our promise
We don’t react to the future, we write it. It’s why we’re the
proud home of forward-thinkers, pioneers and leaders. And
it informs a set of core philosophies:
Our mission
To help people and businesses face the future, and thrive.
At Brit, we start with the customer, and we never forget
the value we deliver. A promise that provides confidence in
an uncertain world.
A mission that requires us to do things differently.
If we are to help people seize the potential of the future we
can’t just sell insurance products, we have to provide a risk
service.
• A risk service that helps clients not only prepare for, but
manage and mitigate the risks they face;
• A risk service that doesn’t just react to change, but sees
the opportunity to create change for the better; and
• A risk service that helps people not only move on from
an event, but helps them to move forward rapidly with
confidence.
This forward-thinking approach comes to life in our promise,
and that promise lives at the heart of everything we do.
The Brit difference
At Brit, LEADERSHIP, INNOVATION and enhancing our product
DISTRIBUTION are at the heart of our strategy, underpinned
by our strong underwriting and claims expertise.
We are a leading global specialty insurer and reinsurer, focused
on underwriting complex risks. We have a keen appetite for
leadership; leading – or acting as second lead 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.
We strive for innovation – across our products, processes
and people. We have created a 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 provide a risk service, not sell insurance products;
• We treat people fairly – conducting ourselves with
honesty & integrity at all times;
• We think proactively to help us and our clients live life on
the front foot;
• We always speak with openness, consistency and clarity;
• We take time to make thoughtful & disciplined decisions;
and
• We put innovation at the heart of our business.
We are committed to creating lasting relationships with brokers
and clients. Hence, we are happy to meet face-to-face, albeit
‘virtually’ in 2020, and make ourselves available when many
others do not. Distribution is one of the key strands of Brit’s
‘LID’ strategy – we are focussed on understanding our key
customers and tailoring our distribution strategy across four
key areas; open market, coverholders, reinsurance and digital.
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 ultimate 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.
Brit Limited Annual Report 2020
11
Strategic Report
our underwriting
Providing a risk service
Choosing to work with Brit means clients are choosing
a service, not just buying a product.
Every day, our multidisciplined team brings diverse skills and
experience to our clients’ businesses, and this deep underwriting
expertise helps clients to effectively mitigate their risks.
By working in close collaboration across Underwriting,
Claims, Actuarial and Technology, our teams gain and share
unparalleled insight into the risks that our clients face.
•
•
•
•
•
Insight that helps us understand our client intimately, and
enables us to deliver a global service.
Insight that helps us not only lead the business we write,
but also to be a meaningful and valuable partner to those
we work with.
Insight that helps us select and price risk with industry
leading accuracy.
Insight to respond to events efficiently and effectively.
Insight that drives us to deliver market-leading innovation
across all four phases of the customer experience –
pricing, risk management, claims and renewals.
Underwriting and claims excellence
Underscored by comprehensive underwriting, claims and risk
services, we operate as a market lead across our full range
of services. At Brit we pride ourselves on Underwriting and
Claims excellence, deploying the latest tools and a disciplined
approach, we have a long record of strong performance.
Underwriting excellence
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
and expertise. 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
primarily through our Syndicates 2987, 2988 and Ki 1618. We
are also helping lead Lloyd’s market modernisation project and
have met the 2020 implementation targets set by Lloyd’s.
Claims excellence
Should the worst happen, our team of claims professionals
are committed to helping those affected not only to move on
from the incident, but to move forward.
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.
12
Brit Limited Annual Report 2020
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.
In 2018 and 2019 our claims team won the ‘Claims Team of the Year’
at the Insurance Day London Market Awards, in recognition of our
strong focus on enhancing the end customer experience alongside
our ability to use innovation to improve both service levels and
efficiency, and the ‘Claims Team of the Year’ at the LMA awards.
In 2020, Marsh and Lockton rated Brit the number one carrier
for services provided in the London Market, while AJG ranked
us third in the London Market and Aon ranked us third out of
34 carriers.
Market-Leading Innovation
By putting innovation at the heart of our business we are
constantly looking for ways to provide the ongoing value
that will help our customers thrive in a changing world. Our
ultimate parent company, Fairfax Financial Holdings Limited,
gives us the perfect foundation to do just that, providing a
strong and stable base for long-term growth, while allowing
us the flexibility to be agile in an ever-evolving industry.
Brit has continued to deliver market-leading innovation:
•
•
In 2020, Brit launched Ki, a standalone business and the
first fully digital and algorithmically-driven Lloyd’s of
London syndicate. Further details are included on page 18.
In December 2020, Brit successfully sponsored a 144A cat
bond issuance, via Sussex Capital UK PCC Limited. This is the
first time a protected cell of a UK domiciled multi-arrangement
risk transformation vehicle has issued a 144A cat bond.
Extensive network
We are proud of our extensive distribution network. We
have strong links with local producers, which enable us to
efficiently provide long-term capacity for risks that would
not otherwise reach the Lloyd’s market.
We are absolutely committed to building relationships and
working closely with our clients to understand and exceed their
needs. With offices in the UK, the US, Bermuda and Japan, our
network allows us to reach and serve clients globally.
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.
Our specialist Delegated Underwriting Management team has
a reputation for its commitment to excellent customer service.
Strategic Report Group GWP by line of business (%)
■ Direct – London Market, 58.2%
■ Overseas Distribution, 18.0%
Group GWP (US$m)
Group combined ratio (%)
Group attritional ratio (%)
2020
2019
2018
2017
2016
2,424.4
2,293.5
2,239.1
2,057.0
1,912.2
2020
2019
2018
2017
2016
112.6
95.8
103.3
112.4
96.4
2020
2019
2018
2017
2016
0
500
1000
1500
2000
2500
0
20
40
60
80
100
120
0
10
20
30
40
50
60
Brit Global Specialty Direct GWP (US$m)
Brit Global Specialty Direct
combined ratio (%)
Brit Global Specialty Direct
attritional ratio (%)
2020
2019
2018
2017
2016
1,766.1
1,713.5
1,758.0
1,675.0
1,546.6
2020
2019
2018
2017
2016
115.5
98.7
101.1
117.5
101.1
2020
2019
2018
2017
2016
0
250
500
750
1000
1250
1500
1750
0
20
40
60
80
100
120
0
10
20
30
40
50
60
Brit Global Specialty Reinsurance
GWP (US$m)
Brit Global Specialty Reinsurance
combined ratio (%)
Brit Global Specialty Reinsurance
attritional ratio (%)
2020
2019
2018
2017
2016
574.3
537.7
451.7
383.3
365.8
2020
2019
2018
2017
2016
101.3
91.7
111.3
86.8
73.6
2020
2019
2018
2017
2016
0
100
200
300
400
500
600
0
20
40
60
80
100
120
0
10
20
30
40
50
60
The 2020 combined ratios excluding COVID-19 related claims were: Direct 100.9%; Reinsurance 80.6%; Group 96.7%
52.6
55.0
57.2
56.4
55.5
51.5
54.6
58.0
56.5
55.5
57.0
55.5
54.1
53.2
52.9
Brit Limited Annual Report 2020
13
Strategic Report■ Financial and Professional Liability, 10.7%■ Programmes and Facilities, 21.8%■ Property, 11.9%■ Ambridge, 1.1%■ Specialty, 12.7%■ BGSB (Bermuda), 3.4%■ BGSU (USA), 11.9%■ Scion (USA), 2.7%■ Reinsurance, 19.8% ■ Casualty Treaty, 10.0% ■ Property Treaty, 9.8%■ Discontinued, 0.2%■ Other, 3.8%
our underwriting
writing the future
The breadth of classes we support, the
depth of our experience and our commitment
to our clients differentiates us.
London Direct
Fin Pro
D&O
Property
FI
Cyber
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.
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.
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.
Healthcare
US PI
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.
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.
14
Brit Limited Annual Report 2020
Political Risk and Trade Credit
Covers non-payment/performance
of counterparties and confiscation,
expropriation, nationalisation,
deprivation, sequestration or forced
abandonment of overseas assets.
Political Violence
Covers physical damage and business
interruption losses due to perils
including terrorism, strikes, riots,
civil commotion, war on land and
nuclear, chemical, biological and/or
radiological attacks.
Open Market and 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.
UK Property
We have a proven track record
of writing and delivering flexible
commercial solutions to address the
precise nature of our customers’
requirements.
Specie and Private Client
Our team has over 25 years of
underwriting experience in the High
Net Worth market, specialising in
tailoring products to clients’ needs.
Strategic Report
London Direct
Facilities
Accident and Health (A&H)
Contingency
An established lead market offering
specialist products for diverse risks
including event cancellation, film
production, non-appearance and prize
indemnity.
Kidnap for Ransom
The world’s security environment is
constantly changing and our individually
tailored kidnap for ransom product
has been designed to respond to
these evolving threats. Our clients
range from private individuals to large
multinationals.
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.
Property Facilities
Commercial Property
Our established portfolio insures
owners of commercial property
and package risks through selected
coverholders and Lloyd’s brokers.
Property Financial
Coverage for financial institutions,
loan servicers and property investors,
including lender-placed hazard and
flood protection. We also offer mortgage
impairment coverage.
Residential Property Facilities
Coverage for primary, secondary and
vacant dwellings plus condominium units
in the US and Canada. Flood, Earthquake
and Landslide available separately or as
a package.
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.
Transport
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.
Long Tail Facilities
Legal and Structured Solutions
A leader in Before the Event (BTE) or
After the Event (ATE) legal expenses
coverage for individuals, companies and
affinity groups worldwide, we deliver
bespoke structured insurance solutions
for financial, contingent and legal risks.
Small North American Liability
We insure small and medium-sized
enterprises in the USA and Canada for
financial recourse resulting from their
professional negligence, errors and
omissions.
Brit Limited Annual Report 2020
15
Strategic Report
Environmental Liability and Public Liability
An experienced team with a flexible
approach to UK and international liability
business including Employers, Public,
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.
our underwriting
London Direct
Specialty
Marine
EL and PL
Cargo
An experienced and respected team
covering cargo on ships, aircraft or
in warehouses worldwide – as well as
project cargo for construction and
inland marine exposures.
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.
Marine Liability
Offering specialist cover including
protection and indemnity, charterers’
liability and pollution as well as
energy liability products for upstream
exploration and production.
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.
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.
Energy
Space
16
Brit Limited Annual Report 2020
Strategic Report London
Reinsurance
Casualty
Overseas
Distribution
USA (BGSU)
Property
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.
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 homeowners’ policies
through to complex commercial/
industrial risks.
BGSU offers a range of E&S, admitted
and reinsurance cover with a focus on
property, casualty and marine.
Headquartered in Chicago, it has
underwriting nationwide offices servicing
each US time zone. It underwrites:
Construction Professional
Contractors Professional Liability (E&S)
Cyber & Technology
Excess Casualty (E&S)
General Liability (E&S)
Miscellaneous Professional Liability (E&S)
Owner Protective Indemnity
Programs (Admitted and E&S)
Alternative Risk Package (E&S)
U.S. Casualty Treaty (Reinsurance)
U.S. Political Violence (Terrorism)
U.S. Property Facultative (Reinsurance)
Bermuda (BGSB)
Our Bermuda operations complement
our distribution network and are a key
step in developing Brit’s global offering.
They underwrite:
Property Treaty
Casualty Treaty
Brit Limited Annual Report 2020
17
Strategic Report
our underwriting
Ki, the first algorithmically driven
Lloyd’s of London syndicate
Ki is a standalone business, launched for 2021, and the first
fully digital and algorithmically-driven Lloyd’s of London
syndicate (Syndicate 1618) that will be accessible anywhere,
at any time. We believe Ki will redefine the commercial
insurance market with its digital and data-first model.
Ki marks a step change for an industry that is yet to face
the disruption seen across the rest of financial services and
other industries. It aims to significantly reduce the amount
of time and effort taken for brokers to place their follow
capacity, creating greater efficiency, responsiveness and
competitiveness. Google Cloud brings to Ki enterprise-grade
cloud solutions powered by innovative technologies that
enable rapid transformation at scale. Ki’s algorithm is able to
evaluate Lloyd’s policies and automatically quote for business
through a digital platform which brokers can access directly.
The selection process is performed using a proprietary
algorithm developed with support from University College
London and their Computer Science department. Ki follows
several ‘nominated’ lead syndicates across the Lloyd’s market,
including Brit. Ki offers brokers a line on every risk in the
selected classes led by these markets.
Ki truly embraces all that is represented in ‘The Future at
Lloyd’s’ by bringing data, technology, innovation and artificial
intelligence to the fore in the complex world of corporate and
specialty underwriting. With Lloyd’s focus on e-placement and
the ever-increasing adoption of electronic trading, we expect
the transition in how the Lloyd’s market transacts business
to be accelerated.
Ki completed one of the largest fundraises of any start-up in
Europe in 2020 with US$500m of committed capital invested
by Blackstone Tactical Opportunities (Blackstone) and Fairfax.
This capital commitment has funded Ki’s launch and will enable
the business to grow rapidly to significant scale.
Securing support from Blackstone, one of the world’s leading
investment firms, is a significant statement of confidence in
Ki and the vision we have set out. With its investors, Ki has the
financial firepower to rapidly scale the business and support
its plan to provide a truly differentiated offering to brokers
and clients
Ki has also onboarded its first trading partners, a leading group
of Lloyd’s brokers including Aon, Aon Re, BGCI, including Ed and
Besso, Bishopsgate, BMS, Gallagher, Guy Carpenter, Howden,
Lockton, Lockton Re, Marsh, Miller, Price Forbes, AmWins/THB,
Tysers, Willis, and Willis Re. Ki has agreed to provide valuable
capacity to each trading partner in 2021, giving their clients
immediate security about placing business in Lloyd’s.
Ki is continuing to focus on innovation, with two upgrades to
the platform deployed in the first 60 days following launch.
In 2021, Ki will deliver additional platform capability on the
back of broker feedback, broaden out the use of non-Brit
Lloyd’s lead markets into new classes and digitally integrate
with a number of broker partners.
These developments are Lloyd’s firsts, enabling seamless
and instantaneous commitment of follow capacity in the
market and comes on the back of the recent launch of Lloyd’s
Blueprint Two and realises a vision for the digital future for
the Lloyd’s follow market.
Ki has brought together a team combining the best talent
from the current Lloyd’s model, with a strong focus on
relationships and deep underwriting and broker expertise
in the Portfolio Underwriting team led by Dan Hearsum,
combined with leading technology, data science and actuarial
skills in its Portfolio Management and Development functions,
led by Alan Tua and James Birch respectively.
In October 2020, Ki Syndicate 1618 achieved ‘permission to
underwrite’ from Lloyd’s, and in November it bound its first
risk, with its line having been generated by its proprietary
algorithm, a first in the Lloyd’s market. Ki plans to write
cUS$400m of GWP in its first year, which would make it the
largest ever digital start-up in Lloyd’s.
Further information can be found at www.ki-insurance.com
and https://youtu.be/_gZUqDGjTrI.
18
Brit Limited Annual Report 2020
Strategic Report Brit Limited Annual Report 2020
19
Strategic Report
underwriting review
2020 underwriting review
COVID-19
COVID-19 has had a significant impact on the insurance
industry, with commentators likening the direct effect of
the pandemic to 9/11 or the combined effects of Hurricanes
Katrina, Rita and Wilma. Lloyd’s has suggested that COVID-19
could be the market’s largest ever single loss event, initially
estimating a potential of US$107bn in claims, with Lloyd’s
share likely to be in excess of US$4.0bn. Given the protracted
nature of the pandemic, these estimates are likely to be
significantly exceeded.
Our immediate priorities as the crisis emerged were to
ensure the safety of our employees and continuity of our
service to our clients and brokers. All our offices were quickly
and successfully able to move to remote working using our
robust IT estate and systems and have maintained a continuity
of service to our clients, remaining fully open for business
throughout the lockdown period. Our underwriters have
been actively engaging with clients and brokers, delivering
market-leading responsiveness. Our Claims team continues to
service our policyholders in these challenging circumstances,
proactively working with our TPAs to ensure claims continue
to be handled promptly and to our usual high standards.
The financial impact on Brit has been significant, with claims
of US$270.7m related to COVID-19 being reported within
Major Losses in the period. These losses have driven an
increase of 15.9 percentage points (pps) in our combined
ratio. COVID-19 has predominantly impacted our Contingency
(Event Cancellation) and Casualty Treaty books.
COVID-19 is a highly unusual insurance event, ‘earning’ over
a prolonged period. Estimating the overall cost is highly
subjective and is dependent on factors such as how long
lockdowns and social distancing continue, the ability to
reschedule events and the potential of minimising cost by
either the early cancelling/postponing of events or holding
them behind closed doors. All these factors play into our
loss estimates.
We also continue to monitor our wider business, which may
be impacted by claims arising directly or indirectly from the
events unfolding, and we continue to consider the potential
impact on medium-term claims from a global recession, which
typically brings increased moral hazard, fraud and a more
litigious environment generally.
Brit notes the outcome of the Supreme Court ruling on
15 January 2021 in respect of the FCA’s COVID-19 related
business interruption test case. Brit was not party to this
action, the outcome of which does not have a material impact
on the Group.
During 2020, we have managed to maintain the collaborative,
can do attitude that has set us apart in the market, and
proved we can operate a leading insurance business remotely
and electronically. Our ability to collaborate using technology
has allowed us to carry on with our goals, and our culture of
managing risk actively has allowed us to adapt. We have moved
paper-based brochures to e-books, physical stamps to e-stamps
and, thanks to our portals and PPL, are able to seek out new
business opportunities with our e-distribution capability.
We have learnt much about ourselves during lockdown and our
culture has excelled, showing itself to its best. New positive
cultural attributes have also emerged during lockdown,
together with some areas that we need to work harder on in
a working from home environment.
Investment markets were also significantly impacted by
COVID-19. In the first quarter of 2020, markets suffered their
worst quarter since the financial crisis as investors priced in
the short-term impact of COVID-19 and potential longer term
impact of a global recession. Markets subsequently rebounded
following fiscal and monetary stimulus and recovered further
in quarter four following positive vaccine news, with value
stocks performing particularly well. Brit’s investment return
for the twelve months to 31 December 2020 was a positive
US$45.5m, which is discussed later in this report.
Major loss activity
2020 also saw a high level of non-COVID-19 related major loss
activity, with an estimated US$83bn of global insured losses
arising from natural catastrophes and man-made events, an
increase of 32% over 2019 (US$63bn) and the fifth-costliest
on record. Natural catastrophes, including hail storms,
wildfires and floods, accounted for US$76bn of the estimate,
as well as having a devastating impact on people’s lives, homes
and businesses. The windstorm season was very active,
with record number of named storms, albeit resulting in only
moderate insured losses of US$20bn. The estimated global
economic loss of all 2020 events is approximately US$187bn
(2019: US$149bn).
The main events impacting Brit in 2020 were Hurricane Laura,
Hurricane Sally, Hurricane Zeta, the Nashville Tornadoes and
US Civil Unrest. The net impact to Brit of the claims incurred
from these events, before reinstatements, was US$132.5m,
or 7.8pps on the combined ratio (2019: US$58.4m/3.6pps).
Whilst moderate individually, they accumulate to a significant
total, well above average expectations. These events have
disproportionately hit insurance lines and less populated
areas outside of the peak zones. As a result, we have seen
higher exposure from our coverholder business, which
is deliberately weighted to these exposures and provides
balance to the overall property account.
Rate increases
The market has continued to benefit from strengthening
premium rates during 2020. Brit achieved an overall risk
adjusted rate increase of 10.6% (2019: 5.9%). All divisions
have continued to achieve rate increases, with the largest
20
Brit Limited Annual Report 2020
Strategic Report underwriting review
increases achieved in Property D&F, Marine Cargo, D&O and
Excess Casualty.
RARC since 1 January 2018 now +20.2%, analysed across
portfolios as follows:
London – Direct
London – RI
Overseas Distribution
Total
2018
%
3.6
3.1
4.5
3.7
2019
%
7.1
2.4
6.4
5.9
2020
%
10.7
7.2
14.6
10.6
Total
%
21.4
12.7
25.5
20.2
Our underwriting
Our overall GWP for 2020 was US$2,424.4m, an increase of
5.7% over 2019 (US$2,293.5m), or 5.6% at constant rates
of exchange. We saw dramatic reductions in some areas of
the business as COVID-19 impacted travel, events and M&A
and have continued to refine our portfolio where conditions
have been challenging. This has reduced the headline
growth rate despite us seeing strong growth in other areas
including Property Treaty, Specialty, Property, Financial and
Professional Lines and Scion, reflecting the strong rating
environment and targeted growth as conditions improved.
Our customers
Our customers are our priority. When a customer has a
claim, we understand they are facing difficult and unexpected
challenges. They expect the insurance they have purchased to
respond and deliver when they need it most. We see each and
every claim as an opportunity to deliver the claims service our
customers need to move forward with their lives. This claims
service has included:
• Driving a strong effort to respond to a high volume of
COVID-19 claims experienced throughout the year, including
assisting many commercial lines customers and brokers
who had previously never experienced a loss, with the extra
support they needed to expedite and resolve their claim;
• Working with our local third-party claims adjusters on a
high volume of property and business interruption claims
in a variety of jurisdictions in response to COVID-19 and
related government actions. Collaboration with our local
TPAs was robust and required extra effort in the early
stages of developing a response strategy;
• Maintaining a focus on responding to our customers and
pursuing opportunities to reduce claims lifecycle and bring
claims to resolution at every opportunity;
• Utilising Geospatial Intelligence Centre technology to
advance our property claims adjusting capabilities by
capturing high resolution images of Brit-insured properties
affected by events ranging from tornadoes in Nashville, to
Hurricanes Laura, Sally and Zeta. Losses were immediately
referred to our TPAs for payment, where covered
damage(s) could be determined, even when affected areas
could not be accessed by local field adjusters;
• Swiftly establishing dedicated loss funds for our TPAs and
coverholders, to expedite claims payments;
• Proactively making interim or partial payments whenever
possible to support our insureds’ recovery efforts; and
• Completing a proof of concept and subsequently introducing
to brokers our new Brit Direct Pay innovation. Brit Direct
Pay provides our customers the option of self-directing their
payment through a custom app directly to their Visa bank card
so that their claims payment can be transferred within hours,
or sooner. This is the first of its kind in the London market, and
we have plans to expand the capability to the US in 2021.
Our retention ratio, the proportion of our business that
renews on a premium weighted basis, was 76.1%, marginally
lower than in 2019 (78.0%). Across all lines, we have retained
our underwriting discipline and are prepared to discontinue
accounts that we believe are inadequately priced or outside
of our appetite.
Distribution remains central to our strategy, and we continue
to build our network. Our overseas offices make a significant
contribution to the Group, providing 19.2% of GWP, and
allowing us to access business not generally available in
London. In 2020 they generated US$465.4m of premium
(2019: US$508.6m).
• Brit Global Specialty USA (BGSU) has written US$289.7m
of premium (2019: US$305.8m). We have streamlined and
refocused our product set, focusing on classes where we
see sustainable opportunities and the potential to operate
at scale.
• Scion Underwriting Services Inc., our US MGA headed by
Scott Brock, generated US$64.8m of premium for Brit in
2020, in its third year of operations (2019: US$46.0m).
This growth reflected the strong rating environment and
increased market traction.
• Ambridge Partners LLC, our New York based MGA,
generated US$27.8m of premium for Brit (2019: US$46.7m).
This reduction reflects the reduction in corporate
transactional activity resulting from the impact of COVID-19
and from other factors such as Brexit uncertainty.
• Our Bermuda operation continues to selectively write
reinsurance business in lines and markets that we believe
are well rated. Premiums generated by our Bermuda office
in 2020 equated to US$83.1m (2019: US$110.1m). The
reduction relates to discontinuing our Casualty Treaty
operation in 2020 as previously announced.
Our combined ratio in 2020 was 112.6%, including 15.9pps in
respect of COVID-19, 7.8pps in respect of other major losses
and (3.6)pps of reserve releases. Over the past five years,
we have delivered an average combined ratio of 104.1%
despite the impact of COVID-19 and extreme catastrophe
years of 2017 and 2018. Excluding the impact of COVID-19
related claims, our 2020 combined ratio was 96.7% and our
five-year average is 100.9%.
Brit Limited Annual Report 2020
21
Strategic Report
underwriting review
Overall, the combination of strong portfolio management
and underwriting discipline has led to us achieving a 52.6%
attritional ratio in 2020 (2019: 55.0%), a strong underlying
performance.
our Cyber, Kidnap and Ransom, Terror, Flood and Private
Client portal services. This demonstrates how innovation
is becoming central to everything we do at Brit, while also
demonstrating our distribution strategy in action.
• Continued development of BGSU
BGSU Cyber and Technology expansion: In January, we
appointed an Assistant Vice President (AVP), Cyber and
Technology and, in April, we appointed an AVP, Cyber. These
roles will support the underwriting and growth of Brit’s US
Cyber portfolio.
BGSU Programs: In April, BGSU appointed a Vice President
(VP), Programs, to develop BGSU’s Specialty Program
offering and identify future opportunities for growth,
working closely with prospective MGAs. In December, BGSU
appointment a VP Programs, to develop and expand the
current portfolio.
BGSU Terrorism: BGSU launched a Terrorism product with
the appointment of a VP, Terrorism. Working with the London
Terrorism team, the US team will look to enhance Brit’s profile
as a highly respected Terrorism market leader.
• Continued Portfolio Management
Where classes remain challenging, we have continued to
take action to improve our performance and maintained
our rigorous risk selection criteria. During 2020, we
examined the classes we write in BGSU and took the
following decisions:
BGSU Cargo and First Dollar: BGSU exited Cargo and First
Dollar, and completed two renewal rights disposals in respect
of these classes. Under both transactions, a number of Brit
staff transferred with the renewal rights.
• BGSU Property E&S: In November, BGSU exited Property
E&S following a review of its performance and prospects.
Despite significant rate rises, the lack of scale, inherent
volatility and cost of reinsurance protection made this book
untenable. We are reallocating the catastrophe aggregate
to our Programs and Reinsurance Classes where we
see greater opportunity to make profitable margins both
now and over the market cycle.
As part of our standard reserving process, we released
US$61.5m of net reserves established for prior year claims,
the equivalent of a combined ratio reduction of 3.6pps (2019:
US$47.9m/2.9pps). This reflected an improvement in Brit’s
overall net estimates arising from the 2017 to 2019 major
loss events, and favourable attritional development across
our London Direct and London Reinsurance portfolios.
These releases were partly offset by a strengthening in our
Overseas Distribution portfolio, reflecting adverse attritional
experience and inflationary pressures in BGSU.
Our business developments during 2020
During 2020 we have continued to focus on our underwriting
strategy. Developments have included:
• Ki, the first algorithmically driven Lloyd’s of London
syndicate
In 2020, Brit launched Ki, a standalone business and the
first fully digital and algorithmically-driven Lloyd’s of
London syndicate. Further details are included on page 18.
•
Issue of Brit sponsored US$300m Cat Bond
On 14 December 2020, Brit successfully sponsored a 144A
cat bond issuance, via Sussex Capital UK PCC Limited. The
bond provides US$300m of multi-year named storm and
earthquake protection for a risk period of four years to
31 December 2024. Structured on an annual aggregate
state weighted basis, the proceeds from the bond will be
used to collateralize a reinsurance agreement with Brit
Syndicates Limited, acting on behalf of Syndicate 2987,
and Sussex Capital UK PCC Limited. This is the first time
a protected cell of a UK domiciled multi-arrangement risk
transformation vehicle has issued a 144A cat bond.
• Private Client launch
In May, we announced the launch of our new Private Client
offering. Brit Private Client offers brokers operating
in the high and ultra-high net worth market, and their
clients, a credible new alternative, combining Brit’s
brand and reputation in claims and service with a team
of highly regarded market practitioners. It differentiates
itself through its bespoke approach, offering clients
personalised solutions through a single policy that will
include significant limits, worldwide coverage and additions
such as personal cyber. Coverage includes homes, rare
and valuable possessions, annual travel and cars all in one
policy. The focus of the book is the UK and Ireland.
• E-trading microsite
In July, our e-trading microsite (www.britinsurance.com/e-
trading) went live, increasing our ability to shine a light on
22
Brit Limited Annual Report 2020
Strategic Report • Commonwealth (CICA)
During 2020, we progressed the sale of CICA. The
transaction completed on 5 February 2021 for a
consideration of US$19.7m. CICA is a US admitted carrier
that holds a number of licences to operate as an insurance
company. Brit originally acquired CICA in April 2018 at a
cost of US$16.4m.
• 2021 business planning
With the launch of Ki Syndicate 1618, Brit’s planned
premium growth across all three syndicates for 2021 is
27.9%. This makes Brit one of the fastest growing large
managing agents in the market, demonstrating the value
and strength of Brit to the Lloyd’s Market.
Syndicate 2987’s GWP is planned to grow by 12.5%. As
in previous years, we continue to actively manage the
portfolios by segmenting Classes into ‘High Performing’,
‘Core Growth’, ‘Core New Initiatives’, ‘Core Opportunistic’
and ‘Portfolio Management’. Growth (excluding RARC) is
driven primarily by the ‘High Performing’ and ‘Core
Growth’ segments, while the largest increases in RARC
are targeted on the weakest performing segments of
the portfolio.
Syndicate 2988’s GWP is planned to grow by 12.8%.
The 2021 plan promotes continued diversification of the
Syndicate’s portfolio, by growing the ‘High Performing’ and
‘Core Growth’ segments such as Casualty Treaty. Growth
in Syndicate 2988 premium is largely a function of greater
penetration into Syndicate 2987’s business plus selective
growth of existing business.
Brit Limited Annual Report 2020
23
Strategic Report
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, 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, together with
the challenges presented by the deterioration in
underwriting market conditions and the increase
in investment market volatility.
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 176 and definitions
of each of our KPIs are included in the Glossary
starting on page 181.
24
Brit Limited Annual Report 2020
Overall performance
Return on net tangible assets before FX movements
and corporate activity costs (RoNTA)
(19.6)%
2020
2019
2018
2017
2016
(19.6)%
18.1%
(14.4)%
1.1%
11.8%
-20
-15
-10
-5
0
5
10
15
20
Return on net tangible assets before foreign exchange
movements (RoNTA) shows the return being generated
by our operations compared to the adjusted net tangible
assets deployed in our business.
In 2020, our RoNTA was (19.6)%, reflecting the impact
of COVID-19, and other major losses activity, partly
offset by a strong attritional performance, solid prior
year reserve releases, and a positive investment
return.
This return resulted in a five-year average RoNTA
of (0.6)%. RoNTA for 2020 after foreign exchange
movements was (19.2)% (2019: 18.4%).
Overall performance
Total value created
US$(217.0)m
2020
2019
2018
2017
2016
-250
-200
-150
-100
-50
0
50
100
150
200
US$(217.0)m
US$198.6m
US$(175.6)m
US$24.7m
US$139.0m
250
The total value created measures the increase in
adjusted NTA (before distributions, capital raisings and
intangibles created on acquisitions) in a year. It reflects
the post-tax result recorded in the income statement
and all other value movements.
In 2020, value creation was a negative US$217.0m,
or 18.9% of opening adjusted NTA. The company has
generated a total value of US$(30.3)m over the past
five years, an average of US$(6.1)m per annum.
Strategic Report
2019
2018
2017
2016
2015
Underwriting
Combined ratio
112.6%
2020
2019
2018
2017
2016
Capital management
Capital ratio
122.1%
112.6%
95.8%
103.3%
112.4%
96.4%
2020
2019
2018
2017
2016
0.0
0.0
0.0
0.0
0.0
122.1%
128.4%
130.4%
136.8%
125.6%
0
20
40
60
80
100
120
0
20
40
60
80
100
120
140
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 2020 was 112.6%, including 15.9pps
in respect of COVID-19 related claims and 7.8pps in respect
of other major losses, partly offset by (3.6)pps of reserve
releases. Over the past five years, we have delivered an
average combined ratio of 104.1% despite the impact of
COVID-19 and extreme catastrophe years of 2017 and 2018.
Excluding COVID-19 related claims, our 2020 combined
ratio was 96.7% and our five-year average combined
ratio was 100.9%
The capital ratio measures the strength of our
statement of financial position by comparing our
available capital resources to the capital we need to hold
to meet our management entity capital requirements.
Our statement of financial position remains strong.
At 31 December 2020, following capital injections from
Fairfax in 2020 of US$524.0m, Group capital resources
totalled US$1,881.3m giving surplus management capital
of US$341.0m (2019: US$348.9m), or 22.1% (2019:
28.4%) over our Group management capital requirement.
During 2020, our capital requirements increased from
US$1,227.7m to US$1,540.3m, primarily reflecting
movements in interest rates and Brit’s share of the
capital requirement of Ki Syndicate 1618. Brit has met its
regulatory capital requirements at all times during 2020.
Investment management
Investment return
Operating platform
Ratio of front office employees to back office employees
1.0%
2020
2019
2018
2017
2016
140.9%
1.0%
3.6%
(2.0)%
4.9%
2.6%
2020
2019
2018
2017
2016
140.9%
150.9%
155.5%
163.8%
180.7%
-2
-1
0
1
2
3
4
5
0
20
40
60
80
100
120
140
160
180
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 average 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 2.0%.
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 2020, the ratio was 140.9%, reflecting
that we had approximately 1.4 front office employees
for every back office employee.
The reduction in the ratio in 2020 follows the trend
in recent years and primarily reflects the relative
increased back office staff to support our overseas
growth, third-party capital management and regulatory
requirements.
Brit Limited Annual Report 2020
25
Strategic Report
financial performance review
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, and FX
FX movements
(Loss)/profit on ordinary activities before tax
Tax
(Loss)/profit for the year after tax
Note 1: Excluding the effects of foreign exchange on non-monetary items.
2020
US$m
2,424.4
1,714.0
(215.0)
(215.0)
45.5
(23.6)
(23.6)
(17.0)
(233.7)
3.2
(230.5)
(1.5)
(232.0)
2019
US$m
2,293.5
1,638.5
68.4
68.4
148.1
(20.3)
(23.7)
10.5
183.0
3.3
186.3
(6.4)
179.9
2018
US$m
2,239.1
1,466.1
(56.9)
(56.9)
(82.1)
(20.0)
(18.8)
(3.4)
(181.2)
(9.1)
(190.3)
23.8
(166.5)
2017
US$m
2,057.0
1,540.1
(172.8)
(172.8)
204.2
(24.0)
(17.1)
2.6
(7.1)
12.6
5.5
16.0
21.5
2016
US$m
1,912.2
1,515.1
54.6
54.6
102.9
(21.3)
(18.8)
1.1
118.5
41.3
159.8
(2.2)
157.6
Group performance and total value created
2020 was dominated by COVID-19 and other major losses. However, we also saw a further improvement to market conditions,
a strong attritional performance, continued reserve releases and a good investment return.
The result on ordinary activities for the year before tax and FX was a loss of US$233.7m (2019: profit of US$183.0m), loss
before tax was US$230.5m (2019: profit before tax of US$186.3m) and loss after tax was US$232.0m (2019: profit after tax was
US$179.9m). Return on adjusted net tangible assets (RoNTA), excluding the effects of FX, was (19.6)% (2019: 18.1%). RoNTA for
2020 after including foreign exchange movements was 18.4% (2019: 18.4%) and total value created for the year was a negative
US$217.0m (2019: positive US$198.6m).
Our adjusted net tangible assets at 31 December 2020 totalled US$1,436.8m (2019: US$1,150.4m).
Performance measures
In addition to our KPIs, we have other measures that offer further insight into the detail of our performance. These measures
include:
• Premium related: Risk adjusted rate change; Retention rate;
• Claims related: Claims ratio; Attritional loss ratio; Major claims ratio; Reserve release ratio; and
• Underwriting expense related: Underwriting expense ratio; Commission ratio; Operating expense ratio.
26
Brit Limited Annual Report 2020
Strategic Report Underwriting
Overview
Our underwriting result for the year was a loss of US$215.0m (2019: profit of US$68.4m) and our combined ratio, which
excludes the effect of foreign exchange on non-monetary items, was 112.6% (2019: 95.8%). The premiums, claims and expenses
components of this result are examined below.
Premiums written
Premium growth
London Market Direct
London Market Reinsurance
Overseas Distribution
Discontinued underwriting
Other underwriting
Group total
2020
US$m
1,411.6
479.2
437.6
5.0
91.0
2,424.4
2019 (Restated)
(Note1)
US$m
1,361.7
427.5
462.0
11.2
31.1
2,293.5
Growth
%
3.7
12.1
(5.3)
(55.4)
192.6
5.7
Growth at constant
FX rates
%
3.6
12.0
(5.3)
(56.1)
192.6
5.6
Note 1: The 2019 analysis has been re-analysed to reflect the underwriting class monitoring structure introduced in 2020.
Premiums by division and class
London Market Direct
Financial and Professional Liability
Programmes and Facilities
Property
Ambridge
Specialty
London Market Reinsurance
Overseas Distribution
Discontinued (Note 2)
Other (Note 3)
Total
Casualty Treaty
Property Treaty
BGSB (Bermuda)
BGSU (USA)
Scion (USA)
Discontinued
Other
2020
US$
260.1
528.7
287.7
27.8
307.3
1,411.6
242.6
236.6
479.2
83.1
289.7
64.8
437.6
5.0
91.0
2,424.4
2019
(Restated)
(Note1)
US$
224.2
577.8
259.1
46.7
253.9
1,361.7
236.6
190.9
427.5
110.1
305.9
46.0
462.0
11.2
31.1
2,293.5
Note 1: The 2019 analysis has been re-analysed to reflect the underwriting class monitoring structure introduced in 2020.
Note 2: ‘Discontinued Underwriting’ represents lines of business in run-off.
Note 3: ‘Other Underwriting’ comprises the Group’s special purpose vehicles and Brit’s share of Syndicate 2988.
Gross written premium (GWP) increased by 5.7% to US$2,424.4m (2019: US$2,293.5m). At constant exchange rates, the
increase was 5.6%. London Market Direct business increased by 3.7% to US$1,411.6m (2019: US$1,361.7m), London Market
Reinsurance increased by 12.1% to US$479.2m (2019: US$427.5m), Overseas Distribution decreased by 5.3% to US$437.6m
(2019: US$462.0m) and Other Underwriting increased by 192.6% to US$91.0m (2019: US$31.1m).
Brit Limited Annual Report 2020
27
Strategic Report
financial performance review
The drivers of the increase in Group GWP, which was in line with expectations, are as follows:
• Current year premiums: Growth in our core London Market Direct (Specialty, Property, and Financial and Professional
Liability) and Reinsurance classes (Property Treaty), reflected the strong rating environment and targeted growth as we
capitalise on market opportunities. These increases were partially offset by reduced demand in certain classes due to the
impact of COVID-19 related restrictions, our withdrawal from a number of underperforming classes, and the non-renewal
of certain accounts due to poor performance or pricing inadequacy. Within Overseas Distribution, while there was an
overall reduction in premium, increases were seen in targeted BGSU classes (Excess Casualty, Casualty RI US, Professional
Liability, Cyber and General Liability) and in Scion.
• Prior year premium development: The book again experienced favourable development on prior years, but at a lower rate
than in 2019. This resulted in a year-on-year reduction of US$23.5m.
• Foreign exchange: The impact of foreign exchange resulted in a US$1.7m year-on-year increase in premium, which reflects
the movement during 2020 of the US dollar against a number of currencies in which the Group writes business.
Premium ratings
Measure
Risk adjusted rate change
Commentary
The risk adjusted rate change (RARC) shows
whether premium rates are increasing, reflecting
a hardening market, or decreasing, reflecting a
softening market. A hardening market indicates
increasing profitability.
In 2020, we achieved a RARC of 10.6%, bringing
the RARC since 1 January 2018 to 20.2%.
Track record
Risk adjusted rate change (%)
2020
2019
2018
2017
2016
10.6%
5.9%
3.7%
(1.3)%
(3.3)%
-5
0
5
10
2020 saw a continued positive rate environment, building on that of 2019 and 2018, with an overall risk adjusted premium rate
increase of 10.6% across the portfolio (2019: 5.9%), bringing the total increase since 1 January 2018 to +20.2%.
In 2020, London Direct increased by 10.7% (2019: 7.1%), London Reinsurance by 7.2% (2019: 2.4%) and Overseas Distribution
by 14.6% (2019: 6.4%). All Divisions achieved rate increases, with the largest increases achieved in Property D&F, Marine
Cargo, D&O and Excess Casualty.
