BRE.L Regulatory News (BRE)

9 Mar 2009 07:00



PRESS RELEASE

FOR IMMEDIATE RELEASE

9 March 2009

BRIT INSURANCE HOLDINGS PLC

Preliminary results for the year ended 31 December 2008

"A robust performance in a turbulent market"

Brit Insurance Holdings PLC, the international insurance and reinsurance group, today announces preliminary results for the year ended 31 December 2008.

 

OUTLOOK

Capacity concerns will shape the global insurance market during 2009. Insurance capital has been eroded by the combined elements of significant catastrophe related claims during 2008 and by the varied and significant effects of economic turbulence. As a result, prospects for continued rating improvements are good across most classes and within all three of our underwriting businesses.

Our diversity, already a strong feature of our portfolio, will continue to develop in 2009, both by the nature of the risk that we are assuming and geographically.

The Group sees excellent prospects for continued profitable growth during the year.

Dane Douetil, Chief Executive Officer of Brit Insurance Holdings PLC, said:

"In a difficult year for insurance, our adherence to the principles of our strategy has led us to a strong result. Market conditions are improving further in most areas, our strong balance sheet and the subscription nature of much of our business are attractive to risk buyers and stand us in good stead for 2009."

  

There will be a presentation to analysts at Brit Insurance's office at 55 Bishopsgate at 10.15am today

An audio webcast of the analysts' presentation will be available on our website www.britinsurance.com from 3.00pm today. 

ENDS 

Enquiries 

Dane Douetil Chief Executive Officer, Brit Insurance Holdings PLC  +44 (0)20 7984 8500

Paul Gildersleeves Investor Relations, Brit Insurance Holdings PLC  +44 (0)20 7984 8763

Peter Rigby / Juliet Tilley Haggie Financial  +44 (0)20 7417 8989

Notes to Editors

Brit Insurance's operations comprise three strategic business units: Brit Global Markets, Brit Reinsurance and Brit UK. All three have access to the two regulatory vehicles through which Brit Insurance underwrites: Brit Insurance Limited which is a UK FSA regulated insurance company and Lloyd's syndicate 2987 which is managed by Brit Syndicates Limited. Brit Insurance has UK underwriting offices in London, Reading, Birmingham, Bristol, Glasgow, Leeds, Darlington, Ilford, Belfast and Manchester. 

 

www.britinsurance.com

  

Chairman's Statement

This is my first report since becoming Chairman. I am pleased to confirm that the strategy and financial position of the Group remain sound. 

Business environment

Growth in the global economy weakened substantially during 2008, leading to asset and commodity price declines and a prolonged period of instability. Investment losses, previously confined to the subprime mortgage sector, spread throughout investment markets. Inter-bank lending and commercial paper borrowing fell sharply precipitating a credit freeze for institutional and individual borrowers. 

Against this background, insurance remains a predominantly necessary purchase for businesses and individuals. Although the recession will inevitably affect demand for insurance, the capital reductions in banking and investment markets, together with above historical average hurricane claims, have led to rate strengthening in the catastrophe exposed insurance markets at 1 January 2009 with other insurance markets expected to record rate rises during 2009.

Group strategy

The Board reviewed the Group strategy and longer term plans during 2008. These plans were founded on financial security, diversity of business and delivery of a return on equity of in excess of 6% above the UK base rate across the underwriting cycle. In the current economic climate these foundations are more pertinent than ever. Looking forward, the Group plans to develop its overall size, scale and diversity. Where we identify suitable opportunities, we expect to be ready and able to capitalise on these.

Capital management and dividends 

The Board intends to pay a total dividend of 15p per share in respect of the 2008 financial year. In the period 2004 to 2008 the Group has returned over £282.0m to shareholders. In light of enhanced opportunities available to the Group, the Board has decided to increase flexibility on earnings retention and proposes to pursue a dividend policy which seeks to grow dividends per share in line with the longer term growth prospects of the Group. For the purposes of this policy it is proposed that the 2008 dividend per share will be used as the base. 

Board changes

At the May 2008 Annual General Meeting (AGM), Clive Coates retired as Chairman. I would like to record my thanks to Clive for his counsel and guidance. Also at the AGM, two of our Non-Executive Directors - Neil Eckert and Anthony Townsend retired; I reiterate Clive's thanks for their significant contributions over the years. At our 2009 AGM Kathy Lisson will retire from the Board and leave the Group. I would like to offer my appreciation to Kathy for her contribution to the Group. 

John Barton 

Chairman

8 March 2009

  Chief Executive Officer's Report

The impact of the 'credit crunch' on the insurance industry

2008 saw a massive destruction in global shareholder wealth as the combined effect of constrained credit, mark to market investment losses and the de-leveraging of corporate and personal borrowing shook the global economy. In the insurance industry, these effects were most apparent in investment returns where mark to market valuation reduced insurers' investment returns to around zero. Casualty lines have been affected by increased levels of claims, or potential claims, from insureds. In general, statements from most insurers and share price movements during 2008 suggest that insurers have typically managed the downside risks well. 

Performance

Our 2008 performance

The Group is starting to see the benefits of the UK development strategy and grew the Brit UK business by 28.0% in 2008. The combined operating ratio for the UK SBU recorded a substantial improvement to 100.0% from 109.3% in 2007. The growth came from our carefully targeted markets focused in the regions, electronic trading and selected coverholder relationships. In the Brit Global Markets and Brit Reinsurance SBUs, we were cautious regarding the impact that the credit crunch would have on some lines of business and took an active stance in introducing exclusions or withdrawing from business where appropriate. The Group has continued to see favourable developments in back year reserves. Prior year net reserves releases were made from all SBUs during 2008, and totalled £79.1m (2007: £58.7m).

Although our 2008 return on equity of 9.2% was 1.5% below our target of in excess of 6.0% above the UK base rate, the five year weighted average return of 14.9% exceeds our target return by 4.1%.

Hurricanes Gustav and Ike 

Early estimates for the total cost of Gustav and Ike were US$98m net of reinsurance recoveries and reinstatement premiums. Subsequent uplifts in the market-wide loss estimates have led us to increase the estimated ultimate costs, net of reinsurance recoveries and reinstatement premiums, to US$112m.

The rating environment in 2008

As expected, 2008 saw rate increases in the Brit UK commercial motor book and personal lines accounts, with rates stabilising or rates of fall slowing in other UK classes. Overall Brit UK rates fell by 0.8% during 2008 (2007: -4.5%). Brit Reinsurance and Global Markets saw annualised rate softening during 2008 of -2.0% and -3.3% respectively (2007: -0.8% and +1.5%).

Our subprime exposure and the broader impact of the current economic turmoil on our casualty book

At 31 December 2007, the Group established net claims reserves, including IBNR, of US$124.6m (or £62.5m at US$1.99:£1) and held unearned premium reserves of US $15.0m. Total net claims reserves and UPR at 31 December 2008 were US$117.6m and US$12.3m respectively. Earned premium net of reinstatement premiums amounted to US$3.7m and incurred claims US$6.3m.

Since Q3 2007, Global Markets has been reducing its exposure to financial institutions business because of concerns over the economic environment. Within Global Markets, total financial and professional gross written premium for the 2008 underwriting year was £320m. Of this, gross written premium from financial institutions business was £74m, of which £26m was US-based, down from £87m and £37m respectively for the 2007 underwriting year. 

For the 2009 underwriting year budgeted gross written premium for financial institutions is £61m, with only £8m of that from US-based liability business. This defensive stance will be maintained until we consider that the financial environment has improved. 

  

Group Strategy

Development of Group Strategy

During the year, the Board - assisted by the executive - actively reviewed the Group strategy. Consideration focused on how we execute and deliver on the strategy. The Board recognised that increased size and international diversification was a logical extension of the product diversification that already exists and we will be considering opportunities to establish a broader geographic footprint. Likewise, and building on our innovative approach to Norton (the holding company for catastrophe retrocession business in which we have an interest), Fremantle (a cash collateralised catastrophe swap), and Rockhampton (a cell in an independently-owned protected cell company writing a share of our outwards reinsurance programme), the Board has asked us to look to develop non capital intensive revenue streams to complement our insurance activities. We will also develop our asset management, capital and tax management strategies to support the Group. We have provided details in our strategic review later in the directors' report. However it is important to note that the Group strategy is driven by three guiding principles:

the organisation must be of a significant size to benefit from economies of diversity and to offset the costs of operating in a heavily regulated environment

the organisation must support those classes where Brit Insurance can lead business and influence the market sector

the organisation must grow into new and diverse market sectors and geographies

The Board regularly considers the Group's strategic direction and sets a series of short and longer term goals. Given the current economic climate, we do not intend to set absolute targets that may rapidly be overtaken by market developments or business events. However, we expect 2009 to provide a number of opportunities to grow the business through rate increases on retained business, organic growth driven by insureds seeking increased risk syndication and potentially through acquisitions. 

A diverse portfolio of insurance risks

Diversification is at the heart of the Group's business model and we write over 70 sub-classes across the strategic business units (SBUs) grouped into 15 primary classes.

Diversity enables the Group to withstand adverse underwriting conditions and individual events. Regulators and rating agencies are increasingly giving credit for this diversification and we expect this trend will continue as Solvency II, the insurance Capital Adequacy Directive, is introduced for EU insurers and reinsurers from 2012. The Directive is expected to benefit larger and more diversified players in terms of capital efficiency, leading to increases in return on equity and delivery of shareholder value. We estimate that, to write our 15 primary classes of business separately, we would need over 50% more capital than we do currently. This is a clear illustration of the enhancements to return on equity and shareholder value diversification brings.

Brit Capital Markets Limited

The Group has been researching and developing its understanding of the interaction and linkages between the capital and insurance markets arising from the withdrawal of certain insurers and capital markets investors. To develop this understanding, the Group established Brit Capital Markets which undertook over 20 trades in 2008, principally the purchase of US$51.0m of Fremantle A/B tranche bonds for a consideration of US$50.7m. In addition the Group purchased 50 lots of an IFEX weather derivative for US$190,750 and sold 10 lots of this instrument during 2008. Trading these products, together with the maintenance of a notional portfolio, has allowed the Group to gain an understanding of the opportunities and risks associated with these markets. Further evaluation of the opportunities to trade or issue products and the diversification benefits that these products may offer will continue through 2009.

 

Xbridge Limited

Xbridge is an electronic trading platform that enables small to medium sized UK commercial insureds, whose insurance needs are more standardised, to receive competing insurance quotes online, and to select, buy and receive policy documentation electronically. Brit Insurance is an insurer on the panel and has an equity interest in the business. This proposition plays to the market segmentation plan of Brit UK and complements our more bespoke regional-based offering. 

  

Investment in people

As a people business, our principal asset is the intellectual capital of the team. Feedback from The Sunday Times 'Best Companies to Work For' survey confirmed our view that quality leadership is critical to success in an environment facing consolidation, new markets and changes to the Lloyd's operating model. 

A common feature of high performing organisations is the calibre of their management and leadership teams. They almost always exhibit exceptional leadership, strategic direction and a real ability to share and engage employees with the Group's vision. To meet these challenges and position ourselves as a market leader, we have initiated a series of management and leadership development programmes for our current and future business leaders. 

Domicile

We have identified the Netherlands as the preferred location for the domicile of the Group's holding company in order to enhance prospects for shareholder value. With its many positive attributes including membership of the EU, strong financial services sector, stable fiscal strategy and excellent communications we anticipate the Netherlands will provide a good springboard for future growth. Subject to receipt of requisite clearances and approvals we anticipate being able to put detailed proposals to shareholders in the coming months.

Dane Douetil CBE 

Chief Executive Officer

8 March 2009

  

FINANCIAL RESULTS  

Segmental analysis

Year ended 31 December 2008	Brit Global Markets	Brit Reinsurance	Brit UK	Rock-hampton	Intra Group Elimination	Other	Total Under-writing	Corporate	Total
	£m	£m	£m	£m	£m	£m	£m	£m	£m
Gross Written Premiums	781.3	260.7	350.6	48.9	(48.9)	2.0	1,394.6	-	1,394.6
Net Written Premiums	640.2	200.6	272.1	48.9	-	1.5	1,163.3	-	1,163.3
Net Earned Premiums	622.7	199.2	252.0	26.3	-	1.6	1,101.8	-	1,101.8
					-
Investment Return	36.9	16.9	34.2	1.7	-	-	89.7	(82.3)	7.4
Return on derivative contracts	(3.5)	(3.5)	(0.4)	-	-	-	(7.4)	(11.7)	(19.1)
Other Income	-	-	-	1.0	-	-	1.0	128.6	129.6
Total Revenue	656.1	212.6	285.8	29.0	-	1.6	1,185.1	34.6	1,219.7
Net Claims Incurred	(398.4)	(131.4)	(167.1)	(29.5)	-	(1.2)	(727.6)	-	(727.6)
Commission Costs	(175.2)	(35.2)	(44.3)	(0.9)	-	(0.3)	(255.9)	-	(255.9)
Expenses	(51.0)	(18.8)	(40.6)	(1.4)	-	-	(111.8)	(28.8)	(140.6)
Operating Profit	31.5	27.2	33.8	(2.8)	-	0.1	89.8	5.8	95.6
Other1									(6.4)
Profit Before Tax									89.2
Claims Ratio	64.0%	66.0%	66.3%	112.2%			66.0%
Expense Ratio	36.3%	27.1%	33.7%	8.7%			33.4%
Combined Ratio	100.3%	93.1%	100.0%	120.9%			99.4%

Year ended 31 December 2007	Brit Global Markets	Brit Reinsurance	Brit UK	Other	Total Underwriting	Corporate	Total
	£m	£m	£m	£m	£m	£m	£m
Gross Written Premiums	749.2	239.4	274.0	2.3	1,264.9	-	1,264.9
Net Written Premiums	674.4	197.5	245.7	1.8	1,119.4	-	1,119.4
Net Earned Premiums	630.4	208.3	262.8	1.8	1,103.3	-	1,103.3
Investment Return	58.6	28.3	40.4	0.3	127.6	9.8	137.4
Return on derivative contracts	(2.7)	(2.7)	(0.3)	-	(5.7)	(4.0)	(9.7)
Other Income	-	-	-	-	-	28.5	28.5
Total Revenue	686.3	233.9	302.9	2.1	1,225.2	34.3	1,259.5
Net Claims Incurred	(342.8)	(117.4)	(200.5)	(0.2)	(660.9)	-	(660.9)
Commission Costs	(167.5)	(39.0)	(45.4)	(0.4)	(252.3)	-	(252.3)
Expenses	(52.3)	(16.5)	(41.2)	-	(110.0)	(35.3)	(145.3)
Operating Profit	123.7	61.0	15.8	1.5	202.0	(1.0)	201.0
Other1							(9.8)
Profit Before Tax							191.2
Claims Ratio	54.4%	56.4%	76.3%		59.9%
Expense Ratio	34.9%	26.6%	33.0%		32.8%
Combined Ratio	89.3%	83.0%	109.3%		92.7%

1 - Includes share of profit of associates, finance income and costs

  

Overview

Profit before tax for the year was £89.2m, (2007: £191.2m). With these results the Group achieved the profit forecast set out in its Trading Statement dated 10 February 2009, which stated that 'pre-tax profit is expected to be significantly higher than the current market consensus of £32m'. Return on equity (RoE) was 9.2% (2007: 22.1%) and the Group combined ratio was 99.4% (2007: 92.7%). Gross written premium (GWP) development and across cycle return is shown below:

Year ended 31 December	GWP £m	Post tax RoE %	Target RoE %	Excess/(deficit) %
2008	1,394.6	9.2	10.7	(1.5)
2007	1,264.9	22.1	11.5	10.6
2006	1,236.3	21.6	10.6	11.0
2005	1,202.5	7.9	10.7	(2.8)
2004	1,086.7	14.4	10.4	4.0
Five year average		14.9	10.8	4.1

Gross written premiums

GWP totalled £1,394.6m (2007: £1,264.9m), an increase of 10.3%. Premium growth in respect of ongoing business, adjusted for exchange rate movements was 4.2%. As anticipated, the premium growth has primarily come from Brit UK. 

Investment return

Investment return was £7.4m, a return of 0.16% (2007: £137.4m, 5.42%). During 2008 SBUs received a standard risk free investment rate on average insurance funds with the balance allocated to corporate. In 2007, investment return was split between insurance and corporate return with the insurance return then reallocated between SBUs using opening net technical reserves as a proxy for funds under management. 

Foreign exchange 

The Group's financial result was affected by the significant strengthening of the US Dollar and Euro relative to Sterling in late 2008. The Group recorded net foreign exchange gains of £124.0m (2007: £18.6m) under 'other income'. The Group's exchange profit includes a gain of £84.1m arising from the translation of non-monetary assets and liabilities as required by IAS 21. Of the £84.1m, £34.5m relates to the reclassification from foreign exchange of items to other lines of the income statement. At 31 December 2008 the valuation of net non-monetary balance sheet liabilities would have been £54.0m higher if valued at closing rates. 

The effect on the year-on-year comparative reported profits is shown below:

Foreign Exchange	Year ended  31 December 2008 £m		Year ended  31 December 2007 £m
Profit on exchange	39.9		18.0
Reversal of prior year non-monetary asset exchange gain	(4.4)		8.6
Non-monetary asset exchange gain carried forward	54.0		4.4
Net movement in non-monetary asset	49.6		13.0
Reclassification of foreign exchange to UPR/DAC in Income Statement	34.5		(12.4)
Total gains on translation of non-monetary items		84.1		0.6
Total Exchange Gains	124.0		18.6
Balance Sheet – UPR/DAC non-monetary items
Net non-monetary items at historical rates	464.5		422.9
Net non-monetary items at closing rate	518.5		427.3
Closing UPR/DAC non-monetary difference	54.0		4.4

  

Expenses

Expenses before commission totalled £140.6m (2007: £145.3m), a decrease of 3.2%. The reduced expenses principally reflected lower staff bonus provisions in 2008 of £6.7m (2007: £14.4m) offset by an increase in other staff costs. Commission costs for the period were £255.9m, 23.2% of net earned premium (2007: £252.3m and 22.9% of net earned premium).

The total expenses ratio remained consistent with 2007 at 36.0%. The Group's insurance expense ratio for 2008 was 33.4% (2007: 32.8%). 

Expense Management	Year ended 31 December 2008		Year ended 31 December 2007
	Expenses	Ratio*	Expenses	Ratio*
	£m	%	£m	%
Expenses before commissions	140.6	12.8	145.3	13.1
Commission costs	255.9	23.2	252.3	22.9
Total expenses	396.5	36.0	397.6	36.0
Insurance related expenses	111.8	10.2	110.0	10.0
Commission costs	255.9	23.2	252.3	22.9
Insurance expenses	367.7	33.4	362.3	32.8
Group overheads	28.8	2.6	35.3	3.2
Total expenses	396.5	36.0	397.6	36.0

*Ratio calculated as the expense as a proportion of net earned premiums.

  

GROUP UNDERWRITING

Overview

Brit Insurance ('The Group') is a general insurance and reinsurance group writing both UK and international business.

The Group underwrites through three strategic business units (SBUs) - Brit Global Markets, Brit Reinsurance and Brit UK. Each SBU underwrites through both regulated underwriting platforms, Brit Insurance Limited (BIL) and Brit Syndicates Limited (BSL). It is core to the Group's strategy to run a diverse portfolio of insurance risks to enable effective management of the insurance cycle and reduce the potential impact on the Group of any one event or series of related events. 

