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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Tellworth British Recovery & Growth Trust plc | LSE:BRIT | London | Ordinary Share | Ordinary Shares |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 280.25 | 0.00 | 01:00:00 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| 0 | 0 | N/A | 0 |
From Jul 2019 to Jul 2024
TIDMBRIT
RNS Number : 7791F
Brit PLC
25 February 2015
Brit PLC
PRESS RELEASE
25 February 2015
Full Year results for the Year ended 31 December 2014
Brit delivers a Strong underwriting and investment performance
Key points
-- Return on adjusted net tangible assets (RoNTA) before FX and IPO costs of 20.7% (2013: 24.2%)
-- Profit after tax increased by 39.7% to GBP139.0m (2013: GBP99.5m)
-- Gross written premiums of GBP1,302.1m (2013: GBP1,185.7m), an increase of 9.8%. The increase at constant exchange rates was 15.0%
-- Full year combined ratio of 89.5% despite challenging rating environment (2013: 85.4%)
-- Investment return for the period increased by 38.4% to GBP75.7m (2013: GBP54.7m), representing a return of 2.9%
-- Total value creation of GBP139.2m driven by strong operating performance (2013: GBP91.3m)
-- Adjusted net tangible assets increased to GBP775.4m or 194.0pps (2013: GBP661.2m/168.6pps), after payment in September 2014 of an interim dividend of GBP25.0m
-- Final dividend declared of 12.5pps plus a special dividend of 12.5pps, bringing total dividend for the year including the interim dividend of 6.25pps to 31.25pps
-- Recommended cash offer of 305 pps for the Company from Fairfax Financial Holdings Limited
Mark Cloutier, Group CEO of Brit PLC, said:
'Brit has had another successful year delivering on our financial targets and moving towards our goal of being the leading global speciality insurer. The return on adjusted net tangible assets before FX and IPO costs of 20.7% is driven by strong underwriting and investment performances, coupled with a continued focus on strict cost control. Our underlying underwriting performance once again excelled and coupled with a relatively benign period in terms of major losses, resulted in a combined ratio of 89.5%. Investment performance has been strong, with the portfolio producing an annualised return of 2.9% as our "income focused" portfolio benefitted from falling bond yields and tightening credit spreads in the first half of the year. As a result of our strong performance during the year I am also very pleased to announce a final dividend of 12.5p per share, in line with our guidance. The Group's robust capital position has also facilitated a special dividend of 12.5p per share.
On 17 February we were pleased to announce that the Boards of Fairfax and Brit have reached agreement regarding the terms of a recommended cash offer of 305pps for Brit PLC. Our business is complementary to their group's current offering and the deal represents an exciting opportunity to continue our story on an even stronger footing. Our position as a market-leading global specialty insurer and reinsurer and our major presence in Lloyd's make us an attractive addition to Fairfax's global footprint. There is very little crossover in our respective international operations, thus allowing Fairfax to further diversify its portfolio while enabling Brit to leverage Fairfax's existing relationships and expertise in the international insurance and reinsurance markets. The combination will enable us to enhance our global product offering and provide us with expanded underwriting opportunities and distribution channels. We believe this is a great fit for both companies, our employees, customers and trading partners as well as representing an attractive financial return for shareholders following our successful IPO in April 2014.
We have a fantastic team here at Brit and I am particularly delighted to announce today the appointment of Matthew Wilson as Deputy Group CEO and Chief Underwriting Officer. Underwriting performance is at the core of our strategy and Matthew's leadership over the past 5 years has been a key factor in the significant transformation that has occurred at Brit. I look forward to working closely with Matthew in his new role as we start an exciting new chapter for the Brit Group.'
For further information, please contact:
Sam Dobbyn, Head of Investor Relations, Brit PLC +44 (0) 20 7984 8800 Paul Marriott, FTI Consulting +44 (0) 20 3727 1341 Tom Blackwell, FTI Consulting +44 (0) 20 3727 1051
Analyst Presentation
Brit will hold its analyst presentation to discuss its full year results at 55 Bishopsgate, London EC2N 3AS, at 9.30 a.m. GMT on Wednesday, 25 February,2015. The presentation may be accessed at 020 3059 8125 (UK) or +44 203 059 8125 (International).
About Brit PLC
Brit PLC is a market-leading global specialty insurer and reinsurer, focused on underwriting complex risks. It has a major presence in Lloyd's of London, the world's specialist insurance market provider, with significant US and international reach. The Brit Group underwrites a broad class of commercial specialty insurance with a strong focus on property, casualty and energy business. Its capabilities are underpinned by robust financials. Brit PLC is listed on the London Stock Exchange.
www.britinsurance.com
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.
This document contains references to the proposed offer by FFHL Group Limited for the entire issued and to be issued share capital of Brit PLC, as announced on 17 February 2015 (the "Fairfax Offer"). This document does not constitute a solicitation of (i) any vote in relation to, (ii) approval of or (iii) acceptance of, the Fairfax Offer. Any response in respect of the Fairfax Offer should be made only on the basis of information contained in the offer document to be despatched by FFHL Group Limited to shareholders of Brit PLC, which will contain the full terms and conditions of the Fairfax Offer, including how the Fairfax Offer may be accepted. Shareholders are advised to read the formal documentation in relation to the Fairfax Offer carefully once it has been despatched.
Chairman's Statement
2014 has been a significant year for Brit. Strategically we have made encouraging progress in delivering our ambition to become the leading global specialty insurer. Financially, our underwriting, investment and operational performance all contributed to an excellent RoNTA of 20.7%. Most importantly, 2014 saw Brit's successful return to the market following our initial public offering (IPO) of 25% of the Company in April.
Our return to the market was met with significant investor interest and I see this as pleasing recognition of the major transformation our business has achieved over the past six years and the strong track record of professionalism and performance that we have built over that time. This is thanks to the hard work and dedication of our employees and the support and trust of our clients and shareholders. Having been CEO of Lloyd's for eight years, until the end of 2013, I have seen from a distance how much commitment this repositioning has taken from all areas of the business and my first-hand experience over the 12 months since I joined the Board as Chairman has further demonstrated what an exceptional job the management team has done. I am confident this is the best team to lead the business forward for you.
Offer from Fairfax
On 17 February 2015, we announced an offer for Brit from Fairfax. Brit's Board was pleased to recommend this combination with Fairfax, which I believe will greatly assist us in delivering our strategy of building the leading global speciality (re)insurer. The proposed deal provides an exciting opportunity to deliver our growth ambitions. Our simple and capital-efficient Lloyd's focused platform make us an attractive partner for Fairfax and our shared values in underwriting discipline, speciality lines focus, operational rigour and meticulous claims management make this transaction a compelling proposition for all stakeholders. The Offer represents a strong result for all our shareholders and produces attractive financial returns following our successful IPO in April 2014.
Performance
Our key differentiators are our focused Lloyd's platform, our underwriting strategy and our investment strategy. We have made good progress against all of our strategic priorities in 2014 and delivered the targets we set at the time of the IPO. In underwriting, we have reported an excellent combined ratio of 89.5% underpinned by another year of attractive attritional loss ratio performance. We have also developed our international capabilities by delivering profitable growth in our US platform, which is now reaching significant scale, as well as our specialist Bermudian operations. In investments, our dynamic and active strategy continues to set us apart from our peers, with a decision to focus on income generating assets across a broad range of asset classes, generating another year of outperformance, with a return of 2.9%, well above investment benchmarks.
Capital advantages
The Brit business model remains simple but very effective. Our decision to focus our capital solely on the Lloyd's platform creates excellent capital efficiency, and our strict approach to cost control allows us to operate a flexible and scalable model across the business. This platform has enabled us to deliver attractive returns (20.7% in 2014) despite challenging market conditions and to maintain a strong statement of financial position, pursue growth opportunities and to support a consistent dividend for shareholders. I am delighted that we have delivered an ordinary dividend of 18.75p per share for 2014 and a further special dividend of 12.5p, driven by this year's excellent result and our rigorous capital management strategy.
Brit strategy and outlook
Looking forward, the financial landscape in which the insurance industry operates continues to offer material challenges. Exceptionally low interest rates, geopolitical uncertainty, global growth concerns and market volatility mean that the industry continues to face a testing back drop. For the insurance industry capital availability is increasing from both traditional and non-traditional sources and we expect this to create further competition and pressure on pricing and conditions in 2015. These new forms of capital, along with evolving distribution channels and constant improvements in technology continue to challenge industry norms and as a Board we will be mindful as to how we can react to this landscape quickly and drive the Brit and industry agenda.
I absolutely believe that we have the right platform and business mix to deliver sector-leading returns for shareholders in this challenging insurance rate and low yield environment. However, to maintain strong profitability, we must focus more than ever on our underwriting discipline, risk selection and capital management. Integral to this is maintaining good relationships with brokers, clients, cover holders and most importantly our regulators.
Brit is in a unique position as the largest Lloyd's-only insurance business and we plan to develop this business by continuing to invest in our people, by attracting top talent and by supporting the innovation of new products to meet our clients' needs. We also plan to build out our global distribution capability selectively, with significant opportunities to grow in mature markets such as the US and Bermuda, where we have achieved critical mass and expect to capitalise further on our investments in 2015. We also see opportunities in key growth markets over the longer-term such as building on the capability of our Latin America team in Miami and growing our presence in China.
We expect 2015 to be another difficult year for the insurance industry but we remain committed to delivering our goal of mid-teen RoNTA for our shareholders. We have the capital strength and exceptional talent within our business to navigate these demanding conditions and to continue to innovate and take advantage of opportunities for incremental growth as and when they arise. I look back at 2014 with immense pride at what has been achieved and I look forward with confidence and realism that we have the platform and the people to deliver strong returns for shareholders.
Finally, I express my sincere appreciation to the Board, the executive and all the staff at Brit for their contribution and for their ongoing commitment to delivering our strategy and for helping the business take another significant step forward to becoming the leading global specialty insurer.
Dr Richard Ward
24 February 2015
Chief Executive Officer's Report
2014 has been a landmark year for Brit, marking our return as a publicly listed company and delivering another strong set of results, a significant achievement given the shifting market dynamics. Since our decision to reposition the business, we have relentlessly focused on developing a platform that is aligned with our key objective of long-term value creation while retaining a highly disciplined approach to the business we choose to underwrite in the short-term.
Our model allows us to 'see the difference' and our recent track record is a strong vindication of what we have set out to achieve. It also gives us a clear path to deliver our key business objective: to maximise long-term value creation for shareholders by leveraging our differentiating Lloyd's-only platform and leading global specialty franchise to deliver the best insurance solutions to complex risks faced by our clients.
We were very pleased to announce on 17 February 2015 an offer for the business from Fairfax. Our business is complementary to the Fairfax group's current offering and the deal represents an exciting opportunity for us to continue our story on an even stronger footing, for the benefit of both companies, our employees, customers and trading partners. It will give Brit access to Fairfax's existing relationships and expertise in the international insurance and reinsurance markets, allowing us to enhance our global product offering.
Financial highlights
In 2014 we have delivered against the targets set out at the time of the IPO and continue to capitalise on profitable growth opportunities.
-- We continue to create value for our stakeholders. In spite of challenging market conditions we produced a RoNTA of 20.7% and the total value we created was GBP139.2m. Underwriting and investment performance both contributed to this result;
-- Our underwriting operations generated a profit of GBP102.0m and produced a combined ratio of 89.5%:
o Our premium growth of 9.8% (15.0% at constant rates of exchange), is driven by new business from the new teams and initiatives put in place from 2012 to 2014. We have also seen organic growth in a few selected lines where rating conditions remain attractive such as US binder business and some other specialty classes;
o The overall risk-adjusted trend in pricing is a decrease of 2.9%, which is in line with our projection at the time of the IPO and our guidance repeated at half year. The price falls in treaty reinsurance were marked and occurred early in the year as the bulk of our reinsurance book renews in the first six months. The insurance business pricing was more resilient with an overall decrease in rates of 1.6%, justifying our strategy to focus on insurance business where our expertise is highly valued. While we are not alone in experiencing rating declines, we are happy with the rating adequacy of our overall portfolio;
o Our claims experience has been in line with expectation and, while we have sustained some losses from natural catastrophes (e.g. Hurricane Odile) and man-made events (e.g. the Tripoli airport attack), the claims environment has been benign. Our attritional claims experience and the development of our prior year reserves have been in line with the guidance offered at the time of our IPO.
-- We have generated investment return net of fees ahead of our guidance at 2.9% and have benefited from falling yields and the tightening of credit spreads that have driven unrealised gains in our government and corporate credit weighted portfolios. We have shortened the duration of our portfolio in a defensive move against expected interest rate rises and we therefore believe we are well-positioned for 2015;
-- We are well capitalised with resources amounting to 150.4% of the capital we need to meet regulatory requirements. As indicated at the time of our IPO, we are and will continue to be active managers of our capital and, in line with our guidance, will make a special dividend of GBP50.1m to bring our surplus position back to the upper end of the 120% to 140% range;
-- In 2014, we successfully completed the commutation of a portfolio reinsurance transaction relating to the restructuring of the Group in 2012. We are pleased to have commuted on favourable terms, bringing closure on a portfolio of long-tail liability reserves including those related to the financial crisis. This transaction marked the final element of the major restructuring of the business undertaken since 2011 by Brit's new management.
Focus on the fundamentals
At Brit we focus on five core fundamentals that drive our overarching business objective: continuing to take advantage of our differentiating Lloyd's-only operating platform; delivering sustainable and profitable underwriting performance (which includes the claims component of our business); focused growth; dynamic asset management; and strong capital management. While we discuss all of these in some detail elsewhere in this Strategic Report, I will provide some additional perspective here.
Underwriting
Underwriting profitability lies at the heart of our strategy. Evidence of that commitment is seen not only in this year's very strong claims ratio but in the reduction in our attritional loss ratio over the last five years.
Under Matthew Wilson's leadership, in what can best be described as a challenging environment, underwriting performance of GBP1,302.1m premium income and a claims ratio of 50.0% again proved the wisdom of writing a diversified portfolio of specialty classes. We saw good top line growth in 2014, predominantly from new teams and initiatives, however we continue to maintain a highly disciplined approach to organic growth, particularly given market conditions and outlook.
In volatile market conditions, the ability to draw on underwriting experience, sophisticated technical pricing tools and long-term trading relationships to grow or reduce exposures depending upon terms and conditions available by business class, is critical to optimising shareholder returns. Over the past six years we have consistently enhanced our product set, as well as the skills of our underwriting community. As a result, we were very well positioned to meet the challenges of the market conditions we faced in 2014 - and will continue to see going forward.
The London market should be a centre of innovation: offering products that are responsive to new and emerging forms of risk. We believe the best response to excess capacity is to create demand through the development of new products for emerging needs, rather than allowing that excess capacity to cause us to give away our margins.
Brit set an excellent example of such innovation in 2014 with the roll-out of our new cyber-attack cover - targeted at first party physical damage and business interruption loss arising from a cyber-attack. We are proud of this development.
In tandem with our underwriting performance, delivery of a first class accurate claims service to our clients is key to our success. During the year we continued to strengthen our claims offering with a number of new hires, deepening our skill set and expanding the experience base in support of the new initiatives we implemented. We have also led innovation within the claim side of the business through the introduction of a fast track arbitration clause that will greatly enhance the client's experience on complex issues, with a more cost effective and robust solution to potential conflict points. This is unique to Brit and has been well received in the market.
Looking ahead, we expect that trading conditions in some classes will continue to be challenging. However, we believe we have the diversity in our portfolio, the cross-class expertise, the discipline and the trading relationships that will enable us to continue driving strong returns through shifting market cycles.
Focused growth
As a specialty (re)insurer we look to grow in two principal ways. First, in the specialty classes in which Lloyd's and the London market have a major and or leading presence. Secondly, through opportunity-driven geographic growth in specialty classes where we have expertise - in both mature and emerging markets including the US, China and Latin America.
2014 saw 15.0% growth in our top line GWP at constant FX rates. This was driven by our specialty insurance business which grew by 22.4%, while we chose to shrink our reinsurance portfolio by 8.1% in response to difficult market conditions. The growth we achieved in our book was driven predominantly by new underwriting initiatives implemented in 2013 and 2014, which included the addition of property and public entity specialty teams in the US, a casualty and property treaty team in Bermuda and a number of specialist class teams in London (high value homeowners, aviation, political and credit risks, and fine art and specie). Growth in our existing business was limited as we remained disciplined. This growth was focused on areas where rates have been most resilient and specifically our US property binder business and US specialty classes.
Our growth has been described as being 'opportunistic' and we agree with that view. Our approach is first to consider any opportunity within the context of our overall strategy and our basic understanding of the product offering to ensure it fits with our longer-term plan. We then examine historical results very closely and model the business in our own structure. This ensures we fully understand the capital implications, aggregation and correlation issues and expense impact. We only proceed if we fully understand the class and the business meets all our criteria - including a very high probability of achieving a profitable run rate within its first 12 months. This disciplined approach means we turn away many more 'opportunities' than we actually take on.
Given our capital structure and highly competitive expense model, it is important to remember that we are under no pressure to write new or unfamiliar premium (exposure); this is particularly important given the current challenging market conditions.
Given current market conditions and the effect of rate movements, we expect the impact of the various initiatives to deliver a low to mid-single digit growth rate for Brit over the next few years.
Investment management
An important part of our strategy is to optimise the risk-adjusted return on our asset portfolio within the context of the responsibilities of a property and casualty insurance business. Under John Stratton's leadership our result in 2014 is a good example of the effectiveness of that strategy.
Invested assets under management amounted to GBP2.6bn at the end of 2014 (2013: GBP2.6bn), with investment return net of fees for the year ahead of expectations at 2.9%, or GBP75.7m (2013: 2.1%, or GBP54.7m).
At 31 December 2014, 88.2% of the Group's investment portfolio was invested in cash and income generating assets. Over 70% of our invested assets corresponded to cash, government bonds and investment grade credit. A small proportion (11.8%) of the portfolio is allocated to growth assets where investment is targeted at lower volatility alternative and equity strategies.
During 2014, the duration and credit risk in the portfolio was actively managed through portfolio rebalancing. This, together with the ability of our growth strategies to manage periods of market volatility enhanced our performance and, in particular, risk-adjusted returns over the year.
While the macro-economic environment remains challenging, we believe our investment portfolio is appropriately positioned for a persistently slow global recovery and the prospect of changing monetary policy in different regions. With our established and flexible operating platform we remain well placed to actively manage our duration and sector profile as the market backdrop develops, accessing attractive investments as risk/reward opportunities arise.
Operating platform
A key element in long-term value creation is to position the Company with an efficient and scalable operating platform. Over the past four years we have developed a model that enables us to operate on a very competitive operating expense ratio. In 2014 our operating expense ratio was stable at 12.0% (2013: 12.0%). We monitor controllable expenses closely and work hard to ensure that discretionary spending is targeted at improving business performance, both for our shareholders and our trading partners.
While we manage expenses carefully, we recognise that both people and systems are critical to maintaining a competitive advantage for a specialty business. In 2014 we have made a number of infrastructure investments which will help empower us with a highly flexible business model. Operating an expense-efficient, scalable platform gives us greater ability to manage effectively through the challenges of market cycles.
Capital management
Our Lloyd's-focused business allows us to maintain a very strong capital position, while still achieving operating ratios that enable us to produce sector-leading returns for our shareholders. The capital efficiency embedded in the Lloyd's model - and the operating efficiency we achieve there - also enhances our flexibility when dealing with competitive pricing pressures and the market impact of lower-cost forms of capital.
We seek to hold actual capital in a range of 120% to 140% of our capital requirement and believe holding capital at this level enhances our ability to manage our approach to opportunity-driven growth, take advantage of positive market circumstances arising following major industry losses, and support our attractive dividend. Notwithstanding the prudent holding of that excess capital, we achieved a 20.7% return on net tangible assets for our shareholders this year and were able to recommend a final dividend of 12.5p per share (GBP50.1m) taking the total ordinary dividend for the year to 18.75p per share (GBP75.1m).
As excess capital builds above our expected range we will look for ways to deploy it through growth in the business. As we committed to at the time of the IPO, if market conditions or a lack of good opportunities suggest growth is not right for us, we will return that excess (above our prudent range) to our shareholders. This was the case in 2014 where our strong results have afforded us additional capital headroom and after consideration of the potential capital requirements for 2015 and growth opportunities we have proposed to pay a special dividend of a further 12.5p per share (GBP50.1m). This takes the total payout for the full year to GBP125.2m/31.25p per share or 90.1% of 2014 earnings. Our capital buffer at the end of 2014, adjusted for these recommended dividends, was 36.0% or GBP251.7m above requirements. Having slightly reduced both our maximum catastrophe realistic disaster scenario exposure and some of our credit exposures on the investment portfolio in the second half of 2014, we believe this is a prudent and appropriate level of capital buffer for our business to carry. I expect to continue this rigorous capital management policy in the future.
Brit has operated its governance and capital resources on a 'Solvency II' standard internal model for some years and we therefore believe we are well positioned to comply with full requirements when they become effective from 1 January 2016.
Conclusion and outlook
The results we have achieved this year and the strength of our business model is a credit to the entire Brit team. Our people are our core asset and everything we achieve is through their talent, experience, hard work and commitment. At Brit we operate a culture of achievement and involvement where we encourage our associates to excel in every aspect of our business through experience, training, natural talents and importantly, collaboration across business activities.
In each of the past two years we have performed engagement surveys to help us understand how our team members view our Company, the corporate environment and the behaviour of management. I am very happy to report extremely high participation levels in both of those surveys with 2014 participation at 89%.
The surveys provide invaluable feedback on what we are doing well and where we have room for improvement. Management takes that feedback very seriously and takes every effort to continuously improve our work environment and culture. I am delighted to report this year we scored very well in some key measures or statements. For example, 86% of employees would recommend Brit as a great place to work and 85% of employees are proud to work here.
We believe having a workforce which is very engaged in the future of the business sets our Group on a course for continued outperformance for many years ahead.
Trading conditions are certainly not getting any easier with a continued flow of capital to our market place, a generally softening rate environment, and a continuing low yield investment environment. Nonetheless we believe we are well positioned to face the challenging days ahead with the flexibility we have built into our business model through our low cost scalable operating platform, our strong yet efficient capital structure, our dynamic approach to asset management and our opportunity-driven growth strategy. In addition, and very importantly given current market trends, we have over the past four years shown clear underwriting discipline; it is that which has enabled us to reach this stage and we will continue to focus on this fundamental which is so core to our business.
I would like to thank every member of the Brit team for their commitment and efforts over the past year and congratulate them on a great result. My thanks also go to our trading partners, brokers, agents, policyholders and cedants for their support and friendship as we have continued to develop the Brit story together.
Finally, I would like to extend my appreciation to our Board of Directors for their encouragement, advice, direction and support through what has been a very exciting and successful year for our Group.
Mark Cloutier
24 February 2015
Financial Review
Overview of Results
The Group's income statement, re-analysed to show the key components of our result, is set out below:
Hot Features
Premium
2014 2013 2012 2011
GBPm GBPm GBPm GBPm
----------------------------------- -------- -------- -------- --------
Gross written premium 1,302.1 1,185.7 1,147.9 1,179.9
Net earned premium (note
1) 970.4 947.7 942.8 1,003.6
Underwriting profit (note
1) 102.0 138.4 63.7 20.0
Underwriting profit 102.0 138.4 63.7 20.0
Return on invested assets,
net of fees 75.7 54.7 87.9 64.4
Corporate expenses (23.5) (14.9) (14.2) (18.9)
Finance costs (13.5) (15.0) (14.6) (16.7)
Other items 0.5 4.4 0.5 (0.3)
-------- -------- -------- --------
Profit on ordinary activities
before tax, FX, negative
goodwill write-off and corporate
activity costs 141.2 167.6 123.3 48.5
FX movements 21.6 (58.2) (27.4) 16.9
Write off of negative goodwill - - - 51.9
Transaction costs (note
2) (13.7) (2.0) - (35.5)
-------- -------- -------- --------
Profit on ordinary activities
before tax 149.1 107.4 95.9 81.8
Tax (10.1) (6.5) (5.2) (0.3)
Discontinued operations - (1.4) 23.8 19.2
-------- -------- -------- --------
Profit for the year (after
tax) 139.0 99.5 114.5 100.7
Pence Pence Pence Pence
Earnings per share (basic)
(all business) 34.8 23.8 25.8 21.6
Earnings per share (basic)
(continuing business) 34.8 24.1 20.4 17.5
Dividend per share 31.25 n/a n/a n/a
Note 1: Excluding the effects of foreign exchange on non-monetary items.
Note 2: The 2013 and 2014 costs relate to the April 2014 IPO; the 2011 costs relate to the acquisition by the Group of Brit Insurance Holdings B.V.
Group performance and total value added
We have delivered a strong performance in our first period as a re-listed Group. Underwriting return was healthy, benefitting from targeted premium growth, a low attritional loss ratio, an absence of large losses and favourable reserve development. This was supported by a very competitive investment return net of fees of 2.9%. Our result for the year also included costs incurred in relation to the IPO.
Profit before tax for the year was GBP149.1m (2013: GBP107.4m) and profit after tax was GBP139.0m (2013: GBP99.5m). Return on adjusted net tangible assets (RoNTA), excluding the effects of FX on monetary items and IPO costs, decreased to 20.7% (2013: 24.2%). Basic EPS was 34.8 pence per share (pps) (2013: 24.1pps). Total value created for the year was GBP139.2m (2013: GBP91.3m).
Our adjusted net tangible assets increased to GBP775.4m or 194.0pps (2013: GBP661.2m/168.6pps), after payment in September of an interim dividend of GBP25.0m.
Dividends
The Board declared and paid an interim dividend of 6.25pps. The Board has also recommended a final ordinary dividend of 12.5pps and a special dividend of 12.5pps. Subject to AGM approval, both the final ordinary and special dividends will be paid on 30 April 2015 to shareholders on the register on 20 March 2015. The shares will go ex-dividend on 19 March 2015.
Key performance indicators
2014 2013
--------------------------------------------------- ---------- ---------
Return on net tangible assets before FX movements
and IPO costs (RoNTA) 20.7% 24.2%
Total value created GBP139.2m GBP91.3m
Combined ratio 89.5% 85.4%
Investment return (net of external investment
related expenses) 2.9% 2.1%
Capital ratio 150.4% 141.0%
Ratio of front office employees to back office
employees 159.8% 149.7%
--------------------------------------------------- ---------- ---------
In 2014 we delivered a RoNTA of 20.7% driven by excellent performance across all areas of the business. Strong underlying underwriting results were supported by limited losses from natural catastrophes and our investment return (net of fees) of 2.9%. In a year with average levels of major claims we target a RoNTA in the mid-teens range.
In 2014 value creation was GBP139.2m or 21.1% of opening adjusted NTA. The company has now generated a total value of GBP451.2m over the past four years, an average of GBP112.8mper annum.
The combined ratio is our key underwriting metric. In a year with average levels of major claims, we target a combined ratio in the low to mid 90% range. In a year with low levels of major claims, the ratio would be expected to fall to the high 80% range. Overall, the combination of strong portfolio management, underwriting discipline and opportunity-driven growth has led to us achieving an excellent 89.5% CoR in 2014, in line with our guidance. We have consistently delivered combined ratios below 100% over the past four years and an average ratio of 91.5% over that period.
We have a track record of delivering consistent investment profitability and attractive risk adjusted returns ahead of benchmarks. The return in 2014 was 2.9% despite the low yield environment.
We target a capital ratio within a range of 120% to 140%. At 31 December 2014, the ratio was 150.4% and as such, management are recommending a special dividend of GBP50.1m. Adjusted for this special dividend and the recommended final ordinary dividend of GBP50.1m, the ratio reduces to136.0%.
Ratio of front office employees to back office employees monitors the efficiency of our business model. At 31 December 2014, the ratio was 159.8%, reflecting that we had 1.6 front office employees for every one back office employee.