Retention rates
Measure
Retention rate
Commentary
The retention rate shows the proportion of our
business that renews, on a premium weighted
basis, compared to the previous year.
Track record
Retention rate (%)
2020
2019
2018
2017
2016
76.1%
78.0%
80.2%
83.6%
84.3%
0
20
40
60
80
100
Our retention rate for the period was 76.1% (2019: 78.0%). The reduction reflects the continued action we have taken to
improve our performance by discontinuing underperforming business lines.
Outwards reinsurance
Our reinsurance expenditure in 2020 increased by US$11.5m to US$648.8m, but reduced as a proportion of GWP from
27.8% to 26.8%. This reflects our targeted reduction in ceded premium (predominately proportional treaties), as we focus on
retaining a greater portion of our high-performing portfolios and those with significant rate increases.
Net earned premium
Net earned premium (NEP) in 2020, excluding the effects of foreign exchange on non-monetary items, increased by 4.6% to
US$1,713.9m (2019: US$1,638.5m). At constant exchange rates, the increase was 4.5%. London Market Direct business
increased by 6.1% to US$979.3m (2019: US$922.9m), London Market Reinsurance increased by 11.5% to US$338.5m (2019:
US$303.6m), Overseas Distribution decreased by 3.2% to US$308.5m (2019: US$318.7m) and Other Underwriting increased
by 16.8% to US$65.9m (2019: US$56.4m). These movements reflected the movements in GWP, together with the proportional
reduction in reinsurance spend.
28
Brit Limited Annual Report 2020
Strategic Report
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 (%)
2020
2019
2018
2017
2016
0
20
40
60
80
100
The claims ratio can be further analysed into its underlying components, as follows:
Measure
Attritional loss ratio
Commentary
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.
The 2020 ratio reflects the impact of COVID-19
related claims (15.9%) and other of major loss
activity (7.8%).
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.
2020
2019
2018
2017
2016
0
20
40
60
80
100
Major claims ratio (%)
2020
2019
2018
2017
2016
0
20
40
60
80
100
Reserve release ratio (%)
2020
2019
2018
2017
2016
-8
-6
-4
-2
0
72.6%
55.7%
63.1%
72.0%
56.5%
52.6%
55.0%
57.2%
56.4%
55.5%
23.7%
3.6%
12.0%
16.2%
4.5%
(3.6)%
(2.9)%
(6.1)%
(0.6)%
(3.5)%
Our underlying claims performance in 2020 was strong, with a reduction in our attritional loss ratio to 52.6% (2019: 55.0%).
This reflects favourable underlying claims experience across our London Market Direct portfolio (principally Programmes and
Facilities, Property and Specialty) and the effect of strong compound rate increases, combined with a change in mix as we
target growth on our high-performing segments while taking remedial action on more marginal business.
The financial impact of COVID-19 on Brit has been significant, with a loss estimate of US$270.7m being reported within Major
Losses in the period. COVID-19 has predominantly impacted our Contingency (Event Cancellation) and Casualty Treaty books,
with a smaller impact on Property, Property Treaty and Personal Accident. These losses have driven an increase of 15.9pps in
our combined ratio.
Brit Limited Annual Report 2020
29
Strategic Report
financial performance review
Non-COVID-19 related catastrophe activity was again significant, with 2020 being the fifth most costly year on record to
the industry. The Group incurred major claims, before reinstatement premiums, of US$132.5m, or 7.8pps of the combined
ratio (2019: US$58.4m/3.6%), as set out below. Major losses are defined as claims which are initially assessed as having
the potential to exceed US$15.0m (net of reinsurance and allowing for reinstatements), incurred from natural or man-made
catastrophes, or from large single risk loss events.
Major losses
Nashville Tornado
US Civil Unrest
Hurricane Laura
Hurricane Sally
Hurricane Zeta
Hurricane Dorian
Typhoon Faxai
Typhoon Hagibis
Total before COVID-19 related losses
COVID-19 related losses
Total before third-party investors’ share
Third-party investors’ share (Note 1)
Total
CoR
2020
US$m
13.7
11.7
65.4
27.1
15.5
–
–
–
133.4
271.4
404.8
(1.6)
403.2
23.7%
2019
US$m
–
–
–
–
–
24.3
12.5
24.8
61.6
–
61.6
(3.2)
58.4
3.6%
Note 1: Accounting rules require Brit to consolidate Sussex Capital and Versutus II which have third-party investors. This adjustment eliminates the third-
party share of major losses which is included in the Group’s consolidated income statement within ‘gains on other financial liabilities’. Of this US$1.6m,
US$0.7m is in respect of COVID-19 related losses and US$0.9m is in respect of other major losses.
As part of our standard reserving process, we released US$61.5m of net reserves established for prior year claims, the
equivalent of a combined ratio reduction of 3.6pps (2019: US$47.9m/2.9pps), maintaining our unbroken record of reserve
releases since we started disclosing them in 2004.
The 2020 release reflected improvements in Brit’s overall net estimates arising from the 2017 to 2019 major loss events, and
favourable attritional development across our London Direct and London Reinsurance portfolios. These releases were partly
offset by a strengthening in our Overseas Distribution portfolio, reflecting adverse attritional experience and inflationary
pressures in certain BGSU classes.
Underwriting expenses
Our underwriting expense ratio was 40.0% (2019: 40.1%).
Measure
Underwriting expense ratio
Commentary
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.
Track record
Underwriting expense ratio (%)
2020
2019
2018
2017
2016
40.0%
40.1%
40.2%
40.4%
39.9%
0
10
20
30
40
30
Brit Limited Annual Report 2020
Strategic Report
The underwriting expense ratio can be further analysed into its underlying components, as follows:
Measure
Commission ratio
Commentary
The commission ratio measures our distribution costs
and shows how much of every US$1 of premium is
paid to acquire our business.
Track record
Commission ratio (%)
Operating expense ratio
The operating expense ratio helps us understand
how much it costs us to support the underwriting
activities. This ratio shows how much of every
US$1 of premium we spend supporting our
underwriting activities.
2020
2019
2018
2017
2016
0
5
10
15
20
25
30
Operating expense ratio (%)
2020
2019
2018
2017
2016
0
5
10
15
20
25
30
26.6%
27.2%
27.8%
27.6%
27.2%
13.4%
12.9%
12.4%
12.8%
12.7%
Commission costs were US$454.3m and the commission expense ratio was 26.6% (2019: US$443.3m/27.2%). The decrease in
the ratio principally reflects a change in business mix towards lower commission business, a drive to reduce overall acquisition
costs and changes to our outwards reinsurance programme.
Our operating expenses are analysed below.
Expenses
Our operating expense ratio increased to 13.4% (2019: 12.9%). Operating expenses for the period were as follows:
Expense analysis
Underlying operating expenses including bonus provisions
Project costs, timing differences and other expense adjustments (Notes 1, 2)
Total operating expenses
2020
US$m
275.9
7.0
282.9
2019
US$m
275.3
1.1
276.4
Note 1: Timing differences relate to movement in deferred non-commission acquisition costs.
Note 2: Includes minority share of expenses incurred by consolidated vehicles, and expenses relating to non-controlling interests.
Underlying operating expenses during 2020 increased by US$0.6m to US$275.9m (2019: US$275.3m). This small increase
relates to the consolidation of a full year of Ambridge expenses (consolidated from 18 April 2019), the consolidation of a
proportion of Syndicate 2988 expenses following Brit providing a proportion of its capital for 2020, increased legal and
professional charges and regulatory levies, partly offset by lower staff, travel and entertainment costs.
The allocation of operating expenses within the Consolidated Income Statement and the Segmental Information is as follows:
Disclosure of operating expenses
Acquisition costs
Other insurance related expenses
Total insurance related expenses
Other operating expenses
Total operating expenses
2020
US$m
145.4
113.9
259.3
23.6
282.9
2019
US$m
150.6
105.5
256.1
20.3
276.4
Brit Limited Annual Report 2020
31
Strategic Report
financial performance review
Other income
Other income totalled US$14.1m (2019: US$45.9m), as set out below:
Other income
Fee and commission income (Note 1)
Change in value of ultimate parent company shares (Note 2)
Total other income
2020
US$m
29.7
(15.6)
14.1
2019
US$m
45.6
0.3
45.9
Note 1: Total fee and commission income is included within our underwriting result and our combined and expense ratios.
Note 2: Change in value of ultimate parent company shares is included within our corporate result.
Fees and commissions generated by the Group’s underwriting management activities have decreased in 2020, totalling
US$29.7m, a reduction of 34.9% (2019: US$45.6m/increase of 225.7%). Included in the reduction were: US$15.9m in
respect of the change in value of shares held by Brit in its ultimate parent, US$6.4m in respect of Brit’s increased share
of Syndicate 2988 resulting in less third-party income, and US$9.5m in respect of Ambridge, which experienced lower
revenues in 2020 reflecting the reduction in corporate transactional activity resulting from the impact of COVID-19 and
other factors such as Brexit uncertainty.
Losses on other financial liabilities
The statement of financial position of the Group includes liabilities representing third-party investors’ share in structured
undertakings consolidated by the Group. These structured undertakings are Sussex Capital, Versutus II and an equity UCITS.
Changes in the value of these liabilities during a year are recorded in the Group’s consolidated income statement as ‘losses on
other financial liabilities’, as follows:
Losses on other financial liabilities
Underwriting vehicle related (Note 1)
Investment vehicle related (Note 2)
Total losses on other financial liabilities
2020
US$m
(6.0)
–
(6.0)
2019
US$m
(2.6)
(7.9)
(10.5)
Note 1: Allocated to the Group’s underwriting and investment result as it represents the third-party share.
Note 2: Allocated to the Group’s investment result as it represents the third-party share of the investment result.
Return on invested assets
The investment portfolio is managed, for the most part, by Hamblin Watsa Investment Counsel Limited, a Fairfax subsidiary with
an excellent long-term track record, whose sole business is managing investment portfolios of Fairfax group companies. They
are supported by a number of external managers across core fixed income and a small allocation to specialised credit.
The return on our invested assets was US$45.5m or 1.0% (2019: US$148.1m/3.6%). This result is analysed below:
Investment return
Income
Realised gains/(losses)
Unrealised (losses)/gains
Investment return before fees
Investment management fees
Investment return, net of fees
Investment related derivative return
Third-party investors’ share of investment return (Note 1)
Return on associated undertakings
Total return
Total return
2020
US$m
73.2
7.5
(11.6)
69.1
(12.6)
56.5
(13.9)
0.9
2.0
45.5
1.0%
2019
US$m
87.3
(51.9)
134.8
170.2
(11.7)
158.5
(2.8)
(7.9)
0.3
148.1
3.6%
Note 1: This adjustment eliminates the amount included in ‘Investment return, net of fees’ which is attributable to third-party investors. This amount is
included in the Group’s consolidated income statement within ‘Gains on other financial liabilities’.
32
Brit Limited Annual Report 2020
Strategic Report Return on invested assets
(net of fees)
Year
2020
2019
2018
2017
2016
%
1.0
3.6
(2.0)
4.9
2.6
In March, the significant fall in yields, as the Federal Reserve delivered two emergency interest rate cuts totalling 150bps
in response to the emerging economic impact of the COVID-19 pandemic, boosted our unrealised gains from fixed income
to US$64.5m (2019: unrealised gains of US$22.4m). However, our total portfolio income return decreased to US$73.2m
(2019: US$87.3m) due to the fall in yields. While we expect income returns going forward to be lower, we continue to seek
opportunities to increase the yield on our portfolio where appropriate opportunities arise.
Following market sell-offs in the first quarter of 2020, our equity portfolio has recovered well. However, it has underperformed
the broader market rally, due to its value bias. Realised and unrealised losses from equities for the year totalled US$48.8m
(2019: gain of US$90.5m). The return on funds was also negative for the year, with a loss of US$32.8m (2019: loss of
US$17.8m), the majority of which is unrealised.
The return on cash has reduced over the year, in line with the fall in interest rates. Our approach to cash management during
the year has, and continues to be, to limit the amount of operational cash and to maximise amounts held within short-term
government bills.
At 31 December 2020, the running yield (expressed as yield as a percentage of invested assets) of our total portfolio was 0.6%
(2019: 1.5%). This has decreased over 2020 in line with the decrease in base rates and decline in the yield curve in the US and
continues to represent a challenging environment for insurance groups.
Our share of our associated undertakings’ net profit was US$2.0m (2019: US$0.3m).
• Camargue Underwriting Managers Proprietary Limited, a leading managing general underwriter of a range of specialised
insurance products and specialist liability solutions in South Africa in which Brit holds a 50% share, contributed US$1.0m to
this return (2019: US$0.6m);
• Sutton Special Risk Inc., a leading Canada-based managing general underwriter specialising in Accident & Health business in
which Brit acquired a 49% share on 8 January 2019, also contributed US$1.0m (2019: US$0.7m) to this return; and
•
In 2019, Ambridge Partners LLC contributed US$(1.0)m to the associated undertaking result. On 19 April 2019, Ambridge
became a 100% subsidiary of the Group and ceased to be an associated undertaking.
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$3.2m in 2020 (2019: gain of US$3.3m), 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 loss of US$12.4m (2019: gain of US$14.0m), relating to the retranslation of transactions and
balances held in currencies other than US dollar. This includes the effect of movements in US dollar, which gave rise to a gain
on our long positions on Canadian dollar, Euro and Sterling;
• Gains of US$12.8m (2019: losses of US$15.2m) on derivative contracts which were entered into to help manage our
monetary FX exposures and therefore should be viewed in conjunction with our monetary FX movements; and
• Gains of US$2.8m (2019: gains of US$4.5m), 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 2020
comprises an increase in the debit carried on the statement of financial position at 31 December 2019 (US$2.0m).
Brit Limited Annual Report 2020
33
Strategic Report
financial performance review
The allocation of the FX result within the Consolidated Income Statement is as follows:
Foreign exchange gains and (losses)
Net change in unearned premium provision – non-monetary FX effect
Acquisition costs – non-monetary FX effect
Net foreign exchange gains – non-monetary (Note 1)
Net foreign exchange (losses)/gains – monetary (Note 1)
Return on derivative contracts – FX related instruments (Note 2)
Total gains
2020
US$m
(3.2)
1.4
4.6
2.8
(12.4)
12.8
0.4
3.2
2019
US$m
3.4
(1.7)
2.8
4.5
14.0
(15.2)
(1.2)
3.3
Note 1: The sum of these two amounts, US$7.8m, is the ‘Net foreign exchange loss’ figure per the Consolidated Income Statement (2019: US$16.8m ‘Net
foreign exchange gains’).
Note 2: The 2019 figure excludes a gain of US$0.4m on a derivative contract entered into to effectively hedge the Sterling proportion of the Group’s
expenses, which is allocated to expenses.
Tax
Our tax on ordinary activities for 2020 resulted in a tax charge of US$1.5m (2019: tax charge of US$6.4m), based on a group
loss before tax of US$230.5m (2019: profit before tax of US$186.3m).
The Group is liable to taxes on its corporate income in a number of jurisdictions where its companies carry on business,
most notably the UK, Australia and the US. Corporate profits and losses in Bermuda are exempt from tax. The tax charge is
calculated in each legal entity across the Group and then consolidated. Therefore, the Group effective rate is sensitive to the
location of taxable profits and is a composite tax rate reflecting the mix of tax rates in those jurisdictions.
The 2020 Group rate varies from the weighted average rate in those jurisdictions due to a number of factors. The principal
factors are an increase of US$41.5m in the unrecognised deferred tax asset in respect of undeclared Lloyd’s syndicate years
of account, and the impact of the change in the UK tax rate used for the calculation of deferred taxes, from 17% for brought
forward balances to 19% for carried forward balances. The rate is further influenced by the impact of exempt income such as
dividend income, disallowable expenses and by non-UK taxes arising in our Lloyd’s syndicates.
34
Brit Limited Annual Report 2020
Strategic Report Brit Limited Annual Report 2020
35
Strategic Report
36
Brit Limited Annual Report 2020
Strategic Report financial position and capital strength
Financial position
At 31 December 2020, our adjusted net tangible assets
totalled US$1,436.8m (2019: US$1,150.4m).
Share capital
During 2020, FFHL Group Limited subscribed for 121,860,468
new Brit Limited class B shares for a contribution of US$524.0m.
Summary consolidated statement of financial position
Assets
Intangible assets
Reinsurance contracts
Insurance and other receivables
Financial investments, investments in
associated undertakings and cash
Assets classified as held for sale
Investment related derivatives
FX related derivatives
Other assets
Total assets
Liabilities
Deferred tax on intangible assets
Insurance contracts
Borrowings
FX related derivatives
Other liabilities
Total liabilities
2020
US$m
2019
US$m
181.2
1,764.1
1,302.0
4,852.8
17.8
4.3
10.6
405.0
8,537.8
25.4
5,813.0
314.5
9.2
661.4
6,823.5
192.6
1,628.1
1,240.2
4,180.1
–
2.1
13.6
415.9
7,672.6
23.1
5,266.1
316.2
14.2
733.1
6,352.7
Net assets
Adjusted net tangible assets (Note 1)
1,714.3
1,436.8
1,319.9
1,150.4
Note 1: Calculated as net assets, less intangible assets net of the deferred
tax liability on those intangible assets, less non-controlling interest.
Of our net assets of US$1,714.3m at 31 December 2020,
US$1,592.6m (2019: US$1,319.9m) are attributable to the owners
of Brit Limited, while US$121.7m (2019: nil) are attributable
to non-controlling interests. The non-controlling interest
represents the third-party investor in Ki Financial Limited.
In addition to the result recognised through the consolidated
income statement, the other movements in our net assets
related to defined benefit pension scheme related gains and
charges (US$3.7m net loss); changes in unrealised foreign
currency translation gains on foreign operations (US$2.3m
gain); retained earnings on liquidation of subsidiaries
(US$0.1m gain); issuance of share capital (US$524.0m);
dividends paid (US$20.6m); and investment in a subsidiary by
non-controlling interests (US$124.4m).
Capital strength
Our statement of financial position remains strong.
At 31 December 2020, Group capital resources totalled
US$1,881.3m, giving surplus management capital of
US$341.0m (2019: US$348.9m), or 22.1% (2019: 28.4%) over
our Group management capital requirement of US$1,540.3m.
On 28 August 2020, as per the Shareholder’s Agreement,
FFHL Group Ltd purchased the remaining 48,000,000 class A
shares directly from OMERS, increasing its ownership of Brit
to 100% (31 December 2019: 89.26%). All shares were then
converted into class B shares.
Subordinated Notes Due 2030
Brit has in issue £135.0m subordinated debt (the Notes)
which is listed on the London Stock Exchange. The Notes were
issued in December 2005, were callable in whole by Brit on
9 December 2020 and mature in 2030. On 14 December 2020,
Brit announced that it had determined not to exercise its call
option to redeem the Notes, in accordance with Condition 7(b)
of the Notes. It also announced that, in accordance with the
terms of the Notes, the interest rate had been reset and was
now 3.6757% (previously 6.625%).
Reserving policy
Preserving a strong 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 2020, this
trend, first reported in 2004, continued with net releases
of US$61.5m (2019: US$47.9m).
At 31 December 2020, in accordance with our group
accounting policy, we have also established an unexpired risk
reserve (URR). This URR relates to COVID-19 related losses,
and is required as the unearned premium reserve for specific
classes on a year of account basis is insufficient to cover
potential losses arising from the risk exposure still to earn
through.
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 soft rating environment.
Brit Limited Annual Report 2020
37
Strategic Report
financial position and capital strength
Asset allocation
Brit’s invested assets (financial investments, investments in associates, cash and cash equivalents and derivative contracts) at
31 December 2020 were US$4,857.1m (31 December 2019: US$4,182.2m).
Our asset allocation, on both a look-through basis and statutory disclosure basis, is set out in the tables below:
31 December 2020
i
s
s
a
b
h
g
u
o
r
h
t
–
k
o
o
L
Government debt securities
Corporate debt securities
Structured products
Loan instruments
Equity securities
Alternative investments
Cash and cash equivalents
Investment related derivatives
Total invested assets (statutory)
31 December 2019
i
s
s
a
b
h
g
u
o
r
h
t
–
k
o
o
L
Government debt securities
Corporate debt securities
Structured products
Loan instruments
Equity securities
Alternative investments
Cash and cash equivalents
Investment related derivatives
Total invested assets (statutory)
Equity
securities
US$m
–
–
–
–
376.7
–
–
–
376.7
–
–
–
–
403.9
–
–
–
403.9
Debt
securities
US$m
1,814.9
1,577.6
–
–
–
–
–
–
3,392.5
1,611.8
1,339.2
0.1
–
–
–
–
–
2,951.1
Loan instruments
US$m
–
23.0
–
–
–
–
23.0
–
–
–
–
–
–
–
–
–
Statutory basis
Specialised
investment funds
US$m
27.3
1.7
18.7
–
212.5
–
5.6
(1.4)
264.4
Cash and cash
equivalents
US$m
–
–
–
–
–
–
775.7
–
775.7
Associated
undertakings
US$m
–
–
–
–
20.5
–
–
–
20.5
9.7
2.2
18.2
–
242.7
8.5
5.1
(0.8)
285.6
–
–
–
–
–
–
520.1
–
520.1
–
–
–
–
19.4
–
–
–
19.4
Investment
Derivatives
(net)
US$m
–
–
–
–
–
–
–
4.3
4.3
–
–
–
–
–
–
–
2.1
2.1
Total
invested
assets
(look-through)
US$m
1,842.2
1,579.3
18.7
23.0
609.7
–
781.3
2.9
4,857.1
1,621.5
1,341.4
18.3
–
666.0
8.5
525.2
1.3
4,182.2
Invested assets – look-through basis (US$m)
Total
invested assets
US$4,857.1m
■ Government debt securities, US$1,842.2m
■ Corporate debt securities, US$1,579.3m
■ Structured products, US$18.7m
■ Loan instruments, US$23.0m
■ Equity securities, US$609.7m
■ Cash and cash equivalents, US$781.3m
■ Investment related derivatives, US$2.9m
Investment return (net of fees) (%)
2020
2019
2018
2017
2016
1.0%
3.6%
(2.0)%
4.9%
2.6%
-2
-1
0
1
2
3
4
5
38
Brit Limited Annual Report 2020
We have extended the duration of our portfolio in 2020. This
offers some protection for our solvency position against
falling interest rates, while still protecting our assets from
the potential of rising rates, as economies begin to reopen and
the impact of the extensive government stimulus continues.
We also took the opportunity to increase our credit allocation
when spreads widened in the first quarter of 2020, although
the swift reversal resulted in less reinvestment opportunities
for maturities in the second half of the year. The allocation
to credit risk, is primarily defensive, focused, high quality,
investment grade non-cyclical companies. Equity allocations
are invested in a portfolio of both listed and private (non-
listed) equities and funds.
The assets remain primarily invested in cash and fixed income
securities (2020: US$4,202.8m or 86.5% of the portfolio;
2019: US$3,488.1m or 83.4% of the portfolio). The fixed
income portfolio is short dated, with a majority allocation to
government bills. Corporate bonds represent 32.5% (2019:
32.1%) of the total portfolio with 1.0pps (2019: 1.9pps) of this
figure being below investment grade.
Strategic Report
Foreign exchange management
At 31 December 2020, our US-dollar denominated net assets
were 90.8% of our total net assets (2019: 85.6%), reflecting
the currency denomination of the majority of the business we
write. Our net assets, analysed by currency, are as follows:
Net assets/(liabilities) by currency
US dollar
Sterling
Canadian dollar
Euro
Australian dollar
Total
2020
%
90.8
(1.9)
6.3
4.1
0.7
100.0
2019
%
85.6
8.4
4.1
1.5
0.4
100.0
The reporting currency for the Group’s consolidated Financial
Statements is US dollars, as are 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.
The exposure to equities and funds has fallen over
2020 (2020: US$628.4m or 12.9% of the portfolio;
2019: US$692.8m/16.6%), predominately due to market
movements.
The duration of our portfolio at 31 December 2020 was
1.45 years (2019: 1.1 years), which is shorter than the
duration of our liabilities. US rates fell significantly across the
curve over 2020, as the US Federal Reserve delivered two
emergency interest rate cuts totalling 150bps in March, in
response to the emerging economic impact of the COVID-19.
At 31 December 2020, 83.7% of our invested assets were
investment grade quality (2019: 81.1%). An analysis of the
credit quality of our invested assets is set out below:
Invested assets by rating
AAA
AA
A
BBB
P-1 and P-2
Other
Total
2020
%
37.9
9.1
24.7
10.8
1.2
16.3
100.0
2019
%
38.8
8.3
21.1
12.2
0.7
18.9
100.0
Other includes equities, funds and investment related derivatives
Gearing
At 31 December 2020, our gearing ratio was 28.0% (2019: 29.9%).
Brit has in place a US$450m revolving credit facility (RCF),
expiring on 31 December 2023. Under our capital policy we
have identified a maximum of US$250.0m (2019: US$250.0m)
of this facility to form part of our capital resources, with the
balance available for liquidity funding.
At 31 December 2020, the cash drawings on the facility
were US$130.0m (2019: US$140.0m) and a US$130.0m
uncollateralised letter of credit (LoC) was in place
(31 December 2019: US$80.0m/uncollateralised) to support
our underwriting activities. At the date of this report, cash
drawings had reduced to US$93.0m and the US$130.0m
uncollateralised LoC remained in place.
Ki Financial Ltd is party to a US$50m LoC facility to provide
a proportion of the FAL for Syndicate 1618 through a
segregated account of Sussex Re. This was fully utilised and
uncollateralised at 31 December 2020.
In addition, we have in issue £135.0m of 3.6757%
subordinated debt with a carrying value of £135.0m/
US$184.5m (31 December 2019: £133.0m/US$176.2m). This
instrument, which is listed on the London Stock Exchange,
was issued in December 2005, matures on 9 December 2030.
Brit Limited Annual Report 2020
39
Strategic Report
principal risks and uncertainties
Risk Management Framework
Brit delivers shareholder value by actively seeking and accepting
risk within agreed limits. Risk management at Brit is a continuous
process that links directly to the organisation’s business and risk
management strategies and the associated Board risk tolerances.
The risk management team, led by the Chief Risk Officer (CRO),
monitors whether Brit is operating within the risk tolerance
levels approved by the Board. This includes assessments
of any new strategic initiatives and the principal risks and
uncertainties faced by the business as detailed below.
Brit’s Risk Management Framework (RMF) applies a consistent
methodology and structure to how risks are identified, measured,
managed and monitored. This process enables us to protect
policyholders and maximise shareholder value by ensuring the risk
and capital implications of business strategy are well understood.
All Brit staff are involved in ensuring there is an appropriate risk
culture which promotes the identification and management of risk.
Brit’s risk culture aims to ensure the risk and capital implications
of decisions are understood and there is open communication
about risks and issues in all areas of the business.
The RMF has the following key elements:
•
Identification: Risk events, risks and relevant controls are
identified and classified. This is a continuous process which
considers any emerging and existing risks. The risk register
sets out the significant risks faced by the business and
identifies the potential impact and likelihood of each risk.
• Measurement: Risks are assessed and quantified and
controls are evaluated. This is done through a combination
of stochastic modelling techniques, stress and scenario
analysis, reverse stress testing and qualitative
assessment using relevant internal and external data.
• Management: The information resulting from risk
identification and measurement is used to improve how the
business is managed.
A key part of the RMF is the setting of risk tolerances and risk
appetite. Risk tolerances are set by the Board and represent
the maximum amount of risk Brit is willing to accept to meet
its strategic objectives. Risk appetite is set by management
and reflects the maximum amount of risk that Brit wishes to
take in the current market environment. The actual amount of
risk taken is monitored against the tolerances and appetites
on an ongoing basis.
The RMF, including the risk tolerances and appetite, reflects
Brit’s strategy and seeks to ensure that risk is accepted in
the areas which are expected to maximise shareholder value
whilst continuing to protect policyholders against extreme
events. The process applies to both the Brit Group and to the
individual underwriting entities (such as Lloyd’s syndicates).
Strategy
Brit’s approach to risk management is designed to encourage
clear decision-making as to which risks Brit takes and how these
are managed based on the potential strategic, commercial,
financial, compliance and legal implications of these risks.
The sections below set out the approach to risk governance, and
the key risks identified, measured and managed under the RMF.
Risk Governance
The Board is responsible for overseeing our risk management
and internal control systems, which management is
responsible for implementing.
Brit maintains a strong risk governance framework using Risk
Oversight Committees and Audit Committees whose membership
consists of independent non-executive Directors. The Board,
Risk and Audit Committee agendas are designed to ensure all
significant areas of risk are reported on and discussed. The Risk
Oversight Committees monitor and review the risk profile and the
effectiveness of all risk management activities and, in particular,
monitor adherence to agreed risk limits.
Our Internal Audit function provides assurance to the Risk
Oversight Committees, Audit Committees and Boards, while
external experts are regularly used for independent assessments.
Brit operates a three lines of defence model for governing
risk. Within the first line of defence individual risk committees
monitor day-to-day risk control activities. The risk
management function, as a second line of defence, provides
oversight over business processes and sets out policies and
procedures. Internal Audit, as a third line of defence, provides
independent assurance and monitors the effectiveness of the
risk management processes.
Business strategy
Risk tolerances and appetites
Key risks
The RMF categorises the risks to Brit as follows:
Risk management framework
Planning and capital processes
Identification
Business plan
Measurement
Economic capital requirements
Management
Capital allocation
• Overarching risk: strategic, earnings and solvency; and
•
Individual risk categories: insurance, market, liquidity,
credit and operational and group.
Insurance risk is the key driver of our Group capital requirements.
40
Brit Limited Annual Report 2020
Strategic Report The key risks and uncertainties are set out in the following table and the principal risks in the current environment are further
described below.
Principal risks
✓
✓
✓
✓
✓
Risk category
Overarching
Insurance
Market
Liquidity
Credit
Risk
Strategic
Earnings
Solvency
Underwriting –
pricing
Underwriting
– natural
catastrophe
Underwriting
– man made
catastrophe
Underwriting –
reinsurance
Reserving
Investment
market risk
Currency
Liquidity
Counterparty
risk
Operational
and group
People
Systems and
processes
Information
security
Outsourcing
arrangements
Reputational
Regulatory
& legal
Conduct
Change
management
Description
Risk that Brit’s strategy is not appropriate or is not implemented effectively.
Unexpected earnings volatility leads to unexpected losses.
Capital ratio falls below the level targeted by management.
Emerging experience is inconsistent with the assumptions and pricing
models used.
Natural catastrophe events impacting Brit’s (re)insureds, leading to large
volumes of claims.
Extreme man-made events, such as terrorist attacks, impacting Brit’s (re)
insureds, leading to large volumes of claims.
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.
Exchange rate fluctuations materially impact our financial performance.
Insufficient financial resources available to meet liabilities as they fall due.
Deterioration in the creditworthiness of, defaults by, or reputational issues
related to, premium debtors, 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.
Failure of our systems or processes, impacting our ability to conduct business
and our ability to provide continuity of service to our clients.
Failure to properly protect information could compromise the confidentiality,
integrity or availability of our information and data, potentially resulting in
financial loss and legal, regulatory and reputational consequences.
Failure on the part of any third-party to perform agreed outsourced services,
on which we are heavily reliant.
Damage to reputation due to actions taken by Brit or related parties and the
impact this has on Brit’s business and operations.
Legislation or regulation adversely affects Brit’s operations.
Failure to ensure company’s products and services deliver the right outcomes
for consumers.
Major projects or other key changes are not implemented effectively.
Brit Limited Annual Report 2020
41
Strategic Report
principal risks and uncertainties
Principal risks
The table below provides additional information on the principal risks in the current environment and how we manage them.
Principal risk
Underwriting – pricing
Inadequate pricing
could have a material
adverse effect
on our results
for underwriting
operations and
financial condition.
Mitigation tools
Metrics
Status
Risk adjusted rate change (2020:
increase of 10.6%; 2019: increase
of 5.9%).
We have seen positive
rate rises since 2018.
However, these increases
follow four years of rate
reductions.
Active rebalancing of the
portfolio remains a key
focus for management.
Follow business only
follows lead syndicates
with a proven profitable
track record.
• 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.
• Monitoring of risk adjusted
rate change.
Largest realistic disaster scenarios
(1 October 2020 estimated loss in
US$m):
Event
Gulf of Mexico windstorm
Florida Miami windstorm
US North East windstorm
San Francisco earthquake
Japan earthquake
Japan windstorm
European windstorm
Gross
1,001
1,081
1,016
1,496
382
80
99
Net
148
95
183
442
201
50
66
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,
catastrophe bonds and
industry loss warranties
where they are a cost-
efficient means to ensure
that the Group remains
within its catastrophe risk
appetite.
Underwriting – natural 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 modelling and
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.
• Identification and monitoring
of emerging risks such as
climate change.
42
Brit Limited Annual Report 2020
Strategic Report Principal risk
Reserving
Estimating insurance
reserves is inherently
uncertain and, if
insufficient, may have
a material adverse
effect on our results
and financial condition.
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
We could be adversely
affected by the loss of
key employees or by
an inability to attract
and retain qualified
personnel.
Mitigation tools
Metrics
Status
Reserve release ratio (2020: 3.6%;
2019: 2.9%).
Return on invested assets, net of fees
(2020: 1.0%; 2019: 3.6%).
Running yield (2020: 0.6%;
2019: 1.5%).
Staff turnover (2020: 10.5%;
2019: 10.1%).
• 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.
• Strong governance
processes around investment
strategy.
• Regular monitoring against
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.
• 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.
Reserves are held at
a ‘conservative best
estimate’ and we also
carry an explicit risk
margin.
No change in approach
from prior years.
Financial markets remain
volatile following the
COVID-19 pandemic.
Although markets have
partly recovered from
significant falls in
H1 2020, interest rates
remain depressed given
the economic outlook. Our
portfolio remains highly
liquid, and was primarily
invested in cash and
investment grade fixed
income securities at
31 December 2020.
The Group’s key functions
have continued to operate
effectively despite
the disruption caused
by COVID-19 related
measures. Feedback
from brokers indicates
Brit is performing well
operationally relative to
its competitors.
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.
Current turnover rates
remain well within our
appetite.
Brit Limited Annual Report 2020
43
Strategic Report
principal risks and uncertainties
COVID-19 risk management
The COVID-19 pandemic originated in Hubei Province in China
and has since spread across the globe. Governments have
taken various actions to contain the pandemic, including social
distancing measures, travel restrictions and lockdowns,
resulting in the closure of certain businesses. This has given
rise to insurance claims from various lines of business, with
our Contingency (Event Cancellation) and Casualty Treaty
books being the most impacted. The pandemic has also
caused significant volatility in the financial markets. Although
investment markets have substantially recovered from
significant falls experienced in H1 2020, interest rates remain
at depressed levels given the economic outlook.
The Group has managed the risks associated with COVID-19
in line with the requirements of its risk management policies.
Further details are provided below.
• Operational risk
COVID-19 has caused a temporary shift from an office-
based working environment to a remote working
environment for all staff since 18 March 2020. Brit and
its outsourced service providers have adapted well.
Operational performance has generally been strong.
All key business services have continued to operate with
no material impact from COVID-19. The investment in 2019
in Microsoft Office 365 and the decision to rollout laptops
to all full-time employees has made working remotely
relatively seamless. Underwriting can be managed through
PPL, Whitespace and reinsurance trading platforms,
and underwriting and claims staff contact details are
available online or via the Brit App. The Claims team
continues to service our policyholders in these challenging
circumstances.
We immediately put in place support mechanisms for our
employees and we continue to communicate regularly to ensure
that people feel engaged and supported. We regularly monitor
and report on the performance of controls and operational
effectiveness. The ongoing monitoring of the operational risk
profile has not identified any material concerns or failings.
In 2020, Marsh and Lockton rated Brit the number one
carrier for services provided in the London Market, while
AJG ranked us third in the London Market and Aon ranked
us third out of 34 carriers.
•
Insurance risk
COVID-19 has resulted in additional claims to the Group,
principally relating to event cancellation covers. The
Group has a rigorous process for establishing reserves
for insurance claim liabilities, including those associated
with COVID-19. However, significant uncertainties remain
around loss estimates given that the pandemic is ongoing.
We also continue to monitor the potential for claims
arising indirectly from the pandemic. For example, due to the
44
Brit Limited Annual Report 2020
global recession which may lead to an increased risk of moral
hazard, fraud and a more litigious environment generally.
The underwriting portfolio is actively managed to reflect
market developments, and action has been taken to ensure
Brit is appropriately positioned for both the pandemic and
the recessionary economic conditions. The Group is now
applying communicable disease exclusions across the vast
majority of its business.
•
Investment and Market risk
Financial markets have experienced volatility in 2020. The
investment portfolio is actively managed to reflect market
developments, and action was taken to ensure Brit’s portfolio
is appropriately positioned for the recessionary economic
conditions and to take advantage of opportunities in asset
prices where these arose. The volatility in investment returns
experienced over the course of 2020 is within the range of
stress and scenario tests carried out by the Group.
• Credit risk
COVID-19 has caused economic disruption around the
world with many businesses and individuals forced to cease
business activity in light of government lockdowns. As at
31 December 2020, the Group has not seen a material
increase in defaults but continues to monitor this closely.
• Solvency and Liquidity risk
As at 31 December 2020, the Group held a surplus of
US$341.0m over its management capital requirements.
All regulatory capital requirements have been complied
with by the Group’s individual insurance subsidiaries
throughout 2020. It should be noted that our regulatory
capital requirements calculation as at 31 December 2020
included an allowance for the uncertainties associated
with COVID-19 as described above.
Brit continues to benefit from the support of the wider
Fairfax Group, with capital contributions of US$524.0m
provided during the year to largely strengthen the resilience
of the statement of financial position to further shocks.
Following the COVID-19 outbreak, the Group conducted stress
testing of its underwriting subsidiaries’ liquidity resources,
in order to assess their ability to continue making claims
payments as they fell due. This stress testing demonstrated
their continued ability to access sufficient liquidity, even in
severe stress scenarios. At 31 December 2020, the Group
held US$2,623.5m of cash and short-dated government debt
securities, and US$190.0m undrawn on its RCF.
As part of the terms of the RCF, Brit is obliged to ensure
that borrowings under the facility will not exceed 40% of
consolidated net tangible assets (defined as the aggregate
of the share capital of the company, the amount standing
to the credit of the consolidated reserves of the Group
and any financial indebtedness of the Group which is
Strategic Report fully subordinated to the facility). At 31 December 2020
Brit was well within this threshold, with RCF drawings equating
to 16.0% of consolidated net tangible assets (2019: 16.9%).
Emerging risks
Brit undertakes a formal emerging risk review annually with
the results reported to the Risk Oversight Committees and
included in Brit’s Own Risk and Solvency Assessment (ORSA)
and Commercial Insurer’s Solvency Self-Assessment (CISSA)
reports of the underwriting entities. The review is an important
part of the risk identification aspect of the RMF and includes
horizon scanning of the internal and external risk environment
to identify potential new or developing risks to Brit. These
risks can then be included in the risk register and managed
appropriately as required.
The emerging risk review has previously identified risks
such as the United Kingdom’s exit from the EU (Brexit) and
cyber risk. These risks have been managed throughout their
development and are now monitored as part of the business
as usual risk management process.
Climate change related financial risks
Climate change has been recognised as an emerging risk in the
ORSA since 2014 and has been an area of focus since having
been identified as a high priority by Brit’s 2018 emerging risks
analysis. Its potential impact on the insurance industry is an area
of focus for the wider insurance market and its regulators.
natural catastrophe risks is monitored on an ongoing basis
by the Risk Management Function.
• Climate change could result in additional liability claims.
For example, there is the potential for claims against firms
for their contribution to climate change. While such claims
have not generally been successful to date, there remains
an ongoing risk. Brit’s exposure is limited through limits
on gross underwriting exposure and through the purchase
of reinsurance.
•
Investment losses have the potential to arise from
exposure to industries perceived to be contributing to
climate change. Brit has a diversified investment portfolio,
with limits on exposure to individual issuers. Brit is
developing metrics to strengthen its understanding of the
potential impacts of climate change on its investments.
Brit also actively considers the potential implications of
climate change and sustainability on its investment and
underwriting strategies, how it should engage more widely on
environmental and ethical issues, and its own sustainability
initiatives. These are further discussed on page 49.
United Kingdom’s exit from the EU (Brexit)
We have continued to work to minimise the impact of Brexit
on Brit and our clients. While direct European business is not
material for Brit, we have continued to monitor and evaluate
the associated risks.