Diversity by SBU

Brit Global Markets				Brit Reinsurance			Brit UK
CEO	Matthew Wilson			CEO	Jonathan Turner		CEO	Peter Burrows
Vision Brit Global Markets seeks to be a highly respected market leader delivering underwriting excellence based on market intelligence and innovation in chosen fields and disciplines.				Vision Brit Reinsurance's vision is to build a diverse and high quality multi-class and multi-territory book of business by participating in this potentially high margin but volatile global business.			Vision Brit UK's vision is to acquire a 5% share of its chosen markets. Expertise, service and execution skills will be the differentiators. It complements the other two business units by adding to the Group's diversified underwriting portfolio.
Classes of business (%)				Classes of business (%)			Classes of business (%)
Accident & Health			18.4	Property Treaty Nth Am		31.3	Employers'/Public Liability			29.5
Aerospace			2.6	Property Treaty Inter		21.2	Professional Indemnity/D&O			9.7
Financial & Professional			39.5	Casualty Treaty		31.7	Motor			24.9
Marine			23.5	Marine XL		6.8	Property & Commercial/
Property			16.0	Aviation XL		6.3	Packages			35.9
				Reinsurance Other		2.7
			100.0			100.0				100.0
2008 performance				2008 performance			2008 performance
GWP		£781.3		GWP		£260.7m	GWP		£350.6m
PBT		£31.5m		PBT		£27.2m	PBT		£33.8m
Risks led (by value)		57.7%		Risks led (by value)		33.9%	Risks led (by value)		91.2%
Retention rate (by value)		76.6%		Retention rate (by value)		82.8%	Retention rate (by value)		78.0%
Combined ratio		100.3%		Combined ratio		93.1%	Combined ratio		100.0%
Key points 105 employees (2007:107) 60 underwriters with an average of over 20 years' experience London based 31.7% of business underwritten by BIL, 68.3% by BSL 56.1% of Group ongoing GWP Tail: short 56.2%; medium 10.7% long 33.1%				Key points 33 employees (2007: 31) 11 underwriters with an average of over 24 years' experience London based 47.6% of business underwritten by BIL, 52.4% by BSL 18.7% of Group ongoing GWP  Tail: short 52.9%; medium 16.7% long 30.4%			Key points 163 employees (2007: 166) 71 underwriters with an average of over 15 years' experience Nine regional offices including London 87.5% of business underwritten by BIL, 12.5% by BSL 25.2% of Group ongoing GWP Tail: short 32.1%; medium 25.4% long 42.5%

  

Diversity by location of risk

Gross written premiums	Year ended 31 December 2008		Year ended 31 December 2007
	£m	%	£m	%
United Kingdom	403.5	28.9	335.7	26.5
Europe	100.9	7.2	70.2	5.5
United States	348.5	25.0	356.1	28.2
Worldwide and Other	541.7	38.9	502.9	39.8
	1,394.6	100.0	1,264.9	100.0

Diversity by tail of business

Gross written premiums	Year ended 31 December 2008		Year ended 31 December 2007
	£m	%	£m	%
Short tail (	691.4	49.6	595.0	47.0
Medium tail (1.5 to 3.0 years)	216.3	15.5	297.5	23.5
Long tail (>3.0 years)	486.9	34.9	372.4	29.5
	1,394.6	100.0	1,264.9	100.0

Diversity by currency

Gross written premiums	Year ended 31 December 2008		Year ended 31 December 2007
	£m	%	£m	%
GBP and other currencies	515.3	37.0	504.9	39.9
US Dollar	639.3	45.8	620.3	49.0
Canadian Dollar	59.7	4.3	50.4	4.0
Euro	180.3	12.9	89.3	7.1
	1,394.6	100.0	1,264.9	100.0

Diversity by underwriting platform

Gross written premiums	Year ended 31 December 2008		Year ended 31 December 2007
	£m	%	£m	%
BIL	679.0	48.7	616.0	48.7
BSL (Syndicate 2987)	713.6	51.2	646.6	51.1
Other	2.0	0.1	2.3	0.2
	1,394.6	100.0	1,264.9	100.0

  

THE Business Environment

During 2008, the impact of the global recession was widely felt, initially in the banking markets, but subsequently more broadly as credit has been restricted across all sectors. Government responses have included the support or nationalisation of banks and injection of liquidity into markets. Substantial reductions in interest rates have been experienced in both the UK and US. In the UK, interest rates fell below inflation, giving negative real returns. Foreign exchange and investment markets both exhibited substantial volatility during the year. 

In 2008 the impact on the insurance sector was substantial with:

- a 35% reduction in US industry capital adequacy 

- a 57% fall in A M Best global non life insurance index 

Sources: Aon Benfield & Bloomberg

 

Looking forward, UK unemployment is expected to go up and this environment is expected to give rise to an increase in litigation, attritional and fraudulent claims, both in the UK and internationally. 

The demand for insurance is not always affected by a recession, as a number of insurance purchases are necessary and in some cases compulsory. However, it is likely that business failures and reductions in non compulsory purchases will cause some reduction in the absolute demand as a result of lower economic activity. Against this, the combination of reductions in available capital and lower investment returns are expected to drive price increases over the next 12 months.

Rating environment

Premium rating increases/(decreases) on renewal business	One month ended	Year ended	Year ended
	31 January 2009	31 December 2008	31 December 2007
	%	%	%
Brit Global Markets	2.0	(2.0)	(0.8)
Brit Reinsurance	8.1	(3.3)	1.6
Brit UK	5.7	(0.8)	(4.5)
Group	4.4	(1.9)	(1.7)
The rate movements should be read with caution. They are based on underwriters' estimates of rate changes, including adjustments to terms and conditions. They relate to renewal business only, since this represents the business for which we have the best year-on-year data.

Increases in personal lines and commercial motor have historically provided an early indicator of rate strengthening. In the UK, 2008 saw rate strengthening in commercial motor, personal lines household and personal lines motor. However, overall Brit UK, along with Brit Global Markets and Brit Reinsurance recorded rate reductions for the full year 2008. 

Claims Activity

Market claims estimates for 2008 natural and man-made catastrophes are in the region of US$50bn (2007: US$25bn) making it the second most costly year ever in terms of insured losses, second only to 2005 where natural catastrophes alone amounted to over US$80bn. The principal catastrophes during the year included hurricanes Ike and Gustav which are estimated to have resulted in insured losses of US$20bn and US$4bn respectively.

Natural catastrophe claims 1970 to 2008
Year	US$bn	Year	US$bn	Year	US$bn	Year	US$bn
1970	1.0	1980	0.5	1990	12.0	2000	0.5
1971	0.0	1981	0.0	1991	10.0	2001	4.0
1972	0.0	1982	0.5	1992	29.0	2002	3.0
1973	0.0	1983	6.0	1993	8.0	2003	7.0
1974	2.0	1984	0.7	1994	22.0	2004	40.0
1975	0.0	1985	1.0	1995	11.0	2005	81.0
1976	2.0	1986	0.5	1996	5.0	2006	12.0
1977	0.0	1987	6.0	1997	1.0	2007	22.0
1978	0.0	1988	2.0	1998	9.0	2008	43.0
1979	5.0	1989	9.0	1999	22.0

Source: Munich Re/Swiss Re

Research has found that the risk of hurricanes reaching landfall in the Atlantic basin for the next five years remains significantly above the historical average. 

Man-made catastrophes in 2008 included explosions and major fires, damages to industry and industrial warehouses and oil and gas related incidents. The market cost of these is currently estimated at US$7bn (2007: US$2bn). 

In 2008, the Group's gross written premium exposed to catastrophe risks equated to 13.5% of gross written premium (2007: 12.2%).

CLAIMS DEVELOPMENT

Claims development triangles

The analysis of claims development by accident year shows development of ultimate claim estimates.

	Accident Year
Ultimate gross claims	2001  and prior years	2002	2003	2004	2005	2006	2007	2008	Total
	£m	£m	£m	£m	£m	£m	£m	£m	£m
At end of accident year	2,185.7	302.5	512.5	825.9	1,405.3	771.3	1,011.4	1,077.8
One year later	2,230.6	303.7	478.8	769.3	1,460.7	801.5	1,070.6
Two years later	2,255.1	299.1	444.2	745.0	1,459.8	772.9
Three years later	2,258.0	302.8	425.0	736.0	1,424.8
Four years later	2,255.9	296.2	394.1	710.6
Five years later	2,232.3	285.7	393.9
Six years later	2,221.4	284.2
Seven years later	2,210.3
Cumulative claims estimate	2,210.3	284.2	393.9	710.6	1,424.8	772.9	1,070.6	1,077.8	7,945.1
Cumulative paid claims									(5,287.0)
Less third party participations on syndicates									(0.4)
Gross liability as per the balance sheet									2,657.7

	Accident year
Ultimate net claims	2001  and prior years	2002	2003	2004	2005	2006	2007	2008	Total
	£m	£m	£m	£m	£m	£m	£m	£m	£m
At end of accident year	1,476.9	230.2	453.2	684.8	968.0	683.5	876.9	932.8
One year later	1,530.3	231.1	414.0	608.5	992.3	711.7	921.6
Two years later	1,546.1	227.5	366.8	592.6	989.0	671.2
Three years later	1,534.8	222.7	353.9	574.8	961.3
Four years later	1,537.5	218.4	321.1	546.8
Five years later	1,528.2	204.1	316.4
Six years later	1,516.0	198.9
Seven years later	1,498.3
Cumulative claims estimate	1,498.3	198.9	316.4	546.8	961.3	671.2	921.6	932.8	6,047.3
Cumulative paid claims									(3,868.5)
Less third party participations on syndicates									(0.3)
Net liability as per the balance sheet									2,178.5

The tables above show the development of claims over a period of time on a gross and net of reinsurance basis. The tables show the cumulative incurred claims, including both notified and IBNR claims, for each successive accident year at each balance sheet date since 2001. They have been grossed up to include 100% of the managed syndicate claims rather than the claims that reflect the Brit Insurance percentage ownership of each syndicate's capacity during the respective accident years. In addition, claims in currencies other than Sterling for all years have been retranslated at 31 December 2008 exchange rates.

Reserve movements

Prior year net reserve movements led to a release of £79.1m, representing 3.5% of opening net reserves (2007: £58.7m and 2.9%). These releases were across all three SBUs and have been further analysed below. Releases in 2008 reflect both the benign claims environment and better than expected run off across most classes, partially offset by claims and premium volume movements, principally in accident and health and aviation XL. 

		Year ended 31 December
Net Reserve movements by SBU	Class	2008 £m	2007 £m	2006 £m	2005 £m
Brit Global Markets	Accident & Health	(10.7)	(4.6)	0.3	9.4
	Aerospace	17.8	12.8	9.0	7.5
	Financial & Professional	4.2	11.2	17.2	22.6
	Marine	5.6	4.0	(15.9)	11.5
	Property	5.1	6.1	6.4	15.1
		22.0	29.5	17.0	66.1
Brit Reinsurance	Property Treaty North America	6.8	4.3	3.7	2.0
	Property Treaty International	0.2	(1.6)
	Casualty Treaty	19.5	8.9	1.3	0.5
	Marine XL	(3.7)	(0.4)	(3.9)	(2.1)
	Aviation XL	(15.2)	(12.3)	2.0	0.8
	Reinsurance Other	12.5	5.3	(15.1)	(6.2)
		20.1	4.2	(12.0)	(5.0)
Brit UK	Employers'/Public Liability	15.0	6.9	7.7	18.4
	Professional Indemnity/D&O	11.3	11.7	6.5	4.1
	Motor	1.7	1.7	1.2	8.8
	Property and Commercial Combined (Package)	10.6	4.9	16.6	12.3
		38.6	25.2	32.0	43.6
Other underwriting		(1.6)	(0.2)	(3.1)	6.1
Total		79.1	58.7	33.9	110.8

Large claims

In 2008 hurricane Ike led to market losses of approximately US$20bn and hurricane Gustav US$4bn. Brit Insurance estimated ultimate costs, net of reinsurance recoveries and reinstatement premiums, for Ike and Gustav amounted to US$112m.

As stated previously the Group has exposure to subprime related claims. At 3 March 2009 notifications had been received from 40 insureds (30 June 2008: 38; 29 February 2008: 25). Of these, 17 (30 June 2008: six; 29 February 2008: six) insureds with direct policies and five (30 June 2008: five; 29 February 2008: three) insureds with reinsurance policies have specified net case reserves totalling US$72.0m (30 June 2008: US$39.5m; 29 February 2009: US$25.2m). 

At 31 December 2007, the Group established subprime net claims reserves, including IBNR, of US$124.6m (or £62.5m) and held unearned premium reserves of US$15.0m. Total net claims reserves and UPR at 31 December 2008 were US$117.6m and US$12.3m respectively.  Earned premium net of reinstatement premiums amounted to US$3.7m and incurred claims US$6.3m.

  

Potential exposure to the global economic conditions 

In the light of the current global economic conditions, casualty lines of insurance have been the subject of increased focus and are likely to experience increased claims activity.

Brit Insurance's main areas of direct exposure are within Brit Global Markets, and in particular the financial institutions and US D&O accounts. Given the current high degree of investor interest in this area the Group has included, for this report, more details of these two classes than would normally be the case.

Financial institutions (FI) 

Brit Global Markets writes a diversified and broad-based FI account, of which 34% is bankers blanket bond (crime) and 66% is long tail liability professional indemnity/D&O. Its GWP for the calendar year ended 31 December 2008 was £77.3m. It is protected by excess of loss reinsurance and a clash reinsurance cover. There is also a 15% quota share reinsurance arrangement. Brit Global Markets leads approximately 40% of FI risks written and the maximum gross line size was US$20m with an average line size of approximately US$6m. 

Details of the historic development of the account are set out below. The figures are in converted Sterling (£1 = US$1.44, Can$1.77, €1.03) and on an underwriting year basis, net of reinsurance. The ultimate net premium figures are net of commission and outwards reinsurance.

		After 1 year	After 2 years	After 3 years	After 4 years	After 5 years	After 6 years		Ultimate net  claims	Ultimate net premium	ULR
		£000	£000	£000	£000	£000	£000		£000	£000	%
2003	Claims paid	10	489	1,527	3,792	4,568	5,662
	Claims incurred	830	3,169	7,860	10,047	8,408	8,594		10,273	30,866	33
	ILR	3%	10%	25%	33%	27%	28%
2004	Claims paid	76	720	2,854	4,187	6,431
	Claims incurred	161	4,021	5,543	6,596	7,473			13,287	39,414	34
	ILR	0%	10%	14%	17%	19%
2005	Claims paid	25	6,754	8,124	9,843
	Claims incurred	1,848	9,137	14,088	11,781				25,709	43,671	59
	ILR	4%	21%	32%	27%
2006	Claims paid	170	2,145	6,930
	Claims incurred	445	10,333	15,820					45,870	51,986	88
	ILR	1%	20%	30%
2007	Claims paid	189	9,295
	Claims incurred	9,468	29,550						81,823	57,464	142
	ILR	16%	51%
2008	Claims paid	250
	Claims incurred	6,103							53,539	47,509	113
	ILR	13%
ILR = Incurred loss ratio; ULR = Ultimate loss ratio

US D&O

Brit Global Markets also writes a US D&O account, of which 32% was public company D&O and 68% was private company/not-for-profit entity D&O. The account generated GWP for the calendar year ended 31 December 2008 of £8.8m. This account has no excess of loss reinsurance cover but it is protected by a 15% quota share reinsurance arrangement and some exposures are covered by facultative reinsurance. Brit Global Markets' maximum gross line size was US$5m with an average line size of approximately US$4m.

Details of the historic development of the account on an underwriting year basis, net of reinsurance, are set out below.

  

		After 1 year	After 2 years	After 3 years	After 4 years	After 5 years	After 6 years		Ultimate net claims	Ultimate net premium	ULR
		£000	£000	£000	£000	£000	£000		£000	£000	%
2003	Claims paid	4	77	334	768	855	940
	Claims incurred	33	290	929	1,077	998	2,365		2,957	4,834	61
	ILR	1%	6%	19%	22%	21%	49%
2004	Claims paid	1	98	356	791	2,958
	Claims incurred	20	248	950	1,485	3,356			4,052	7,750	52
	ILR	-	3%	12%	19%	43%
2005	Claims paid	3	129	918	1,383
	Claims incurred	18	627	1,500	4,059				6,346	9,681	66
	ILR	-	6%	15%	42%
2006	Claims paid	3	181	1,559
	Claims incurred	61	1,159	3,452					8,324	11,333	73
	ILR	1%	10%	30%
2007	Claims paid	-	142
	Claims incurred	14	4,732						6,777	9,675	70
	ILR	-	49%
2008	Claims paid	5
	Claims incurred	35							6,945	6,975	100
	ILR	1%

  

bRIT gLOBAL MARKETS 

Vision 

Brit Global Markets seeks to be a highly respected market leader delivering underwriting excellence based on market intelligence and innovation in chosen fields and disciplines.

Objectives and strategy

Brit Global Markets' strategy supports the Group objectives and strategy of profitability, growth, market position and control of risks through a focus on:

writing a balanced and sustainable portfolio of risks applying underwriting disciplines and controls with a focus on profit and return on capital

building strong, mutually beneficial relationships with partners 

exhibiting leadership and innovation through a service-led proposition 

attracting, developing and retaining talented and experienced individuals who can themselves attract a market following

Brit Global Markets provides a comprehensive range of insurance products for small and medium-sized enterprises and large corporate clients worldwide. Distribution of these is through leading London market brokers and delegated authorities with selected coverholders who distribute products into local markets. Brit Global Markets' competitive advantages include strong producer and client relationships and experienced underwriting. It led 57.7% of its business in 2008 which places it in a strong position to influence the market as the underwriting cycle improves.

Underwriting and risk management

Brit Global Markets writes a diversified and balanced underwriting portfolio. It aims to understand and manage its risk and aggregate exposure through exercising underwriting disciplines and controls and use of market intelligence in support of underwriting decisions.

The SBU wrote a broad spread of risks by class, geography and currency. During 2008 the SBU:

continued its growth of the marine hull portfolio from gross written premium of £39.4m in the 2007 underwriting year to £60.5m, an increase of £21.1m or 53.6%, diversifying the distribution channels in the process

increased worldwide ex-USA property portfolio from a gross written premium of £16.6m in the 2007 underwriting year to £23.8m, an increase of £7.2m or 43.4%

created Brit Insurance Services (USA) Inc. ('BISI'). The US is Brit Global Markets' largest operating territory and BISI allows the SBU to provide a local service to clients, establishing a physical presence in the USA

established the delegated underwriting management committee to oversee the operational efficiency and control of delegated underwriting arrangements

enhanced the tools used to manage and control aggregate exposures across the property and marine portfolios

Reflecting the current market turmoil, the SBU continued the scaling back of:

UK mortgage indemnity business, from a gross written premium of £14.5m in the 2006 underwriting year to £2.6m in the 2008 underwriting year

financial institutions business, where gross written premium for the 2008 underwriting year was £73.6m, of which £25.8m was US-based, down from £87.4m and £37.6m respectively in the 2007 underwriting year. For the 2009 underwriting year budgeted gross written premium for financial institutions is £61.0m, with only £8.0m of that from US-based liability business. The defensive stance will be maintained until such time as the SBU judges that the financial environment has improved 

commercial US D&O business, where gross written premium of £10.3m in the 2007 underwriting year reduced to £9.6m in the 2008 underwriting year and in 2009 this book will be reduced further if rates do not rise considerably in line with requirements

The focus on underwriting discipline and portfolio management will remain a priority. This will ensure that risk pricing and policy terms are maintained to position Brit Global Markets to capitalise on the anticipated upturn in the market.

Reputation and market position

Brit Global Markets aims to establish itself as the lead underwriter of choice by building and maintaining strong, long-term and mutually beneficial relationships with intermediaries and clients. The SBU will deliver products through actively managed producer and coverholder relationships in a cost effective manner. The SBU also seeks to be at the leading edge of market initiatives such as e-trading, which will enhance the efficiency and effectiveness of end-to-end trading for the Group and the London market as a whole.

Building on the Broker Relationship Management platform established in 2007, Brit Global Markets continues to focus on developing core broking relationships and identifying opportunities which meet its aspirations. In 2008 the SBU took an increasingly active and robust portfolio management position to promote cross-team relationship management.

Financial

Brit Global Markets' focus is to deliver underwriting profit and return on capital employed commensurate with Group targets across the market cycle making greater use of technical pricing models. Teams are encouraged to apply underwriting disciplines, market intelligence and controls to secure business at the right price.

The SBU continues to review and assess the profitability and return on capital of the book, applying rate increases, exclusions or withdrawing from business where appropriate. Brit Global Markets has benefited in 2008 from underwriting decisions taken in 2006 to significantly reduce exposure to Gulf of Mexico windstorm exposed offshore energy business.

Operations

The objective is to support developments that will enable effective global distribution of products, a delegated underwriting centre, provide underwriters with portfolio planning and delivery support tools (including core management information and analytics) and support enhanced relationship management with brokers, coverholders and insureds.

During 2008, the Group rolled out the first regional claims hub outside the UK. The claims hub will service local clients, provide improved management information, economies of scale and establish the brand and reputation overseas. The technical processing unit assumed responsibility for bordereaux collection, processing and credit control. A new Delegated Underwriting Committee was also established to oversee delegated authority applications, due diligence and approvals in line with the 45% of Group business written through delegated authorities.   

The focus going forward will be to provide effective underwriting support through centralised data management and use of automated workflow, improved electronic information exchange with third parties, and use of management information.

Strengths and resources

Brit Global Markets aims to attract and retain an underwriting team that is highly motivated, empowered and dynamic. The SBU has a team of 105 people including 60 underwriters with an average of over 20 years' market experience. 

Following the appointment of Matthew Wilson as the new SBU CEO during 2008, there has been an increased emphasis on portfolio management and in the development of the longer term strategic direction. To this end two new positions were created with the promotion of Kevin Huttly to Chief Underwriting Officer and Stephen Moss to Portfolio Director for long tail business. Four new divisional directors have also been appointed, all from within the SBU. These appointments, together with the award of the Insurance Day Young Underwriter of the Year and runner-up from within Brit Global Markets, demonstrate the depth of talent within the SBU. 

