Strong rate increases and premium growth in an unprecedented period defined by Covid-19
Gross written premiums of US$1,282.5m (H1 2019: US$1,210.5m), a 5.9% increase (6.5% at constant FX rates).
Premium rate increases of 8.2% (H1 2019: 4.3%). Premium rate increases since 1 January 2018 of 17.8%.
Net earned premium1 of US$818.1m (H1 2019: US$804.9m), an increase of 2.2% at constant FX rates.
Attritional ratio of 52.0%, an improvement of 4.0pps (H1 2019: 56.0%).
Combined ratio1,2 of 106.7% (H1 2019: 94.4%), including 15.7pps of COVID-19 related losses.
Operating loss before the impact of FX and tax of US$193.6m (H1 2019: profit of US$139.6m).
Loss after tax of US$227.4m (H1 2019: profit of US$120.3m).
Investment return3 after fees of US$99.1m in Q2 2020, following losses of US$219.4m in Q1 2020. Investment return3 after fees of -US$120.3m for H1 2020, representing a non-annualised return of -2.9% (H1 2019: +US$94.7m/+2.4%).
RoNTA4 (non-annualised) of -16.4% (H1 2019: +12.6%) and total value created was -US$227.3m (H1 2019: +US$122.2m).
Balance sheet remains strong: Adjusted net tangible assets5 of US$1,102.5m (31 December 2019: US$1,150.4m), after capital contribution from Fairfax of US$200.0m and dividend payment of US$20.6m.
Continued implementation of our strategy, including:
Announced plans to launch ‘Ki’, the first algorithmically driven Lloyd’s of London syndicate, in collaboration with Google Cloud;
Launched our Private Client offering; and
Continued to selectively expand our BSGU operations.
Matthew Wilson, Group Chief Executive Officer of Brit Limited, commented:
‘The COVID-19 pandemic is a global crisis, the like of which has not been seen for generations. As well as the devastating human cost, it has created an extraordinarily significant amount of global disruption and economic uncertainty, with the impact on the global economy likely to be felt for many years to come.
Our immediate priorities as the crisis emerged were to ensure the safety of our employees and continuity of our service to our clients and brokers. All our offices were quickly and successfully able to move to remote working using our robust IT estate and systems and have maintained a continuity of service to our clients, remaining fully open for business throughout the lockdown period. Our underwriters have been actively engaging with clients and brokers, delivering market-leading responsiveness. Our Claims team continues to service our policyholders in these challenging circumstances, proactively working with our TPAs to ensure claims continue to be handled promptly and to our usual high standards.
The crisis has impacted many of our clients. Our products are designed to support businesses and individuals in such difficult times and we have focussed on responding to claims as they have been notified. We have stood tall with respect to valid COVID-19 claims and the financial impact on Brit has been significant, with claims of US$127.9m related to COVID-19 being reported within Major Losses in the period. COVID-19 has predominantly impacted our Contingency (Event Cancellation) and Casualty Treaty books in the first half of the year. These losses have driven an increase of 15.7 percentage points (pps) in our combined ratio, bringing the overall combined ratio to 106.7%.
The pandemic has also severely impacted investment markets. The first quarter of 2020 saw markets suffer their worst period since the 2008 financial crisis, as investors priced in the short-term impact of the shutdown and potential longer term impact of a global recession, while the second quarter witnessed a partial recovery. Brit’s investment return in the period was a negative US$120.3m, driven by the performance of our equity holdings. Our overall operating result before FX movements was a loss of US$193.6m and our result before tax was a loss of US$217.5m.
Despite the backdrop of COVID-19, there were a number of positives in the period. We achieved risk adjusted rate increases of 8.2%, with almost all classes contributing to the increase. This gives a total overall increase since 1 January 2018 of 17.8%. In this positive rate environment, we continued to grow our written premium to US$1,282.5m, an increase of 6.5% at constant exchange rates.
During the period we delivered an attritional claims ratio of 52.0%, an improvement of 4.0pps, reflecting underwriting discipline, rigorous risk selection, and rate increases. We have also maintained our long-standing track record of prior year reserve releases, improving the combined ratio by 4.2pps (US$34.9m).
Brit’s brand purpose is ‘writing the future’. In May, we were proud to announce plans to launch Ki, a standalone business and the first fully digital and algorithmically-driven Lloyd's of London syndicate, that will be accessible anywhere, at any time, in collaboration with Google Cloud. We believe Ki will redefine the commercial insurance market and places Brit at the forefront of innovation in our sector.