The financial risks to insurers may include the potential for
increased frequency and severity of weather-related natural
catastrophes, for example, hurricanes and wildfires. This year
has seen the most active Atlantic hurricane season on record,
with 30 named storms being recorded. Of these 12 made
landfall in the US, six of which were category three hurricane
strength or higher, both statistics either equalling or setting
new records. 2020 was also a record year for wildfires, with
California seeing its first ever ‘gigafire’, a blaze that burns at
least a million acres of land.
Our new processes are operational and we commenced
writing business via Lloyd’s Brussels in the fourth quarter
of 2018, for risks incepting on or after 1 January 2019.
Brit notes the Trade and Cooperation Agreement (TCA)
between the UK and the EU, which governs the UK and
EU’s economic and trading relationship from 1 January 2021.
Brit also notes the areas on which further agreement still
needs to be reached, including financial services and data
adequacy.
Climate change specific tests and scenarios have been
included in both ORSAs and Brit’s Solvency II internal models.
Brit is managing the risks associated with climate change
in line with the RMF and is embracing the latest regulatory
guidance. This will continue to be an area of management,
Risk Committee and Board focus, with a multi-disciplinary
Climate Change Risk Working Party having been set up to
consider the financial risks associated with climate change.
The three main areas of risk identified for Brit are natural
catastrophes, liability claims and investment losses:
• Natural catastrophe risks relating to climate change are
the risk of increased frequency and severity of weather-
related natural catastrophes. This could result in additional
claims to Brit. We continuously monitor scientific studies,
regularly review the completeness of existing models and
the application of the Brit view of risk. Brit’s exposure to
The main risk to Brit was the ability to service historical
policies with EEA claims. However, the successful completion
in December 2020 of the transfer to Lloyd’s Insurance
Company S.A. (LIC) of Syndicate 2987’s and Syndicate 2988’s
European liabilities in accordance with Part VII of the Financial
Services and Markets Act 2000, provides a mechanism to
address this risk. This transfer was sanctioned by the High
Court on 25 November 2020 and took effect on 30 December
2020, whereupon all relevant policies (and related liabilities)
underwritten by the Group’s syndicates for years of account
between 1993 and April 2019 (or October 2020 in the case
of German reinsurance) were transferred to LIC. On the
same date, a 100% Quota Share Reinsurance Agreement
was entered into, whereby LIC reinsured all risks on the
same policies back to the relevant open years of account of
the syndicates that wrote the transferring policies and/or
inherited liabilities on transferring policies through Reinsurance
to Close of earlier years of account. The combined effect of the
two transactions has no economic impact for the Group.
Brit Limited Annual Report 2020
45
Strategic Report
46
Brit Limited Annual Report 2020
Strategic Report our people, culture, social, community and
environmental matters
Introduction
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.
Brit’s cross-functional Social Committee has continued to
organise a range of social, community and charitable events
for employees during the year.
The 2020 staff turnover rate excluding retirements and
redundancies was 10.5% (2019: 10.1%).
At 31 December 2020, 38.7% (2019: 37.1%) of staff had
completed at least five years of service and 14.1% (2019:
15.2%) had served at least ten years.
Details of Brit’s employment policies are given in the
‘Employment’ section of the Directors’ Report on page 63.
During 2020 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.
Staff engagement
We want to engage with our employees and invest in their
future so that they do not just progress, but thrive – both
professionally, and emotionally. By developing and retaining
a highly skilled, engaged and motivated workforce, we
can generate value for them, the Company and our other
stakeholders.
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.
During 2020, with our people working remotely for most of
the year, engagement has been more important than ever.
As well as our usual engagement activities continuing in
the virtual environment, a significant amount of additional
engagement has taken place, focussing on staff wellbeing and
the challenges we have all faced in 2020.
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 succession and talent mapping
exercises, all of which aim to grow expertise from within and
ensure robust succession plans.
Our offices have been shut for the majority of 2020 due to
the COVID-19 pandemic, with our people working remotely.
To support them we have run a number of development
activities for all staff, designed to help managers lead their
teams remotely, help individuals maximise their learning and
performance opportunities while working from home, and to
ensure we are retaining and protecting our culture.
Mental health awareness has been a key focus through 2020.
We have three fully trained Mental Health First Aiders and
have provided all managers with two mental health awareness
training sessions. All employees have access to e-learning
modules as well as support through our Employee Assistant
Programme.
The Board principally engages with its workforce through its
executive Directors. Brit believes in two-way communication
between Directors, managers and all staff. It has a number of
initiatives and processes designed to support and encourage
this, including:
• An employee engagement survey, which takes place every
two years across the Group. This is a key mechanism
for assessing the views of our staff and leads to further
engagement with them. The most recent engagement
survey was held in late 2020. We had an excellent response
rate of 89% and our overall engagement score increased
by 7pps to 76%. The survey results were discussed at the
executive level and then presented to all staff by the Chief
Executive Officer. The findings were also presented to the
Board. In the first quarter of 2021, we will be cascading the
departmental results and each team will be encouraged to
develop their own action plan to focus on their engagement
priorities.
• Brit People Forum, focussing on inclusion and diversity,
was launched in 2020. Further details are given in the
inclusion and diversity section below.
Brit Syndicates Limited has Chartered Insurer status
through the Chartered Insurance Institute. This prestigious
designation signifies to our customers – and the market – that
we are committed to the pursuit of the highest standards and
demonstrates our adherence to ethical good practice.
• Executive Blogs – These blogs provide a useful medium
through which the Executive Committee and other
members of senior management can update employees
on matters such as the Group’s performance, initiatives
and other developments, charitable activities and market
Brit Limited Annual Report 2020
47
Strategic Report
our people, culture, social, community and environmental matters
conditions. All employees are encouraged to respond with
a question or comment to help facilitate understanding
and debate.
• Town Halls – Each month, a member of the Executive
Committee presents on their area of focus. All staff
are invited to these presentations, which are followed
by questions and discussion. These presentations are
recorded and made available to those unable to attend.
• Spotlight series – These in-depth interviews are circulated
to all staff and are a way to highlight new initiatives and
projects. Recent topics have included the engagement survey
and a series highlighting cross functional staff moves.
• Team Meetings – At Brit, team meetings are encouraged
both at a macro and micro level.
•
Intranet – The Brit intranet site, relaunched during
2020, provides a central point of information, news and
announcements to support working lives at Brit and
provide access to tools and systems essential to people
performing their roles.
• Email announcements – To communicate significant or high-
profile news to all employees or groups of employees.
•
In October 2020, Brit held its fourth annual ‘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 overcoming adversity, coping with addiction,
managing work and home balance and having a positive
self-image. The various sessions, hosted by external
specialists, were held virtually and were very well
attended and well received.
Engagement with our staff allows us to assess the extent to
which they are motivated. Such motivation contributes to the
success of our organisation. Engagement also identifies areas
we need to focus on to continue to develop staff motivation.
High engagement results have a positive impact on our team
performance and employee retention, our service quality
(both internally and externally), and our overall business
performance, ultimately benefitting all stakeholders.
Inclusion and Diversity (I&D)
At Brit we talk about ‘writing the future’ and to be able to do
this we strive to ensure equal opportunity is part of how we
conduct ourselves as a business and as a team. We continue
to work hard on this topic. The simple message is that
discrimination in all its forms will not be tolerated at Brit.
Advancing inclusion and diversity at Brit has been a priority
for the Executive Committee for some time, and in 2020 we
have continued to make progress.
• Working with an external consultancy, we completed work
on our I&D maturity index and our progress towards total
inclusion. Following five internal I&D focus groups, Brit has
been benchmarked based on 100 companies to highlight
where we need to improve and to showcase what best
practice looks like.
• Following this, in July 2020 we launched the Brit People
Forum. The Forum signals our intention and commitment
to developing and nurturing an inclusive culture within our
organisation. It will provide the opportunity for us to come
together and learn from the personal stories of the widest
spectrum of the Brit community and make inclusion and
diversity ‘business as usual’ for Brit. The Forum is made
up of a group of volunteers and has the following outcomes
in mind:
•
Inspire: get up to speed on what the inclusion and
diversity landscape looks like, and Brit’s unique role in
shaping the future;
• Listen and engage: open the floor to the real
experiences of the Brit team as well as hearing from
expert external speakers to shed new light on important
topics; and
• Act: use this as an opportunity to make continuous
improvements to how we work at Brit, ensuring we’re
always striving to be better.
The Forum looks at a number of focus areas – from race
and identity, to what it means to have an invisible disability.
For each focus area, a selected group is steering the
agenda and leading the way.
• We have held a number of lectures and events in 2020,
to help celebrate all minorities and promote the message
that we welcome diversity and denounce all forms of
discrimination.
• We became silver sponsors of the African Caribbean
Insurance Network (www.theacin.co.uk) which was formed
to boost black and minority ethnic representation within
the insurance industry by making the insurance sector a
more attractive destination for young ethnic professionals.
• Brit has also signed up to the Business in the Community
(BITC) Race at Work Charter.
I&D remains a priority at Brit and we look forward to
continuing our journey in 2021.
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.
Following a gift of US$200k from our ultimate parent, Fairfax,
for COVID-19 related charitable purposes, we donated £100k
to The Captain Tom Foundation (www.captaintom.org) as
founder donor. The Captain Tom Foundation supports causes
which help combat loneliness, support hospices and help those
48
Brit Limited Annual Report 2020
Strategic Report facing bereavement across the UK, including The Royal British
Legion, MIND, Willen Hospice and Helen & Douglas House.
The remainder of the money was split between four further
charities: Childline (www.childline.org.uk), Compudopt
(www.compudopt.org), Refuge (www.refuge.org.uk), and
The Silverline (www.thesilverline.org.uk).
During 2020 we again supported ten charities chosen by
employees. The charities selected for 2020 were SWAN UK,
Stroke Association, Lakeview Pantry, Dogs on the Streets,
Ignite the Spirit, Friends of Essex and London Homeless,
Hospice UK, Hand Of and The Ocean Cleanup. We donated
a sum of money to each charity at the start of the year
and continued with fundraising activities through the year,
including an additional payment at the start of the COVID-19
pandemic to recognise that many of their fundraising
activities had been cancelled. A further ten staff-nominated
charities have been selected to receive our support in 2021.
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.
In 2020 we continued our support for a school that educates
boys and girls from the age of five to 18 in Kibera, the largest
slum in Africa. The school does not discriminate between
religion or tribal allegiance but instead believes in its motto
that ‘knowledge is power’. A group of Brit employees were
able to volunteer at the school in February 2020 and we look
forward to continuing our support in 2021.
We have supported Team BRIT, a team of disabled motor
racing drivers, since 2017. In 2020, we continued our contract
with Team BRIT, as title sponsor, allowing them to launch their
racing academy. This has allowed it to successfully offer any
disabled driver the opportunity to access expert tuition and
coaching, to allow them to gain a race licence.
In July 2019 we announced that we were delighted to be
supporting Great Ormond Street Hospital (GOSH) as one
of our chosen corporate charities. GOSH is a world leading
children’s hospital based in London. In 2020, Brit employees
helped raise funds for GOSH and we now sponsor a treatment
room on one of their wards.
Following the killing of George Floyd in Minnesota we took
some time to reflect and listen to each other as individuals,
teams and as a business. We raised over US$14k for the
National Urban League (https://nul.org), a charity that
supports education, jobs, housing, healthcare and a range
of social justice issues.
We also run a payroll giving scheme and match any money
raised by employees participating in charitable events.
During 2020, Brit donated US$1.1m (2019: US$0.6m) under
its charitable initiatives. In addition to this, Brit employees
completed 69 volunteering days (2019: 104 days).
Environmental responsibility
Governance
Brit has been operating an internal ‘Sustainability and Ethical
Business Forum’ (SEB) to agree strategy and actions around
sustainability and ethical business since 2019. We are aware
of the importance of Environmental, Social and Corporate
Governance (ESG) matters, and the benefits a clear strategy
can bring to a business, especially when addressing the risks
and opportunities associated with climate change.
The Board receives regular updates on the activities of the
SEB and Brit’s progress on its sustainability journey. It also
receives periodic sustainability related training.
Strategy
The SEB oversees the development and implementation of the
Group’s sustainability strategy, as follows:
• External engagement
Brit continues to develop its strategy by engaging with
experts, reviewing external reports and monitoring
external developments. A number of internal sustainability
initiatives have been launched, including partnering with
ClimateCare to offset carbon emissions from employees’
air travel, exploring energy saving techniques and
reviewing waste monitoring and management. Additionally,
externally, Brit has worked with the LifeStraw project to
help bring safe drinking water to over four million people
in Kenya and more environmentally friendly cookstoves to
people in Africa.
Brit actively participates in a number of external initiatives.
This includes membership of ClimateWise, IceBreaker One
and Chapter Zero, as well as engagement with Lloyd’s and
other London Market businesses.
We are also working with an experienced sustainability
consulting firm to refine our framework and define a
roadmap for future activities.
• Underwriting strategy
Brit is engaging with a number of ESG data providers and
is assessing their product offerings. While we undertake
this selection process, this workstream is focussing
raising underwriter awareness and approach, so they can
ensure our clients operate in line with our own ethos. It
also engages with the underwriting leadership around the
strategic product offerings, such as renewable energy
within our Energy class.
Brit Limited Annual Report 2020
49
Strategic Report
our people, culture, social, community and environmental matters
•
Investment strategy
We are integrating ESG considerations into our investment
guidelines, our mandates with external managers and
our reporting. Our investment approach recognises
wider environmental, social and governance risks within
the investment process, and considers the potential for
economic loss arising from these factors, including the
impact of climate change. Our investment approach also
considers potential opportunities created by these factors.
• Managing Brit’s own environmental impact
At Brit we take our environmental responsibilities very
seriously and continually seek to improve the sustainability
of our business. In 2020, we have continued with our
initiative to offset all our carbon emissions through
ClimateCare (www.climatecare.org). For every tonne of
carbon generated we fund the equivalent reduction through
ClimateCare’s carbon reduction projects – neutralising our
impact and helping to address climate change. For 2020, we
have purchased further tonnage to offset additional emissions
generated by our employees while working from home.
At 31 December 2020 we remained fully Energy Saving
Opportunities Scheme (ESOS) compliant.
Risk management
The Group’s approach to managing climate change related
financial risks is set out on page 45.
our employees while working from home in 2020. The sources
of these emissions were as follows:
Emission source
Gas (note 1)
Electricity (note 1)
Business travel – air (note 2)
Business travel – hotels (note 2)
Business travel – other (note 2)
Total carbon footprint before offset
Offset
Total carbon footprint after offset
Number of employees at 31 December,
excluding NEDs
Carbon footprint per employee
before offset
Carbon footprint per employee
after offset
2020
CO2 (tonnes)
339
511
959
20
–
1,829
(3,373)
(1,544)
748
2.4
(2.1)
2019
CO2 (tonnes)
357
385
3,862
–
5
4,609
(4,220)
389
645
7.1
0.6
Note 1: Where Brit operates out of offices which form part of a larger
commercial development, usage and emission data has been supplied by the
building manager. Where Brit operates out of serviced office suites, it has
no control over the management of utilities, with that responsibility falling to
the landlord. Such serviced accommodation is considered out of scope for
this purpose.
Metrics
Our offices closed on 18 March 2020, as we followed
government advise on the outbreak of COVID-19. As a result,
our consumption of materials has been significantly reduced
compared to 2019, as have levels of business travel.
Note 2: For all travel including air, hotels and rail, data has been provided
from our travel agent partner, through whom all travel is arranged.
Brit’s Streamlined Energy and Carbon Reporting (SECR)
disclosures are as follows:
We continue strive to reduce the levels of recyclable and
non-recyclable waste we generate. During 2020 we recycled
4.5 tonnes of paper waste (2019: 7.6 tonnes) and we sent
3.6 tonnes of general waste to energy recycling (2019:
16.6 tonnes). In 2020, we also recycled 0.3 tonnes of glass
(2019: 1.4 tonnes), 1.6 tonnes of cardboard (2019: 5.1 tonnes)
and no food waste (2019: 0.2 tonnes). During 2020,
in conjunction with our building managers, we continued to
work hard to reduce waste sent to landfill.
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 2020 our
carbon emissions per employee before offset were 2.4 tonnes
(2019: 7.1 tonnes), which reduced significantly after
offset to a negative 2.1 tonnes per employee (2019: positive
0.6 tonnes). The negative figure reflects our purchase of
further tonnage to offset additional emissions generated by
Scope 1 (note 3)
Scope 2 (note 4)
Scope 3 (note 5)
Total before offset
Per UK employee before offset
2020
kWh
GHG
(CO2 tonnes)
1,047,392
881,308
–
1,928,700
3,242
271
409
–
680
1.1
Note 1: The scope of table differs from the carbon emissions reported
above, in that it only covers UK based operations, in accordance with SECR
requirements for unlisted companies.
Note 2: Scope 2 includes gas purchased for consumption in Brit’s UK office.
Note 3: Scope 3 includes electricity purchased for consumption in Brit’s UK
office.
Note 4: In 2020, Brit had de-minimis emissions from business travel in rental
or employee-owned vehicles.
Note 5: Details of methodologies, efficiency actions and intensity metrics are
given above.
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Brit Limited Annual Report 2020
Strategic Report
stakeholder engagement
The Board recognises the importance of engaging with its broader stakeholder base. The Company’s key stakeholders,
as identified by the Board, are set out below, together with why and how we engage with them and the outcomes of that
engagement. Engagement has continued and indeed been strengthened in 2020, with Brit’s virtual engagement capabilities
coming to the fore.
Clients and Intermediaries
Why we engage
Form of engagement
Impact of engagement
We care deeply about our clients’ needs
and work with brokers and partners to
share expertise and deliver a seamless
service for the end insured.
Intermediary engagement commences
before any formal relationship is
entered into, with a robust on-boarding
governance process.
As a specialty insurer, almost 100%
of Brit’s business is distributed via
intermediaries. In London, the majority
of this is via Lloyd’s brokers and in
BGSU via both wholesale and retail
intermediaries.
Engagement and building strong
relationships with our intermediaries is
crucial for us to source business and
to deliver the best service and products
for our insureds.
Intermediaries also provide a range
of services to Brit, for which we
remunerate them via brokerage and
commissions.
Post on-boarding, Brit underwriters
engage with intermediaries in a number of
ways. During 2020 this has predominantly
been via electronic means.
To maximise our intermediary
relationships, Brit has entered into
strategic partnership agreements with
six of our largest brokers, covering
over 50% of our gross premium. Under
these agreements Brit pays an annual
fee, which gives access to a range of
services including regular engagement
and introductions, data provision
and consultancy. All new and renewal
agreements require full Board approval.
During 2020, Brit has received excellent
feedback. Marsh and Lockton rated Brit
the number one carrier for services
provided in the London Market, while AJG
ranked us third in the London Market and
Aon ranked us third out of 34 carriers.
By engaging with clients and
intermediaries we provide a risk service
that helps clients not only prepare for but
manage and mitigate the risks they face.
By building stronger and deeper
relationships with our intermediaries,
we believe we put ourselves in a stronger
position to quickly take advantage of
new opportunities and understand and
satisfy changing customer needs. The
data provided to us by brokers allows us
to have more informed discussions and
make more informed decisions.
In 2020, Ki has also onboarded its
first trading partners, a leading group
of Lloyd’s brokers. It has agreed to
provide valuable capacity to each
trading partner in 2021, giving their
clients immediate security about placing
business in Lloyd’s.
One of our key areas of focus is the
management of acquisition costs. We
are working with a number of our major
broking partners to explore ways we can
work together via digital platforms to
reduce overall cost and improve efficiency
for our mutual business models.
When a client has a claim, their life or
business has been disrupted, or even
put in peril, they expect their insurance
to deliver. 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 our
clients move forward.
When a client has a claim we adopt a
proactive approach. We engage directly
with them or their intermediary to
ensure their needs are met. Following a
major loss event, we instigate additional
measures including establishing 24/7
contact with claims administrators,
extending deployment of Brit claims
adjusters from London and swiftly
establishing dedicated loss funds.
Engagement with our clients,
intermediaries and other service
providers after an event reinforces our
provision of a risk service that helps
people not only move on from an event
but helps them to move forward rapidly
with confidence.
Brit Limited Annual Report 2020
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Strategic Report
stakeholder engagement
Reinsurers
Why we engage
Form of engagement
Impact of engagement
Brit purchases reinsurance to help
manage risk, reduce volatility, enhance
earnings, control aggregations and
create capital efficiency.
Brit uses its appointed brokers for
the majority of reinsurer interactions,
allowing us to benefit from their
expertise.
Brit’s risk appetite is defined by its
outwards reinsurance strategy and
plan, which is approved as part of the
annual business planning process.
We also engage when we make
recoveries under the cover we have
purchased.
Brit also engages directly with
reinsurers, such as when there is
a need to achieve broader strategic
aims which would involve more than
one broker. These tend to be with our
largest reinsurance counterparties.
This engagement allows Brit to access
up to date market information and to
access a broad range of reinsurance
counterparties and reinsurance
products, thereby managing its risk
appetite in the most effective way. It also
aids the administration of reinsurance
products and may give Brit access to
a range of advisory functions on contract
wordings, financial modelling and
ancillary functions.
When we make recoveries, such
engagement helps to expedite the
recovery process.
Investment managers
Why we engage
Form of engagement
Impact of engagement
We are responsible for managing the
assets which support our underwriting
and ensure that clients’ claims can be
paid. We manage those assets with
a long-term view and aim to maximise
return while controlling the level of
market risk.
We have regular discussions with our
managers to monitor performance
and assess the outlook for investment
markets. We also receive regular
written investment reports covering
positioning, investment performance
and outlook.
We implement our investment strategy
using the expertise of investment
managers, whose mandates are set out
in investment management agreements
(IMAs).
We engage with our investment
managers to monitor their performance
and to ensure assets are managed
within the restrictions set out in the
IMAs.
We also gain additional insights and
expertise by engaging with investment
managers.
We have regular and ad-hoc discussions
with managers to review new
investment opportunities and to assess
their suitability for our portfolio.
Investment managers regularly present
to the Board and Investment Committee
Board.
We also perform annual due diligence
meetings to review the operational
aspects of the investment managers’
processes.
Engaging with our investment managers
allows us to ensure that the assets
are managed within our risk tolerances
and guidelines and that any changes
are implemented in a timely fashion. We
receive insights from our investment
managers which enhances our
investment strategy and performance.
Engagement allows us to discuss
potential new opportunities with
our investment managers, adding
diversification and resilience to our
portfolio. Discussions also help us
to understand their approach to
environmental, social and governance
issues, including climate risk and
stranded assets, validating the
sustainability of the portfolio.
Our operational reviews confirm assets
are managed robustly and controls
the risk of fraud within the investment
managers and other third parties.
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Brit Limited Annual Report 2020
Strategic Report Capital providers
Why we engage
Form of engagement
Impact of engagement
Working with third-party capital
providers on Ki, Syndicate 2988 and
Sussex creates the opportunity to
increase Brit’s leadership footprint and
proposition to clients. It also leverages
our operational infrastructure resulting
in a more expense efficient model for
both us and our capital providers.
Brit regularly engages with the third-
party capital providers on Ki. It also
engages with current and prospective
third-party capital providers ahead
of an underwriting year, to market
the Syndicate 2988 and Sussex
propositions and to understand
investor appetite and capacity.
Engagement with third-party capital
providers also supports our growth
strategy for those vehicles.
After an underwriting year incepts,
Brit formally meets each provider
regularly to discuss performance,
outlook and any other relevant
matter. Ad-hoc queries and requests
for information are also welcomed.
Most interaction is via face-to-face
discussion or by conference call.
The successful implementation of the Ki,
Syndicate 2988 and Sussex strategies
is dependent on developing strong
relationships with third-party investors
and institutions. Such engagement helps
facilitate this.
The insight we gain from our regular
interactions and feedback helps Brit
to ensure that our propositions can
continuously evolve in line with investor
appetite.
Form of engagement
Impact of engagement
Brit engages with its principal
regulators through:
Engagement with regulators impacts
Brit through:
• Regular meetings between supervisory
• The Periodic Summary and Close and
Regulators
Why we engage
Regulators are key stakeholders for
any regulated business and Brit’s
Board is pro-active in ensuring that
Brit meets regulators’ expectations
around compliance, transparency and
aligning the business with regulators’
objectives.
Brit engages with regulators to
ensure that:
• We understand their regulatory
objectives and how they apply to Brit;
• Regulators have a proper
understanding of Brit’s business
model, strategy and risk appetite;
teams, key decision-makers and
authorised persons at Brit, including
executive and non-executive Directors;
• Sharing of key business updates and
internal documents including board and
committee papers to ensure regulators
have a thorough understanding of
Brit’s business and the opportunity to
ask questions about it;
• Responding to thematic reviews and
information requests as required;
• Regulators understand how Brit’s
business model, risk appetite and
operational processes and controls
are aligned to regulatory objectives.
• Engaging with Lloyd’s across the
business including around business
planning and compliance with Minimum
Standards;
• Ensuring the Board is kept up-to-
date on regulatory matters as
communicated by regulators.
Continuous supervision approach by the
PRA enables Brit to respond promptly
to the PRA’s regulatory concerns and
areas of regulatory focus;
• Engagement with regulators on
thematic reviews and information
requests enables Brit to contribute to
regulators’ understanding of how the
market operates and best practice;
• Brit’s regular engagement with
regulators enables it to pro-actively
plan its response to areas of regulatory
focus, e.g. operational resilience;
• Engagement with regulators assists
Brit to meet the prudential and conduct
standards required by regulators;
• Directors and employees understand
their regulatory responsibilities.
Brit Limited Annual Report 2020
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Strategic Report
Form of engagement
Impact of engagement
Brit determines the risk of the potential
engagement by investigating the
potential spend value, criticality of the
services to be provided and personal
information to be shared between
parties.
Brit has strong partnerships with a
number of critical suppliers. These
partnerships are fostered by a range of
activities including ongoing dialogue and
meetings at both executive and function
owner level. We also engage with key
suppliers in areas such as technical and
product roadmaps, integration planning
and disaster recovery.
Brit also has a rigorous on-boarding
process for new suppliers.
Such supplier engagement enables us to:
• Provide a better service to and satisfy
the needs of our customers and other
stakeholders;
• Enhance current operational processes,
leading to better efficiencies and
increased competitive advantage in the
marketplace;
• Comply with appropriate laws and
regulations, by implementing suitable
controls and measures;
• Improve the Company’s technological
resilience; and
• Ensure the robustness and integrity of
our suppliers, such as their compliance
with the Modern Slavery Act 2015.
Form of engagement
Impact of engagement
Brit’s ultimate shareholder is
represented on the Brit Limited board
and there is regular contact between
Brit executives and senior management
and those of our shareholder.
This engagement helps ensure that Brit’s
strategy is aligned to and supported by
our shareholder.
Such engagement also presents us
with underwriting and investment
opportunities, and can result in
favourable collaboration with other
members of the Fairfax Group.
stakeholder engagement
Key suppliers
Why we engage
Supply chain integrity is a critical
part of our business, as we rely on a
number of key suppliers of goods and
services to help us meet the needs
of our customers and those of other
stakeholders.
On-going engagement with such
suppliers helps us ensure that those
needs are met and ensures that the
standards set by those suppliers meet
Brit’s criteria.
Such suppliers include providers
of IT systems, claims management,
professional services, facilities and
travel providers.
Members
Why we engage
Brit Limited’s 100% ultimate
shareholder is Fairfax Financial
Holdings Limited (FFHL).
Our aim is to provide long term
sustainable value for our shareholders.
Engagement ensures that our
objectives are aligned and that our
strategy, operating environment and
performance are clearly understood.
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Brit Limited Annual Report 2020
Strategic Report Brit Limited Annual Report 2020
55
Strategic Report
56
Brit Limited Annual Report 2020
Strategic Report section 172(1) statement
Introduction
The Brit Limited Directors’ key responsibility is to promote
the success of the Company. This principle is embodied in the
Board’s terms of reference and is the cornerstone of their
discussions and decision making. Each Director is cognisant that
in discharging this key responsibility, they must have regard to:
• The likely consequences of any decisions in the long-term;
• The interests of the Company’s employees;
• The need to foster the Company’s business relationships
with suppliers, customers and others;
• The impact of the Company’s operations on the community
and environment;
• The desirability of the Company maintaining a reputation
for high standards of business conduct; and
• The need to act fairly as between shareholders of the Company.
The Directors of Brit Limited consider, both individually and
collectively, that they have acted in the way they consider,
in good faith, would be most likely to promote the success
of the Company for the benefit of its members as a whole
(having regard to the stakeholders and matters set out in
s172(1)(a-f) of the Act).
The Board’s approach to section 172(1) and decision making
The Board’s terms of reference, which are reviewed annually,
clearly articulate the Board’s responsibilities, the role of
the Chair and matters reserved for the Board. They also
set out which of the Board’s powers and responsibilities
may be delegated to other committees and the governance
mechanisms by which the Board monitors those committees’
activities and performance. The Chair ensures that these
terms of reference are adhered to and, by doing so, ensures
that Directors have due regard for all appropriate factors
during the decision-making process.
Our strategy
The Board is responsible for a number of key strategic
decisions, including approving the business plans, objectives
and strategy of the Company. It is also responsible for
conduct risk strategy and appetite, for recommending
dividends and for setting dividend policy.
The Company’s strategy and business plans are approved
annually by the Board. The Board also assesses how the
strategy underpins long-term value creation by discussing
and approving a three-year plan. Such matters are also
discussed at the Group’s annual strategy review and planning
day, in which the Directors of the Company and its principal
subsidiaries participate. On-going performance is discussed
and monitored at Board meetings.
credit, market and liquidity risk appetites and tolerances. They
ensure the Company has an effective risk management framework
in place, approve its conduct risk strategy and appetite.
Board information
The Board receives regular information on a range of relevant
topics, and receives information on other areas as requested
by the Directors from time to time.
During 2020, the Board has received and discussed regular
comprehensive updates on the impact of COVID-19. These
updates have included a general update on the pandemic, its
impact on financial and capital markets, and the impact on Lloyd’s
and the wider insurance market. It also included an overview of
key developments at Brit, an update from each key functional
area, scenario analysis and an assessment of key risks.
The Board receives regular formal reports on the operations
and performance of the Company from the Group Chief Executive
Officer and the Group Chief Financial Officer. The Board also
receives regular reports from the chairs of the committees
of the Board such as the Audit Committee, Remuneration
Committee and Nomination Committee, and from the chairs of its
principal subsidiaries’ boards including those of Brit Syndicates
Limited and Brit Reinsurance (Bermuda) Limited. It also receives
the minutes of meetings of these bodies. Each of these
reports provides an update on areas necessary to help the
Directors promote the success of Brit Limited.
In addition, the Board receives and considers a number of
annual reports, such as the ‘Whistleblowing Annual Report’.
From time to time the Board receives detailed reports on specific
areas for it to consider. During 2020, such reports included a
‘Group Capital Update’ and a ‘Group Investment Update’.
Our policies and practices
All relevant factors are appropriately addressed by the Board
when considering matters reserved for it, as set out in its
terms of reference.
The Board also ensures that appropriate consideration is given
to relevant factors by the committees to which it delegates
responsibilities. The Board reviews the terms of reference
of such committees on an annual basis, and receives regular
updates and reports from those committees’ chairs.
The Board also reviews the Company’s key policies on an
annual basis, ensuring that all relevant considerations to
assist it discharge its responsibilities are embedded in the key
operations of the business. These policies help to promote the
long-term success of the Company by focusing on areas such
as the key operations of the Company.
The Directors’ assessment of long-term value creation also
considers the Company’s resilience. The Directors determine
and monitor underwriting, reserving, business, operational,
The Board reviews its key stakeholder map on an annual
basis. New key stakeholder relationships are identified
through information received and considered by the Board
Brit Limited Annual Report 2020
57
Strategic Report
Section 172(1) Statement
on a regular basis, or through the Board’s consideration and
approval of substantial contracts and commitments.
Training
To assist the Directors discharge their responsibilities,
they are provided with on-going training and development
opportunities. They have received a number of in-depth
briefings on specific relevant issues.
The Company also maintains a ‘Code of Conduct’ setting out
the standard we expect from all of our staff. This is regularly
reviewed and updated, and compliance is attested to by each
employee on an annual basis.
Our people
Our people are key to our success. How we engage with them
and how we invest in them is set out on pages 47 to 50.
For the wider workforce, there is a comprehensive staff
development programme tailored to meet individual needs.
Elements of this training are mandatory, with all staff
required to successfully complete e-learning modules on key
areas such as money laundering, bribery and corruption,
data protection, fraud and cyber risk.
Our stakeholders
The Board recognises the importance of engaging with its
broader stakeholder base. The Company’s key stakeholders, as
identified by the Board, are set out on pages 51 to 54, together
with why and how we engage with them and the outcomes of that
engagement.
Our culture
Building and maintaining the Company’s reputation and its high
standards of business conduct are essential to the future
success of the Company. This is embedded in our culture.
In October 2019, we launched our new brand purpose. Our
brand purpose informs everything we do, from how we
communicate, to how we develop and deliver our services,
to how we work together. Our purpose informs our core
philosophies, which are set out on page 11.
Community and environment
The Board recognises the importance of not only generating
value for shareholders but also to contribute to wider society.
We do this through a number of initiatives, as set out on
pages 48-49. We also monitor and manage our environmental
impact, as set out on pages 49 to 50.
58
Brit Limited Annual Report 2020
Strategic Report Sale of Commonwealth Insurance Company of America (CICA)
During 2020, the Board approved the sale of the Group’s
US admitted carrier, CICA. The transaction completed on
5 February 2021 for a consideration of US$19.7m.
In arriving at this decision, the Board considered Brit’s
immediate and longer-term strategic priorities and the
interests of its stakeholders. The Board concluded that
the sale and redeployment of capital to support other
opportunities was aligned to the Group’s strategic objectives.
2021 business plan and capital requirements
The Directors reviewed and approved the 2021 business
plan. The plan included the Group’s underwriting and
investment strategy, together with the capital needed to
support the plan.
The Directors considered the Company’s immediate
and longer-term strategic priorities, together with the
risks facing the business. They also considered the
needs and expectations of the Company’s shareholders,
the interest of its clients and employees, and those of
the wider stakeholder group. After due discussion, the
Directors concluded that the plans and attaching capital
requirements positioned the Company well for 2021 and
the longer term.
Approval of policies
During 2020, the Directors reviewed and approved the
Company’s key policies, including the Whistleblowing Policy
and the Financial Crime Policy.
In approving these policies, the Directors considered
whether they support the strategic aims of the Company,
and whether all relevant considerations were satisfactorily
embedded in the key operations of the business. Such
integration helps ensure the Group’s approved operational
practices are clearly articulated and understood by all
relevant employees, ensuring our reputation for high
standards of business conduct is maintained. Such
practices in turn will help ensure our longer-term strategic
aims are delivered, in the interests of all our stakeholders.
Key decisions made by the Directors during the year
Dividends and share issues
On 9 April, the Board approved a dividend payment
of US$20.6m to Brit’s minority shareholder, OMERS.
During 2020, the Board agreed to a number of new share
issues. These issues totalled 121,860,468 class B shares,
which were acquired by Fairfax for a contribution of
US$524.0m.
In considering these decisions, the Directors assessed
Brit’s ongoing underwriting strategy and capital
requirements, the impact of COVID-19 on Brit’s
underwriting and investment performance, and its
obligation to act fairly between members. It was mindful
of its agreed obligations to its minority shareholder and
to its majority shareholder, Fairfax, whose ownership of
Brit increased from 89.3% to 100.0% during the year.
2019 financial statements and reserving position
The Directors approved the financial statements for
the year ended 31 December 2019, on 12 February
2020. As part of this process, the Directors considered
and approved the claims reserves held by the Group’s
underwriting entities.
In considering these key factors and in approving the
final reserving position, the Directors were mindful of the
importance of maintaining the Group’s policy of reserving
on a conservative best estimate basis. This policy provides
robust security to our policyholders, while ensuring
the long-term financial strength of the Group, thereby
protecting the interests of our key stakeholders including
our clients, members and employees.
Subordinated debt – call decision
Brit has in issue £135.0m subordinated debt (the Notes) which
is listed on the London Stock Exchange and mature in 2030.
The Notes were callable in whole on 9 December 2020. On
14 December 2020, Brit announced that it had determined not
to exercise its call option to redeem the Notes.
In arriving at this decision, the Directors considered the
interests and views of its shareholder. The Board concluded
that maintaining this source of capital was in the best
interests of Brit and its shareholder.
Ki Financial Limited
In 2020, the Board approved the formation of, and an
investment in, Ki Financial Limited.
The Board considered Brit’s immediate and longer-
term strategic priorities, as well as the interests of its
shareholder, and other stakeholders, including Lloyd’s
and the wider market. It concluded that opportunities
presented by this initiative would position the Group and
other stakeholders well for the longer term.
Brit Limited Annual Report 2020
59
Strategic Report
60
Brit Limited Annual Report 2020
Governance Directors’ Report
Corporate Governance Report
Modern Slavery and Human Trafficking Statement
62
65
67
Governance
Directors’ Report
This report sets out other information of
interest to shareholders. It includes information
on our significant shareholders, the Directors’
responsibility statement and the 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.
Brit Limited Annual Report 2020
61
Governance
directors’ report
The Directors present their report together with the audited
consolidated financial statements for the year ended
31 December 2020.
Principal activities, review of business and other
disclosures
Details of the Company’s principal activities and a review
of the business, including how the business environment is
likely to affect its future development and performance, are
included in the Strategic Report.
Directors
The following Directors held office at the date of this report:
Gordon Campbell
Matthew Wilson
Mark Allan
Andrew Barnard
Jeremy Ehrlich (resigned 28.08.2020)
Andrea Welsch
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.
62
Brit Limited Annual Report 2020
Dividends
On 9 April 2020, the Company paid a dividend of US$20.6m to
the holder of its class A ordinary shares. The Directors do not
recommend a final dividend.
Share capital
The Company’s ordinary issued share capital at 31 December
2020 comprised one class of ordinary shares, 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 shareholder at the time of this report is as
follows:
FFHL Group Limited
Units
568,837,653
Class
B Ordinary
% of Shareholder
total
100.0
• During 2020, FFHL Group Limited subscribed for
121,860,468 new Brit Limited class B ordinary shares for
US$524.0m, as follows:
• On 7 April 2020, 46,511,628 Class B Ordinary Shares for
US$200.0m;
• On 24 August 2020, 19,767,442 Class B Ordinary Shares
for US$85.0m;
• On 21 September 2020, 3,488,373 Class B Ordinary Shares
for US$15.0m;
• On 20 November 2020, 31,395,349 Class B Ordinary
Shares for US$135.0m;
• On 23 November 2020, 3,720,931 Class B Ordinary Shares
for US$16.0m; and
• On 23 December 2020, 16,976,745 Class B Ordinary
Shares for US$73.0m.
Additionally, on 28 August 2020, as per the Shareholder’s
Agreement, FFHL Group Ltd purchased the remaining
48,000,000 class A shares directly from OMERS, increasing
its ownership of Brit to 100% (31 December 2019: 89.26%).
All shares were then converted into class B shares.
Significant agreements
The following agreement which was in force at 31 December
2020, takes effect, alters or terminates on a change of
control of the Company.
Revolving Credit Facility
The Group has a syndicated revolving credit facility (RCF)
Governance
which provides for US$450.0m of committed multi-currency
financing. Amounts under the RCF can be drawn until
30 November 2023, and the RCF terminates on 31 December
2023, on which date all outstanding facilities must be repaid.
• 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.
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 are 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.
Energy consumption and greenhouse gas emissions
Brit’s energy consumption and greenhouse gas emissions, and
its related strategy, are discussed on pages 49 to 50.
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
Auditor
PricewaterhouseCoopers LLP remain in office as the
Company’s auditor.
Events occurring after the reporting date
Brit notes the outcome of the Supreme Court ruling on
15 January 2021 in respect of the FCA’s COVID-19 related
business interruption test case. Brit was not party to this
action, the outcome of which does not have a material impact
on the Group.
The disposal of the Commonwealth Insurance Company
of America (CICA) completed on 5 February 2021 for a
consideration of US$19.7m. Brit originally acquired CICA in
April 2018 at a cost of US$16.4m. As at 31 December 2020,
the assets and liabilities of CICA were recorded within the
balance sheet lines of Assets classified as held for sale and
Liabilities directly associated with assets classified as held
for sale, reflecting the Group’s expectation of sale in 2021.