To further enhance the team and take advantage of the upturn in the market, the SBU has made six external underwriting appointments since the year end, two of whom have already joined the Group in the accident and health and property divisions. The remaining four will take up positions as Portfolio Director for short tail business and as underwriters in the property and marine divisions.

  

Performance

Brit Global Markets
Premium Rating Index (Year 2000 as base year)
	January	Full year	Full year	Full year	Full year	Full year	Full year	Full year	Full year	Full year
	2009	2008	2007	2006	2005	2004	2003	2002	2001	2000
Accident & Health	170	170	169	164	152	149	142	131	100	n/a
Aerospace	203	203	215	254	268	260	237	202	158	100
Financial & Professional	272	266	268	276	280	280	265	207	122	100
Marine	184	177	181	182	171	160	156	144	112	100
Property	159	156	168	171	151	152	155	150	112	100
The rate movements should be read with caution. They are based on underwriters' estimates of rate changes, including adjustments to terms and conditions. They relate to renewal business only, since this represents the business for which we have the best year-on-year data.

	Year ended 31 December 2008	Year ended 31 December 2007	Year ended 31 December 2006	Year ended 31 December 2005	Year ended 31 December 2004
	£m	£m	£m	£m	£m
Gross written premium:
Accident & Health	144.2	143.7	140.2	93.2	54.0
Aerospace	20.3	16.5	23.9	11.1	28.6
Financial & Professional	308.3	276.5	267.8	223.2	181.4
Marine	183.5	165.9	143.4	115.7	80.0
Property	125.0	146.6	131.6	115.4	87.6
Total GWP	781.3	749.2	706.9	558.6	431.6
KPIs
GWP Growth (%)	4.3	6.0	26.6	29.4	(7.8)
Underlying GWP Growth (%)	(3.1)	11.7
Business led (%)	57.7	58.8
Retention ratio (%)	76.6	80.1
Net earned premium	622.7	630.4	557.5	412.1	367.4
Underwriting profit/(loss)	(1.9)	67.8	81.2	(0.8)	28.2
Profit before tax	31.5	123.7	127.5	44.2	57.4
Claims ratio (%)	64.0	54.4	46.5	63.8	58.0
Expense Ratio (%)	36.3	34.9	38.9	38.2	34.5
Combined Ratio (%)	100.3	89.3	85.4	102.0	92.5

In the first half of 2008 competition and pricing impacted many areas of the SBU's portfolios and uncertainty surrounding economic conditions focused attention on reducing the levels of business in targeted areas. In the latter half of 2008, following the hurricane season and developments relating to economic conditions, the rating environment began to show signs of improvement.

Gross written premium increased by 4.3% compared with the previous year as a consequence of the weakness of Sterling. On a like-for-like basis gross written premium fell 3.1% compared with prior year.

The level of claims activity, both frequency and severity, increased compared with the previous year, thereby worsening the claims ratio from 54.4% to 64.0%. Excluding hurricanes Gustav and Ike the claims ratio would have been 59.8%.

Outlook

Without doubt 2008 was a challenging year; however Brit Global Markets proactively sought to manage renewing business with a focus on underwriting discipline, control and return on capital. These actions are expected to continue into 2009.

Rate increases in January 2009 indicate that the insurance markets are following the reinsurance markets upwards. The SBU recorded increases of 2.0% for January renewals and this hardening market trend is expected to accelerate during 2009. 

  BRIT REINSURANCE 

Vision

Brit Reinsurance's vision is to build a diverse and high quality multi-class and multi-territory book of business by participating in this potentially high margin but volatile global business.

Objectives and strategy

Brit Reinsurance's objectives and strategy are aligned to those of the Group in terms of profitability, growth, market position and risk management. The levels of business written by the SBU are restricted to a target limit of 25% of the Group's gross written premium because of the higher implicit volatility in reinsurance compared with the Group's other insurance portfolios. It focuses on:

Brit Reinsurance writes business which originates in the worldwide markets through both the syndicate and BIL. These markets offer a global spread and distribution of the product range, enabling Brit Reinsurance to manage its risk profile by building a diverse book of business. Relationships are established with long-term buyers of reinsurance, providing access to customers requiring reinsurance risk transfer mechanisms. The business is 100% broker produced. 

The SBU will continue to broaden its influence beyond the London and Lloyd's markets via the development of the existing relationships within Europe and Australia. The SBU led on 33.9% of the business written in 2008. Given Brit Reinsurance's overall market share and size this is a high proportion, reflecting its level of expertise across the reinsurance segment. 

Underwriting and risk management 

The team aims to manage the reinsurance pricing cycle efficiently and cost-effectively. It has maintained pricing discipline in the face of competitive pressures by managing gross and net exposures in line with the Group's risk appetite.

Developments in 2008

Key developments for Brit Reinsurance during 2008 were:

The reshaping of the account in 2006 has served the SBU well. The 2008 result reflects the improved balance of the portfolio, leaving the team in a strong position to capitalise on the more favourable pricing environment anticipated over the coming year and beyond.

  

Reputation and market position

Brit Reinsurance offers a multi-class capability with the capacity to quote and lead business whilst aiming to deliver a first-class all-round service to customers in areas such as claims handling and contractual wording documentation. 

The SBU has a diverse portfolio spanning numerous classes of business with 47.6% of business written into BIL and the remaining 52.4% in BSL. The SBU wrote 18.7% of 2008 Group gross written premium and the business mix is short tail 52.9%; medium tail 16.7% and long tail 30.4%.

The team is looking to increase its lead positions on business, to take advantage of market opportunities and to continue strengthening and developing its long-term customer partnerships.

Financial

The SBU's strategy is to achieve steady underlying growth whilst maintaining a continued focus on bottom-line profitability. In 2008 Brit Reinsurance delivered a profit of £27.2m (2007: £61.0m) with a combined ratio of 93.1% (2007: 83.0%). Excluding hurricane claims from Ike and Gustav the 2008 combined ratio would have been 75.5%.

Given anticipated favourable market conditions, the SBU will aim to develop the portfolio whilst not losing sight of the underwriting discipline that has served it so well these past few years.

Strengths and resources

Brit Reinsurance will aim to continue to attract and retain quality people, whilst maintaining a highly motivated, empowered and dynamic underwriting team. It benefits hugely from appropriately skilled and experienced reinsurance professionals. Staff turnover remained very low. Fourteen employees are currently studying for their ACII or equivalent qualification. 

Brit Reinsurance comprises 33 employees (2007: 31) including a London-based team of 11 specialist lead underwriters with an average of over 24 years' experience in the reinsurance market. This provides access to new business opportunities through individuals who are well established and known to producing brokers and clients alike. 

Performance

Brit Reinsurance
Premium Rating Index (Year 2000 as base year)
	January	Full year	Full year	Full year	Full year	Full year	Full year	Full year	Full year	Full year
	2009	2008	2007	2006	2005	2004	2003	2002	2001	2000
Property Treaty	215	198	207	198	155	153	154	149	110	100
Casualty Treaty	235	226	230	234	228	230	215	182	115	100
Marine XL	330	279	288	286	193	183	179	171	115	100
Aviation XL	n/a	130	125	125	128	139	159	167	100	100
The rate movements should be read with caution. They are based on underwriters' estimates of rate changes, including adjustments to terms and conditions. They relate to renewal business only, since this represents the business for which we have the best year-on-year data.

  

	Year ended 31 December 2008	Year ended 31 December 2007	Year ended 31 December 2006	Year ended 31 December 2005	Year ended 31 December 2004
	£m	£m	£m	£m	£m
Gross written premium:
Property Treaty Nth America	81.5	71.7	-	-	-
Property Treaty International	55.3	47.8	-	-	-
Property Treaty	-	-	139.5	140.8	133.3
Casualty Treaty	82.6	85.1	95.5	73.3	60.9
Marine XL	17.8	9.1	9.4	12.0	7.1
Aviation XL	16.3	25.2	15.4	39.4	36.0
Reinsurance Other	7.2	0.5	1.1	63.3	42.7
Total	260.7	239.4	260.9	328.8	280.0
KPIs
GWP Growth (%)	8.9	(8.2)	(20.7)	17.4	26.2
Underlying GWP Growth (%)	1.4	(2.9)
Business led (%)	33.9	29.6
Retention ratio (%)	82.8	87.4
Net earned premium	199.2	208.3	237.0	224.2	179.9
Underwriting profit/(loss)	13.8	35.4	50.3	(103.5)	9.0
Profit/(loss) before tax	27.2	61.0	76.5	(81.1)	23.2
Claims ratio (%)	66.0	56.4	50.0	119.8	68.5
Expense ratio (%)	27.1	26.6	28.8	28.5	26.6
Combined ratio (%)	93.1	83.0	78.8	148.3	95.1

Pricing came under increased pressure throughout 2008 in the majority of classes. Top-line premium growth of 8.9% primarily reflects positive exchange rate movements and adjustments relating to prior year premiums. Excluding the impact of these adjustments, underlying gross written premium growth is 1.4% inclusive of Aviation XL business from which the SBU withdrew in November 2008. The underlying growth figure excluding Aviation XL was 6.2%.

Claims activity was notable in terms of both frequency and severity with the claims ratio increasing from 56.4% to 66.0%. The account has experienced claims arising from a number of events including Hurricanes Gustav and Ike, and various property risk XL claims.

Outlook

Brit Reinsurance saw renewal rate increases across all classes of business written in January 2009. In aggregate, the SBU achieved rate increases across the portfolio of 8.1%. Increases were particularly evident in classes most affected by the 2008 hurricane season, namely property treaty North America and marine XL. The January renewals season is an important period for the SBU with approximately 50% of the premium income written at this time. 

Market conditions are expected to continue to harden in 2009 and the overall outlook for the SBU remains positive with cause for optimism both in terms of pricing levels and terms and conditions.

  BRIT UK 

Vision

Brit UK's vision is to acquire a 5% share of its chosen markets. Expertise, service and execution skills will be the differentiators. It complements the other two business units by adding to the Group's diversified underwriting portfolio. 

Objectives and strategy

Brit UK's strategy is aligned to the Group objectives and strategy in terms of profitability, growth, market position and control of risks. Brit UK continues to position itself to take advantage of a market upturn by:

Brit UK operates in a UK marketplace dominated by a number of large insurers. However, there is broker appetite for an alternative to the established larger players. Brokers are willing to support an insurer distributing its products through a limited number of intermediaries. Brit UK's proposition, which centres upon the establishment of regional offices staffed by experienced, empowered underwriters with a strong service ethic, has been well received.

Brit UK is focused on UK small and mid-market enterprises with a turnover of up to £300m. It has specialist teams focused on identified segments in personal lines, including mid-net worth household and private motor. Its London-based liability underwriting team participates in a number of programmes placed in the London market which relate to overseas exposures. Almost all of the SBU's business is produced via brokers. Brit UK handles small commercial risks and personal lines business electronically, leaving regional underwriters to concentrate on middle market commercial lines business. 

Reputation and market position

Brit UK is looking to continue to build its reputation for excellence in underwriting combined with high quality customer service. It aims to become renowned in the marketplace for delivery, agility and visibility with a regional office network accessible to brokers. The SBU is looking to continuously improve claims processes and build upon its established reputation for claims handling based upon fairness and prompt response.

2008 was a year of significant achievement for Brit UK. With headcount marginally down on 2007, revenue grew by 28.0% and the combined operating ratio improved from 109.3% in 2007 to 100.0%. The SBU has begun to capitalise on the investment in people, processes and infrastructure, with regions outside London growing by 45% and now representing 25% of Brit UK's total revenue. At the same time, Brit UK's focus on electronically traded personal lines and small commercial lines business has borne fruit with strong growth evident. Service delivery has been recognised in independent broker surveys whilst Brit UK's product and proposition development has seen further progress in both underwriting and claims including the launch of a new rehabilitation offering.

In 2009 the focus is on continuing with the execution of the SBU strategy, building upon Brit UK's growing reputation across the UK market and the continuous improvement of its core competencies in underwriting and claims management whilst maintaining a tight grip on expenses. The distribution strategy will be refined, maintaining a selective approach but looking to further enhance the offering to established partners. Brit UK will prepare to enhance its offering in the small business sector through investment in new technology designed to increase efficiency for itself and its business partners.

Underwriting and risk management

In 2008 Brit UK continued its investment in new, enhanced rating models across a number of product lines. The underwriting management team, focused on portfolio management through a strong line of business approach, is now well established. A framework of new underwriting controls and guidelines has been introduced to ensure a rigorous and consistent approach to risk selection across regions and portfolios. 

Brit UK will continue to improve the level of sophistication in pricing. At the same time it will effectively manage risk aggregation and maintain a balanced, blended, fit-for-purpose governance structure which includes peer reviews alongside technical audits.

  

Financial

The UK business is focused on delivering profitable top line growth that meets Group targeted returns. In 2008 premium growth was 28.0%, whilst headcount marginally reduced and other direct costs were kept under control. Brit UK delivered a combined operating ratio of 100.0% (2007: 109.3%) despite the competitive market which drove rate reductions on casualty and property classes. 

In 2009 the focus is on seeking further opportunities to profitably grow the business, whilst continuing to leverage the investments made in infrastructure and resource.

Operations

During 2008 a new, flexible product management capability was delivered that reduced the time to market for critical products. E-trading capabilities continued to be rolled out through BritBord and other channels.

In 2009 the priorities are to improve functionality in core systems to enhance efficiency, whilst enabling electronic information exchange with third parties.

Strengths and resources

Brit UK has a team of high calibre staff with appropriate skills and experience, whether in sales or the provision of a local underwriting service via the regional offices. The SBU has a team of 163 employees (2007: 166), slightly below prior year. The business operates through nine regional offices including London. Gross written premium per head has increased by £0.5m from £1.7m in 2007 to £2.2m in 2008. The 71 underwriters have an average of over 15 years' experience each. Brit UK is focused on retaining the current team and selectively recruiting to ensure that the resource, skills and experience are in place to enable Brit UK to continue to grow. The SBU writes 25.2% of Group ongoing gross written premium spread between short tail 32.1%; medium tail 25.4% and long tail 42.5%. The business is predominantly written through BIL (87.5%) with the remainder written through BSL (12.5%). 

The Brit UK team believes passionately in excellent service underpinned by strong relationships with its business partners. It works with a select group of 300 to 400 regional brokers out of some 4,000 brokers in the UK today. Relationship development continues with selected brokers and coverholders throughout the UK market, spearheaded by our senior team and the dedicated sales and distribution team established in 2007.

Performance

Brit UK
Premium Rating Index (Year 2000 as base year)
	January	Full year	Full year	Full year	Full year	Full year	Full year	Full year	Full year	Full year
	2009	2008	2007	2006	2005	2004	2003	2002	2001	2000
Employers'/Public Liability	207	206	217	237	257	284	286	200	100	n/a
Professional Indemnity/D&O	105	105	111	118	130	132	130	100	n/a	n/a
Motor	120	108	101	104	111	122	120	115	108	100
Property	128	121	122	125	130	131	132	123	104	100
The rate movements should be read with caution. They are based on underwriters' estimates of rate changes, including adjustments to terms and conditions. They relate to renewal business only, since this represents the business for which we have the best year-on-year data.

  

	Year ended 31 December 2008	Year ended 31 December 2007	Year ended 31 December 2006	Year ended 31 December 2005	Year ended 31 December 2004
	£m	£m	£m	£m	£m
Gross written premium:
Employers’/Public Liability	103.5	89.8	91.4	112.8	129.2
Professional Indemnity/D&O	34.0	36.3	36.7	35.6	37.3
Motor	87.3	63.8	91.3	89.9	105.6
Property & Commercial/ Packages	125.8	84.1	60.5	79.6	73.3
Total	350.6	274.0	279.9	317.9	345.4
KPIs
GWP Growth (%)	28.0	(2.1)	(12.0)	(8.0)	11.6
Underlying GWP Growth (%)	26.5	(1.9)
Business led (%)	91.2	87.1
Retention ratio (%)	78.0	72.3
Net earned premium	252.0	262.8	251.2	302.6	301.0
Underwriting profit/(loss)	0.0	(24.3)	7.7	65.7	24.5
Profit before tax	33.8	15.8	40.4	112.3	54.3
Claims ratio (%)	66.3	76.3	69.6	55.8	68.1
Expense ratio (%)	33.7	33.0	27.3	22.6	23.9
Combined ratio (%)	100.0	109.3	96.9	78.4	92.0

Market conditions have remained competitive, but 2008 was a year of real progress for Brit UK. Gross premium increased by 28.0% largely driven by growth in premium written through regional offices, e-traded business and personal lines. Regional premium written now comprises 25% of the total UK book (2007: 20%). 

Brit UK achieved rating increases on the commercial motor, personal lines motor and household books but has seen rates continue to fall on other classes, albeit at a slower rate than during 2007. Despite the drop in rates, Brit UK has been determined not to chase top line growth where prices have been inadequate. This is evidenced by premium growth skewed towards those areas where rates have held up, such as personal lines and micro-commercial business, offset by small reductions in the premium written in the London liability portfolio and professional indemnity/D&O portfolio.

Net earned premium decreased by 4.1% despite the substantial growth in GWP. This reflects an increase in reinsurance spend of £50.2m and the timing of growth in gross written premium which was mainly during the second half of 2008. The increased reinsurance spend includes two new quota share reinsurance contracts: a 40% quota share of the motor portfolio (£28.2m) and a 5% quota share of the overall UK portfolio to Rockhampton (£10.5m) neither of which were in place during 2007.

The £18.0m increase in profit before tax compared to 2007 comprises £24.3m improvement in underwriting profit partly offset by a £6.3m reduction in investment income. The improved underwriting profit reflects the absence of any significant weather-related events (2007: UK floods £9.2m net), a disciplined approach to underwriting where business was declined where an adequate rate could not be secured, the decision to grow into those classes where rates have been hardening and continued favourable development of prior year reserves of £38.6m (2007: £25.2m). The combined ratio of 100.0% is favourable to 109.3% in 2007 and is driven by the improvement in the claims ratio from 76.3% in 2007 to 66.3% in 2008. Expenses reduced by £0.6m; but due to the reduction in the net earned premium, the expense ratio deteriorated from 33.0% in 2007 to 33.7% in 2008. 

Outlook

The economic climate is expected to present some new challenges in 2009 with the likelihood of some increase in claims frequency and possibly fraud. The dynamics of the UK economy have markedly changed since the last recession and it remains to be seen just how much impact there will be on the UK business.

Absolute demand will inevitably dampen down but exposure to risk will also reduce in some sectors and lines of business as economic activity slows. In the meantime a number of major insurers in the sector are repositioning their businesses with the result that it is anticipated increased demand from the broker market overall. The efforts Brit UK has made in recent years to build a strong reputation place the business in a very strong position to capitalise upon any dislocation in relationships. The business remains optimistic about the outlook.

 

FINANCIAL MANAGEMENT

Capital Management

Strategy

The capital strategy focuses on:

achieving a target return on equity in excess of 6% over the UK base rate across the cycle 

having a balance sheet that will give a stable platform for growth 

having sufficient capital to satisfy regulatory requirements with a suitable margin and to maintain BIL's target 'A' rating

Capital resources and requirements

The Group continues to have a strong balance sheet that is not dependent on short-term gearing. At 8 March 2009 BIL was rated A+ (Strong) by Fitch and A (Excellent) by AM Best with negative and stable outlooks respectively.

The Group's principal sources of actual and potential capital are equity, subordinated debt, reinsurance and other instruments such as catastrophe bonds. 

Capital resources	31 December 2008 £m	31 December 2007 £m	31 December 2006 £m	31 December 2005 £m	31 December 2004 £m
Net tangible assets	767.6	768.4	724.3	638.4	643.5
Long-term subordinated debt*	132.7	147.3	147.2	147.1	-
Total capital resources	900.3	915.7	871.5	785.5	643.5

* Subordinated borrowings which have at least five years remaining to maturity or call and are of the types which qualify as regulatory capital.

The Group gearing ratio at 31 December 2008 was 15.9% (31 December 2007: 19.0%). The Group appetite is to retain a gearing ratio below 30%. 

The Group's Capital Committee, under the authority of the Portfolio Management Committee, is responsible for managing all capital issues affecting the Group including:

ensuring the Group has appropriate capital

capital allocation to each underwriting platform and class of business to allow measurement and comparison of return on capital and

reviewing the internal capital model assumptions and results

The Capital Committee meets quarterly and is chaired by the Finance Director. It includes the SBU CEOs and actuarial and risk management representatives. Current and future financial projections of capital requirements are made to assess the level of capital required by the Group. Capital requirements are assessed using internal capital models, rating agency capital models and regulatory benchmarks.