Other performance measures
In addition to these KPIs, we have other measures that offer further insight into the detail of our performance. These measures are:
-- Premium related: Risk adjusted rate change; Retention rate;
-- Claims related: Claims ratio; Attritional loss ratio; Major claims ratio; Reserve release ratio; Reserve releases as a percentage of opening net claims reserves; and
-- Underwriting expense related:Underwriting expense ratio; Commission ratio; Operating expense ratio.
These measures are explained in the sections below.
Underwriting - Group
Overview
Our underwriting profit for the year amounted to GBP102.0m (2013: GBP138.4m) and our combined ratio, which excludes the effect of foreign exchange on non-monetary items, was 89.5% (2013: 85.4%). The premiums, claims and expenses components of this result are examined below.
Premiums written
Premium growth Growth at
constant
2014 2013 Growth FX rates
GBPm GBPm % %
----------------------------------- -------- -------- -------- ----------
Brit Global Specialty Direct 1,056.8 903.1 17.0 22.4
Brit Global Specialty Reinsurance 245.3 281.0 (12.7) (8.1)
Other underwriting - 1.6 (100.0) (100.0)
Group 1,302.1 1,185.7 9.8 15.0
----------------------------------- -------- -------- -------- ----------
Premiums by class 2014 2013
GBPm GBPm
-------------------------------------- -------- --------
Brit Global Specialty Direct
Short-tail direct
Property 282.2 228.1
Energy 82.4 106.2
Marine 119.6 109.0
US specialty (BGSU) 102.0 67.0
Terrorism, political and aerospace 69.4 23.0
Accident and health 61.6 65.9
-------- --------
Short-tail direct total 717.2 599.2
-------- --------
Long-tail direct
Casualty 239.0 233.1
Specialist liability 100.2 70.8
-------- --------
Long-tail direct total 339.2 303.9
-------- --------
Discontinued lines 0.4 -
-------- --------
Total direct 1,056.8 903.1
-------- --------
Brit Global Specialty Reinsurance
Short-tail RI (property treaty) 109.1 136.9
Long-tail RI (casualty treaty) 135.7 141.4
Discontinued lines 0.5 2.7
-------- --------
Total reinsurance 245.3 281.0
Other underwriting - 1.6
Group total 1,302.1 1,185.7
While our underwriters have displayed excellent discipline in the more challenging classes, we still achieved premium growth in 2014, with weaker lines being offset by growth in our fledgling international platforms and business generated by our new initiatives and team hires.
Gross written premium (GWP) in 2014 increased by 9.8% to GBP1,302.1m (2013: GBP1,185.7m). Direct business increased by 17.0% to GBP1,056.8m (2013: GBP903.1m), while reinsurance decreased by 12.7% to GBP245.3m (2013: GBP281.0m). At constant exchange rates the overall increase was 15.0% (2013: 2.1%).
The drivers of the 9.8% increase in Group GWP, which was in line with expectations, are set out in the chart below:
GBPm
-------------------------------- --------
2013 GWP 1,185.7
Underwriting initiatives 93.4
Organic growth 32.3
Prior year premium development 44.6
Foreign exchange (53.9)
2014 GWP 1,302.1
-------------------------------- --------
These drivers are explained further below:
-- The Group's underwriting initiatives, launched in both 2013 and 2014 resulted in a GBP93.4m increase in GWP. The main contributors were aviation, Bermuda, high value homeowners, BGSU and political and credit.
-- The Group's organic growth of GBP32.3m was driven by growth in classes experiencing favourable rate increases including the property binder book, specialist liability, and marine. These growth areas were partly offset by premium reductions in classes experiencing falling rates including reinsurance and energy.
-- The favourable development on prior years of GBP44.6m has resulted from a review of premium estimates, predominantly from our casualty book. This business was originally written in a stronger rating environment.
-- These growth areas were offset by the impact of foreign exchange (GBP53.9m), which reflect the movements during 2014 of Sterling against a number of currencies in which the Group writes business including the US dollar.
An increasing proportion of our GWP is US dollar-denominated, reflecting the expansion of our US operations. Our GWP analysed by currency is set out below:
Premiums by currency 2014 2013
% %
----------------------- ------ ------
Sterling (note 1) 19.2 21.9
US dollar 69.6 67.4
Euro 6.5 5.7
Canadian dollar 4.7 5.0
100.0 100.0
----------------------- ------ ------
Note 1: Includes incidental currencies
Premium ratings
Overall risk adjusted premium rates decreased by 2.9% during 2014 (2013: increased by 0.3%), brought about by low levels of catastrophe activity and increased competition from new sources of capacity. This reduction was strongly influenced by reinsurance business which experienced rate reductions of 7.4%, driven by a 10.6% rate reduction in property treaty. Rates for direct business fell by 1.6% in the period, with the principal movements being decreases in energy, the property open market book and casualty. These were partly offset by increases in specialist liability, marine and the property binder book.
In response to these conditions, we have taken a defensive position, particularly in our property treaty reinsurance book. We have reduced our reinsurance volumes and have focused on increasing our specialty business; our portfolio continues to re-balance towards short-tail specialty business where we believe there is greater rating adequacy. Critically, we are still seeing rate adequacy in many lines which should allow target returns on capital to be met.
Retention rates
Our retention rate for the period, which reflects the proportion of our business that renews on a risk adjusted basis, was 83.0% (2013: 83.0%). The retention rates we achieved in 2013 and 2014 reflect the successful renewal of a profitable book of business, following the re-underwriting of the book that occurred between 2008 and 2012, through which we rebalanced our book and non-renewed around half of our underwriting portfolio.
Our business is built on our talented underwriting professionals and our strong relationships with brokers and policyholders. During 2014, we have retained our underwriting talent and have continued to attract new hires. Our ability to lead business, combined with our innovative approach to underwriting, supports our success in building long-term and dependable market relationships. This is reflected in our retention rate, which has increased to 83% from 70% in 2009 and by us leading, or being second agreement party, on more than 70% of the business we write. This helps us to secure favourable rates.
Outwards reinsurance
Our reinsurance expenditure in 2014 was GBP277.2m or 21.3% of GWP (2013: GBP229.4m/19.3%), an increase of GBP47.8m (20.8%).
Included within our 2014 reinsurance expenditure was GBP42.9m in respect of a specific one-off reinsurance contract, entered into to provide adverse development cover for a discontinued professional lines account with exposure to Italian medical malpractice. This contract has provided the Group with significantly greater certainty over a poorly performing legacy account. Under the terms of this contract, GBP40.3m of reserves transferred to the reinsurer, resulting in a net cost to the Group of GBP2.6m. An effect of this contract was to reduce our attritional ratio while increasing our underwriting expense ratio however there was no material impact on our combined ratio.
During 2014, we also took advantage of reinsurance market conditions to significantly strengthen our catastrophe cover. These additional protections include a Group-wide property aggregate catastrophe cover and some additional variable quota share protections. As a result, the expected recoveries against a number of our realistic disaster scenarios (RDS) have increased, thereby reducing our net exposure to such events. Our largest net exposure under the Lloyd's-defined RDSs has fallen to GBP113m (2013: GBP149m).
Net earned premium
Net earned premium (NEP) in 2014, excluding the effects of foreign exchange on non-monetary items, increased by 2.4% to GBP970.4m (2013: GBP947.7m/0.5%). This growth was impacted by the GBP42.9m reinsurance premium paid in respect of the specific one-off reinsurance contract referred to in the outwards reinsurance section.
Direct business increased by 7.2% to GBP756.4m (2013: GBP705.7m/2.3%), while reinsurance decreased by 15.5% to GBP201.2m (2013: GBP238.1m/3.6%).
At constant exchange rates the overall increase was 7.4% (2013: decrease of 1.2%).
Claims
Our claims experience in 2014 was in line with expectations, with an overall claims ratio of 50.0% (2013: 48.5%). Overall, the combination of strong portfolio management, underwriting discipline and opportunity-driven growth has led to us achieving an excellent 89.5% CoR in 2014.
Our key claims metrics were as follows:
2014 2013
% %
------------------------ ------ ------
Attritional loss ratio 51.0 51.3
Major claims ratio 2.3 3.2
Reserve release ratio (3.3) (6.0)
------------------------ ------ ------
Claims ratio 50.0 48.5
------------------------ ------ ------
Our 51.0% attritional ratio has benefitted from the one-off reinsurance contract as described above however this was offset by a number of one off risk losses earnings through from 2013 and 2014, as well as deterioration arising from rating pressures and a change in business mix as the Group reduced short-tail reinsurance exposures. We believe the impact of these effects leaves an underlying attritional in the mid 51% range and on this basis is a testament to the strength of our underwriting franchise in the face of competitive pressures.
2014 saw limited natural catastrophe activity, the only event being Hurricane Odile which resulted in incurred net losses of GBP8.8m.
We had immaterial exposure to the losses of Malaysian Airlines' MH370 and MH17, the Korean ferry (SEWOL) and Air Asia, but we did incur net losses of GBP12.9m from the Tripoli airport attack.
As part of our quarterly reserving process, we released GBP32.1m of claims reserves established for prior year claims, the equivalent of a combined ratio reduction of 3.3% (2013: GBP57.3m/6.0%). Of this release, 87.9% was derived from the 2011 and prior underwriting years (2013: 88.5% from the 2010 and prior underwriting years). The main drivers of this release were casualty treaty, property treaty and marine. Our statement of financial position remains strong and we continue to operate a robust reserving process. Reserve releases in 2014 were equivalent to 1.9% of our opening net claims reserves (2013: 2.7%).
Underwriting expenses
Our underwriting expense ratio was 39.5% (2013: 36.9%). The key components of this ratio were as follows:
2014 2013
% %
---------------------------- ----- -----
Commission ratio 27.5 24.9
Operating expense ratio 12.0 12.0
---------------------------- ----- -----
Underwriting expense ratio 39.5 36.9
---------------------------- ----- -----
Commission costs were GBP269.9m and the commission expense ratio was 27.5% (2013: GBP235.8m/24.9%). In addition to the effects of the one-off reinsurance, the ratio was affected by changes in business mix, including increased binder business. We wrote more business through cover-holders as, in the current softening conditions, the rating of this business tends to be better than open market business.
Our operating expenses are analysed later in this report.
Underwriting - by business unit
2014 2013
Brit Other Brit Other
Brit Global Under- Brit Global Under-
Global Specialty Writing Total Global Specialty Writing Total
Specialty Reinsur- and (note Specialty Reinsur- and (note
Direct ance Intra-Group 1) Direct ance Intra-Group 1)
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Gross written
premium
(GBPm) 1,056.8 245.3 - 1,302.1 903.1 281.0 1.6 1,185.7
Net Earned
Premium
(GBPm) 756.4 201.2 12.8 970.4 705.7 238.1 3.9 947.7
Underwriting
profit
(GBPm) 30.5 66.7 4.8 102.0 56.6 83.2 (1.0) 138.4
Claims ratio
(%) 53.5 37.2 43.0 50.0 52.5 36.6 43.6 48.5
Underwriting
expense
ratio (%) 42.5 29.6 19.5 39.5 39.5 28.5 92.3 36.9
Combined
ratio (%) 96.0 66.8 62.5 89.5 92.0 65.1 135.9 85.4
Rate change
(%) (1.6) (7.4) - (2.9) 0.8 (0.9) - 0.3
Note 1: Excluding the effect of foreign exchange on non-monetary items.
Brit Global Specialty Direct
We lead approximately 50% of the direct business we write and are second agreement party on a further 20%. This strong offering to brokers and clients allows us to drive scale and relevance in our core insurance lines of property, energy and casualty, where the Lloyd's market has significant market share and relevance. The broad nature of our insurance portfolio allows us to manage cycle dynamics by class and allows us to take advantage of opportunities that may arise in our diversifying lines of business such as marine, terror, political risks, aviation and accident and health.
In 2014 this was illustrated by 17.0% growth in our GWP (22.4% at constant FX rates). The benefits of organic growth in more resilient lines such as property binders, US specialty and the income from new initiatives such as aviation, more than offset our underwriting discipline of reducing our energy account.
Brit Global Specialty Direct's CoR was 96.0%, driven by a particularly pleasing attritional loss ratio of 51.3%.
Brit Global Specialty Reinsurance
The profitability of our treaty reinsurance book remained strong with a CoR of 66.8%, driven by low catastrophe experience in our property account and another year of good performance from our market leading casualty reinsurance account. During 2014, our treaty reinsurance portfolio accounted for 18.8% of our GWP, however, in the competitive landscape our underwriters maintained discipline, resulting in a reduction of premiums of 12.7% (8.1% at constant FX rates). This allowed us to reallocate their surplus capital to direct lines with more robust rating levels.
Investment return
2014 has produced a strong investment performance, driven by two aspects of our strategy - the focus on generating a higher running yield and our broader exposure to credit markets.
The return on our invested assets after deducting external fees was GBP75.7m or 2.9% (2013: GBP54.7m/2.1%). Our invested assets at 31 December 2014 amounted to GBP2,582.3m (2013: GBP2,590.9m). Overall duration at 31 December 2014 was 1.1 years (2013: 2.0 years) and the average credit quality was 'A' (2013: 'A'). Our 2014 investment return of 2.9% was a combination of 2.2% of investment income and 0.9% of realised and unrealised gains on the portfolio, less fees equivalent to 0.2%.
Investment return 2014 2013
GBPm GBPm
------ ------
Income 57.9 57.5
Released gains/(losses) 12.7 1.2
Unrealised gains/(losses) 5.6 4.1
------ ------
Investment return before fees 76.2 62.8
Investment management fees (6.1) (5.9)
Investment return net of fees 70.1 56.9
Investment related derivative return 5.6 (2.2)
------ ------
Total return 75.7 54.7
-------------------------------------- ------ ------
Total return (%) 2.9% 2.1%
-------------------------------------- ------ ------
Our income producing assets performed well and we generated income of GBP57.9m during the year, representing a running yield of 2.2% (2013: GBP57.5m/2.2%). Our total return in 2014 of GBP75.7m (2013: GBP54.7m) was influenced by falling bond yields and a contraction in credit spreads across the US and European markets which led to gains on our fixed income and credit portfolios. Our growth assets showed gains as equity markets and alternatives rose.
Within our unrealised gains for the year there are GBP15.1m of gains made within fund investments (2013: GBP8.3m). Of these gains, GBP9.1m was distributed on scheduled distribution dates in January 2015 (January 2014: GBPnil), thereby converting unrealised gains into income.
Expenses
Our operating expense ratio was unchanged at 12.0% (2013: 12.0%). Operating expenses for the period were as follows:
Expense analysis 2014 2013
GBPm GBPm
------ ------
Underlying operating expenses including bonus
provisions 138.0 129.5
Project costs, timing differences and other expense
adjustments 1.5 (0.7)
------ ------
Expenses before IPO related costs 139.5 128.8
IPO related costs 13.7 2.0
------ ------
Total operating expenses 153.2 130.8
----------------------------------------------------- ------ ------
Underlying operating expenses during 2014 increased by 6.6% to GBP138.0m (2013: GBP129.5m). This increase related to an increase in bonus costs, targeted expansion and investment in growth areas such as our US specialty business (BGSU) and aviation, together with increased costs reflecting the Company's listed status.
The allocation of operating expenses within the Consolidated Income Statement and the Segmental Information is as follows:
Disclosure of operating expenses 2014 2013
GBPm GBPm
------ ------
Acquisition costs 58.7 51.7
Other insurance related expenses 57.3 62.2
------ ------
Total insurance related expenses 116.0 113.9
Other operating expenses 37.2 16.9
Total operating expenses 153.2 130.8
---------------------------------- ------ ------
Foreign exchange
We manage our currency exposures to mitigate its impact on solvency rather than to achieve a short-term impact on earnings. We experienced a total foreign exchange gain of GBP21.6m in 2014 (2013: loss of GBP58.2m). This total foreign exchange related gain comprised:
-- An unrealised revaluation loss of GBP0.4m (2013: loss of GBP65.4m), primarily relating to the mark to market of the capital we hold in non-Sterling currencies to match our risk exposures. The loss comprises a gain of GBP20.6m resulting from the weakening of Sterling against the US dollar, offset by losses of GBP21.0m resulting from the strengthening of Sterling against a number of other currencies, primarily the Euro, Australian dollar and the Canadian dollar;
-- Gains of GBP1.7m (2013: gain of GBP13.2m) on derivative contracts which were entered into to help manage our FX exposures; and
-- An accounting gain of GBP20.3m (2013: loss of GBP6.0m), as a result of the IFRS requirement to recognise non-monetary assets and liabilities at historic exchange rates.
The allocation of the FX result within the Consolidated Income Statement is as follows:
Foreign exchange gains/ (losses) 2014 2013
GBPm GBPm
--------------------------------------------------------- -------------- ---------------
Net change in unearned premium provision - non-monetary
FX effect 9.3 (2.2)
Acquisition costs - non-monetary FX effect (2.3) 0.4
Net foreign exchange gains/ (losses) - non-monetary
(Note 1) 13.3 (4.2)
-------------- ---------------
20.3 (6.0)
-------------- ---------------
Net foreign exchange losses - monetary (Note 1) (0.4) (65.4)
Return on derivative contracts - FX related instruments 1.7 13.2
-------------- ---------------
1.3 (52.2)
-------------- ---------------
Total gain/ (loss) 21.6 (58.2)
--------------------------------------------------------- -------------- ---------------
Note 1: The sum of these two amounts, GBP12.9m (2013: GBP69.6m), is the 'Net foreign exchange gains/(losses)' figure per the Consolidated Income Statement.
Tax
The Group is liable to taxes on its corporate income in a number of jurisdictions, in particular the UK, Gibraltar and the US, where its companies carry on business. Our effective tax rate for the period was 6.8% (2013: 6.1%) which is a composite tax rate reflecting the mix of the tax rates charged in those jurisdictions.
Financial position
At 31 December 2014 our adjusted net tangible assets totalled GBP775.4m or 194.0pps (2013: GBP661.2m/168.6pps), an increase of 17.3% in the year.
At 31 December 2014 our gearing ratio was 13.8% (2013: 21.9%). The reduction in the ratio reflects the collateralisation of the US$80m letter of credit in April 2014.
We have successfully renegotiated our revolving credit facility. The facility limit remains at GBP225m and has been extended by one year to 31 December 2018. Under our capital policy we have identified a maximum of US$235m (2013: GBP125.0m) of the facility to form part of our capital resources, with the balance available for liquidity funding. At 31 December 2014 a fully collateralised US$80.0m letter of credit was in place (31 December 2013: US$80.0m/uncollateralised) to support our underwriting activities. At 31 December 2014 and at 31 December 2013 no other drawings were outstanding on the facility.
Capital Strength
At Brit we carry capital resources significantly in excess of our management capital requirements and seek to hold capital resources in a range of 120% to 140% of our requirement. We believe this is an appropriate level of capital for the business and provides management with:
-- The flexibility to absorb major losses while still being in a position to take advantage of subsequent market dislocations;
-- The ability to pursue opportunity-driven growth in our core business; and -- The support to provide continuity in regular dividend payments to shareholders.
As shown in the table below, our statement of financial position remains strong, with capital resources equivalent to 150.4% of requirements (2013: 141.0%). Following approval and payment of the recommended final ordinary and special dividends, the 31 December 2014 capital ratio will reduce to 136.0%.
Capital resources and requirements 2014 2013
GBPm GBPm
---------------------------------------------------- -------- --------
Adjusted net tangible assets 775.4 661.2
Subordinated debt 124.5 123.2
Letters of credit / contingent funding 150.6 125.0
-------- --------
Total available capital resources 1,050.5 909.4
Management entity capital requirements (698.6) (645.0)
-------- --------
Excess of resources over management entity capital
requirements 351.9 264.4
Capital ratio 150.4% 141.0%
Total value created for shareholders in 2014 was GBP139.2m. We have recommended a final ordinary dividend of GBP50.1m (12.5pps) for 2014. As stated at the time of the IPO, in the event that our capital position is in excess of requirements and we do not need this for growth opportunities, we will return it to our shareholders. After allowing for an increase in our capital requirements for 2015, driven by the growth of our business and overall pressure on market conditions, the capital buffer remained above our target level of 140%. Therefore, we have also recommended a special dividend of GBP50.1m (12.5pps) taking total dividends paid or recommended since the IPO in April to GBP125.2m (31.25pps).
We remain committed to proactive capital and risk management. After allowing for these dividends, our excess of capital resources over management entity capital requirements of GBP251.7m, a capital ratio of 136.0%, remains at the high end of our target range of 120% to 140% and is still comfortably in excess of our maximum RDS event on a net basis of GBP113m.
Asset allocation
We have a diversified and dynamic approach to investment strategy. Investment return is a key component of Brit's earnings and a strategic priority for us. The recent low interest rate environment and weak global economic performance has presented a challenging environment for insurers for a number of years. We have realigned our investment strategy and have transitioned to a broader mix of asset classes in order to deliver a more balanced and consistent risk adjusted return for our shareholders. We have also invested in our in-house capabilities that allow us to be more proactive in tactical decision-making within asset classes, which we feel is necessary in what remain challenging investment markets.
We continue to review our asset mix and have tactically moved to a slightly more defensive credit positioning in late 2014. In addition we have rebalanced some assets into our growth/diversifying portfolio. Both of these changes are intended to reduce the impact of any 'surprise' negative data, while broadly maintaining the potential returns in a strong economic environment. During 2015, we will continue to keep our asset mix and positioning of our portfolio under review.
At 31 December 2014, 72.9% of our invested assets were investment grade quality (2013: 72.9%). Our asset allocation, on both a look-through basis and statutory disclosure basis, is set out in the tables below:
31 December 2014 Statutory basis
---------------------------------------------------------------------------------------------
Equity Debt Loan Specialised Cash Derivative Derivative Total
securities securities instruments investment and cash assets liabilities invested
funds equivalents assets
(look
through)
------------------------
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------- ------------- ----------- ----------- ------------ ------------ ------------ ----------- ------------ ---------
Look Government
through debt
basis securities - 315.0 - 190.0 - - - 505.0
Corporate debt
securities - 433.7 - 312.7 - - - 746.4
Structured products - 236.9 - 97.1 - - - 334.0
Loan instruments - - 169.3 3.3 - - - 172.6
Equity securities 27.2 - - 72.4 - - - 99.6
Alternative
investments - - - 198.5 - - - 198.5
Cash and cash
equivalents - - - 199.0 321.4 - (1.3) 519.1
Derivatives - - - 4.7 - 2.4 - 7.1
Total invested
assets (statutory) 27.2 985.6 169.3 1,077.7 321.4 2.4 (1.3) 2,582.3
------------------------ ----------- ----------- ------------ ------------ ------------ ----------- ------------ ---------
31 December 2013 Statutory basis
---------------------------------------------------------------------------------------------
Equity Debt Loan Specialised Cash Derivative Derivative Total
securities securities instruments investment and cash assets liabilities invested
funds equivalents assets
(look
through)
------------------------
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------- ------------- ----------- ----------- ------------ ------------ ------------ ----------- ------------ ---------
Look Government
through debt
basis securities - 369.4 - 75.0 - - - 444.4
Corporate debt
securities - 341.0 - 452.2 - - - 793.2
Structured products - 288.4 - 48.6 - - - 337.0
Loan instruments - - 292.7 39.6 - - - 332.3
Equity securities 47.6 - - 107.5 - - - 155.1
Alternative
investments - - - 125.2 - - - 125.2
Cash and cash
equivalents - - - 86.7 315.7 0.5 (2.7) 400.2
Derivatives - - - 2.0 - 1.5 - 3.5
Total invested
assets (statutory) 47.6 998.8 292.7 936.8 315.7 2.0 (2.7) 2,590.9
------------------------ ----------- ----------- ------------ ------------ ------------ ----------- ------------ ---------
The changes between 2013 and 2014 have been driven principally by a re-balancing of the portfolio following the commutation of the 2012 reinsurance contract described above.
Our investments in specialised investment funds account for 41.7% of our invested assets and the investments within these funds are analysed in the tables above. We use these fund structures as vehicles for investment as we believe they deliver a number of advantages:
-- Group structure: Where a number of Group entities hold similar investments, it is significantly more efficient for these entities to invest via a fund structure, rather than having separate segregated mandates;
-- Investment strategy: Where a Group entity wishes to make a small investment in a niche strategy or specialist manager a separate managed account would often not be viable. A fund structure facilitates such an investment;
-- Operational complexity: Some of the investment strategies are complex. By investing through a fund that complexity is centralised within the fund and is the responsibility of the fund manager; and
-- Admissibility: A fund structure simplifies the regulatory admissibility assessment, especially when the structure meets the requirement for 'undertakings for collective investment in transferable securities' (UCITS).
Andrew Baddeley
24 February 2015
Consolidated Income Statement
For the year ended 31 December 2014
Year ended Year ended
31 December 31 December
2014 2013
Note GBPm GBPm
------------------------------------------------- ------ -------------- -----------------
Revenue
Gross premiums written 5 1,302.1 1,185.7
Less premiums ceded to reinsurers 5 (277.2) (229.4)
------------------------------------------------- ------ -------------- -----------------
Premiums written, net of reinsurance 1,024.9 956.3
Gross amount of change in provision for unearned
premiums (50.2) (34.0)
Reinsurers' share of change in provision for unearned
premiums 5.0 23.2
Net change in provision for unearned premiums (45.2) (10.8)
Earned premiums, net of reinsurance 979.7 945.5
------------------------------------------------- ------ -------------- -----------------
Investment return 6 70.1 56.9
Return on derivative contracts 7 7.3 11.0
Profit on disposal of asset held for sale - 4.4
Other income 0.5 -
Net foreign exchange gains 8 12.9 -
Total revenue 1,070.5 1,017.8
------------------------------------------------- ------ -------------- -----------------
Expenses
Claims incurred:
Claims paid:
Gross amount (758.7) (542.1)
Reinsurers' share 112.5 99.2
------------------------------------------------- ------ -------------- -----------------
Claims paid, net of reinsurance (646.2) (442.9)
Change in the provision for claims:
Gross amount 101.5 (34.1)
Reinsurers' share 59.9 17.8
------------------------------------------------- ------ -------------- -----------------
Net change in the provision for claims 161.4 (16.3)
Claims incurred, net of reinsurance 5 (484.8) (459.2)
Acquisition costs 9 (328.6) (287.5)
Other operating expenses 9 (94.5) (79.1)
Net foreign exchange losses 8 - (69.6)
Total expenses excluding finance costs (907.9) (895.4)
------------------------------------------------- ------ -------------- -----------------
Operating profit 162.6 122.4
Finance costs (13.5) (15.0)
Profit on ordinary activities before tax 149.1 107.4
Tax expense 13(a) (10.1) (6.5)
Profit for the year from continuing operations 139.0 100.9
------------------------------------------------- ------ -------------- -----------------
Loss from discontinued operations - (1.4)
-------------- -----------------
Profit for the year 139.0 99.5
------------------------------------------------- ------ -------------- -----------------
The accompanying Notes are an integral part of the annual accounts.
Consolidated Income Statement (continued)
For the year ended 31 December 2014
Earnings per share from continuing operations
attributable to equity holders of the parent Year ended Year ended
(pence per share) 31 December 31 December
2014 2013
Note GBPm GBPm
----------------------------------------------- ----- -------------- -----------------
Basic 11 34.8 24.1
Diluted 11 34.8 24.1
----------------------------------------------- ----- -------------- -----------------
Total earnings per share attributable to
equity holders of the parent (pence per share) Year ended Year ended
31 December 31 December
2014 2013
Note GBPm GBPm
------------------------------------------------- ----- -------------- -----------------
Basic 11 34.8 23.8
Diluted 11 34.8 23.8
------------------------------------------------- ----- -------------- -----------------
The numbers of shares used for calculating the earnings per share are those of Brit PLC. The number of Achilles Holdings 1 S.à r.l. shares in the comparative period has been converted into the equivalent number of Brit PLC shares to reflect the corporate reorganisation on 28 March 2014.