We strive to ensure equal opportunity is part of how we conduct ourselves as a business and as a team. The simple message is that discrimination in all its forms will not be tolerated at Brit. Following the killing of George Floyd, I was contacted by a number of colleagues from all backgrounds wanting to express their feelings. I believe it is a testament to our culture that people from every background have been able to speak up, even if it has felt uncomfortable doing so. Over the last six months we have been working with an independent consultancy to measure our progress towards total inclusion, and to highlight where we need to improve. We continue to work hard on this topic and are committed to proactively addressing its challenges. We have also launched the Brit People Forum, so we can listen to and learn from the personal stories of the widest spectrum of the Brit community and come together to make inclusion and diversity ‘business as usual’ for Brit.
Looking ahead to the remainder of 2020 and beyond, significant uncertainty exists for the insurance industry. COVID-19 related claims are likely to be incurred over a prolonged period, a situation potentially exacerbated by the risk of a second wave of infections as lockdowns are gradually eased. We also face the consequences of the measures taken by governments driving yields down to record lows and the likely impact on the economy, with recessionary risks heightened.
However, against this challenging backdrop there are a number of indicators to give us cause for optimism, including rate increases, the withdrawal of capacity in the market from certain classes and our improving attritional claims ratio. In this environment, our clear strategy of embracing data driven underwriting discipline, and rigorous risk selection, coupled with innovative capital management solutions and continued investment in distribution, positions us well to respond to the opportunities and challenges ahead.’
Mark Allan, Group Chief Financial Officer of Brit Limited, said:
‘For Brit and the wider insurance market, the first half of 2020 has proved to be very challenging, with results heavily impacted by the COVID-19 pandemic and its impact on insurance, investment and currency markets. Brit’s operating result before FX movements for the six months ended 30 June 2020 was a loss of US$193.6m (2019: profit of US$139.6m), while the post-tax result was a loss of US$227.4m (2019: profit of US$120.3m).
Our underwriting loss of US$55.0m and combined ratio of 106.7% included major losses of US$156.2m (or 19.2pps of the combined ratio), resulting from COVID-19 related claims (US$127.9m), the Nashville Tornadoes (US$13.3m) and US Civil Unrest (US$15.0m). However, we were pleased with the attritional ratio of 52.0%, an improvement of 4.0pps, and to continue our long-standing track record of prior year reserve releases (US$34.9m), benefiting our combined ratio by 4.2pps.
Our investment return net of fees in Q2 2020 was a strong US$99.1m, following losses in Q1 2020 of US$219.4m, making the return for the six months a loss of US$120.3m or -2.9% (non-annualised). Our equity and fund portfolios suffered losses of US$206.1m, driven by their performance in the first quarter as markets sold off due to fears around the financial impact of the coronavirus pandemic, while our fixed income portfolio generated positive returns of US$98.0m.
Preserving a strong financial position is critical to the long-term success of an insurance business. Our balance sheet remains strong as we maintain our ‘conservative best estimate’ reserving policy which provides us with a secure foundation. At the end of the period our adjusted net tangible assets totalled US$1,102.5m (31 December 2019: US$1,150.4m), after capital contributions from Fairfax of US$200.0m and the payment of a US$20.6m dividend, ensuring a robust capital position. During the period, our management capital requirement increased from US$1,227.8m to US$1,454.0m, primarily reflecting movements in interest rates. We continue to benefit from the financial strength of our parent, Fairfax, and from our relationships with our capital partners supporting Syndicate 2988 and the Sussex vehicles.
We are very excited about the prospects for our new launch, Ki, that brings together the best of Lloyd’s underwriting with the latest technology and data science. This cutting-edge initiative is a first for the market and will launch later this year with a fundamentally different operating model, designed to dramatically improve the broker experience for follow capacity in Lloyd’s. We are delighted to be working with World-class partners in Google Cloud and University College London on the launch.
While we have seen some positive market developments in the period, the period has been defined by COVID-19. The outlook for the insurance market is uncertain and challenging, with underwriting returns that are likely to be impacted by COVID-19 over a prolonged period. However, our strategy and discipline position us well against the significant macro-economic challenges that lie ahead.’
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1 Excludes the effect of foreign exchange on non-monetary items.
2 Excludes amount attributable to third party underwriting capital providers.
3 Inclusive of return on investment related derivatives, return on associates and after deducting investment management expenses and third party share of investment return.
4 RoNTA calculation excludes all FX movements. Based on adjusted net tangible assets (footnote 5).
5 Adjusted net tangible assets are defined as total equity, less intangible assets net of the deferred tax liability on those intangible assets.