The Group's regulatory capital requirements are calculated by reference to the internal capital model. The capital requirements are mainly derived from underwriting premium, reserves and investments. Following a period of premium growth, capital requirements continue to increase as reserves on long tail classes take time to reach full maturity. 

During 2008, in accordance with the regulatory timetable, capital requirements for BIL and Syndicate 2987 were agreed with the FSA and Lloyd's respectively. The Lloyd's capital requirement is known as Funds at Lloyd's (FAL). The following table shows the FAL composition for 2008/9.

  

	2009 Year £m	2008 Year £m
Underwriting Capacity at Lloyd's (Syndicate 2987)	525.0	600.0
FAL requirement
Calculated on capacity	310.3	286.8
Funding of open year of account losses	-	75.7
Allowance for open year of account (profits)	(15.9)	-
Total	294.4	362.5
FAL assets at 31 December	2008	2007
Investments	265.5	348.7
Cash	29.2	24.0
Total	294.7	372.7

Total FAL requirements are calculated from annual syndicate business forecasts (SBFs) submitted to Lloyd's in the October prior to the start of the relevant underwriting year. Foreign currency components of the SBF are converted into Sterling at exchange rates prescribed by Lloyd's. The rates for the 2009 SBF were £1 = US$1.99; CAN$2.04; €1.25.

The subsequent weakening of Sterling against the US dollar, Euro and Canadian dollar will result in increased FAL requirements to support the 2009 SBF. It is anticipated that this increase will be in the region of £55.0m.

In addition to current regulatory and rating capital requirements, the Group is actively researching and assessing the impact of anticipated changes to regulations such as Solvency II, which is expected to be effective from 2012.

Taxation 

The Group's effective tax rate was 25.3% (2007: 28.0%). The tax charge benefited from tax free disposals countered by the non recognition of a potential deferred tax asset in respect of capital losses on investments. 

Brit Insurance is a substantial payer of UK and overseas corporation tax (CT) on its profits. It also incurs and collects significant amounts of indirect tax, notably insurance premium tax (IPT), pay as you earn income tax (PAYE), national insurance contributions (NIC) and value added tax (VAT). The following are the principal UK taxes payable or accounted for by the Group for the year ended 31 December 2008. 

Tax	Year ended 31 December 2008		Year ended 31 December 2007
	Borne by Brit Insurance £m	Collected by Brit Insurance £m	Borne by Brit Insurance £m	Collected by Brit Insurance £m
CT	11.5	-	36.0	-
PAYE/NIC	6.5	18.2	6.4	18.0
IPT	0.0	16.5	0.1	14.1
VAT	3.5	1.0	3.9	0.8
Business rates	0.9	-	1.1	-
TOTAL	22.4	35.7	47.5	32.9

  

Reinsurance and Risk Transfer

Overview

Brit Insurance's uses of reinsurance include:

facultative reinsurance for individual specific inwards contracts

risk excess of loss reinsurance purchased to protect a range of inwards contracts that could give rise to individual large claims

general excess of loss reinsurance purchased to provide protection from the aggregation of claims, possibly arising from catastrophe events 

pro rata reinsurance purchased to provide protection against claims arising either from large individual claims or aggregations

The Portfolio Management Committee (PMC) is responsible for structuring the protection purchased to mitigate that element of the risk the Group does not wish to retain. Different outwards reinsurance strategies are modelled and reviewed to assess the level of balance sheet and earnings volatility protection available. 

Reinsurance spend as a percentage of gross written premium was 16.6% (2007: 11.5%). 

Reinsurance expenditure	Year ended 31 December 2008 £m	Year ended 31 December 2007 £m
Proportional	73.5	41.6
Non-proportional	157.8	103.9
Total	231.3	145.5

The £85.6m increase in reinsurance spend in 2008 includes new quota share reinsurance treaties and increased reinsurance costs in line with increased inwards premium volume. Rockhampton reinsurance is estimated to have retained £12.8m of reinsurance that would historically have been placed with external reinsurers.

The financial strength of the Group reinsurance recoverables at 31 December 2008 are set out below and are net of impairment provisions against reinsurance recoverables at 31 December 2008 of £15.5m (2007: £11.2m).

	AAA	AA	A	BBB & below	Collat-eralised	Not rated	Total
	£m	£m	£m	£m	£m	£m	£m
Reinsurance assets at 31 December 2008	8.8	229.1	149.8	3.9	77.8	9.8	479.2
Reinsurance assets at 31 December 2007	3.8	129.9	150.5	0.0	31.7	10.2	326.1

Rockhampton Insurance PCC Limited

As part of the risk management framework, a dedicated cell (Rockhampton) in Rockhampton Insurance PCC Limited, an independently owned protected cell company, wrote part of the Group's outwards reinsurance programme. The cell participated in the Group's purchased quota share and excess of loss reinsurance programmes alongside external reinsurers and on equivalent terms. It also wrote a 5% whole account quota share of the Group's 2008 business. During 2008 Rockhampton's GWP was £48.9m (2007:£nil). The cell is consolidated in the Group's financial statements as if it were a subsidiary. Subject to performance and market conditions, Rockhampton anticipates its business and range of activities will expand over time. For 2009, this quota share will be increased to at least 20% and it is expected that further business will be ceded to Rockhampton. 

Fremantle Limited

In June 2007 BIL entered into a three year cash collateralised catastrophe swap contract with Fremantle Limited (Fremantle), a Cayman Islands company. Fremantle will pay BIL up to US$200m in the event of four to nine qualifying natural catastrophes (trigger events), US$40m for each of the fourth and fifth events (tranche C) and US$30m for each of the sixth to ninth events (tranches A and B). The first three trigger events are excluded. 

  

During 2008, the Group purchased US$51.0m of the Fremantle A/B tranche bonds for a consideration of US$50.7m.

Under the provisions of International Financial Reporting Standard (IFRS) 4 and International Accounting Standard (IAS) 39, this catastrophe swap contract is accounted for as a derivative and not an insurance contract. The cost of the instrument in 2008 was £7.4m (2007: £5.7m). 

Capital Reduction

At a General Meeting on 17 November 2008 a proposal to cancel all remaining share premium and capital redemption reserve, amounting to £138.6m was approved by shareholders in order to create additional distributable reserves. This became effective on 11 December 2008 following approval by the High Court. The capital reduction was a continuation of the Group's capital management programme and followed previous capital reductions in 2004 and 2006. The additional distributable reserves will be available to the Group for all normal purposes including paying dividends and making on market purchases of ordinary shares.

Share Buy-Back

During the first quarter of 2008, the Company purchased 520,000 shares for £1.1m representing 0.16% of the total issued share capital. No further purchases were made during the year. 

Debt Repurchases

During the year, the Group repurchased £15.0m of the Lower Tier Two long term subordinated debt, with a carrying value of £15.6m, for £8.4m giving rise to a £7.2m profit. The Group also redeemed the £19.7m outstanding 8.5% 2008 ULS on 31 December 2008 at par. 

Liquidity Management

The Group has access to a five year £150.0m revolving credit facility effective from 21 December 2007, led by the Royal Bank of Scotland and syndicated to four banks. The current cost of the facility is LIBOR plus 85.00 basis points if drawn and 29.75 basis points if undrawn. The facility was undrawn throughout 2008 and at 8 March 2009. 

Dividend Policy

The Board intends to pay a total dividend of 15p per share in respect of the 2008 financial year. In light of the enhanced opportunities available to the Group, the Board has decided to increase flexibility on earnings retention and proposes to pursue a dividend policy which seeks to grow dividends per share in line with the longer term growth prospects of the Group. For the purposes of this policy it is proposed that the 2008 dividend per share will be used as the base.

Associated Undertakings

Norton Holdings Limited 

During 2008 the Group had an 18.8% interest in Norton Holdings Limited. Norton Re Insurance Limited, its 100% subsidiary, wrote catastrophe retrocession business for 2007. During 2008 both companies were successfully liquidated. Shareholders received a full return of principal plus a post tax gain of approximately 27%.

Norton II Holdings Limited 

The Group has a 16.9% interest in Norton II Holdings Limited, whose 100% subsidiary, Norton Re II Insurance Limited (Norton Re II) writes catastrophe retrocession business. The initial underwriting period has now closed. During 2008, Norton Re II was affected by a number of hurricane claims including claims arising from Ike and Gustav. Despite these claims, investors made a return of 8.9% on capital in 2008. The Group's share of profit after tax for the year ended 31 December 2008 was £0.8m. It is anticipated that the return of principal plus gains to investors will commence in March 2009.

Xbridge Limited

During the year, the Group invested £7.2m in Xbridge Limited giving it a 38.8% interest in the business. The Group has granted Xbridge Limited a five year loan facility of up to £6.0m. As at 31 December 2008, £4.5m of this amount had been drawn down. Xbridge is an online insurance and finance technology company and provides access to a growing customer base who wish to interact online. The Group's share of loss after tax for the period since investment is £0.4m. 

Ebix Inc 

During the period, the Group reduced its shareholding in Ebix Inc (Ebix), the NASDAQ-listed provider of application software products to the insurance industry, to below 20%. This disposal of shares resulted in a realised profit of £4.6m. Since this disposal the Group's remaining holding has been classified as an equity investment.

RI3K Limited (RI3K)

The Group holds a 21.8% interest in RI3K at 31 December 2008. RI3K is an electronic marketplace for the insurance industry with the ability to trade both commercial insurance and reinsurance. 

Defined Benefit Pension Scheme 

The pension fund deficit as calculated under IAS 19 fell from £5.1m to £1.4m. During 2008 the scheme's assets were affected by falls in equity markets while the present value of its obligations benefited from favourable movements in discount rate and inflation assumptions. Additional contributions of £13.3m were made by the Group in 2008 which fully discharged its obligations under the recovery plan following the 31 July 2006 actuarial revaluation. The scheme has been closed to new members since October 2001.

  

INVESTMENTS 

Vision and Strategy 

The Group's vision is to maximise investment return within the Group's risk appetite parameters. The strategy is based on three main principles:

asset allocation - the Group Investment Committee adopts a proactive approach to asset allocation. Asset selection is influenced by risk, expected return and correlation to interest rate and equity price movements

diversification - the portfolio incorporates a collection of assets with exposure to several sources of return

manager selection - specialist asset managers have been chosen for certain asset classes leaving traditional asset managers to run bond and equity portfolios

In 2008 the Group achieved gross investment income of £7.4m (2007: £137.4m), equivalent to a return of 0.16% (2007: 5.42%) on invested assets. Investment conditions were difficult during the year due to deterioration in credit markets and the deepening global recession. 

At the beginning of 2008, the Group decided to undertake an extensive review of its investment portfolio with the support of Lord North Street Limited, a specialist investment advisor. This review was completed towards the end of the year and resulted in moves to reclassify the investment portfolio into three broad portfolios to support investment decision-making. These portfolios are:

Liability fund - policyholder funds matching insurance liabilities

Treasury - working capital

Diversified growth funds - shareholder funds

The liability and treasury funds will be invested primarily in cash and bonds. The diversified growth fund will include most of the current equity and specialised investment funds. 

Performance

Investment return for the year was £7.4m (0.16%) (2007: £137.4m and 5.42%).

 

Investment return	Year ended 31 December 2008		Year ended 31 December 2007
	£m	%	£m	%
Equities	(36.7)	(24.03)	10.9	5.64
Fixed Income	89.4	4.59	97.9	5.63
Specialised Investment Funds	(69.9)	(38.81)	5.4	4.24
Cash and cash equivalents	24.6	4.63	23.2	5.10
Total portfolio	7.4	0.16	137.4	5.42

The Sterling fixed income portfolio returned 6.90% (2007: 5.54%) and the US Dollar portfolio 3.73% (2007: 5.82%). The equity portfolio returned a negative return of 24.0%.  Over the course of the year the exposure to equity was reduced through net sales of 29.0% of the equities held at the end of 2007. Similarly, specialised investment funds were reduced, with net sales of 47.8% of the opening funds. The entire asset backed portfolio and the high yield portfolio were sold in the year.

The Group's investment portfolio is diversified in terms of asset class and currency.

Asset allocation by asset class	31 December 2008		31 December 2007
	£m	%	£m	%
Equities	117.4	3.6	218.7	8.0
Fixed Income	2,162.5	66.9	1,493.6	54.7
Specialised Investment Funds	113.1	3.5	281.0	10.3
Cash and cash equivalents	840.7	26.0	735.3	27.0
Total	3,233.7	100.0	2,728.6	100.0

The credit ratings show that 99.9% of the fixed income portfolio is investment grade, and all of the short term fixed income portfolio rated as P-1 by Moodys. 

Fixed Income portfolio by credit rating	31 December 2008 %	31 December 2007 %
Government	34.8	31.6
AAA	7.8	16.7
AA	17.1	26.8
A	14.4	8.7
B and below	0.1	1.5
Long-term ratings	74.2	85.3
Short term rating - all P-1	25.8	14.7
Total	100.0	100.0

Financial investments and cash and cash equivalents increased by 18.5% in converted Sterling terms (4.3% at constant exchange rates).

Investments by currency	31 December 2008		31 December 2007
	£m	%	£m	%
Sterling	1,564.6	48.4	1,632.5	59.9
US Dollar	1,217.2	37.6	684.7	25.1
Euro	334.9	10.4	298.3	10.9
CAN Dollar	117.0	3.6	113.1	4.1
Total	3,233.7	100.0	2,728.6	100.0

Brit Insurance's portfolio is highly liquid with over 45% of assets held in cash and assets maturing within one year. These assets consist mostly of overnight money market funds and certificates of deposit. The bond portfolio is 35% invested in Government issued notes and 64% in certificates of deposit, commercial paper and corporate bonds. 

Fixed income by currency	31 December 2008	31 December 2007
	%	%
Sterling	51.1	59.3
US Dollar	36.4	25.4
Euro	8.2	11.1
CAN Dollar	4.3	4.2
Total	100.0	100.0

Bond portfolio duration	31 December 2008	31 December 2007
	Yrs	Yrs
Sterling	1.51	1.65
US Dollar	1.21	1.50
Euro	1.45	1.62
CAN Dollar	1.59	1.68

  

Valuation of Assets

FAS 157 overview

FAS 157, a US accounting standard, provides guidance on valuation of assets.  It classifies assets into three levels:

Level 1 - quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 - inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly through corroboration with observable market data (market-corroborated inputs).

Level 3 - unobservable inputs for the asset or liability, that is, inputs that reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability (including assumptions about risk) developed based on the best information available in the circumstances.

At 31 December 2008, the majority of the Group's investments excluding cash and cash equivalents were classified as 'Level 1' and 'Level 2'. The 'Level 3' classification accounted for £98.3m of the Group's £2,393.0m investment portfolio. 

Strengths and Resources

Brit Insurance's investment strategy uses a risk management driven approach, tested by the use of value at risk modelling. The investment team has recently been further strengthened by the appointment of a Director of Treasury & Investments with responsibility for asset allocation overseen by the Group Investment Committee. The Group runs a diversified portfolio of products and uses specialist managers for selected products.

At 31 December 2008, portfolio managers included Epic Asset Management, Close Private Asset Management, EEA Fund Management Limited, Goldman Sachs Asset Management, Ruffer LLP, Odey Asset Management and a selection of Fund of Hedge Fund Managers. During 2009 we will review investment managers in line with the new portfolio structure. 

Outlook

The impact of the financial crisis on the insurance sector will be felt for many years. Although the policy response from governments across the world has provided support for the financial system, one result is the lack of return available from short-term, risk free investments. This situation is likely to persist for the foreseeable future. 

The Group is currently focused on preserving its capital base, leading to a lower than normal allocation to risk bearing assets. At an appropriate point, we will look to redeploy cash into assets that enhance returns in a low interest rate environment.

  RISK FACTORS AND RISK MANAGEMENT

Introduction

The Board is responsible for ensuring the principal risks and uncertainties facing the Group are identified and addressed. The Group believes that strong risk management practices and a sound internal control system are fundamental to its continued success and profitable growth. Failure to manage risk properly exposes the Group to significant losses, regulatory issues and risks damaging the Group's reputation.  

The executive has established the framework, principles and guidelines for risk management. The primary focus is to manage the risk of Brit Insurance incurring economic losses from the categories set out below. Business managers are responsible for establishing and implementing risk management processes and responding to the needs and issues, including concentrations, with appropriate oversight from Group Risk Management. The risk management framework links appetite and management to the governance structure. 

The Group management programme of risk and control identification and assessment ensures that the risk register is maintained. Risk accountability is clearly defined with meetings held with owners on a regular basis to discuss the status of risks and the effectiveness of the control environment. The programme embraces all areas of the Group's operation. Register information is reported to senior management and the Board on a regular basis. The Group has set a number of key performance indicators to manage and monitor key activities of the business. 

The Group continues to refine the risk metrics (appetite, tolerance and capacity) for group, credit, market, liquidity, insurance and operational risk and reinforce these metrics with the Group strategy. The principal committees of the Group and their responsibilities for risk categories are set out below:

Principal Risks

The Group identifies and manages risk under categories consistent with the Financial Services Authority (FSA) risk classification: group, market, insurance, credit, liquidity and operational.

1 Group Risk

Group risk is defined as the risk of sub-optimal business strategy or execution arising from internal or external factors. Group risk is owned by the Group CEO and strategy is implemented through the Executive Management Committee (EMC) and business owners throughout the Group. Risk tolerance is set by the Board, with risk appetite set by the EMC through the annual review of the Group's strategic direction and three year plan.

Group risk is affected by economic, political, regulatory, social, ethical, environmental, reputational and legal factors together with market competition.

The strategic plan is updated annually to reflect the Group's longer term competitive and market position. Three year business plans are prepared at SBU, principal operating legal entity and Group levels. The plans are subject to realistic disaster scenario analysis, stress tests and stochastic capital assessments and the impact on both earnings and solvency evaluated. Business plans are evaluated against return on capital targets that take into consideration the inherent risk in each class of business. 

Actual results in any period are likely to vary, perhaps materially, from the modelled scenarios and the occurrence of one or more severe events could have a material adverse effect on Brit Insurance's financial condition, results of operations and liquidity.

2 Market Risk

Market risk is defined as the risk that the fair value or future cash flow will fluctuate because of adverse movements in exchange rates, interest rates or asset prices. Market risk is owned by the Finance Director. With effect from February 2009, day-to-day management of market risk is delegated to the Director of Treasury & Investments. 

  

Market risk for investments is monitored using value at risk parameters (VAR). The VAR methodology recognises the expected returns from each asset, the historical volatility of the asset and the correlation to other assets in the portfolio to calculate the risk of loss within specified levels of statistical confidence. VAR is reliant upon historical data, assumed distributions, holding periods and frequency of calculations.  VAR measures not only the size of individual exposures but also the interaction between different market exposures, thereby providing a portfolio approach to measuring market risk. 

Interest rate risk is managed through duration limits contained in the investment guidelines. The maximum permitted weighted average duration of the portfolio should not exceed five years and the maximum maturity for any debt instrument is ten years. This ensures that the investment portfolio duration is less than that of the anticipated future insurance liabilities.

The Group has material exposure to insurance business written in foreign currencies. Elements of the anticipated profits arising in foreign currencies are sold on a periodic basis. Some net assets are retained in foreign currencies as a hedge against solvency and realistic disaster scenario (RDS) requirements arising from those currencies and to meet Lloyd's Trust Fund requirements. At 31 December 2008, Sterling equivalents of net assets held in foreign currencies were £138.9m in US Dollars, £47.9m in Canadian Dollars and £36.8m in Euros.

3 Insurance Risk

Insurance risk is defined as the possibility that the insured event occurs and a claim results. By the very nature of an insurance contract, risk is based on fortuity and is therefore unpredictable. The principal risks that the Group faces under its insurance contracts are those of inherent uncertainty in the pricing of insurance risk, the aggregation of underwriting exposures, adverse claims development, reserving inadequacy and the timing of the associated cash flows. 

Uncertainties include the severity, frequency and timing of claims and claims settlements compared to those anticipated when the business was written. Insurance risk is owned by the SBU CEOs and is delegated to the class underwriters. The portfolio management committee monitors underwriting plans on a Group basis. 

Risk appetite is set by reference to underwriters' experience and judgement in light of:

The Group seeks to manage the level of insurance risk, volatility and risk aggregation in line with the risk appetite set by the EMC. Mitigation operates at a number of levels moving from policy level, to reserve and catastrophe assessment. However, it is important to recognise that insurance business necessarily requires a level of estimation of future claims payments. The reported result for any single accounting period is sensitive to the accuracy of these estimates. There is no standard methodology to project possible losses from exposures. In addition, there are no industry standard assumptions to be used in projecting these losses. The use of different methodologies and assumptions could materially change the projected losses. Therefore, modelled losses may not be comparable to estimates made by other insurers. Estimates are inherently uncertain and may not reflect Brit Insurance's maximum exposure to events. It is possible that the Group's losses will vary, perhaps significantly, from the estimates. The key components of insurance risk are aggregation, pricing and reserving. 