Going concern
As part of its going concern assessment, the Board has
considered the impact of the COVID-19 pandemic on specific risks,
and considered how successfully Brit has managed those risks:
• Operational risk: Including Brit’s ability to work remotely
and continue to provide a high level of service its
customers.
•
Insurance risk: Including Brit’s reserving methodology
and how it actively manages its portfolio to ensure it is
appropriately positioned for both the pandemic and the
recessionary economic conditions.
•
Investment and market risk: Including the positioning
of Brit’s investment portfolio and expected returns.
• Credit risk: Including any evidence as to the financial
impact of COVID-19 on our customers.
• Solvency: Including Brit’s capital strength at 31 December
2020 and its track record of accessing additional capital
from its ultimate parent.
• Liquidity risk: Including stress testing of liquid resources,
access to sources of liquidity including undrawn RCF
amounts, and RCF covenant headroom.
These risks are discussed in more detail on pages 40 to 45.
Brit Limited Annual Report 2020
63
Governance
After assessing the evidence from the reviews performed,
the Directors concluded they 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 financial statements.
Information included in the Strategic Report
The information below is not shown in the Directors’ report
because it is shown in the Strategic Report instead under
s414C(11).
• Employee engagement
Disclosures regarding employee engagement can be found
on pages 47 to 48.
• Stakeholder engagement
Disclosures regarding stakeholder engagement can be
found on pages 51 to 54.
• Charitable donations
Disclosures regarding charitable donations can be found
on pages 47 to 49.
• Financial instruments
Details of the Group’s risk management framework are set
out on pages 40 to 45.
By order of the Board
Tim Harmer Company Secretary
16 February 2021
Brit Limited – 08821629
directors’ report
The Board also considered other factors including:
• Brit’s baseline 2021 financial plan: For Brit’s main
underwriting platform, Syndicate 2987, 2021 GWP is
forecast to grow by 12.5%. The Board noted that as in
previous years, Brit continues to actively manage the
portfolios by segmenting Classes into ‘High Performing’,
‘Core Growth’, ‘Core New Initiatives’, ‘Core Opportunistic’
and ‘Portfolio Management’. Growth (excluding RARC)
is driven primarily by the ‘High Performing’ and ‘Core
Growth’ segments, while the largest increases in RARC
are targeted on the weakest performing segments of the
portfolio. In assessing the plan, the Board considered,
amongst other factors:
• Brit’s recent underwriting performance: During 2020,
Brit has demonstrated the strength of its underlying
business with an attritional ratio of 52.6%. This strong
ratio is partly driven by market conditions which
continue to improve.
•
Improving market conditions: In 2020, Brit achieved an
overall risk adjusted rate increase of 10.6%, giving total
rate increases since 1 January 2018 of 20.2%. Further
increases have been achieved to date in 2021.
• Brit’s reserving policy and track record: Brit has a
policy of reserving on a ‘conservative best estimate’
basis and carrying an explicit risk margin above that
‘conservative best estimate’. This policy has led to a
track record of modest annual reserve releases. In
2020, this trend, first reported in 2004, continued with
net releases of US$61.5m in 2020 (2019: US$47.9m).
•
Investment market conditions: The Directors
considered if the current low interest rate environment
was appropriately reflected in the plan.
• Scenario testing around the ongoing impact of the
pandemic: Assessments were performed throughout
2020, with the most recent in December. This used Brit’s
baseline 2021 financial plan, and considered moderate and
severe downside scenarios. For example, against a base
case of a vaccination programme roll-out in Q1 2021, the
moderate scenario assumed the programme would not
start until Q2 2021 or later, while the severe scenario
assumed a slow vaccination roll-out with potential side
effects. The impact of premium volumes, rates, defaults,
claims deterioration and investment return were all
assessed under both the moderate and severe scenarios.
In addition to the impact on capital from trading losses, the
exercise also considered the impact of interest rates on
management capital requirements.
• 2022 outlook: The Directors also considered the Group’s
outlook for 2022.
A review of the financial performance of the Group is set out
on pages 24 to 34. The financial position of the Group, its cash
flows and borrowing facilities are set out on pages 37 to 39.
64
Brit Limited Annual Report 2020
Governance 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 (Code).
Board of Directors
The Board currently has six Directors and the full board meets
on a regular basis.
Independence of Directors
The Board considers Gordon Campbell to be an independent
non–executive Director of the Company, within the meaning of
the Code. Gordon Campbell was appointed Chair of the Board on
1 January 2019, chair of the Company’s Audit Committee with
effect from 1 January 2019, chair of the Company’s Nomination
Committee with effect from 1 January 2019 and chair of the
Company’s Remuneration Committee with effect from
1 January 2019.
Chair
The Chair is responsible for leadership of the Board ensuring
its effectiveness on all aspects of its role and setting its
agenda. The Chair 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 Chair, 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.
Conflicts of Interest
Under the Companies Act 2006, all Directors must seek
authorisation before taking up any position with another
company that conflicts or may possibly conflict with the
Company’s interests. The Directors are required to notify the
Company of any conflicts so that they can be considered and if
appropriate authorised by the Board. The Board carries out an
annual review of conflicts of interest and each authorisation is
set out in the conflicts register.
Committees of the Board
The Board has delegated specific responsibilities to Board
committees, notably the Brit Limited Audit, Nomination and
Remuneration Committees.
Brit Governance Structure as at 31 December 2020
The Governance structure, shown below, is deeply embedded
within the business. The Company’s main operating subsidiaries
have in place governance principles in accordance with the
Group’s Memorandum on Corporate Governance.
Governance structure
Ki
Ki Financial
Limited
Board
Audit
Committee
Remuneration
Committee
Sussex
Sussex Capital
Management Limited
Board
Brit Limited
Board
Remuneration
Committee
Audit Committee
Nomination
Committee
Brit Insurance
Holdings Limited
Board
Brit Reinsurance
(Bermuda) Limited
Board
Executive
Committee
Underwriting
Committee
Brit Syndicates
Limited
Board
Management
Committee
Investment
Committee
Valuation
Committee
Risk
Oversight
Committee
Audit
Committee
Management
Committee
Audit
Committee
UK
Investment
Committee
Risk
Oversight
Committee
Model
Governance
Committee
Brit Limited Annual Report 2020
65
Governance
corporate governance report
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. The
Committee currently comprises one executive Director, one
non-executive shareholder representative Director and one
independent non-executive Director who is also the Chair of
the Board, whereas the Code indicates that the Chair of the
Board should not chair the Committee, and that membership
of the Committee should be comprised of three independent
non-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 Nomination Committee.
By order of the Board
Tim Harmer Company Secretary
16 February 2021
66
Brit Limited Annual Report 2020
Governance modern slavery and human trafficking statement
This statement sets out the steps taken by Brit Limited 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
(Lloyd’s), the world’s specialist insurance market provider, and
a significant US and international reach. We have local offices
in the US, Bermuda and Japan.
We operate globally via our own international distribution
network and broker partners. Insurance represents 76.3% of
our gross written premium, with the remainder coming from
treaty reinsurance.
The average number of employees working at Brit during
2020, including non-executive Directors, was 754 and the
result after tax in 2020 was a loss of US$232.0m.
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.
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 provide 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
31 December 2020.
This Modern Slavery and Human Trafficking Statement is
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
16 February 2021
Brit Limited Annual Report 2020
67
Governance
68
Brit Limited Annual Report 2020
Financial Statements Financial Statements
Independent Auditor’s Report to the
Members of Brit Limited
Consolidated Financial Statements
Parent Company Financial Statements
70
79
167
Brit Limited Annual Report 2020
69
Financial Statements
independent auditor’s report to the members of Brit Limited
Report on the audit of the financial statements
Opinion
In our opinion:
• 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 2020 and of the Group’s loss and
the Group’s cash flows for the year then ended;
• the Group financial statements have been properly prepared
in accordance with international accounting standards in
conformity with the requirements of the Companies Act 2006;
• 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
We have audited the financial statements, included within
the Annual Report, which comprise: the consolidated and
parent Company statements of financial position as at
31 December 2020; the consolidated income statement,
the consolidated statement of comprehensive income, the
consolidated statement of cash flows, and the consolidated and
Company statements of changes in equity for the year then
ended; and the notes to the consolidated financial statements,
which include a description of the significant accounting policies.
Our opinion is consistent with our reporting to the Audit Committee.
Separate opinion in relation to international financial
reporting standards adopted pursuant to Regulation (EC)
No 1606/2002 as it applies in the European Union
As explained in note 2 to the consolidated financial statements,
the Group, in addition to applying international accounting
standards in conformity with the requirements of the
Companies Act 2006, has also applied international financial
reporting standards adopted pursuant to Regulation (EC)
No 1606/2002 as it applies in the European Union.
•
In our opinion, the Group financial statements have been
properly prepared in accordance with international financial
reporting standards adopted pursuant to Regulation (EC)
No 1606/2002 as it applies in the European Union.
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 Auditors’ 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.
70
Brit Limited Annual Report 2020
Independence
We remained independent of the Group 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 headed by Fairfax Financial Holdings
Limited, of which the Company is a member.
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 under audit.
Our audit approach
Overview
Audit scope
• We performed audit procedures over material balances/
transactions in active operations/ subsidiaries in the UK
for the purpose of the Group audit.
• 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, as the Group
maintains its accounting records in the UK.
• We have also scoped in certain balances and transactions
in Sussex Capital Limited/Sussex Re Limited (Bermuda)
which are audited by a component auditor and the results
reported to us.
Key audit matters
• Appropriateness of methodologies and assumptions
applied in the valuation of the IBNR component of insurance
contracts liabilities (Group)
• Risk of inappropriate revenue recognition (including fraud
risk (Group))
• Valuation of investments with valuations modelled using
unobservable inputs (Group)
•
Impact of Covid-19 (Group).
Materiality
• Overall Group materiality: US$14.79m (2019: US$16.39m)
based on 1% of combined operating ratio. This represents
the total by which net operating expenses and/or net
claims incurred would have to fluctuate to move the
combined operating ratio (‘COR’) by 1%.
• Overall Company materiality: US$14.79m (2019:
US$12.68m) based on 1% of total assets.
• Performance materiality: US$11.09m (Group) and
US$11.09m (Company).
Financial Statements The scope of our audit
As part of designing our audit, we determined materiality and
assessed the risks of material misstatement in the financial
statements.
Capability of the audit in detecting irregularities,
including fraud
Irregularities, including fraud, are instances of non-
compliance with laws and regulations. We design procedures
in line with our responsibilities, outlined in the Auditors’
responsibilities for the audit of the financial statements
section, to detect material misstatements in respect of
irregularities, including fraud. The extent to which our
procedures are capable of detecting irregularities, including
fraud, is detailed below.
Based on our understanding of the Group and industry, we
identified that the principal risks of non-compliance with laws
and regulations related to breaches of regulatory principles,
such as those governed by the Prudential Regulation
Authority (“PRA”) and the Financial Conduct Authority (“FCA”),
and we considered the extent to which non-compliance
might have a material effect on the financial statements.
We also considered those laws and regulations that have a
direct impact on the preparation of the financial statements
such as the Companies Act 2006, the Council of Lloyd’s
regulations, the FCA, and the PRA’s regulations applicable to
insurance companies, the Listing rules and UK tax legislation.
We evaluated management’s incentives and opportunities
for fraudulent manipulation of the financial statements
(including the risk of override of controls), and determined
that the principal risks were related to posting inappropriate
journal entries to increase revenue and management bias
in accounting estimates such as valuation of the IBNR
component of insurance contract liabilities, accrued pipeline
premium and investments with valuations modelled using
unobservable inputs. The Group engagement team shared this
risk assessment with the component auditors so that they
could include appropriate audit procedures in response to
such risks in their work. Audit procedures performed by the
Group engagement team and/or component auditors included:
• Discussions with the audit committee, management,
internal audit and the Group’s director of legal and
compliance, including consideration of known or suspected
instances of non-compliance with laws and regulation and
fraud;
• Evaluation and testing of the operating effectiveness of
management’s controls designed to prevent and detect
irregularities;
•
Identifying and testing journal entries, in particular any
journal entries posted with unusual account combinations/
narrative in journal description or posted by or on behalf of
senior management;
• Assessment of matters reported on the Group’s
whistleblowing helpline and the results of management’s
investigation of such matters;
• Reading key correspondence with regulatory authorities
which included, the Council of Lloyd’s, the FCA and the
PRA in relation to compliance with laws and regulations
(including meeting with the PRA);
• Reviewing relevant meeting minutes including those of the
Risk Committee and the Reserving Committee;
• Reviewing the Group’s and Company’s list of litigation
and claims, internal audit reports, compliance reports in
so far as they related to non-compliance with laws and
regulations and fraud; and
• Procedures relating to valuation of the IBNR component of
insurance contract liabilities, accrued pipeline premium and
investments with valuations modelled using unobservable
inputs described in the key audit matters below.
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. Also, 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.
Key audit matters
Key audit matters are those matters that, in the auditors’
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 auditors,
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.
The impact of Covid-19 is a new key audit matter this year.
Otherwise, the key audit matters below are consistent with
last year.
Brit Limited Annual Report 2020
71
Financial Statements
Independent auditor’s report to the members of Brit Limited
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 (Group)
See notes 2.5, 3.2, 4.1.3 and 21 of the consolidated financial
statements for disclosures of related accounting policies,
judgements and estimates.
The IBNR component of insurance contract liabilities, net
of reinsurance is a material balance within the financial
statements which is judgemental and complex to calculate.
These are a best estimate of all claims incurred but not
reported 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.
• 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 major events and in all those
cases where significant differences were identified we
obtained satisfactory responses and concluded on the
reasonableness of management estimates. Covid-19 is
considered a catastrophe event, refer to the key audit
matter for the Impact of Covid-19 below for the related
testing procedures performed.
Based on the work performed, the recorded IBNR is
consistent with the evidence obtained.
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Brit Limited Annual Report 2020
Financial Statements Key audit matter
How our audit addressed the key audit matter
Risk of inappropriate revenue recognition (including fraud risk
(Group))
Our testing procedures over pipeline premium estimates and
non-standard earning patterns included:
See notes 2.5, 3.3, and 5 of the consolidated financial
statements for disclosures of related accounting policies,
judgements 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 judgemental 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 applied 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.
Valuation of investments with valuations modelled using
unobservable inputs (Group)
See notes 2.5, 3.6 and 23 of the consolidated financial
statements for disclosures of related accounting policies,
judgements and estimates.
The Group investment portfolio contains US$185m of Level 3
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 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.
• We have reviewed the methodology adopted in the
calculation of pipeline premiums estimates including
recalculation of development factors.
• 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.
• We have obtained and checked, on a sample basis
management’s calculations for non-standard earning
patterns.
Based on the above procedures we note that no material
exceptions were identified in relation to the risk of fraud in
revenue recognition.
We coordinated with our internal valuation specialists based
in Toronto who centrally test the valuation of all investments.
We have performed the following for a sample of Level 3
portfolio investments:
• With our valuations specialists we reviewed the
appropriateness of the valuation methodologies, models,
key inputs and assumptions;
• We corroborated key inputs and assumptions in the
valuation model to independent support. For investments
where the valuations are based on forecasted information
and an estimate was made in prior reporting periods,
we performed retrospective procedures to assess the
reasonability of the forecasts used in management’s
valuation, comparing historic forecasted information to
audited financial information;
• Reviewed and re-performed the fair value calculations; and
• Concluded on the reasonableness of the valuation models.
Based on the above procedures, no material exceptions were found.
Brit Limited Annual Report 2020
73
Financial Statements
Independent auditor’s report to the members of Brit Limited
Key audit matter
Impact of Covid-19 (Group)
See notes 2.5, 3.2, 3.9 and 4.7 of the consolidated financial
statements for disclosures of related accounting and risk
management policies, judgements and estimates.
The Covid-19 pandemic has had a significant impact on the
performance of the Group during the year, resulting in
increased estimation uncertainty in key areas of the financial
statements described below:
• Management estimated claims in 2020 relating to the
Covid-19 represents the Group’s largest major loss event,
predominantly impacting the contingency and casualty
treaty books. Management’s estimates are based on a
combination of detailed exposure analysis and underwriter
judgement. Management also established an unexpired risk
reserve (URR) as a result of Covid-19 related losses to
reflect the fact that losses are expected on premium that
has been written but is yet to be earned.
• The estimated claims arising from Covid-19 have
contributed to the total carried forward tax losses in
respect of Lloyd’s undeclared years of account 2018,
2019 and 2020, in respect of which management have
recognised a deferred tax asset of $52.5m (note 3.9).
Management have not recognised a further deferred tax
asset of $43.9m on the basis that management consider
it is not yet possible to measure the asset reliably due to
further work required to forecast results beyond 2027.
• The Group continues to benefit from the support of the
parent entity, with capital contributions provided during
the year to strengthen the resilience of the statement of
financial position. Management determined that the Group
has continued ability to access sufficient liquidity and can
continue making claims payments as they fall due. The
directors have considered the appropriateness of the
going concern basis of preparation in the Group’s financial
statements and have considered the impact of Covid-19
on operational, insurance, investment, market, credit,
solvency, and liquidity risks and how the Group managed
those risks.
• Management’s ways of working, including the operation of
controls, has been impacted as a result of a large number
of staff having to work remotely. This has inevitably
resulted in an increase in risk due to the remote accessing
of the IT systems and a potentially heightened cyber risk.
How our audit addressed the key audit matter
In response to the key areas identified as being significantly
impacted by Covid-19, we performed the following procedures:
• We performed inquiries with members of the underwriting
and actuarial teams to understand management’s estimation
process, monitoring of controls and key assumptions. We
tested the completeness of exposure analyses and challenged
key assumptions such as the likelihood of event cancellation.
We traced notified losses to supporting documentation,
including corroborating and contradictory evidences. We
also assessed assumptions relating to reinsurance, including
reviewing legal opinions supporting management’s position
where appropriate. We utilised a combination of market
benchmarking and testing of management’s process in our
testing of Covid-19 losses and related URR.
• We reviewed supporting evidence for the recoverability of
deferred tax assets. We considered historical performance
against forecasts, understood key assumptions relating to
future forecasts and how management had responded to
historical variances against business plans.
• We traced capital contributions to supporting documentation
and reviewed management’s assessment of solvency and
liquidity as part of their going concern analysis.We also
corroborated information obtained from our testing of
Covid-19 losses and our understanding of the business.
• We performed additional procedures to assess any control
implications arising from the impact of Covid-19, including
inquiries regarding the operation of IT and business
process controls and heightened cyber risk and evaluating
the results of our control testing.
Based on the work performed, we determined the recorded
losses related to Covid-19 are based on the best available
information at the time of management’s estimation of the
losses and are consistent with the evidence obtained. We
determined that the key assumptions used are reasonable in
relation to the circumstances of the loss and the exposures
identified are based on complete information. We did not
identify material exceptions. Our market benchmarking
indicates that the Group’s ultimate claim estimates at a total
level are broadly in line with market averages. We did not
identify any risks to going concern in relation to Covid-19. We
also did not identify any evidence of material deterioration in
the control environment due to Covid-19.
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Brit Limited Annual Report 2020
Financial Statements How we tailored the audit scope
We tailored the scope of our audit to ensure that we performed
enough work to be able to give an opinion on the financial
statements as a whole, taking into account the structure of
the Group and the Company, the accounting processes and
controls, and the industry in which they operate.
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. Further, the Group has invested in
Sussex Capital Limited, which is a special purpose vehicle
in Bermuda, which through Sussex Re Limited (a Bermuda
domiciled special purpose insurer) writes direct collateralised
reinsurance while also providing collateralised reinsurance
to Brit’s reinsurance portfolio. We have scoped in the 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 are maintained
in the Group’s London headquarters. We have also scoped
in certain balances and transactions in Sussex Re Limited/
Sussex Capital Limited, which are audited by a component
auditor and the results reported to us.
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:
Overall
materiality
How we
determined
it
Rationale
for
benchmark
applied
Financial statements –
Group
US$14.79m
(2019: US$16.39m).
1% of combined operating
ratio. This represents
the total by which net
operating expenses and/or
net claims incurred would
have to fluctuate to move
the combined operating
ratio (‘COR’) by 1%
Materiality for the
consolidated financial
statements is based on
a 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.
Financial statements
– Company
US$14.79m
(2019: US$12.68m).
1% of total assets,
capped at the group
materiality level
We believe that
due to the nature
of operations
of the parent
Company which is
a holding company,
total assets is an
appropriate and
generally accepted
auditing benchmark.
Brit Limited Annual Report 2020
75
Financial Statements
Independent auditor’s report to the members of Brit Limited
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 US$4.75m and US$14.78m. Certain
components were audited to a local statutory audit materiality
that was also less than our overall Group materiality.
We use performance materiality to reduce to an appropriately
low level the probability that the aggregate of uncorrected
and undetected misstatements exceeds overall materiality.
Specifically, we use performance materiality in determining
the scope of our audit and the nature and extent of our
testing of account balances, classes of transactions and
disclosures, for example in determining sample sizes. Our
performance materiality was 75% of overall materiality,
amounting to US$11.09m for the Group financial statements
and US$11.09m for the Company financial statements.
In determining the performance materiality, we considered
a number of factors - the history of misstatements, risk
assessment and aggregation risk and the effectiveness of
controls - and concluded that an amount at the upper end
of our normal range was appropriate.
We agreed with the Audit Committee that we would report
to them misstatements identified during our audit above
US$0.74m (Group audit) (2019: US$0.82m) and US$0.74m
(Company audit) (2019: US$0.61m) as well as misstatements
below those amounts that, in our view, warranted reporting
for qualitative reasons.
Conclusions relating to going concern
Our evaluation of the directors’ assessment of the Group’s
and the Company’s ability to continue to adopt the going
concern basis of accounting included:
•
Inquiries with directors and relevant members of
management
• Assessment of the impact of Covid-19 pandemic to going
concern and specific responses made by management to
address any additional risks identified as a result of the
pandemic
• Assessment of the Company’s financial position, capital and
solvency measures, and liquidity
• Tracing capital contributions and commitments to
supporting documentation
Based on the work we have performed, we have not identified
any material uncertainties relating to events or conditions
that, individually or collectively, may cast significant doubt on
the Group’s and the Company’s ability to continue as a going
concern for a period of at least twelve months from when the
financial statements are authorised for issue.
In auditing the financial statements, we have concluded that
the directors’ use of the going concern basis of accounting in
the preparation of the financial statements is appropriate.
However, because not all future events or conditions can be
predicted, this conclusion is not a guarantee as to the Group’s
and the Company’s ability to continue as a going concern.
Our responsibilities and the responsibilities of the directors
with respect to going concern are described in the relevant
sections of this report.
Reporting on other information
The other information comprises all of the information in the
Annual Report other than the financial statements and our
auditors’ 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 our work undertaken in the course of the audit,
the Companies Act 2006 requires 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 2020
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.
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Brit Limited Annual Report 2020
Financial Statements 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 obtained 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.
• a corporate governance statement has not been prepared
by the Company.
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 five years, covering the years
ended 31 December 2016 to 31 December 2020.
Mark Bolton (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
16 February 2021
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, 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.
Auditors’ 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 auditors’ 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.
Our audit testing might include testing complete populations of
certain transactions and balances, possibly using data auditing
techniques. However, it typically involves selecting a limited
number of items for testing, rather than testing complete
populations. We will often seek to target particular items for
testing based on their size or risk characteristics. In other cases,
we will use audit sampling to enable us to draw a conclusion about
the population from which the sample is selected.
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 auditors’ 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.
Brit Limited Annual Report 2020
77
Financial Statements
Financial Statements
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.
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Brit Limited Annual Report 2020
contents Financial Statements
Index to the Consolidated Financial Statements
Consolidated Income Statement
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
Note 2
Note 3
Note 4
Note 5
Note 6
Note 7
Note 8
Note 9
General information
Accounting policies and basis
of preparation
Critical accounting estimates and
judgements in applying accounting policies
Risk management policies
Segmental information
Investment return
Return on derivative contracts
Other income
Net foreign exchange (losses)/gains
Note 10
Acquisition costs and other operating
expenses
Note 11
Staff costs
Note 12
Finance costs
Note 13
Auditor’s remuneration
Note 14
Investments in associated undertakings
Note 15
Non-controlling interests
Note 16
Tax expense
80
81
82
83
84
86
86
86
98
101
121
125
125
126
126
127
127
128
128
129
131
132
Note 17
Intangible assets
Note 18
Property, plant and equipment
Note 19
Deferred acquisition costs
Note 20
Deferred taxation
Note 21
Insurance and reinsurance contracts
Note 22
Employee benefits
Note 23
Financial investments
Note 24
Derivative contracts
Note 25
Insurance and other receivables
Note 26
Cash and cash equivalents
Note 27
Assets and liabilities of disposal groups
classified as held for sale
Note 28
Borrowings
Note 29
Other financial liabilities
Note 30
Insurance and other payables
Note 31
Called up share capital
Note 32
Dividends
Note 33
Cash flows provided by operating activities
Note 34
Share-based payments
Note 35
Consolidated entities
Note 36
Related party transactions
and Ultimate Parent Company
Note 37
Guarantees and contingent liabilities
Note 38
Events occurring after the reporting date
133
136
137
137
139
144
149
152
154
154
155
155
156
156
157
157
158
159
161
163
166
166
Brit Limited Annual Report 2020
79
contents
Financial Statements
consolidated income statement
For the year ended 31 December 2020
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
Gain on business combination
Other income
Losses on other financial liabilities
Net foreign exchange gains
Total revenue
Expenses
Claims incurred:
Claims paid:
Gross amount
Reinsurers’ share
Claims paid, net of reinsurance
Change in the provision for claims:
Gross amount
Reinsurers’ share
Net change in the provision for claims
Claims incurred, net of reinsurance
Acquisition costs
Other operating expenses
Net foreign exchange losses
Total expenses excluding finance costs
Operating (loss)/profit
Finance costs
Share of net profit of associates
(Loss)/profit on ordinary activities before tax
Tax (charge)/income
(Loss)/profit for the year
All (losses)/profits arise from continuing operations.
The accompanying Notes are an integral part of the financial statements.
80
Brit Limited Annual Report 2020
Note
5
5
6
7
8
8
9
5
10
10
9
12
14
16(a)
Year ended
31 December
2020
US$m
Year ended
31 December
2019
US$m
2,424.4
(648.8)
1,775.6
(52.2)
(12.7)
(64.9)
1,710.7
56.5
(1.1)
–
14.1
(6.0)
–
1,774.2
(1,326.8)
391.4
(935.4)
(417.6)
113.9
(303.7)
(1,239.1)
(598.7)
(137.5)
(7.8)
(1,983.1)
(208.9)
(23.6)
2.0
(230.5)
(1.5)
(232.0)
2,293.5
(637.3)
1,656.2
(43.8)
29.5
(14.3)
1,641.9
158.5
(17.6)
10.2
45.9
(10.5)
16.8
1,845.2
(1,366.6)
509.1
(857.5)
83.2
(140.2)
(57.0)
(914.5)
(595.2)
(125.8)
–
(1,635.5)
209.7
(23.7)
0.3
186.3
(6.4)
179.9
consolidated statement of comprehensive income
For the year ended 31 December 2020
Financial Statements
(Loss)/profit attributable to:
Owners of the parent
Non-controlling interests
(Loss)/profit for the year
Other comprehensive income
Items not to be reclassified to profit or loss in subsequent periods:
Actuarial losses on defined benefit pension scheme
Deferred tax gain relating to actuarial losses on defined benefit
pension scheme
Items that may be reclassified to profit or loss in subsequent periods:
Change in unrealised foreign currency translation losses on foreign operations
Total other comprehensive income
Note
15
22
16(b)
Year ended
31 December
2020
US$m
Year ended
31 December
2019
US$m
(229.3)
(2.7)
(232.0)
(5.5)
1.8
2.3
(1.4)
179.9
–
179.9
(4.7)
6.4
3.7
5.4
Total comprehensive income recognised for the year
(233.4)
185.3
Total comprehensive income for the year attributable to:
Owners of the parent
Non-controlling interests
Total comprehensive income for the year
The accompanying Notes are an integral part of the financial statements.
15
(230.7)
(2.7)
(233.4)
185.3
–
185.3
Brit Limited Annual Report 2020
81
Financial Statements
consolidated statement of financial position
At 31 December 2020
Assets
Intangible assets
Property, plant and equipment
Deferred acquisition costs
Investments in associated undertakings
Reinsurance contracts
Employee benefits
Deferred taxation
Current taxation
Financial investments
Derivative contracts
Insurance and other receivables
Cash and cash equivalents
Assets classified as held for sale
Total assets
Liabilities and Equity
Liabilities
Insurance contracts
Borrowings
Other financial liabilities
Provisions
Deferred taxation
Current taxation
Derivative contracts
Insurance and other payables
Liabilities directly associated with assets classified as held for sale
Total liabilities
Equity
Called up share capital
Share premium
Capital redemption reserve
Foreign currency translation reserve
Retained earnings
Total equity attributable to owners of the parent
Non-controlling interests
Total liabilities and equity
Note
31 December
2020
US$m
31 December
2019
US$m
17
18
19
14
21
22
20
23
24
25
26
27
21
28
29
20
24
30
27
31
31
15
181.2
60.5
247.3
20.5
1,764.1
48.8
49.8
8.5
4,056.6
14.9
1,302.0
775.7
17.8
8,547.7
5,813.0
314.5
62.0
2.3
9.9
–
9.2
620.7
1.8
6,833.4
8.6
1,027.9
1.0
(84.1)
639.2
1,592.6
121.7
8,547.7
192.6
67.9
243.6
19.4
1,628.1
51.9
41.1
11.4
3,640.6
15.7
1,240.2
520.1
–
7,672.6
5,266.1
316.2
75.5
3.5
–
1.2
14.2
676.0
–
6,352.7
7.0
505.5
1.0
(86.4)
892.8
1,319.9
–
7,672.6
The accompanying Notes are an integral part of the financial statements.
These financial statements were approved by the Board of Directors on 16 February 2021 and were signed on its behalf by:
Matthew Wilson
Group Chief Executive Officer
Mark Allan
Group Chief Financial Officer
82
Brit Limited Annual Report 2020
consolidated statement of cash flows
For the year ended 31 December 2020
Cash flows from operating activities
Cash used in operations
Tax received
Interest received
Dividends received
Net cash outflows from operating activities
Cash flows from investing activities
Purchase of intangible assets
Purchase of property, plant and equipment
Acquisition of subsidiary undertaking
Acquisition of associated undertaking
Dividends from associated undertakings
Net cash outflows from investing activities
Cash flows from financing activities
Proceeds from issue of shares
Drawdown/(repayment) on revolving credit facility
Purchase of shares for share-based payment schemes
Interest paid
Transactions with non-controlling interests
Dividends paid to owners of the parent
Net cash inflows from financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
Effect of exchange rate fluctuations on cash and cash equivalents
Cash and cash equivalents at the end of the year
The accompanying Notes are an integral part of the financial statements.
Note
33
17
18
15
32
26
Financial Statements
Year ended
31 December
2020
US$m
Year ended
31 December
2019
US$m
(414.3)
2.7
63.3
6.3
(342.0)
(6.5)
(1.2)
–
–
1.0
(6.7)
524.0
(10.0)
(3.0)
(14.0)
124.0
(20.6)
600.4
251.7
520.1
3.9
775.7
(467.0)
0.6
70.1
5.3
(391.0)
(5.2)
(4.9)
(31.1)
(13.0)
0.5
(53.7)
70.6
132.0
(25.0)
(14.5)
–
(20.6)
142.5
(302.2)
818.2
4.1
520.1
Brit Limited Annual Report 2020
83
Financial Statements
consolidated statement of changes in equity
For the year ended 31 December 2020
At 1 January 2020
Total comprehensive income recognised
Issuance of share capital
Dividend
Transactions with non-controlling
interests
At 31 December 2020
31
32
15
7.0
–
1.6
–
–
Called up
share
capital
US$m
Note
Capital
redemption
reserve
US$m
Foreign
currency
translation
reserve
US$m
Total
attributable
to owner
of the
parent
US$m
Retained
earnings
US$m
Non-
controlling
interests
US$m
Total
equity
US$m
1.0
(86.4)
892.8
1,319.9
–
1,319.9
–
–
–
–
2.3
–
–
–
(233.0)
–
(20.6)
(230.7)
524.0
(20.6)
(2.7)
–
–
(233.4)
524.0
(20.6)
–
–
124.4
124.4
Share
premium
US$m
505.5
–
522.4
–
–
8.6
1,027.9
1.0
(84.1)
639.2
1,592.6
121.7
1,714.3
The accompanying Notes are an integral part of the financial statements.
84
Brit Limited Annual Report 2020
consolidated statement of changes in equity
For the year ended 31 December 2019
Financial Statements
At 1 January 2019
Total comprehensive income recognised
Recycling of foreign exchange losses
upon acquisition of Ambridge
Issuance of share capital
Dividend
At 31 December 2019
Nature and Purpose of Group Reserves
Called up
share
capital
US$m
Note
6.8
–
–
0.2
–
7.0
31
32
Capital
redemption
reserve
US$m
Foreign
currency
translation
reserve
US$m
1.0
(89.7)
–
–
–
–
3.7
(0.4)
–
–
Retained
earnings
US$m
731.8
181.6
Total
equity
US$m
1,085.0
185.3
–
–
(20.6)
(0.4)
70.6
(20.6)
1.0
(86.4)
892.8
1,319.9
Share
premium
US$m
435.1
–
–
70.4
–
505.5
Share premium: The balance represents the difference between the price at which shares are issued and their nominal value,
less any distributions made from this account.
Capital redemption reserve: The balance represents the amount by which share capital is diminished in the event of a share
cancellation and is required to be recognised in a legal reserve 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.
Brit Limited Annual Report 2020
85
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 2020 were authorised for issue in accordance with a resolution of the Directors on 16 February 2021. 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. The address of the registered
office is: The Leadenhall Building, 122 Leadenhall Street, London, EC3V 4AB.
2
Accounting policies and basis of preparation
Basis of preparation
2.1
The consolidated financial statements for the year ended 31 December 2020 have been prepared in accordance with international
accounting standards in conformity with the requirements of the Companies Act 2006 (“IFRS”). The accounting policies of the Group
have been applied consistently to all the years presented, unless otherwise stated. The Group, in addition to applying international
accounting standards in conformity with the requirements of the Companies Act 2006, has also applied international financial
reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union.
The consolidated financial statements have been compiled on a going concern basis and prepared on a historical cost basis, except
for financial investments, derivative contracts and certain 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, judgements and assumptions are included within Note 3 to the consolidated financial statements.
The Directors have considered the impact of the COVID-19 pandemic on the principal risks and uncertainties faced by the Group
as summarised in Note 4.7.
The Directors have considered various factors in order to be satisfied that a going concern basis of preparation is appropriate.
Such factors include, but are not limited to, the reserving policy and track record of the Group, including recent underwriting
performance, improving market conditions, and the financial plans of the Group. Additionally, the capital position of the Group has
been bolstered by capital injections of US$524.0m from the ultimate parent company, Fairfax Financial Holdings Limited. More detail
on these considerations can be found on pages 63 to 64 of the Strategic report.
After assessing evidence in respect of these considerations, the Directors have a reasonable expectation that the Group has
adequate resources to continue in operational existence for the foreseeable future. Therefore, they consider it appropriate
to continue to adopt the going concern basis for the preparation of its 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 standards and amendments with a date of initial application of 1 January 2020 for the first time:
(a) Other improvements and amendments
The Group has also applied the following standards and amendments for the first time for the reporting period commencing
1 January 2020:
• Definition of Material – Amendments to IAS 1 and IAS 8
• Definition of a Business – Amendments to IFRS 3
• Revised Conceptual Framework for Financial Reporting, and
•
Interest Rate Benchmark Reform – Amendments to IFRS 9, IAS 39 and IFRS 7
86
Brit Limited Annual Report 2020
notes to the consolidated financial statements Financial Statements
The amendments listed above did not have any impact on the amounts recognised in prior periods and are not expected
to significantly affect the current or future periods.
(b) New standards and interpretations not yet adopted
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 9 Financial Instruments (2014)
IFRS 17 Insurance Contracts (2017)
Effective
Periods commencing on or after 1 January 2018
Periods commencing on or after 1 January 2023
IFRS 9 ‘Financial Instruments’
In July 2014, the IASB issued the final version of IFRS 9 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 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 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. In line with the deferral of the effective date of IFRS 17 to 1 January 2022 the IASB has
agreed to extend the IFRS 9 exemption for insurers to the same date. Brit has taken advantage of this temporary exemption and will
apply IFRS 9 for the period beginning 1 January 2023.
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 2023, 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 will ensure that Brit Limited can
meet all of its reporting requirements in 2023.
Basis of consolidation
2.2
The consolidated financial statements include the financial statements 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.
Non-controlling interests in the results are shown separately in the consolidated income statement, statement of comprehensive
income, consolidated statement of changes in equity and statement of financial position respectively.
The financial statements of the subsidiaries are prepared up to 31 December each year. Consolidation adjustments are made
to convert subsidiary financial statements from local GAAP into IFRS 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. The acquisition method
of accounting is used to account for business combinations by the Group.
Included within the financial statements 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.
Brit Limited Annual Report 2020
87
Financial Statements
2
Accounting policies and basis of preparation (continued)
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 2020 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, and participated as a member with an 18.46% share
of the 2018 year of account of, Syndicate 2988 at Lloyd’s. The Group also participated as a member with a 60.70% share of the 2020
year of account of Syndicate 2988 at Lloyd’s. Consequently, 18.46% of the 2018 year of account, as well as 60.70% of the 2020 year
of account, has been consolidated into the financial position and performance in the Group’s financial statements. The Group did not
participate on Syndicate 2988’s 2019 year of account.
Associates are those entities over which the Group has the power to exercise significant influence but not control. The
Group’s investments in associated undertakings are 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.
Product classification
2.3
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’.
Business combinations
2.4
The acquisition method of accounting is used for business combinations. The cost of an acquisition is measured as the aggregate
of the consideration transferred, measured at acquisition date fair value and the amount of any non-controlling interest (NCI) in the
acquiree, where relevant. Acquisition-related costs are expensed as incurred. Where goodwill or a bargain purchase arises, this
is accounted for in accordance with the policy set out in Note 2.5.7(a).
When the Group acquires a business, it assesses the identifiable assets acquired and liabilities assumed, measured initially
at their fair values at the acquisition date, for appropriate classification and designation in accordance with the contractual terms,
economic circumstances and pertinent conditions at the acquisition date. This includes the separation of embedded derivatives
in host contracts by the acquiree. No reclassification of insurance contracts is required as part of the accounting for the business
combination. Thus, insurance contracts are classified on the basis of the contractual terms and other factors at the inception of the
contract or modification date.
The group recognises any non-controlling interest in the acquired entity on an acquisition-by-acquisition basis either at fair value
or at the non-controlling interest’s proportionate share of the acquired entity’s net identifiable assets.
If the business combination is achieved in stages, any previously held equity interest is remeasured at its acquisition date fair value
and any resulting gain or loss is recognised in profit or loss.
Any contingent consideration will be recognised at fair value at the acquisition date. Contingent consideration that is classified
as equity is not remeasured and its subsequent settlement is accounted for within equity. Contingent consideration that is classified
as an asset or liability within or outside the scope of IAS 39 is measured at fair value through profit or loss (FVTPL).
88
Brit Limited Annual Report 2020
notes to the consolidated financial statements Financial Statements
Other accounting policies
Insurance contracts
2.5
2.5.1
(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.
Brit Limited Annual Report 2020
89
Financial Statements
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 deferred and
amortised. Premiums ceded and claims reimbursed are presented on a gross basis in the consolidated income statement and
statement of financial position as appropriate.
2.5.2 Revenue recognition
Revenue is measured by the Group based on the consideration to which it expects to be entitled through contracts with customers
(net of refunds). Amounts collected on behalf of third parties are excluded from revenue. When control of a service is transferred
to a customer, the related revenue is then recognised.
(a) Management fee income
The Group receives administration and broking fees from non-aligned syndicates, in accordance with management agreements
that are agreed on an annual basis and specify the services to be provided. These services are in relation to ‘effectively managing
and operating’ the syndicate and are therefore provided continuously throughout the year. As a result, these services are treated
as a single performance obligation. The price is fixed with no variable element and is matched against the single performance
obligation. Consequently, the passage of time is used to measure the amount of fees and commission to be recognised.
