Strong growth in an improving environment

FULL YEAR RESULTS FOR THE YEAR ENDED 31 DECEMBER 2018

STRONG GROWTH IN AN IMPROVING ENVIRONMENT

Key points

• Gross written premiums of US$2,239.1m (2017: US$2,057.0m), an increase at constant exchange rates of 8.0%.
• Risk adjusted premium rates on renewal business increased by 3.7% (2017: 1.3% reduction).
  Combined ratio1 of 103.3% (2017: 112.4%), including 12.0 percentage points of major losses (2017: 16.2pps), against a long term expected annual average of 3.9%.
• Major losses in line with expectations given the nature and scale of the events (the fourth most costly natural catastrophe year on record) and our market share.
• Return on invested assets2 after fees of -US$82.1 or -2.0% (2017: +US$204.2m or +4.9%).
• Loss after tax of US$166.5m (2017: profit of US$21.5m) and RoNTA3 before FX movements of -14.4% (2017: +1.1%).
• Strong balance sheet maintained with adjusted net tangible assets4 of US$992.9m (2017: US$1,043.7m).
• Strong capital ratio of 130.4% (2017: 136.8%).
• Brit managed capacity on new initiatives (Versutus, Sussex Capital and Syndicate 2988) expanded to over US$400m for 2018.
• Continued focus on leadership, innovation and distribution, with continued opportunity-driven considered expansion in a number of areas including US Professional Lines, US Cyber and Technology, US Marine, US Casualty, Kidnap and Ransom and Private Clients.
• Fairfax ownership increased from 72.5% to 88.9%.

Matthew Wilson, Group Chief Executive Officer of Brit Limited, commented:

‘Brit generated strong premium growth in 2018, against a backdrop of improving rates, whilst taking decisive action in underperforming areas. Premiums written increased by 8.0% through the expansion of our US operations and growth in classes where we have a strong track record. During 2018 both insurance and investment market conditions remained challenging, with catastrophe events and unrealised losses on equities and funds heavily impacting our results. Despite this, our results reflect our ability to maintain strong underwriting discipline while continuing to deliver selective growth, particularly through our BGSU and third-party capital platforms. We therefore enter 2019 with premium rates trending upwards and believe we are well positioned to benefit from this improving environment.

2018 again demonstrated the value of our products particularly in response to catastrophe losses. 2018 was the fourth most costly natural catastrophe year on record and, with 2017, the most costly back-to-back years ever. While we achieved overall risk adjusted rate increases of 3.7%, those increases were lower than initially anticipated, as available capacity has continued to exceed demand.

Against this backdrop, our business proved resilient with a combined ratio of 103.3%, including 12.0 percentage points in respect of major losses. Our attritional ratio was a solid 57.2% and we continued to demonstrate our conservative reserving approach with a reserve release benefitting the combined ratio by 6.1pps.

In 2018 we again saw increased demand for our products. Our premium written grew to US$2,239.1m, reflecting the favourable development of prior year premiums, the impact of rate increases, our investments in Syndicate 2988 and Sussex Capital, partly offset by reductions in certain classes following the actions outlined below. It was again pleasing to see an increased contribution from our initiatives of recent years as we continue to expand our international presence.

For 2018, Brit’s total managed capacity across Versutus, Sussex Capital and Syndicate 2988 exceeded US$400m. We successfully launched Sussex Capital in January 2018, the open-ended fund which writes through Sussex Re, providing collateralised reinsurance direct to third parties and to Brit. In February, we announced the fourth annual expansion of Versutus, which now has invested capital of US$187m, offering access to Brit’s strong underwriting franchise. In addition, Syndicate 2988, which was launched in 2017, was expanded by 79% to a stamp capacity of £98.5m (c.US$130m) for 2018 and now offers broad access to Brit’s extensive underwriting capabilities. These initiatives represent excellent progress as we continue to develop and enhance our capital markets participation.
In this challenging market, we have continued to take action to protect our balance sheet, with the application of rigorous risk selection criteria in marginal lines of business and the decision to withdraw from certain classes such as International Professional Indemnity, Yacht, Contractors Plant & Equipment and Aviation.

We do however, continue to selectively expand our core underwriting capabilities, predominantly in the US. This ongoing success in attracting high-quality talent is helping us expand our client offering while delivering sustainable, profitable growth.

Our customers are our priority and our products are designed to support those businesses and individuals in difficult times. In 2018, we have continued to focus on providing an outstanding claims service, ensuring our customers’ needs are met and our brokers have commended us for our service excellence, including the expediting of claims payments wherever appropriate. I was delighted that our claims team won the Claims Team of the Year at the 2018 Insurance Day Awards, in recognition of their proactive approach and commitment to delivering service excellence, and the Lloyd’s Market Association Award for Innovation for their work on loss funds with the InsureTech firm Vitesse.