Catastrophe risk and aggregate exposure management

The risk of catastrophic loss is managed through aggregate exposure management together with reinsurance protections that seek to limit losses arising from catastrophic events.

The Group's tolerance for catastrophe risk is a function of expected profitability and available capital. This tolerance is expressed as the maximum net incurred claims acceptable under a number of scenarios. The Realistic Disaster Scenario Committee monitors and controls the accumulation of risk for over 30 key realistic disaster scenario (RDS) events. These RDSs reflect the diversity of the Group's exposures and include specific scenarios for elemental, man-made and economic disasters. The RDSs are reviewed quarterly in light of Group exposures and environmental factors, with more frequent reviews of the peak zone natural peril catastrophe RDSs that present the greatest exposure for the Group. The Board may decide to increase or decrease the maximum tolerance based on market conditions and other factors. Ultimately, the size of a probable maximum loss (PML) arising from an event or series of events will always remain subjective for Brit Insurance and others in the industry.

 

The Group uses its own and commercially available proprietary risk management software. However, there is always a risk that the assumptions and techniques used in these models are unreliable or that claims arising from an unmodelled event are greater than those arising from a modelled event.

As a guide to the level of catastrophe exposure written by the Group, the table below shows hypothetical claims at 1 January 2009 for various RDS events. 

Event	Modelled industry gross claims US$m	Brit Insurance gross claims £m	Brit Insurance net claims £m	Comments
Florida hurricane  - Tampa Bay	125,000	299	171	Category 4 storm on the SS Scale, landfalling in Tampa. Brit Insurance claims estimates include demand surge, flood associated with the hurricane, and non-property exposures.
Florida hurricane - Miami	125,000	257	129	Category 5 storm on the SS Scale, landfalling in Miami. Brit Insurance claims estimates include demand surge, flood associated with the hurricane, and non-property exposures.
US north east coast hurricane	78,000	263	151	Category 4 storm on the SS Scale, landfalling in Suffolk County, New York State. Brit Insurance claims estimates include demand surge, flood associated with the hurricane, and non-property exposures.
California earthquake  - Los Angeles	78,000	290	115	Magnitude 7.2 earthquake on the MMI scale, on the Elsinore fault in Los Angeles. Brit Insurance claims estimates include demand surge, fire following the earthquake, and non-property exposures.
California earthquake  - San Francisco	78,000	300	120	Magnitude 7.4 earthquake on the MMI scale, on the San Andreas Fault in San Francisco. Brit Insurance claims estimates include demand surge, fire following the earthquake, and non-property exposures.
Europe windstorm	31,000	244	99	A winter storm with peak gusts in excess of 112mph resulting in a broad swath of damage across southern England, France, Belgium, Netherlands, Luxembourg, Germany and Denmark. Brit Insurance claims estimates include demand surge and UK coastal flood.
Japan earthquake	51,000	196	101	Based on a repeat of the Great Kanto event in 1923, a magnitude 7.9 earthquake in the Tokyo Metropolitan Area.

Source: RMS/Lloyd's/Brit Insurance

The modelled claims reflect 31 December 2008 rates of exchange and the devaluation in Sterling during 2008.

Risk pricing and approval

The Group uses rating tables, actuarial pricing models and underwriter judgement to evaluate and price individual risks and coverholder schemes. SBU peer reviews are undertaken in all SBUs. Pricing is a fundamental part of the underwriting process and each underwriter is given clear authority relating to line size, aggregate exposure and the classes of business that may be written. The underwriters and actuaries jointly develop rating models, and review large risks. Each SBU operates a monthly management committee, responsible for assessing underwriting activity and consistency with the underwriting plan for each class of business.

Reserving

Insurance businesses necessarily require a level of estimation of future claims payments. The reported result for any single accounting period is sensitive to the accuracy of these estimates. The Group Reserving Panel is responsible for reviewing and setting reserves. The panel is chaired by the Finance Director and includes the Group Actuary, the SBU CEOs and Claims representatives. The reserves selected by the Reserving Panel are based on quarterly reserve recommendations from the Actuarial department. Each year the reserves are also reviewed by external actuarial consultants. Further details on insurance risk are provided in Note 4.

  

4 Credit Risk

Credit risk is the risk that a counterparty (including reinsurers, brokers, coverholders, insureds, banks and investment counterparties) is unable or unwilling to settle their obligations as they fall due. Credit risk is owned by the Finance Director, is monitored through the Credit Committee and is managed by the market securities and ratings team, the credit control and the investment and treasury team. 

5 Liquidity Risk

Liquidity risk is defined as the risk that the Group, although solvent, will have insufficient liquid financial resources to settle its obligations as they fall due. Liquidity risk includes ensuring adequate cash flow and monitoring funding sources in line with prevailing market conditions. Liquidity risk is owned by the Finance Director and managed by the treasury and investment team. The Group risk appetite is to have access to sufficient liquidity at all times in each of its three liquidity centres: BIL, Syndicate 2987 and the remainder of the Group. In BIL and Syndicate 2987 the tolerance is to fund a minimum of two, and a tolerance of three RDS events. At holding company level the tolerance is to have access to a minimum of £20m of liquidity over and above short term liabilities at all times.

6 Operational risk

Operational risk is the risk of loss of earnings and/or value resulting from inadequate or failed internal processes, people and systems or from external events. It is inherent within all of the above risk categories. Operational risks encompass customer treatment, product development risk, processes and systems risk, change risk, people risk, theft, fraud, legal and regulatory risks and corporate governance risk. Operational risk is owned by the EMC and is managed by operational managers throughout the Group. Operational risk is monitored by the Operational Risk Management Committee which reports to the EMC and the Audit Committee. 

The Group has a business continuity plan in place which is regularly tested and enhanced and established policies cover the risks of financial crime, money laundering, whistle-blowing and disaster recovery.

  

The Brit Insurance BRAND 

Introduction

The Group brand strategy focuses on developing a successful and recognisable brand and is critical to achieving the objectives of growth and market position. The strategy is to build the Brit Insurance brand among intermediaries and potential customers wherever the Group may trade - in London, across the UK regions and internationally. The brand strategy seeks to ensure that the Group's proposition is clearly articulated and understood. In 2008 activities initiated in 2007 were enhanced and built on, allowing the Brit Insurance brand to continue to grow in stature and achieve much wider recognition.  Promotional and relationship building campaigns to the insurance trade ran throughout the year. Towards the end of 2008 a new look to documentation and promotional campaigns was introduced, which included the adoption of the strapline 'Protection for Business'. 

Sponsorship is now firmly established as a core element of brand development. In 2008 the involvement in cricket was extended and a new sponsorship with the Design Museum was established. 

Cricket

In 2008 the Group entered into its first broadcast sponsorship with a two-year agreement with Sky Sports. A combination of live coverage, highlights and promotions across Sky channels allowed the Brit Insurance brand to reach over 18 million individuals during the summer. During 2008, increased activity with the cricket media led to better penetration of the brand in key national and regional press. Both the Surrey and Test Match Ground sponsorships generated good broadcast and print media exposure for the brand. Total TV and media coverage connected with the Brit Insurance Oval sponsorship rose 84% year-on-year.

The Design Museum 

In January 2008 the Group entered into a new four year partnership with the Design Museum, the world's foremost museum devoted to contemporary design. The partnership involves title sponsorship of the Brit Insurance Design Awards, and a supporting exhibition, the Brit Insurance Designs of the Year. These celebrate the most innovative and progressive international design over the previous 12 months and span the seven major design disciplines: Architecture, Graphics, Fashion, Product, Furniture, Interactive and Transport.

In 2008 the Awards were received with critical acclaim and have increased visibility of Brit Insurance in the media and with key associated audiences. In the first year, the media campaign delivered coverage in all target quality national daily and weekend press.

CORPORATE RESPONSIBILITY

'FTSE4GOOD' 

During 2008, Brit Insurance was independently assessed according to the 'FTSE4Good' criteria and again satisfied the requirements of the 'FTSE4Good Index Series'. Created by the global index company FTSE Group, FTSE4Good is an equity index series designed to facilitate investment in companies that meet globally recognised corporate responsibility standards. Companies in the FTSE4Good Index Series meet stringent social, ethical and environmental criteria and are positioned to capitalise on the benefits of responsible business practice.

Charitable Giving and Community Involvement

Introduction

The Group is committed to supporting local and international communities. Its strategy is to select charitable giving and community projects based on three criteria:

projects must be for a good cause and operate in an area relevant to Brit Insurance

financial involvement should be capable of being leveraged for the benefit of the good cause, such as sponsored charity cricket matches

projects should, where possible, offer alignment with the Group's vision 

  

Brit Insurance's main aims are to:

support the multi-year partnership with the British Red Cross and the community activities of Brit Insurance's sponsorship partners: Surrey County Cricket Club, the Design Museum and Lloyd's Community Programme

provide humanitarian aid in instances of uninsured catastrophic events

match money raised by staff for UK registered charities 

build a reserve to support ongoing charitable giving in future years 

During 2008 over 14,700 people benefited from our community sponsorships.

Up to 0.5% of the Group's pre-tax profit is made available for charitable giving each year, capped at £1m. In 2008, the Group paid charitable donations of £279,271 (2007: £911,320) and made a further £675,729 available for community and charitable initiatives. No donations were made to any political organisation (2007: nil). 

During 2008, Brit Insurance made substantial contributions, both financially and in staff time and expertise, to many projects relating to youth, education and disability and which complement commercial sponsorships.

The Group promotes staff involvement through matching their fund raising and an employee volunteering scheme. This grants every employee two additional days of paid leave a year to volunteer their time through schemes offered by charity partners. In 2008 over £74,000 raised by staff or donated through the payroll was matched. In addition, the Group supported its business partners in their charitable endeavours to the value of £37,000. 

British Red Cross

Of the £911,320 that was donated to the Brit Insurance Charitable Trust in 2007, £230,000 was given in 2008 to the Group's long-term partner, the British Red Cross. This was used to fund emergency vehicles in the UK and respond to three international emergency disaster appeals. One of the key aims of the partnership is to help UK communities be better prepared for, and cope with emergencies. The funding provided 'Emergency Response Unit' vehicles and vital equipment in Leeds, Darlington, London, Birmingham and Reading, from which over 2,300 people benefited. It also enabled the British Red Cross to train 459 people in first aid and emergency skills.

A further £50,000 donation in 2008 allowed the British Red Cross to develop and launch its 'Prepare for the Unexpected' website, providing advice on how best to handle emergencies. This achieved up to 250 hits a day during the peak of the supporting promotional campaign and continues to average in excess of 70 a day.

The Group's employees raised £11,450 through challenge and office-based events, which the Group matched. 

Surrey County Cricket Club (Surrey)

The Group actively supports Surrey's community programmes. In 2008 it contributed to initiatives that included its playground markings scheme and the Brit Insurance Howzat education programme and coaching. The funding provided over 7,100 children and young people with cricket and educational activities throughout inner London and Surrey.

Design Museum

In conjunction with the Design Museum's education department a number of activities - including a family learning programme - were devised to help children, students and teachers develop skills in design and technology. The programme reached 2,400 children, 300 students and 950 teachers.

Lloyd's Community Programme

A day of play at the Brit Insurance Oval was again donated to the Lloyd's Community Programme to enable 160 children from Tower Hamlets to enjoy cricket coaching and a tournament.

  

Consolidated Income Statement

for the year ended 31 December 2008

	Note	Year ended 31 December 2008 £m	Year ended 31 December 2007 £m
Revenue
Gross premiums written	5	1,394.6	1,264.9
Less premiums ceded to reinsurers	5	(231.3)	(145.5)
Premiums written, net of reinsurance		1,163.3	1,119.4
Gross amount of change in provision for unearned premiums		(77.2)	(10.8)
Reinsurers' share of change in provision for unearned premiums		15.7	(5.3)
Net change in provision for unearned premiums		(61.5)	(16.1)
Earned premiums, net of reinsurance		1,101.8	1,103.3
Foreign exchange gains and other income	6	125.1	21.4
Investment return	7	7.4	137.4
Return on derivative contracts	8	(19.1)	(9.7)
Disposal of subsidiary undertakings		-	2.3
Disposal of asset held for sale		-	2.9
Disposal and partial disposal of associated undertakings		4.5	1.9
Total revenue		1,219.7	1,259.5
Expenses
Claims incurred:
Claims paid:
Gross amount		(694.3)	(584.8)
Reinsurers' share		90.0	112.9
Claims paid, net of reinsurance		(604.3)	(471.9)
Change in the provision for claims:
Gross amount		(191.8)	(201.5)
Reinsurers' share		68.5	12.5
Net change in the provision for claims		(123.3)	(189.0)
Claims incurred, net of reinsurance	5	(727.6)	(660.9)
Acquisition costs	9	(306.1)	(298.4)
Other operating expenses	9	(90.4)	(99.2)
Total expenses excluding finance costs		(1,124.1)	(1,058.5)
Operating profit		95.6	201.0
Finance costs		(13.1)	(12.7)
Finance income		7.2	-
Share of (loss)/profit after tax of associated undertakings		(0.5)	2.9
Profit on ordinary activities before tax		89.2	191.2
Tax expense	10(i)	(22.6)	(53.6)
Profit attributable to owners of the parent		66.6	137.6
Basic earnings per share (pence per share)	11	21.52p	43.24p
Diluted earnings per share (pence per share)	11	21.52p	43.13p

Consolidated Statement of Comprehensive Income

for the year ended 31 December 2008

	Note	Year ended 31 December 2008 £m	Year ended 31 December 2007 £m
Profit for the year		66.6	137.6
Other comprehensive income net of tax
Actuarial (losses) / gains on defined benefit pension scheme	17	(10.1)	1.9
Tax relating to components of other comprehensive income	10(ii)	2.9	(0.6)
Foreign exchange translation differences arising on the revaluation of foreign operations		4.1	(0.3)
Reversal of foreign exchange translation differences resulting from the disposal and partial disposal of foreign operations		1.3	0.3
Effect of associates' capital movements		0.6	1.9
Other comprehensive income for the year net of tax		(1.2)	3.2
Total comprehensive income for the year
attributable to owners of the parent		65.4	140.8

  

Consolidated Statement of Financial Position

at 31 December 2008

	Note	31 December 2008 £m	31 December 2007 £m
Assets
Property, plant and equipment		8.0	10.0
Intangible assets		82.1	80.5
Deferred acquisition costs		152.1	132.2
Investments in associated undertakings		29.1	33.0
Current taxation		1.9	-
Reinsurance contracts	12	549.6	380.8
Financial investments	13	2,393.0	1,993.3
Derivative contracts	14	1.4	1.8
Insurance and other receivables	15	518.4	467.5
Cash and cash equivalents	16	840.7	735.3
Total assets		4,576.3	3,834.4
Liabilities and Equity
Liabilities
Insurance contracts	12	3,344.7	2,623.0
Employee benefits	17	1.4	5.1
Borrowings		143.1	174.2
Current taxation		-	12.3
Deferred taxation	18	29.5	21.4
Provisions		0.4	0.4
Derivative contracts	14	5.4	1.9
Insurance and other payables	19	202.1	147.2
Total liabilities		3,726.6	2,985.5
Equity
Called up share capital	21	247.3	247.3
Share premium account		-	138.0
Capital redemption reserve		-	0.6
Translation reserve		4.1	(1.3)
Own shares		(64.2)	(63.1)
Retained earnings		662.5	527.4
Total equity attributable to owners of the parent		849.7	848.9
Total liabilities and equity		4,576.3	3,834.4

  

Consolidated Statement of Cash Flows

for the year ended 31 December 2008

	Note	Year ended 31 December 2008 £m	Year ended 31 December 2007 £m (restated)
Cash generated from operations
Cash flows provided by operating activities	22	36.5	368.2
Tax paid		(25.8)	(47.1)
Interest paid		(11.8)	(12.3)
Interest received		109.3	109.1
Dividends received		4.0	5.7
Net cash inflows from operating activities		112.2	423.6
Cash flows from investing activities
Purchase of property, plant and equipment		(2.1)	(3.9)
Purchase of intangible assets		(5.5)	(7.5)
Net proceeds from disposal of property, plant and equipment		0.2	0.4
Net proceeds from disposal of asset held for sale		-	1.2
Net increase in cash from disposal of subsidiary undertakings		-	7.6
Net proceeds from disposals and partial disposals of associated undertakings		22.1	5.1
Net movements in associated undertaking ordinary and preference shares		(0.8)	1.5
Investment in associated undertakings		(13.2)	(10.0)
Net cash inflows/(outflows) from investing activities		0.7	(5.6)
Cash flows from financing activities
Proceeds from exercised share options		-	3.5
Equity dividends paid		(68.2)	(54.5)
Repurchase of Lower Tier Two subordinated debt		(8.4)	-
Repurchase of 8.5% unsecured subordinated loan stock		(19.7)	-
Acquisition of own shares for employee incentive schemes		(0.5)	(5.5)
Repurchase of treasury shares		(1.1)	(52.3)
Net cash outflows from financing activities		(97.9)	(108.8)
Net increase in cash and cash equivalents		15.0	309.2
Cash and cash equivalents at beginning of the year		735.3	421.1
Effect of exchange rate fluctuations on cash and cash equivalents		90.4	5.0
Cash and cash equivalents at the end of the year	16	840.7	735.3

Consolidated Statement of Changes in Equity

for the year ended 31 December 2008

	Note	Called up share capital	Share premium account	Capital redemption reserve	Translation reserve	Capital reorganisation reserve	Own shares	Retained earnings	Total equity attributable to owners of the parent
		£m	£m	£m	£m	£m	£m	£m	£m
Balance at 1 January 2008		247.3	138.0	0.6	(1.3)	-	(63.1)	527.4	848.9
Total comprehensive income for the year		-	-	-	5.4	-	-	60.0	65.4
Acquisition of own shares for share schemes		-	-	-	-	-	(0.5)	-	(0.5)
Vesting of own shares		-	-	-	-	-	0.5	(0.5)	-
Purchase of treasury shares		-	-	-	-	-	(1.1)	-	(1.1)
Equity dividends	20	-	-	-	-	-	-	(68.2)	(68.2)
Share-based payments		-	-	-	-	-	-	5.2	5.2
Capital reduction		-	(138.0)	(0.6)	-	-	-	138.6	-
Balance at 31 December 2008		247.3	-	-	4.1	-	(64.2)	662.5	849.7

The translation reserve arises on the revaluation of overseas associated undertakings.

Following an application to the High Court, the Company was permitted to cancel the balance on the share premium account and capital redemption reserve and transfer these amounts to retained earnings. This capital reorganisation became effective on 11 December 2008.

Consolidated Statement of Changes in Equity

for the year ended 31 December 2007

	Note	Called up share capital	Share premium account	Capital redemption reserve	Translation reserve	Capital reorganisation reserve	Own shares	Retained earnings	Total equity attributable to owners of the parent
		£m	£m	£m	£m	£m	£m	£m	£m
Balance at 1 January 2007		246.1	135.8	0.6	(1.3)	180.0	(5.8)	257.9	813.3
Total comprehensive income for the year		-	-	-	-	-	-	140.8	140.8
Acquisition of own shares for share schemes		-	-	-	-	-	(5.5)	-	(5.5)
Vesting of own shares		-	-	-	-	-	0.5	(0.5)	-
Purchase of treasury shares		-	-	-	-	-	(52.3)	-	(52.3)
Equity dividends	20	-	-	-	-	-	-	(54.5)	(54.5)
Share-based payments		-	-	-	-	-	-	3.7	3.7
Exercised share options		1.2	2.2	-	-	-	-	-	3.4
Capital reorganisation		-	-	-	-	(180.0)	-	180.0	-
Balance at 31 December 2007		247.3	138.0	0.6	(1.3)	-	(63.1)	527.4	848.9

  

Notes to the Financial Statements

1 General information

Brit Insurance Holdings PLC (the Company) is a company registered in England and Wales under the Companies Act 1985. The address of the registered office is provided in the Company's website at www.britinsurance.com. 

2 Accounting policies

The preliminary results have been prepared in accordance with International Financial Reporting Standards (IFRS) adopted for use by the European Union (EU).

This preliminary announcement is prepared on the same basis as set out in the previous year's annual accounts with the exception of the following:

During the year the group has adopted IFRIC 11 'IFRS 2: Group and Treasury Share Transactions' and IFRIC 14 'IAS19: The Limit on a Defined Benefit Asset, Minimum Funding requirements and their interaction' The adoption of IFRIC 11 and IFRIC 14 has had no effect on the preliminary results.