(b) Underwriting agency fee income
The Group also receives commissions for the placement or underwriting of policies on behalf of other insurers. Such commissions,
which are measured as a portion of the policy premium, are recognised at the later of the policy inception date or when the policy
placement has been completed.
Brit also receives fees in respect of the costs and expenses of establishing and administering Lloyd’s consortia and conducting the
underwriting on their behalf. The services provided are classed as ‘establishing and administering’ the consortium and are provided
continuously throughout the year. As a result, this is treated as a single performance obligation and measured in accordance with
the measurement bases set out in the relevant consortium agreement.
90
Brit Limited Annual Report 2020
notes to the consolidated financial statements Financial Statements
Investment return
2.5.3
Investment income comprises all interest and dividend income and realised and unrealised gains and losses less investment
management fees. Interest income is recognised using the effective interest method. Dividend income is recognised when the
shareholders’ right to receive the payment is established.
Realised gains and losses on investments are calculated as the difference between net sales proceeds and cost and are recognised
when the sale transaction occurs.
Unrealised gains and losses on investments are calculated as the difference between the valuation at the date of the statement
of financial position and the valuation at the last statement of financial position or purchase price, if acquired during the year.
Unrealised investment gains and losses include adjustments in respect of unrealised gains and losses recorded in prior years which
have been realised during the year and are reported as realised gains and losses in the current year’s income statement.
2.5.4 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.
Investments
2.5.5
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 minimise
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 instruments’ stated rates of interest.
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Accounting policies and basis of preparation (continued)
2.5.6 Derivatives
Derivative financial instruments include foreign exchange contracts, forward rate agreements, interest rate futures, currency and
interest rate swaps and other financial instruments that derive their value mainly from underlying interest rates, foreign exchange
rates, credit indices, commodity values or equity instruments. All derivatives are initially recognised in the statement of financial
position at their fair value, which represents their cost. They are subsequently remeasured at their fair value, with 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.
Intangible assets
2.5.7
(a) Goodwill
Goodwill is initially measured at cost, being the excess of the fair value of the consideration transferred and the amount recognised
for non-controlling interests and any previous interest held, over the net identifiable assets acquired and liabilities assumed. If those
amounts are less than the fair value of the net identifiable assets of the business acquired, the difference is recognised directly
in profit or loss as a bargain purchase.
After initial recognition, goodwill is not amortised but is measured at cost less any accumulated impairment losses. Goodwill
is tested for impairment annually or more frequently if events or circumstances indicate that it might be impaired. For the purposes
of impairment testing, goodwill acquired in a business combination is allocated to an appropriate cash generating unit (CGU)
that is expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquiree are assigned
to those units.
Where goodwill has been allocated to a CGU and part of the operation within that unit is disposed of, the goodwill associated with
the disposed operation is included in the carrying amount of the operation when determining the gain or loss on disposal of the
operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of and the
portion of the cash-generating unit retained.
(b) 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.
(c) Trade names
Trade names 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 carrying value of the trade names is reviewed for impairment annually by reference to the expected future
profit streams to be earned from the CGUs to which the trade names relate, with any impairment in value being charged to the
income statement.
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(d) Computer software
Acquired computer software licences are capitalised based on 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.
(e) Distribution channels
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, not exceeding a period of 15 years.
(f) Employee-related intangibles
A non-compete agreement in favour of the Group, signed upon acquisition of a subsidiary, and non-compete clauses in certain
employee contracts acquired in business combinations have been recognised at fair value. These are considered to be finite life
assets and, as such, are amortised on a straight-line basis over their expected useful economic lives, not exceeding a period
of three years.
(g) Regulatory licences
Regulatory licences 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 do not expire and will provide benefits over an indefinite future period and are therefore
not subject to an annual amortisation charge. The carrying value of the licences is reviewed for impairment annually by reference
to the expected future profit streams to be earned from the respective licences, with any impairment in value being charged to the
income statement.
2.5.8 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.
Impairment
2.5.9
Goodwill, syndicate participation rights, trade names and regulatory licenses are not subjected to amortisation but are tested annually
for impairment as they are assets 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.
2.5.10 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.
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Accounting policies and basis of preparation (continued)
Income taxes
2.5.11
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. If the deferred income tax arises
from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction
affects neither accounting nor taxable profit or loss, it is not recognised.
Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the date of the
statement of financial position and are expected to apply when the related deferred income tax asset is realised or the deferred
income tax liability is settled.
Deferred income tax assets are recognised to the extent that it is probable that future taxable profit will be available against which
the temporary differences can be utilised.
Deferred income tax relating to items recognised in other comprehensive income is also recognised in other comprehensive income.
Deferred income tax is provided on temporary differences arising on investments in subsidiaries and associates, except where
the Group controls the timing of the reversal of the temporary difference and it is probable that the temporary difference will not
reverse in the foreseeable future.
Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against
current tax liabilities and when the deferred income taxes relate to the same fiscal authority.
Deferred tax assets and liabilities are not discounted.
2.5.12 Employee benefits
The Group operates a number of defined contribution schemes. It also makes payments into a number of personal money purchase
pension plans. Contributions in respect of these schemes are charged to the income statement in the period to which they relate.
The Group also operates a defined benefit pension scheme. The asset recognised in the statement of financial position in respect
of the defined benefit scheme is the fair value of the scheme assets less the present value of the defined benefit obligation which
is determined by discounting the estimated future cash outflows. The discount rate is based on market yields at the reporting date
of high-quality corporate bonds that have terms to maturity which approximate to those of the related pension liability. An asset
is recognised only to the extent that it is considered available in the form of future refunds from the plan, in particular taking into
consideration any minimum funding requirements that apply to the plan.
Actuarial gains and losses are recognised immediately through other comprehensive income.
The Group determines the net interest expense/income on the net defined benefit liability/asset for the period by applying the discount
rate used to measure the defined benefit obligation at the beginning of the annual period to the net defined benefit liability/asset.
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.
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2.5.13 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 upon a change in the market share price of the underlying shares or at the
valuation date.
Provisions and contingencies
2.5.14
Provisions are liabilities with uncertainties in the amount or timing of payments. Provisions are recognised if there is a present
obligation as a result of past events, it is probable that an outflow of resources embodying economic benefits will be required
to settle the obligation, and a reliable estimate of the amount of the obligation can be made at the date of the statement
of financial position.
A contingent liability is a possible obligation that arises from past events or a present obligation that is not recognised as it is not
probable that an outflow of resources will be required to settle the obligation or the amount of obligation cannot be measured with
sufficient reliability. A contingent liability is disclosed but not recognised.
Leases
2.5.15
The Group leases various offices under rental contracts that are typically from 1 to 15 years but may have extension options. Lease
terms are negotiated on an individual basis and contain a wide range of terms and conditions. Leased assets are recognised as right-
of-use assets and corresponding liabilities are recorded at the date at which the leased assets are available for use by the Group.
Assets and liabilities arising from a lease are initially measured on a present value basis.
Lease liabilities include the net present value of the following lease payments:
• fixed payments (including in-substance fixed payments), less any lease incentives receivable;
• variable lease payments that are based on an index or a rate, initially measured using the index or rate as at the
commencement date; and
• payments of penalties for terminating the lease, if the lease term reflects the Group exercising that option.
Lease payments to be made under reasonably certain extension options are also included in the measurement of the liability.
The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be readily determined, which
is generally the case for leases in the Group, the lessee’s incremental borrowing rate is used, being the rate that the individual lessee
would have to pay to borrow the funds necessary to obtain an asset of similar value to the right-of-use asset in a similar economic
environment with similar terms, security and conditions. To determine this, the Group uses recent third-party financing received
by the individual lessee (where available) and, if necessary, makes adjustments to reflect subsequent changes in financing conditions
and other adjustments specific to the lease (for example, to reflect lease term, country of leased asset, contract currency
and security).
The Group is exposed to potential future increases in variable lease payments based on an index or rate, which are not included
in the lease liability until they take effect. When adjustments to lease payments based on an index or rate take effect, the lease liability
is reassessed and adjusted against the right-of-use asset.
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Accounting policies and basis of preparation (continued)
Lease payments are allocated between principal and finance cost. The finance cost is charged to profit or loss over the lease period
so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period.
Right-of-use assets are measured at cost comprising the following:
• the amount of the initial measurement of lease liability;
• any lease payments made at or before the commencement date less any lease incentives received;
• any initial direct costs, and
• restoration costs.
Right-of-use assets are generally depreciated over the shorter of the asset’s useful life and the lease term on a straight-line basis.
Payments associated with short-term leases and leases of low-value assets are recognised on a straight-line basis as an expense
in profit or loss. Short-term leases are leases with a term of 12 months or less.
Extension and termination options are included in a number of leases across the Group. These are used to maximise operational
flexibility in terms of managing the assets used in the Group’s operations. Most of the extension and termination options held are
exercisable only by the Group and not by the respective lessor.
2.5.16 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.
2.5.17 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.
2.5.18 Other financial liabilities
The Group has designated its financial liabilities in respect of third-party investments in consolidated structured entities and
investment funds 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 other vehicles or investment funds in which those entities have invested. Gains or losses in respect to change in fair value
is recognised through the income statement.
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2.5.19 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.
2.5.20 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.
2.5.21 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.
2.5.22 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.
2.5.23 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.
2.5.24 Non-current assets (or disposal groups) held for sale
Non-current assets (or disposal groups) are classified as held for sale if their carrying amount will be recovered principally through
a sale transaction rather than through continuing use and a sale is considered highly probable. They are measured at the lower
of their carrying amount and fair value less costs to sell, except for assets such as deferred tax assets, assets arising from
employee benefits, financial assets and investment property that are carried at fair value and contractual rights under insurance
contracts, which are specifically exempt from this requirement.
An impairment loss is recognised for any initial or subsequent write-down of the asset (or disposal group) to fair value less costs
to sell. A gain is recognised for any subsequent increases in fair value less costs to sell of an asset (or disposal group), but not
in excess of any cumulative impairment loss previously recognised. A gain or loss not previously recognised by the date of the sale
of the noncurrent asset (or disposal group) is recognised at the date of derecognition.
Non-current assets (including those that are part of a disposal group) are not depreciated or amortised while they are classified
as held for sale. Interest and other expenses attributable to the liabilities of a disposal group classified as held for sale continue
to be recognised.
Non-current assets classified as held for sale and the assets of a disposal group classified as held for sale are presented separately
from the other assets in the balance sheet. The liabilities of a disposal group classified as held for sale are presented separately
from other liabilities in the balance sheet.
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Critical accounting estimates and judgements in applying accounting policies
Introduction
3.1
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.
Estimation and judgement in relation to determining the ultimate liability arising from claims made under insurance contracts
3.2
The estimation of the ultimate liability arising from claims made under insurance contracts is the Group’s most critical accounting
estimate. There are several sources of uncertainty that need to be considered in the estimate of the amounts that the Group will
ultimately pay to settle such claims. Significant areas requiring estimation and judgement include:
• Estimates of the amount of any liability in respect of claims notified but not settled and incurred but not reported claims (IBNR)
to be included within provisions for inwards insurance and reinsurance contracts;
• The corresponding estimate of the amount of outwards reinsurance recoveries which will become due as a result of the
estimated claims on inwards business;
• The recoverability of amounts due from reinsurers; and
• Estimates of the proportion of exposure which has expired in the period as represented by the earned proportion of premiums written.
The assumptions used and the manner in which these estimates and judgements are made are set out below, including the reserving
process for the estimation of gross, and net of reinsurance, ultimate premiums and claims:
• Quarterly statistical data is produced in respect of gross and net premiums and claims (paid and incurred);
• Projections of ultimate premiums, reinstatement premiums and claims are produced by the internal actuarial department using
standard actuarial projection techniques (e.g. Basic Chain Ladder, Bornhuetter-Ferguson, Initial Expected Loss Ratio). The Basic
Chain Ladder and Bornhuetter-Ferguson projection methods are based on the key assumption that historical development
of premiums and claims is representative of future development. Claims inflation is taken into account in the Initial Expected Loss
Ratio selections but is otherwise assumed to be in line with historical inflation trends, unless explicit adjustments for other drivers
of inflation such as legislative developments are deemed appropriate;
• Some classes of business have characteristics which do not necessarily lend themselves easily to statistical estimation
techniques, e.g. due to low data volumes. In such cases, for example, a policy-by-policy review may also be carried out
to supplement statistical estimates;
•
In the event of catastrophe losses, 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; and
• Following review of the actuarial estimate, the Reserving Committee recommends the committee estimate to be adopted in the
financial statements.
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.
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At 31 December 2020, Brit has adopted a comprehensive approach to reserving for COVID-19 related losses, in line with its policy
of reserving on a ‘conservative best estimate’ basis and carrying an explicit risk margin above that ‘conservative best estimate’. Our
detailed analysis of the principal exposed classes has resulted in net COVID-19 related losses of US$271.4m, US$14.4m of which was carried
as an unexpired risk reserve recognised in respect events dated after 31 December 2020. Our main exposures to COVID-19 relate to our
Contingency and Casualty Treaty accounts, with lower levels of exposure in Property, Property Treaty and Personal Accident. Significant
uncertainties remain around the 2020 loss estimates given the complexities of the pandemic. Furthermore, as the pandemic continues,
there remains uncertainty in relation to contingency business and events scheduled for 2021, with questions remaining as to factors such
as the roll out and effectiveness of vaccines, and the roadmap to reducing or ending restrictions. We continue to monitor developments, the
legal landscape and all impacted areas of our business.
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$4,792.7m (2019: US$4,296.7m) as set out in Note 21 to the financial statements. The
amount of reinsurance recoveries estimated at that date is US$1,493.0m (2019: US$1,345.3m).
Estimation of pipeline premiums
3.3
Written premiums include pipeline premiums of US$725.3m (2019: US$735.6m) 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.
Estimation involved in impairment testing of intangible assets
3.4
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 calculations use projected profit streams based on cash flow
forecasts and are approved by management. The indefinite useful life intangible assets of the Group consist of goodwill, syndicate
participation rights, trade names and US state authorisation regulatory licenses. The carrying amount at the date of the statement
of financial position was as follows: goodwill: US$45.9m (2019: US$45.9m); trade names: US$0.5m (2019: US$0.5m); syndicate participation
rights: US$70.8m (2019: US$70.8m); and regulatory licenses: US$7.5m (2019: US$7.5m). As at 31 December 2020 regulatory licenses were
recorded in the statement of financial position within the line ‘Assets classified as held for sale’.
For further information on intangible assets, refer to Note 17.
Judgements made in respect of lease accounting
3.5
The accounting for leases under IFRS 16 requires an incremental borrowing rate to use as the discount rate for the leases. Brit has
taken advantage of the practical expedient in IFRS 16 to apply a single discount rate to its portfolio of leases. The property leases
do not explicitly or implicitly state interest rates, therefore unsecured borrowing rates for individual leases have been estimated
by using the borrowing rate for the group in the jurisdictions that the leases are held.
Extension and termination options are included in a number of leases across the Group. These are used to maximise operational
flexibility in terms of managing the assets used in the group’s operations. Most of the extension and termination options held are
exercisable only by the group and not by the respective lessor. Management have exercised judgement in determining whether there
is a significant expectation that these options would be exercised.
Estimation and judgements in respect of fair values of financial investments
3.6
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$4,056.6m (2019: US$3,640.6m). Determining the fair value of certain
investments requires estimation.
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Critical accounting estimates and judgements in applying accounting policies (continued)
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 2020, financial investments amounting to US$182.6m (2019: US$215.2m) 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 23.
Estimation of defined benefit plan assets or obligations
3.7
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$48.8m (2019: US$51.9m).
For further information, refer to Note 22.
Judgements in respect of the consolidation of structured entities
3.8
The Group holds investments in two Bermuda-domiciled special purpose vehicles, Versutus Limited and Sussex Capital Limited (which
is the sole investor in all but one segregated accounts and protected cells of two other special purpose vehicles, Sussex Re Limited
and Sussex Capital UK PCC Limited). The Group is therefore required to determine whether these entities (or segregated accounts
or protected cells 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 (iii) the ability to use that power to affect the amount of the Group’s returns.
The Group is exposed to variability of returns from the activities of these entities both through its direct investments in the
vehicles and through the receipt of fee income from services provided to those entities. As at 31 December 2020, 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 continued to consolidate these
entities (or relevant segregated accounts or protected cells thereof) during the financial year.
Estimation of deferred tax asset in respect of carried forward losses
3.9
The deferred tax asset includes an amount of US$52.5m (2019: US$80.3m) which relates to carried forward tax losses in respect
of Lloyd’s undeclared year of account losses for 2018, 2019 and 2020 which will be taxed under the Lloyd’s declaration basis in the
years 2021, 2022 and 2023 respectively.
While catastrophe losses have exceeded plan in three of the last five calendar years, reflecting both elevated natural catastrophe
activity and the impact of the COVID-19 pandemic, the projected syndicate results have been prepared on the basis that natural
catastrophe losses return to a modelled average level.
The Group has concluded that the deferred tax asset is recoverable based on the Lloyd’s approved plan for the year of account 2021 and
forecast profits for the Brit Group UK entities which are available for group relief. The losses can be carried forward indefinitely and have
no expiry date, however a further deferred tax asset of US$43.9m (2019: US$2.4m) has not been recognised on the basis that it is not yet
possible to measure the asset reliably due to further work required to forecast results beyond 2027 and the year of account for 2024.
100
Brit Limited Annual Report 2020
notes to the consolidated financial statements Financial Statements
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.
Insurance risk
4.1
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
Underwriting risk 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. The underwriting environment and the associated impact on premium rates,
including trends due to the underwriting cycle, are 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 primarily writes 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. Primarily using the Lloyd’s platform to underwrite, subjects the Group to a number
of underwriting risks. The Group relies on the efficient functioning of the Lloyd’s market. If for any reason Brit Syndicates Limited
(BSL) was restricted or otherwise unable to write insurance through the Lloyd’s market, there would be a potentially material
adverse effect on the Group’s business. 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.
The Group also writes business through the Sussex Capital collateralised reinsurance platform. Through Sussex Re Limited the
platform writes direct collateralised property catastrophe reinsurance in addition to providing collateralised reinsurance to Brit’s
Property Treaty portfolio. Please refer to section 4.11 for details on the governance structure relevant to the Sussex platform.
(b) Controls over underwriting strategy
The Board sets the Group’s underwriting strategy for accepting and managing underwriting risk. The BSL Underwriting Committees
(including the Ki Portfolio and Underwriting Committee) and Brit Re Management Committee meet regularly 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 underwriting entity Boards. The underwriting risk policy also sets out a number of controls, which are
summarised below.
Brit Limited Annual Report 2020
101
Financial Statements
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 Committees
as well as by the Boards of the regulated entities. A dedicated Risk Aggregation Team also performs catastrophe modelling and
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/or portfolio managers, 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.
For Ki Syndicate 1618, business will be written via an electronic platform with risks selected by an algorithm. Notwithstanding
the different approach to distribution, unless otherwise stated, all of the controls discussed above apply to business written
by Syndicate 1618. Additionally, a dedicated Portfolio Management function monitors the business written on a daily basis to ensure
the portfolio is balanced and aggregations are controlled. The Ki Portfolio and Underwriting Committee is responsible for governance
and oversight of the portfolio and the underwriting process
(c) Underwriting risk profile
The core insurance portfolio of property, 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 Boards 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 84.31% of the GWP for the Group in 2020 was sourced in London. Other business
written includes that sourced through a wholly-owned service company in the United States, the business of which accounted for
11.93% of the Group’s annual GWP in 2020. The Group also writes business from its office in Bermuda, with Brit Global Specialty
Bermuda (BGSB) accounting for 3.43% of the Group’s annual GWP in 2020. In 2020, 35% of the Group’s GWP was reinsured
to third parties.
102
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notes to the consolidated financial statements Financial Statements
(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 four principal locations of the Group’s
policyholders are the United States, UK, Europe and Canada. The concentration of insurance premium before and after reinsurance
by the location of the underlying risk is summarised below:
2020
United States
United Kingdom
Canada
Europe (excluding UK)
Other (including worldwide)
2019
United States
United Kingdom
Canada
Europe (excluding UK)
Other (including worldwide)
Gross
premiums
written
US$m
Net
premiums
written
US$m
1,335.2
160.4
100.7
54.9
773.2
962.2
108.7
69.2
35.6
599.9
2,424.4
1,775.6
1,207.3
141.0
103.8
69.5
771.9
863.5
97.1
70.4
44.7
580.5
2,293.5
1,656.2
The nature of the London Market business is such that the insureds and reinsureds are often operating on a multi-territory
or worldwide basis and hence coverage is often provided on a worldwide basis. Premiums written on a multi-territory or worldwide
basis are included in ‘Other’ in the table above.
(e) Portfolio mix
The Group underwrites business in a wide variety of classes. The breakdown of premium before reinsurance by principal lines
of business is summarised below:
London – Direct
London – RI
Overseas distribution
Discontinued
Other
2020
Gross
premiums
written
%
58.2%
19.8%
18.0%
0.2%
3.8%
100%
US$m
1,361.7
427.5
462.0
11.2
31.1
2,293.5
2019
Gross
premiums
written
%
59.4%
18.6%
20.1%
0.5%
1.4%
100%
US$m
1,411.6
479.2
437.6
5.0
91.0
2,424.4
Brit Limited Annual Report 2020
103
Financial Statements
4
Risk management policies (continued)
London – Direct
Financial and Professional Liability
Programmes and Facilities
Property
Ambridge
Specialty
London – RI
Casualty Treaty
Property Treaty
Overseas distribution
BGSU
BGSB
Scion
Discontinued
Discontinued London
BGSU Discontinued
Other
Other underwriting and corporate
2020
Gross
premiums
written
%
58.2%
10.7%
21.8%
11.9%
1.1%
12.7%
19.8%
10.0%
9.8%
18.0%
11.9%
3.4%
2.7%
0.2%
0.2%
0.0%
3.8%
3.8%
100%
US$m
1,411.6
260.1
528.7
287.7
27.8
307.3
479.2
242.6
236.6
437.6
289.7
83.1
64.8
5.0
5.5
(0.5)
91.0
91.0
2,424.4
2019
Gross
premiums
written
%
59.4%
9.8%
25.2%
11.3%
2.0%
11.1%
18.6%
10.3%
8.3%
20.1%
13.3%
4.8%
2.0%
0.5%
0.5%
0.0%
1.4%
1.4%
US$m
1,361.7
224.2
577.8
259.1
46.7
253.9
427.5
236.6
190.9
462.0
305.9
110.1
46.0
11.2
11.2
0.0
31.1
31.1
2,293.5
100%
The Group underwrites a mix of both insurance and reinsurance, long and short-tail business across a number of geographic areas
which results in diversification within the Group’s portfolio. The business mix is monitored on an ongoing basis.
Underwriting risk is mainly driven by the Group’s US catastrophe exposure. Casualty Treaty is also a driver due to its long-tail
exposure. The risk profile of Brit’s underwriting portfolio is set out in more detail in the sections below.
(i) London – Direct
(1) Financial & Professional (FINPRO)
Directors & Officers
Financial institutions
Coverage provided to both directors and officers and companies for personal liability
or securities-related lawsuits.
Coverage of financial institutions for risks including internal and external fraud, and
liability to customers, shareholders and regulators.
Cyber, Privacy and Technology
Coverage of first- and third-party risks relating to network security, privacy and
data protection risks.
Healthcare
Coverage of hospitals, allied health and long-term care liability, predominantly in the US.
US Professional Indemnity
Coverage for professional negligence, errors and omissions, provided on both an open
market and a binding authority basis.
Financial and professional lines are typically long-tailed, meaning that on average the claims are not settled for several years after
the expiry of the policy, which increases exposure to claims inflation. Other key risks relate to increasing claim frequency due
to global recessions or systemic malpractice, as well as an increasing prevalence of cybersecurity risk. 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.
104
Brit Limited Annual Report 2020
notes to the consolidated financial statements
Financial Statements
(2) Facilities
Property Facilities
Coverage of commercial and residential properties, including high value homes, and
for financial institutions, loan servicers and property investors, including lender-placed
hazard and flood protection.
Accident and Health
Coverage for personal accident and medical expenses, kidnap and ransom, and contingency.
Transport
Long Tail Facilities
Coverage of commercial automobile physical damage and motor truck cargo across the
US and Canada.
Coverage of legal expenses for individuals, companies and affinity groups worldwide, and
of professional negligence, errors and omissions for small and medium-sized enterprises
in the US and Canada.
The Facilities portfolio consists of business written on a delegated authority basis. Property Facilities is exposed to catastrophe
claims, particularly US windstorms, earthquakes, floods and terrorist events, and to an increased frequency of fire and weather-
related events.
Accident and Health offers 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.
Contingency classes have exposure to multiple claims from a single event.
The key risks relating to Long Tail Facilities lie with increasing claim frequency due to global recessionary events
or systemic malpractice.
(3) Property
Political Risk and Trade Credit
Covers non-payment/performance of counterparties and confiscation, expropriation,
nationalisation, deprivation, sequestration or forced abandonment of overseas assets.
Political Violence
Covers physical damage and business interruption losses due to perils including terrorism,
riots, war, chemical, biological and/or radiological attacks.
Open Market and Worldwide Property Coverage of commercial property in the US and internationally.
UK Property
UK property package covers for individuals and small or medium sized enterprises.
Specie and Private Client
Coverage of fine art, specie and private client risks.
Brit provides property cover on a worldwide basis, with the largest exposures in the US. The open market, UK and worldwide
property lines are exposed to catastrophe claims, particularly windstorms, earthquakes, floods and terrorist events, and
to an increased frequency of fire and weather-related events. The Political Risk and Political Violence classes are exposed
to individual large losses arising from terrorist attacks or state action.
(4) Ambridge
Ambridge is a specialised managing general underwriter of complex risks, whose core products are Transactional Insurance,
Complex Management Liability Insurance and Intellectual Property Insurance.
(5) Specialty
Marine
Energy
EL & PL
Space
Coverage for cargo, hull, marine war and marine liability.
Coverage for Upstream and Midstream operations, including renewables.
Cover for UK and international liability business including Employers, Public, Products and
Environmental Liability across a range of territories.
Coverage for satellites at both launch and in orbit.
Brit Limited Annual Report 2020
105
Financial Statements
4
Risk management policies (continued)
The Specialty portfolio includes a diverse range of business lines. However, the portfolio is exposed to large losses on individual risks,
for example due to the loss of marine vessels or offshore oil platforms. The EL and PL portfolio is exposed to large losses resulting
from bodily injury claims, and the risk of latent claims arising from risks that were not envisaged at the time of writing the policy.
Outwards reinsurance is purchased to mitigate this large loss risk.
(ii) London Reinsurance
Property treaty
Casualty treaty
Catastrophe excess of loss, risk excess of loss reinsurance and retrocession.
Casualty and accident treaty reinsurance. Worldwide portfolio, writing predominantly
non-proportional reinsurance (including retrocession) 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.
The key exposures for Property Treaty are US windstorms and Californian earthquakes. Property Treaty also has exposures
to Japanese earthquakes and European windstorms.
The Casualty Treaty business is exposed 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.
(iii) Overseas Distribution
Brit Global Specialty USA (BGSU)
BGSU underwrites a range of E&S, admitted and reinsurance cover with a focus
on property, casualty and marine.
Brit Global Specialty Bermuda (BGSB) Property and casualty treaty reinsurance and retrocession business.
Scion
Underwrites commercial property, E&S co-tenancy risk, and E&S specialist casualty
insurance, focusing on excess liability (including Transportation) and primary
general liability.
The US portfolio is well-diversified, but is exposed to the risk of US catastrophe claims and individual large losses. A downturn in the
US economy could also lead to increased claims activity.
The Bermuda property treaty business is exposed to natural catastrophe events, particularly US windstorms and earthquakes.
The Bermuda casualty treaty business is exposed to man-made catastrophe claims such as terrorism, increased claims 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.
(iv) Aggregate exposure management
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.
The Group’s catastrophe risk tolerance is reviewed and set by the boards on an annual basis. The last review of catastrophe risk
tolerances was in March 2020.
Overall, the Group, for major catastrophe events (as measured by World Wide All Perils net, 1-in-5, 1-in-30 and 1-in-250 Aggregate
Exceedance Probability (AEP)) has tolerances for each return period expressed as a percentage of the Brit Limited Group net
tangible assets.
106
Brit Limited Annual Report 2020
notes to the consolidated financial statements
Financial Statements
Stress and scenario tests are also run, such as Lloyd’s and internally developed realistic disaster scenarios (RDSs). 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 2020 foreign exchange rates.
Modelled
Group loss at
1 October 2020
(Note 1)
Net
US$m
Gross
US$m
Modelled
Group loss at
1 October 2019
(Note 1)
Net
US$m
Gross
US$m
1,001
1,081
1,016
1,496
382
80
99
148
95
183
442
201
50
66
827
868
845
1,038
291
78
96
151
128
149
191
142
47
59
Estimated
Industry loss
US$m
111,000
131,000
81,000
80,000
77,664
16,504
29,357
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 non-modelled losses which result in actual losses
exceeding these figures. Moreover, the portfolio of insured risks changes dynamically over time.
(v) Sensitivity to changes in net claims ratio
The Group profit/loss on ordinary activities before taxation 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:
London – Direct
FINPRO, Progs and Facilities, Property, Ambridge, Specialty
London – Ri
Property and Casualty Treaty
Overseas Distribution
BGSB, BGSU, Scion
Discontinued
Discontinued London, BGSU Discontinued
Other
Total
Other Underwriting and Corporate
Movement
in profit
year ended
2020
%
57.1%
19.7%
US$m
9.7
3.4
3.1
18.0%
0.2
0.7
17.1
1.3%
3.9%
100%
Movement
in profit
year ended
2019
%
US$m
9.2
56.3%
3.0
3.0
0.6
0.6
16.4
18.5%
18.3%
3.4%
3.5%
100%
Subject to taxation, the impact on shareholders’ equity would be the same as that on profit following a change in the net claims ratio.
Brit Limited Annual Report 2020
107
Financial Statements
4
Risk management policies (continued)
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, 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,
catastrophe bonds and industry loss warranties where they are a cost-efficient means to ensure that the Group remains within
its catastrophe risk appetite.
•
In December 2020 Brit issued a catastrophe bond which provides US$300m of reinsurance protection to Syndicate 2987. The
bond has a four-year term and covers losses from US named windstorms and US earthquakes. The bond was issued in the UK via
Sussex Capital.
• 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 Outwards Reinsurance Committee oversees the purchase of reinsurance.
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.
• Basis risk on reinsurance which responds to something other than Brit’s Ultimate Net Loss.
These risks are managed through a combination of techniques and controls including risk aggregation 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.
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Brit Limited Annual Report 2020
notes to the consolidated financial statements Financial Statements
4.1.3 Reserving risk
Reserving risk arises as the actual cost of losses for policyholder obligations incurred before 31 December 2020 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 and 2988’s reserving risk, and the Brit Reinsurance (Bermuda)
Limited Management Committee performs a similar function for Brit Reinsurance (Bermuda) Limited. The Ki Reserving Committee will
be responsible for managing Syndicate 1618’s reserving risk.
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 risk aggregation 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 21.
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 Committees 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 BSL 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.
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 21.
Investment risk management
Introduction
4.2
4.2.1
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).
Investment governance framework
4.2.2
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.
Brit Limited Annual Report 2020
109
Financial Statements
4
Risk management policies (continued)
The BSL Investment Committee and the Brit Reinsurance (Bermuda) Limited Management Committee 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 Limited (HWIC) and a range of other 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 underwriting entity within the Group 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 cash flow profile for investments which would minimise the sensitivity of the Group’s solvency position
to changes in interest and exchange rates. The Group seeks to implement this through the use of cash, investments and foreign
exchange forward contracts in the respective currencies. The investment guidelines for each entity stipulate duration limits and the
positioning and sensitivity for both the asset and solvency position is reported quarterly.
Investment management
4.2.5
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.
Market risk
Introduction
4.3
4.3.1
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 section 4.4 Credit risk.
110
Brit Limited Annual Report 2020
notes to the consolidated financial statements Financial Statements
Interest rate risk
4.3.2
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 2020
Cash and cash equivalents
Financial investments
At 31 December 2019
Cash and cash equivalents
Financial investments
1 year or less
US$m
1 to 3 years
US$m
3 to 5 years Over 5 years
US$m
US$m
Equities
US$m
Total
US$m
775.7
2,228.8
3,004.5
–
553.0
553.0
–
564.1
564.1
–
334.0
334.0
–
775.7
376.6 4,056.5
376.6 4,832.2
520.1
2,367.5
2,887.6
–
455.3
455.3
–
232.2
232.2
–
181.7
181.7
–
403.9
520.1
3,640.6
403.9
4,160.7
The duration of the investment portfolio is set within an allowable range relative to the targeted duration and monitored
on a quarterly basis.
As the claims liabilities are measured on an undiscounted basis, the reported liabilities are not sensitive to changes in interest rates.
Therefore, there is a balance to be struck between targeting a longer duration to protect the solvency position against movements
in interest rates, and targeting a shorter duration that will reduce the possible volatility around the income statement.
Sensitivity to changes in investment yields
The sensitivity of the profit to the changes in investment yields is set out in the table below. The analysis is based on the information
at 31 December 2020.
Impact on profit before tax
Increase
25 basis points
50 basis points
100 basis points
Decrease
25 basis points
50 basis points
100 basis points
Subject to taxation, the effect on shareholders’ equity would be the same as the effect on profit.
2020
US$m
2019
US$m
(17.7)
(35.3)
(70.6)
17.6
35.1
70.2
(11.6)
(23.2)
(46.5)
11.5
22.9
45.9
Brit Limited Annual Report 2020
111
Financial Statements
4
Risk management policies (continued)
4.3.3 Currency risk
Introduction
Currency risk is the risk that movements in exchange rates impact the financial performance or solvency position of the Group.
The Group matches assets to liabilities for each of the main currencies. Group capital is held in proportion to the liabilities,
to minimise the impact on solvency and distributable earnings from movements in exchange rates. The split of assets and liabilities
for each of the Group’s main currencies, converted to US dollars, is set out in the tables below:
USD
US$m
GBP
conv.
US$m
CAD $
conv.
US$m
EUR €
conv.
US$m
AUS $
conv.
US$m
Total
conv.
US$m
At 31 December 2020
Total assets
Total liabilities
Net assets/(liabilities) excluding the effect of currency derivatives
6,294.9
4,866.7
1,428.2
1,079.8
1,201.3
(121.5)
769.8
346.2
423.6
Adjustment for foreign exchange derivatives
Adjusted net assets
At 31 December 2019
Total assets
Total liabilities
Net assets/(liabilities) excluding the effect of currency derivatives
1,048.3
(115.7)
Adjusted for foreign exchange derivatives
Adjusted net assets
81.2
1,129.5
226.2
110.5
127.9
88.8
(314.9)
1,556.1
(32.7)
108.7
5,490.8
4,442.5
1,081.0
1,196.7
700.2
324.3
375.9
(321.3)
54.6
323.3
331.6
(8.3)
78.1
69.8
330.7
306.3
24.4
(4.4)
20.0
79.9 8,547.7
87.6 6,833.4
(7.7)
1,714.3
20.1
–
12.4
1,714.3
69.9
82.9
7,672.6
6,352.7
(13.0)
1,319.9
18.3
5.3
–
1,319.9
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 24.
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 revalued 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.
112
Brit Limited Annual Report 2020
notes to the consolidated financial statements
Financial Statements
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 and items recorded as non-monetary assets and liabilities under IFRS. The analysis is based on the information
at 31 December 2020.
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
2020
US$m
2019
US$m
23.0
46.1
26.6
53.3
(23.0)
(46.1)
(26.6)
(53.3)
Subject to taxation, the effect on shareholders’ equity would be the same as the effect on profit.
Other price risk
4.3.4
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.
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 2020.
Impact on profit before tax
Increase in fair value
10%
20%
30%
Decrease in fair value
10%
20%
30%
Subject to taxation, the effect on shareholders’ equity would be the same as the effect on profit.
2020
US$m
2019
US$m
64.1
128.2
192.3
69.0
137.9
206.9
(64.1)
(128.2)
(192.3)
(69.0)
(137.9)
(206.9)
Brit Limited Annual Report 2020
113
Financial Statements
4
Risk management policies (continued)
Credit risk
4.4
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; and
• 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.
Investment credit risk
4.4.1
Investment credit risk management process
The Group Board has overall responsibility for investment credit risk. The investment guidelines and investment policy set out clear
limits and controls around the level of investment credit risk. The Group has established concentration guidelines that restrict the
exposure to any individual counterparty. The investment guidelines further limit the type, credit quality and maturity profile of both
the Group’s cash and investments. In addition, the investment risk framework further limits potential exposure to credit risk through
aggregate investment risk limits. The UK Investment Committee chaired by Simon Lee, a non-executive Director of Brit Syndicates
Limited, is responsible for the immediate oversight of the Group’s UK investments and the Brit Reinsurance (Bermuda) Limited board
is responsible for the immediate oversight of the Group’s Bermuda investments.
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 2020
Financial investments
Derivative contracts
Cash and cash equivalents
At 31 December 2019
Financial investments
Derivative contracts
Cash and cash equivalents
AAA
US$m
AA
US$m
A
US$m
P-1
US$m
P-2
US$m
1,663.9
–
174.6
1,838.5
1,469.4
–
150.1
1,619.5
337.9
–
103.6
813.2
–
385.5
441.5
1,198.7
347.6
–
0.8
348.4
577.7
–
303.8
881.5
–
–
19.7
19.7
–
–
7.8
7.8
–
–
38.4
38.4
–
–
19.0
19.0
BBB and
below
US$m
471.3
–
53.9
525.2
478.4
–
31.7
510.1
Equities
US$m
Not rated
US$m
Total
US$m
376.6
–
–
376.6
403.9
–
–
403.9
393.6 4,056.5
14.9
775.7
14.9
–
408.5
4,847.1
363.6
15.7
6.9
386.2
3,640.6
15.7
520.1
4,176.4
The table above gives an indication of the level of credit worthiness of assets that are most exposed to credit risk. The ratings are
mainly sourced from Standard & Poor’s and where these are not available an equivalent rating agency.
114
Brit Limited Annual Report 2020
notes to the consolidated financial statements
Financial Statements
Insurance credit risk
4.4.2
Insurance credit risk management process
The Credit Committee chaired by the Group Chief Financial Officer is responsible for the management of credit risk arising from
insurance activities.
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 Credit Committee. The reinsurer security
list, which sets out the list of approved reinsurance counterparties, is reviewed at least annually and following any significant change
in risk profile, which includes any changes to reinsurers’ financial ratings. Credit risk appetite limits are set for reinsurance entities
and groups to limit accumulations of risk. These positions are monitored quarterly against current balance sheet exposures and
in relation to a number of extreme loss scenarios.
Reinsurance aged debt is monitored and managed against the management risk appetite limits set by the Credit Committee. A bad
debt provision is held against all non-rated reinsurers or any reinsurer where there is deemed to be a specific risk of non-payment.
Any breaches of credit risk tolerance and/or appetite are reported to the Risk Oversight Committee and the Board at least quarterly.
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 2020
Reinsurance assets
Insurance receivables
At 31 December 2019
Reinsurance assets
Insurance receivables
AAA
US$m
AA
US$m
A
US$m
Collateral
US$m
Not rated
US$m
Total
US$m
5.7
–
5.7
3.4
–
3.4
860.8
–
860.8
785.8
–
785.8
461.1
–
461.1
327.4
–
327.4
144.2
–
144.2
21.2
1,152.8
1,493.0
1,152.8
1,174.0
2,645.8
174.0
–
174.0
54.7
1,091.3
1,345.3
1,091.3
1,146.0
2,436.6
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 2020, collateral of US$144.2m (2019: US$174.0m) had been drawn against reinsurance assets.