Consolidated Statement of Comprehensive Income
For the year ended 31 December 2014
Year ended Year ended
31 December 31 December
2014 2013
Note GBPm GBPm
----------------------------------------------- ------ -------------- -----------------
Profit attributable to:
Equity holders of the parent 139.0 99.1
Non-controlling interests - 0.4
----------------------------------------------- ------ -------------- -----------------
Profit for the year 139.0 99.5
----------------------------------------------- ------ -------------- -----------------
Other comprehensive income
Items not to be reclassified to profit or
loss in subsequent periods:
Actuarial gains on defined benefit pension
scheme 0.4 2.0
Deferred tax charge relating to actuarial
gains on defined benefit pension scheme 13(b) (0.1) (0.5)
----------------------------------------------- ------ -------------- -----------------
Net other comprehensive income not to be
reclassified to profit or loss in subsequent
periods 0.3 1.5
Other comprehensive income for the year net
of tax 139.3 101.0
----------------------------------------------- ------ -------------- -----------------
Total comprehensive income for the period
attributable to:
Equity holders of the parent 139.3 100.6
Non-controlling interests - 0.4
----------------------------------------------- ------ -------------- -----------------
Total comprehensive income for the year 139.3 101.0
----------------------------------------------- ------ -------------- -----------------
The accompanying Notes are an integral part of the annual accounts.
Consolidated Statement of Financial Position
At 31 December 2014
31 December 31 December
2014 2013
Note GBPm GBPm
-------------------------------------------- ----- -------------- --------------
Assets
Intangible assets 14 62.2 62.7
Property, plant and equipment 15 4.7 5.1
Deferred acquisition costs 134.3 125.7
Reinsurance contracts 16 526.4 450.0
Employee benefits 27.8 21.9
Current taxation 10.5 6.0
Financial investments 17 2,259.8 2,275.9
Derivative contracts 18 7.8 12.7
Insurance and other receivables 19 452.7 380.9
Cash and cash equivalents 20 321.4 315.7
Total assets 3,807.6 3,656.6
-------------------------------------------- ----- -------------- --------------
Liabilities and Equity
Liabilities
Insurance contracts 16 2,604.3 2,593.9
Borrowings 21 124.5 123.2
Deferred taxation 22.8 17.1
Provisions 22 1.9 2.4
Current taxation 2.9 10.6
Derivative contracts 18 2.7 11.1
Insurance and other payables 23 220.8 187.3
Total liabilities 2,979.9 2,945.6
-------------------------------------------- ----- -------------- --------------
Equity
Called up share capital 24 4.0 0.7
Share premium account - 455.7
Own shares (0.9) (1.6)
Reserves - (94.4)
Retained earnings 824.6 349.5
Total equity attributable to owners of the
parent 827.7 709.9
-------------------------------------------- ----- -------------- --------------
Non-controlling interests - 1.1
-------------------------------------------- ----- -------------- --------------
Total equity 827.7 711.0
-------------------------------------------- ----- -------------- --------------
Total liabilities and equity 3,807.6 3,656.6
-------------------------------------------- ----- -------------- --------------
The accompanying Notes are an integral part of the annual accounts.
These financial statements were approved by the Board of Directors on 24 February 2015 and were signed on its behalf by:
Dr Richard Ward Mark Cloutier
Chairman Chief Executive Officer
Consolidated Statement of Cash Flows
For the year ended 31 December 2014
Year ended Year ended
31 December 31 December
2014 2013
Note GBPm GBPm
--------------------------------------------- ----- -------------- -----------------
Cash generated from operations
Cash flows provided by operating activities 27 (45.5) 55.9
Tax paid (16.7) (8.5)
Interest paid (11.3) (13.7)
Interest received 38.4 67.6
Dividends received 20.7 1.4
Net cash (outflows)/ inflows from operating
activities (14.4) 102.7
--------------------------------------------- ----- -------------- -----------------
Cash flows from investing activities
Purchase of property, plant and equipment 15 (1.6) (1.4)
Purchase of intangible assets 14 (3.1) (4.3)
Acquisitions (1.2) (1.2)
Disposal of consolidated structured entity 43.9 -
Disposal of asset held for sale - 17.4
Movements in associated undertaking loan
balances - (0.1)
Net cash inflows from investing activities 38.0 10.4
--------------------------------------------- ----- -------------- -----------------
Cash flows from financing activities
Share redemption - (94.2)
Purchase/(repurchase) of shares by/(from)
non-controlling interests 1.5 (0.6)
Buy-out of non-controlling interests - (5.1)
Disposal/(purchase) of own shares 0.3 (0.4)
Dividend paid (25.0) -
Net cash outflows from financing activities (23.2) (100.3)
--------------------------------------------- ----- -------------- -----------------
Net increase in cash and cash equivalents 0.4 12.8
Cash and cash equivalents at beginning of
the year 315.7 304.9
Effect of exchange rate fluctuations on cash and
cash equivalents 5.3 (2.0)
-------------- -----------------
Cash and cash equivalents at the end of the
year 20 321.4 315.7
--------------------------------------------- ----- -------------- -----------------
The accompanying Notes are an integral part of the annual accounts.
Consolidated Statement of Changes in Equity
For the year ended 31 December 2014
Total
Equity
Called Attributable
up Share to owners
Share Premium Own Retained of the Non-controlling Total
capital account shares Reserves earnings parent interests equity
Note GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----- -------- -------- ------- --------- --------- ------------- ---------------- --------
At 1 January
2014 0.7 455.7 (1.6) (94.4) 349.5 709.9 1.1 711.0
----------------- ----- -------- -------- ------- --------- --------- ------------- ---------------- --------
Total
comprehensive
income
recognised - - - - 139.3 139.3 - 139.3
Purchase of
shares by
non-controlling
interests - - - - - - 1.5 1.5
Buy-out of
non-controlling
interests - 16.7 - - (14.1) 2.6 (2.6) -
Vesting of own
shares - - 0.7 - (0.7) - - -
Corporate
reorganisation (0.7) (472.4) 0.9 94.4 377.8 - - -
Establishment of
Brit PLC 800.0 - (1.2) - (798.8) - - -
Capital
reduction 24 (796.0) - - - 796.0 - - -
Disposal of own
shares - - 0.3 - - 0.3 - 0.3
Share based
payments 28 - - - - 0.6 0.6 - 0.6
Dividend 25 - - - - (25.0) (25.0) - (25.0)
----------------- ----- -------- -------- ------- --------- --------- ------------- ---------------- --------
At 31 December
2014 4.0 - (0.9) - 824.6 827.7 - 827.7
----------------- ----- -------- -------- ------- --------- --------- ------------- ---------------- --------
The accompanying Notes are an integral part of the annual accounts.
Consolidated Statement of Changes in Equity
For the year ended 31 December 2014
Total
Equity
Called Attributable
up Share to owners Non
Share Premium Own Retained of the -controlling Total
capital account shares Reserves earnings parent interests equity
Note GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------- ----- --------- --------- -------- --------- --------- ------------- ------------- --------
At 1 January
2013 0.8 456.1 (1.2) 0.1 248.7 704.5 5.7 710.2
----------------- ----- --------- --------- -------- --------- --------- ------------- ------------- --------
Total
comprehensive
income
recognised - - - - 100.6 100.6 0.4 101.0
Redemption of
shares (0.1) (0.4) - (94.5) 0.8 (94.2) - (94.2)
Purchase of own
shares - - (0.4) - - (0.4) - (0.4)
Buy-out of
non-controlling
interests - - - - (0.7) (0.7) (4.4) (5.1)
Repurchase of
shares from
non-controlling
interests - - - - - - (0.6) (0.6)
Share based
payments 28 - - - - 0.1 0.1 - 0.1
----------------- ----- --------- --------- -------- --------- --------- ------------- ------------- --------
At 31 December
2013 0.7 455.7 (1.6) (94.4) 349.5 709.9 1.1 711.0
----------------- ----- --------- --------- -------- --------- --------- ------------- ------------- --------
Nature and Purpose of Group Reserves
Share premium account: The share premium account represents the difference between the price at which
shares are issued and their nominal value, less any distributions made from this account.
Own shares: Own shares represents the cost of shares held in trust for settling share-based payments and
shares held in treasury.
Retained earnings: Retained earnings represents the cumulative comprehensive income retained by the Group
after taxation and after any distributions made from this account.
Reserves: The balance results from a share cancellation less a legal reserve.
-----------------------------------------------------------------------------------------------------------
The accompanying Notes are an integral part of the annual accounts.
Notes to the Consolidated Financial Statements
1 General information
The consolidated financial statements of Brit PLC and its subsidiaries (collectively, the Group) for the year ended 31 December 2014 were authorised for issue in accordance with a resolution of the Directors on 24 February 2015.
Brit PLC (the Company) is a limited company, incorporated and domiciled in England and Wales, whose shares are publicly traded. The Group's principal activity is the underwriting of general insurance and reinsurance business.
2 Accounting policies and basis of preparation 2.1 Corporate reorganisation
Brit PLC was incorporated as a limited company on 19 December 2013 and was subsequently re-registered as a public limited company on 24 March 2014.
On 28 March 2014, Brit PLC acquired the entire share capital of the former ultimate holding company of the Group, Achilles Holdings 1 S.à.r.l.. Brit PLC was introduced as a new parent to the Achilles Insurance Group by the principal investors who were the same before and after the reorganisation.
Brit PLC's ordinary shares were admitted to trading on the London Stock Exchange on 2 April 2014.
On the basis that the transaction was effected by creating a new parent that is itself not a business, the transaction is considered to be outside the scope of IFRS 3 Business Combinations. It has therefore been accounted for using the pooling of interest method as a continuation of the existing Group. The result is that the consolidated financial statements of Brit PLC are the same as those previously presented by Achilles Holdings 1 S.à.r.l., except for the share capital being that of Brit PLC.
2.2 Basis of preparation
The consolidated financial statements for the year ended 31 December 2014 have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU).
The consolidated financial statements have been prepared on a historical cost basis, except for financial investments and derivative contracts which have been measured at fair value. The consolidated financial statements are presented in Sterling and all values are rounded to the nearest GBP0.1m except where otherwise indicated.
Certain amounts recorded in the financial information include estimates and assumptions made by management, particularly about insurance liability reserves, investment valuations, interest rates and other factors. Actual results may differ from the estimates made.
The consolidated financial statements include the results of the Company and all its subsidiary undertakings (collectively, the Group) made up to the same accounting date.
The Group has adopted the following new standards and amendments to standards with a date of initial application of 1 January 2014:
(a) Offsetting Financial Assets and Financial Liabilities - Amendments to IAS 32
These amendments clarify the meaning of 'currently has a legally enforceable right to set-off' and also clarify the criteria for non-simultaneous settlement mechanisms of clearing houses to qualify for offsetting. These amendments have no impact on the Group.
(b) Recoverable Amount Disclosures for Non-Financial Assets - Amendments to IAS 36
These amendments remove the unintended consequences of IFRS 13 'Fair Value Measurement' on the disclosures required under IAS 36 'Impairment of Assets'. In addition, these amendments require disclosure of the recoverable amounts for the assets or cash-generating units (CGUs) for which an impairment loss has been recognised or reversed during the period. These amendments have no impact on the Group.
(c) Novation of Derivatives and Continuation of Hedge Accounting - Amendments to IAS 39
These amendments provide relief from discontinuing hedge accounting when novation of a derivative designated as a hedging instrument meets certain criteria. These amendments have no impact on the Group.
(d) IFRIC 21- Levies
IFRIC 21 was endorsed by the EU for periods commencing on or after 17 June 2014. Earlier application was permitted and hence the Group has early adopted the IFRIC in accordance with the IASB effective date of 1 January 2014. It is applicable to all levies imposed by governments under legislation, other than outflows that are within the scope of other standards. The interpretation clarifies that an entity recognises a liability for a levy no earlier than when the activity that triggers payment, as identified by the relevant legislation, occurs. It also clarifies that a levy liability is accrued progressively only if the activity that triggers payment occurs over a period of time, in accordance with the relevant legislation. IFRIC 21 has no impact on the Group.
At the date of authorisation of these financial statements, the following standards which have not been applied in these financial statements were in issue but not yet effective:
Standard Effective
------------------------------------- ---------------------------------
IFRS 14 Regulatory Deferral Accounts Periods commencing on or after 1
(2014) January 2016
IFRS 15 Revenue From Contracts With Periods commencing on or after 1
Customers (2014) January 2017
IFRS 9 Financial Instruments (2013) Periods commencing on or after 1
January 2018
------------------------------------- ---------------------------------
In November 2009, as part of the phased project to replace IAS 39 'Financial Instruments: Recognition and Measurement', the IASB issued IFRS 9 'Financial Instruments' which reconsiders the classification and measurement of financial assets. This standard has not yet been endorsed by the EU. The Group plans to assess the impact of this standard on its financial statements in conjunction with the revised standard on IFRS 4 'Insurance Contracts' which is expected to be effective from no earlier than 2018. The Directors anticipate that the adoption of the other standards in future periods will have no material impact on the financial statements of the Group.
2.3 Basis of consolidation
The consolidated accounts include the accounts of the Company, its subsidiaries and the Group's participation in Lloyd's syndicates' assets, liabilities, revenues and expenses. Subsidiaries are those entities (including structured entities) that an investor controls, when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. The financial statements of subsidiaries are prepared up to 31 December each year. Consolidation adjustments are made to convert subsidiary accounts from local GAAP into IFRS so as to remove any dissimilar accounting policies that may exist. Subsidiaries are consolidated from the date control is transferred to the Group and cease to be consolidated from the date control is transferred from the Group. All inter-company balances, profits and transactions are eliminated.
2.4 Product classification
Insurance contracts are those contracts that transfer significant insurance risk. The significance of insurance risk is dependent on both the probability of an insured event and the magnitude of its potential effect to the policyholder.
Once a contract has been classified as an insurance contract, it remains an insurance contract for the remainder of its lifetime, even if the insurance risk reduces significantly during this period.
Where the Group has issued financial guarantee contracts these have been regarded as insurance contracts and have been accounted for in accordance with IFRS 4 'Insurance Contracts'.
2.5 Other accounting policies 2.5.1 Insurance contracts (a) Premiums
Premiums written relate to business incepted during the year, together with any differences between booked premiums for prior years and those previously accrued, and include estimates of premiums due but not yet receivable or notified, less an allowance for cancellations. Premiums are accreted to the income statement on a pro rata basis over the term of the related policy, except for those contracts where the period of risk differs significantly from the contract period. In these circumstances, premiums are recognised over the period of risk in proportion to the amount of insurance protection provided. Reinstatement premiums are accreted to the income statement on a pro rata basis over the term of the original policy to which it relates. Premiums are shown net of premium taxes and other levies on premiums. Pipeline premium estimates are typically based on using standard actuarial projection techniques (e.g. Basic Chain Ladder) on the key assumption that historical development of premiums is representative of future development.
(b) Profit commissions and overrider commissions receivable
Profit commission income arising from whole account quota share contracts is recognised when the economic benefits are highly probable. Profit commissions and overrider commissions are netted off commission costs which are included within the 'acquisition cost' 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 those external costs related to the negotiation and settlement of claims.
(e) Outstanding claims provisions
Outstanding claims represent the estimated ultimate cost of settling all claims (including direct and indirect claims settlement costs) arising from events which have occurred up to the date of the statement of financial position, including provision for claims incurred but not reported, less any amounts paid in respect of those claims. The Group does not discount its liabilities for unpaid claims, the ultimate cost of which cannot be known with certainty at the date of the statement of financial position.
(f) Provision for unearned premiums
The proportion of written premiums that relate to unexpired terms of policies in force at the date of the statement of financial position is deferred as a provision for unearned premiums, generally calculated on a time apportioned basis. The movement in the provision is taken to the income statement in order that revenue is recognised over the period of the risk.
(g) Liability adequacy tests
At the date of each statement of financial position, liability adequacy tests are performed, to ensure the adequacy of unearned premiums net of related deferred acquisition costs, employing the current estimates of future cash flows under its insurance contracts. If as a result of these tests, the carrying amount of the Group's insurance liabilities is found to be inadequate in comparison to the value of these future cash flows, the deficiency is charged to the income statement for the period by establishing an unexpired risk provision. The tests are performed at a whole account and portfolio level at the Statement of Financial Position date to ensure the estimated costs of future claims and related deferred acquisition costs do not exceed the unearned premium provision.
(h) Reinsurance
The Group assumes and cedes reinsurance in the normal course of business. Premiums and claims on reinsurance assumed are recognised in the income statement along the same basis as direct business, taking into account the product classification. Reinsurance premiums ceded and reinsurance recoveries on claims incurred are included in the respective expense and income accounts. Reinsurance outwards premiums are earned according to the nature of the cover. 'Losses occurring during' policies are earned evenly over the policy period. 'Risks attaching' policies are expensed on the same basis as the inwards business being protected. Reinstatement premiums on both inwards and outwards business are accreted to the income statement on a pro rata basis over the term of the original policy to which they relate.
Reinsurance assets include amounts recoverable from reinsurance companies for paid and unpaid losses and loss adjustment expenses, and ceded unearned premiums. Amounts recoverable from reinsurers are calculated with reference to the claims liability associated with the reinsured risks. Revenues and expenses arising from reinsurance agreements are therefore recognised in accordance with the underlying risk of the business reinsured.
Gains or losses on buying reinsurance are recognised immediately in the income statement.
If a reinsurance asset is impaired, the Group reduces its carrying amount accordingly, and will immediately recognise the impairment loss in the income statement. A reinsurance asset will be deemed to be impaired if there is objective evidence, as a result of an event that occurred after initial recognition of the asset, that the Group may not receive all amounts due to it under the terms of the contract, and that the event has a reliably measurable impact on the amounts that the Group will receive from the reinsurer.
Gains or losses on buying retroactive reinsurance are recognised immediately in the income statement and are not amortised. Premiums ceded and claims reimbursed are presented on a gross basis in the consolidated income statement and statement of financial position as appropriate.
(i) Syndicate assets and liabilities
For each managed syndicate on which the Group participates, the Group's proportion of the syndicate's assets and liabilities has been reflected in its consolidated statement of financial position. Syndicate assets are held subject to trust deeds for the benefit of the syndicate's insurance creditors.
2.5.2 Revenue recognition
(a) Fee and commission income
Fee and commission income consists mainly of administration and broking fees charged to third parties. It is recognised in the accounting period in which the service is rendered by reference to completion of the specific transaction, assessed on the basis of the actual service provided as a proportion of the total services to be provided.
(b) Investment return
Investment income comprises all interest and dividend income and realised and unrealised gains and losses less investment management fees. Interest income is recognised using the effective interest method. Dividend income is recognised when the shareholders' right to receive the payment is established.
Realised gains and losses on investments are calculated as the difference between net sales proceeds and cost and are recognised when the sale transaction occurs.
Unrealised gains and losses on investments are calculated as the difference between the valuation at the date of the statement of financial position and the valuation at the last statement of financial position or purchase price, if acquired during the year. Unrealised investment gains and losses include adjustments in respect of unrealised gains and losses recorded in prior years which have been realised during the year and are reported as realised gains and losses in the current year's income statement.
2.5.3 Recognition and derecognition of financial assets and financial liabilities
Financial assets and financial liabilities are recognised when the Group becomes a party to the contractual provisions of the contract.
A financial asset is derecognised when either the contractual rights to the asset's cash flows expire, or the asset is transferred and the transfer qualifies for derecognition under a combination of risks and rewards and control tests.
A financial liability is derecognised when it is extinguished which is when the obligation in the contract is discharged, cancelled or expired.
All 'regular way purchases and sales' of financial assets are recognised on the trade date, i.e. the date that the Group commits to purchase or sell the asset. Regular way purchases and sales are purchases and sales of financial assets that require delivery of assets within the time frame generally established by regulation or convention in the marketplace.
2.5.4 Investments
The Group has designated on initial recognition its financial assets held for investment purposes (investments) at fair value through profit or loss (FVTPL). This is in accordance with the Group's documented investment strategy and consistent with investment risk being assessed on a portfolio basis. Information relating to investments is provided internally to the Group's Directors and key managers on a fair value basis.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value of financial assets and liabilities traded in active markets (which are the principal markets or the most advantageous markets that maximise the amount that would be received to sell the asset or minimises the amount that would be paid to transfer the liability) are based on quoted market bid and ask price for both financial assets and financial liabilities respectively.
The fair value of financial assets and liabilities that are not traded in an active market, including over-the-counter derivatives, is determined using valuation techniques. The Group uses a variety of methods and makes assumptions that are based on market conditions existing at each reporting date. Valuation techniques include the use of comparable recent arm's length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis, option pricing models and others commonly used by market participants and which make the maximum use of observable inputs.
Gains and losses on investments designated as FVTPL are recognised through the income statement. Interest income from investments in bonds and short-term investments is recognised at the effective interest rate. Interest receivable is shown separately in the statement of financial position based on the debt instruments' stated rates of interest.
2.5.5 Derivatives
Derivative financial instruments include foreign exchange contracts, forward rate agreements, interest rate futures, currency and interest rate swaps and other financial instruments that derive their value mainly from underlying interest rates, foreign exchange rates, credit indices, commodity values or equity instruments. All derivatives are initially recognised in the statement of financial position at their fair value, which represents their cost. They are subsequently remeasured at their fair value, with the method of recognising movements in this value in the income statement. Fair values are obtained from quoted market prices or, if these are not available, by using valuation techniques such as discounted cash flow models or option pricing models.
All derivatives are carried as assets when the fair values are positive and as liabilities when the fair values are negative. Derivative contracts may be traded on an exchange or over-the-counter (OTC). Exchange-traded derivatives are standardised and include certain futures and option contracts. OTC derivative contracts are individually negotiated between contracting parties and include forwards and swaps.
Derivatives are subject to various risks including market, liquidity and credit risk, similar to those related to the underlying financial instruments. Many OTC transactions are contracted and documented under International Swaps and Derivatives Association (ISDA) master agreements or their equivalent, which are designed to provide legally enforceable set-off in the event of default, reducing the Group's exposure to credit risk. The notional or contractual amounts associated with derivative financial instruments are not recorded as assets or liabilities on the statement of financial position as they do not represent the fair value of these transactions.
2.5.6 Intangible assets (a) Syndicate participation rights
Lloyd's syndicate participation rights that have been acquired on acquisition of a subsidiary are initially recognised at fair value. They are considered to have an indefinite useful life as they will provide benefits over an indefinite future period and are therefore not subject to an annual amortisation charge. The continuing value of the capacity is reviewed for impairment annually by reference to the expected future profit streams to be earned from the respective syndicate, with any impairment in value being charged to the income statement.
(b) Computer software
Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring into use the specific software. Internal development costs that are directly associated with the production of identifiable and unique software products controlled by the Group are also capitalised where the cost can be measured reliably, the Group intends to and has adequate resources to complete development and the computer software will generate future economic benefits.
All computer software costs are finite life assets and amortised on a straight-line basis over their expected useful lives, not exceeding a period of five years.
(c) Trade names and distribution channels
Trade names and distribution channels that have been acquired on acquisition of a subsidiary are initially recognised at fair value. They are deemed to be finite life assets and amortised on a straight-line basis over their expected useful economic lives, as follows:
Trade names 5 years Distribution channels 15 years ---------------------- ---------
(d) Renewal rights
Renewal rights are recognised at fair value upon acquisition and amortised straight line over their expected useful lives which varies between two and four years.
2.5.7 Property, plant and equipment
Property, plant and equipment are carried at cost, less accumulated depreciation and any impairment in value. Depreciation is calculated so as to write-off the cost over their estimated useful economic lives on a straight-line basis having regard to the residual value of each asset, as follows:
Office refurbishment costs, office machinery, furniture 5 years and equipment Computers, servers, data storage devices, networks and 3 years other IT infrastructure -------------------------------------------------------- --------
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.
2.5.8 Impairment
Syndicate participation rights are not subjected to amortisation but are tested annually for impairment as they are an asset with an indefinite useful life. Other assets, except for assets arising from insurance contracts, are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
If the carrying value of an asset is impaired, it is reduced to the recoverable amount by an immediate charge to the income statement. The recoverable amount is the higher of an asset's fair value less costs to sell and value in use.
Value in use is based on discounting cash flows at the Group's weighted average cost of capital which is loaded where significant uncertainties exist. Assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units).
Impairment reviews are made by comparing carrying value to recoverable amount.
2.5.9 Cash and cash equivalents
Cash and cash equivalents in the statement of financial position include cash in hand, deposits held at call with banks and other short-term highly liquid investments with a maturity of three months or less at the date of acquisition.
2.5.10 Income taxes
Income tax comprises current and deferred tax. Income tax is recognised in the income statement except where it relates to an item which is recognised in equity.
(a) Current income tax
Current income tax is the expected tax payable on the taxable profit for the period using tax rates (and laws) enacted or substantively enacted at the date of the statement of financial position and any adjustment to the tax payable in respect of previous periods. The Group calculates current income tax using current income tax rates.
(b) Deferred income tax
Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, if the deferred income tax arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss, it is not recognised.
Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the date of the statement of financial position and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.
Deferred income tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.
Deferred income tax relating to items recognised in other comprehensive income is also recognised in other comprehensive income.
Deferred income tax is provided on temporary differences arising on investments in subsidiaries and associates, except where the Group controls the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.
Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes relate to the same fiscal authority.
Deferred tax assets and liabilities are not discounted.
2.5.11 Employee benefits
The Group operates a defined contribution group personal pension plan and several other defined contribution schemes. It also makes payments into a number of personal money purchase pension plans. Contributions in respect of these schemes are charged to the income statement in the period to which they relate.
The Group also operates a defined benefit pension scheme. The asset recognised in the statement of financial position in respect of the defined benefit scheme is the fair value of the scheme assets less the present value of the defined benefit obligation which is determined by discounting the estimated future cash outflows. The discount rate is based on market yields at the reporting date of high-quality corporate bonds that have terms to maturity which approximate to those of the related pension liability.
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 and bonus plans where a contractual obligation to employees exists or where there is a past practice that has created a constructive obligation.
2.5.12 Share-based payments
The fair value of equity instruments granted under share-based payment plans are recognised as an expense and spread over the vesting period of the instrument. The total amount to be expensed is determined by reference to the fair value of the awards made at the grant date, excluding the impact of any non-market vesting conditions. 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. It recognises the impact of the revision of original estimates, if any, in the income statement, and a corresponding adjustment is made to equity over the remaining vesting period. The fair value of the awards and ultimate expense are not adjusted on a change in market vesting conditions during the vesting period.
2.5.13 Earnings per share
Basic earnings per share are calculated by dividing profit after tax attributable to equity shareholders of the parent company by the weighted average number of ordinary shares in issue during the period.
Diluted earnings per share requires that the weighted average number of ordinary shares in issue is adjusted to assume conversion of all dilutive potential ordinary shares. These arise from awards made under share-based incentive schemes. Share awards with performance conditions attaching to them are not considered to be dilutive unless these conditions have been met at the reporting date.
Shares held in employee share trusts are excluded from the weighted average number of shares in issue until they have vested unconditionally with the employees.
2.5.14 Own shares
Where the Company purchases its own share capital, the consideration paid is shown as a deduction from total shareholders' equity. No gain or loss is recognised in the income statement on the purchase, sale, issue or cancellation of own shares and any consideration paid or received is recognised directly in equity.
2.5.15 Provisions and contingencies
Provisions are liabilities with uncertainties in the amount or timing of payments. Provisions are recognised if there is a present obligation as a result of past events, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made at the date of the statement of financial position.
A contingent liability is a possible obligation that arises from past events or a present obligation that is not recognised as it is not probable that an outflow of resources will be required to settle the obligation or the amount of obligation cannot be measured with sufficient reliability. A contingent liability is disclosed but not recognised.
2.5.16 Leased assets
Where the Group enters into an operating lease, the payments (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the lease term.
An operating lease is one in which the risks and rewards remain with the lessor.
2.5.17 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 present its consolidated financial statements in Sterling 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 Sterling 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.
2.5.18 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.
2.5.19 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.
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.