The preliminary results also reflect the early adoption of the revisions to International Accounting Standard 1 'Presentation of Financial Statements' (IAS1R). The main effect of adopting IAS1R has been to present information previously in the notes to the accounts in a new financial statement, the Statement of Changes in Equity. This statement presents transactions with owners in detail and non-owner changes in equity as a single line. The standard introduces a Consolidated Statement of Comprehensive Income which presents all items of recognised income and expense and is linked to the Consolidated Income Statement.

In addition, the Consolidated Balance Sheet has been renamed the Consolidated Statement of Financial Position and The Consolidated Cash Flow Statement has been renamed the Consolidated Statement of Cash Flows.

The Consolidated Statement of Cash Flows has been restated to show the net purchase or sale of investments as cash generated from operations instead of a cash flow from investing activities. This new presentation is deemed to more accurately reflect the nature of the Group's activities.

Basis of preparation

The preliminary results have been prepared in accordance with IFRS and those parts of the Companies Act 1985 applicable to companies reporting under IFRS. IFRS comprises standards issued by the International Accounting Standards Board (IASB) and interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC) and as adopted by the EU.

At the date of authorisation of these preliminary results, the following standards which have not been applied in this preliminary announcement were in issue but not yet effective:

  

Standard		Effective
IFRS 8 Operating segments		Periods commencing on or after 1 January 2009
IFRS 3R Business Combinations and IAS 27R Consolidated and Separate Financial statements		Periods commencing on or after 1 July 2009
Amendment to IFRS 2 Share-Based Payment: Vesting Conditions and Cancellations		Periods commencing on or after 1 January 2009
Amendments to IFRS 1 First-time Adoption of IFRS and IAS 27 Consolidated and Separate Financial Statements		Periods commencing on or after 1 January 2009
Improving Disclosures about Financial Instruments (Amendments to IFRS 7)		Periods commencing on or after 1 January 2009
IAS 32 Financial Instruments: Presentation and IAS 1 Presentation of Financial statements - Puttable Financial Instruments and Obligations Arising on Liquidation		Periods commencing on or after 1 January 2009
IFRIC 16 Hedges of a Net Investment in a Foreign Operation		Periods commencing on or after 1 October 2008

The directors anticipate that the adoption of these standards in future periods will have no material impact on the financial statements of the Group except for additional disclosures on segmental information required by IFRS 8 and additional disclosures on financial instruments required by IFRS 7.

In accordance with IFRS 4, 'Insurance Contracts', the Group continues to comply with the recommendations of the Statement of Recommended Practice on Accounting for Insurance Businesses issued by the Association of British Insurers in December 2005 (as revised in December 2006). However the Group has the option to make improvements to its policies if the changes make the financial statements more relevant to decision making needs of the users.

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. For further information on the use of estimates and judgements, refer to Note 3.

3 Critical accounting estimates and judgements in applying accounting policies

The Group makes estimates and assumptions that affect the reported amounts of assets and liabilities. Estimates and judgements are continually evaluated and based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

i) 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:

a) estimates of the amount of any liability in respect of claims notified but not settled and incurred but not reported claims provisions (IBNR) included within provisions for insurance and reinsurance contracts.

b) the corresponding estimate of the amount of reinsurance recoveries which will become due as a result of these estimated claims.

c) the recoverability of amounts due from reinsurers.

d) 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:

a) quarterly statistical data is produced in respect of gross and net premiums and claims (paid and incurred).

b) projections are produced by an internal actuarial department, with appropriate adjustment for specific claims made by management where deemed appropriate.

c) the resulting projections are discussed with the experienced underwriting and claims personnel and claims provision recommendations made to an internal reserving panel consisting of senior underwriters, claims managers and finance staff.

d) claims provisions are subject to independent external actuarial review at least annually. The panel then approves those estimated claims provisions to be included in the financial statements.

e) some classes of business have characteristics which do not necessarily lend themselves easily to statistical estimation techniques. These classes would include Financial Risk, Casualty Treaty, Catastrophe Retrocessional and Mortgage Indemnity Guarantee business. In these cases review is carried out on a policy-by-policy basis to support statistical estimates.

f) in the event of catastrophe losses and prior to detailed claims information becoming available, claims provision estimates are compiled using a combination of specific recognised modelling software and reviews of material contracts exposed to the event in question.

Overall the objectives of the estimates and judgements applied to claims provisions seek to state such provisions on a best estimate, undiscounted basis.

In addition to claims provisions, the reserve for future loss adjustment expenses is also subject to estimation. In arriving at this estimate, regard is had to the levels of internal and third party loss adjusting expenses incurred annually and the length of time expected to be necessary to adjust all claims arising from the different classes of business. For this purpose, classes of business are grouped into short, medium and long tail categories. The estimated loss adjustment expenses are expressed as a percentage of net insurance provisions. These are benchmarked to assess the reasonableness of the estimate.

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, 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 £2,657.7m (2007: £2,013.2m) as set out in Note 12. The amount of reinsurance recoveries estimated at that date is £479.2m (2007: £326.1m).

ii) Impairment of goodwill

Determining whether goodwill is impaired requires an estimation of the value in use of the cash-generating units to which goodwill has been allocated. The value in use calculation requires the Group to estimate the future cash flows expected to arise from the cash-generating unit and a suitable discount rate in order to calculate present value, both of which are material sources of uncertainty.

The carrying amount of goodwill at the date of the statement of financial position was £63.7m (2007: £63.7m).

iii) Financial investments

Financial investments are carried in the statement of financial position at market values. Market values for bonds, certificates of deposits and equities are obtained from Bloomberg, Citibank and the broker market. Market valuations of funds are obtained from fund administrators.

The carrying amount of financial investments at the date of the statement of financial position was £2,393.0m (2007: £1,993.3m) as set out in Note 13.

 

4 Risk management policies

The Group's activities expose the business to a number of key risks which have the potential to affect its ability to achieve its business objectives. The following describes the Group's financial and insurance risk management from a quantitative and qualitative perspective.

The Board is responsible for the Group's systems of internal control and for reviewing their effectiveness. The systems of internal control are designed to manage rather than eliminate risk and aim to provide reasonable and not absolute assurance. Group underwriting activities are co-ordinated through a system of strategic business unit management committees as well as the Executive Management Committee and the Boards for the regulated entities. Investment risk is managed in accordance with investment frameworks which are set by the Investment Committee which meets monthly.

Financial Risk

(i) Credit risk

This is the risk that one party to a financial arrangement will fail to discharge an obligation and cause the other party to incur a financial loss. The following is an overview of how the Group manages its significant credit risk exposures.

Reinsurance

Reinsurance is placed in line with policy guidelines and concentration of risk is managed by reference to counterparties' limits that are set each year and are subject to regular reviews. On a regular basis management performs assessments of creditworthiness of reinsurers to update reinsurance purchase strategy and to ascertain suitable allowance for impairment of reinsurance assets.

Financial investments and cash and cash equivalents

Credit risk relating to financial investments and cash and cash equivalents is monitored daily. The Group's investment guidelines specify the maximum percentage of the portfolios that can be invested in or with any single counterparty - these limits are determined using the Moody's credit rating of each asset. In addition the Group's Investment Committee will from time to time impose special limits on assets that are deemed more at risk than the rating agencies currently imply.

Insurance receivables

The Group credit risk is in respect of balances with both customers and intermediaries. The Group seeks to reduce its credit exposure to intermediaries through application of its internal credit vetting processes and its active credit control procedures. Wherever possible, the Group includes premium payment warranties in its terms and conditions which gives it the right to cancel policies in the event of non-payment. Insurance receivables are made up of trade debtors and debtors arising out of direct and reinsurance operations.

Derivative products

The Group may use derivatives from time to time, with prior approval from the Investment Committee. The four main derivative classes are credit derivatives, foreign exchange forwards and options, interest rate derivatives and equity index options. Derivatives are only used for the purposes of efficient portfolio management, reduction in investment risk and to mitigate the credit risk of certain reinsurance counterparties.

Credit risk with respect to derivatives, where deemed necessary, is controlled with the implementation of collateral agreements with derivative counterparties that puts a finite limit on the credit risk of each transaction.

The following credit risk table in respect of monetary assets provides information regarding the credit risk exposure of the Group by classifying the assets according to credit ratings of the counterparties. Ratings in respect of financial investments and cash and cash equivalents are from the Moody's rating scale and ratings in respect of reinsurance assets are from the Standard and Poor rating scale. These amounts represent the maximum credit risk exposure.

  

31 December 2008

		Gover-nment £m	AAA £m	AA £m	A £m	P-1 £m	B and below £m	Collate-ralised £m	Equities £m	Not rated £m	Total £m
Reinsurance assets	(a)	-	8.8	229.1	149.8	-	3.9	77.8	-	9.8	479.2
Financial investments		753.9	168.4	369.5	311.9	557.0	1.8	-	117.4	113.1	2,393.0
Derivative contracts		-	-	-	-	-	-	-	-	1.4	1.4
Insurance receivables	(b) (c)	-	-	-	-	-	-	-	-	458.7	458.7
Cash and cash equivalents		-	435.7	156.7	108.4	139.9	-	-	-	-	840.7
		753.9	612.9	755.3	570.1	696.9	5.7	77.8	117.4	583.0	4,173.0

31 December 2007

		Gover-nment £m	AAA £m	AA £m	A £m	P-1 £m	B and below £m	Collate-ralised £m	Equities £m	Not rated £m	Total £m
Reinsurance assets	(a)	-	3.8	129.9	150.5	-	-	31.7	-	10.2	326.1
Financial investments		470.9	249.3	400.7	130.1	219.9	22.7	-	218.7	281.0	1,993.3
Derivative contracts		-	-	-	-	-	-	-	-	1.8	1.8
Insurance receivables	(b) (c)	-	-	-	-		-	-	-	421.8	421.8
Cash and cash equivalents		-	154.4	239.9	19.6	321.4	-	-	-	-	735.3
		470.9	407.5	770.5	300.2	541.3	22.7	31.7	218.7	714.8	3,478.3

(a)  Amounts recoverable from reinsurers on claims reported and loss adjustment expenses and claims incurred

(b) Insurance receivables arising out of direct and reinsurance operations.

(c) Insurance receivables are generally due from customers and intermediaries who are unlikely to seek ratings as part of their normal course of business.

Impairment

The Group considers reinsurer ratings, notified disputes and collection experience in determining which assets should be impaired.

The following table shows the movements in impairment provisions during the year.

	Impairment provision against reinsurance assets		Impairment provision against insurance receivables
	2008	2007	2008	2007
	£m	£m	£m	£m
1 January	11.2	17.0	5.1	6.9
Strengthening/(release) for the year	2.1	(5.7)	-	(1.8)
Net foreign exchange differences	2.2	(0.1)	-	-
31 December	15.5	11.2	5.1	5.1

The following table shows a breakdown of the impairment provision against reinsurance assets.

	31 December 2008 £m	31 December 2007 £m
AAA	0.3	0.1
AA	8.8	5.0
A	5.8	5.7
BBB and below	0.2	-
Not rated	0.4	0.4
Total	15.5	11.2

  

The following table shows the amount of insurance receivables that were past due but not impaired at the end of the year.

	31 December  2008	31 December 2007
	£m	£m
0-3 months past due	25.7	26.7
4-6 months past due	2.2	3.8
7-9 months post due	1.6	3.3
10-12 months past due	0.6	1.1
More than 12 months past due	-	3.4
Total	30.1	38.3

(ii) Liquidity Risk

The Group has defined liquidity risk as 'the risk that the Group, although solvent, either does not have available sufficient financial resources to enable it to meet its obligations as they fall due, or can secure them only at excessive cost.'

The major liquidity risk confronting the Group is the daily calls on its available cash resources in respect of claims arising from insurance contracts. In respect of US regulated business the liquidity risk is increased by the requirement to collateralise the US Credit for Reinsurance Trust Fund (CRTF) in respect of gross outstanding claims and claims incurred but not reported for the Group's Lloyd's business and letters of credit (LOC) issued by Brit Insurance Limited.

The Group manages this risk by maintaining sufficient liquid assets or assets that can be translated into liquid assets at short notice and without capital loss to meet the expected cash flow requirements. The Group's Investment Guidelines also set out various short term cash balances to be held by external fund managers.

The Group has determined the minimum proportion of funds required to ensure that the Group has sufficient liquid assets to withstand claim scenarios at the extreme end of business plan projections by reference to modelled Realistic Disaster Scenario events.

The table below analyses the undiscounted value of monetary assets and 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.

31 December 2008

Assets		Undiscounted values
	Statement of Financial Position £m	Up to a year £m	1-3 years £m	3-5 years £m	Over 5 years  £m	Equities £m	Total £m
Reinsurance assets	479.2	135.6	130.9	85.0	127.7	-	479.2
Financial investments	2,393.0	783.3	1,089.5	390.2	12.6	117.4	2,393.0
Derivative contracts	1.4	0.3	-	-	-	-	0.3
Insurance receivables	458.7	458.7	-	-	-	-	458.7
Cash and cash equivalents	840.7	840.7	-	-	-	-	840.7
	4,173.0	2,218.6	1,220.4	475.2	140.3	117.4	4,171.9

Liabilities		Undiscounted values
	Statement of Financial Position £m	Up to a year £m	1-3 years £m	3-5 years £m	Over 5 years  £m	Equities £m	Total £m
Insurance contract liabilities	2,657.7	752.1	725.9	471.3	708.4	-	2,657.7
Derivative contracts	5.4	6.9	2.5	-	-	-	9.4
Borrowings	143.1	19.9	17.9	17.9	197.6	-	253.3
Insurance and other payables	202.1	202.1	-	-	-	-	202.1
	3,008.3	981.0	746.3	489.2	906.0	-	3,122.5

  31 December 2007

Assets		Undiscounted values
	Statement of Financial Position £m	Up to a year £m	1-3 years £m	3-5 years £m	Over 5 years  £m	Equities £m	Total £m
Reinsurance assets	326.1	87.0	99.3	62.7	77.1	-	326.1
Financial investments	1,993.3	669.0	539.8	544.9	20.9	218.7	1,993.3
Derivative contracts	1.8	-	-	-	-	-	-
Insurance receivables	421.8	421.8	-	-	-	-	421.8
Cash and cash equivalents	735.3	735.3	-	-	-	-	735.3
	3,478.3	1,913.1	639.1	607.6	98.0	218.7	3,476.5

Liabilities		Undiscounted values
	Statement of Financial Position £m	Up to a year £m	1-3 years £m	3-5 years £m	Over 5 years  £m	Equities £m	Total £m
Insurance contract liabilities	2,013.2	537.0	613.2	386.7	476.3	-	2,013.2
Derivative contracts	1.9	5.0	8.7	-	-	-	13.7
Borrowings	174.2	32.0	27.9	19.9	229.5	-	309.3
Insurance and other payables	147.2	147.2	-	-	-	-	147.2
	2,336.5	721.2	649.8	406.6	705.8	-	2,483.4

The nature of insurance is that the requirements of funding cannot be predicted with absolute certainty and therefore the theory of probability is applied to insurance contracts to ascertain the likely provision and the time period when such liabilities will require settlement. The amounts and maturities in respect of insurance liabilities are thus based on management's best estimate based on statistical techniques and past experience.

Collateral

Part of the Group's underwriting is carried out through its syndicate, Syndicate 2987 at Lloyd's. This syndicate writes regulated business in a number of countries, including USA and Canada. As a result the syndicate is required to collateralise a number of Lloyd's trust funds in respect of outstanding claims relating to this business. Collateral is provided in the form of cash and approved investments in accordance with the terms of the trust deed. The total amount of collateral provided at 31 December 2008 was £490.4m (2007: £456.5m).

In addition Brit Insurance Limited maintains letters of credit (LOC) facilities in respect of its US regulated business. The company is obliged to collateralise any LOCs issued under these facilities. The total amount of collateral provided at 31 December 2008 was £59.0m (2007: £43.2m).

(iii) Market Risk

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: currency risk, interest rate risk and price risk.

Market risk can be caused by factors specific to the individual instrument or its issuer or factors affecting all instruments traded in the market.

a) Currency Risk

The Group writes a significant proportion of its insurance business in currencies other than Sterling.

Currency risk is mitigated by the Group mainly maintaining financial assets denominated in the same currencies as its liabilities which is demonstrated in the table below. The Executive Management Committee monitors this matching by reviewing the Group's currency statement of financial position on a quarterly basis.

  

31 December 2008

Assets			Sterling equivalent
	US Dollars £m	Canadian Dollars £m	Euros £m	Sterling and others £m	Total £m
Reinsurance assets	300.2	6.5	26.0	146.5	479.2
Financial investments	836.9	93.8	222.4	1,239.9	2,393.0
Derivative contracts	(1.7)	-	-	3.1	1.4
Insurance receivables	262.2	16.1	44.9	135.5	458.7
Cash and cash equivalents	380.3	23.2	112.5	324.7	840.7
Total monetary assets	1,777.9	139.6	405.8	1,849.7	4,173.0
Non-monetary assets	118.3	11.9	21.0	252.1	403.3
Total assets	1,896.2	151.5	426.8	2,101.8	4,576.3

Liabilities			Sterling equivalent
	US Dollars £m	Canadian Dollars £m	Euros £m	Sterling  and others £m
					Total
					£m
Insurance contract liabilities	1,365.2	74.6	316.4	901.5	2,657.7
Derivative contracts	-	-	-	5.4	5.4
Borrowings	10.4	-	-	132.7	143.1
Insurance and other payables	85.5	8.4	14.9	93.3	202.1
Total monetary liabilities	1,461.1	83.0	331.3	1,132.9	3,008.3
Non-monetary liabilities	296.2	20.6	58.7	342.8	718.3
Total liabilities	1,757.3	103.6	390.0	1,475.7	3,726.6
Net assets and liabilities	138.9	47.9	36.8	626.1	849.7

31 December 2007

Assets			Sterling equivalent
	US Dollars £m	Canadian Dollars £m	Euros £m	Sterling and others £m	Total £m
Reinsurance assets	164.0	10.3	16.7	135.1	326.1
Financial investments	497.4	71.0	253.5	1,171.4	1,993.3
Derivative contracts	-	-	-	1.8	1.8
Insurance receivables	208.9	10.5	12.0	190.4	421.8
Cash and cash equivalents	187.3	42.1	44.8	461.1	735.3
Total monetary assets	1,057.6	133.9	327.0	1,959.8	3,478.3
Non-monetary assets	111.4	8.4	9.1	227.2	356.1
Total assets	1,169.0	142.3	336.1	2,187.0	3,834.4

  

Liabilities			Sterling equivalent
	US Dollars £m	Canadian Dollars £m	Euros £m	Sterling  and others £m	Total £m
Insurance contract liabilities	929.5	59.3	196.4	828.0	2,013.2
Derivative contracts	-	-	-	1.9	1.9
Borrowings	7.4	-	-	166.8	174.2
Insurance and other payables	46.2	1.9	8.3	90.8	147.2
Total monetary liabilities	983.1	61.2	204.7	1,087.5	2,336.5
Non-monetary liabilities	260.0	22.0	21.3	345.7	649.0
Total liabilities	1,243.1	83.2	226.0	1,433.2	2,985.5
Net assets and liabilities	(74.1)	59.1	110.1	753.8	848.9

The matching of assets and liabilities prevents economic exposure to currency risk but it does not prevent exposure to exchange gains or losses recorded in the income statement created as a result of the IFRS accounting treatment of certain assets and liabilities. IFRS requires that gross and reinsurers unearned premium reserves and deferred acquisition costs are translated at historical transaction rate rather than closing rate. This means that these amounts in the statement of financial position are carried at a different exchange rate to the remaining assets and liabilities with the resulting exchange differences that are created being recognised in the income statement.

A strengthening of the following currencies relative to sterling by 10% would have resulted in a net gain/(loss) before tax in the income statement as set out below which is made up of foreign exchange gains/(losses) less (losses)/gains on forward hedges.

	Year ended 31 December 2008 £m	Year ended 31 December 2007 £m
US dollars	39.5	24.0
Canadian dollars	6.7	8.2
Euros	5.1	7.1

b) Interest rate risk and price risk

The Group is exposed to interest rate and price risk on its investment portfolio. Interest rate risk is the risk that the value and future cash flows of a financial instrument will fluctuate because of changes in interest rates. Price risk is the risk that the value of investments decreases due to market factors.

In order to manage interest rate and price risk the Group uses Value at Risk (VaR) methodology with the objective of minimising the risk taken on the investment portfolio in targeting a desired return. This is performed by examining the asset allocation of the portfolio and modelling the portfolio's expected return and associated risk. Different asset combinations are then modelled to examine the effect of the changes on risk, determining which combination of changes is expected to minimise risk.

The model uses assumptions of risks, correlations and expected returns for each asset class. Interest rate risk, price risk and currency risk are all included in the model both independently and in their interaction with each other. Assumptions for future market returns, volatilities and correlations are provided by independent investment consultants.

The principal measure of risk produced by the model is one year VaR. One year VaR measures the minimum amount by which the assets should be expected to underperform the expected annual return of the portfolio with a one in twenty probability.