The following table shows movements in impairment provisions during the year:
2020
Opening provision at 1 January
Strengthening for the year
Net foreign exchange differences
Closing provision at 31 December
2019
Opening provision at 1 January
(Release)/strengthening for the year
Net foreign exchange differences
Closing provision at 31 December
Impairment
provision
against
reinsurance
assets
US$m
Impairment
provision
against
insurance
receivables
US$m
–
0.5
–
0.5
–
–
–
–
11.0
(9.1)
(0.8)
1.1
11.7
0.3
(1.0)
11.0
Brit Limited Annual Report 2020
115
Financial Statements
4
Risk management policies (continued)
The following table shows the amount of insurance receivables past due but not impaired at the end of the year:
0-3 months past due
4-6 months past due
7-9 months past due
10-12 months past due
More than 12 months past due
2020
US$m
36.6
6.5
(0.3)
0.6
5.3
48.7
2019
US$m
16.2
29.7
0.6
0.4
2.5
49.4
Liquidity risk
4.5
Liquidity risk is the risk that the Group may encounter difficulty in meeting obligations associated with financial liabilities that are
settled by delivering cash or another financial asset. The predominant liquidity risk the Group faces is the daily calls on its available
cash resources in respect of claims arising from insurance contracts.
The Group monitors the levels of cash and cash equivalents on a daily basis, ensuring adequate liquidity to meet the expected cash
flow requirements due over the short-term.
The Group also limits the amount of investment in illiquid securities in line with the liquidity policy set by the Boards. This involves
ensuring sufficient liquidity to withstand claim scenarios at the extreme end of business plan projections, by reference to modelled
realistic disaster scenarios. Contingent liquidity also exists in the form of a Group revolving credit facility.
The tables below present the fair value of monetary assets and the undiscounted value of monetary liabilities of the Group into
their relevant maturing groups based on the remaining period at the end of the year to their contractual maturities or expected
repayment dates. Borrowings are stated at their nominal value at maturity.
Statement
of financial
position
US$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
1,764.1
4,056.6
14.9
1,152.8
775.7
718.2
2,228.9
14.3
1,152.8
775.7
7,764.1 4,889.9
494.2
553.0
–
–
–
1,047.2
255.3
564.1
0.4
–
–
819.8
296.4
334.0
0.2
–
–
630.6
–
1,764.1
376.6 4,056.6
14.9
1,152.8
775.7
7,764.1
–
–
–
376.6
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$m
5,813.0
9.2
314.5
62.0
620.7
2,342.6
9.2
130.0
–
620.7
1,497.9
–
–
–
–
816.9
–
–
–
–
1,155.6
–
184.5
–
–
–
–
–
62.0
–
5,813.0
9.2
314.5
62.0
620.7
6,819.4
3,102.5
1,497.9
816.9
1,340.1
62.0
6,819.4
31 December 2020
Assets
Reinsurance assets
Financial investments
Derivative contracts
Insurance receivables
Cash and cash equivalents
31 December 2020
Liabilities
Insurance contract liabilities
Derivative contracts
Borrowings
Other financial liabilities
Insurance and other payables
116
Brit Limited Annual Report 2020
notes to the consolidated financial statements
Financial Statements
Fair values
<1 year
US$m
1 to 3 years
US$m
3 to 5 years
US$m
>5 years
US$m
Equities
US$m
Total
US$m
Statement
of financial
position
US$m
1,345.3
3,640.6
15.7
1,091.3
520.1
Statement
of financial
position
US$m
4,296.7
14.2
316.2
75.5
676.0
404.9
2,367.5
15.3
1,091.3
520.1
435.4
455.3
–
–
–
890.7
233.9
232.2
–
–
–
466.1
Fair values
271.1
181.7
0.4
–
–
–
403.9
–
–
–
1,345.3
3,640.6
15.7
1,091.3
520.1
453.2
403.9
6,613.0
<1 year
US$m
1 to 3 years
US$m
3 to 5 years
US$m
>5 years
US$m
Equities
US$m
Total
US$m
6,613.0
4,399.1
1,190.6
14.2
140.0
–
676.0
1,321.0
–
–
–
–
749.7
–
–
–
–
749.7
1,035.4
–
182.9
–
–
1,218.3
–
–
–
75.5
–
75.5
4,296.7
14.2
322.9
75.5
676.0
5,385.3
5,378.6
2,020.8
1,321.0
31 December 2019
Assets
Reinsurance assets
Financial investments
Derivative contracts
Insurance receivables
Cash and cash equivalents
31 December 2019
Liabilities
Insurance contract liabilities
Derivative contracts
Borrowings
Other financial liabilities
Insurance and other payables
Operational risk
4.6
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 BSL Operations Committee, chaired by the Group Chief Operating Officer, is a key governance committee reporting to the
Executive Committee. The BSL Operations Committee is responsible for managing operational risk in line with the operational
risk policy and the risk tolerance and management appetite limits set by the BSL Board and management respectively. Each
individual risk committee is provided with relevant operational risk updates and these committees include 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.
A conduct risk framework is in place across the Group to ensure Brit’s products and services continue to meet the needs
of our customers.
Brit Limited Annual Report 2020
117
Financial Statements
4
Risk management policies (continued)
COVID-19
4.7
The COVID-19 pandemic originated in Hubei Province in China and has since spread across the globe. Governments have taken
various actions to contain the pandemic, including social distancing measures, travel restrictions and lockdowns, resulting in the
closure of certain businesses. This has given rise to insurance claims from various lines of business, with our Contingency (Event
Cancellation) and Casualty Treaty books being the most impacted. The pandemic has also caused significant volatility in the financial
markets. Although investment markets have substantially recovered from significant falls experienced in H1 2020, interest rates
remain at depressed levels given the economic outlook.
The Group has managed the risks associated with COVID-19 in line with the requirements of its risk management framework
and policies.
• Operational risk
COVID-19 has caused a temporary shift from an office-based working environment to a remote working environment for
all staff since 18 March 2020. Brit and its outsourced service providers have adapted well. Operational performance has
generally been strong.
All key business services have continued to operate with no material impact from COVID-19. The investment in 2019 in Microsoft
Office 365 and the decision to rollout laptops to all full-time employees has made working remotely relatively seamless.
Underwriting can be managed through PPL, Whitespace and reinsurance trading platforms, and underwriting and claims staff
contact details are available online or via the Brit App. The Claims team continues to service our policyholders in these challenging
circumstances.
We immediately put in place support mechanisms for our employees and we continue to communicate regularly to ensure
that people feel engaged and supported. We regularly monitor and report on the performance of controls and operational
effectiveness. The ongoing monitoring of the operational risk profile has not identified any material concerns or failings.
•
Insurance risk
COVID-19 has resulted in additional claims to the Group, principally relating to event cancellation covers. The Group has a rigorous
process for establishing reserves for insurance claim liabilities, including those associated with COVID-19. However, significant
uncertainties remain around loss estimates given that the pandemic is ongoing. We also continue to monitor the potential for
claims arising indirectly from the pandemic. For example, due to the global recession which may lead to an increased risk of moral
hazard, fraud and a more litigious environment generally.
The underwriting portfolio is actively managed to reflect market developments, and action has been taken to ensure Brit
is appropriately positioned for both the pandemic and the recessionary economic conditions. The Group is now applying
communicable disease exclusions across the vast majority of its business.
•
Investment and Market risk
Financial markets have experienced volatility in 2020. The investment portfolio is actively managed to reflect market
developments, and action was taken to ensure Brit’s portfolio is appropriately positioned for the recessionary economic conditions
and to take advantage of opportunities in asset prices where these arose. The volatility in investment returns experienced over
the course of 2020 is within the range of stress and scenario tests carried out by the Group.
• Credit risk
COVID-19 has caused economic disruption around the world with many businesses and individuals forced to cease business
activity in light of government lockdowns. As at 31 December 2020, the Group has not seen a material increase in defaults but
continues to monitor this closely.
• Solvency and Liquidity risk
As at 31 December 2020, the Group held a surplus of US$341.0m over its management capital requirements. All regulatory capital
requirements have been complied with by the Group’s individual insurance subsidiaries throughout 2020. It should be noted that
our regulatory capital requirements calculation as at 31 December 2020 included an allowance for the uncertainties associated
with COVID-19 as described above.
118
Brit Limited Annual Report 2020
notes to the consolidated financial statements Financial Statements
Brit continues to benefit from the support of the wider Fairfax Group, with capital contributions of US$524.0m provided during
the year to largely strengthen the resilience of the statement of financial position to further shocks.
Following the COVID-19 outbreak, the Group conducted stress testing of its underwriting subsidiaries’ liquidity resources, in order
to assess their ability to continue making claims payments as they fell due. This stress testing demonstrated their continued
ability to access sufficient liquidity, even in severe stress scenarios. At 31 December 2020, the Group held US$2,623.5m of cash
and short-dated government debt securities, and US$190.0m undrawn on its RCF.
The United Kingdom’s exit from the EU (Brexit)
4.8
The Brexit transition period ended on 31 December 2020 with a Trade and Cooperation Agreement (TCA) between the UK and the
EU being agreed on 24 December 2020. The TCA came into effect on 1 January 2021 replacing the existing arrangements under the
transition period. The key risk to Brit was considered to be the successful completion of the Part VII transfer to Lloyd’s Brussels
as Brit’s ability to service historical policies with EEA claims was dependent on this. The Part VII transfer was successfully completed
on 30 December 2020 as originally scheduled. It should be noted that Brit has been successfully writing EU business via Lloyd’s
Brussels since 1 January 2019. Further details of the Part VII transfer are given in Note 21(c).
Emerging risks
4.9
Brit undertakes a formal emerging risk review annually with the results reported to the Risk Oversight Committee and included in the
Own Risk & Solvency Assessment (ORSA) report. The review is an important part of the risk identification aspect of the RMF and
includes horizon scanning of the internal and external risk environment to identify potential new or developing risks to Brit. These
risks can then be included in the risk register and managed appropriately as required.
The emerging risk review has previously identified risks such as the United Kingdom’s exit from the EU (Brexit) and cyber risk. These risks
have been managed throughout their development and are now monitored as part of the business as usual risk management process.
4.9.1 Climate Change
Climate change has been recognised as an emerging risk in the ORSA since 2014 and has been an area of focus since having been
identified as a high priority by Brit’s 2018 emerging risks analysis. Its potential impact on the insurance industry is an area of focus
for the wider insurance market and its regulators.
The financial risks to insurers may include the potential for increased frequency and severity of weather-related natural
catastrophes, for example, hurricanes and wildfires. This year has seen the most active Atlantic hurricane season on record, with
30 named storms being recorded. Of these 12 made landfall in the US, six of which were category three hurricane strength or higher,
both statistics either equalling or setting new records. 2020 was also a record year for wildfires, with California seeing its first ever
‘gigafire’, a blaze that burns at least a million acres of land.
Climate change specific tests and scenarios have been included in both ORSAs and Brit’s Solvency II internal models. Brit is managing
the risks associated with climate change in line with the RMF and is embracing the latest regulatory guidance. This will continue to be
an area of management, Risk Committee and Board focus, with a multi-disciplinary Climate Change Risk Working Party having been
set up to consider the financial risks associated with Climate Change.
The three main areas of risk identified for Brit are natural catastrophes, liability claims and investment losses:
• Natural catastrophe risks relating to climate change are the risk of increased frequency and severity of weather-related
natural catastrophes. This could result in additional claims to Brit. We continuously monitor scientific studies, regularly review
the completeness of existing models and the application of the Brit view of risk. Brit’s exposure to natural catastrophe risks
is monitored and on an ongoing basis by the Risk Management Function.
• Climate change could result in additional liability claims. For example, there is the potential for claims against firms for their
contribution to climate change. While such claims have not generally been successful to date, there remains an ongoing risk.
Brit’s exposure is limited through limits on gross underwriting exposure and through the purchase of reinsurance.
•
Investment losses have the potential to arise from exposure to industries perceived to be contributing to climate change. Brit
has a diversified investment portfolio, with limits on exposure to individual issuers. Brit is developing metrics to strengthen its
understanding of the potential impacts of climate change on its investments.
Brit also actively considers the potential implications of climate change and sustainability on its investment and underwriting strategies,
how it should engage more widely on environmental and ethical issues, and its own sustainability initiatives.
Brit Limited Annual Report 2020
119
Financial Statements
4.10 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.
The Group’s available capital consists of net tangible assets, subordinated debt, letters of credit and contingent funding. This amounted
to US$1,881.3m as at 31 December 2020. This represented a surplus of US$341.0m over the management capital requirements.
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 2020, Brit primarily 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.
Sussex: Governance Structure
4.11
Sussex Capital is Brit’s collateralised reinsurance platform based in Bermuda which was launched on 1 January 2018. Sussex Capital
Limited has two segregated accounts operating as funds available for capital investment, referred to as The Diversified Fund and
Specialty Insurance Fund (the Funds). Through Sussex Re, it writes direct collateralised property catastrophe reinsurance and also
provides collateralised reinsurance to Brit’s Property Treaty portfolio.
Sussex Capital has an independent governance structure to manage its operations. This consists of a Board and three sub-
committees. The Board has overall responsibility for oversight of the business. The Valuation Committee is responsible for fund
valuation, settling claims and setting reserves, the Investment Committee ensures investments are made in line with the Funds
objectives, and the Management Committee oversees the day-to-day operations of the Funds.
The risks to Brit from Sussex Capital arise from two main sources: First, a direct investment risk due to the Group’s investment
in the Funds. Secondly, operational, reputational, and strategic risks relating to managing the Funds on behalf of external investors.
The direct investment risk is managed in the same way as the Group’s other investment risks, through oversight by the relevant
committees. The operational, reputational, and strategic risks are managed through the governance structure in place at Sussex
as described above. In particular, the Sussex Board has independent non-executive Directors with significant industry experience.
The Brit Group provides support (for example, catastrophe modelling) to assist Sussex’s operations and risk management.
Ki: Governance and Risk Management Framework
4.12
Ki is first fully digital and algorithmically-driven Lloyd’s syndicate offering instant capacity, accessible anywhere, at any time. It has
been approved by Lloyd’s to start writing business from 1 January 2021, writing a mix of lines that are either already underwritten
by other Brit Syndicates (S2987 and S2988) or other approved nominated lead.
Ki is managed by BSL, with its capital backing coming from a mix of Fairfax and Blackstone. In line with Brit’s Risk Management
Framework, risks to Ki and Syndicate 1618 are managed in the same way as Brit’s other syndicates, other than where
specifically noted above.
120
Brit Limited Annual Report 2020
notes to the consolidated financial statements Financial Statements
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 2020, the reportable segments identified were as follows:
•
•
‘London Direct’, which underwrites the Group’s international and US business, other than treaty reinsurance. In the main, London
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.
‘London 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.
•
‘Overseas Distribution’ writes business generated by BGSU and Scion in the US, and BGSB (Bermuda).
•
‘Discontinued’ represents lines on business which have been placed into run-off.
•
‘Other Underwriting’, includes the Group’s special purpose vehicles and Brit’s share of Syndicate 2988. The share of the Group’s
special purpose vehicles attributable to third-party underwriting capital providers is represented by the ‘gains on other financial
liabilities’.
•
‘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 2020
(31 December 2019: 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.
Information regarding the Group’s reportable segments is presented below.
Brit Limited Annual Report 2020
121
Other
corporate
US$m
–
–
–
–
–
Total
US$m
2,424.4
(648.8)
1,775.6
2,372.2
(661.5)
Financial Statements
5
Segmental information (continued)
(a) Income statement by segment
Year ended 31 December 2020
London
London
Direct Reinsurance
US$m
US$m
Total
underwriting
excluding
the effect
of foreign
exchange on
Total
underwriting
after the
effect of
foreign
exchange on
Other non-monetary non-monetary non-monetary
items
US$m
Effect of
foreign
exchange on
items
US$m
items
US$m
Overseas
Distribution Discontinued Underwriting
US$m
US$m
US$m
Gross premiums written
Less premiums ceded
1,411.6
479.2
437.6
5.0
91.0
2,424.4
(138.8)
(131.8)
(1.6)
(13.1)
(648.8)
–
–
2,424.4
(648.8)
(363.5)
1,048.1
1,386.8
(407.5)
979.3
18.5
–
6.9
–
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
Losses on other financial liabilities
Total revenue
Gross claims incurred
(1,045.5)
Reinsurers’ share
372.2
Claims incurred, net of reinsurance (673.3)
Acquisition costs – commission
(320.9)
Acquisition costs – other
(60.8)
Other insurance related expenses
(66.3)
Other expenses
–
Net foreign exchange losses
–
Total expenses excluding
1,004.7
340.4
472.1
(133.6)
338.5
12.2
–
1.4
–
352.1
(302.6)
37.1
(265.5)
(66.4)
(14.8)
(24.9)
–
–
305.8
432.5
(124.0)
308.5
8.5
–
1.8
–
318.8
(331.1)
73.3
(257.8)
(51.9)
(40.2)
(22.2)
–
–
3.4
33.4
(11.7)
21.7
3.2
–
–
–
24.9
(28.4)
11.3
(17.1)
(6.2)
(2.6)
–
–
–
77.9
52.0
13.9
1,775.6
2,376.8
(662.9)
–
1,775.6
(4.6) 2,372.2
(661.5)
1.4
65.9
3.9
–
19.6
(8.2)
1,713.9
46.3
–
29.7
(8.2)
(3.2)
–
–
–
–
1,710.7
46.3
–
29.7
(8.2)
–
10.2
(1.1)
(15.6)
2.2
1,710.7
56.5
(1.1)
14.1
(6.0)
81.2
1,781.7
(3.2)
1,778.5
(4.3)
1,774.2
(36.8)
11.4
(25.4)
(8.9)
(27.4)
(0.5)
–
–
(1,744.4)
505.3
(1,239.1)
(454.3)
(145.8)
(113.9)
–
–
(1,744.4)
505.3
(1,239.1)
(453.3)
(145.4)
(113.9)
–
4.6
–
1.0
0.4
–
–
4.6
–
–
–
–
–
–
(23.6)
(12.4)
(1,744.4)
505.3
(1,239.1)
(453.3)
(145.4)
(113.9)
(23.6)
(7.8)
finance costs
(1,121.3)
(371.6)
(372.1)
(25.9)
(62.2)
(1,953.1)
6.0
(1,947.1)
(36.0)
(1,983.1)
(116.6)
Operating loss
Finance costs
Share of net profit of associates
Loss on ordinary activities before tax
Tax charge
Loss for the year
(19.5)
(53.3)
(1.0)
19.0
(171.4)
2.8
(168.6)
(40.3)
(208.9)
(23.6)
2.0
(230.5)
(1.5)
(232.0)
Claims ratio
Expense ratio
Combined ratio
68.8%
45.7%
114.5%
78.4%
31.3%
109.7%
83.6%
37.1%
120.7%
72.6%
40.0%
112.6%
122
Brit Limited Annual Report 2020
notes to the consolidated financial statements
Financial Statements
Year ended 31 December 2019
Gross premiums written
Less premiums ceded
to reinsurers
Premiums written,
net of reinsurance
Gross earned premiums
Reinsurers’ share
Total
underwriting
excluding
the effect
of foreign
exchange on
Total
underwriting
after the
effect of
foreign
exchange on
Other non-monetary non-monetary non-monetary
items
US$m
Effect of
foreign
exchange on
items
US$m
items
US$m
Overseas
Distribution Discontinued Underwriting
US$m
US$m
US$m
London
London
Direct Reinsurance
US$m
US$m
1,361.7
427.5
462.0
11.2
31.1
2,293.5
(427.9)
(98.8)
(122.2)
(5.1)
16.7
(637.3)
–
–
2,293.5
(637.3)
933.8
1,326.4
(403.5)
328.7
401.2
(97.6)
339.8
425.0
(106.3)
47.8
38.7
17.7
1,656.2
2,244.7
(606.2)
–
5.0
(1.6)
1,656.2
2,249.7
(607.8)
Other
corporate
US$m
–
–
–
–
–
Earned premiums,
net of reinsurance
Investment return
Return on derivative contracts
Gain on business combination
Other income
Losses on other financial liabilities
Net foreign exchange gains
Total revenue
Gross claims incurred
Reinsurers’ share
922.9
18.9
0.2
–
11.8
–
–
953.8
(697.0)
263.0
Claims incurred, net of reinsurance (434.0)
(313.8)
Acquisition costs – commission
(62.0)
Acquisition costs – other
(54.8)
Other insurance related expenses
–
Other expenses
303.6
11.2
0.1
–
2.4
–
–
317.3
(247.5)
56.6
(190.9)
(55.2)
(15.0)
(20.8)
–
318.7
7.9
0.1
–
2.9
–
–
329.6
(311.0)
74.4
(236.6)
(52.4)
(43.9)
(24.6)
–
6.1
53.4
(16.5)
36.9
3.5
–
–
0.1
–
–
40.5
(9.5)
(17.2)
(26.7)
(10.5)
(5.4)
(1.7)
–
56.4
3.4
–
–
28.4
(2.6)
–
1,638.5
44.9
0.4
–
45.6
(2.6)
–
85.6
1,726.8
(18.4)
(7.9)
(26.3)
(11.4)
(23.9)
(3.6)
–
(1,283.4)
368.9
(914.5)
(443.3)
(150.2)
(105.5)
–
1,641.9
44.9
0.4
–
45.6
(2.6)
2.8
–
113.6
(18.0)
10.2
0.3
(7.9)
14.0
3.4
–
–
–
–
–
2.8
6.2
1,733.0
112.2
1,845.2
–
–
(1,283.4)
368.9
–
(1.3)
(0.4)
–
–
(914.5)
(444.6)
(150.6)
(105.5)
–
–
–
(1,283.4)
368.9
–
–
–
–
(20.3)
(914.5)
(444.6)
(150.6)
(105.5)
(20.3)
Total
US$m
2,293.5
(637.3)
1,656.2
2,249.7
(607.8)
1,641.9
158.5
(17.6)
10.2
45.9
(10.5)
16.8
Total expenses excluding
finance costs
(864.6)
(281.9)
(357.5)
(44.3)
(65.2)
(1,613.5)
(1.7)
(1,615.2)
(20.3)
(1,635.5)
89.2
Operating profit
Finance costs
Share of net profit of associates
Profit on ordinary activities before tax
Tax charge
Profit for the year
35.4
(27.9)
(3.8)
20.4
113.3
4.5
117.8
91.9
209.7
(23.7)
0.3
186.3
(6.4)
179.9
Claims ratio
Expense ratio
Combined ratio
47.0%
46.7%
93.7%
62.9%
30.0%
92.9%
74.2%
37.9%
112.1%
55.7%
40.1%
95.8%
Brit Limited Annual Report 2020
123
Financial Statements
5
Segmental information (continued)
b) Depreciation, amortisation and capital expenditure by segment
London
London
Direct Reinsurance
US$m
US$m
Overseas
Other
Distribution Discontinued Underwriting
US$m
US$m
US$m
Year ended 31 December 2020
Depreciation and impairment of property, plant and equipment
Amortisation of intangibles
Capital expenditure
Year ended 31 December 2019
Depreciation and impairment of property, plant and equipment
Amortisation of intangibles
Capital expenditure
3.7
4.2
3.9
4.3
3.5
4.1
1.2
1.4
1.4
1.4
1.1
1.4
3.1
1.8
2.3
2.7
1.3
4.3
0.1
0.1
0.1
0.2
0.1
0.2
0.8
3.2
–
0.7
2.7
0.1
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 five 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.
Total
US$m
8.9
10.7
7.7
9.3
8.7
10.1
Year ended
Year ended
31 December 31 December
2019
US$m
2020
US$m
Gross premiums written
United States
United Kingdom
Canada
Europe (excluding UK)
Other (including worldwide)
1,335.2
160.4
100.7
54.9
773.2
2,424.4
1,207.3
141.0
103.8
69.5
771.9
2,293.5
The nature of the London Market business is such that the insureds and reinsureds are often operating on a multi-territory
or worldwide basis and hence coverage is often provided on a worldwide basis. Premiums written on a multi-territory or worldwide
basis are included in ‘Other’ in the table above.
124
Brit Limited Annual Report 2020
notes to the consolidated financial statements
Financial Statements
6
Investment return
This Note shows the income generated through investing funds. It also shows the gains and losses generated on various types
of investment assets as a result of the movement in their market values.
Year ended 31 December 2020
Equity securities
Debt securities
Mortgages and loans
Specialised investment funds
Cash and cash equivalents
Total investment return before expenses
Investment management expenses
Total investment return
Year ended 31 December 2019
Equity securities
Debt securities
Specialised investment funds
Cash and cash equivalents
Total investment return before expenses
Investment management expenses
Total investment return
7
Return on derivative contracts
Investment
Net realised Net unrealised
income gains/(losses) (losses)/gains
US$m
US$m
US$m
Total
investment
return
US$m
6.3
63.8
0.2
–
2.9
73.2
(12.6)
60.6
5.7
71.8
–
9.8
87.3
(11.7)
75.6
(7.1)
13.0
–
1.6
–
7.5
–
7.5
(39.2)
(12.2)
(0.5)
–
(51.9)
–
(51.9)
(41.7)
64.5
–
(34.4)
–
(11.6)
–
(11.6)
129.7
22.4
(17.3)
–
134.8
–
134.8
(42.5)
141.3
0.2
(32.8)
2.9
69.1
(12.6)
56.5
96.2
82.0
(17.8)
9.8
170.2
(11.7)
158.5
This Note shows the effect on the income statement of derivative contracts held during the year, and which help manage exposure
to fluctuations in interest rates and foreign exchange rates. Derivatives are shown analysed between investment and currency
related derivatives, reflecting the way the business is managed.
Year ended
Year ended
31 December 31 December
2019
US$m
2020
US$m
Investment-related non-currency options
Currency forwards
Return on derivative contracts
(13.9)
12.8
(1.1)
(2.8)
(14.8)
(17.6)
Brit Limited Annual Report 2020
125
Financial Statements
8
Other income (including gains/(losses) on other financial liabilities)
This Note shows the analysis of other income generated in the year, including gains/(losses) on other financial liabilities.
Year ended
Year ended
31 December 31 December
2019
US$m
2020
US$m
Fees and commission from non-aligned syndicate
Change in value of ultimate parent company shares held by Brit
Net commission fee income from intermediary activities
Consortium income
Other
Other income
Change in value of other financial liabilities*
Total
6.9
(15.6)
18.5
2.9
1.4
14.1
(6.0)
8.1
12.7
0.3
28.0
3.2
1.7
45.9
(10.5)
35.4
*Other financial liabilities are investments by third parties in structured insurance and investment entities consolidated by the Group.
9
Net foreign exchange (losses)/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 losses of US$7.8m (2019: gains of US$16.8m) in the income statement in the year. Foreign
exchange gains and losses result from the translation of the statement of financial position items using closing exchange rates
and translation of income statement items using the exchange rates prevailing at the dates of the relevant transactions or at the
average rate for the period when this is a reasonable approximation. However, as an exception to this, IAS 21 ‘The Effects of Changes
in Foreign Exchange Rates’ requires that net unearned premiums and deferred acquisition costs (UPR/DAC), being non-monetary
items, remain at historic exchange rates. This creates a foreign exchange mismatch, the financial effects of which are shown
in the table below.
Year ended
Year ended
31 December 31 December
2019
US$m
2020
US$m
(Losses)/gains on foreign exchange arising from:
Translation of the statement of financial position and income statement
Maintaining UPR/DAC items in the income statement at historic rates
Net foreign exchange (losses)/gains
Principal exchange rates applied are set out in the table below.
Sterling
Canadian dollar
Euro
Australian dollar
(12.4)
4.6
(7.8)
14.0
2.8
16.8
Year ended
31 December
2020
US$m
Closing
Average
Year ended
31 December
2019
US$m
Closing
Average
0.779
1.340
0.876
1.447
0.732
1.274
0.817
1.296
0.783
1.327
0.893
1.438
0.755
1.297
0.891
1.423
In accordance with IAS 1 ‘Presentation of Financial Statements’, exchange gains and losses are presented on a net basis. They are
reported within income where they result in a net gain and within expenses where they result in a net loss.
126
Brit Limited Annual Report 2020
notes to the consolidated financial statements
Financial Statements
10
Acquisition costs and other operating expenses
This Note shows the analysis of costs incurred in acquiring and underwriting insurance contracts and the running costs of our
business during the year. We have separated out the more material costs in order to provide a more detailed insight into
our cost base.
Year ended 31 December 2020
Other
operating
expenses
US$m
Total
US$m
Acquisition
costs
US$m
Year ended 31 December 2019
Other
operating
expenses
US$m
Total
US$m
Acquisition
costs
US$m
Salary, pension and social security costs (Note 11)
Other staff related costs
Accommodation costs
Legal and professional charges
IT costs
Travel and entertaining
Marketing and communications
Amortisation and impairment of intangible assets
Depreciation and impairment of property, plant and equipment
Regulatory levies and charges
Other
Expenses before commissions
Commission costs
Total acquisition costs and other operating expenses
63.1
3.3
6.2
11.5
2.5
1.1
0.2
0.5
2.8
47.6
6.6
145.4
453.3
598.7
60.0
9.9
3.2
13.9
24.8
0.7
1.5
10.2
6.1
0.4
6.8
137.5
–
137.5
123.1
13.2
9.4
25.4
27.3
1.8
1.7
10.7
8.9
48.0
13.4
282.9
453.3
736.2
73.5
4.6
6.1
8.0
2.2
4.7
0.5
0.4
2.4
43.7
4.5
150.6
444.6
595.2
56.9
12.3
2.2
7.7
20.0
2.6
1.9
8.3
6.9
–
7.0
125.8
–
125.8
130.4
16.9
8.3
15.7
22.2
7.3
2.4
8.7
9.3
43.7
11.5
276.4
444.6
721.0
11
Staff costs
This Note gives a breakdown of the total cost of employing staff (including executive and non-executive Directors) and gives the
average number of people employed by the Group during the year.
Year ended
Year ended
31 December 31 December
2019
US$m
2020
US$m
Wages and salaries
Social security costs
Pension costs
Total staff costs
105.6
11.4
6.1
123.1
112.0
13.3
5.1
130.4
Brit Limited Annual Report 2020
127
Financial Statements
11
Staff costs (continued)
The average number of employees during the year, including executive and non-executive Directors, was as follows:
Year ended
Year ended
31 December 31 December
2019
Number
2020
Number
Front office staff
Underwriters
Claims staff
Other underwriting and direct support staff
Total front office staff
Back office staff
Management
Administration
Total back office staff
Total employees
213
65
163
441
118
195
313
754
213
58
156
427
107
176
283
710
‘Management’ includes non-executive Directors and employees who have other members of staff reporting to them.
12
Finance costs
Finance costs arise from interest due on moneys borrowed by the Group and any other amounts payable in respect of those
borrowings or borrowing facilities. Finance costs also includes interest payable on lease liabilities. The Group’s borrowings consist
of a revolving credit facility and listed unsecured subordinated debt, details of which are set out in Note 28.
Year ended
Year ended
31 December 31 December
2019
US$m
2020
US$m
Revolving credit facility and other bank borrowings
Interest payable on lease liabilities
Subordinated debt
Total finance costs
13
Auditor’s remuneration
7.9
1.6
14.1
23.6
7.9
1.8
14.0
23.7
The Group engages PricewaterhouseCoopers LLP to perform the audit of the Group and all subsidiaries except for the
Ambridge companies.
The remuneration of the auditors or their associates is analysed as follows:
Audit of the Group and Company financial statements
Audit of subsidiaries
Audit related assurance services
Total audit and audit related assurance services
Total non-audit services
Total audit and non-audit services
128
Brit Limited Annual Report 2020
Year ended
Year ended
31 December 31 December
2019
US$m
2020
US$m
0.5
1.3
0.1
1.9
–
1.9
0.6
1.2
0.1
1.9
–
1.9
notes to the consolidated financial statements
Financial Statements
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 (‘Camargue’)
On 30 August 2016, the Group acquired 50% of the share capital of Camargue for ZAR65.5m plus £0.3m (US$4.9m) and entered into
a call and a put option to purchase the remaining 50% in 2021. The investment in Camargue is measured using the equity accounting
method. The principal place of business of Camargue is South Africa. Camargue is a leading managing general underwriter of
a range of specialised insurance products and specialist liability solutions in South Africa and is an important trading partner for Brit.
The summarised statement of financial position of Camargue and reconciliation to the carrying amount is as follows:
Statement of financial position
Current assets
Non-current assets
Total assets
Current liabilities
Non-current liabilities
Total liabilities
Net assets
50% not owned by Brit
Acquisition fair value, result since acquisition and other adjustments
Carrying value
Income statement
Commission revenue
Operating expenses
Net profit
50% not owned by Brit
Share of net profit of associate
31 December 31 December
2019
US$m
2020
US$m
6.7
1.7
8.4
(5.7)
(0.1)
(5.8)
2.6
(1.3)
5.0
6.3
5.6
1.6
7.2
(4.8)
(0.1)
(4.9)
2.3
(1.2)
5.0
6.1
31 December 31 December
2019
US$m
2020
US$m
6.4
(4.4)
2.0
(1.0)
1.0
5.4
(4.2)
1.2
(0.6)
0.6
Brit Limited Annual Report 2020
129
Financial Statements
14
Investments in associated undertakings (continued)
Sutton Special Risk Inc. (‘Sutton’)
On 2 January 2019, Brit Insurance Holdings Limited, acquired 49% of the issued shares of Sutton for a total purchase consideration
of CAD$17.2m and entered into a forward contract to purchase the remaining 51% in 2024. Sutton is a Canadian managing general
underwriter of a range of specialised insurance products, including Accident and Health. The summarised statement of financial
position of Sutton and reconciliation to the carrying amount is as follows:
Statement of financial position
Current assets
Non-current assets
Total assets
Current liabilities
Total liabilities
Net assets
51% not owned by Brit
Acquisition fair value, result since acquisition and other adjustments
Carrying value
Income statement
Commission revenue
Operating expenses
Net profit
51% not owned by Brit
Share of net profit of associate
31 December 31 December
2019
US$m
2020
US$m
16.2
3.8
20.0
(15.4)
(15.4)
4.6
(2.3)
11.9
14.2
16.2
3.0
19.2
(16.4)
(16.4)
2.8
(1.4)
11.9
13.3
31 December 31 December
2019
US$m
2020
US$m
7.8
(5.8)
2.0
(1.0)
1.0
8.0
(6.6)
1.4
(0.7)
0.7
130
Brit Limited Annual Report 2020
notes to the consolidated financial statements
Financial Statements
15
Non-controlling interests
This Note provides summarised financial information for each subsidiary that has non-controlling interests that are material to the
Group. The amounts disclosed are before inter-company eliminations.
During 2020, Ki Financial Limited was incorporated and received initial funding from investors, including Brit Limited, to support the
initial underwriting activities of Ki syndicate 1618. As at 31 December 2020, the Group holds 20.0% of the share capital but a majority
of the voting rights in the company.
The summarised financial information of Ki Financial Limited, before inter-company eliminations, is as follows:
Statement of financial position
Current assets
Non-current assets
Total assets
Current liabilities
Total liabilities
Net assets
Accumulated NCI
Comprehensive Income statement
Loss for the period
Other comprehensive income
Total comprehensive income
Loss allocated to NCI
Statement of Cash flows
Cash flows from operating activities
Cash flows from investing activities
Cash flows from financing activities
Net increase in cash and cash equivalents
31 December
2020
US$m
25.6
130.6
156.2
6.0
6.0
150.2
121.7
31 December
2020
US$m
(5.2)
–
(5.2)
(2.7)
31 December
2020
US$m
(2.0)
(129.0)
155.4
24.4
Brit Limited Annual Report 2020
131
Financial Statements
16
Tax expense
Income tax is tax charged on 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 charged to the income statement
Current tax:
Current taxes on income for the year
Overseas tax on income for the year
Double tax relief
Adjustments in respect of prior years
Total current tax
Deferred tax:
Relating to the origination and reversal of temporary differences
Adjustments in respect of prior years
Total deferred tax
Total tax charged to the income statement
Year ended
Year ended
31 December 31 December
2019
US$m
2020
US$m
–
(0.1)
(0.1)
1.1
0.3
1.3
(2.6)
(0.2)
(2.8)
(1.5)
2.0
(1.6)
0.4
1.2
1.8
3.4
(10.6)
0.8
(9.8)
(6.4)
Overseas tax and double tax relief principally arise from taxes suffered as a result of the Group’s operations at Lloyd’s. Double tax
relief is effectively limited to an amount equal to the tax due at the UK tax rate on the same source of income.
(b) Tax credited to other comprehensive income
Year ended
Year ended
31 December 31 December
2019
US$m
2020
US$m
Deferred tax credit on actuarial losses on defined benefit pension scheme
1.8
6.4
(c) Tax reconciliation
The tax on the Group’s (loss)/profit before tax differs from the theoretical amount that would arise based on the weighted average
rate of tax as follows:
Year ended
Year ended
31 December 31 December
2019
US$m
2020
US$m
(Loss)/profit on ordinary activities before tax
Tax calculated at weighted average rate of tax on income
Non-deductible and non-taxable items
Taxes on income at rates in excess of the domestic rate and where credit is unavailable
Effect of temporary differences not recognised
Effect of revaluation of deferred tax following change in rate of tax
Other items
Adjustments to tax charge in respect of prior years
Total tax charged to income statement
(230.5)
32.6
(0.7)
1.2
(42.0)
7.2
0.1
0.1
(1.5)
186.3
(3.2)
1.8
1.2
7.2
(15.8)
(0.2)
2.6
(6.4)
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
The main rate of UK corporation tax of 19% has been used in the calculation of the UK’s deferred tax assets and liabilities
as at 31 December 2020. This rate is expected to remain at 19% under current UK legislation.
132
Brit Limited Annual Report 2020
notes to the consolidated financial statements
Financial Statements
17
Intangible assets
An intangible asset is an asset without any physical substance but which has long-term value to the business. With the exception
of goodwill, syndicate participation rights at Lloyd’s, trade names and the regulatory licences, which are classified as indefinite
life assets, the value of these assets are reduced according to their useful life by way of amortisation. Amortisation is included
as an expense in the income statement.
Goodwill
US$m
Trade
names
US$m
Distribution
Syndicate
channels Participations
US$m
US$m
Regulatory
licenses
US$m
Employee
related
US$m
Software
US$m
Total
US$m
Cost:
At 1 January 2019
Additions
Additions through acquisitions
Foreign exchange effect
At 31 December 2019
At 1 January 2020
Additions
Assets reclassified as held-for-sale
Disposals
Foreign exchange effect
At 31 December 2020
Amortisation:
At 1 January 2019
Charge for the year
Foreign exchange effect
At 31 December 2019
At 1 January 2020
Charge for the year
Disposals
Foreign exchange effect
At 31 December 2020
Carrying amount:
At 31 December 2019
At 31 December 2020
–
–
45.9
–
45.9
45.9
–
–
–
–
45.9
–
–
–
–
–
–
–
–
–
–
–
0.5
–
0.5
0.5
–
–
–
–
0.5
–
–
–
–
–
–
–
–
–
9.8
–
42.6
–
52.4
52.4
–
–
–
–
52.4
5.1
2.7
–
7.8
7.8
3.5
–
–
11.3
70.8
–
–
–
70.8
70.8
–
–
–
–
70.8
–
–
–
–
–
–
–
–
–
7.5
–
–
–
7.5
7.5
–
(7.5)
–
–
–
–
–
–
–
–
–
–
–
–
45.9
45.9
0.5
0.5
44.6
41.1
70.8
70.8
7.5
–
–
–
1.2
–
1.2
1.2
–
–
–
–
1.2
–
0.3
–
0.3
0.3
0.4
–
0.7
0.9
0.5
36.7
5.2
0.9
1.4
44.2
44.2
6.5
–
(7.8)
1.4
44.3
15.3
5.7
0.8
21.8
21.8
6.8
(7.8)
1.1
21.9
124.8
5.2
91.1
1.4
222.5
222.5
6.5
(7.5)
(7.8)
1.4
215.1
20.4
8.7
0.8
29.9
29.9
10.7
(7.8)
1.1
33.9
22.4
22.4
192.6
181.2
Additional information
The gross cost of software fully amortised but still in use is US$13.6m (2019: US$8.1m). All software additions in 2020 and 2019 were
internally developed. The software amortisation charge for the year of US$6.8m (2019: US$5.7m) is included in the ‘other operating
expenses’ line in the income statement. There were no impairments to software in 2020 (2019: nil). Assets not yet in use with a total
cost of US$1.1m (2019: US$0.6m) are included in software. Further information is given in Note 5(b).
Brit Limited Annual Report 2020
133
Financial Statements
17
Intangible assets (continued)
Impairment testing
Goodwill
Goodwill is reviewed annually for impairment and has been allocated to the Ambridge cash-generating unit (CGU):
Ambridge Group
31 December 31 December
2019
US$m
2020
US$m
45.9
45.9
The goodwill of the Group relates to the acquisition of Ambridge in 2019 and the recoverable amounts have been determined using
a value in use calculation.