Being a member of the Fairfax family has presented us with a number of opportunities in 2018. We assumed the renewal rights from Advent of a number of classes accretive to Brit’s portfolio, with 21 Advent staff transferring to Brit. We entered into an arms-length loss portfolio reinsurance contract with RiverStone, covering a number of legacy classes. We also received further investment from Fairfax itself, which increased its holding in Brit from 72.5% to 88.9%.

The combination of continued catastrophe events, market conditions and the strict Lloyd’s planning process for 2019 has meant the market has seen significant withdrawals from a number of classes of business and some reductions in appetite. However, the underwriting environment in general remains competitive and the 1 January 2019 renewal season saw only modest rate increases. While consistent with our overall expectation, this is disappointing given the market’s operating results.

We remain focused on our core fundamentals of leadership, innovation and distribution, and believe our underwriting discipline, risk selection, capital management and the targeted expansion of our global distribution capability remain key. We believe this focus will continue to hold us in good stead in the current economic and regulatory environment, allowing us to operate successfully through the current difficult market conditions, whilst being able to take full advantage of emerging opportunities as they arise.

Finally, Mark Cloutier stepped down from his role as Executive Chairman of Brit on 31 December 2018. Mark played a pivotal role in Brit’s recent history having been appointed CEO in 2011 and subsequently Executive Chairman in 2017. We wish him well.’

Mark Allan, Group Chief Financial Officer of Brit Limited, said:

‘2018 was another difficult year for the market, with investment conditions compounding losses from major catastrophe activity. Brit’s result for the year ended 31 December 2018 reflects significant claims from major loss activity and volatile investment markets resulting in significant unrealised losses on equity holdings, offset by a solid attritional loss ratio performance and strong prior year reserve releases.

Despite these pressures, our business model has proved resilient and we enter 2019 with a very strong capital position, having again demonstrated our ability to meet our commitments to clients in their time of need.

Against this challenging backdrop, the result on ordinary activities for the year before tax and FX was a loss of US$181.2m (2017: loss of US$7.1m) and the loss after tax was US$166.5m (2017: profit of US$21.5m). Return on adjusted net tangible assets (RoNTA), excluding the effects of FX, decreased to (14.4)% (2017: 1.1%).

Our capital position was well placed to deal with the challenging operating environment in 2018 and during the year we received further capital from our main shareholder, Fairfax, to ensure that this position is maintained to support our plans in 2019 and beyond. As a result, our balance sheet remains strong, with adjusted net tangible assets of US$992.9m (2017: US$1,043.7m) at the year end, after capital contributions, dividends paid and share buybacks. This represents a surplus of US$328.7m or 30.4% above the Group’s management capital requirement.

Given the severe losses arising from the 2018 US/Japanese Wind and Californian Wildfire events, our underwriting activities returned a loss of US$56.9m, which, while disappointing, was a significant improvement over 2017 (loss of US$172.8m). Claims arising from the major loss activity totalled US$196.8m (2017: US$250.0m), increasing the combined ratio by 12.0pps to 103.3% (2017: 16.2pps/112.4%). Our attritional and expense ratios of 57.2% and 40.2% respectively were relatively stable despite the challenging market conditions, while strong reserve releases of US$99.3m (2017: US$9.6m) continue to demonstrate the benefits of our conservative reserving approach.

Given equity market volatility and increases in yields during the year, our net investment return was a loss of US$82.1m (2017: profit of US$204.2m), representing a return of (2.0)% (2017: 4.9%), driven by unrealised losses on our equity and fund investments.

Syndicate 2988, Versutus and Sussex are key to Brit’s strategy of building long term relationships with the capital markets, and through these platforms we now have access to over US$400m of capacity. The support they provide enables us to strengthen our market position and provide Brit capacity to support our clients whilst offering capital market investors attractive, non-correlating returns.

We manage our currency exposures to mitigate their impact on solvency rather than to achieve a short-term impact on earnings. While we reported a total foreign exchange loss of US$9.1m through the income statement in the period, foreign exchange movements reduced our management capital requirements by US$21.0m, favourably impacting our solvency position.

The underwriting outlook has shown modest rate improvement but remains challenging. Lloyd’s has expressed its support for innovation and growth in well performing lines, while reinforcing through the 2019 planning process that perennially unprofitable areas must demonstrate a credible plan to return to profit. We welcome these actions and anticipate that they will help drive improvement in market conditions as the market focuses on sustainable underwriting. We believe we are well positioned and have the right strategy to prosper in the market.’

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Notes

1 The combined ratio excludes the effect of foreign exchange on non-monetary items.
2 Return on invested assets includes return on investment related derivatives and share of net profit of associates and is after deducting investment management fees.
3 RoNTA is based on adjusted net tangible assets.
4 Adjusted net tangible assets are defined as total equity, less intangible assets net of the deferred tax liability on those intangible assets.

For further information, please contact:

Antony E Usher, Group Financial Controller, Brit Limited +44 (0) 20 3857 0000

Edward Berry, FTI Consulting +44 (0) 20 3727 1046

Tom Blackwell, FTI Consulting +44 (0) 20 3727 1051