The model used by the Group estimates the VaR and the tracking error. The tracking error measures annual volatility as the standard deviation of the asset returns relative to the expected return. Whereas VaR expresses a 1 in 20 probability of the portfolio returns being reduced by at least that amount in one year, the tracking error is the expected deviation above or below the expected return.

  

	Year ended 31 December  2008	Year ended 31 December 2007
Value at Risk 95%	3.44%	3.99%
Tracking Error	2.17%	2.32%

As an illustration of the above information, if the expected return as at 31 December 2008 for the following year was 5.0%, then there would be a 1 in 20 probability that if the asset portfolio remained unaltered, the actual return for the following year would underperform the 5.0% expected return by at least 3.44% i.e. a 1.56% return or less.

The VaR at the end of the year is lower than at the beginning of the year despite increased market volatility. This is due to a lower proportion of the investment portfolio being in equities and specialised investment funds which have a higher risk loading.

The model is designed to illustrate the future range of returns stemming from different asset classes and their inter-relationship. The assumptions have incorporated a degree of subjective judgement to complement the information provided by historical returns and current conditions.

(iv) Capital risk management

The total amount of capital of the Group is £900.3m (2007: £915.7m) consisting of net tangible assets amounting to £767.6m (2007: £768.4m) and long-term subordinated debt amounting to £132.7m (2007: £147.3m).

The Group's Capital Committee is responsible for reviewing the capital structure on a regular basis such that the Group maximises the return to stakeholders through the optimisation of the debt and equity balance. The structure is either maintained or changed by the payment of dividends and the issue of new shares as well as the issue of new debt or the redemption of existing debt.

The most significant entities within the Group subject to externally imposed capital requirements are the registered insurance company, Brit Insurance Limited and the Lloyd's corporate member, Brit UW Limited, which provides the entire capacity of Syndicate 2987.

Brit Insurance Limited is regulated by the Financial Services Authority (FSA) which has provided the company with capital guidance based on the Enhanced Capital Requirements return (ECR). The ECR, which takes into account the premiums written and outstanding reserves on a class of business basis, seeks to ensure that the company has at least the minimum amount and type of capital to meet future expected claims obligations. The company holds capital in excess of the FSA requirement in order to maintain a strong 'A' credit rating.

The Lloyd's corporate member is required to hold capital at Lloyd's which is held in trust and known as Funds at Lloyd's (FAL). These funds are intended primarily to cover circumstances where syndicate assets prove insufficient to meet participating members' underwriting liabilities. FAL is determined by a risk based capital assessment based upon the syndicate's specific circumstances and results in an individual capital assessment (ICA).

The ICA is effectively a combination of a stochastic risk-based capital model and scenario testing developed by the Group which allows the Group's Capital Committee to identify an appropriate level of capital required. The ICA differs from the ECR in that it is specific to the actual reserving history, reinsurance programme and business profile of a particular entity rather than being based on company market averages.

The Group's capital committee reviews and approves all capital modelling submissions to both Lloyd's and the FSA.

All externally imposed capital requirements have been complied with during the year.

  

Insurance risk

(i) Introduction

The risk under any one insurance contract is the possibility that an insured event occurs and a claim results. By the very nature of an insurance contract, risk is based on fortuity and is therefore unpredictable.

The principal risks that the Group faces under its insurance contracts are that the business will be under-priced, under-reserved or subject to catastrophe claims.

Experience shows that the larger the portfolio of similar insurance contracts, the smaller the relative variability about the expected outcome will be. In addition, a more diversified portfolio is less likely to be affected across the board by a change in any subset of the portfolio. The Group has developed its insurance underwriting strategy to diversify the type of insurance risks accepted to achieve a sufficiently large population of risks to reduce the variability of the expected outcome.

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 as well as establishing more general principles and conditions. A proportion of the Group's insurance risks are written by third parties under delegated underwriting authorities. 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.

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.

The Group carries out an annual business planning process for each of its underwriting units. The resulting plans set out premium, territorial and aggregate limits for all classes of business. Performance against the plans is monitored on a regular basis through a system of underwriting committees as well as regularly by the Executive Management Committee and the Boards for the regulated entities.

(ii) Concentrations of risk

The concentration of insurance risk before and after reinsurance by the location of the underlying risk is summarised below:

Year ended 31 December 2008

	Gross written premium £m	Premium ceded to reinsurers £m	Net written premium £m
UK	403.5	(83.3)	320.2
Europe	100.9	(16.8)	84.1
US	348.5	(65.0)	283.5
Other (including worldwide)	541.7	(66.2)	475.5
	1,394.6	(231.3)	1,163.3

Year ended 31 December 2007

	Gross written premium £m	Premium ceded to reinsurers £m	Net written premium £m
UK	335.6	(48.6)	287.0
Europe	70.2	(9.1)	61.1
US	356.2	(47.0)	309.2
Other (including worldwide)	502.9	(40.8)	462.1
	1,264.9	(145.5)	1,119.4

The Group is organised into three Strategic Business Units, details of which are set out in Note 5.

(iii) Reinsurance

The Group purchases reinsurance to limit its exposure to individual risks and aggregation of risks arising from individual large claims and catastrophe events. The types of reinsurance purchased were as follows:

All of the Group's reinsurance purchasing is approved by the Portfolio Management Committee, a sub-committee of the Executive Management Committee. Decisions are supported by historical underwriting experience and actuarial analysis.

(iv) Aggregate exposure management

The Group's Realistic Disaster Scenario Committee monitors and controls the accumulation of risk for over thirty key Realistic Disaster Scenario (RDS) events. These RDSs reflect the diversity of the Group's exposures. There are specific scenarios for elemental, man-made and economic disasters, and for different business classes such as marine, aerospace, casualty and property. The RDSs are regularly reviewed in light of Group exposures and environmental factors.

The Group's RDS Committee reviews each scenario quarterly, with more frequent reviews of the peak zone natural peril catastrophe RDSs which present the greatest exposure to the Group.

Aggregate claims tolerance

The Group's tolerance for catastrophe risk is a function of expected profitability and available capital. This tolerance is expressed as the maximum net claims acceptable under a number of scenarios.

Exposure and compliance with the severity band matrix is formally reviewed on a quarterly basis, with informal reviews being conducted more frequently. The Board may decide to increase or decrease the maximum tolerances based on market conditions and other factors.

The tolerance for catastrophe risk is set using industry claims bandings. For example for US Windstorm, tolerance is set for seven separate industry claims bands increasing from a 'US$20bn-US$30bn' band to a 'US$200bn-US$350bn' band. The underlying frequency and severity of catastrophe events varies by peril and territory. For instance, a US$20bn US windstorm is expected to occur much more frequently than a US$20bn Japanese earthquake. Therefore, in terms of risk appetite and claims tolerance, it is not appropriate to treat these events equally.

The severity bands show the industry claims for each peril which are probabilistically equivalent. An example band is shown below.

US windstorm	US$70bn-US$100bn
California earthquake	US$30bn-US$40bn
European windstorm	US$10bn-US$15bn
Japanese earthquake	US$20bn-US$30bn
Japanese typhoon	US$10bn-US$15bn

The portfolio contains a mix of business and therefore given an industry event there will be a large range of possible aggregate claims to the Group. To capture this claim distribution whilst being able to measure compliance, the measure used is a weighted 75th percentile of the claim distribution within a particular band. Ultimately, the size of a probable maximum loss (PML) arising from an event or series of events will always remain judgemental for Brit Insurance and others in the industry.

The Group uses its own and commercially available proprietary risk management software. However, there is always a risk that the assumptions and techniques used in these models are unreliable or that claims arising from an unmodelled event are greater than those arising from a modelled event.

As a further guide to the level of catastrophe exposure written by the Group, the table below shows hypothetical claims as at 1 January 2009 for various RDSs.

Event	Modelled industry  claims	Brit Insurance gross  claims	Brit Insurance net claims	Comments
	US$m	£m	£m
Florida hurricane Tampa Bay	125,000	299	171	Category 4 storm on the SS Scale, landfalling in Tampa. Brit Insurance claims estimates include demand surge, flood associated with the hurricane, and non-property exposures.
Florida hurricane - Miami	125,000	257	129	Category 5 storm on the SS Scale, landfalling in Miami. Brit Insurance claims estimates include demand surge, flood associated with the hurricane, and non-property exposures.
US north east coast hurricane	78,000	263	151	Category 4 storm on the SS Scale, landfalling in Suffolk County, New York State. Brit Insurance claims estimates include demand surge, flood associated with the hurricane, and non-property exposures.
California earthquake - Los Angeles	78,000	290	115	Magnitude 7.2 earthquake on the MMI scale, on the Elsinore fault in Los Angeles. Brit Insurance claims estimates include demand surge, fire following the earthquake, and non-property exposures.
California earthquake -San Francisco	78,000	300	120	Magnitude 7.4 earthquake on the MMI scale, on the San Andreas Fault in San Francisco. Brit Insurance claims estimates include demand surge, fire following the earthquake, and non-property exposures.
Europe windstorm	31,000	244	99	A winter storm with peak gusts in excess of 112mph resulting in a broad swath of damage across southern England, France, Belgium, Netherlands, Luxembourg, Germany and Denmark. Brit Insurance claims estimates include demand surge and UK coastal flood.
Japan earthquake	51,000	196	101	Based on a repeat of the Great Kanto event in 1923, a magnitude 7.9 earthquake in the Tokyo Metropolitan Area.

Source: RMS/Lloyd's/Brit Insurance

The modelled claims reflect 31 December 2008 rates of exchange and the devaluation in Sterling during 2008.

  

(v) Sensitivity

The Group profit on ordinary activities before tax is sensitive to an independent 1% change in the net claims ratio for each class of business as follows:

Strategic business unit	Class	Year ended 31 December 2008 £m	Year ended 31 December 2007 £m
Global Markets	Accident & Health	1.5	1.3
	Aerospace	0.1	0.2
	Financial Risks	-	-
	International Legal & Professional	0.9	0.8
	North American Liability	0.6	0.5
	Financial & Professional	0.8	0.8
	Marine	1.4	1.5
	Property	1.0	1.2
		6.3	6.3
Reinsurance	Property Treaty NA	0.6	0.6
	Property Treaty INT	0.3	0.4
	Property Treaty	-	-
	Casualty Treaty	0.8	0.8
	Marine XL	0.1	0.1
	Aviation XL	0.2	0.2
	Reinsurance Other	-	-
		2.0	2.1
UK	Employers'/Public Liability	0.9	0.9
	Professional Indemnity/D&O	0.3	0.3
	Motor	0.6	0.8
	Property and Commercial Combined (Packages)	0.9	0.6
		2.7	2.6
Total		11.0	11.0

Subject to taxation, the impact on equity would be the same as that on profit following a change in the net claims ratio.

  

5 Segmental information

(i) Primary reporting format - business segments

As at 31 December 2008, the Group is organised into three Strategic Business Units offering varying products and serving different markets.

The three are Brit Global Markets, Brit Reinsurance and Brit UK.

The Global Markets Strategic Business Unit underwrites Brit's international and US business other than reinsurance. In the main, Global Markets deals with wholesale buyers of insurance, not individuals. Risks are large and usually syndicated by several underwriters - the subscription market.

The Brit Reinsurance Strategic Business Unit underwrites reinsurance business which is essentially the insurance of insurance and reinsurance companies and includes providing non-proportional cover for major events such as earthquakes or hurricanes. These insurance and reinsurance companies calculate how much risk they want to bear and pass on the remaining exposure to reinsurers in return for a premium.

The Brit UK Strategic Business Unit is developing business opportunities within the UK general commercial insurance markets through both wholesale and retail brokers and has opened offices in key locations across the UK.

'Other underwriting' is made up of Syndicate 389 (Life - final year of account 2003), and historic participations on external managed syndicates in run off (final year of account 2000).

In addition, the Rockhampton cell commenced trading on 1 January 2008 and became a new primary segment in 2008. Intra Group trading between Rockhampton cell and the three Strategic Business Units is on an arm's length basis.

Certain revenues and expenses are incurred relating to central functions which along with certain related assets and liabilities are retained at the corporate centre level.

'Other corporate' is made up of residual income and expenditure attaching to the corporate centre not allocated to other segments.

RI3K was discontinued as a segment with effect from 3 May 2007 when the Group reduced its holding and it became an associated undertaking.

The Group has changed the way in which investment return is allocated to the Strategic Business Units with effect from 1 January 2008. The Group investment return is managed centrally and an allocation is now made to each of the Strategic Business Units based on the average base interest rate for the period being applied to the insurance funds of each Unit.

This is the basis on which the Group reports its primary segment information.

  

a) Income statement by segment

Year ended 31 December 2008

 

	Brit Global Markets £m	Brit Reinsurance £m	Brit UK £m	Other underwriting £m	Rockhampton cell £m	Intra Group £m	Total  underwriting £m	Other corporate £m	Total £m
Gross premiums written	781.3	260.7	350.6	2.0	48.9	(48.9)	1,394.6	-	1,394.6
Less premiums ceded to reinsurers	(141.1)	(60.1)	(78.5)	(0.5)	-	48.9	(231.3)	-	(231.3)
Premiums written, net of reinsurance	640.2	200.6	272.1	1.5	48.9	-	1,163.3	-	1,163.3
Gross earned premiums	750.8	252.2	312.3	2.1	26.3	(26.3)	1,317.4	-	1,317.4
Reinsurers' share	(128.1)	(53.0)	(60.3)	(0.5)	-	26.3	(215.6)	-	(215.6)
Earned premiums, net of reinsurance	622.7	199.2	252.0	1.6	26.3	-	1,101.8	-	1,101.8
Foreign exchange gains and other income	-	-	-	-	1.0	-	1.0	124.1	125.1
Investment return	36.9	16.9	34.2	-	1.7	-	89.7	(82.3)	7.4
Return on derivative contracts	(3.5)	(3.5)	(0.4)	-	-	-	(7.4)	(11.7)	(19.1)
Disposal of subsidiary undertakings, asset held for sale and partial disposal of associated undertakings	-	-	-	-	-	-	-	4.5	4.5
Total revenue	656.1	212.6	285.8	1.6	29.0	-	1,185.1	34.6	1,219.7
Gross claims incurred	(529.1)	(144.2)	(211.7)	(1.1)	(29.5)	29.5	(886.1)	-	(886.1)
Reinsurers' share	130.7	12.8	44.6	(0.1)	-	(29.5)	158.5	-	158.5
Claims incurred, net of reinsurance	(398.4)	(131.4)	(167.1)	(1.2)	(29.5)	-	(727.6)	-	(727.6)
Acquisition costs - commission	(175.2)	(35.2)	(44.3)	(0.3)	(0.9)	-	(255.9)	-	(255.9)
Acquisition costs - other	(24.5)	(9.2)	(15.1)	-	(1.4)	-	(50.2)	-	(50.2)
Other insurance related expenses	(26.5)	(9.6)	(25.5)	-	-	-	(61.6)	-	(61.6)
Other expenses	-	-	-	-	-	-	-	(28.8)	(28.8)
Total expenses excluding finance costs	(624.6)	(185.4)	(252.0)	(1.5)	(31.8)	-	(1,095.3)	(28.8)	(1,124.1)
Operating profit	31.5	27.2	33.8	0.1	(2.8)	-	89.8	5.8	95.6
Finance costs									(13.1)
Finance income									7.2
Share of loss of associated undertakings									(0.5)
Profit on ordinary activities before tax									89.2
Tax expense									(22.6)
Profit attributable to owners of the parent									66.6

Claims ratio	64.0%	66.0%	66.3%		112.2%		66.0%
Expense ratio	36.3%	27.1%	33.7%		8.7%		33.4%
Combined ratio	100.3%	93.1%	100.0%		120.9%		99.4%

  

Year ended 31 December 2007

	Brit Global Markets £m	Brit Reinsurance £m	Brit UK £m	Other underwriting £m	Total  underwriting £m	RI3K £m	Other corporate £m	Total £m
Gross premiums written	749.2	239.4	274.0	2.3	1,264.9	-	-	1,264.9
Less premiums ceded to reinsurers	(74.8)	(41.9)	(28.3)	(0.5)	(145.5)	-	-	(145.5)
Premiums written, net of reinsurance	674.4	197.5	245.7	1.8	1,119.4	-	-	1,119.4
						-	-
Gross earned premiums	708.7	251.6	291.4	2.4	1,254.1	-	-	1,254.1
Reinsurers' share	(78.3)	(43.3)	(28.6)	(0.6)	(150.8)	-	-	(150.8)
Earned premiums, net of reinsurance	630.4	208.3	262.8	1.8	1,103.3	-	-	1,103.3
Foreign exchange gains and other income	-	-	-	-	-	0.5	20.9	21.4
Investment return	58.6	28.3	40.4	0.3	127.6	-	9.8	137.4
Return on derivative contracts	(2.7)	(2.7)	(0.3)	-	(5.7)	-	(4.0)	(9.7)
Disposal of subsidiary undertaking, asset held for sale and partial disposal of associated undertakings	-	-	-	-	-	-	7.1	7.1
Total revenue	686.3	233.9	302.9	2.1	1,225.2	0.5	33.8	1,259.5
Gross claims incurred	(425.4)	(129.7)	(230.8)	(0.4)	(786.3)	-	-	(786.3)
Reinsurers' share	82.6	12.3	30.3	0.2	125.4	-	-	125.4
Claims incurred, net of reinsurance	(342.8)	(117.4)	(200.5)	(0.2)	(660.9)	-	-	(660.9)
Acquisition costs - commission	(167.5)	(39.0)	(45.4)	(0.4)	(252.3)	-	-	(252.3)
Acquisition costs - other	(24.2)	(7.3)	(14.6)	-	(46.1)	-	-	(46.1)
Other insurance related expenses	(28.1)	(9.2)	(26.6)	-	(63.9)	-	-	(63.9)
Other expenses	-	-	-	-	-	(1.7)	(33.6)	(35.3)
Total expenses excluding finance costs	(562.6)	(172.9)	(287.1)	(0.6)	(1,023.2)	(1.7)	(33.6)	(1,058.5)
Operating profit	123.7	61.0	15.8	1.5	202.0	(1.2)	0.2	201.0
Finance costs								(12.7)
Share of profit of associated undertakings								2.9
Profit on ordinary activities before tax								191.2
Tax expense								(53.6)
Profit attributable to owners of the parent								137.6

Claims ratio	54.4%	56.4%	76.3%		59.9%
Expense ratio	34.9%	26.6%	33.0%		32.8%
Combined ratio	89.3%	83.0%	109.3%		92.7%

  

b) Statement of financial position by segment

As at 31 December 2008

	Brit Global Markets £m	Brit Reinsurance £m	Brit UK £m	Other underwriting £m	Rockhampton cell £m	Intra Group £m	Total  underwriting £m	Other corporate £m	Total £m
Reinsurance contracts	416.0	80.1	110.4	1.0	-	(57.9)	549.6	-	549.6
Intangible assets	8.9	3.3	58.1	-	-	-	70.3	11.8	82.1
Other assets	2,088.6	754.5	996.0	4.4	83.0	(21.3)	3,905.2	39.4	3,944.6
Total assets	2,513.5	837.9	1,164.5	5.4	83.0	(79.2)	4,525.1	51.2	4,576.3
Insurance contracts	1,818.1	656.4	866.4	3.8	57.9	(57.9)	3,344.7	-	3,344.7
Other liabilities	123.9	45.0	59.4	0.2	0.3	(21.3)	207.5	174.4	381.9
Total liabilities	1,942.0	701.4	925.8	4.0	58.2	(79.2)	3,552.2	174.4	3,726.6

As at 31 December 2007

	Brit Global Markets £m	Brit Reinsurance £m	Brit UK £m	Other Under-writing £m	Total Under-writing £m	RI3K £m	Other  corporate £m	Total £m
Reinsurance contracts	249.6	67.6	62.3	1.3	380.8	-		380.8
Intangible assets	9.0	3.3	56.6	-	68.9	-	11.6	80.5
Other assets	1,806.0	651.6	811.1	5.7	3,274.4	-	98.7	3,373.1
Total assets	2,064.6	722.5	930.0	7.0	3,724.1	-	110.3	3,834.4
Insurance contracts	1,432.0	525.2	661.4	4.4	2,623.0	-	-	2,623.0
Other liabilities	88.3	28.5	32.0	0.3	149.1	-	213.4	362.5
Total liabilities	1,520.3	553.7	693.4	4.7	2,772.1	-	213.4	2,985.5

c) Other information by segment

Year ended 31 December 2008

	Brit Global Markets £m	Brit Reinsurance £m	Brit UK £m	Other under- writing £m	Rockhampton cell £m	Intra Group £m	Total  under- writing £m	Other corporate £m	Total £m
Depreciation	1.3	0.5	1.3	-	-	-	3.1	-	3.1
Amortisation	1.7	0.6	1.6	-	-	-	3.9	-	3.9
Capital expenditure	2.7	1.3	3.6	-	-	-	7.6	-	7.6

Year ended 31 December 2007

	Brit Global Markets £m	Brit Reinsurance £m	Brit UK £m	Other under- writing £m	Total under-  writing £m	RI3K £m	Other  corporate £m	Total £m
Depreciation	1.3	0.4	1.3	-	3.0	-	-	3.0
Amortisation	2.0	0.7	1.9	-	4.6	-	-	4.6
Impairment	-	-	-	-	-	-	4.0	4.0
Capital expenditure	5.6	2.0	3.8	-	11.4	-	-	11.4

  

(ii) Secondary reporting format - geographical segments

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 insured.