The value in use calculation uses cash flow projections based on business plans approved by senior management covering a three-
year period and subsequent cash flows which assume a nil growth rate. These cash flows have been discounted using a risk adjusted
discount rate of 9.9% (2019: 9.2%). In the goodwill impairment review, the recoverable amount significantly exceeds the carrying
value of the CGU including its associated goodwill and it is considered that a reasonably possible change in key assumptions will not
cause the carrying value of the CGU to exceed its recoverable amount.
The key assumptions used for the impairment calculations were that cash flows and profit levels will mainly depend on the level
of commissions earned by Ambridge. The business plan reflects senior management’s best estimates based on historical experience,
growth rates for the respective insurance industry sector, the insurance pricing cycle and expected results from ongoing and future
strategic business unit product and distribution strategies.
Syndicate participations
Syndicate participations are indefinite life intangible assets and are therefore reviewed annually for impairment. They have been
allocated to cash-generating units (CGUs) as follows:
Global Specialty Direct
Global Specialty Reinsurance
Total
31 December 31 December
2019
US$m
2020
US$m
52.7
18.1
70.8
52.7
18.1
70.8
These CGUs are based upon operating segments which earn revenues and incur expenses and whose results are regularly reviewed
by management.
The recoverable amounts of the CGUs have been determined using a value in use calculation.
Each value in use calculation uses pre-tax cash flow projections based on business plans approved by senior management covering
a three-year period and subsequent cash flows which assume a nil growth rate. These cash flows have been discounted using
a risk adjusted pre-tax discount rate of 9.9% (2019: 9.2%). In each syndicate participation impairment review, the recoverable
amount significantly exceeds the carrying value of the CGU including its associated syndicate participations and it is considered that
a reasonably possible change in key assumptions will not cause the carrying value of the CGU to exceed its recoverable amount.
The key assumptions used for the impairment calculations were that cash flows and profit levels will mainly depend on the level
of premiums written by each strategic business unit, the rates at which these premiums are written and the claims activity on both
prior and future underwriting years. The business plans reflect senior management’s best estimates based on historical experience,
growth rates for the respective insurance industry sector, the insurance pricing cycle and expected results from ongoing and future
strategic business unit product and distribution strategies.
Commissions and other insurance related expenses are assumed to remain materially in line with current amounts relative
to premium levels.
134
Brit Limited Annual Report 2020
notes to the consolidated financial statements
Financial Statements
Trade names
Trade names are indefinite life intangible assets and are therefore reviewed annually for impairment. They have been allocated
to cash-generating units (CGUs) as follows:
Ambridge Group
31 December 31 December
2019
US$m
2020
US$m
0.5
0.5
The trade names were acquired in 2019 as part of the Ambridge acquisition and the recoverable amounts have been determined
using a relief from royalty approach to estimate the fair value.
Each calculation of the current fair value of the trade names uses revenue projections based on business plans approved by senior
management. A royalty rate is applied as a percentage of the revenue stream and these cash flows have been discounted using
a risk adjusted discount rate of c.13%.
The key assumptions used for the impairment calculations are the level of projected revenue cash flows and the estimated royalty
rate. The revenue estimates reflect senior management’s best estimates based on historical experience, growth rates for the
respective industry sector and expected results from the product and distribution strategies of the CGUs. The royalty rate used
of 0.25% was determined post-acquisition following consideration of comparable market royalty rates.
Regulatory licenses
On 30 April 2018, as part of Brit’s acquisition of Commonwealth Insurance Company of America from TIG Insurance Company,
an intangible asset was recognised in respect of the US$7.5m paid for its operating licences in 48 US states.
The carrying amount of the Commonwealth business is to be recovered principally through a sale transaction so the assets,
including the regulatory licenses, and liabilities of this disposal group have been presented separately within the “assets classified
as held for sale” and “liabilities directly associated with assets classified held for sale” categories on the consolidated statement
of financial position.
Brit Limited Annual Report 2020
135
Financial Statements
18
Property, plant and equipment
This Note gives a breakdown of the type of assets in use such as computer equipment, office fixtures and fittings and furniture.
The value of these assets are reduced according to their useful life by way of depreciation. Depreciation is included as an expense
in the income statement. An annual assessment of the carrying value of these assets is carried out and, if necessary, an impairment
charge to the income statement is made.
Computers
and office
machinery,
furniture and
equipment
US$m
Right of
use assets
US$m
Office
refurbishment
US$m
Cost:
At 1 January 2019
Additions
Additions through acquisitions
Disposals
Foreign exchange effect
At 31 December 2019
At 1 January 2020
Additions
Disposals
Foreign exchange effect
At 31 December 2020
Depreciation:
At 1 January 2019
Charge for the year
Impairments
Disposals
Foreign exchange effect
At 31 December 2019
At 1 January 2020
Charge for the year
Disposals
Foreign exchange effect
At 31 December 2020
Carrying amount:
At 31 December 2019
At 31 December 2020
20.4
3.1
0.2
–
0.8
24.5
24.5
0.3
–
0.7
25.5
6.0
1.7
–
–
0.3
8.0
8.0
2.3
–
0.1
10.4
16.5
15.1
Total
US$m
82.5
4.9
2.0
(0.1)
3.2
92.5
92.5
1.2
(2.6)
2.5
93.6
14.7
9.1
0.2
(0.1)
0.7
24.6
24.6
8.9
(1.4)
1.0
33.1
11.7
0.9
0.3
–
0.4
13.3
13.3
0.9
(1.1)
0.3
13.4
8.7
1.7
–
–
0.3
10.7
10.7
0.9
(1.1)
0.4
10.9
50.4
0.9
1.5
(0.1)
2.0
54.7
54.7
–
(1.5)
1.5
54.7
–
5.7
0.2
(0.1)
0.1
5.9
5.9
5.7
(0.3)
0.5
11.8
2.6
2.5
48.8
42.9
67.9
60.5
The gross cost of property, plant and equipment fully depreciated but still in use is US$9.4m (2019: US$8.7m). The depreciation
charge for the year of US$8.9m (2019: US$9.1m) is included in the ‘other operating expenses’ line in the income statement. No
impairment charge was recognised in 2020 (2019: US$0.2m). A dilapidations provision of US$2.5m (2019: US$3.5m) has been set up
in respect of the refurbishment of rented property.
Further information on depreciation and capital expenditure by segment is given in Note 5(b).
136
Brit Limited Annual Report 2020
notes to the consolidated financial statements
Financial Statements
19
Deferred acquisition costs
Acquisition costs are costs incurred in underwriting insurance risks and include commissions paid to third parties and some
internally generated costs such as underwriter salaries. These costs are deferred and are charged to the income statement over
the duration of the contract. The movement in these deferred costs and releases to the income statement is shown in this Note.
At 1 January
Costs deferred during the year
Amortisation charge for the year
At 31 December
20
Deferred taxation
2020
US$m
2019
US$m
243.6
602.9
(599.2)
247.3
244.1
594.7
(595.2)
243.6
This Note describes the tax that may have to be paid in the future. Deferred tax arises from differences in the way that tax
is calculated for accounting purposes and tax purposes.
The deferred tax asset is attributable to temporary differences arising on the following:
At 1 January 2019
Movements in the year:
(Charged)/credited to income statement
Foreign exchange effect
At 31 December 2019
Set-off of deferred tax liabilities pursuant to set-off provisions
Net deferred tax asset at 31 December 2019
At 1 January 2020
Movements in the year:
(Charged)/credited to income statement
Foreign exchange effect
At 31 December 2020
Set-off of deferred tax liabilities pursuant to set-off provisions
Net deferred tax asset at 31 December 2020
Intangible
assets Underwriting
US$m
US$m
1.5
92.8
(0.6)
–
0.9
0.2
–
93.0
Other
US$m
3.9
1.0
(0.1)
4.8
Total
US$m
98.2
0.6
(0.1)
98.7
(57.6)
41.1
0.9
93.0
4.8
98.7
(0.3)
–
0.6
(32.7)
–
60.3
28.8
0.4
34.0
(4.2)
0.4
94.9
(45.1)
49.8
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 arose from significant catastrophe-related activity, which is not expected to recur. The losses can be carried forward
indefinitely and have no expiry date. Please see Note 3.9 for further detail on the estimation of deferred tax assets.
Deferred tax assets have not been recognised in respect of certain losses carried forward of US$16.8m (2019: US$18.8m) and
in respect of undeclared year of account losses of US$231.1m (2019: US$14.1m) 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.
Brit Limited Annual Report 2020
137
Financial Statements
20
Deferred taxation (continued)
Deferred tax assets arising on decelerated capital allowances of US$0.3m (2019: US$0.6m) have not been provided for due
to uncertainty over the timing of their utilisation.
The deferred tax liability is attributable to temporary differences arising on the following:
At 1 January 2019
Movements in the year:
(Charged)/credited to income statement
Acquisition of Ambridge
Tax relating to components of other comprehensive income (Note 16(b))
Foreign exchange effect
At 31 December 2019
Set-off of deferred tax assets pursuant to set-off provisions
Net deferred tax liability at 31 December 2019
At 1 January 2020
Movements in the year:
(Charged)/credited to income statement
Tax relating to components of other comprehensive income (Note 16(b))
Foreign exchange effect
At 31 December 2020
Set-off of deferred tax assets pursuant to set-off provisions
Net deferred tax liability at 31 December 2020
Intangible
Pensions
US$m
assets Underwriting
US$m
US$m
Other
US$m
Total
US$m
(9.1)
(13.8)
(17.5)
(1.7)
(42.1)
(14.9)
–
6.4
(0.6)
(18.2)
0.3
(10.5)
–
–
(24.0)
4.2
–
–
0.4
(12.9)
–
–
–
(0.8)
(2.5)
(10.4)
(10.5)
6.4
(1.0)
(57.6)
57.6
–
(18.2)
(24.0)
(12.9)
(2.5)
(57.6)
(0.4)
1.8
(0.3)
(2.0)
–
–
3.5
–
0.5
(17.1)
(26.0)
(8.9)
0.3
–
(0.8)
(3.0)
1.4
1.8
(0.6)
(55.0)
45.1
(9.9)
138
Brit Limited Annual Report 2020
notes to the consolidated financial statements
Financial Statements
21
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 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
Unexpired risk reserve
Claims incurred but not reported
Unearned premiums
Total gross liabilities
Recoverable from reinsurers
Claims reported and loss adjustment expenses
Claims incurred but not reported
Unearned premiums
Total reinsurers’ share of liabilities
Net
Claims reported and loss adjustment expenses
Unexpired risk reserve
Claims incurred but not reported
Unearned premiums
Total net insurance liabilities
31 December 31 December
2019
US$m
2020
US$m
1,783.3
12.4
2,997.0
4,792.7
1,020.3
5,813.0
1,705.1
–
2,591.6
4,296.7
969.4
5,266.1
578.2
914.8
1,493.0
271.1
1,764.1
550.2
795.1
1,345.3
282.8
1,628.1
1,205.1
12.4
2,082.2
3,299.7
749.2
4,048.9
1,154.9
–
1,796.5
2,951.4
686.6
3,638.0
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. It is typical to consider the attritional claims separately from the large claims, separately from the catastrophe losses.
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.
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.
Brit Limited Annual Report 2020
139
Financial Statements
21
Insurance and reinsurance contracts (continued)
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 is 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.
In addition to the above statistical techniques, alternative approaches are often considered 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. For example, losses from a catastrophe are typically formed from reviewing potential exposure
on a policy by policy basis and taking account of market intelligence to determine Brit’s share of the loss. The estimate of large claims
ultimate will typically be formed from estimating the number of unreported large claims, using the standard statistical techniques
described above, and multiplying this with the expected severity of such losses.
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. Where
outward reinsurance is impacted by seasonal claims variability, e.g. catastrophe covers, the earning of the premium is adjusted
to reflect the seasonality of the claims.
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 2020 exchange rates.
140
Brit Limited Annual Report 2020
notes to the consolidated financial statements Financial Statements
Ultimate gross claims
Underwriting year
2011
and prior
years
2012
2013
2014
2015
2016
2017
2018
2019
Intra Group
and other
underwriting
2020 adjustments
Total
Claims ratio:
At end of underwriting year 80.9% 76.1% 70.0% 70.2%
78.4% 71.6%
One year later
70.1% 73.6%
78.6% 72.4% 70.2% 73.3%
Two years later
78.3% 70.5% 69.9% 74.7%
Three years later
78.9% 73.2%
Four years later
71.3% 74.3%
77.4% 74.1% 70.7% 73.2%
Five years later
76.5% 73.5% 69.7% 72.8%
Six years later
76.4% 72.4% 68.2%
Seven years later
76.6% 71.5%
Eight years later
76.0%
Nine years later
75.7% 80.4%
89.3%
96.4% 84.6%
101.6%
101.2%
108.8%
108.8%
110.8%
76.6%
85.5%
89.3%
88.1%
89.4%
70.6%
71.4%
73.5%
72.5%
70.5%
70.5%
Total ultimate
gross claims at
31 December 2020
Less accumulated
gross paid claims
Unearned premium
portion of gross
ultimate claims
Claims handling
provision and other
corporate adjustments
Total outstanding
gross claims at
31 December 2020
US$m
US$m
US$m
US$m
US$m
US$m
US$m
US$m
US$m
US$m
US$m
US$m
10,200.2 954.3 969.4 1,127.4 1,035.6
1,372.1
1,751.0
1,671.9 1,465.7 1,438.3
113.8 22,099.7
(9,857.7) (848.9) (835.8) (928.9)
(764.6)
(959.8) (1,138.1)
(848.2)
(338.9)
(104.4)
(12.7) (16,638.0)
–
–
–
–
–
–
–
–
(59.5)
(634.5)
(41.4)
(735.4)
4.8
1.5
2.0
3.0
4.1
5.9
8.1
10.8
13.1
7.9
5.2
66.4
347.3 106.9
135.6
201.5
275.1
418.2
621.0
834.5 1,080.4
707.3
64.9
4,792.7
Brit Limited Annual Report 2020
141
Financial Statements
21
Insurance and reinsurance contracts (continued)
Ultimate net claims
Underwriting year
2011
and prior
years
2012
2013
2014
2015
2016
2017
2018
2019
Intra Group
and other
underwriting
2020 adjustments
Total
Claims ratio:
At end of underwriting year 86.7% 82.4% 75.4% 76.1%
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
77.6%
84.0% 78.1% 76.8% 79.2% 80.4%
81.1%
83.2% 77.8% 76.4% 78.3%
78.9%
81.3% 75.6% 76.4% 79.1%
76.3%
81.4% 76.6%
77.1% 77.8%
79.9% 76.7% 74.9% 77.4%
76.4%
78.7% 75.5% 73.6% 77.2%
78.2% 74.4%
78.1% 73.2%
77.8%
71.9%
95.7% 82.2% 89.5%
100.0%
100.7% 102.4% 94.5%
100.7% 106.8%
103.7%
83.1%
90.2%
91.6%
91.3%
92.0%
Total ultimate
net claims at
31 December 2020
Less accumulated
gross paid claims
Unearned premium
portion of gross
ultimate claims
Claims handling
US$m
US$m
US$m
US$m
US$m
US$m
US$m
US$m
US$m
US$m
US$m
US$m
7,555.6 739.0
740.5 864.6
811.2
944.6 1,089.6 1,158.0 1,024.9 1,069.3
112.3
16,109.6
(7,362.8) (673.2) (657.6) (725.8)
(614.5)
(688.7)
(703.8)
(588.7)
(270.6)
(88.7)
(14.8) (12,389.2)
–
–
–
–
–
–
–
–
(45.0)
(466.4)
(39.6)
(551.0)
provision, bad debt
provision and other
corporate adjustments
Total outstanding
net claims at
31 December 2020
4.2
1.5
2.1
3.0
4.1
6.0
8.2
11.0
13.9
8.0
68.3
130.3
197.0
67.3
85.0
141.8
200.8
261.9
394.0
580.3
723.2
522.2
126.2
3,299.7
The percentages in the gross and net triangles are shown on an ultimate loss basis inclusive of catastrophe losses by year of account.
The 2010, 2016, 2017 and 2018 years of account include the impact of natural catastrophes which occurred in the following calendar
year and which attached back to policies incepting in those respective years of account. The 2017 and prior years of account will
also be impacted by the loss portfolio reinsurance contract entered into in 2018 with RiverStone Managing Agency Limited (for and
on behalf of Lloyd’s syndicate 3500).
During 2020, the net aggregate reserve releases from prior years amounted to US$61.5m, which included US$16.5m release
in 2019 coupled with US$36.3m in 2018 and prior from 2987 and US$10.7m from other group entities. By comparison in 2019, the
net aggregate reserve releases from prior years amounted to US$47.9m, which included US$31.3m strengthening in 2018 partially
offset by a release US$70.4m in 2018 and prior from 2987 and US$7.4m from other group entities.
Reserves in London Direct experienced releases of US$66.3m (2019: US$68.8m), London RI experienced releases of US$24.3m
(2019: US$4.0m), Overseas Distribution experienced a strengthening of US$36.0m (2019: US$23.5m), Discontinued experienced
a strengthening of US$1.1m (2019: US$6.5m) and Other experienced releases of US$9.9m (2019: US$3.8m).
142
Brit Limited Annual Report 2020
notes to the consolidated financial statements
Financial Statements
(b) Movements in insurance and reinsurance contracts
(i) Claims and loss adjustment expenses
As at 1 January
Cash paid for claims settled in the year
Increase in liabilities
Net foreign exchange differences
As at 31 December
(ii) Unearned premiums
As at 1 January
Premiums written in the year
Premiums earned during the year
Net foreign exchange differences
As at 31 December
31 December 2020
Gross Reinsurance
US$m
US$m
Net
US$m
Gross
US$m
31 December 2019
Reinsurance
US$m
Net
US$m
4,296.7
(1,326.8)
1,744.4
78.4
4,792.7
391.4
(505.3)
(33.8)
(1,345.3) 2,951.4
(935.4)
1,239.1
44.6
(1,493.0) 3,299.7
4,348.5
(1,366.6)
1,283.4
31.4
(1,446.5) 2,902.0
(857.5)
914.5
(7.6)
509.1
(368.9)
(39.0)
4,296.7
(1,345.3)
2,951.4
31 December 2020
Gross Reinsurance
US$m
US$m
Net
US$m
Gross
US$m
31 December 2019
Reinsurance
US$m
Net
US$m
969.4
2,424.4
(2,372.2)
(1.3)
(282.8)
(648.8)
661.5
(1.0)
1,020.3
(271.1)
686.6
1,775.6
(1,710.7)
(2.3)
749.2
925.6
2,293.5
(2,249.7)
–
(253.3)
(637.3)
607.8
–
672.3
1,656.2
(1,641.9)
–
969.4
(282.8)
686.6
(c) Lloyd’s Part VII transfer
On 25 November 2020 the High Court sanctioned the transfer to Lloyd’s Insurance Company S.A. (LIC) of syndicates’ European
liabilities in accordance with Part VII of the Financial Services and Markets Act 2000. The scheme took effect on 30 December 2020,
whereupon all relevant policies (and related liabilities) underwritten by the Group’s syndicates for years of account between 1993
and April 2019 (or October 2020 in the case of German reinsurance) were transferred to LIC. On the same date, a 100% Quota
Share Reinsurance Agreement was entered into whereby LIC reinsured all risks on the same policies back to the relevant open
years of account of the syndicates that wrote the transferring policies and/or inherited liabilities on transferring policies through
Reinsurance to Close of earlier years of account.
The combined effect of the two transactions had no economic impact for the Group, and accordingly there is no impact
on the consolidated income statement or consolidated statement of financial position. Current year underwriting results for
the transferred policies have been reported in the same classes of business as in prior years, as the effective date of the
transfer was 30 December 2020, and in line with Society of Lloyd’s guidance no movements were processed on these policies
on 31 December 2020. In future years, results relating to these risks will be reported under the Reinsurance Accepted class
of business, reflecting the new contractual arrangement with LIC.
Subsequent to the year-end, on 4 January 2021, under the 100% Quota Share Reinsurance Agreement between the Syndicate and
LIC, the Group was required to set up advanced funds in segregated Part VII settlement accounts managed by the Managing Agent
on behalf of LIC from which claims with respect to transferred liabilities will be settled. As this transaction took place after the
end of the reporting period, there is no impact on the Group’s consolidated statement of financial position or consolidated income
statement as at 31 December 2020.
Brit Limited Annual Report 2020
143
Financial Statements
22
Employee benefits
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 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.
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 (2019: 16 years).
The scheme is approved by HMRC for tax purposes. The scheme is operated from a trust, which has assets which are held
separately from the Group. The trust is 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 2018 and identified a funding surplus of £9.5m.
Following the 2018 valuation, the Group agreed to continue to pay contributions of £2.0m a year until 31 July 2024. These
contributions are now paid into a designated Brit Group Services Limited bank account over which the scheme has a charge.
These contributions are payable by Brit Group Services Limited and backed-up by cross-company guarantees 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.
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
Closing statement of financial position
31 December 31 December
2019
US$m
2020
US$m
(222.2)
271.0
48.8
(193.3)
245.2
51.9
31 December 31 December
2019
US$m
2020
US$m
51.9
1.0
1.4
(5.5)
48.8
53.1
1.5
2.0
(4.7)
51.9
A net pension asset is recognised on the statement of financial position as there is an unconditional right of the Group to be refunded
the surplus in the scheme. The measurement of the net pension asset is impacted by a number of factors, including the actuarial
assumptions used, the effects of changes in foreign exchange rates, and the contributions paid to the scheme by the Group. The
Group expects this asset to be available as a refund to the sponsoring employer. Under UK legislation, surplus payments made
from a UK pension scheme to the sponsoring employer are received net of an income tax deduction of 35%.
144
Brit Limited Annual Report 2020
notes to the consolidated financial statements
Financial Statements
Net credit recognised in the income statement comprised:
Net interest on net defined benefit asset
31 December 31 December
2019
US$m
2020
US$m
1.0
1.5
This credit has been recognised in the ‘other operating expenses’ line in the income statement. Contributions to the Group’s defined
contribution pension arrangements are in addition to those set out in this note and are charged directly to the income statement.
The allocation of the scheme’s assets was as follows:
Equities
Index-linked UK government bonds
Liability Driven Investment funds
Other debt securities
Cash and net current assets
Gold and gold mining equities
Other scheme assets
Fair value of scheme assets
31 December 31 December
2019
US$m
2020
US$m
11.2
–
175.6
72.0
7.7
2.1
2.4
271.0
12.6
154.0
–
66.9
7.4
2.1
2.2
245.2
All scheme assets have quoted prices in active markets. The scheme does not invest directly in property occupied by the Group
or in financial securities issued by the Group.
Investment strategy
The Trustee determines the scheme’s investment strategy after taking appropriate advice from their investment consultants.
The management of the assets is delegated to Ruffer LLP and Insight Investments. The Trustee’s investment objectives are to ensure
that the scheme has adequate resources to meet the members’ entitlements under the Trust Deed and Rules as they fall due,
and thereafter to minimise long-term costs of the Scheme by maximising the return on the assets. Investment risk is managed
by investing in low risk assets which are expected to move in a similar way to the benefits. The assets include LDI which aims
to match a significant part of the scheme’s inflation-linked benefits and therefore help to reduce the Group’s exposure to interest
and inflation risks.
Movements in the present value of the defined benefit obligation were as follows:
Opening defined benefit obligation
Interest on defined benefit obligation
Remeasurements due to:
Changes in financial assumptions
Experience on benefit obligations
Foreign exchange effect
Benefits paid
Closing defined benefit obligation
31 December 31 December
2019
US$m
2020
US$m
193.3
3.9
27.7
(2.2)
7.6
(8.1)
222.2
174.5
4.8
19.2
0.5
7.5
(13.2)
193.3
Brit Limited Annual Report 2020
145
Financial Statements
22
Employee benefits (continued)
Movements in the fair value of the scheme assets were as follows:
Opening fair value of scheme assets
Interest income
Actual return excluding interest income
Foreign exchange effect
Benefits paid
Closing fair value of scheme assets
The principal actuarial assumptions at the year-end were:
Discount rate
Retail Prices Index (RPI) inflation
Consumer Prices Index (CPI) inflation
Pension increases in payment
Mortality assumptions:
Life expectancy of male aged 60 at statement of financial position date
Life expectancy of female aged 60 at statement of financial position date
Life expectancy of male retiring in 20 years’ time aged 60
Life expectancy of female retiring in 20 years’ time aged 60
31 December 31 December
2019
US$m
2020
US$m
245.2
4.9
20.1
8.9
(8.1)
271.0
227.6
6.4
15.0
9.4
(13.2)
245.2
31 December
2020
US$m
31 December
2019
US$m
1.29%
3.05%
2.20%
2.98%
27.8 years
30.0 years
29.4 years
31.5 years
2.11%
3.10%
2.30%
2.98%
27.8 years
29.9 years
29.3 years
31.4 years
The assumptions used to determine end-of-year benefit obligations are also used to calculate the following year’s cost.
Sensitivity analysis:
Assumption
Discount rate
Future RPI inflation increases
Future CPI inflation increases
Assumed life expectancy at age 60
Change in assumption
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$16m
Increase by US$2.9m
Increase by US$10.5m
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.
146
Brit Limited Annual Report 2020
notes to the consolidated financial statements
Financial Statements
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 gilt yields rise 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 judgements.
(b) Brit Group Services Limited – Defined Contribution Personal Pension Plan
Brit Group Services Limited operates a defined contribution group personal pension plan. The assets of the scheme are held
separately from those of the Group in an independently administered fund.
The pension cost charge represents contributions payable by Brit Group Services Limited to the fund and amounted to US$6.1m
(2019: US$5.5m).
At 31 December 2020 no contributions were payable to the fund (2019: 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$0.9m
(2019: US$0.9m).
At 31 December 2020 no contributions were payable to the fund (2019: nil).
(d) Brit Insurance Services USA Inc. – Nonqualified deferred compensation plan
Brit Insurance Services USA Inc. operates a ‘409(a) Nonqualified deferred compensation plan’. The assets of the scheme are not held
separately from those of the Group.
No pension payments were made by Brit Insurance Services USA Inc. to the fund in 2020 (2019: nil).
(e) BGS Services (Bermuda) Limited – Registered plan
BGS Services (Bermuda) Limited operates a registered plan for Bermudan employees. 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 BGS Services (Bermuda) Limited to the fund and amounted to US$51k
(2019: US$28k).
At 31 December 2020 no contributions were payable to the fund (2019: nil).
(f) BGS Services (Bermuda) Limited – Unregistered plan
BGS Services (Bermuda) Limited operates an unregistered plan for non-Bermudan employees. 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 BGS Services (Bermuda) Limited to the fund and amounted to US$37k
(2019: US$37k).
At 31 December 2020 no contributions were payable to the fund (2019: nil).
Brit Limited Annual Report 2020
147
Financial Statements
22
Employee benefits (continued)
(g) Sussex Capital Management Limited – Unregistered plan
Sussex Capital Management Limited operates an unregistered plan for non-Bermudan employees. 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 Sussex Capital Management Limited to the fund and amounted
to US$33k (2019: US$56k).
At 31 December 2020 no contributions were payable to the fund (2019: nil).
(h) Ambridge Partners LLC – 401(k) Safe Harbor Plan, Profit sharing plan and trust
Ambridge Partners LLC. 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. Employees may elect to contribute a percentage of their compensation. Ambridge Partners
LLC does not match employee contributions.
(i) Ambridge Europe Limited – Defined Contribution Personal Pension Plan
Ambridge Europe 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 Ambridge Europe Limited to the fund and amounted to US$80k
(2019: US$65k).
At 31 December 2020, contributions payable to the fund amounted to US$17k (2019: nil).
(j) Brit Reinsurance (Bermuda) Limited – Registered plan
Brit Reinsurance (Bermuda) Limited operates an unregistered plan for Bermudan employees. 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 Reinsurance (Bermuda) Limited to the fund and amounted
to US$18k (2019: US$30k).
At 31 December 2020 no contributions were payable to the fund (2019: nil).
148
Brit Limited Annual Report 2020
notes to the consolidated financial statements Financial Statements
23
Financial investments
This Note summarises the total value of the financial assets of the Group and shows how much has been invested in each class
of asset. It also explains how each asset is categorised under three different levels of hierarchy, the methods used to value assets
within each level and assets transferred between levels.
Equity securities
Debt securities
Mortgages and Loans
Specialised investment funds
Total
31 December 31 December
2019
US$m
2020
US$m
376.7
3,392.5
23.0
264.4
4,056.6
403.9
2,951.1
–
285.6
3,640.6
All financial investments have been designated as held at fair value through profit or loss.
Basis for determining the fair value hierarchy of financial instruments
The Group has classified the fair value measurements using a fair value hierarchy that reflects the significance of the inputs used
in making those measurements. The fair value hierarchy comprises the following levels:
(a) Level one – quoted prices (unadjusted) in active markets for identical assets;
(b) Level two – inputs other than quoted prices included within level one that are observable for the asset, either directly (i.e. as prices)
or indirectly (i.e. derived from prices); and
(c) Level three – inputs for the assets that are not based on observable market data (unobservable inputs).
Assets are categorised as level one where fair values determined in whole directly by reference to an active market relate to prices
which are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency and
those prices represent actual and regularly occurring market transactions on an arm’s-length basis, i.e. the market is still active.
For assets and liabilities that are recognised at fair value on a recurring basis, the Group determines whether transfers have
occurred between levels in the hierarchy by reassessing categorisation (based on the lowest level of input that is significant to the
fair value measurement as a whole) at the end of each reporting period. Fair values for level two and level three assets include:
• Values provided at the request of the Group by pricing services and which are not publicly available or values provided by external
parties which are readily available but relate to assets for which the market is not always active; and
• Assets measured on the basis of valuation techniques including a varying degree of assumptions supported by market
transactions and observable data.
For all assets not quoted in an active market or for which there is no active market, the availability of financial data can vary and
is affected by a wide variety of factors, including the type of financial instrument, whether it is new and not yet established in the
marketplace, and other characteristics specific to each transaction. To the extent that valuation is based on the models or inputs
that are unobservable in the market, the determination of fair value requires more judgement. Accordingly, the degree of judgement
exercised is higher for instruments classified in level three and the classification between level two and level three depends highly
on the proportion of assumptions used, supported by market transactions and observable data.
Brit Limited Annual Report 2020
149
Financial Statements
23
Financial investments (continued)
Valuation techniques
Level one
Inputs represent unadjusted quoted prices for identical instruments exchanged in active markets (where transactions occur with
sufficient frequency and volume). The fair values of securities sold short and the majority of the company’s equities are based
on published quotes in active markets. These also include government bonds and treasury bills issued in the 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’ 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.
Disclosures of fair values in accordance with the fair value hierarchy
31 December 2020
Equity securities
Debt securities
Mortgages and loans
Specialised investment funds
31 December 2019
Equity securities
Debt securities
Specialised investment funds
Level one
US$m
Level two
US$m
Level three
US$m
Total
US$m
247.7
1,739.3
–
–
–
1,637.8
–
249.2
129.0
15.4
23.0
15.2
376.7
3,392.5
23.0
264.4
1,987.0
1,887.0
182.6 4,056.6
220.7
1,443.2
–
–
1,492.7
268.8
183.2
15.2
16.8
403.9
2,951.1
285.6
1,663.9
1,761.5
215.2
3,640.6
All unrealised losses of US$11.6m (2019: gains of US$134.8m) and realised gains of US$7.5m (2019: losses of US$51.9m) on financial
investments held during the year, are presented in investment return in the consolidated income statement.
150
Brit Limited Annual Report 2020
notes to the consolidated financial statements
Financial Statements
Transfers between fair value levels
Fair values are classified as level one when the financial instrument or derivative is actively traded and a quoted price is available.
In accordance with the Group’s policy if an instrument classified as level one subsequently ceases to be actively traded,
it is immediately transferred out of level one. In such cases, instruments are classified into level two, unless the measurement of its
fair value requires the use of significant unobservable inputs, in which case it is classified as level three. All fair value measurements
above are recurring as they are required to be measured and recognised at the end of each reporting period.
Transfers from level one to level three
There were no equity transfers (2019: US$nil) from level one to level three during 2020.
Transfers from level two to level one
There were no equity transfers (2019: US$nil) from level two to level one during 2020.
Transfers from level three to level two
There were no equity transfers (2019: US$nil) from level three to level two during 2020.
Reconciliation of movements in level three financial investments measured at fair value
At 1 January 2019
Total gains/(losses) recognised in the income statement
Purchases
Sales
Foreign exchange gains
At 31 December 2019
Total losses recognised in the income statement
Purchases
Sales
Foreign exchange gains
At 31 December 2020
Equity
securities
US$m
Debt
securities
US$m
Mortgages
and loans
US$m
140.5
17.5
35.4
(11.0)
0.8
183.2
(9.0)
2.3
(48.4)
0.9
129.0
43.7
(15.3)
14.3
(27.9)
0.4
15.2
(0.1)
–
–
0.3
15.4
–
–
–
–
–
–
–
21.9
–
1.1
23.0
Specialised
investment
funds
US$m
14.8
2.0
–
–
–
16.8
(1.6)
–
–
–
15.2
Total
US$m
199.0
4.2
49.7
(38.9)
1.2
215.2
(10.7)
24.2
(48.4)
2.3
182.6
Total net losses recognised in the income statement under ‘investment return’ in respect of level three financial investments for
the period amounted to US$10.7m (2019 gains of: $4.2m). Included in this balance are US$6.3m of unrealised losses (2019: gains
of US$19.1m) attributable to assets still held at the end of the year.
Sensitivity of level three financial investments measured at fair value to changes in key assumptions
The following table shows the sensitivity of the fair value of level three financial investments to changes in key assumptions.
Equity securities
Debt securities
Mortgages and loans
Specialised investment funds
31 December 2020
31 December 2019
Effect of
possible
alternative
Carrying assumptions
(+/-)
amount
US$m
US$m
Effect of
possible
alternative
Carrying assumptions
(+/-)
US$m
amount
US$m
129.0
15.4
23.0
15.2
182.6
2.4
1.0
1.2
0.4
183.2
15.2
–
16.8
215.2
1.4
0.5
–
0.7
In order to determine reasonably possible alternative assumptions, the Group has monitored the price movements of the securities
invested on a month by month basis during 2020, or since acquisition if acquired during the year. This has resulted in an average
expected percentage change due to the change in assumptions, which forms the basis of this analysis.
Brit Limited Annual Report 2020
151
Financial Statements
24
Derivative contracts
This Note summarises the total value of the derivative contracts of the Group. It also explains how each derivative contract
is categorised under three different levels of hierarchy, the valuation methods used to value derivative contracts and amounts
transferred between levels. At 31 December 2020 and 31 December 2019, the options formed part of the investment management
strategy, while the currency forwards formed part of the foreign exchange management strategy.
The disclosure provided in the tables below include derivatives recorded in the Group’s statement of financial position.
Derivative contract assets
31 December 2020
Currency forwards
Options
Industry loss warranty contracts
Sutton forward contract
Total return swap
Total
31 December 2019
Currency forwards
Options
Industry loss warranty contracts
Call and put option over Camargue
Sutton forward contract
Total
Derivative contract liabilities
31 December 2020
Currency forwards
Total
31 December 2019
Currency forwards
Total
Disclosures of fair values in accordance with the fair value hierarchy
31 December 2020
Derivative contract assets
Derivative contract liabilities
31 December 2019
Derivative contract assets
Derivative contract liabilities
152
Brit Limited Annual Report 2020
Gross amounts of
receivables on derivative
contract assets
US$m
Gross amounts of
payables on derivative
contract assets
US$m
Derivative contract
assets presented
in the statement
of financial position
US$m
519.5
1.5
0.2
1.6
1.9
524.7
561.6
0.4
0.1
10.4
9.3
581.8
(508.9)
(0.9)
–
–
–
(509.8)
(548.0)
–
–
(9.6)
(8.5)
(566.1)
10.6
0.6
0.2
1.6
1.9
14.9
13.6
0.4
0.1
0.8
0.8
15.7
Gross amounts of
payables on derivative
contract liabilities
US$m
Gross amounts of
receivables on derivative
contract liabilities
US$m
Derivative contract
liabilities presented
in the statement
of financial position
US$m
(634.3)
(634.3)
(668.4)
(668.4)
625.1
625.1
654.2
654.2
Level two
US$m
Level three
US$m
12.7
(9.2)
13.6
(14.2)
2.2
–
2.1
–
(9.2)
(9.2)
(14.2)
(14.2)
Total
US$m
14.9
(9.2)
15.7
(14.2)
notes to the consolidated financial statements
Financial Statements
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
utilise 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 2019
Total losses recognised in the income statement
Foreign exchange losses
At 31 December 2019
Purchases
Total losses recognised in the income statement
Foreign exchange gains
At 31 December 2020
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
US$m
3.3
(0.9)
(0.3)
2.1
7.0
(9.0)
2.2
2.3
Put options
31 December 2020
Effect of
possible
alternatives
Carrying assumptions
(+/-)
amount
US$m
US$m
31 December 2019
Effect of
possible
alternatives
assumptions
(+/-)
US$m
Carrying
amount
US$m
2.2
0.7
2.0
0.6
In order to determine reasonably possible alternative assumptions, the Group adjusted key unobservable model inputs, including
inflation volatility inputs and credit risk inputs.
Brit Limited Annual Report 2020
153
Financial Statements
25
Insurance and other receivables
This Note sets out the various categories of amounts which are owed to the Group.
Arising out of direct insurance operations
Arising out of reinsurance operations
Receivables from contracts with customers
Prepayments
Accrued income
Outstanding settlements on investments
Other assets
Other debtors
Total
31 December 31 December
2019
US$m
2020
US$m
611.4
484.9
56.5
8.8
13.9
24.3
43.6
58.6
1,302.0
601.7
470.0
19.6
14.2
14.3
6.1
58.6
55.7
1,240.2
Other assets relate to shares purchased to settle share-based payment awards. For further information, refer to Note 34.
26
Cash and cash equivalents
This Note analyses the amounts of cash and cash equivalents. Cash equivalents are investment instruments with less than 90 days
left to maturity when purchased by the Group. Additional analysis which explains where cash and cash equivalents are held and why
they are being held is also provided.
Cash at bank and on deposit
Cash equivalents
Total
The carrying amounts disclosed above, reasonably approximate fair values.
The source of these amounts can be further analysed as follows:
Classification
Definition
Cash within segregated fund mandates
Lloyd’s trust funds
Self-managed cash
Total
Short-term investment funds, money market funds,
treasury bills or cash held within segregated mandates.
Cash within the Lloyd’s Overseas Deposits trust funds
held to meet regulatory requirements.
Highly liquid instruments held to meet ongoing
working capital requirements.
31 December 31 December
2019
US$m
2020
US$m
423.0
352.7
775.7
229.9
290.2
520.1
31 December 31 December
2019
US$m
2020
US$m
172.4
77.0
59.4
41.6
543.9
775.7
401.5
520.1
154
Brit Limited Annual Report 2020
notes to the consolidated financial statements
Financial Statements
27
Assets and liabilities of disposal group classified as held for sale
In December 2020 management committed to a plan to sell Commonwealth Insurance Company of America, a subsidiary of the Group.
Accordingly, that business is presented as a disposal group held for sale. The sale was completed on 5 February 2021.
As at 31 December 2020, the disposal group was stated at the carrying amount of the relevant assets and liabilities, which
comprised the following:
Assets classified as held for sale:
Regulatory licenses
Reinsurance contracts
Financial investments
Cash equivalents
Total assets of disposal group held for sale
Liabilities directly associated with assets classified as held for sale:
Insurance contracts
Insurance and other payables
Total liability of disposal group held for sale
28
Borrowings
31 December
2020
US$m
7.5
1.4
7.6
1.3
17.8
1.6
0.2
1.8
This Note describes the main sources of borrowing available to the Group and the amounts currently borrowed from each
of those sources.
Non-current
Subordinated debt
Revolving credit facility
Maturity
Call
31 December 2020
31 December 2019
Effective
interest rate
Amortised
cost
US$m
Fair value
US$m
Amortised
cost
US$m
Fair value
US$m
2030
2023
–
–
3.7%
LIBOR +1.5%
184.5
130.0
314.5
170.4
130.0
300.4
176.2
140.0
316.2
182.9
140.0
322.9
As at 31 December 2020 and 31 December 2019, 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 23.