Collateral received in the form of cash is recognised as an asset on the statement of financial position with a corresponding liability for the repayment. Non-cash collateral received is not recognised on the statement of financial position.
Collateral pledged is not derecognised from the statement of financial position unless the Group defaults on its obligations under the relevant agreement.
3 Critical accounting estimates and judgements in applying accounting policies 3.1 Introduction
The Group makes various assumptions that affect the reported amounts of assets and liabilities. Estimates and judgements are regularly re-evaluated and are based on a combination of historical experience and other factors, including exposure analysis, expectations of future experience and expert judgement.
3.2 The ultimate liability arising from claims made under insurance contracts
The estimation of the ultimate liability arising from claims made under insurance contracts is the Group's most critical accounting estimate. There are several sources of uncertainty that need to be considered in the estimate of the amounts that the Group will ultimately pay to settle such claims. Significant areas requiring estimation and judgement include:
-- Estimates of the amount of any liability in respect of claims notified but not settled and incurred but not reported claims (IBNR) to be included within provisions for inwards insurance and reinsurance contracts;
-- The corresponding estimate of the amount of outwards reinsurance recoveries which will become due as a result of the estimated claims on inwards business;
-- The recoverability of amounts due from reinsurers; and
-- Estimates of the proportion of exposure which has expired in the period as represented by the earned proportion of premiums written.
The assumptions used and the manner in which these estimates and judgements are made are set out below, including the reserving process for the estimation of gross, and net of reinsurance, ultimate premiums and claims:
-- Quarterly statistical data is produced in respect of gross and net premiums and claims (paid and incurred);
-- Projections of ultimate premiums, reinstatement premiums and claims are produced by the internal actuarial department using standard actuarial projection techniques (e.g. Basic Chain Ladder, Bornhuetter-Ferguson, Initial Expected Loss Ratio). The Basic Chain Ladder and Bornhuetter-Ferguson projection methods are based on the key assumption that historical development of premiums and claims is representative of future development. Claims inflation is taken into account in the Initial Expected Loss Ratio selections but is otherwise assumed to be in line with historical inflation trends, unless explicit adjustments for other drivers of inflation such as legislative developments are deemed appropriate.
-- Some classes of business have characteristics which do not necessarily lend themselves easily to statistical estimation techniques e.g. due to low data volumes. In such cases, for example, a policy-by-policy review may also be carried out to supplement statistical estimates;
-- In the event of catastrophe losses, and prior to detailed claims information becoming available, claims provision estimates are compiled using a combination of output from specific recognised modelling software and detailed reviews of contracts exposed to the event in question;
-- The initial ultimate selections derived by the actuarial department, along with the underlying key assumptions and methodology, are discussed with class underwriters, divisional underwriting directors and the claims team at 'Pre-Committee' meetings. The actuarial department may make adjustments to the initial ultimates following these meetings;
-- Following the completion of the 'Pre-Committee' meetings and peer review process within the actuarial department, the ultimate selections (Actuarial Estimate), assumptions, methodology and uncertainties are presented to the Reserving Committee, chaired by the Chief Financial Officer and reporting to the Executive Management Committee for discussion and debate;
-- Following review of the Actuarial Estimate, the Reserving Committee recommends the Committee Estimate to be adopted in the financial statements; and
-- Claims provisions are subject to independent external actuarial review at least annually.
The results of the independent external actuarial review are 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 and provide additional information on which to base the establishment of the reserves for the Group.
The estimates and judgements are applied in line with the overall reserving philosophy and seek to state the claims provisions on a best estimate, undiscounted basis. A management risk margin is also applied over and above the actuarial best estimate to allow for the inherent uncertainty within the best estimate reserve position.
In addition to claims provisions, the reserve for future loss adjustment expenses is also subject to estimation with consideration being given to the level of internal and third party loss adjustment expenses incurred annually. The estimated loss adjustment expenses are expressed as a percentage of gross claims reserves and the reasonableness of the estimate is assessed through benchmarking. Further judgements are made as to the recoverability of amounts due from reinsurers. Provisions for bad debts are made specifically, based on the solvency of reinsurers, internal and external ratings, payment experience with them and any disputes of which the Group is aware.
The carrying value at the date of the statement of financial position of gross claims reported and loss adjustment expenses and claims incurred but not reported were GBP2,057.9m (2013: GBP2,097.7m) as set out in Note 16. The amount of reinsurance recoveries estimated at that date is GBP445.4m (2013: GBP374.0m).
3.3 Pipeline premiums
Written premiums include pipeline premiums of GBP292.2m (2013: GBP234.4m) which represent future premiums receivable on in-force insurance contracts. Pipeline premium estimates are typically based on standard actuarial projection techniques (e.g. Basic Chain Ladder) on the key assumption that historical development of premiums is representative of future development.
3.4 Intangible assets
Intangible assets with indefinite useful lives are tested for impairment on an annual basis in accordance with IAS 36 'Impairment of Assets'. Determining the assumptions used in the test requires estimation. The indefinite useful life intangible assets of the Group consist of syndicate participation rights and their carrying amount at the date of the statement of financial position was GBP45.4m (2013: GBP45.4m). For further information, refer to Note 14.
3.5 Financial investments
Financial investments are carried in the statement of financial position at fair value. The carrying amount of financial investments at the date of the statement of financial position was GBP2,259.8m (2013: GBP2,275.9m). Determining the fair value of certain investments requires estimation.
The Group value investments using designated methodologies, estimation and assumptions. These securities, which are reported at fair value on the consolidated statement of financial position, represent the majority of the invested assets. The measurement basis for assets carried at fair value is categorised into a 'fair value hierarchy' in accordance with the valuation inputs and consistent with IFRS 13 'Fair Value Measurement'. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (level one); the middle priority to fair values other than quoted prices based on observable market information (level two); and the lowest priority to unobservable inputs that reflect the assumptions that we consider market participants would normally use (level three). At 31 December 2014, financial investments amounting to GBP202.6m (2013: GBP331.7m) 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 17.
4 Risk management policies 4.1 Insurance risk
Insurance risk arises from the possibility of an adverse financial result due to actual experience being different from that expected when an insurance product was designed and priced. The actual performance of insurance contracts is subject to the inherent uncertainty in the occurrence, timing and amount of the final insurance liabilities. This is the principal risk the Group is exposed to as the Group's primary function is to underwrite insurance contracts. The risk arises due to the possibility of insurance contracts being under-priced, under-reserved or subject to unforeseen catastrophe claims.
The areas of insurance risk discussed below include underwriting (including aggregate exposure management), reinsurance and reserving.
4.1.1 Underwriting risk (a) Introduction
This is the risk that insurance premiums will not be sufficient to cover the future losses and associated expenses. It arises from the fluctuations in the frequency and severity of financial losses incurred through the underwriting process by the Group as a result of unpredictable events.
The Group is also exposed to the risks resulting from its underwriters accepting risks for premiums which are insufficient to cover the ultimate claims which result from such policies. This risk is considered to be heightened in the current competitive underwriting environment which is resulting in significant downwards pressure on premium rates. This trend in premium rates has been factored into the Group's pricing models and risk management tools and is continually monitored to assess whether any corrective action is required. Additional controls over the underwriting strategy are described in the section below.
The Group writes all of its business through Lloyd's and therefore can take advantage of Lloyd's centralised infrastructure and service support. Lloyd's also has an established global distribution framework, with extensive licensing agreements providing the Group access to over 200 territories. Exclusively using the Lloyd's platform subjects the Group to a number of resulting underwriting risks. The Group relies on the efficient functioning of the Lloyd's market and if for any reason, BSL is restricted or otherwise unable to write insurance through the Lloyd's market, this would have a material adverse effect on the Group's business and results of operations. In particular, any damage to the brand or reputation of Lloyd's, increase in tax levies imposed on Lloyd's participants or deterioration in Lloyd's asset base when compared with its liabilities may have a material adverse effect on the Group's ability to write new business.
BSL also benefits from the ability to write business based on the Lloyd's financial rating, which allows the Group to write more business as part of the Lloyd's platform. A downgrade in Lloyd's financial strength ratings may have an adverse effect on the Group.
(b) Controls over underwriting strategy
The Board sets the Group's underwriting strategy for accepting and managing underwriting risk. The PLC Underwriting Committee chaired by an independent non-executive Director, meets quarterly and is responsible for the management of underwriting risk in line with the RMF using specific measurable targets/actions and any breaches are reported to Executive Management, the Risk Oversight Committee and the Board.
The UK Underwriting Committee meets monthly to drive the underwriting strategy and to monitor performance against the plans. The assessment of underwriting performance is all-encompassing applying underwriting KPIs, technical pricing MI, premium monitoring, delegated underwriting operations and claims MI. The risks are managed by the committee in line with the underwriting risk policy and within the risk tolerance set by the Board. The underwriting risk policy also sets out a number of controls, which are summarised below.
The Group carries out a detailed annual business planning process for each of its underwriting units. The resulting plans set out premium, territorial and aggregate limits and reinsurance protection thresholds for all classes of business and represent a key tool in managing concentration risk. Performance against the plans is monitored on a regular basis by the Underwriting Committee as well as by the Boards of the regulated entities. A dedicated Exposure Management team also performs Realistic Disaster Scenario (RDS) analysis on a regular basis to ensure that the Group's net losses remain within its risk appetite.
The Group has developed underwriting guidelines, limits of authority and business plans which are binding upon all staff authorised to underwrite. These are detailed and specific to underwriters and classes of business. Gross and net line size limits are in place for each class of business with additional restrictions in place on catastrophe exposed business.
A proportion of the Group's insurance risks are written by third parties under delegated underwriting authorities, with the remaining being written through individual risk acceptances or through reinsurance treaties. The third parties are closely vetted in advance and are subject to tight reporting requirements. In addition, the performance of these contracts is closely monitored by underwriters and regular audits are carried out.
The technical pricing framework ensures that the pricing process in the Group is appropriate. It ensures pricing methodologies are demonstrable and transparent and that technical (or benchmark) prices are assessed for each risk. The underwriting and actuarial functions work together to maintain the pricing models and assess the difference between technical price and actual price. The framework also ensures that sufficient data is recorded and checked by underwriters to enable the Group to maintain an effective rate monitoring process.
Compliance is checked through both a peer review process and, periodically, by the Group's internal audit department which is entirely independent of the underwriting units.
In order to limit risk, the number of reinstatements per policy is limited, deductibles are imposed, policy exclusions are applied and whenever allowed by statute, maximum indemnity limits are put in place per insured event.
(c) Underwriting risk profile
The core insurance portfolio of property, energy and casualty covers a variety of largely uncorrelated events and also provides some protection against the underwriting cycle as different classes are at different points in the underwriting cycle. The underwriting portfolio is managed to target top quartile underwriting performance and the mix of business is continually adjusted based on the current environment (including the current pricing strength of each class). This assessment is conducted as part of the business planning and strategy process which operates annually and uses inputs from the technical pricing framework. The business plan is approved by the Board and is monitored monthly.
The Group underwrites a well-diversified portfolio across multiple regions and classes. While the underlying risk and the policyholder may be situated anywhere in the world, more than 90% of the GWP of the Group in 2014 was sourced in London. The other business written by the syndicate is sourced through a wholly-owned service company in the United States, which accounted for 7.8% of the Group's annual GWP in 2014. The Group has also recently started writing business through the Lloyd's China Platform and from its office in Bermuda (which opened in September 2013). In 2014, 21.3% of the Group's GWP was reinsured to third parties.
(d) Geographical concentration of premium
The Group enters into policies with policyholders from all over the world, with the underlying risk relating to premiums spread worldwide. This allows the Group to benefit from a wide geographic diversification of risk. The three principal locations of the Group's policyholders are the United States, UK and Ireland and mainland Europe. The concentration of insurance premium before and after reinsurance by the location of the underlying risk is summarised below:
Gross premiums Net premiums
written written
GBPm GBPm
---------------------------- --------------- -------------
2014
United States 501.4 401.9
United Kingdom 96.7 72.6
Europe (excluding UK) 84.0 51.9
Other (including worldwide) 620.0 498.5
----------------------------
1,302.1 1,024.9
---------------------------- --------------- -------------
2013
United States 421.5 336.6
United Kingdom 93.0 68.3
Europe (excluding UK) 61.8 41.8
Other (including worldwide) 609.4 509.6
---------------------------- --------------- -------------
1,185.7 956.3
---------------------------- --------------- -------------
The nature of the London Market business is such that the insureds and reinsureds are often operating on a multi-territory or worldwide basis and hence coverage is often provided on a worldwide basis. Premiums written on a multi-territory or worldwide basis are included in "Other" in the table above.
(e) Portfolio mix
The Group's third party underwriting takes place through the syndicate underwriting business in a wide variety of business lines. The business lines can be broken down into four principal categories: (i) short-tail direct insurance; (ii) long-tail direct insurance; (iii) short-tail reinsurance; and (iv) long-tail reinsurance.
The breakdown of premium before reinsurance by principal lines of business is summarised below:
2014 2013
Gross premiums Gross premiums
written written
GBPm % GBPm %
Property, marine, energy, accident
Short-tail direct and health, BGSU, aerospace, terrorism
insurance and political 717.6 55% 599.2 50%
Long-tail direct Professional lines, specialty lines,
insurance specialist liability 339.2 26% 303.9 26%
Short-tail Reinsurance Property treaty 109.6 8% 139.6 12%
Long-tail Reinsurance Casualty treaty 135.7 10% 141.4 12%
Other Other underwriting and other corporate - <1% 1.6 <1%
------------------------ ----------------------------------------- ---------- ------ ---------- ------
1,302.1 100% 1,185.7 100%
------------------------------------------------------------------ ---------- ------ ---------- ------
The Group underwrites a business mix of both insurance and reinsurance, long and short-tail business across a number of geographic areas which results in a diversification of the Group's portfolio. The business mix is monitored on an ongoing basis with particular focus on the short-tail vs. long-tail split and the proportion of delegated underwriting business. Long-tail business makes up 36.5% of the portfolio at 31 December 2014 (2013: 37.4%) and delegated underwriting represents 38.0% (2013: 41.8%). Underwriting risk is mainly driven by the syndicate's US catastrophe exposure. Casualty Treaty is also a driver due to its long-tail exposure.
i) Short-tail direct insurance
Short-tail insurance generally refers to lines of business where the claims are typically settled within a short time of the claim being made; therefore, they are typically classes where a large element of the claims is property damage.
The Group's short-tail business consists of six principal lines of business:
Property Property coverage including business interruption
on a worldwide basis and delegated underwriting
business predominantly in North America.
------------------------- -----------------------------------------------------
Marine Coverage for cargo (including specie and fine
art), hull (including yacht) and marine liability.
------------------------- -----------------------------------------------------
Energy Coverage for upstream (offshore) and midstream
activities related to oil and gas production.
------------------------- -----------------------------------------------------
US specialty Public and non-profit package on both a self-insured
retention (SIR) and first dollar basis; property
and liability Package business for US criminal
justice service operations; property direct and
facultative reinsurance.
------------------------- -----------------------------------------------------
Accident and health Coverage for personal accident (including kidnap
and ransom), bloodstock and contingency
------------------------- -----------------------------------------------------
Terrorism, political and Coverage for terrorism (including aviation war),
aerospace political and credit risks, and satellites at
both launch and in-orbit.
------------------------- -----------------------------------------------------
The key risks on short-tail business are exposures to catastrophe claims, particularly US windstorms, earthquakes, flood and terrorist events.
The property lines are also exposed to an increased frequency of fire and weather related events. Coverage on energy is provided in respect of physical damage and business interruption/loss of income and would be exposed to large individual claims and extreme catastrophe losses. Within US specialty, the syndicate writes business in property direct and facultative reinsurance exposed to wind, earthquake and flood catastrophe claims as well as expanding in a number of niche casualty lines. Accident and health offers further diversification due to low correlation with other business lines. Personal accident has the potential to suffer from large losses due to a high concentration of multiple deaths from a catastrophe or large claims from highly valued insured individuals. Medical expense claims are subject to high inflationary costs and may experience a high claim frequency. Both bloodstock and contingency classes have exposure to multiple claims from a single event/location. Terrorism, aerospace and political classes have key exposures to single catastrophe events and terrorist events or a series of losses.
ii) Long-tail direct insurance
Long-tail insurance refers to insurance where on average the claims are not settled for several years after the expiry of the policy. The long-tail direct insurance business can be categorised into two principal lines of business:
Casualty Includes cover for financial institutions, legal
expenses, directors' and officers', and professional
lines.
--------------------- ------------------------------------------------------
Specialist liability Cover for employers' liability and public liability
both in the UK and internationally but excluding
the US.
--------------------- ------------------------------------------------------
Key exposures on casualty lines lie with increasing claim frequency due to global recessionary events or international systemic malpractice. The specialist liability portfolio is subject to large losses resulting in bodily injury claims. This portfolio is also exposed to the risk of latent claims arising from risks which were not envisaged at the time of writing the policy.
iii) Short-tail reinsurance
The Group's short-tail reinsurance business centres around property treaty. This typically covers catastrophic loss accumulation or individual large loss ceded by insurance and reinsurance company clients. The key exposures which property treaty is exposed to are US windstorms and Californian earthquakes. Property treaty also has exposures to Japanese earthquakes and European windstorms.
Property treaty Catastrophe excess of loss and risk excess of
loss reinsurance.
---------------- ----------------------------------------------
iv) Long-tail reinsurance
Introduction
The Group's long-tail reinsurance business centres around casualty treaty. Core lines of business include Officers', Workers' Compensation, Medical Malpractice, Accident & Health, and other accident classes including Property Terror.
Casualty treaty Casualty and accident treaty reinsurance. Worldwide
portfolio, written on excess of loss basis (currently
only one specialist quota share contract written).
The largest regional block is the US and Canada.
The account is a mix of risk, catastrophe and
clash business.
---------------- -------------------------------------------------------
The key risks this division is exposed to include exposure to man-made catastrophe claims such as terrorism, increased claim activity in the event of an economic downturn and the potential for latent claims which were not foreseen at the time the policies were underwritten. This division contains the longest tailed liabilities the Group holds, i.e. there can be a significant delay between the notification and final settlement of a claim. This delay can result in the final settlement being subject to significant claims inflation.
Aggregate exposure management
The Group is exposed to the potential of large claims from natural catastrophe events. The Group's catastrophe risk appetite is set by the board who may adjust limits to reflect market conditions. Overall, the Group has a maximum catastrophe risk tolerance for major catastrophe events (as measured through RDS losses such as a Florida Miami windstorm) of 30% of Brit PLC Group level net tangible assets. This equates to a maximum acceptable loss (after all reinsurance) of GBP229.7m at 31 December 2014.
The Group closely monitors aggregation of exposure to natural catastrophe events against agreed risk appetites using stochastic catastrophe modelling tools, along with knowledge of the business, historical loss information, and geographical accumulations. Analysis and monitoring also measures the effectiveness of the Group's reinsurance programmes. Stress and scenario tests are also run, such as Lloyd's and internally developed Realistic Disaster Scenarios (RDS). The selection of the RDS is adjusted with development of the business. Below are the key RDS losses to the Group for all classes combined (unaudited):
Modelled Modelled
Group loss Group loss
at 1 October 2014 at 1 October 2013
Estimated
Industry Loss (note 1) (note 1)
Gross Net Gross Net
GBPm GBPm GBPm GBPm GBPm
-------------------------- ---------------- ---------- --------- ---------- ---------
Gulf of Mexico windstorm 71,474 449 110 349 149
Florida Miami windstorm 80,128 346 82 262 83
US North East windstorm 50,000 388 83 304 133
San Francisco earthquake 50,000 382 113 273 89
Japan earthquake 26,745 117 86 93 51
Japan windstorm 8,024 55 46 47 34
European windstorm 17,829 140 80 148 79
-------------------------- ---------------- ---------- --------- ---------- ---------
Note 1: At 31 December 2014 foreign exchange rates.
Actual results may differ materially from the losses above given the significant uncertainties within model assumptions, techniques and simulations applied to calculate these event loss estimates. There could also be unmodelled losses which result in actual losses exceeding these figures. Moreover, the portfolio of insured risks changes dynamically over time.
Sensitivity to changes in net claims ratio
The Group profit on ordinary activities before tax is sensitive to an independent 1% change in the net claims ratio (excluding the effect of foreign exchange on non-monetary items) for each class of business as follows:
Movement in profit Movement in profit
year ended year ended
31 December 2014 31 December 2013
GBPm % GBPm %
----------------------------- ---------- --------- ---------- ---------
Short-tail direct insurance 5.1 52% 5.0 52%
Long-tail direct insurance 2.5 26% 2.1 22%
Short-tail Reinsurance 0.7 8% 0.9 10%
Long-tail Reinsurance 1.3 13% 1.4 15%
Other 0.1 1% 0.1 1%
----------------------------- ---------- --------- ---------- ---------
9.7 100% 9.5 100%
----------------------------- ---------- --------- ---------- ---------
Subject to taxation, the impact on shareholders' equity would be the same as that on profit following a change in the net claims ratio.
4.1.2 Reinsurance
The Group purchases reinsurance to manage its exposure to individual risks and aggregation of risks arising from individual large claims and catastrophe events. This allows the Group to mitigate exposure to insurance losses against the risk appetite, reduce volatility of reported results and protect capital.
Proportional quota share reinsurance is purchased to provide protection against claims arising either from individual large claims or aggregation of losses. Quota share reinsurance is also used to manage the Group's net exposure to classes of business where the Group's risk appetite is lower than the efficient operating scale of the class of business on a gross of reinsurance basis. These placements are reviewed on the basis of market conditions.
The Group also has in place a comprehensive programme of excess of loss reinsurances to protect itself from severe size or frequency of losses:
-- Facultative reinsurance is used to reduce risk relating to individual contracts. The amount of cover bought varies by class of business. Facultative reinsurance is also used as a tool to manage the net line size on individual risks to within tolerance.
-- Risk excess of loss reinsurance is used to protect a range of individual inwards contracts which could give rise to individual large claims. The optimal net retention per risk is assessed for each class of business given the Group's risk appetite during the business planning exercise.
-- An aggregate catastrophe excess of loss cover is in place to protect the Group against combined property claims from multiple policies resulting from catastrophe events. This is supplemented by specific covers for peril regions, catastrophe swaps and industry loss warranties where they are a cost-efficient means to ensure that the Group remains within its catastrophe risk appetite.
Given the fundamental importance of reinsurance protection to the Group's risk management, the Group has in place internal controls and processes to ensure that the reinsurance arrangements provide appropriate protection of capital and maintain our ability to meet policyholder obligations. The Head of Outwards Reinsurance, the CEO of Brit Global Specialty and Chief Risk Officer propose external reinsurance arrangements with input from class underwriters for class level reinsurance. The CEO of Brit Global Specialty proposes reinsurance arrangements with BIG. All reinsurance purchases must be signed off by the Group's Underwriting Committee. The Head of Outwards Reinsurance monitors and reports on the placement of reinsurance protections.
The Group remains exposed to a number of risks relating to its reinsurance programme:
-- It is possible for extremely severe catastrophe losses to exhaust the reinsurance purchased. Any losses exceeding the reinsurance protection would be borne by the Group.
-- Some parts of the programme have limited reinstatements which limit the amount that may be recovered from second or subsequent claims. If the entirety of the cover is exhausted, it may not be possible to purchase additional reinsurance at a reasonable price.
-- A dispute may arise with a reinsurer which may mean the recoveries received are lower than anticipated.
These risks are managed through a combination of techniques and controls including exposure management, capital modelling and internal actuarial review of outward reinsurance costs. The counterparty risk in relation to reinsurance purchased is managed by the Group's Credit Committee. This is further discussed in the Credit risk section below.
4.1.3 Reserving risk
Reserving risk arises as the actual cost of losses for policyholder obligations incurred before 31 December 2014 differs 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 Reserving Committee is responsible for the management of Syndicate 2987's reserving risk, and the BIG Management Committee performs a similar function for BIG.
The Group has a rigorous process for establishing reserves for insurance claim liabilities and a number of controls are used to mitigate reserving risk. The reserving process starts with controls over claims data which ensure complete and accurate recording of all paid and notified claims. Claims staff 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 staff, underwriters and external experts where necessary.
Whilst the case reserve is expected to be sufficient to meet the claims amount when it is settled, incurred but not reported (IBNR) claims require additional reserves. This is particularly the case for the longest tailed classes of business where the final settlement can occur several years after the claim occurred. Actuarial triangulation techniques are employed by the Group's experienced actuaries to establish the IBNR reserve. These techniques project IBNR reserves based on historical development of paid and incurred claims by underwriting year. For the most uncertain claims, the triangulation techniques are supplemented by additional methods to ensure the established reserve is appropriate. The actuarial team work closely with other business functions such as underwriting, claims and exposure management to ensure that they have a full understanding of the emerging claims experience across the Group. Further details on the actuarial methods used can be found in Note 16.
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 sign-off by the Reserving Committee, chaired by the Chief Financial Officer and reporting to the Group's Executive Management Committee, as part of the formal governance arrangements for the Group. The estimate agreed by the committees is used as a basis for the Group 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. This margin increases the reserves reflected in the Group financial statements above the mean expectation. Finally, the reserves in the financial statements are presented to the Audit Committee for recommendation to the Board who are responsible for the final sign-off. The reserves are subject to an independent external actuarial review at least annually.
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 casualty treaty and specialty liability 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 16.
4.2 Investment risk management 4.2.1 Introduction
This section describes the Group's approach to managing its investment risk, from both a quantitative and a qualitative perspective. Investment risk includes market risk (which is covered in section 4.3), investment credit risk (which is covered in section 4.4) and liquidity risk (which is covered in section 4.5).
4.2.2 Investment governance framework
Investment risk is managed in line with the elements of the Group Risk Management Framework (RMF) - identification, measurement and management. The Board has overall responsibility for determining the investment strategy, including defining the amount of risk tolerance. This is achieved through investment policies, guidelines and the Group's Strategic Asset Allocation, by which the assets are managed, which reflect the risk appetite and the business strategy of the Group. The Group's Strategic Asset Allocation is discussed is section 4.2.4 below.
The Investment Committee has been mandated to review, advise and make recommendations to the Board on investment strategy with a view to optimising the Group's investment performance. The Investment Committee can assign the management of these assets to external investment and fund managers as well as to the internal investment team.
The Risk Oversight Committee ensures that the investment risk is managed within the framework and also reports to the Board. An Operational Risk Working Group oversees the operational risk that is relevant to the investment management function.
Monthly information is provided 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 quarterly.
4.2.3 Risk tolerance
Investment risk tolerances are set by the Board, defining the Group's appetite to investments earnings risk, solvency risk due purely to investment, currency risk and liquidity risk. The appetite to these elements of investment risk is derived from the overall risk appetite and business strategy of the Group and reflects a number of factors, including the current and expected economic climate, capital management strategy, liquidity needs and asset liability matching (ALM) policy. The investment risk tolerance helps determine the Strategic Asset Allocation.
Risk metrics are monitored and reported on regularly to ensure that performance is within the Board-approved levels, and limits continue to remain appropriate, within the governance framework highlighted above.
4.2.4 Strategic asset allocation
The Strategic Asset Allocation represents the medium-term target asset allocation across the economic cycle with the aim to optimise risk-adjusted returns. Funds are allocated across various asset classes defined by type or risk reflecting entity-level considerations and governance matters. Tactical ranges (known as the Tactical Asset Allocation) around the asset allocation in the Strategic Asset Allocation provide flexibility to optimise the balance between risk and return.
The Strategic Asset Allocation has been designed and is managed within the constraints of the Group's Credit, Foreign Exchange, Liquidity, and ALM Policies and Guidelines. The Strategic Asset Allocation, the Tactical Asset Allocation and the investment guidelines form part of the guidelines framework that is set by the Investment Committee and approved by the Board, in line with the Group's risk appetite and business strategy.
4.2.5 Solvency matching
Assets are considered by both currency and duration profile in relation to the liabilities thereby managing the impact of foreign exchange and interest rate risk on the solvency position.
Under this strategy, the total assets of each Group underwriting entity are sought to be held in currencies in proportion to the currencies in that entity's technical provisions. The Group seeks to implement this through the use of cash, investments and foreign exchange forward contracts in the respective currencies.
For each Group underwriting entity, a solvency matched duration target is calculated that seeks to minimise the sensitivity of the Group to changes in interest rates impacting its solvency position. Within the investment guidelines for each entity, limits above and below this solvency matched position are stipulated. Cash, investments and interest rate derivatives are structured to target appropriate positioning within this range recognising the current yield curve.
4.2.6 Investment management
The Group outsources investment management where it is believed to be in its best interest. Where the Group sees fit, investment activities will also be carried out, analysed and monitored by the Investment department.
The Group aims to appoint 'best in class' managers, targeting their specific area of expertise. The managers are subject to a rigorous manager selection process. The Group also monitors and controls its third party investment managers on an ongoing basis. Investment management agreements with each internal and external manager document the relevant guidelines and procedures in place to deal with monitoring of performance and controls.
The investment guidelines specify the allowable strategic asset allocations for each investing entity along with the detailed concentration limits surrounding each of the investment portfolios. The tactical ranges around the asset allocation provide flexibility to optimise the balance between risk and return. Investment manager agreements are constructed so that in aggregate the investment portfolios are consistent with the parameters set out in the investment guidelines.
The investment guidelines, derived from the Strategic Asset Allocation and Tactical Asset Allocation, issued to fund managers stipulate exposure limits for counterparties, credit quality and subordination levels to help control credit risk.
4.3 Market risk 4.3.1 Introduction
Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises three types of risk: interest rate risk, currency risk and other price risk. Credit risk on financial investments and cash is covered in the credit risk section.
4.3.2 Interest Rate Risk
Introduction
Interest rate risk is the risk that the fair value and/or future cash flows of a financial instrument will fluctuate because of changes in interest rates. The Group is exposed to interest rate risk through its investment portfolio, borrowings and cash and cash equivalents. The sensitivity of the price of these financial exposures is indicated by their respective durations. This is defined as the modified duration which is the change in the price of the security subject to a 100 basis points parallel shift in interest rates. The greater the duration of a security, the greater the possible price volatility.
The banded durations of the Group's financial investments and cash and cash equivalents sensitive to interest rate risk are shown in the table below:
Duration 1 year 1 to 3 to Over
or less 3 years 5 years 5 years Equities Total
GBPm GBPm GBPm GBPm GBPm GBPm
--------------------------- --------- --------- --------- --------- --------- --------
At 31 December 2014
Cash and cash equivalents 321.4 - - - - 321.4
Financial Investments 1,222.2 311.2 231.0 468.2 27.2 2,259.8
--------------------------- --------- --------- --------- --------- --------- --------
1,543.6 311.2 231.0 468.2 27.2 2,581.2
--------------------------- --------- --------- --------- --------- --------- --------
At 31 December 2013
Cash and cash equivalents 315.7 - - - - 315.7
Financial Investments 1,055.7 415.3 251.5 505.8 47.6 2,275.9
--------------------------- --------- --------- --------- --------- --------- --------
1,371.4 415.3 251.5 505.8 47.6 2,591.6
--------------------------- --------- --------- --------- --------- --------- --------
The Group takes into account the duration of its required capital, targeting an investment portfolio duration that, under a variation in interest rates, preserves the solvency ratio of the Group. The duration of the investment portfolio is then set within an allowable range relative to the targeted duration. This is achieved by the use of interest rate derivatives.
As the claims liabilities are measured on an undiscounted basis, the reported liabilities are not sensitive to changes in interest rates. This leads to the conflict between targeting a longer duration to protect the solvency position against movements in interest rates, whilst a shorter duration for the assets will reduce the possible volatility around the income statement.
Sensitivity to changes in bond 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 2014.
Impact on profit before tax 2014 2013
GBPm GBPm
----------------------------- ------- -------
Increase:
25 basis points (6.8) (14.4)
50 basis points (13.5) (28.7)
100 basis points (27.0) (57.5)
Decrease:
25 basis points 6.8 14.4
50 basis points 13.5 28.7
100 basis points 27.0 57.5
------------------------------ ------- -------
Subject to taxation, the effect on shareholders' equity would be the same as the effect on profit.
4.3.3 Currency risk
Introduction
Currency risk is the risk that the fair value of assets and liabilities or future cash flows will fluctuate as a result of movements in the rates of foreign exchange. As the Group reporting currency is Sterling it is exposed to currency risk because it underwrites insurance business internationally, dealing in five main currencies: US dollars, Sterling, Canadian dollars, Euros and Australian dollars. All other currencies are included as Sterling.
The split of assets and liabilities for each of the Group's main currencies, converted to Sterling, is set out in the tables below:
GBP US $ CAD $ EUR EUR AUS $ Total
GBP Conv. Conv. Conv. Conv. Conv.
GBPm GBPm GBPm GBPm GBPm GBPm
--------------------- ------ -------- ------- -------- ------- --------
At 31 December 2014
Total assets 779.1 2,221.6 330.4 374.5 102.0 3,807.6
Total liabilities 701.6 1,819.4 167.8 222.9 68.2 2,979.9
--------------------- ------ -------- ------- -------- ------- --------
Net assets 77.5 402.2 162.6 151.6 33.8 827.7
--------------------- ------ -------- ------- -------- ------- --------
At 31 December 2013
Total assets 813.3 2,013.7 294.7 378.1 156.8 3,656.6
Total liabilities 786.7 1,615.0 163.8 288.2 91.9 2,945.6
--------------------- ------ -------- ------- -------- ------- --------
Net assets 26.6 398.7 130.9 89.9 64.9 711.0
--------------------- ------ -------- ------- -------- ------- --------
The non-Sterling denominated net assets of the Group may lead to a reported loss (depending on the mix relative to the liabilities), should Sterling strengthen against these currencies. Conversely, reported gains may arise should Sterling weaken.
The Group matches its currency position so holds net assets across a number of currencies. The Group takes into consideration the underlying currency of its required capital and invests its assets proportionately across these currencies so as to protect the solvency of the Group, and hence capital available for distribution to shareholders, against variation in foreign exchange rates. As a result, the Group holds a significant proportion of its assets in foreign currency investments.
In part, foreign currency forward contracts are used to achieve the desired exposure to each currency. From time to time the Group may also choose to utilise options on foreign currency derivatives to mitigate the risk of reported losses due to changes in foreign exchange rates. The degree to which options are used is dependent on the prevailing cost versus the perceived benefit to shareholder value from reducing the chance of a reported loss due to changes in foreign currency exchange rates. The details of all foreign currency derivatives contracts entered into are given in Note 18.
As a result of the accounting treatment for non-monetary items, the Group may also experience volatility in its income statement due to fluctuations in exchange rates. In accordance with IFRS, non-monetary items are recorded at original transaction rates and are not re-valued at the reporting date. These items include unearned premiums, deferred acquisition costs and reinsurers' share of unearned premiums. Consequently, a mismatch arises in the income statement between the amount of premium recognised at historical transaction rates, and the related claims that are valued using foreign exchange rates in force at the reporting date. The Group considers this to be a timing issue which can cause volatility in the income statement.
Sensitivity to changes in foreign exchange rates
The table below gives an indication of the impact on profit of a percentage movement in the relative strength of Sterling against the value of the US dollar, Canadian dollar, Australian dollar and Euro simultaneously. The analysis is based on the information at 31 December 2014.
Impact on profit before tax 2014 2013
GBPm GBPm
------------------------------ -------- --------
Sterling weakens:
10% against other currencies 104.1 72.1
20% against other currencies 208.3 144.2
Sterling strengthens:
10% against other currencies (104.1) (72.1)
20% against other currencies (208.3) (144.2)
------------------------------- -------- --------
Subject to taxation, the effect on shareholders' equity would be the same as the effect on profit.
4.3.4. Other price risk
Introduction
This is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices (other than those arising from interest rate risk or currency risk), whether those changes are caused by factors specific to the individual financial instrument or its issuer, or factors affecting all similar financial instruments traded in the market.
Financial assets and derivatives that are recognised at their fair value are susceptible to losses due to adverse changes in their prices. This is known as price risk.
Listed investments are recognised in the financial statements at quoted bid price. If the market for the investment is not considered to be active, then the Group establishes fair valuation techniques. This includes using recent arm's length transactions, reference to current fair value of other similar investments, discounted cash flow models and other valuation techniques that are commonly used by market participants.
The prices of fixed and floating rate income securities are predominantly impacted by currency, interest rate and credit risks. Credit risk on investments is discussed in the following section of this Note.
The Group invests a proportion of its assets in equities and hedge funds. These investments are limited within the investment guidelines to a diverse, small and manageable part of the Group investment portfolio.
Sensitivity to changes in other price risk
The sensitivity of the profit to the changes in the prices of equity and hedge fund investments is set out in the table below. The analysis is based on the information at 31 December 2014.
Impact on profit before tax 2014 2013
GBPm GBPm
---------------------------- -------- -------
Increase in fair value:
10% 34.1 28.0
20% 68.2 56.1
30% 102.3 84.1
Decrease in fair value:
10% (34.1) (28.0)
20% (68.2) (56.1)
30% (102.3) (84.1)
---------------------------- -------- -------
Subject to taxation, the effect on shareholders' equity would be the same as the effect on profit.
4.4 Credit risk
This is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. The main sources of credit risk relate to:
-- Reinsurers: through the failure to pay valid claims against a reinsurance contract held by the Group.
-- Brokers and coverholders: where counterparties fail to pass on premiums or claims collected or paid on behalf of the Group.
-- Investments: through the issuer default of all or part of the value of a financial instrument or the market value of that instrument.
-- Cash and cash equivalents: through the default of the banks holding the cash and cash equivalents.
The insurance and non-insurance related counterparty credit risks are managed separately by the Group.
4.4.1 Investment credit risk
Investment credit risk management process
The Investment Committee chaired by the Group CEO is responsible for the management of investment credit risk. The Investment Guidelines and investment policy set out clear limits and controls around the level of investment credit risk. The Group has established concentration guidelines that restrict the exposure to any individual counterparty. The investment guidelines further limit the type, credit quality and maturity profile of both the Group's cash and investments. In addition, the investment risk framework further limits potential exposure to credit risk through aggregate investment risk limits.
Investment credit risk profile
The summary of the investment credit risk exposures for the Group is set out in the tables below:
BBB
and Not
AAA AA A BBB P-1 P-2 below Equities Rated Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------- ------ ------ -------- --------- ------ ------ ------- --------- ------- --------
At 31 December 2014
Financial
investments 199.1 239.8 1,063.8 42.4 18.8 - 338.9 27.2 329.8 2,259.8
Derivative
contracts - - - - - - - - 7.8 7.8
Cash and
cash equivalents 151.9 - - - 60.9 108.6 - - - 321.4
------------------- ------ ------ -------- --------- ------ ------ ------- --------- ------- --------
351.0 239.8 1,063.8 42.4 79.7 108.6 338.9 27.2 337.6 2,589.0
------------------- ------ ------ -------- --------- ------ ------ ------- --------- ------- --------
At 31 December 2013
Financial
investments 221.2 310.1 978.0 57.5 5.7 - 382.5 47.6 273.3 2,275.9
Derivative
contracts - - - - - - - - 12.7 12.7
Cash and
cash equivalents 243.5 - 4.0 37.1 37.1 31.1 - - - 315.7
------------------- ------ ------ -------- --------- ------ ------ ------- --------- ------- --------
464.7 310.1 982.0 42.8 42.8 31.1 382.5 47.6 286.0 2,604.3
------------------- ------ ------ -------- --------- ------ ------ ------- --------- ------- --------
The table above gives an indication of the level of credit worthiness of assets that are most exposed to credit risk. The ratings are mainly sourced from Standard & Poor's and where these are not available an equivalent rating agency.
4.4.2 Insurance credit risk
Insurance credit risk management process
The Credit Committee chaired by the Chief Financial Officer and reporting to the Executive Management Committee, is responsible for the management of credit risk arising from insurance activities. Some responsibilities for reinsurance related credit decisions have been delegated to the Reinsurance Security Committee chaired by the Head of Group Financial Performance.
Reinsurer credit risk is managed by transacting only with reinsurance counterparties that satisfy a minimum level of financial strength or provide appropriate levels of collateral, and have been approved for use by the Reinsurance Security Committee. The reinsurer security list, which sets out the list of approved reinsurance counterparties, is reviewed at least annually and following any significant change in risk profile, which includes any changes to reinsurers' financial ratings. Credit risk appetite limits are set for reinsurance entities and groups to limit accumulations of risk. These positions are monitored quarterly against current statement of financial position exposures and in relation to a number of extreme loss scenarios.
Reinsurance aged debt is monitored and managed against tolerance limits set by the Board. 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 appetite are reported to the Risk Oversight Committee and the Board on at least a quarterly basis.
Insurance credit risk profile
The summary of the insurance credit risk exposures for the Group is set out in the tables below:
BBB and Not
AAA AA A below rated Total
GBPm GBPm GBPm GBPm CollateralGBPm GBPm GBPm
----------------------- ------ ------ ------ -------- --------------- ------- ------
At 31 December 2014
Reinsurance assets 0.4 201.9 148.7 - 82.9 11.5 445.4
Insurance receivables - - - - - 424.2 424.2
----------------------- ------ ------ ------ -------- --------------- ------- ------
0.4 201.9 148.7 - 82.9 435.7 869.6
----------------------- ------ ------ ------ -------- --------------- ------- ------
At 31 December 2013
Reinsurance assets - 174.5 134.9 3.5 36.4 24.7 374.0
Insurance receivables - - - - 16.5 335.3 351.8
----------------------- ------ ------ ------ -------- --------------- ------- ------
- 174.5 134.9 3.5 52.9 360.0 725.8
----------------------- ------ ------ ------ -------- --------------- ------- ------
Insurance credit risk arises primarily from reinsurers (whereby reinsurers fail to pay recoveries due to the Group in a timely manner) and brokers and coverholders (whereby intermediaries fail to pass on premiums due to the Group in a timely manner).
As at 31 December 2014, collateral of GBP250.7m (2013: GBP64.1m) is held in third-party trust accounts or as a letter of credit (LOC) to guarantee Syndicate 2987 against reinsurance counterparties and is available for immediate drawdown in the event of a default. Of this amount, GBP82.9m (2013: GBP36.4m) had been drawn against reinsurance assets at 31 December 2014.
As at 31 December 2013, GBP16.5m was included within insurance receivables relating to funds provided to RiverStone Insurance Limited as collateral for standby letters of credit. This was repaid during 2014.
The following table shows movements in impairment provisions during the year:
Impairment Impairment
provision provision
against against
reinsurance insurance
assets receivables
GBPm GBPm
-------------------------------------- ------------- -------------
2014
Opening provision at 1 January 0.8 6.5
(Release)/strengthening for the year (0.2) 2.0
Net foreign exchange differences - 0.3
--------------------------------------- ------------- -------------
Closing provision at 31 December 0.6 8.8
--------------------------------------- ------------- -------------
2013
Opening provision at 1 January 0.4 6.4
Strengthening for the year 0.4 0.2
Net foreign exchange differences - (0.1)
--------------------------------------- ------------- -------------
Closing provision at 31 December 0.8 6.5
--------------------------------------- ------------- -------------
The following table shows the amount of insurance receivables that were past due but not impaired at the end of the year.
2014 2013
GBPm GBPm
------------------------------ ------ ------
0-3 months past due 9.1 7.5
4-6 months past due 2.2 1.7
7-9 months past due 0.6 1.3
10-12 months past due 0.2 1.0
More than 12 months past due 0.5 1.8
------------------------------- ------ ------
12.6 13.3
------------------------------ ------ ------
4.5 Liquidity risk
Liquidity risk is the risk that the Group may encounter difficulty in meeting obligations associated with financial liabilities that are settled by delivering cash or another financial asset. The predominant liquidity risk the Group faces is the daily calls on its available cash resources in respect of claims arising from insurance contracts.
The Group monitors the levels of cash and cash equivalents on a daily basis, ensuring adequate liquidity to meet the expected cash flow requirements due over the short-term.
The Group also limits the amount of investment in illiquid securities in line with the Liquidity policy set by the Board. This involves ensuring sufficient liquidity to withstand claim scenarios at the extreme end of business plan projections, by reference to modelled realistic disaster scenarios. Contingent liquidity also exists in the form of a Group revolving credit facility.
The tables below present the fair value of monetary assets and the undiscounted value of monetary liabilities of the Group into their relevant maturing groups based on the remaining period at the end of the year to their contractual maturities or expected repayment dates. Borrowings are stated at their nominal value.
31 December 2014 Fair values
Statem-ent
of financial < 1 1 to 3 to >5
position Year 3 years 5 years Years Equities Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Assets
Reinsurance assets 445.4 120.5 142.1 74.9 107.9 - 445.4
Financial investments 2,259.8 1,222.2 311.2 231.0 468.2 27.2 2,259.8
Derivative contracts 7.8 7.8 - - - - 7.8
Insurance receivables 424.2 424.2 - - - - 424.2
Cash and cash equivalents 321.4 321.4 - - - - 321.4
3,458.6 2,096.1 453.3 305.9 576.1 27.2 3,458.6
--------------------------- -------------- -------- --------- --------- ------- --------- --------
31 December 2014 Undiscounted values
Statem-ent
of financial < 1 1 to 3 to >5
position Year 3 years 5 years Years Equities Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Liabilities
Insurance contract liabilities 2,057.9 568.7 671.2 349.2 468.8 - 2,057.9
Derivative contracts 2.7 2.7 - - - - 2.7
Borrowings 124.5 - - - 135.0 - 135.0
Insurance and other
payables 220.8 220.8 - - - - 220.8
2,405.9 792.2 671.2 349.2 603.8 - 2,416.4
-------------------------------- -------------- ------ --------- --------- ------- --------- --------
31 December 2013 Fair values
Statem-ent
of financial < 1 1 to 3 to >5
position Year 3 years 5 years Years Equities Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Assets
Reinsurance assets 374.0 108.3 124.7 62.8 78.2 - 374.0
Financial investments 2,275.9 1,055.7 415.3 251.5 505.8 47.6 2,275.9
Derivative contracts 12.7 12.7 - - - - 12.7
Insurance receivables 351.8 351.8 - - - - 351.8
Cash and cash equivalents 315.7 315.7 - - - - 315.7
3,330.1 1,844.2 540.0 314.3 584.0 47.6 3,330.1
--------------------------- -------------- -------- --------- --------- ------- --------- --------
31 December 2013 Undiscounted values
Statem-ent
of financial < 1 1 to 3 to >5
position Year 3 years 5 years Years Equities Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Liabilities
Insurance contract liabilities 2,097.7 600.1 691.4 356.3 449.9 - 2,097.7
Derivative contracts 11.1 11.1 - - - - 11.1
Borrowings 123.2 - - - 135.0 - 135.0
Insurance and other
payables 187.3 187.3 - - - - 187.3
2,419.3 798.5 691.4 356.3 584.9 - 2,431.1
-------------------------------- -------------- ------ --------- --------- ------- --------- --------
4.6 Operational risk
Operational risk is the potential for loss arising from the failure of people, process or technology or the impact of external events. The nature of operational risk means that it is dispersed across all functional areas of Brit. Operational risk exposures are managed through a consistent set of management processes that drive risk identification, assessment, control and monitoring.
The Chief Operating Officer chairs the Operational Risk Working Group (ORWG) that provides a dedicated forum for managing operational risk in line with the Operational Risk policy and appetite limits set by the Board. This group reports to the EMC where it is augmented by operational risk owners within executive management who actively manage operational risk within their respective areas (such as Underwriting, Claims, Investments and Finance).
An operational risk management framework is in place to ensure an appropriate standard approach is taken to managing operational risk across the Group. The key elements of this framework are:
-- Allocation of responsibility for the identification and assessment of operational risk. Standard tools are used to facilitate these assessments;
-- Definition of standard elements of sound operating controls that are expected to be in place to address all identified operational risks;
-- A process that integrates with Brit's internal model to support the setting and monitoring of operational risk appetite and tolerances;
-- Governance, reporting and escalation for operational risk; -- Infrastructure supporting the operational risk management framework; and -- Operational risk management training and awareness. 4.7 Capital management
The Group's capital policy is to hold management capital at an entity level and surplus capital resources at both entity and Group levels. Management capital is the capital required by each entity for current trading purposes based on our business strategy and regulatory requirements. The level of the surplus capital held at Group level is based on our risk appetite and provides flexibility, allowing the Group to deal with shock events and to take advantage of opportunities as they arise.
The capital policy is set by the Board and is based on the output of the internal model which reflects the risk profile of the business. The policy requires capital to be held well in excess of regulatory minimum requirements and underpins the Group's Statement of Financial Position strength. The policy ensures the capital adequacy of the Group, and each entity, through an efficient capital structure. The Group proactively responds to developments in the financial environment to ensure its capital strength is maintained whilst optimising risk adjusted returns.
At Brit we seek to hold capital resources in a range of 120% to 140% of our requirement. We believe this is an appropriate level of capital for the business and provides management with:
-- The flexibility to absorb major losses while still being in a position to take advantage of subsequent market dislocations;
-- The ability to pursue opportunity-driven growth in our core business; and -- The support to provide continuity in regular dividend payments to shareholders.
The Group manages Adjusted net tangible assets, Subordinated debt, Letters of credit and Contingent funding as capital which amounted to GBP1,050.5m as at 31 December 2014 (31 December 2013 : GBP909.4m.
All external capital requirements have been complied with during the year by the Company as well as its individual insurance subsidiaries.
The Lloyd's market is subject to the solvency and capital adequacy requirements of the Prudential Regulation Authority (PRA), as a result of which the Group may be adversely affected. 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.
Brit Global Specialty solely underwrites 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. A 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.
5 Segmental information
As at 31 December 2014, the reportable segments identified were as follows:
-- 'Brit Global Specialty Direct', which underwrites the Group's international and US business, other than reinsurance. In the main, Brit Global Specialty Direct deals with wholesale buyers of insurance, rather than individuals. Risks are large and usually syndicated by several underwriters by means of the subscription market.
-- 'Brit Global Specialty Reinsurance', which underwrites reinsurance business (essentially the insurance of insurance and reinsurance companies) and includes writing non-proportional cover for major events such as earthquakes or hurricanes. These insurance and reinsurance companies calculate how much risk they want to retain and then pass on their remaining exposure to reinsurers in return for a premium.
-- 'Other underwriting', which comprises excess of loss reinsurance ceded from the strategic business units to a cell of Brit Insurance (Gibraltar) PCC Limited and life Syndicate 389.
-- '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 2014 (31 December 2013: 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:
(a) Statement of profit or loss by segment
Year ended 31 December 2014
Total underwriting Total
excluding underwriting
the Effect after the
effect of effect
of foreign foreign of foreign
Brit Brit exchange exchange exchange
Global Global on on on
Specialty Specialty Other Intra non-monetary non-monetary non-monetary Other Continuing Discontinued
Direct Reinsurance Underwriting Group items items items corporate Operations Operations Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------
Gross
premiums
written 1,056.8 245.3 22.1 (22.1) 1,302.1 - 1,302.1 - 1,302.1 - 1,302.1
Less
premiums
ceded
to
reinsurers (250.9) (45.3) (3.1) 22.1 (277.2) - (277.2) - (277.2) - (277.2)
------------- ---------- ------------- ------------- ------- --------------------- ------------- ------------- ---------- ----------- ------------- ---------
Premiums
written,
net of
reinsurance 805.9 200.0 19.0 - 1,024.9 - 1,024.9 - 1,024.9 - 1,024.9
Gross earned
premiums 993.8 247.4 14.6 (14.6) 1,241.2 10.7 1,251.9 - 1,251.9 - 1,251.9
Reinsurers'
share (237.4) (46.2) (1.8) 14.6 (270.8) (1.4) (272.2) - (272.2) - (272.2)
------------- ------------- ------- --------------------- ------------- ------------- ----------
Earned
premiums,
net
of
reinsurance 756.4 201.2 12.8 - 970.4 9.3 979.7 - 979.7 - 979.7
Investment
return 16.6 7.2 0.1 - 23.9 - 23.9 46.2 70.1 - 70.1
Return on
derivative
contracts - - - - - - - 7.3 7.3 - 7.3
Other income - - - - - - - 0.5 0.5 - 0.5
Net foreign
exchange
gains - - - - - 13.3 13.3 (0.4) 12.9 - 12.9
Total
revenue 773.0 208.4 12.9 - 994.3 22.6 1,016.9 53.6 1,070.5 - 1,070.5
------------- ---------- ------------- ------------- ------- --------------------- ------------- ------------- ---------- ----------- ------------- ---------
Gross claims
incurred (574.6) (86.6) (5.9) 9.9 (657.2) - (657.2) - (657.2) - (657.2)
Reinsurers'
share 170.2 11.7 0.4 (9.9) 172.4 - 172.4 - 172.4 - 172.4
------------- ---------- ------------- ------------- ------- --------------------- ------------- ------------- ---------- ----------- ------------- ---------
Claims
incurred,
net
of
reinsurance (404.4) (74.9) (5.5) - (484.8) - (484.8) - (484.8) - (484.8)
Acquisition
costs
-
commission (232.4) (35.3) 0.1 - (267.6) (2.3) (269.9) - (269.9) - (269.9)
Acquisition
costs
- other (46.8) (9.3) (2.6) - (58.7) - (58.7) - (58.7) - (58.7)
Other
insurance
related
expenses (42.3) (15.0) - - (57.3) - (57.3) - (57.3) - (57.3)
Other
expenses - - - - - - - (37.2) (37.2) - (37.2)
Total
expenses
excluding
finance
costs (725.9) (134.5) (8.0) - (868.4) (2.3) (870.7) (37.2) (907.9) - (907.9)
------------- ---------- ------------- ------------- ------- --------------------- ------------- ------------- ---------- ----------- ------------- ---------
Operating
profit 47.1 73.9 4.9 - 125.9 20.3 146.2 16.4 162.6 - 162.6
---------- ------------- ------------- ------- --------------------- ------------- ------------- ---------- ----------- ------------- ---------
Finance
costs (13.5) - (13.5)
Profit on
ordinary
activities
before
tax 149.1 - 149.1
Tax expense (10.1) - (10.1)
----------- ------------- ---------
Profit attributable to
owners
of the parent 139.0 - 139.0
------------------------- ------------- ------------- ------- --------------------- ------------- ------------- ---------- ----------- ------------- ---------
Claims ratio 53.5% 37.2% 43.0% 50.0% 49.5%
Expense
ratio 42.5% 29.6% 19.5% 39.5% 39.4%
Combined
ratio 96.0% 66.8% 62.5% 89.5% 88.9%
Year ended 31 December 2013
Total
underwriting Total
excluding underwriting
the Effect after the
effect of of effect of
foreign foreign foreign
Brit exchange exchange exchange
Global Brit Global on on on
Specialty Specialty Other Intra non-monetary non-monetary non-monetary Other Continuing Discontinued
Direct Reinsurance Underwriting Group items items items corporate Operations Operations Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------
Gross premiums
written 903.1 281.0 6.0 (4.4) 1,185.7 - 1,185.7 - 1,185.7 - 1,185.7
Less premiums
ceded
to reinsurers (181.5) (50.1) (2.2) 4.4 (229.4) - (229.4) - (229.4) - (229.4)
------------------ ---------- ------------ ------------- ------ ------------- ------------- ------------- ---------- ----------- ------------- --------
Premiums written,
net of
reinsurance 721.6 230.9 3.8 - 956.3 - 956.3 - 956.3 - 956.3
Gross earned
premiums 868.1 283.8 6.1 (4.2) 1,153.8 (2.1) 1,151.7 - 1,151.7 - 1,151.7
Reinsurers' share (162.4) (45.7) (2.2) 4.2 (206.1) (0.1) (206.2) - (206.2) - (206.2)
------------------ ------------- ------ ------------- ------------- ------------- ----------
Earned premiums,
net
of reinsurance 705.7 238.1 3.9 - 947.7 (2.2) 945.5 - 945.5 - 945.5
Investment return 16.8 7.8 0.2 - 24.8 - 24.8 32.1 56.9 - 56.9
Return on
derivative
contracts - - - - - - - 11.0 11.0 - 11.0
Profit on
disposal
of asset held
for
sale - - - - - - - 4.4 4.4 - 4.4
Other income - - - - - - - - - 1.4 1.4
Total revenue 722.5 245.9 4.1 - 972.5 (2.2) 970.3 47.5 1,017.8 1.4 1,019.2
------------------ ---------- ------------ ------------- ------ ------------- ------------- ------------- ---------- ----------- ------------- --------
Gross claims
incurred (482.3) (93.1) (3.5) 2.7 (576.2) - (576.2) - (576.2) - (576.2)
Reinsurers' share 111.9 6.0 1.8 (2.7) 117.0 - 117.0 - 117.0 - 117.0
------------------ ---------- ------------ ------------- ------ ------------- ------------- ------------- ---------- ----------- ------------- --------
Claims incurred,
net
of reinsurance (370.4) (87.1) (1.7) - (459.2) - (459.2) - (459.2) - (459.2)
Acquisition costs
- commission (196.5) (39.3) (0.4) - (236.2) 0.4 (235.8) - (235.8) - (235.8)
Acquisition costs
- other (38.8) (9.7) (3.2) - (51.7) - (51.7) - (51.7) - (51.7)
Other insurance
related
expenses (43.4) (18.8) - - (62.2) - (62.2) - (62.2) (1.2) (63.4)
Other expenses - - - - - - - (16.9) (16.9) - (16.9)
Net foreign
exchange
losses - - - - - (4.2) (4.2) (65.4) (69.6) - (69.6)
Total expenses
excluding
finance costs (649.1) (154.9) (5.3) - (809.3) (3.8) (813.1) (82.3) (895.4) (1.2) (896.6)
------------------ ---------- ------------ ------------- ------ ------------- ------------- ------------- ---------- ----------- ------------- --------
Operating
profit/(loss) 73.4 91.0 (1.2) - 163.2 (6.0) 157.2 (34.8) 122.4 0.2 122.6
------ ------------- ------------- ------------- ---------- --------
Loss on sale of
subsidiary - (1.5) (1.5)
Finance costs (15.0) - (15.0)
Profit/(loss) on ordinary
activities before tax 107.4 (1.3) 106.1
Tax expense (6.5) (0.1) (6.6)
Profit/(loss) attributable
to owners of the parent 100.9 (1.4) 99.5
------------------------------ ------------ ------------- ------ ------------- ------------- ------------- ---------- ----------- ------------- --------
Claims ratio 52.5% 36.6% 43.6% 48.5% 48.6%
Expense ratio 39.5% 28.5% 92.3% 36.9% 37.0%
Combined ratio 92.0% 65.1% 135.9% 85.4% 85.6%
----------------- ----------- ------------ ------------- --------------------- ---------------------------- ------------------------------------------------
b) Depreciation, amortisation, impairment and capital expenditure by segment
Year ended 31 December 2014
Brit Global
Specialty Brit Global
Direct Specialty Total
GBPm ReinsuranceGBPm GBPm
----------------------------------------------- ------------ ----------------- ------
Depreciation of property, plant and equipment 1.4 0.6 2.0
Amortisation of intangibles 4.0 1.7 5.7
Capital expenditure 3.7 1.0 4.7
----------------------------------------------- ------------ ----------------- ------
Year ended 31 December 2013
Brit Global
Specialty Brit Global
Direct Specialty Total
GBPm ReinsuranceGBPm GBPm
----------------------------------------------- ------------ ----------------- ------
Depreciation of property, plant and equipment 1.4 0.6 2.0
Impairment of property, plant and equipment 0.2 - 0.2
Amortisation of intangibles 3.3 1.5 4.8
Impairment of intangibles 0.2 - 0.2
Capital expenditure 4.6 1.1 5.7
----------------------------------------------- ------------ ----------------- ------
Capital expenditure consists of additions of property, plant and equipment and intangible assets but excludes assets recognised on business combinations.
c) Geographical information
The Group's strategic business units operate mainly in four geographical areas, though the business is managed on a worldwide basis.