Subordinated debt
The Group did not take up the option to call the subordinated debt on 9 December 2020. Following this date, the interest rate has
reset to 3.6757%, being the higher of:
i) 3.4% above the gross redemption yield of the 4.75% Treasury Gilt due 2030 quoted on the reset date; and
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$450.0m (2019: US$450.0m) revolving credit facility which expires on 31 December 2023.
At 31 December 2020, a US$130.0m (2019: US$80.0m) uncollateralised letter of credit had been utilised. In addition, there was
a cash drawing of US$130.0m.
Brit Limited Annual Report 2020
155
Financial Statements
29
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
The statement of financial position of the Group includes financial liabilities arising from third-party investments in structured
entities that are consolidated by the Group.
These financial liabilities have been designated as held at fair value through profit or loss. As at 31 December 2020, the fair value
of the investments by independent third parties was US$62.0m (2019: US$75.5m), of which US$62.0m (2019: US$75.5m) related
to other financial liabilities owing to investors in collateralised reinsurance arrangements.
The fair value of these liabilities was determined by reference to the underlying net assets of the vehicles and was therefore
categorised as level three in the fair value hierarchy. Further information relating to the Group’s approach to fair value measurement
is available in Note 23.
30
Insurance and other payables
This Note sets out the various categories of amounts which are owed by the Group.
Arising out of direct insurance operations
Arising out of reinsurance operations
Other taxes and social security costs
Accruals and deferred income
Lease liabilities
Outstanding settlements on investments
Other creditors
Total
31 December 31 December
2019
US$m
2020
US$m
68.4
404.6
3.0
58.1
54.6
–
32.0
620.7
62.2
437.0
2.8
68.7
60.5
6.8
38.0
676.0
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.
Of the total lease liabilities recognised above, US$6.0m is a current liability (2019: US$6.5m).
156
Brit Limited Annual Report 2020
notes to the consolidated financial statements
Financial Statements
31
Called up share capital
This Note sets out the number of shares the Company has in issue and their nominal value.
Ordinary shares:
Allotted, issued and fully paid
At 1 January 2019
Issue of class B shares
At 31 December 2019
At 1 January 2020
Issue of class B shares
At 31 December 2020
31 December
2020
US$m
31 December
2019
US$m
31 December
2020
1p each
Number
31 December
2019
1p each
Number
8.6
7.0
568,837,653
446,977,185
Share premium
US$m
Share capital
US$m
Share capital
Number
435.1
70.4
505.5
505.5
522.4
1,027.9
6.8
0.2
7.0
7.0
1.6
8.6
430,549,278
16,427,907
446,977,185
446,977,185
121,860,468
568,837,653
All shares currently in issue are class B. The number of shares reported is for Brit Limited, the immediate parent of the Brit Group.
On 07 April 2020, 46,511,628 Class B Ordinary Shares were issued by Brit Limited, each with a nominal value of 1p, for US$200.0m.
Following this share issuance, US$199.4m was recorded in the share premium accounts.
On 24 August 2020, 19,767,442 Class B Ordinary Shares were issued by Brit Limited, each with a nominal value of 1p, for US$85.0m.
Following this share issuance, US$84.7m was recorded in the share premium accounts.
On 28 August 2020, Fairfax purchased all 48,000,000 Class A shares from OMERS and increased its percentage shareholding
to 100.00%. Simultaneously, these shares were converted to Class B shares.
On 21 September 2020, 3,488,373 Class B Ordinary Shares were issued by Brit Limited, each with a nominal value of 1p, for US$15.0m.
Following this share issuance, US$15.0m was recorded in the share premium accounts.
On 20 November 2020, 31,395,349 Class B Ordinary Shares were issued by Brit Limited, each with a nominal value of 1p, for US$135.0m.
Following this share issuance, US$134.6m was recorded in the share premium accounts.
On 23 November 2020, 3,720,931 Class B Ordinary Shares were issued by Brit Limited, each with a nominal value of 1p, for US$16.0m.
Following this share issuance, US$16.0m was recorded in the share premium accounts.
On 23 December 2020, 16,976,745 Class B Ordinary Shares were issued by Brit Limited, each with a nominal value of 1p, for US$73.0m.
Following this share issuance, US$72.8m was recorded in the share premium accounts.
32
Dividends
This Note gives details of the amounts paid to shareholders during 2020 and 2019 by way of dividends.
Dividend paid in respect of prior year
2020
US$
0.43
2019
US$
0.43
2020
US$m
20.6
20.6
2019
US$m
20.6
20.6
A US$20.6m dividend in respect of the year-ended 31 December 2019 was paid to the class A shareholders on 9 April 2020
in accordance with the shareholders’ agreement at an amount equal to US$0.43 per share (2019: US$20.6m/US$0.43 per share).
Brit Limited Annual Report 2020
157
Financial Statements
33
Cash flows provided by operating activities
The tables below show how the profit for the year translates into cash flows generated from operating activities and provide
a reconciliation of the liabilities arising from financing activities.
Year ended
Year ended
31 December 31 December
2019
US$m
2020
US$m
(Loss)/profit on ordinary activities before tax
Adjustments for non-cash movements:
Realised and unrealised losses/(gains) on investments
Realised and unrealised losses on derivatives
Amortisation of intangible assets
Depreciation and impairment of property, plant and equipment
Foreign exchange gains on cash and cash equivalents
Share of gains after tax of associated undertakings
Profit on disposal of associated undertaking
Unrealised losses/(gains) on shares held for share based payments
Charges in respect of share–based payment schemes
Interest income
Dividend income
Finance costs on borrowing
Changes in working capital:
Deferred acquisition costs
Insurance and other receivables excluding accrued income
Insurance and reinsurance contracts
Financial investments
Derivative contracts
Other financial liabilities
Insurance and other payables
Employee benefits
Provisions
Cash flows used in operating activities
(230.5)
186.3
4.1
1.1
10.7
8.9
(3.3)
(2.0)
–
15.6
3.0
(66.9)
(6.3)
23.6
(3.7)
(77.5)
410.9
(423.2)
(5.3)
(13.5)
(55.7)
(3.1)
(1.2)
(414.3)
(82.9)
17.6
8.7
9.3
(3.8)
(0.3)
(10.2)
(0.3)
7.0
(81.6)
(5.7)
23.7
0.5
(138.9)
63.7
(404.1)
(15.8)
(166.3)
123.6
1.2
1.3
(467.0)
158
Brit Limited Annual Report 2020
notes to the consolidated financial statements
Financial Statements
Reconciliation of liabilities arising from financing activities
31 December 2020
Long-term borrowings
Subordinated debt
Short-term borrowings
Revolving credit facility
Total liabilities from financing activities
31 December 2019
Long-term borrowings
Subordinated debt
Short-term borrowings
Revolving credit facility
Total liabilities from financing activities
34
Share-based payments
Year ended
31 December
2019
US$m
Cash flows
US$m
Foreign
exchange
movement
US$m
Year ended
Other 31 December
2020
US$m
changes
US$m
Non-cash changes
176.2
(11.5)
140.0
316.2
(12.5)
(24.0)
5.8
–
5.8
14.1
184.6
2.5
16.6
130.0
314.6
Year ended
31 December
2018
US$m
Cash flows
US$m
Foreign
exchange
movement
US$m
Year ended
Other 31 December
2019
US$m
changes
US$m
Non-cash changes
166.9
(11.9)
8.0
174.9
129.4
117.5
6.8
–
6.8
14.4
176.2
2.6
17.0
140.0
316.2
The Group rewards its employees through various share-based incentive schemes. This Note explains the different schemes
used to facilitate those share-based payments and the charge recognised in the consolidated income statement in respect
of these schemes.
The compensation cost recognised in the income statement under IFRS 2 ‘Share-based Payments’ for the Group’s share-based
payments arrangements are shown below:
Year ended
Year ended
31 December 31 December
2019
US$m
2020
US$m
Equity-settled plans
Employee Share Ownership Plan
Cash-settled plans
Long Term Incentive Plan
Total
1.3
1.7
3.0
0.8
6.2
7.0
The total liability in respect of cash-settled plans at 31 December 2020 was US$10.3m (2019: US$11.4m). In regard to the Long
Term Incentive Plan, no gain or loss (2019: nil) is included in the consolidated statement of changes in equity in respect of equity
settled plans. US$1.6m (2019: US$1.4m) is included within other creditors in respect of national insurance contributions on the
share schemes. A further US$1.3m (2019: US$0.8m) 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.
(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. The options vested in November 2018 and
there are a further seven years to exercise the options.
Brit Limited Annual Report 2020
159
Financial Statements
34
Share-based payments (continued)
Reconciliation of movement in the number of awards
Outstanding at 1 January
Exercised
Outstanding at 31 December
Year ended
Year ended
31 December 31 December
2019
Number
of awards
2020
Number
of awards
865
(124)
741
1,271
(406)
865
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 2019 and 2020. The remaining 741 shares were exercisable at the year end.
(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 between two and ten 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 10% 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
Exercised
Forfeited
Outstanding at 31 December
Year ended
Year ended
31 December 31 December
2019
Number
of awards
2020
Number
of awards
114,451
19,986
(6,977)
(8,834)
118,626
55,981
61,309
–
(2,839)
114,451
The total intrinsic value at the end of the period of liabilities for awards that have been vested, but not exercised, amounted to $1.8m
(2019: nil). The weighted average share price at the date of exercise for share options exercised during the period was $333.70
(2019: nil). The weighted average fair value at date of grant for awards granted during 2020 was US$340.54 (2019: US$459.56).
In order to settle share-based payment awards, in 2020 the Group purchased US$3.0m (2019: US$25.0m) 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 that accrues over the vesting period
of the awards.
(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 2020, the Company purchased a total of 11,749 common shares in Fairfax (2019: 7,001)
at an average price of US$329.63 (2019: US$464.93) in respect of this plan.
160
Brit Limited Annual Report 2020
notes to the consolidated financial statements
Financial Statements
35
Consolidated entities
This Note sets 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 or other unitised issuances. The Group holds 86% of the capital of the Versutus
segregated account consolidated by Brit. The Group also holds 48% and 100% investments in The Diversified Fund and the
Specialty Insurance Fund respectively, which are segregated accounts within Sussex Capital Limited. The Group has consolidated
all segregated accounts of Sussex Re Limited and protected cells Sussex Capital UK PCC Limited apart from those where the
investment therein has been made directly by investors that are external to the Brit Group.
On 16 October 2018 Advent Capital (Holdings) Limited, another subsidiary of the Fairfax group, invested US$165.5m in the HWIC Long-
Term Value Strategies UCITS CCF resulting in a reduction of Brit’s ownership in the fund from 100% to 64.2%. This investment was
divested in Q1 2019 and the UCITS vehicle was subsequently liquidated.
As mentioned in Note 2.2, 18.46% of the 2018 year of account result and assets of syndicate 2988 is included in these consolidated
financial statements. 60.70% of the 2020 year of account result and assets of syndicate 2988 is included in these consolidated
financial statements.
On 23 September 2020 and 24 November 2020, Brit Limited invested US$15m and US$16m respectively into Ki Financial Limited.
The Group holds 20.0% of the share capital of Ki Financial Limited and 51.0% of the voting rights. The entity is consolidated in full
by the Group.
The subsidiaries of the company at 31 December 2020, 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
Sussex Capital UK PCC Limited
Nameco (No. 1341) Limited
Intermediate holding company
Lloyd’s managing agent
Lloyd’s corporate member
Service company
Service company
Group services company
Group services company
Service company
Service company (Dormant)
Service company (Dormant)
Service company (Dormant)
Special purpose vehicle
Lloyd’s corporate member
Ambridge Europe Limited
Insurance intermediary
Ambridge European Holdings Limited
Service company
Ki Financial Limited
Ki Capital Solutions Limited
Ki Technology Limited
Ki Member Limited
Ki Group Services Limited
Intermediate holding company
Service company (Dormant)
Service company (Dormant)
Service company (Dormant)
Service 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
The Leadenhall Building
5th Floor, 40 Gracechurch Street,
London, EC3V 0BT
c/o PKF Littlejohn 15 Westferry Circus,
Canary Wharf, London, E14 4HD
c/o PKF Littlejohn 15 Westferry Circus,
Canary Wharf, London, E14 4HD
The Leadenhall Building
The Leadenhall Building
The Leadenhall Building
The Leadenhall Building
The Leadenhall Building
Brit Limited Annual Report 2020
161
Financial Statements
35
Consolidated entities (continued)
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
Commonwealth Insurance Company of America
Insurance company
Ambridge Partners LLC
Ambridge Due Diligence Services LLC
Brit USA Services Company Inc.
Insurance intermediary
Service company (Dormant)
Service company
Bermuda
North America Property Insurance
Series 2017 Account A-3 (a segregated
account within Versutus Limited)
Special purpose vehicle
Sussex Capital Management Limited
Service company
Sussex Capital Limited
Sussex Re Limited
Special purpose vehicle
Special purpose vehicle
Brit Reinsurance (Bermuda) Limited
Insurance company
161 N. Clark Street, Suite 3200,
Chicago, IL, 60601
161 N. Clark Street, Suite 3200,
Chicago, IL, 60601
3,333 Lee Parkway, Suite 627,
Dallas, TX, 75219
250 Commercial Street, Suite 5000,
Manchester, NH, 03101
251 Little Falls Drive, Wilmington, DE 19808
251 Little Falls Drive, Wilmington, DE 19808
161 N. Clark Street, Suite 3200,
Chicago, IL, 60601
Clarendon House, 2 Church Street,
Hamilton HM 11
Ground Floor Chesney House, The Waterfront,
96 Pitts Bay Road, Pembroke, HM 08
Wessex House, 3rd Floor, 45 Reid Street,
Hamilton HM 12
Wessex House, 3rd Floor, 45 Reid Street,
Hamilton HM 12
Ground Floor Chesney House, The Waterfront,
96 Pitts Bay Road, Pembroke, HM 08
Singapore
Brit Global Specialty Singapore Pte. Ltd.
The Netherlands
Brit Insurance Holdings B.V.
Germany
Ambridge Europe GmbH & Co. KG
Service company
138 Market St., #04-03 CapitaGreen, 048946
Former holding company
The Leadenhall Building
Insurance intermediary
Grüneburgweg 58 – 62, 60322 Frankfurt
am Main, Germany
Grüneburgweg 58 – 62, 60322 Frankfurt
am Main, Germany
Ambridge German Holdings GmbH
Service company
162
Brit Limited Annual Report 2020
notes to the consolidated financial statements
Financial Statements
36
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 on 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.
(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 2020, the Group incurred and paid investment management
fees to HWIC of US$11.0m (2019: US$9.8m).
The Group has historically entered into various reinsurance arrangements with affiliates of Fairfax.
In respect of insurance and ceded outwards reinsurance activity, the amounts included in the income statement relating to trading
with affiliates of Fairfax were as follows:
Year ended
Year ended
31 December 31 December
2019
US$m
2020
US$m
Gross premiums written
Less premiums ceded to reinsurers
Premiums written, net of reinsurance
Gross amount of change in provision for unearned premiums
Reinsurers’ share of change in provision for unearned premiums
Net change in provision for unearned premiums
Earned premiums, net of reinsurance
Gross claims paid
Reinsurers’ share of claims paid
Claims paid, net of reinsurance
Gross change in the provision for claims
Reinsurers’ share of change in the provision for claims
Net change in the provision for claims
Commission income
Commission expense
16.8
(17.8)
(1.0)
3.9
(2.4)
1.5
0.5
(7.0)
19.7
12.7
(5.7)
(4.8)
(10.5)
0.8
(3.3)
48.0
(18.6)
29.4
(2.4)
5.7
3.3
32.7
(12.9)
43.6
30.7
(0.3)
(39.3)
(39.6)
–
(10.7)
Brit Limited Annual Report 2020
163
Financial Statements
36
Related party transactions and Ultimate Parent Company (continued)
The amounts included in the statement of financial position outstanding with Fairfax and its affiliates as at 31 December 2020
were as follows:
Year ended
Year ended
31 December 31 December
2019
US$m
2020
US$m
Debtors arising out of direct insurance and reinsurance operations:
Insurance premium receivable
Recoverable from reinsurers
Creditors arising out of direct insurance and reinsurance operations:
Payable to reinsurers
Unpaid claims liabilities
Deferred acquisition costs
Gross unearned premiums
Unearned premium recoverable from reinsurers
(c) Associated undertakings
7.9
17.2
7.9
157.9
(4.8)
(49.3)
(8.1)
(50.7)
1.1
(5.7)
3.8
1.9
(9.9)
6.2
Camargue Underwriting Managers Proprietary Limited
On 30 August 2016, the Group acquired 50% of the share capital of the South African company, Camargue Underwriting Managers
Proprietary Limited (Camargue) and also entered into a call and a put option to purchase the remaining 50% in 2021. Camargue
is a leading managing general underwriter of a range of specialised insurance products and specialist liability solutions in South
Africa and is an important trading partner for Brit.
Trading with Camargue is undertaken on an arm’s-length basis and is settled in cash. The amounts in the income statement relating
to trading with Camargue for the year ended 31 December 2020 included commission for introducing insurance business of US$2.9m
(2019: US$2.9m).
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 2020 and 2019 were not material.
Sutton Special Risk Inc
On 2 January 2019, Brit Insurance Holding Limited, acquired 49% of the issued shares of Sutton for a total purchase consideration
of CAD$17.2m and entered into a forward contract to purchase the remaining 51% in 2024. Sutton is a Canadian MGU, specialising
in Accident and Health business.
Trading with Sutton 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 2020 included commission for introducing insurance business of US$2.6m
(2019: US$1.1m).
Amounts recorded in the statement of financial position in respect of premium net of commissions due from, and fees payable to,
Sutton as at 31 December 2020 were not material.
164
Brit Limited Annual Report 2020
notes to the consolidated financial statements
Financial Statements
(d) Advent Capital (Holdings) Limited
In 2018 Brit was the majority investor in the HWIC Long-Term Value Strategies UCITS CCF, which was consolidated by the Group.
On 16 October 2018 another company within the Fairfax group, Advent Capital (Holdings) Limited, invested US$175.5m in this UCITS,
resulting in an ownership of 35.8% of the fund. However, in early 2019, work was completed by HWIC and FFS Management Services
to open two new fund structures (the Global Equity QIAIF and the Value Opportunities QIAIF) to investors within the Fairfax group
of companies and, as a consequence, the HWIC Long-Term Value Strategies UCITS CCF ceased operation in March 2019, resulting
in Advent’s disinvestment from the vehicle.
(e) Crum and Forster commission agreement
On 1 May 2018, Brit Insurance Services USA, Inc. (BISI) entered into a binding authority agreement with Crum and Forster Specialty
(C&F), another subsidiary of the Fairfax group. C&F has authorized BISI to bind certain commercial insurance contracts on their
behalf. BISI earns a commission of up to 26.7% for this business including external broker commission. The agreement will continue
in perpetuity until BISI or C&F provide written notice of cancellation. During 2020, C&F paid BISI US$5.8k (2019: US$830.1k) in respect
of commission. US$140.8k was outstanding at the year-end (2019: US$82.0k).
(f) Key management compensation
The amount of the emoluments granted in respect of the financial year to the members of the administrative, managerial and
supervisory bodies by reason of their responsibilities, and any commitments arising or entered into in respect of retirement pension
for former members of those bodies, are broken down as follows:
Year ended
Year ended
31 December 31 December
2019
US$m
2020
US$m
Salaries and other short-term employee benefits
Post-employment benefits
Share-based payments
Termination benefits
Total compensation
8.6
0.8
1.6
0.1
11.1
6.5
0.7
3.9
–
11.1
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.
As at 31 December 2020, US$0.4m was recorded in the statement of financial position in respect of unsecured loans to key
management personnel. These loans were recognised during the year, are expected to be settled in cash, carry an annual interest
charge of 2.25%, and have no fixed maturity date.
Brit Limited Annual Report 2020
165
Financial Statements
37
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 companies within the Group that
participate on Lloyd’s syndicates, including Brit UW Limited, the principal corporate member of the Group. As at 31 December 2020
the Funds at Lloyd’s requirement amounted to US$1,598.8m (2019: US$1,285.5m) in respect of Brit UW Limited, and US$152.3m
(2019: US$5.0m) in respect of other companies within the Group.
(b) Credit facilities
The Group has a US$450.0m (2019: US$450.0m) revolving credit facility which expires on 31 December 2023. At 31 December 2020,
a US$130.0m (2019: US$80.0m) uncollateralised letter of credit had been utilised in respect of this facility. In addition, there was
a cash drawing of US$130.0m.
The Group also has a US$50.0m Letter of Credit Facility, which expires on 31 December 2024, and which had been fully utilised
at the year-end.
(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 2.5.11.
38
Events occurring after the reporting date
This Note sets out how events occurring after the reporting date relate to the financial position and performance of the Group in the
reporting period.
(a) FCA business interruption case
On 15 January 2021, the UK Supreme Court upheld the judgement on the Financial Conduct Authority’s COVID-19 related business
interruption test case. The FCA brought the case forward in May 2020 to seek legal clarity on whether insurers were obligated to pay
out on BI claims related to the COVID-19 pandemic.
Brit was not party to this action, the outcome of which does not have a material impact on the Group. Brit is committed to paying all
valid claims and has maintained sufficient reserves to fulfil its contractual obligations.
(b) Sale of Commonwealth Insurance Company of America
The disposal of the Commonwealth Insurance Company of America (CICA) completed on 5 February 2021 for a consideration
of US$19.7m. Brit originally acquired CICA in April 2018 at a cost of US$16.4m. As at 31 December 2020, the assets and liabilities
of CICA were recorded within the balance sheet lines of Assets classified as held for sale and Liabilities directly associated with
assets classified as held for sale, reflecting the Group’s expectation of sale in 2021.
166
Brit Limited Annual Report 2020
notes to the consolidated financial statements Financial Statements
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
Note 2
Note 3
Note 4
Note 5
Note 6
Note 7
Note 8
Note 9
Accounting policies and basis of preparation
Auditor’s remuneration
Shares in Group undertakings
Loans to Group undertakings
Debtors: Amounts falling due within one year
Creditors: Amounts falling due within one year 172
Creditors: Amounts falling due after more
than one year
Called up share capital
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
168
169
170
170
171
171
171
172
172
173
174
174
174
174
175
175
Brit Limited Annual Report 2020
167
contents
Financial Statements
statement of financial position
At 31 December 2020
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 assets
Total assets less current liabilities
Creditors: Amounts falling due after more than one year
Net assets
Capital and reserves
Called up share capital
Share premium
Capital redemption reserve
Retained earnings
Total equity
Note
31 December
2020
US$m
31 December
2019
US$m
3
4
5
6
7
8
1,081.5
140.9
1,222.4
555.6
0.1
555.7
(0.9)
554.8
1,777.2
(184.5)
1,592.7
8.6
1,027.9
1.0
555.2
1,592.7
1,050.5
136.6
1,187.1
78.7
0.3
79.0
(0.7)
78.3
1,265.4
(179.4)
1,086.0
7.0
505.5
1.0
572.5
1,086.0
The accompanying Notes are an integral part of these financial statements.
These financial statements were approved by the Board of Directors on 16 February 2021 and were signed on its behalf by:
Matthew Wilson
Group Chief Executive Officer
Mark Allan
Group Chief Financial Officer
168
Brit Limited Annual Report 2020
statement of changes in equity
Financial Statements
For the year ended 31 December 2020
1 January 2020
Total comprehensive income for the year
Issuance of share capital
Dividend
At 31 December 2020
For the year ended 31 December 2019
1 January 2019
Total comprehensive income for the year
Issuance of share capital
Dividend
At 31 December 2019
Note
8
11
Note
8
11
Called up
share
capital
US$m
7.0
–
1.6
–
8.6
Share
premium
US$m
505.5
–
522.4
–
Capital
redemption
reserve
US$m
Retained
earnings
US$m
Total
equity
US$m
1.0
572.5
1,086.0
–
–
–
3.3
–
(20.6)
3.3
524.0
(20.6)
1,027.9
1.0
555.2
1,592.7
Called up
share
capital
US$m
6.8
–
0.2
–
7.0
Share
premium
US$m
435.1
–
70.4
–
505.5
Capital
redemption
reserve
US$m
Retained
earnings
US$m
Total
equity
US$m
1.0
598.4
1,041.3
–
–
–
(5.3)
–
(20.6)
(5.3)
70.6
(20.6)
1.0
572.5
1,086.0
Brit Limited Annual Report 2020
169
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.
Basis of preparation
1.1
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 08821629. 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 financial statements of the parent company was a US$3.3m gain (2019: US$5.3m loss).
The Company financial statements are presented in US dollars and all values are rounded to the nearest US$0.1m except where
otherwise indicated.
Accounting policies
1.2
(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.
170
Brit Limited Annual Report 2020
notes to the financial statements Financial Statements
(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 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$15,525 (2019: US$15,525).
3
Shares in Group undertakings
This Note explains the direct shareholdings of the Company in other Group entities.
Investment in Brit Insurance Holdings Limited
Investment in Ki Financial Limited
31 December 31 December
2019
US$m
2020
US$m
1,050.5
31.0
1,081.5
1,050.5
–
1,050.5
On 23 September and 24 November, the Company made investments of US$15.0m and US$16.0m respectively in Ki Financial Limited.
The subsidiaries of the Company at 31 December 2020, and their principal activities, are disclosed in the Brit Limited consolidated
financial statements.
4
Loans to Group undertakings
This Note sets out moneys lent by the Company to other Group companies.
Loans to Group undertakings
31 December 31 December
2019
US$m
2020
US$m
140.9
136.6
On 8 September 2014, a long-term loan to another Group company was novated to Brit Limited at fair value. The agreement carries
interest at an annual interest rate of 7.05%.
Brit Limited Annual Report 2020
171
Financial Statements
5
Debtors: Amounts falling due within one year
This Note sets out moneys owed to the Company that are due before 31 December 2021.
Interest receivable on loans to Group undertakings
Amounts owed by Group undertakings
Prepayments
Total
6
Creditors: Amounts falling due within one year
This Note sets out moneys owed by the Company that are due before 31 December 2021.
Accruals and deferred income
Total
7
Creditors: Amounts falling due after more than one year
This Note sets out moneys owed by the Company that are due after 31 December 2021.
31 December 31 December
2019
US$m
2020
US$m
22.5
532.4
0.7
555.6
12.2
65.9
0.6
78.7
31 December 31 December
2019
US$m
2020
US$m
0.9
0.9
0.7
0.7
Subordinated debt
Maturity
2030
Call
–
31 December 2020
31 December 2019
Effective
interest rate
Amortised
cost
US$m
Fair value
US$m
Amortised
cost
US$m
Fair value
US$m
3.7%
184.5
170.4
179.4
182.9
The fair value of the subordinated debt has been determined by reference to trading market values on recognised exchanges and
is categorised as level one in the fair value hierarchy.
The subordinated debt was novated to the Company from another Group company on 8 September 2014 at fair value.
The subordinated debt is listed and callable in whole by the Company on 9 December 2020. Following this date, the interest rate reset
to 3.6757%, being the higher of:
i) 3.4% above the gross redemption yield of the 4.75% Treasury Gilt due 2030 quoted on the reset date; and
ii) 3.4% above the gross redemption yield of the 8% Treasury Stock due 2021 quoted on the reset date.
The effective interest rate method of accounting has been applied over the term up to the call date.
172
Brit Limited Annual Report 2020
notes to the financial statements
Financial Statements
8 Called up share capital
This Note sets out the number of shares in issue and their nominal value.
Ordinary shares:
Allotted, issued and fully paid
All shares currently in issue are class B.
At 1 January 2019
Issue of new class B shares
At 31 December 2019
At 1 January 2020
Issue of new class B shares
At 31 December 2020
31 December
2020
US$m
31 December
2019
US$m
31 December
2020
1p each
Number
31 December
2019
1p each
Number
8.6
7
568,837,653
446,977,185
Share
premium
US$m
435.1
70.4
505.5
505.5
522.4
1,027.9
Share
capital
US$m
6.8
0.2
7.0
7.0
1.6
8.6
Share
capital
Number
430,549,278
16,427,907
446,977,185
446,977,185
121,860,468
568,837,653
On 07 April 2020, 46,511,628 Class B Ordinary Shares were issued by Brit Limited, each with a nominal value of 1p, for US$200.0m.
Following this share issuance, US$199.4m was recorded in the share premium accounts.
On 24 August 2020, 19,767,442 Class B Ordinary Shares were issued by Brit Limited, each with a nominal value of 1p, for US$85.0m.
Following this share issuance, US$84.7m was recorded in the share premium accounts.
On 28 August 2020, Fairfax purchased all 48,000,000 Class A shares from OMERS and increased its percentage shareholding
to 100.00%. Simultaneously, these shares were converted to Class B shares.
On 21 September 2020, 3,488,373 Class B Ordinary Shares were issued by Brit Limited, each with a nominal value of 1p, for US$15.0m.
Following this share issuance, US$15.0m was recorded in the share premium accounts.
On 20 November 2020, 31,395,349 Class B Ordinary Shares were issued by Brit Limited, each with a nominal value of 1p, for US$135.0m.
Following this share issuance, US$134.6m was recorded in the share premium accounts.
On 23 November 2020, 3,720,931 Class B Ordinary Shares were issued by Brit Limited, each with a nominal value of 1p, for US$16.0m.
Following this share issuance, US$16.0m was recorded in the share premium accounts.
On 23 December 2020, 16,976,745 Class B Ordinary Shares were issued by Brit Limited, each with a nominal value of 1p, for US$73.0m.
Following this share issuance, US$72.8m was recorded in the share premium accounts.
Brit Limited Annual Report 2020
173
Financial Statements
9
Directors’ emoluments
This Note gives a breakdown of emoluments paid to Directors both in total and in respect of the highest paid Director.
Aggregate remuneration
Aggregate contributions to money purchase pension schemes
Total
The Directors’ remuneration disclosed above includes the following amounts paid to the highest paid Director:
Aggregate remuneration
Number of Directors with benefits accruing under money purchase pension schemes
Number of Directors in respect of whose qualifying services, shares were received
or receivable under long-term incentive schemes
31 December 31 December
2019
US$m
2020
US$m
4.8
0.1
4.9
4.7
0.1
4.8
2.8
2.7
Number
Number
1
2
1
2
Shares were received or receivable by the highest paid Director in respect of qualifying services under a long-term incentive scheme
during 2020 and 2019.
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$450.0m (2019: US$450.0m) revolving credit facility which expires on 31 December 2023.
Guarantees have been made by Brit Limited and a subsidiary company to the syndicated banks providing the facility.
11
Dividends
This Note gives details of the amounts paid to shareholders during 2020 and 2019 by way of dividends.
Dividend paid in respect of prior year
2020
US$
0.43
2019
US$
0.43
2020
US$m
20.6
20.6
2019
US$m
20.6
20.6
A US$20.6m dividend in respect of the year-ended 31 December 2019 was paid to the class A shareholders on 9 April 2020
in accordance with the shareholders’ agreement at an amount equal to US$0.43 per share (2019: US$20.6m/US$0.43 per share).
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 incentive schemes can be found in Note 34 of the notes accompanying the
Brit Limited Group consolidated Financial Statements.
174
Brit Limited Annual Report 2020
notes to the financial statements
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.
Brit Limited Annual Report 2020
175
Additional Information
Return on net tangible assets before FX movements (RoNTA)
Return on net tangible assets before foreign exchange movements (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
PAT, adjusted for RoNTA calculation
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
Adjusted NTA at start of year
External distributions and share issuances
See ‘Total Value Created’ section below.
Weighted adjustment to reflect distributions
and shares issued during the year.
NTA, adjusted for RoNTA calculation
RoNTA
2020
US$m
(232.0)
8.7
(3.8)
(227.1)
2019
US$m
179.9
7.1
(2.8)
184.2
1,150.4
992.9
10.2
1,160.6
(19.6)%
25.8
1,018.7
18.1%
Total value created
The total value created measures the increase in adjusted NTA (including distributions) in a year. It reflects the after tax result
recorded in the income statement and all other value movements.
Comment/financial statements reference
Total equity attributable to owners of the parent
Less: Intangible assets
Consolidated statement of financial position
Consolidated statement of financial position
Net tangible assets
Add back deferred tax liability on intangible assets
Note 20: Deferred taxation
Adjusted net tangible assets
Adjusted NTA at end of year
Less: Adjusted NTA at start of year
Movement in adjusted NTA
Add: Intangibles and goodwill acquired
on acquisition of Ambridge
Less: Issuance of share capital, repurchase
of shares and dividend paid
Consolidated statement of changes in equity
Total value created
2020
US$m
2019
US$m
1,592.6
(181.2)
1,411.4
25.4
1,436.8
1,436.8
(1,150.4)
286.4
1,319.9
(192.6)
1,127.3
23.1
1,150.4
1,150.4
(992.9)
157.5
–
91.1
(503.4)
(217.0)
(50.0)
198.6
176
Brit Limited Annual Report 2020
reconciliation of key performance indicators to the financial statements
Additional Information
Combined ratio
The combined ratio is our key underwriting metric and measures the profitability of our underwriting. It shows how much of every
US$1 of premium is spent in the total costs of sourcing and underwriting the business and settling claims. A combined ratio under
100% indicates underwriting profitability.
Earned premium, net of reinsurance
Adjustments for share of third-party vehicles
Note 5: Segmental information
See note (i) below
Adjusted earned premium, net of reinsurance
Comment/financial statements reference
Attritional losses
Major claims
Reserve releases
Claims incurred, net of reinsurance
Note 5: Segmental information
Attritional losses – Adjustments for share
of third-party vehicles
Major losses – Adjustments for share
of third-party vehicles
Reserve releases – Adjustments for share
of third-party vehicles
Adjusted claims incurred, net of reinsurance
Acquisition costs – commissions
Acquisition costs – other and Other insurance
See note (i) below
See note (i) below
See note (i) below
Note 5: Segmental information
related expenses
Note 5: Segmental information
Other income
Acquisition costs – commissions – Adjustments for
share of third-party vehicles
See note (i) below
Acquisition costs – other and Other insurance
related expenses – Adjustments for share of
third-party vehicles and non-controlling interest
See note (i) below
Adjusted underwriting expenses
Derivative contracts
Underwriting profit/(loss)
Loss ratio
Major claims ratio
Reserve release ratio
Claims ratio
Commission ratio
Operating expense ratio
Underwriting expense ratio
Combined ratio
Attritional losses/Earned premium,
net of reinsurance
Major claims/Earned premium,
net of reinsurance
Reserve releases/Earned premium,
net of reinsurance
Note 5: Segmental information
Acquisition costs – commissions
Acquisition costs – other and Other
insurance related expenses
Note 5: Segmental information
Claims ratio + Underwriting expense ratio;
Note 5: Segmental information
2020
US$m
2019
US$m
1,713.9
(12.2)
1,701.7
(897.7)
(404.8)
63.4
(1,239.1)
1,638.5
(14.8)
1,623.7
(899.4)
(61.6)
46.5
(914.5)
3.4
1.6
(1.9)
(1,236.0)
5.7
3.2
1.4
(904.2)
(454.3)
(443.3)
(259.7)
29.7
(255.7)
45.6
1.0
1.7
2.7
(680.6)
–
(215.0)
0.2
(651.5)
0.4
68.4
52.6%
55.0%
23.7%
3.6%
(3.6)%
(2.9)%
72.6%
55.7%
26.6%
27.2%
13.4%
40.0%
12.9%
40.1%
112.6%
95.8%
Note (i): On the face of the consolidated income statement, the third-party share of our underwriting is consolidated, with the net impact eliminated through ‘gains on other financial liabilities’.
These adjustments reallocate this elimination on a line by line basis, thereby giving a fairer view of Brit’s underwriting performance as attributable to its shareholders.
Brit Limited Annual Report 2020
177
Additional Information
Investment return
We assess the performance of our investment portfolio by comparing the return generated by our invested assets, net of external
investment related expenses, against the value of those invested assets.
Share of net profit of associates
Return on financial investments and cash
and cash equivalents
Return on investment related derivatives
Return on invested assets
Comment/financial statements reference
Note 14: Investment in associated undertakings
Note 6: Investment return (Note 1)
Note 7: Return on derivative contracts
Investment in associated undertakings
Financial investments
Derivative contracts (investment related)
Cash and cash equivalents
Note 14: Investment in associated undertakings
Note 23: Financial investments
Note 24: Derivative contracts
Note 26: Cash and cash equivalents
Invested assets
Opening invested assets
Closing invested assets (Note 1)
Average invested assets
Return (%)
Note 1 – Adjusted for third-party share of investment return
Return on invested assets/Average invested assets
2020
US$m
2.0
57.4
(13.9)
45.5
2019
US$m
0.3
150.6
(2.8)
148.1
20.5
4,056.6
4.3
775.7
4,857.1
19.4
3,640.6
2.1
520.1
4,182.2
4,182.2
4,857.1
4,519.7
1.0%
3,846.7
4,182.2
4,014.5
3.6%
Capital ratio
The capital ratio measures the strength of our statement of financial position by comparing our available capital resources to the
capital we need to hold to meet our management entity capital requirements. It is calculated as follows:
Total equity attributable to owners of the parent
Less: Intangible assets
Net tangible assets
Comment/financial statements reference
Consolidated statement of financial position
Consolidated statement of financial position
Add: Deferred tax liability on intangible assets
Note 20: Deferred taxation
2020
US$m
2019
US$m
1,592.6
(181.2)
1,411.4
25.4
1,436.8
184.5
1,319.9
(192.6)
1,127.3
23.2
1,150.5
176.2
260.0
1,881.3
250.0
1,576.6
Note 28: Borrowings
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. In addition, we have identified
the owners of the parent’s share of the letter of credit
held to support Ki’s underwriting.
The capital required by an entity for business strategy
and regulatory requirements.
(1,540.3)
(1,227.7)
341.0
122.1%
348.9
128.4%
Adjusted net tangible assets
Subordinated debt
Letters of credit/contingent funding
Total available capital resources
Management entity capital requirements
Excess of resources over management entity
capital requirements
Capital ratio
178
Brit Limited Annual Report 2020
reconciliation of key performance indicators to the financial statements
Additional Information
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
2020
Number
2019
Number
441
313
754
427
283
710
Total front office staff/Total back office staff
140.9%
150.9%
Brit Limited Annual Report 2020
179
Company Information
Directors
Mr Gordon Campbell – Chair
Mr Matthew Wilson – Group Chief Executive Officer
Mr Mark Allan – Group Chief Financial Officer
Mr Andrew Barnard – Non-executive Director
Ms Andrea Welsch – Non-executive Director
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
08821629
Auditor
PricewaterhouseCoopers LLP
7 More London Riverside
London
SE1 2RT
180
Brit Limited Annual Report 2020
company information 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, less non-controlling interest.
Adjusted net tangible assets per share: Calculated as closing
adjusted net tangible assets divided by the number of shares
in issue at the reporting 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.
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.
BGSU: Brit Global Specialty USA, the business of the Group
operating in the United States, of which BISI is the managing
general agent.
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.
Glossary
C
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.
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.
E
Earned premium: That proportion of a premium which relates
to the portion of a risk which has expired during a given period.
ESOS: The energy savings opportunity scheme or ESOS,
is a mandatory government initiative to promote energy
efficiency in large businesses.
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.
Brit Limited Annual Report 2020
181
glossary
I
ILS or Insurance-linked securities: ILSs are essentially financial
instruments which are sold to investors whose value is affected
by an insured loss event.
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 percentage: Investment return expressed
as a percentage of average invested assets, calculated
on a month by month basis.
Glossary
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 Group CEO.
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.
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.
182
Brit Limited Annual Report 2020
glossary 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 Brussels (LBS): The insurance company of Lloyd’s
located in Brussels, authorised and regulated by the National
Bank of Belgium, which writes all non-life risks from the
European Economic Area.
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 or Major losses: Major claims are defined
as claims which are initially assessed as having the potential
to exceed US$15.0m (net of reinsurance and allowing for
reinstatements), incurred from natural or man-made
catastrophes, or from large single risk loss events.
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.
Non-controlling interest:
The equity in a subsidiary not attributable, directly
or indirectly, to a parent.
Glossary
O
Outstanding claims: Claims which have been notified at the
reporting 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.
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Glossary
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.
Retention ratio: 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).
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.
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Brit Limited Annual Report 2020
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.
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.
Treaty: A reinsurance contract pursuant to which the reinsurer
is obliged to accept, within agreed limits, all risks underwritten
by the reinsured within specified classes of business
in a given time period.
glossary 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
commission 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 reporting 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
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185
Brit Limited
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