The segmental split shown below is based on the location of the underlying risk.
Gross premiums written Year ended Year ended
31 December 31 December
2014 2013
GBPm GBPm
----------------------------- ------------- -------------
US 501.4 421.5
UK 96.7 93.0
Europe (excluding UK) 84.0 61.8
Other (including worldwide) 620.0 609.4
------------------------------ ------------- -------------
1,302.1 1,185.7
----------------------------- ------------- -------------
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.
6 Investment return
Year ended 31 December 2014
Investment Net realised Net unrealised Total investment
income gains (losses)/gains return
GBPm GBPm GBPm GBPm
-------------------------------- ----------- ------------- ---------------- -----------------
Equity securities 0.8 2.2 (0.6) 2.4
Debt securities 26.5 2.5 (5.0) 24.0
Loan instruments 9.8 1.7 (3.9) 7.6
Specialised investment funds 20.1 6.3 15.1 41.5
Cash and cash equivalents 0.7 - - 0.7
Total investment return before
expenses 57.9 12.7 5.6 76.2
Investment management expenses (6.1) - - (6.1)
-------------------------------- ----------- ------------- ---------------- -----------------
Total investment return 51.8 12.7 5.6 70.1
-------------------------------- ----------- ------------- ---------------- -----------------
Year ended 31 December 2013
Investment Net realised Net unrealised Total investment
income (losses)/gains gains/(losses) return
GBPm GBPm GBPm GBPm
-------------------------------- -------------------- ---------------- ---------------- -----------------
Equity securities 0.3 (0.1) 1.0 1.2
Debt securities 43.5 (15.3) (8.2) 20.0
Loan instruments 8.3 0.8 3.0 12.1
Specialised investment funds 4.9 15.7 8.3 28.9
Cash and cash equivalents 0.5 0.1 - 0.6
Total investment return before
expenses 57.5 1.2 4.1 62.8
Investment management expenses (5.9) - - (5.9)
-------------------------------- -------------------- ---------------- ---------------- -----------------
Total investment return 51.6 1.2 4.1 56.9
-------------------------------- -------------------- ---------------- ---------------- -----------------
7 Return on derivative contracts
Year ended Year ended
31 December 31 December
2014 2013
GBPm GBPm
-------------------------------- ------------- -------------
Interest rate swaps 6.6 (2.6)
Futures (1.4) 0.4
Non-currency options 0.4 -
-------------------------------- ------------- -------------
Investment related derivatives 5.6 (2.2)
--------------------------------- ------------- -------------
Currency forwards 4.1 13.2
Currency options (2.4) -
-------------------------------- ------------- -------------
Currency related derivatives 1.7 13.2
--------------------------------- ------------- -------------
7.3 11.0
-------------------------------- ------------- -------------
8 Net foreign exchange gains/(losses)
The Group recognised foreign exchange gains of GBP12.9m (31 December 2013: losses of GBP69.6m) in the Income Statement in the period.
Foreign exchange gains and losses result from the translation of the Statement of Financial Position to closing exchange rates and the income statement to average exchange rates. However, as an exception to this, IAS 21 'The Effects of Changes in Foreign Exchange Rates' requires that net unearned premiums and deferred acquisition costs (UPR/DAC), being non-monetary items, remain at historic exchange rates. This creates a foreign exchange mismatch, the financial effects of which are shown in the table below:
Year ended Year ended
31 December 31 December
2014 2013
GBPm GBPm
--------------------------------------------------------- ------------- -------------
(Losses)/ gains on foreign exchange arising from:
Translation of the Statement of Financial Position
and income statement (0.4) (65.4)
Maintaining UPR/DAC items in the Statement of Financial
Position at historic rates 20.3 (6.0)
Maintaining UPR/DAC items in the income statement
at historic rates (7.0) 1.8
---------------------------------------------------------- ------------- -------------
Net foreign exchange gains/(losses) 12.9 (69.6)
---------------------------------------------------------- ------------- -------------
Principal exchange rates applied are set out in the table below.
Year ended Year ended
31 December 31 December
2014 2013
GBPm GBPm
Average Closing Average Closing
------------------- -------- -------- -------- --------
US dollar 1.65 1.56 1.56 1.66
Canadian dollar 1.82 1.81 1.61 1.76
Euro 1.24 1.29 1.18 1.20
Australian dollar 1.83 1.91 1.62 1.85
------------------------ -------- -------- -------- --------
In accordance with IAS 1 'Presentation of Financial statements', exchange gains and losses are presented on a net basis. They are reported within revenue where they result in a net gain and within expenses where they result in a net loss.
9 Acquisition costs and other operating expenses
Year ended 31 December Year ended 31 December
2014 2013
------------------------------------ --------------------------------- ---------------------------------
Other Other
Acquisition operating Acquisition operating
costs expenses Total costs expenses Total
GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------------ ------------ ----------- ------ ------------ ----------- ------
Salary, pension and social
security costs (Note 10) 25.6 45.4 71.0 20.8 37.8 58.6
Other staff-related costs 0.8 3.9 4.7 0.7 3.1 3.8
Accommodation costs 3.5 3.1 6.6 3.1 3.3 6.4
Legal and professional charges 1.7 4.8 6.5 1.3 5.7 7.0
IT costs 0.5 11.9 12.4 0.6 11.8 12.4
Travel and entertaining 2.8 1.9 4.7 2.0 1.8 3.8
Marketing and communications 0.2 1.0 1.2 0.1 4.4 4.5
Amortisation and impairment
of intangible assets 0.7 5.0 5.7 0.5 4.5 5.0
Depreciation and impairment
of property, plant and equipment 0.2 1.8 2.0 0.2 2.0 2.2
Regulatory levies and charges 21.3 - 21.3 22.1 0.2 22.3
Costs relating to initial
public offering - 13.7 13.7 - 2.0 2.0
Other 1.4 2.0 3.4 0.3 2.5 2.8
------------------------------------ ------------ ----------- ------ ------------ ----------- ------
Expenses before commissions 58.7 94.5 153.2 51.7 79.1 130.8
Commission costs 269.9 269.9 235.8 - 235.8
Acquisition costs and other
operating expenses - continuing
operations 328.6 94.5 423.1 287.5 79.1 366.6
Acquisition costs and other
operating expenses - discontinued
operations - - - - 1.2 1.2
Total acquisition costs and
other operating expenses 328.6 94.5 423.1 287.5 80.3 367.8
------------------------------------ ------------ ----------- ------ ------------ ----------- ------
Netted off against 'commission costs' above are GBP1.2m (2013: GBP8.8m) of profit commissions receivable in respect of whole account quota share reinsurance contracts ceded by the Group.
10 Staff costs
Year ended Year ended
31 December 31 December
2014 2013
GBPm GBPm
------------------------------------------ ------------- -------------
Wages and salaries 60.5 48.0
Social security costs 6.7 6.5
Pension costs 3.8 4.1
------------------------------------------- ------------- -------------
Staff costs from continuing operations 71.0 58.6
Staff costs from discontinued operations - 1.2
------------------------------------------- ------------- -------------
Total staff costs 71.0 59.8
------------------------------------------- ------------- -------------
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
2014 2013
Number Number
--------------------------------------------- ------------- -------------
Front office staff
Underwriters 139 112
Claims staff 50 44
Other underwriting and direct support staff 97 94
---------------------------------------------- ------------- -------------
Total front office staff 286 250
---------------------------------------------- ------------- -------------
Back office staff
Management 76 74
Administration 103 93
---------------------------------------------- ------------- -------------
Total back office staff 179 167
Total employees 465 417
---------------------------------------------- ------------- -------------
'Management' includes non-executive Directors and employees who have other members of staff reporting to them.
11 Earnings and net assets per share
The numbers of shares used for calculating the earnings per share and net assets per share are those of Brit PLC. The number of Achilles Holdings 1 S.à.r.l. shares in the comparative periods have been converted into the equivalent number of Brit PLC shares to reflect the corporate reorganisation on 28 March 2014. For further information refer to Note 2.
The calculations of the basic and diluted earnings per share from continuing operations are based on the following figures:
Year ended Year ended
31 December 31 December
2014 2013
------------------------------------------------------- ------------- -------------
Profit on ordinary activities after tax, attributable
to the parent (GBPm) 139.0 100.5
Basic weighted average number of shares (number
in millions) 399.4 416.8
Diluted weighted average number of shares (number
in millions) 399.7 417.2
Basic earnings per share (pence per share) 34.8 24.1
Diluted earnings per share (pence per share) 34.8 24.1
-------------------------------------------------------- ------------- -------------
The calculations of the total basic and diluted earnings per share are based on the following figures:
Year ended Year ended
31 December 31 December
2014 2013
------------------------------------------------------- ------------- -------------
Profit on ordinary activities after tax, attributable
to the parent (GBPm) 139.0 99.1
Basic weighted average number of shares (number
in millions) 399.4 416.8
Diluted weighted average number of shares (number
in millions) 399.7 417.2
Basic earnings per share (pence per share) 34.8 23.8
Diluted earnings per share (pence per share) 34.8 23.8
-------------------------------------------------------- ------------- -------------
The calculations of the net assets and net tangible assets per share are based on the following figures:
31 December 31 December
2014 2013
---------------------------- ------------ ------------
Net assets (GBPm) 827.7 711.0
Intangible assets (GBPm) (62.2) (62.7)
----------------------------- ------------ ------------
Net tangible assets (GBPm) 765.5 648.3
----------------------------- ------------ ------------
31 December 31 December
2014 2013
---------------------------------------------------- ------------ ------------
Number of shares in issue at the end of the period
(number in millions) 400.5 393.0
Number of own shares (number in millions) (0.8) (0.9)
----------------------------------------------------- ------------ ------------
Number of shares in issue less own shares (number
in millions) 399.7 392.1
----------------------------------------------------- ------------ ------------
31 December 31 December
2014 2013
------------------------------------------------- ------------ ------------
Net assets per share (pence per share) 207.1 181.3
Net tangible assets per share (pence per share) 191.5 165.3
-------------------------------------------------- ------------ ------------
12 Finance costs
Year ended Year ended
31 December 31 December
2014 2013
GBPm GBPm
----------------------------------------------------- ------------- -------------
Revolving credit facility and other bank borrowings 3.2 4.9
Lower Tier Two subordinated debt 10.3 10.1
------------------------------------------------------ ------------- -------------
13.5 15.0
----------------------------------------------------- ------------- -------------
13 Tax expense
(a) Tax (charged)/credited to income statement
Year ended Year ended
31 December 31 December
2014 2013
GBPm GBPm
Current tax:
Current taxes on income for the year (5.1) (2.0)
Overseas tax on income for the year (4.1) (2.8)
(9.2) (4.8)
Double tax relief 3.5 2.2
Adjustments in respect of prior years 1.2 2.2
Total current tax (4.5) (0.4)
---------------------------------------------------------- ------------- -------------
Deferred tax:
Relating to the origination and reversal of temporary
differences (7.0) (8.5)
Relating to changes in tax rates - 1.4
Adjustments in respect of prior years 1.4 1.0
Total deferred tax (5.6) (6.1)
---------------------------------------------------------- ------------- -------------
Total tax charged to income statement from continuing
operations (10.1) (6.5)
Total tax charged to income statement from discontinued
operations - (0.1)
Total tax charged to income statement (10.1) (6.6)
---------------------------------------------------------- ------------- -------------
Overseas tax and double tax relief principally arise from taxes suffered as a result of the Group's operations at Lloyd's. Double tax relief is effectively limited to an amount equal to the tax due at the UK tax rate on the same source of income.
(b) Tax charged to other comprehensive income
Year ended Year ended
31 December 31 December
2014 2013
GBPm GBPm
--------------------------------------------------- ------------- -------------
Deferred tax charge on actuarial gains on defined
benefit pension scheme (0.1) (0.5)
---------------------------------------------------- ------------- -------------
(0.1) (0.5)
--------------------------------------------------- ------------- -------------
(c) Tax reconciliation
Based on the analysis of Group profits, the weighted average rate of tax is 10.8% (2013: 10.2%). The tax on the Group's profits before tax differs from the theoretical amount that would arise based on the weighted average rate of tax as follows:
Year ended Year ended
31 December 31 December
2014 2013
GBPm GBPm
Profit on continuing ordinary activities before
tax 149.1 107.4
Loss on sale of subsidiary - (1.5)
Income less expenses of discontinued business - 0.2
------------------------------------------------------ ------------- -------------
Total profit on ordinary activities before tax 149.1 106.1
------------------------------------------------------ ------------- -------------
Tax calculated at weighted average rate of tax on
income (16.1) (10.8)
Non-deductible and non-taxable items 2.6 2.6
Taxes on income at rates in excess of the domestic
rate and where credit is unavailable (0.5) (0.6)
Effect of temporary differences not recognised 0.2 (2.4)
Effect of revaluation of deferred tax following
change in rate of tax - 1.4
Other items 1.1 -
Adjustments to tax charge in respect of prior years 2.6 3.2
------------------------------------------------------ ------------- -------------
(10.1) (6.6)
----------------------------------------------------- ------------- -------------
Tax expense on profit on ordinary activities (10.1) (6.5)
Tax expense on profit on discontinued operations - (0.1)
------------------------------------------------------ ------------- -------------
Total tax charged to income statement (10.1) (6.6)
------------------------------------------------------ ------------- -------------
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.
14 Intangible assets
Syndicate
Distribution Trade participat- Renewal
channels names ions rights Software Total
GBPm GBPm GBPm GBPm GBPm GBPm
-------------------------------- ------------- ------- ------------- -------- ---------- -------
Cost:
At 1 January 2013 6.3 12.1 45.4 - 27.2 91.0
Additions - - - - 4.3 4.3
Additions through acquisitions - - - 1.4 - 1.4
Disposals - - - - (12.1) (12.1)
-------------------------------- ------------- ------- ------------- -------- ---------- -------
At 31 December 2013 6.3 12.1 45.4 1.4 19.4 84.6
At 1 January 2014 6.3 12.1 45.4 1.4 19.4 84.6
Additions - - - - 3.1 3.1
Additions through acquisitions - - - 2.1 - 2.1
Disposals - - - - (3.7) (3.7)
-------------------------------- ------------- ------- ------------- -------- ---------- -------
At 31 December 2014 6.3 12.1 45.4 3.5 18.8 86.1
-------------------------------- ------------- ------- ------------- -------- ---------- -------
Amortisation:
At 1 January 2013 0.7 6.5 - - 21.8 29.0
Charge for the year 0.4 1.7 - 0.4 2.3 4.8
Impairment - - - - 0.2 0.2
Disposals - - - - (12.1) (12.1)
-------------------------------- ------------- ------- ------------- -------- ---------- -------
At 31 December 2013 1.1 8.2 - 0.4 12.2 21.9
At 1 January 2014 1.1 8.2 - 0.4 12.2 21.9
Charge for the year 0.4 1.8 - 1.3 2.2 5.7
Disposals - - - - (3.7) (3.7)
-------------------------------- ------------- ------- ------------- -------- ---------- -------
At 31 December 2014 1.5 10.0 - 1.7 10.7 23.9
-------------------------------- ------------- ------- ------------- -------- ---------- -------
Carrying amount:
At 31 December 2013 5.2 3.9 45.4 1.0 7.2 62.7
At 31 December 2014 4.8 2.1 45.4 1.8 8.1 62.2
-------------------------------- ------------- ------- ------------- -------- ---------- -------
Additional information
The gross cost of software fully amortised but still in use is GBP6.1m (2013: GBP8.7m).
All software additions in 2014 and 2013 were internally developed.
The software amortisation charge for the year of GBP2.2m (2013: GBP2.3m) is included in the 'other operating expenses' line in the Income Statement.
There were impairments to intangible assets of GBP0.2m in 2013 which have been included in the other operating expenses' line in the income statement.
Assets not yet in use with a total cost of GBP1.8m (2013: GBP3.8m) are included in software.
Further information is given in Note 5(b).
Impairment tests for syndicate participations
Syndicate participations are indefinite life intangible assets and are therefore reviewed annually for impairment. They have been allocated to cash-generating units (CGUs) as follows:
31 December 31 December
2014 2013
GBPm GBPm
------------------------------ ------------ ------------
Global Specialty Direct 33.8 33.8
Global Specialty Reinsurance 11.6 11.6
------------------------------- ------------ ------------
45.4 45.4
------------------------------ ------------ ------------
The recoverable amounts of the CGUs have been determined using a value in use calculation.
Each 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 9.1% (2013: 8.7%). 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.
15 Property, plant and equipment
Computers
and office
machinery,
Office furniture
refurbishment and equipment Total
GBPm GBPm GBPm
-------------------------------- --------------- --------------- -------
Cost:
At 1 January 2013 14.1 9.7 23.8
Additions 0.3 1.1 1.4
Additions through acquisitions - 0.1 0.1
Disposals (8.4) (4.5) (12.9)
-------------------------------- --------------- --------------- -------
At 31 December 2013 6.0 6.4 12.4
At 1 January 2014 6.0 6.4 12.4
Additions - 1.6 1.6
Disposals (0.3) (0.5) (0.8)
-------------------------------- --------------- --------------- -------
At 31 December 2014 5.7 7.5 13.2
-------------------------------- --------------- --------------- -------
Depreciation:
At 1 January 2013 10.1 7.9 18.0
Charge for the year 1.0 1.0 2.0
Impairment 0.1 0.1 0.2
Disposals (8.4) (4.5) (12.9)
-------------------------------- --------------- --------------- -------
At 31 December 2013 2.8 4.5 7.3
At 1 January 2014 2.8 4.5 7.3
Charge for the year 1.0 1.0 2.0
Disposals (0.3) (0.5) (0.8)
-------------------------------- --------------- --------------- -------
At 31 December 2014 3.5 5.0 8.5
-------------------------------- --------------- --------------- -------
Carrying amount:
At 31 December 2013 3.2 1.9 5.1
At 31 December 2014 2.2 2.5 4.7
-------------------------------- --------------- --------------- -------
The gross cost of property, plant and equipment fully depreciated but still in use is GBP4.3m (2013: GBP3.2m).
The depreciation charge for the year of GBP2.0m (2013: GBP2.0m) is included in the 'other operating expenses' line in the income statement.
There were impairments to property, plant and equipment of GBP0.2m in 2013 which have been included in the 'other operating expenses' line in the income statement.
Further information is given in Note 5(b).
16 Insurance and reinsurance contracts
(a) Balances on insurance and reinsurance contracts
31 December 31 December
2014 2013
GBPm GBPm
---------------------------------------------- ------------ ------------
Gross
Claims reported and loss adjustment expenses 914.4 994.7
Claims incurred but not reported 1,143.5 1,103.0
----------------------------------------------- ------------ ------------
2,057.9 2,097.7
Unearned premiums 546.4 496.2
Total gross liabilities 2,604.3 2,593.9
----------------------------------------------- ------------ ------------
Recoverable from reinsurers
Claims reported and loss adjustment expenses 216.8 202.3
Claims incurred but not reported 229.2 172.5
Impairment provision (0.6) (0.8)
----------------------------------------------- ------------ ------------
445.4 374.0
Unearned premiums 81.0 76.0
Total reinsurers' share of liabilities 526.4 450.0
----------------------------------------------- ------------ ------------
Net
Claims reported and loss adjustment expenses 697.6 792.4
Claims incurred but not reported 914.3 930.5
Impairment provision 0.6 0.8
----------------------------------------------- ------------ ------------
1,612.5 1,723.7
Unearned premiums 465.4 420.2
Total net insurance liabilities 2,077.9 2,143.9
----------------------------------------------- ------------ ------------
Insurance contracts - assumptions and changes in assumptions
Process used to decide on assumptions required
The risks associated with these insurance liabilities are complex and subject to a number of variables that complicate quantitative analysis, particularly with casualty insurance liabilities.
The Group uses several statistical methods to incorporate the various assumptions made in order to estimate the ultimate costs of claims. The two methods more commonly used are the chain-ladder and the Bornhuetter-Ferguson methods.
Chain-ladder methods may be applied to premiums, paid claims or incurred claims (i.e. paid claims plus case estimates). The basic technique involves the analysis of historical claims development factors and the selection of estimated development factors based on these historical patterns. The selected development factors are then applied to cumulative claims data for each underwriting year that is not yet fully developed to produce an estimated ultimate claims cost for each underwriting year.
Chain-ladder techniques are most appropriate for mature classes of business that have a relatively stable development pattern. Chain-ladder techniques are less suitable in cases in which the insurer does not have a developed claims history for a particular class of business or for underwriting years at early stages of development where the outcome is still highly uncertain.
The Bornhuetter-Ferguson method uses a combination of a benchmark or market-based estimate and an estimate based on claims experience. The former is based on a measure of exposure such as premium and 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 combinations of techniques have been selected for the individual underwriting year or groups of underwriting years within the same class of business.
Standard statistical techniques may not be solely appropriate for assessing ultimate claims for a number of classes of business (e.g. Casualty Treaty) and particular events (e.g. natural catastrophes) and therefore alternative methodologies may be employed to add additional rigour to the process. Examples include reviewing potential exposure on a policy by policy basis and taking account of market intelligence to determine Brit's share of the loss.
In addition to the estimation of claims reserves, certain estimates are produced for unearned premiums. For open market business, earned premium is calculated at policy level. However, premium derived from delegated underwriting authorities is calculated by applying the 1/144ths method to estimated premiums applied to the master policy. This assumes that attachments to master policies arise evenly throughout the period of that master policy.
Reinsurance outwards premiums are earned according to the nature of the cover. 'Losses occurring during' policies are earned evenly over the policy period. 'Risks attaching' policies are earned on the same basis as the inwards business being protected.
Changes in assumptions
The Group did not change its estimation techniques for the insurance contracts disclosed in this Note during the year.
Claims development tables
The tables below show the development of claims over a period of time on a gross and net of reinsurance basis.
The claims development tables have been presented on an underwriting year basis.
The tables show the cumulative incurred claims, including both notified and IBNR claims, for each successive underwriting year at the end of each year, together with cumulative paid claims at the end of the current year.
The claims have been adjusted to make them comparable on a year by year basis.
They have been grossed up to include 100% of the managed syndicate claims rather than the claims that reflects the Group percentage ownership of each syndicate's capacity during the respective underwriting years. In addition, claims in currencies other than Sterling have been retranslated at 31 December 2014 exchange rates.
Ultimate gross claims
Intra
2005 Group
and and other
Underwriting prior underwriting
year years 2006 2007 2008 2009 2010 2011 2012 2013 2014 adjustments Total
-------------- ---------- -------- -------- -------- -------- -------- -------- -------- -------- -------- ------------- ----------
At end of
underwriting
year 93.1% 67.8% 84.7% 90.3% 73.8% 76.5% 81.3% 76.0% 70.1% 70.4%
One year
later 91.1% 68.4% 86.6% 90.0% 76.1% 88.6% 78.7% 71.7% 70.3% -
Two years
later 90.6% 63.7% 85.6% 92.8% 73.0% 92.4% 79.1% 72.2% - -
Three years
later 89.4% 61.7% 93.1% 96.8% 74.7% 92.9% 78.7% - - -
Four years
later 89.1% 59.1% 95.4% 98.2% 75.4% 91.9% - - - -
Five years
later 87.7% 57.0% 95.5% 98.0% 76.3% - - - - -
Six years
later 86.9% 57.2% 96.0% 99.8% - - - - - -
Seven years
later 86.7% 58.5% 95.8% - - - - - - -
Eight years
later 86.3% 59.1% - - - - - - - -
Nine years
later 86.2% - - - - - - - - -
-------------- ---------- -------- -------- -------- -------- -------- -------- -------- -------- -------- ------------- ----------
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------- ---------- -------- -------- -------- -------- -------- -------- -------- -------- -------- ------------- ----------
Total
ultimate
gross claims
at
31 December
2014 3,568.8 329.2 628.0 663.0 503.8 637.9 583.2 633.9 655.3 698.3 - 8,901.4
Less
accumulated
gross paid
claims (3,438.3) (286.3) (531.9) (505.6) (371.3) (455.1) (363.3) (290.8) (179.8) (38.5) - (6,460.9)
Unearned
premium
portion of
gross
ultimate
claims - - - - - - - - (25.1) (386.1) - (411.2)
Claims
handling
provision
and
other
corporate
adjustments 1.9 0.7 1.5 2.4 2.0 2.7 3.2 5.2 6.8 4.2 (2.0) 28.6
Total
outstanding
gross claims
at 31
December
2014 132.4 43.6 97.6 159.8 134.5 185.5 223.1 348.3 457.2 277.9 (2.0) 2,057.9
-------------- ---------- -------- -------- -------- -------- -------- -------- -------- -------- -------- ------------- ----------
Ultimate net claims
Intra
2005 Group
and and other
Underwriting prior underwriting
year years 2006 2007 2008 2009 2010 2011 2012 2013 2014 adjustments Total
-------------- ---------- -------- -------- -------- -------- -------- -------- -------- -------- -------- ------------- ----------
At end of
underwriting
year 88.5% 76.6% 87.2% 96.0% 79.6% 79.9% 87.0% 82.2% 75.4% 76.3%
One year
later 86.6% 76.3% 83.1% 96.2% 79.1% 89.3% 84.2% 78.2% 76.9% -
Two years
later 85.8% 68.0% 83.7% 96.8% 76.3% 91.3% 83.6% 77.7% - -
Three years
later 84.0% 65.4% 88.0% 100.2% 74.8% 91.3% 81.7% - - -
Four years
later 83.1% 63.6% 89.9% 102.4% 75.3% 89.5% - - - -
Five years
later 81.7% 61.0% 90.3% 101.3% 76.7% - - - - -
Six years
later 80.8% 60.4% 90.7% 101.8% - - - - - -
Seven years
later 80.4% 61.0% 90.9% - - - - - - -
Eight years
later 80.0% 60.9% - - - - - - - -
Nine years
later 80.0% - - - - - - - - -
-------------- ---------- -------- -------- -------- -------- -------- -------- -------- -------- -------- ------------- ----------
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------- ---------- -------- -------- -------- -------- -------- -------- -------- -------- -------- ------------- ----------
Total
ultimate net
claims at
31 December
2014 2,512.2 276.7 489.2 520.5 409.7 497.7 485.1 528.3 533.1 573.7 - 6,826.2
Less
accumulate
net paid
claims (2,416.7) (251.8) (428.8) (428.4) (323.5) (360.0) (307.7) (243.4) (150.3) (34.7) - (4,945.3)
Unearned
premium
portion of
net
ultimate
claims - - - - - - - - (21.4) (311.8) - (333.2)
Claims
handling
provision,
bad
debt
provision
and other
corporate
adjustments 1.2 0.7 1.5 2.5 2.1 3.5 3.2 5.2 7.1 4.2 33.6 64.8
Total
outstanding
net claims
at 31
December
2014 96.7 25.6 61.9 94.6 88.3 141.2 180.6 290.1 368.5 231.4 33.6 1,612.5
-------------- ---------- -------- -------- -------- -------- -------- -------- -------- -------- -------- ------------- ----------
The percentages in the gross and net triangles are shown on an ultimate loss basis inclusive of catastrophe losses by year of account. The development patterns reflect our conservative reserving philosophy where positive development from the initial reserving position is slowly recognised as experience begins to emerge.
The development of the 2007 and 2008 years of account was impacted by exposure to the financial crisis which resulted in reserving action which has subsequently led to stability in the ratios for a number of years. The 2010 year of account includes the impact of natural catastrophes occurring in 2011 which attached back to policies incepting in the 2010 year of account.
During 2014, the net aggregate reserve releases from prior years amounted to GBP32.1m, of which 87.9% was derived from the 2011 and prior underwriting years (2013: GBP57.3m / 88.5% from the 2010 and prior underwriting years). Reserves in Brit Global Specialty Direct and Brit Global Specialty Reinsurance experienced releases of GBP3.4m (2013: releases of GBP13.0m) and GBP29.2m (2013: releases of GBP45.3m) respectively with a strengthening of GBP0.5m (2013: strengthening of GBP1.0m) within Other Underwriting.
(b) Movements in insurance and reinsurance contracts
(i) Claims and loss adjustment expenses
31 December 2014 31 December 2013
Gross Reinsurance Net Gross Reinsurance Net
GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------------- -------- ------------ -------- ---------- --------------- ---------
As at 1 January 2,097.7 (374.0) 1,723.7 2,099.0 (361.5) 1,737.5
Cash paid for claims settled
in the year (758.7) 112.5 (646.2) (542.1) 99.2 (442.9)
Increase in liabilities 657.2 (172.4) 484.8 576.2 (117.0) 459.2
Net foreign exchange differences 61.7 (11.5) 50.2 (35.4) 5.3 (30.1)
---------------------------------- -------- ------------ -------- ---------- --------------- ---------
As at 31 December 2,057.9 (445.4) 1,612.5 2,097.7 (374.0) 1,723.7
---------------------------------- -------- ------------ -------- ---------- --------------- ---------
(ii) Unearned premiums
31 December 2014 31 December 2013
Gross Reinsurance Net Gross Reinsurance Net
GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------ ---------- ------------ -------- ----------- ------------ --------
As at 1 January 496.2 (76.0) 420.2 462.2 (52.8) 409.4
Premiums written in the year 1,302.1 (277.2) 1,024.9 1,185.7 (229.4) 956.3
Premiums earned during the
year (1,251.9) 272.2 (979.7) (1,151.7) 206.2 (945.5)
As at 31 December 546.4 (81.0) 465.4 496.2 (76.0) 420.2
------------------------------ ---------- ------------ -------- ----------- ------------ --------
17 Financial investments
31 December 31 December
2014 2013
GBPm GBPm
------------------------------ ------------ ------------
Equity securities 27.2 47.6
Debt securities 985.6 998.8
Loan instruments 169.3 292.7
Specialised investment funds 1,077.7 936.8
------------------------------- ------------ ------------
2,259.8 2,275.9
------------------------------ ------------ ------------
All financial investments have been designated as held at fair value through profit or loss.
Basis for determining the fair value hierarchy of financial instruments
The Group has classified the fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making those measurements. The fair value hierarchy comprises the following levels:
(a) Level one - quoted prices (unadjusted) in active markets for identical assets;
(b) Level two - inputs other than quoted prices included within level one that are observable for the asset, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and
(c) Level three - inputs for the assets that are not based on observable market data (unobservable inputs).
The level in the fair value hierarchy within which the fair value measurement is categorised in its entirety is determined on the basis of the lowest level input that is significant to the fair value measurement. The significance of an input is assessed against the fair value measurement in its entirety.
Assets are categorised as level one where fair values are 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 additional judgement. Accordingly, the degree of judgement exercised is higher for instruments classified in level three and the classification between level two and level three depends highly on the proportion of assumptions used, supported by market transactions and observable data.
Valuation techniques
Level one
Assets included in level one are government bonds, treasury bills, exchange-traded equities and exchange-traded funds which are measured based on quoted prices.
Level two
Level two securities contain certain investments in US and non-US government agency securities, US and non-US Corporate debt securities, loan instruments, structured products (Asset Backed Securities (ABS), Collateralised Mortgage Obligations (CMOs), Commercial Mortgage Backed Securities (CMBSs), Collateralised Loan Obligations (CLOs), Mortgage Backed Securities (MBSs) and Residential Mortgage Backed Securities (RMBSs)) and specialised investment funds.
US and non-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. US and non-US corporate debt securities are investment grade and the information collected during pricing of these instruments includes credit data as well as other observations from the market and the particular sector. Prices for all these securities are based on a limited number of transactions so they are derived indirectly using inputs that can be corroborated by observable market data.
Level two loan instruments consist primarily of below investment-grade debt of a wide variety of corporate issuers and industries. These instruments are mostly over the counter (OTC) traded. These instruments are priced using pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for substantially the full term of the asset or liability.
Level two structured products include certain ABS, CMOs, CMBSs, CLOs, MBSs and RMBSs. These structured products include pools of assets with a variety of underlying collateral. During pricing, the prepayment models might be adjusted for the underlying collateral and current price data, treasury curve, swap curve as well as the cash settlement.
Level two specialised investment funds contain alternative and credit opportunities funds that are valued based on the underlying assets in the fund on a security by security basis. A number of direct and indirect inputs such as benchmark yield curves, credit spreads, estimated default rates, anticipated market interest rate volatility, coupon rates and anticipated timing of principal repayments are considered during their valuation.
Level three
Level three securities contain certain investments in ABS, CMO, CMBS and RMBS as well as investments in Insurance-Linked Securities (ILS), loan instruments and specialised investment funds.
Level three ABSs, MBSs and CMBSs include debt securities backed by pools of loans with a variety of underlying collateral. These instruments are priced using unobservable inputs.
Level three CMOs are non-agency mortgage backed securities that are valued using unobservable data at the time of valuation.
Level three RMBSs include non-agency RMBS backed by non-conforming residential mortgages. Pricing models factor in interest rates, bond or credit swap spreads and volatility.
ILSs are financial instruments whose performance is primarily driven by insurance and/or reinsurance loss events. Instead of an active market, there is a secondary market existing for ILS contracts. Valuations of these securities require mark-to-market considerations when evaluating risk/return and pricing models use at least one significant input not being based on observable market data.
Level three loan instruments consist primarily of below investment-grade debt of a wide variety of corporate issuers and industries. These instruments are mostly over the counter (OTC) traded. These instruments are priced using unobservable inputs.
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.
Disclosures of fair values in accordance with the fair value hierarchy
31 December 2014
Level one Level two Level three Total
GBPm GBPm GBPm GBPm
Equity securities 27.2 - - 27.2
Debt securities 142.9 702.7 140.0 985.6
Loan instruments - 165.2 4.1 169.3
Specialised investment funds 686.3 332.9 58.5 1,077.7
------------------------------ ---------- ---------- ------------ --------
856.4 1,200.8 202.6 2,259.8
------------------------------ ---------- ---------- ------------ --------
31 December 2013
Level one Level two Level three Total
GBPm GBPm GBPm GBPm
Equity securities 47.6 - - 47.6
Debt securities 251.6 489.8 257.4 998.8
Loan instruments - 292.7 - 292.7
Specialised investment funds 792.9 69.6 74.3 936.8
------------------------------ ---------- ---------- ------------ --------
1,092.1 852.1 331.7 2,275.9
------------------------------ ---------- ---------- ------------ --------
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.
All unrealised gains of GBP5.6m (31 December 2013: GBP4.1m) and realised gains of GBP12.7m (31 December 2013: GBP1.2m) on financial investments held during the period, are presented in investment return in the consolidated income statement.
Transfers from level one to level two
A total of GBP190.4m of funds were transferred from level one to level two during 2014 (2013: GBPnil). Additional information was obtained in 2014 from one fund manager relating to the underlying assets within their specialised investment funds which identified that the majority of the underlying assets were level two.
Reconciliation of movements in level three financial investments measured at fair value
Specialised
investment
Debt Securities Loan instruments funds Total
GBPm GBPm GBPm GBPm
-------------------------------------- ---------------- ----------------- ------------------- -----------------
At 1 January 2013 19.2 - 49.8 69.0
Transfers from level two 88.0 - - 88.0
Total (losses)/gains recognised
in the income statement (0.4) - 6.7 6.3
Purchases 159.5 - 73.7 233.2
Sales proceeds (9.1) - (52.5) (61.6)
Foreign exchange gains/(losses) 0.2 - (3.4) (3.2)
-------------------------------------- ---------------- ----------------- ------------------- -----------------
At 31 December 2013 257.4 - 74.3 331.7
Transfers (to)/ from level two (83.0) 0.2 (22.1) (104.9)
Total gains recognised in the income
statement 1.8 (0.1) 1.2 2.9
Purchases 20.3 3.9 3.7 27.9
Sales proceeds (64.6) - (2.1) (66.7)
Foreign exchange gains 8.1 0.1 3.5 11.7
-------------------------------------- ---------------- ----------------- ------------------- -----------------
At 31 December 2014 140.0 4.1 58.5 202.6
-------------------------------------- ---------------- ----------------- ------------------- -----------------
Total net gains recognised in the income statement under 'investment return' in respect of level three financial investments for the period amounted to GBP2.9m (31 December 2013: GBP6.3m). Included in this balance are GBP0.7m of unrealised gains (31 December 2013: GBP0.9m) attributable to assets still held at the end of the year.
During the year ended 31 December 2014 the transfers of financial assets between fair value hierarchy level two and level three is as follows:
Transfers from level two to level three
A loan of GBP0.2m (2013:GBPnil) was transferred from level two to level three due to its inputs becoming unobservable during 2014.
Transfers from level three to level two
There were transfers amounting to GBP105.1m (2013:GBPnil), which comprised the following:
31 December 31 December
2014 2013
GBPm GBPm
----------------------------- ------------ ------------
ABSs 49.0 -
CMOs 3.0 -
CMBSs 9.7 -
RMBSs 18.1 -
Specialised investment funds 22.1 -
Other financial assets 3.2 -
----------------------------- ------------ ------------
105.1 -
----------------------------- ------------ ------------
The availability of financial data for structured products such as ABSs, CMOs, RMBSs and CMBSs can vary and is affected by a wide variety of factors, including the type of financial instrument, whether it is established in the marketplace and other characteristics specific to each transaction. At the time the 2014 levelling exercise was performed, there was an increase in the availability of indirect observable market inputs (e.g. interest rates, yield curves, volatilities, prepayment speeds, credit risk, default rates) over those inputs available at the time of the 2013 levelling exercise. This increase in the availability of inputs was driven by an increase in trading of the instruments
held by the Group or through an increase in trading of similar instruments.
These factors, together with the pricing validation exercise conducted on a regular basis throughout 2014, has given management comfort and allowed it to reassess certain structured products as level two in the fair value hierarchy.
A total of GBP22.1m of funds were transferred from level three to level two during 2014 (2013: GBPnil). Additional information was obtained in 2014 from fund managers relating to the underlying assets within their specialised investment funds which identified that the majority of the underlying assets were level two.
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.
31 December 2014 31 December 2013
------------------------------ --- ------------------------ ------------------------
Effect of Effect of
possible possible
alternative alternative
Carrying assumptions Carrying assumptions
amount (+/-) amount (+/-)
GBPm GBPm GBPm GBPm
Debt securities 144.1 4.6 257.4 12.9
Specialised investment funds 58.5 1.3 74.3 5.1
----------------------------------- --------- ---------
202.6 331.7
--------------------------------- --------- ------------- --------- -------------
In order to determine reasonably possible alternative assumptions, the Group adjusted key unobservable model inputs as follows:
-- For debt securities, the Group adjusted, dependent on the type and valuation methodology of the investment, key variables including the probability of spread movements, leverage ratio changes and changes in mortgage default rates used in the models.
-- For specialised investment funds, the assumptions have been adjusted by between 5% and 8% as determined by historic movements in volatility of valuations or price changes in the underlying investments.
18 Derivative contracts
The disclosure provided in the tables below include derivatives that are set off in the Group's statement of financial position.
Derivative contract assets
Gross amounts Related
of derivative Net amounts amount
contract of derivative of
liabilities contract cash collateral
set off assets presented received
Gross amounts in the statement in the statement not set
of derivative of financial of financial off in the
contract position position statement Net amount
31 December 2014 assets GBPm GBPm of financial GBPm
GBPm position
GBPm
-------------------- ---------------- ------------------ ------------------- ----------------- -------------
Currency forwards 474.5 (469.1) 5.4 - 5.4
Options 2.4 - 2.4 - 2.4
-------------------- ---------------- ------------------ ------------------- ----------------- -------------
476.9 (469.1) 7.8 - 7.8
-------------------- ---------------- ------------------ ------------------- ----------------- -------------
31 December 2013
Currency forwards 478.9 (468.2) 10.7 - 10.7
Options 2.0 - 2.0 - 2.0
------------------- ------ -------- ----- -----
480.9 (468.2) 12.7 - 12.7
------------------- ------ -------- ----- -----
Derivative contract liabilities
Gross amounts Net amounts Related
of derivative of derivative amount
contract contract of
assets set liabilities cash collateral
Gross amounts off in the presented pledged
of derivative statement in the statement and not
contract of financial of financial set off
liabilities position position in the statement Net amount
31 December 2014 GBPm GBPm GBPm of financial GBPm
position
GBPm
---------------------- ---------------- --------------- ------------------ -------------------- -------------
Currency forwards (326.8) 325.4 (1.4) - (1.4)
Interest rate swaps (1.3) - (1.3) 1.44 0.1
(328.1) 325.4 (2.7) 1.4 (1.3)
---------------------- ---------------- --------------- ------------------ ------------------- --------------
31 December 2013
Currency forwards (348.6) 340.2 (8.4) - (8.4)
Interest rate swaps (2.7) - (2.7) 2.1 (0.6)
(351.3) 340.2 (11.1) 2.1 (9.0)
---------------------- --------- --------- --------- -------- -----------
Disclosures of fair values in accordance with the fair value hierarchy
31 December 2014
Level one Level two Level three Total
GBPm GBPm GBPm GBPm
Derivative contract assets - 5.4 2.4 7.8
Derivative contract liabilities - (2.7) - (2.7)
--------------------------------- ---------- ---------- ------------ -------
31 December 2013
Level one Level two Level three Total
GBPm GBPm GBPm GBPm
Derivative contract assets 10.7 - 2.0 12.7
Derivative contract liabilities (8.4) (2.7) - (11.1)
--------------------------------- ---------- ---------- ------------ -------
Valuation techniques
Level one
Futures contracts are 'forward-based' derivative contracts that are standardised, transferable and exchange-traded and therefore quoted prices are available in an active market.
Level two
The fair value of the Interest rate swaps are determined using pricing models based on observable market data such as prices of instruments with similar maturities and characteristics, interest rate yield curves and measures of interest rate volatility. The value is adjusted to reflect the credit risk of the counterparty.
The valuation technique used to determine the fair value of forward contracts is derived from observable inputs such as active foreign exchange and interest rate markets that may require adjustments for certain unobservable inputs.
Level three
The valuation technique to measure the fair value of put options is to use pricing models which require market-based inputs such as expected volatility, expected dividend yield and the risk-free rate of interest.
Reconciliation of movements in level three derivative contracts measured at fair value
Currency
Put options forwards Total
GBPm GBPm GBPm
------------------------------------------------ ------------ ---------- ------
At 1 January 2013 - (0.7) (0.7)
Transferred to level 1 - 0.7 0.7
On disposal of asset held for sale 2.0 - 2.0
------------------------------------------------ ------------ ---------- ------
At 31 December 2013 2.0 - 2.0
Purchases 0.1 - 0.1
Total gains recognised in the income statement 0.3 - 0.3
------------------------------------------------ ------------ ---------- ------
At 31 December 2014 2.4 - 2.4
------------------------------------------------ ------------ ---------- ------
19 Insurance and other receivables
31 December 31 December
2014 2013
GBPm GBPm
-------------------------------------------- ------------ ------------
Arising out of direct insurance operations 117.9 156.2
Arising out of reinsurance operations 306.3 195.6
Prepayments 8.5 8.0
Accrued income 4.0 5.2
Outstanding settlement on investments 11.9 12.3
Other debtors 4.1 3.6
452.7 380.9
-------------------------------------------- ------------ ------------
20 Cash and cash equivalents
31 December 31 December
2014 2013
GBPm GBPm
----------------------------- ------------ ------------
Cash at bank and on deposit 294.2 284.3
Cash equivalents 27.2 31.4
321.4 315.7
----------------------------- ------------ ------------
The carrying amounts disclosed above reasonably approximate fair values.
The source of these amounts can be further analysed as follows:
Classification Definition 31 December 31 December
2014 2013
GBPm GBPm
------------------------ --------------------------------------- ------------ ------------
Short term investment funds,
money market funds, treasury
Cash within segregated bills or cash held within segregated
fund mandates mandates. 58.8 64.5
Cash within the Lloyd's Overseas
Deposits Trust Funds held to
Lloyd's Trust Funds meet regulatory requirements. 31.8 29.9
Highly liquid instruments held
to meet on going working capital
Self-managed cash requirements. 136.1 189.5
Letter of cash credit Cash held as collateral for
collateral letters of credit. 60.6 2.0
Cash within segregated accounts
held to meet margin calls and
Derivative operating to enable derivative positions
cash to be rolled. 34.1 29.8
------------------------ ---------------------------------------- ------------
321.4 315.7
---------------------------------------------------------------- ------------ ------------
The cash and cash equivalent balances held in Lloyds's trust Funds and letter of credit collateral are not available for use by the Group.
21 Borrowings
31 December 2014 31 December 2013
-------------- ---------- ------ ---------- --------------------------------- -----------------------------------
Initial Initial
capitalised capitalised
Effective borrowing Amortised Fair borrowing Amortised Fair
interest costs cost value costs cost value
Maturity Call rate GBPm GBPm GBPm GBPm GBPm GBPm
-------------- ---------- ------ ---------- ------------ ---------- ------- ------------ ---------- ---------
Non-current
Lower tier
two
subordinated
debt 2030 2020 8.3% 1.8 124.5 137.3 1.8 123.2 131.0
Revolving
credit LIBOR
facility 2018 - +2.3% 9.4 - - 8.2 - -
-------------- ---------- ------ ---------- ------------ ---------- ------- ------------ ---------- ---------
11.2 124.5 137.3 10.0 123.2 131.0
-------------------------------- ---------- ------------ ---------- ------- ------------ ---------- ---------
As at 31 December 2014, the fair value of the lower tier two 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. As at 31 December 2013, the fair value of the lower tier two subordinated debt was determined by reference to a portfolio of securities with similar characteristics with a discount applied to allow for illiquidity and was therefore categorised as a level two measurement in the fair value hierarchy. For further information relating to the fair value hierarchy, refer to Note 17.
Lower Tier Two subordinated debt
The lower tier two subordinated debt has a nominal value of GBP135.0m and interest is payable annually at a rate of 6.625%. It is listed callable in whole by the Group on 9 December 2020 and following this date the interest rate resets to the higher of
i) 3.4% above the gross redemption yield of the 4.75% Treasury Gilt due 2030 quoted on the Reset Date or
ii) 3.4% above the gross redemption yield of the 8% Treasury Gilt 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
During 2014, the Group renegotiated its GBP225m revolving credit facility with its existing banking partners, with certain amendments taking effect on the date of the corporate reorganisation. The main changes were to reduce the margin from 3.0% to 2.3% and to extend the expiry date from 31 December 2017 to 31 December 2018.
At 31 December 2014, a US$80.0m (GBP51.3m) (2013: US$80.0m/GBP48.2m), letter of credit had been put in place under the facility while the remainder was undrawn. At 31 December 2014, the US$80.0m was fully collateralised (2013: uncollateralised).
22 Provisions
Onerous
lease Dilapidation
provision provision Total
GBPm GBPm GBPm
---------------------------------- ----------- ------------- ------
At 1 January 2013 2.9 1.5 4.4
Amounts utilised during the year (2.1) (0.3) (2.4)
Unwinding of discount 0.2 0.2 0.4
---------------------------------- ----------- ------------- ------
At 31 December 2013 1.0 1.4 2.4
---------------------------------- ----------- ------------- ------
At 1 January 2014 1.0 1.4 2.4
Amounts utilised during the year (0.6) (0.1) (0.7)
Unwinding of discount 0.1 0.1 0.2
---------------------------------- ----------- ------------- ------
At 31 December 2014 0.5 1.4 1.9
---------------------------------- ----------- ------------- ------
23 Insurance and other payables
31 December 31 December
2014 2013
GBPm GBPm
-------------------------------------------- ------------ ------------
Arising out of direct insurance operations 6.0 14.7
Arising out of reinsurance operations 156.3 111.8
Other taxes and social security costs 1.4 1.2
Accruals and deferred income 34.7 31.0
Outstanding settlements on investments 17.3 23.8
Other creditors 5.1 4.8
220.8 187.3
-------------------------------------------- ------------ ------------
The carrying amounts disclosed above are reasonably approximate fair values as all amounts are payable within one year of the date of the statement of financial position.
24 Share Capital
31 December
31 December 31 December 31 December
2014 2013 2014 2013
On incorporation
On incorporation 1p each 200p each 200p each
GBPm GBPm GBPm Number Number Number
----------- ------------ ----------------------------------------- ---------------------------------------------- --------------- ------------ -----------------
Ordinary
shares:
Allotted,
Issued
and
fully
paid 4.0 - - 400,452,960 1 1
----------- ------------ ----------------------------------------- ---------------------------------------------- --------------- ------------ -----------------
GBPm Number
----------------------------------------------------- --------- ------------
As at 31 December 2013 - 1
Issue of ordinary share on corporate reorganisation 800.0 399,999,999
Capital reduction (796.0) -
Shares issued in respect of share based incentive
schemes - 452,960
------------------------------------------------------ --------- ------------
As at 31 December 2014 4.0 400,452,960
------------------------------------------------------ --------- ------------
Following court approval, on 30 April 2014, the share capital of the Company was reduced by the cancellation of 199p from the nominal value of each ordinary share.
The number of shares reported is for Brit PLC, the ultimate parent of the Group.
Brit PLC was incorporated on 19 December 2013.
25 Dividends
A final ordinary dividend of 12.5p per share (2013: nil) and a special dividend of 12.5p per share (2013: nil) was agreed by the Board on 24 February 2015 and is subject to shareholder approval at the AGM on 21 April 2015. These financial statements do not include as a liability the provision for these dividends. Subject to AGM approval, both the final ordinary and special dividends are payable on 30 April 2015 to shareholders on the register on 20 March 2015. The shares will go ex-dividend on 19 March 2015.
An interim dividend of 6.25p (2013: nil) per share was paid on 26 September 2014.
26 Commitments
Operating lease commitments
The Group has entered into a number of operating lease arrangements to lease properties and office equipment.
Property leases typically have rent reviews every five years where the lease payments could be increased to reflect market rates.
Operating lease payments recognised in the consolidated income statement during 2014 were GBP3.3m (2013: GBP3.1m).
The future minimum lease payments under non-cancellable operating leases were as follows:
31 December 31 December
2014 2013
GBPm GBPm
--------------------------------------------------- ------------ ------------
Not later than one year 3.1 3.4
Later than one year and not later than five years 1.5 6.5
4.6 9.9
--------------------------------------------------- ------------ ------------
27 Cash flows provided by operating activities
Year ended Year ended
31 December 31 December
2014 2013
GBPm GBPm
Profit on ordinary activities before tax 149.1 107.4
Adjustments for non-cash movements:
Realised and unrealised (gains)/losses on investments (18.3) (5.3)
Realised and unrealised (gains)/losses on derivatives (7.3) (11.0)
Amortisation of intangible assets 5.7 4.8
Impairment of intangible assets - 0.2
Depreciation of property, plant and equipment 2.0 2.0
Impairment of property, plant and equipment - 0.2
Foreign exchange (gains)/losses on cash and cash
equivalents (5.3) 2.0
Profit on disposal of asset held for sale - (4.4)
Charges to equity in respect of employee share
schemes 0.6 0.1
Interest income (37.2) (56.1)
Dividend income (20.7) (1.4)
Finance costs on borrowing 13.5 15.0
Movements in operating assets and liabilities:
Deferred acquisition costs (8.6) (12.4)
Insurance and other receivables excluding accrued
income (73.0) (38.6)
Insurance and reinsurance contracts (66.0) (3.1)
Financial investments (9.5) 41.5
Derivative contracts 3.8 10.6
Insurance and other payables 31.7 11.6
Employee benefits (5.5) (5.2)
Provisions (0.5) (2.0)
Cash flows provided by operating activities (45.5) 55.9
-------------------------------------------------------- ------------- -------------
28 Share-based payments
The Group has a number of long-term employee incentive schemes.
The compensation cost recognised in the income statement under International Financial Reporting Standard 2 'Share-based Payments' for the Group's share-based payments arrangements are shown below:
Year ended Year ended
31 December 31 December
2014 2013
GBPm GBPm
------------------------------------------- ------------- -------------
Equity-settled plans
Retention Partnership Plan 0.2 0.1
Performance Share Plan (PSP) 0.2 -
Brit All Employee Share Plan 0.1 -
Cash-settled plans
PSP dividend equivalents settled in cash 0.1 -
0.6 0.1
------------------------------------------- ------------- -------------
The total liability in respect of cash-settled plans at 31 December 2014 was GBP0.1m (2013: GBPnil). The total intrinsic value of cash-settled awards which had vested at 31 December 2014 was GBPnil (2013: GBPnil).
(a) Retention Partnership Plan (RPP)
During 2011, selected employees in the senior management team were invited to buy a number of shares in Achilles Holdings 1 S.à r.l. under the RPP. For each share bought, the participant was granted five nil-cost options over shares in Achilles Holdings 1 S.à r.l.. As a result of the corporate reorganisation, the outstanding RPP awards were exercised with an effective date of 28 March 2014.
Reconciliation of movement in the number of Retention Partnership Plan options
Year ended Year ended
31 December 31 December
2014 2013
Number of Number of
options options
---------------------------- ------------- -------------
Outstanding at 1 January 401,080 451,215
Forfeited - (50,135)
Exercised (401,080) -
Outstanding at 31 December - 401,080
----------------------------- ------------- -------------
The numbers of shares Achilles Holdings 1 S.à r.l. have been converted into the equivalent number of Brit PLC shares in order to reflect the corporate reorganisation on 28 March 2014.
(b) Performance Share Plan (PSP)
During 2014 selected employees were awarded the right to acquire a defined number of Brit PLC shares at no cost to the employee. Subject to continued service and the satisfaction of the performance conditions, the right to acquire shares may be exercised in differing proportions with effect from the third, fourth and fifth anniversaries of the grant date. These proportions are 50%, 25% and 25% respectively.
The performance conditions are:
- 75% of each award is subject to achieving specific targets for average annual Return on Net Tangible Assets (RoNTA) over a fixed three-year performance period; and
- 25% of each award is subject to the Group's Total Shareholder Return (TSR) achieving specific targets relative to a bespoke industry comparator group over a fixed three-year performance period.
Participants do not receive any dividends until after the shares have been received. A payment may be made at the time of vesting to reflect the dividend that would have accrued on vested shares between the date of grant and vesting.
The fair value of the PSP share awards with a TSR performance condition is calculated at the date of grant using a Monte Carlo simulation. This valuation process simulates the future TSRs for the Group and each stock in the comparator group over the three performance periods. The TSR for each stock is simulated by assuming a log-normal model of share returns. The inputs to that model are the risk-free interest rate, expected future dividends, the expected volatility of share returns over the life of the awards and the historical correlation matrix of returns between companies. Expected dividends are deducted in the calculation of fair value because any dividends accrued over the vesting period are expected to be paid separately in cash.
The fair value of the PSP share awards with a RoNTA performance condition is equal to the share price on date of grant less the value of expected dividends in respect of the shares. The value of expected dividends is excluded because it is anticipated, as for the PSP awards with vesting based on TSR, that they will be paid separately in cash.
For PSP share awards granted during the year, the following key assumptions have been made:
Year ended Year ended
31 December 31 December
2014 2013
------------------------------------------- ------------- -------------
Risk-free interest rate (3 - 5 year terms) 1.3% - 1.8%
pa -
------------------------------------------- ------------- -------------
Expected volatility 22.0% pa -
Expected dividend yield 7.7% pa -
------------------------------------------- ------------- -------------
The risk-free rate is equal to the yields available on zero-coupon UK government bonds at the date of grant with terms equal to the expected lives of the awards. Expected volatility is based on the historic volatility of the Group's share returns since the IPO and the historic volatility of the comparator group companies over periods commensurate with the expected term of the awards. The expected dividend yield is based on declared dividends and the Group's dividend policy as at the date of grant and the share price on the date of grant.
The calculation of the compensation cost recognised in the income statement in respect of these awards assumes forfeitures due to employee turnover of 5% per annum prior to vesting, with subsequent adjustments to reflect actual experience.
Reconciliation of movement in the number of PSP awards
Year ended Year ended
31 December 31 December
2014 2013
Number of Number of
awards awards
--------------------------- ------------- -------------
Outstanding at 1 January - -
Granted 2,596,365 -
Outstanding at 31 December 2,596,365 -
--------------------------- ------------- -------------
There were no awards exercisable at the end of the year.
The weighted average fair value at date of grant for equity-settled awards granted during 2014 was 158p. In addition, the weighted average fair value at date of grant for the related dividend equivalents, which are cash-settled, was 54p.
The weighted average remaining contractual life at the end of the year was 3.5 years.
(c) Brit All-Employee Share Plan
The Brit All-Employee Share Plan (comprising the Share Incentive Plan (SIP) for UK employees and the International Share Incentive Plan for overseas employees) provides for the award of Brit PLC Free Shares, Partnership Shares, Matching Shares and Dividend Shares. In 2014, Free Share awards were granted with a vesting period of three years from the Award Date. Vesting is unconditional for participants still in-service at the vesting date. Participants will also receive Dividend Shares which represent the value of reinvested dividends that would have accrued over the vesting period on the shares in the Free Share award. No Partnership or Matching shares had been awarded by 31 December 2014.
The fair value of the Brit All-Employee Share Plan awards is equal to the share price on date of grant. Dividends are not deducted in the calculation of fair value because dividends will be accumulated over the vesting period and repaid in equivalent Dividend shares.
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 Brit All-Employee Share Plan awards
Year ended Year ended
31 December 31 December
2014 2013
Number of Number of
awards awards
--------------------------- ------------- -------------
Outstanding at 1 January - -
Granted 528,205 -
Forfeited (19,555) -
Vested (6,108) -
Outstanding at 31 December 502,542 -
--------------------------- ------------- -------------
The weighted average fair value at date of grant for awards granted during 2014 was 239p.
The weighted average remaining contractual life at the end of the year was 2.5 years.
Employee share trusts and award settlement
Awards under the RPP were settled by the transfer of shares from an independent trust. New Brit PLC shares have been issued to an independent trust in order to settle awards as they vest under the Share Incentive Plan (SIP) for UK employees.
29 Related party transactions (a) Principal investors
The principal investors in Brit PLC are a number of Apollo and CVC investment funds.
The Group has paid monitoring fees to Apollo and CVC affiliated investment funds amounting to GBP7.4m (31 December 2013: GBP2.0m) of which GBP5.4m (31 December 2013:GBPnil) was paid in connection with the termination of those monitoring fee arrangements on 27 March 2014.
Apollo Capital Management LP and Athene Asset Management LLC are members of the Apollo Group and CVC Credit Partners LLC is a member of the CVC Group. The Group has incurred investment management fees, including performance fees, payable to these companies as follows:
Year ended Year ended
31 December 31 December
2014 2013
GBPm GBPm
------------------------------ ------------- -------------
Apollo Capital Management LP 0.6 0.4
Athene Asset Management LLC 1.0 0.9
CVC Credit Partners LLC 0.2 0.1
------------------------------- ------------- -------------
1.8 1.4
------------------------------ ------------- -------------
The Group has made investments in Apollo and CVC investment funds as follows:
31 December 31 December
2014 2013
GBPm GBPm
------------------------------------------------- ------------ ------------
Apollo Offshore Credit Strategies Fund 27.2 22.1
CVC Credit Partners European Opportunities Fund 15.3 17.0
-------------------------------------------------- ------------ ------------
42.5 39.1
------------------------------------------------- ------------ ------------
The Group has made investments in the loan notes of members of the Apollo Group as follows:
31 December 31 December
2014 2013
GBPm GBPm
------------------------- ------------ ------------
Great Wolf Resorts Inc. 0.6 1.5
Rexnord Corporation 1.3 1.7
-------------------------- ------------ ------------
1.9 3.2
------------------------- ------------ ------------
(b) Key management
(i) 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
2014 2013
GBPm GBPm
------------------------------------------------- ------------- -------------
Salaries and other short-term employee benefits 6.6 6.3
Post-employment benefits 0.2 0.2
Share based payments 0.1 -
Termination benefits - 0.5
-------------------------------------------------- ------------- -------------
6.9 7.0
------------------------------------------------- ------------- -------------
For the purposes of International Accounting Standard 24, 'Related Party Disclosures', key managers are defined as the Board of Directors and members of the Executive Management Committee which is the primary vehicle for implementing Board decisions in respect of UK-managed operations.
(ii) Loans
On 27 March 2014, certain key managers and certain other employees of the Group entered into loan agreements with Achilles Holdings 1 S.à r.l., pursuant to which they borrowed GBP1.4m from Achilles Holdings 1 S.à.r.l. for the purpose of funding their acquisition of additional shares in Achilles Holdings 2 S.à.r.l., a Group company. The loans are interest free and are repayable in full on 28 February 2015 or, if earlier, the date on which the borrower ceases to be employed by a Group company. As part of the corporate reorganisation, the relevant shares in Achilles Holdings 2 S.à.r.l. were exchanged for shares in Achilles Holdings 1 S.à.r.l., which in turn were exchanged for shares in Brit PLC. Each key manager and employee has been required to sell 25% of all of their shares in Brit PLC resulting from the corporate reorganisation and use 50% of the post-tax consideration for full or partial repayment of their respective loan. As at 31 December 2014, the total amount of such loans outstanding was GBP0.2m.
One of the loans referred to above was made to a Director, Mark Cloutier. The initial loan was GBP0.5m and the amount outstanding at 31 December 2014 was GBP0.2m.
(iii) Other transactions with Directors
Certain Directors are also directors of other companies as set out in the Governance section of the Annual Report. Some of these companies and their subsidiaries trade with companies within the Brit Group. All such trading is carried out on arms-length commercial terms.
30 Guarantees and contingent liabilities
(a) Lloyd's
Assets have been pledged, as Funds at Lloyd's, by way of deposits and fixed and floating charges for Brit UW Limited, the corporate member of the Group. As at 31 December 2014 the Funds at Lloyd's requirement amounted to GBP490.9m (2013: GBP551.2m).
(b) Revolving credit facility
The Group has access to a GBP225.0m revolving credit facility. For further information, refer to Note 21. Guarantees have been made by Brit PLC and Brit Insurance Holdings Limited to the syndicated banks providing the facility.
As at 31 December 2014, a US$80m (GBP51.3m) letter of credit had been provided to Lloyd's (2013: US$80.0m/GBP48.2m). At 31 December 2014, this letter of credit was fully collateralised with USD cash held in a charged bank account (31 December 2013: uncollateralised).
(c) Collateral pledged
As part of its reinsurance arrangements, a subsidiary company entered into a collateralised reinsurance arrangement with a counterparty and the fair value of the assets held to support this liability as at 31 December 2013 was GBP428.1m. The reinsurance arrangements ceased on 18 August 2014 and the collateral pledged was withdrawn on that date.
A Group company, Brit Syndicates Limited, has a letter of credit facility with Citibank PLC. Letter of credit to the value of US$14.6m (GBP9.3m) were in issuance at 31 December 2014 (31 December 2013: US$3.3m (GBP2.0m) and were fully collateralised in cash.
(d) 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 2.5.10.
31 Subsequent events
On 17 February 2015, the boards of Fairfax Financial Holdings Limited (Fairfax) and the Company announced that they had reached agreement regarding the terms of a recommended cash offer through which the entire issued and to be issued ordinary share capital of the Company would be acquired by FFHL Group Ltd, an entity wholly-owned by Fairfax.
Under the terms of this offer, shareholders of the Company would be entitled to receive 305 pence in cash for each Brit share, comprising 280 pence in cash and 25 pence by way of the 2014 finalordinary and special dividends recommended by the Board of the Company.
32 Financial information and posting of accounts
The financial information set out above does not constitute the Company's statutory accounts for the year ended 31 December 2014 or 2013, but is derived from those accounts. Statutory accounts for Achilles Holdings 1 S.à r.l. for 2013 have been delivered to the Registre de Commerce et des Sociétés de Luxembourg and the statutory accounts for Brit PLC for 2014 will be delivered to the Registrar of Companies following the Company's annual general meeting. The auditor has reported on those accounts; their reports were unqualified and did not contain statements under Section 498(2) or (3) of the Companies Act 2006.
The audited Annual Report and Accounts for 2014 are expected to be posted to shareholders by no later than 6 March 2015. It will also be posted by that date on the Company's website. Copies of the Report may be obtained, once it is published, by writing to the Company Secretary, Brit PLC, 55 Bishopsgate, London EC2N 3AS, UK. The annual general meeting of the Company will be held at the same address at 9.30am on 21 April 2015.
The preliminary results were approved by the Board on 24 February 2015.
Glossary of terms
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 oradjusted NTA: Total equity, less intangible assets net of the deferred tax liability on those intangible assets.
Adjusted net tangible assets per share: Calculated as closing adjusted net tangible assets divided by the number of shares in issue at the statement of financial position date less own shares.
Admitted market: Insurance provided by an insurer that is admitted (or licensed) in the US state in which the policy was sold. Admitted insurance must also be sold by an agent who is licensed in that state.
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'.
Apollo: Means (i) AP Achilles Holdings (EH-1), LLC, AP Achilles Holdings (EH-2), LLC, AP Achilles Holdings (EH-3), LLC, and AP Achilles Holdings (EH-4), LLC; (ii) AP Helios Co-Invest, L.P.; and (iii) AP Selene Co-Invest, L.P.
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.
Asset leverage: The ratio of invested assets to adjusted net tangible assets. In this calculation both invested assets and adjusted net tangible assets are reduced by the amount of any recommended final ordinary and special dividends.
Attritional losses: Common losses, as opposed to a major or catastrophe losses, incurred from ordinary insurance and/or reinsurance operations.
Attritional loss ratio: Attritional losses incurred expressed as a percentage of net earned premiums (excluding the effect of foreign exchange movements on non-monetary items).
Available capital resources: Adjusted net tangible assets, subordinated debt and Letters of credit / contingent funding.
B
BGSB: Brit Global Specialty Bermuda, the business of the Group operating in Bermuda.
BGSU: Brit Global Specialty USA, the business of the Group operating in the United States, of which BISI is the managing general agent.
BIG: Brit Insurance (Gibraltar) PCC Limited, the Group's captive reinsurer incorporated in Gibraltar.
Binder business: Business conducted by a coverholder acting under a binding authority.
Binding authority: See 'delegated underwriting authority'.
BISI: Brit Insurance Services USA, Inc., a company incorporated in Illinois, USA.
Broker: An intermediary who negotiates contracts of insurance or reinsurance, receiving a commission for placement and other services rendered.
C
Capital ratio: Available capital resources expressed as a percentage of management entity capital requirement.
Captive: An entity that provides risk-mitigation services for other entities within the same Group only.
Catastrophe or Cat: Perils including earthquakes, hurricanes, hailstorms, severe winter weather, floods, fires, tornadoes, explosions and other natural or man-made disasters. Catastrophe losses may also arise from acts of war, acts of terrorism and political instability.
Claims: Moneys demanded by an insured for indemnity under an insurance contract.
Claims development triangles: Tabulations of claims development data, set out with underwriting years along one axis and calendar years of development along the other.
Claims incurred: Claims arising from events that have occurred, regardless of whether or not they have been reported to the insurer.
Claims ratio: Calculated as total claims incurred expressed as a percentage of net earned premiums (excluding the effect of foreign exchange movements on non-monetary items). The claims ratio is the aggregate of the reserve release ratio, major claims ratio and the attritional loss ratio.
Clash reinsurance: A form of reinsurance that provides additional cover in the event that the reinsured is exposed to multiple claims from two or more of its insureds arising out of the same loss occurrence.
Combined ratio or CoR: Calculated as total claims incurred and total expenses incurred by the underwriting divisions, expressed as a percentage of net earned premiums (excluding the effect of foreign exchange movements on non-monetary items). The combined ratio is the aggregate of the claims ratio and the expense ratio.
Commission ratio: Commission expense incurred by the underwriting division expressed as a percentage of net earned premiums (excluding the effect of foreign exchange movements on non-monetary items).
Commutation: An agreement between a ceding insurer and a reinsurer that provides for the valuation, payment and complete discharge of all obligations between the parties under a particular reinsurance contract.
Constant FX rates: An increase or decrease in figures between two years after eliminating the effect of FX rate movements.
Corporate member: A company providing the capital to support the underwriting activity of a syndicate at Lloyd's. Brit's corporate member is Brit UW Limited.
Coverholder: An entity authorised by an insurer to enter into a contract of insurance on its behalf.
CVC: Means (i) Bishop, L.P. and (ii) the CVC European Equity V Funds.
CVC European Equity V Funds: Means CVC European Equity V Funds means CVC European Equity Partners V (A) L.P., CVC European Equity Partners V (B) L.P., CVC European Equity Partners V (C) L.P., CVC European Equity Partners V (D) L.P. and CVC European Equity Partners V (E) L.P, whose shareholdings in the Company are held directly by their wholly owned direct subsidiary, White Poolco Holdings Limited.
Cycles: Trends or patterns that may exist in a given market environment. See 'hard market' and 'soft market'.
D
Deferred acquisition costs orDAC: 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.
Energy downstream: Cover for the petrochemical / refining sector.
Energy midstream: Cover for elements of production not covered by energy upstream including land rigs, gas plants and general midstream energy excluding petrochemical and refining. Coverage provided for physical damage, business interruption.
Energy upstream: Cover for exploration and upstream production including construction, operational physical damage risk, business interruption / loss of production income, liabilities (on a package basis), operators extra expenses and the typical ancillary coverages required by the energy sector.
Excess and Surplus or E&S: A generic US regulatory classification referring to insurance coverage not ordinarily written by insurers fully admitted in various states. The E&S lines business is largely unregulated as to rate and form but insurers must be authorised to write such business in a state by the local regulator.
Excess of loss or XL: A type of reinsurance that covers specified losses incurred by the reassured party in excess of a stated amount (the excess) up to a higher amount of limit, for example GBP5m excess of GBP1m. Such coverage can operate on a per loss basis or an aggregate basis.
Executive Management Committee orEMC: Acommittee at Brit consisting of the senior management and the CEO.
Expense ratio: Calculated as total expenses incurred by the underwriting divisions expressed as a percentage of a percentage of net earned premiums (excluding the effect of foreign exchange movements on non-monetary items). The expense ratio is the aggregate of the commission ratio and the operating expense ratio.
F
FCA: The UK Financial Conduct Authority, established pursuant to the Financial Services Act 2012 and responsible for, among other things, the conduct regulation of all firms authorised and regulated under FSMA and the prudential regulation of firms which are not regulated by the PRA.
First Dollar: An insurance policy written with low excess and deductible, and written in the admitted market.
FSC: The Financial Services Commission of Gibraltar, a statutory body corporate established by the 1989 Financial Services Commission Ordinance (since replaced by the Financial Services Commission Act 2007), responsible for regulating the financial services industry in Gibraltar.
Funds at Lloyd's or FAL: Funds held in trust at Lloyd's to support a Lloyd's underwriter's underwriting activities.
FX: Foreign exchange.
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.
Higher hazard liability business: The provision of cover to industries that have inherent and significant hazards, including industries where personnel work at height, depth or in confined space.
HMRC: Her Majesty's Revenue and Customs.
I
Incurred but not reported orIBNR: 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 orIAS: 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, cash and cash equivalents and investment related derivatives.
Investment related derivatives: Includes options and interest rate swaps. Excludes currency forwards.
Investment return: Income, net realised and unrealised gains and losses on financial investments, cash and cash equivalents and investment related derivatives (net of investment management fees).
Investment return percentage: Investment return expressed as a percentage of average invested assets, calculated on a month by month basis.
L
Lead underwriter or lead: A lead underwriter (usually a specialist in the field of the insurance concerned) is the first underwriter to take a portion of a risk, quote an appropriate rate of premium and set terms and conditions.
Letter of credit or LoC: A written undertaking by a financial institution to provide funding if required.
LIBOR: The daily London Interbank Offered Rate set by the British Banking Association.
Line size: The proportion of an insurance or reinsurance risk that is accepted by an underwriter or which an underwriter is willing to accept.
Lloyd's China Platform: The branch of Lloyd's in Shanghai in the People's Republic of China operated through Lloyd's Insurance Company (China) Limited, on which certain Lloyd's syndicates have representation.
Lloyd's of London: The Society of Lloyd's and Corporation of Lloyd's created and governed by the Lloyd's Acts 1871-1982, including the Council of Lloyd's (and its delegates and other persons through whom the Council may act), as the context may require.
London Market: The London insurance market, which includes the Lloyd's market.
Long-tail: The term used to describe business where the difference between the timing of the average premium receipt and the timing of the average claim payment is over three years.
M
Major claims: Claims arising from natural or man-made catastrophes, or claims in excess of GBP10.0m (net of reinsurance and allowing for reinstatements) from large single risk loss events.
Major claims ratio: Major claims incurred expressed as a percentage of net earned premiums (excluding the effect of foreign exchange movements on non-monetary items).
Management entity capital requirement: The capital required by an entity based on business strategy and regulatory requirements.
Managing Agency: A company that manages a syndicate at Lloyd's on behalf of the member or members providing the capital. Brit's managing agency is Brit Syndicates Limited.
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 tangible assets per share: Calculated as closing net tangible assets divided by the number of shares in issue at the statement of financial position date less own shares.
Net written premiums or NWP: Gross premiums written during a specified period less outwards reinsurance premiums ceded.
O
Operating expense ratio: Calculated as operating expenses incurred by the underwriting divisions expressed as a percentage of net earned premiums (excluding the effect of foreign exchange movements on non-monetary items).
Ordinary dividend (interim and final): The sustainable regular dividendthat the Company aims to pay shareholders. Dividends are linked to past performance and future prospects, expected cash flows and working capital needs, as well as the availability of distributable reserves.
Outstanding claims: Claims which have been notified at the statement of financial position 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
Portfolio director: The employees of the Group appointed to manage the Group's underwriting portfolios: short tail direct, long tail direct, short tail reinsurance and long tail reinsurance.
Pps: Pence per share.
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.
Premium leverage: The ratio of gross written premium to adjusted net tangible assets. For this calculation the adjusted net tangible assets are reduced by the amount of the recommended final ordinary and special dividends.
Premium trust fund or PTF: The premiums and other monies that members receive in respect of their underwriting at Lloyd's which are held by their managing agents in trust for them subject to the discharge of their underwriting liabilities.
Protected cell company orPCC: A company that has been separated into legally distinct portions or cells. The revenue streams, assets and liabilities of each cell are kept separate from all other cells. Each cell has its own separate portion of the PCC's overall share capital, allowing shareholders to maintain sole ownership of an entire cell.
Q
Quota share or QS: A type of reinsurance which provides that the reassured shall cede to the reinsurer a specified percentage of all the premiums that it receives in respect of a given section or of all of its underwriting account for a given period in return for which the reinsurer is obliged to pay the same percentage of any claims and specified expenses arising on the reinsured business.
R
Ratio of front office employees to back office employees: Calculated as the average number of front office staff divided by the average number of back office staff employed during the year. Front office employees are defined as underwriters, other underwriting staff, claims staff and direct support staff. The balance of employees are classified as back office.
Realistic Disaster Scenarios or RDS: Specific scenarios which the Group uses to test its ability to settle claims arising from certain types of disaster.
Reinsurance: The transfer of some or all of an insurance risk to another insurer. The company transferring the risk is called the 'ceding company' and the company assuming the risk is called the 'assuming company' or the 'reinsurer'.
Representative office: An office established by a Brit to conduct marketing and other non-transactional operations overseas.
Reserves: Outstanding claims and claims incurred but not reported.
Reserve releases: The amount of the reserves at the end of the previous period determined as being excess to requirements at the end of the current period.
Reserve release ratio: The amount of reserve releases expressed as a percentage of net earned premiums (excluding the effect of foreign exchange movements on non-monetary items).
Retention rate: The ratio, in percent, of the value of premiums relating to risks written in one year renewed in the following year. The data used is risk adjusted (i.e. it allows for changes to terms and conditions).
Retrocession: The transfer of some or all of areinsurance risk to another reinsurer.
Return on equity or RoE: See 'Return on net tangible assets or RoNTA'.
Return on net tangible assets before foreign exchange movements and IPO costs or RoNTA: Profit after tax before the effects of foreign exchange movements on monetary and non-monetary items, before the return on currency related derivative contracts, before charges in respect of intangible assets and before costs incurred in respect of the IPO, expressed as a percentage of adjusted opening net tangible assets. The adjusted opening net tangible assets are also modified on a weighted average basis for capital distributions, share buybacks or share issues during the period.
Risk adjusted rate change: Change in premium rates during the year expressed as a percentage of opening premium rates. The data reflects internal estimates by Brit's underwriters, based on available year-on year underlying renewal data after allowing for changes to terms and conditions.
Risk management framework or RMF: The Group's own internal framework for risk management.
Running yield: The income return, expressed as a percentage of 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 orSCR: The higher of the two capital levels required by Solvency II. The SCR is the prudent amount of assets to be held in excess of liabilities and functions as an early warning mechanism if it is breached. The SCR is calculated using either the standard formula or an approved internal model.
Solvency matched: The matching of the currencies of the Group's liabilities and management entity capital requirements with the currencies of the assets held by the Group.
Solvency II: A combination of several EU Directives that codify and harmonise EU insurance regulation, primarily concerning the amount of capital that EU insurance companies must hold to reduce the risk of insolvency. Principal components are Directive 2009/138/EC on the taking-up and pursuit of the business of insurance and reinsurance and Directive 2012/23/EU on the financial position of insurance undertakings. Solvency II will come into force in all EU member states on 1 January 2016.
Special dividend: Any dividend paid in excess of the ordinary dividend. In the event that the Group's capital position is in excess of requirements and that excess capital is not needed for growth opportunities, the Company will consider returning it to its shareholders. This will be done via a special dividend.
Strategic asset allocation orSAA: The Group's strategic asset allocation defines the overall Group investment strategy and reflects entity-level considerations and governance matters. See 'asset allocation'.
Syndicate: A group of underwriting members of Lloyd's or a single corporate member managed as a unit to underwrite insurance business at Lloyd's to which a particular syndicate number is assigned by or with the authority of Lloyd's of London. Brit operates through
Lloyd's Syndicate 2987.
T
Tactical asset allocation: This is the allocation of invested assets from time to time (within the strategic asset allocation ranges and investment risk framework) to reflect shorter-term changes in market conditions.
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 PLC.
The Group: Brit PLC 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: The sum of 'financial investments', 'assets held for sale', 'cash and cash equivalents' and net 'derivative contracts'.
Total operating expenses: These represent all expenses incurred by the Group, excluding commission costs. They include costs incurred in respect of the IPO.
Total value created: Calculated as closing adjusted net tangible assets plus dividends paid during the year, less opening adjusted net tangible assets.
Treaty: A reinsurance contract pursuant to which the reinsurer is obliged to accept, within agreed limits, all risks underwritten by the reinsured within specified classes of business in a given time period.
U
Ultimate claims: The total forecast claims expected to arise from a policy or class of business. Ultimate claims include those losses paid, those notified and IBNR.
Underlying operating expenses: Calculated as Total operating expenses less IPO related expenses, project costs and other timing differences. Underlying operating expenses include bonus costs.
Underwriting capacity: The maximum premium income which a Lloyd's syndicate is permitted to underwrite. A capacity figure is assigned to each underwriting year and the relevant premium income is defined as gross written premiums less commissions payable.
Underwriting profit: Operating profit generated by our underwriting segments less investment return.
Unearned premium reserve orUPR: The portion of premium income written in the calendar year that is attributable to periods after the statement of financial position date. It is accounted for as unearned premiums in the underwriting provisions.
Unrealised gains or losses:
Gains or losses that are yet to be crystallised in the form of a cash movement from disposals of invested assets.
This information is provided by RNS
The company news service from the London Stock Exchange
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