This is the basis on which the Group reports its secondary segmental information.

	Year ended 31 December  2008 £m	Year ended 31 December  2007 £m
United Kingdom	403.5	335.6
Europe	100.9	70.2
United States	348.5	356.2
Other (including worldwide)	541.7	502.9
	1,394.6	1,264.9

Total assets

	31 December  2008 £m	31 December  2007 £m
United Kingdom	2,101.8	2,187.0
Europe	426.8	336.1
United States	1,896.2	1,169.0
Other (including worldwide)	151.5	142.3
	4,576.3	3,834.4

All capital expenditure during 2007 and 2008 has been made in the United Kingdom.

6 Foreign exchange gains and other income

	Year ended 31 December  2008 £m	Year ended 31 December  2007 £m
Foreign exchange gains	124.0	18.6
Electronic infrastructure design and development	-	0.5
Other fees and commissions	1.1	2.3
	125.1	21.4

Included within foreign exchange gains are exchange gains of £278.8m (2007: £9.9m) arising on the retranslation of monetary items that are classified as fair value through profit or loss.  

7 Investment return

	Year ended 31 December 2008				Year ended 31 December 2007
	Investment income £m	Net  realised gains/ (losses) £m	Net unrealised gains/ (losses) £m	Total  investment return £m	Investment income £m	Net  realised gains/ (losses) £m	Net unrealised gains/ (losses) £m	Total investment return £m
Equity securities	1.6	6.3	(44.6)	(36.7)	5.7	20.5	(15.3)	10.9
Debt securities	100.0	(12.3)	1.7	89.4	88.6	(1.3)	10.6	97.9
Specialised investment funds	2.4	(3.9)	(68.4)	(69.9)	0.5	2.8	2.1	5.4
Cash and cash equivalents	24.6	-	-	24.6	23.2	-	-	23.2
	128.6	(9.9)	(111.3)	7.4	118.0	22.0	(2.6)	137.4

8 Return on derivative contracts

	Year ended 31 December  2008 £m	Year ended 31 December 2007 £m
Currency forwards	(11.9)	(5.0)
Catastrophe swap contracts	(7.4)	(5.7)
Other	0.2	1.0
	(19.1)	(9.7)

9 Acquisition costs and other operating expenses

	Year ended 31 December 2008			Year ended 31 December 2007
	Acquisition costs £m	Other operating expenses £m	Total £m	Acquisition costs £m	Other operating expenses £m	Total £m
Staff costs	25.3	40.2	65.5	22.1	48.4	70.5
Other staff related costs	0.6	9.7	10.3	1.0	8.6	9.6
Accommodation costs	4.0	3.7	7.7	3.8	4.1	7.9
Legal and professional charges	3.1	5.6	8.7	1.9	5.3	7.2
Investment management expenses	-	4.2	4.2	-	3.2	3.2
IT costs	-	7.4	7.4	0.2	6.6	6.8
Travel and entertaining	2.4	0.7	3.1	2.0	0.8	2.8
Marketing and communications	0.1	3.0	3.1	-	3.0	3.0
Amortisation and impairment of intangible assets	-	3.9	3.9	-	8.6	8.6
Depreciation of property, plant and equipment	-	3.1	3.1	-	3.0	3.0
Regulatory levies and charges	16.4	-	16.4	16.9	-	16.9
Other	0.7	8.9	9.6	0.7	7.6	8.3
Movement on insurance related acquisition cost deferral	(2.4)	-	(2.4)	(2.5)	-	(2.5)
Expenses before commissions	50.2	90.4	140.6	46.1	99.2	145.3
Commission costs	255.9	-	255.9	252.3	-	252.3
Total expenses	306.1	90.4	396.5	298.4	99.2	397.6

10 Tax expense

(i) Tax charged to income statement

	Year ended 31 December 2008 £m	Year ended 31 December 2007 £m
Current tax:
For the year	(12.0)	(40.2)
Adjustments in respect of prior years	0.4	2.9
Total current tax	(11.6)	(37.3)
Deferred tax:
Origination and reversal of temporary differences	(13.9)	(15.3)
Adjustments in respect of prior years	2.9	(1.0)
Total deferred tax	(11.0)	(16.3)
Total tax charged to income statement	(22.6)	(53.6)

An amount of tax relating to the associated companies of £nil (2007: £0.1m) has been charged to the income statement within the Group's share of profit after tax of associated undertakings.

(ii) Tax relating to components of other comprehensive income

	Year ended 31 December  2008 £m	Year ended 31 December 2007 £m
Deferred tax on actuarial gains/(losses) on defined benefit pension scheme	2.9	(0.6)

(iii) Tax reconciliation

The tax on the Group's profits before tax differs from the theoretical amount that would arise from using the current standard rate for corporation tax applicable in the UK of 28.5% (2007: 30%) as follows:

	Year ended 31 December  2008 £m	Year ended 31 December  2007 £m
Profit on ordinary activities before tax	89.2	191.2
Tax calculated at standard rate for corporation tax	(25.4)	(57.4)
Expenses not deductible for tax purposes	(1.6)	(0.9)
Equity dividends not subject to corporation tax	0.6	0.7
Profit on sale and unrealised gain on substantial shareholdings	3.8	2.1
Overseas tax not recoverable	(0.1)	(1.3)
Effect of future tax rate changes	0.6	1.1
Deferred tax in respect of associated undertakings	-	(0.6)
Deferred tax asset written off in respect of realised and unrealised capital losses	(3.8)	-
Tax effect of share of results of associated undertakings	(0.1)	0.9
Other adjustments to tax charge in respect of prior years	3.4	1.8
	(22.6)	(53.6)

  

11  Earnings per share

The calculations of the basic and diluted earnings per share are based on the following figures:

	Year ended 31 December  2008 £m	Year ended 31 December  2007 £m
Profit on ordinary activities after tax	66.6	137.6
	Year ended	Year ended
	31 December 2008	31 December 2007
	Number	Number
Basic weighted average number of shares	309,415,097	318,174,520
Employee share options	-	770,328
Diluted weighted average number of shares	309,415,097	318,944,848
Basic earnings per share (pence per share)	21.52	43.24
Diluted earnings per share (pence per share)	21.52	43.13

12 Insurance and reinsurance contracts

(i) Balances on insurance and reinsurance contracts

	31 December 2008 £m	31 December 2007 £m
Gross
Insurance contracts
Claims reported and loss adjustment expenses	1,439.2	1,076.2
Claims incurred but not reported	1,218.5	937.0
	2,657.7	2,013.2
Unearned premiums	687.0	609.8
Total insurance contracts	3,344.7	2,623.0
Recoverable from reinsurers
Reinsurance contracts
Claims reported and loss adjustment expenses	274.9	207.4
Claims incurred but not reported	219.8	129.9
Impairment provision	(15.5)	(11.2)
	479.2	326.1
Unearned premiums	70.4	54.7
Total reinsurance contracts	549.6	380.8
Net
Claims reported and loss adjustment expenses	1,164.3	868.8
Claims incurred but not reported	998.7	807.1
Impairment provision	15.5	11.2
	2,178.5	1,687.1
Unearned premiums	616.6	555.1
Net insurance and reinsurance contracts	2,795.1	2,242.2

Insurance contracts - assumptions and changes in assumptions

Process used to decide on assumptions required

The risks associated with these insurance contracts and in particular with casualty insurance contracts are complex and subject to a number of variables that complicate quantitative sensitivity analysis.

The Group uses several statistical methods to incorporate the various assumptions made in order to estimate the ultimate costs of claims. The two methods more commonly used are the chain-ladder and the Bornhuetter-Ferguson methods.

Chain-ladder methods may be applied to premiums, paid claims or incurred claims (i.e., paid claims plus case estimates). The basic technique involves the analysis of historical claims development factors and the selection of estimated development factors based on this historical pattern. The selected development factors are then applied to cumulative claims data for each accident year that is not yet fully developed to produce an estimated ultimate claims cost for each accident 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.

The Bornhuetter-Ferguson method uses a combination of a benchmark or market-based estimate and an estimate based on claims experience. The former is based on a measure of exposure such as premiums; the latter is based on the paid or incurred claims to date. The two estimates are combined using a formula that gives more weight to the experience-based estimate as time passes. This technique is used in situations in which developed claims experience are not available for the projection (recent accident years or new classes of business).

The choice of selected results for each year of each class of business depends on an assessment of the technique that has been most appropriate to observed historical developments. In certain instances, this has meant that different techniques or combination of techniques have been selected for the individual accident year or groups of accident years within the same class of business.

Claims for a number of classes of business, including Financial Risk, Mortgage Indemnity Guarantee, Catastrophe Retrocession and Casualty Treaty, do not always conform to the statistical distribution expected. For these classes claims reserves are additionally reviewed on a policy by policy basis by Underwriters and Claims Managers and these reviews take account of market intelligence in addition to notified claims.

In addition to the estimation of claims reserves certain estimates are produced for unearned premiums. All inwards premiums are deemed to earn out 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. 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 expensed 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 tables show the cumulative incurred claims, including both notified and IBNR claims, for each successive accident year at the end of each year, together with cumulative claims as 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 Brit Insurance percentage ownership of each syndicates' capacity during the respective accident years.

In addition, claims in currencies other than Sterling have been retranslated at 31 December 2008 exchange rates.

Ultimate gross claims

Accident year	2001  & prior years £m	2002 £m	2003 £m	2004 £m	2005 £m	2006 £m	2007 £m	2008 £m	Total £m
At end of accident year	2,185.7	302.5	512.5	825.9	1,405.3	771.3	1,011.4	1,077.8
One year later	2,230.6	303.7	478.8	769.3	1,460.7	801.5	1,070.6
Two years later	2,255.1	299.1	444.2	745.0	1,459.8	772.9
Three years later	2,258.0	302.8	425.0	736.0	1,424.8
Four years later	2,255.9	296.2	394.1	710.6
Five years later	2,232.3	285.7	393.9
Six years later	2,221.4	284.2
Seven years later	2,210.3
Estimate of cumulative claims	2,210.3	284.2	393.9	710.6	1,424.8	772.9	1,070.6	1,077.8	7,945.1
Cumulative paid claims									(5,287.0)
Less third party participations on syndicates									(0.4)
Gross liability as per the statement of financial position (Note 12(i))									2,657.7

Ultimate net claims

Accident year	2001 & prior years £m	2002 £m	2003 £m	2004 £m	2005 £m	2006 £m	2007 £m	2008 £m	Total £m
At end of accident year	1,476.9	230.2	453.2	684.8	968.0	683.5	876.9	932.8
One year later	1,530.3	231.1	414.0	608.5	992.3	711.7	921.6
Two years later	1,546.1	227.5	366.8	592.6	989.0	671.2
Three years later	1,534.8	222.7	353.9	574.8	961.3
Four years later	1,537.5	218.4	321.1	546.8
Five years later	1,528.2	204.1	316.4
Six years later	1,516.0	198.9
Seven years later	1,498.3
Estimate of cumulative claims	1,498.3	198.9	316.4	546.8	961.3	671.2	921.6	932.8	6,047.3
Cumulative paid claims									(3,868.5)
Less third party participations on syndicates									(0.3)
Net liability as per the statement of financial position (Note 12(i))									2,178.5

 

Material Surpluses Released

The net aggregate reserve releases from prior years amounted to £79.1m (2007: £58.7m). In part this arises from the Group's reserving philosophy which aims to make the most recent years, with the greatest uncertainty of result, prudently reserved leaving a potential for subsequent release.

Releases have been made in the Brit Global Markets SBU of £22.0m (2007: £29.5m), Brit Reinsurance SBU of £20.1m (2007: £4.2m), Brit UK SBU of £38.6m (2007: £25.2m) with a strengthening in Other Underwriting of £1.6m (2007: £0.2m).

(ii) Movements in insurance and reinsurance contracts

a) Claims and loss adjustment expenses

	Year ended 31 December 2008				Year ended 31 December 2007
	Gross £m	Reinsurance £m	Net £m	Gross £m		Reinsurance £m	Net £m
As at 1 January	2,013.2	(326.1)	1,687.1	1,801.1		(314.1)	1,487.0
Cash paid for claims settled in the year	(694.3)	90.0	(604.3)	(584.8)		112.9	(471.9)
Increase in liabilities	886.1	(158.5)	727.6	786.3		(125.4)	660.9
Net foreign exchange differences	452.7	(84.6)	368.1	10.6		0.5	11.1
As at 31 December	2,657.7	(479.2)	2,178.5	2,013.2		(326.1)	1,687.1

b) Unearned premiums

	Year ended 31 December 2008			Year ended 31 December 2007
	Gross £m	Reinsurance £m	Net £m	Gross £m	Reinsurance £m	Net £m
As at 1 January	609.8	(54.7)	555.1	599.0	(60.0)	539.0
Premiums written in the year	1,394.6	(231.3)	1,163.3	1,264.9	(145.5)	1,119.4
Premiums earned during the year	(1,317.4)	215.6	(1,101.8)	(1,254.1)	150.8	(1,103.3)
As at 31 December	687.0	(70.4)	616.6	609.8	(54.7)	555.1

13 Financial investments 

	31 December 2008 £m	31 December 2007 £m
Equity securities :
Listed	116.0	217.7
Unlisted	1.4	1.0
	117.4	218.7
Debt securities :
Listed	1,537.5	1,102.3
Unlisted	2.9	2.8
Certificates of deposit	622.1	388.5
	2,162.5	1,493.6
Specialised investment funds	113.1	281.0
	2,393.0	1,993.3

All financial investments have been designated as held at fair value through the profit or loss.

As at 31 December 2008, £98.3m of the financial investments were either unquoted, monthly priced or valued using a model.

14 Derivative contracts

	31 December 2008 £m	31 December 2007 £m
Derivative contract assets
Currency forwards	-	1.8
Other	1.4	-
	1.4	1.8

	31 December 2008 £m	31 December 2007 £m
Derivative contract liabilities
Currency forwards	3.1	1.9
Catastrophe swap contracts	2.3	-
	5.4	1.9

15 Insurance and other receivables

	31 December 2008 £m	31 December 2007 £m
Arising out of direct insurance operations	288.2	250.9
Arising out of reinsurance operations	170.5	170.9
Prepayments	4.7	2.7
Accrued income	50.3	35.0
Other debtors	4.7	8.0
	518.4	467.5

The carrying amounts disclosed above reasonably approximate fair values.

All amounts are due within one year of the date of the statement of financial position.

16  Cash and cash equivalents

	31 December 2008 £m	31 December 2007 £m
Cash at bank and on deposit	840.1	460.3
Cash equivalents	0.6	275.0
	840.7	735.3

The carrying amounts disclosed above reasonably approximate fair values.

Included in cash and cash equivalents are amounts totalling £418.2m (2007: £250.4m) not available for use by the Group which are held within the Lloyd's syndicates and as Funds at Lloyd's.

In addition, there are amounts totalling £10.0m (2007: £27.1m) which have been deposited in a separate bank account so as to guarantee payment of the interest and capital payable to the holders of the outstanding US dollar floating rate unsecured subordinated loan notes 2034 in the period up to and including 15 August 2009.

17 Employee benefits

The Group has the following pension schemes in operation:

(i) Brit Group Services Limited - defined benefit pension scheme

The Group operates a funded pension plan providing benefits for its employees based on final pensionable salaries.

The assets of the scheme are held in a separate trustee administered fund. This scheme closed to new entrants on 4th October 2001.

The scheme is subject to a formal actuarial valuation every three years and the results of the valuation carried out as at 31 July 2006 were updated to the accounting date by an independent qualified actuary in accordance with International Accounting Standard 19 'Employee Benefits' (IAS 19). As required by IAS 19, the value of the defined benefit obligations and current service cost have been measured using the projected unit credit method.

The following table sets out the key IAS 19 assumptions used for the scheme.

	31 December 2008 %	31 December 2007 %	31 December 2006 %
Retail price inflation	2.90	3.30	2.90
Discount rate	6.40	5.80	5.20
Pension increases in payment	2.90	3.20	2.90
General salary increases	4.90	5.30	4.90

Life expectancy of a pensioner aged 60 at the date of the statement of financial position

Male	26.8 years	26.8 years	24.7 years
Female	29.2 years	29.2 years	27.6 years

Life expectancy of a member retiring at age 60 in 20 years' time 

Male	28.1 years	28.0 years	25.9 years
Female	30.3 years	30.2 years	28.7 years

The expected rate of return on assets has been derived by taking the weighted average of the long-term expected rate of return on each of the asset classes at the start of each year.

  

The expected returns for individual asset classes at the start of each year were as follows:

	31 December 2008 %	31 December 2007 %	31 December 2006 %
Equities	7.60	7.50	7.30
Corporate Bonds	5.00	4.80	4.40
Gilts	4.20	4.10	4.00
Cash	4.40	4.30	4.00
Weighted average expected return	6.60	6.60	6.40

The amount included in the statement of financial position arising from the Group's obligations in respect of the scheme is as follows:

	31 December 2008 £m	31 December 2007 £m	31 December 2006 £m
Present value of defined benefit obligations	84.1	93.5	89.7
Fair value of scheme assets	(82.7)	(88.4)	(77.3)
Net pension benefit obligations	1.4	5.1	12.4

The amounts recognised in the income statement were as follows:

	31 December 2008 £m	31 December 2007 £m
Current service cost	1.6	1.9
Interest cost	5.4	4.6
Expected return on scheme assets	(6.0)	(5.0)
Total expense recognised in the income statement	1.0	1.5

The above charges have been recognised in the acquisition costs and other operating expenses lines of the income statement.

The actual return on the scheme's assets over the year was a loss of £16.3m (2007: gain of £7.7m).

The allocation of the scheme's assets was as follows:

	31 December 2008 Allocation	Fair value	31 December 2007 Allocation	Fair value	31 December 2006 Allocation	Fair value
	%	£m	%	£m	%	£m
Equity instruments	57	46.8	68	59.8	70	54.0
Debt instruments	27	22.6	31	27.6	29	22.8
Other	16	13.3	1	1.0	1	0.5
	100	82.7	100	88.4	100	77.3

  

A reconciliation of the present value of the defined benefit obligation is as follows:

	31 December 2008 £m	31 December 2007 £m
Opening defined benefit obligations	93.5	89.7
Current service cost	1.6	1.9
Interest cost	5.4	4.6
Actuarial (gains)/losses	(12.2)	0.8
Benefits paid	(4.2)	(3.5)
Closing defined benefit obligations	84.1	93.5

A reconciliation of the fair value of the scheme assets is as follows:

	31 December 2008 £m	31 December 2007 £m
Opening fair value of scheme assets	88.4	77.3
Expected return on scheme assets	6.0	5.0
Difference between expected and actual return on scheme assets	(22.3)	2.7
Contributions by the employer	14.8	6.9
Benefits paid	(4.2)	(3.5)
Closing fair value of scheme assets	82.7	88.4

During 2008 the group has paid regular contributions of 33.7% of eligible salaries totalling £1.5m.

In addition during the year, the Group made lump sum contributions totalling £13.3m

During 2009 the Group expects to continue to pay similar regular contributions.

A summary of the scheme's experience was as follows:

	31 December 2008 £m	31 December 2007 £m	31 December 2006 £m	31 December 2005 £m	31 December 2004 £m
Defined benefit obligation	(84.1)	(93.5)	(89.7)	(95.0)	(79.2)
Scheme assets	82.7	88.4	77.3	72.2	60.7
Deficit	(1.4)	(5.1)	(12.4)	(22.8)	(18.5)

The recent history of experience gains and losses is as follows:

	31 December 2008 £m	31 December 2007 £m	31 December 2006 £m	31 December 2005 £m
Difference between expected and actual return on scheme assets:
Amount - (loss)/gain	(22.3)	2.7	(0.3)	8.0
Percentage of scheme assets	(27%)	3%	0%	11%
Experience gains and losses on obligations:
Amount - (loss)/gain	(0.6)	(0.7)	4.1	(0.7)
Percentage of the present value of the obligations	(1%)	(1%)	5%	(1%)
Total amount recognised outside income statement:
Actuarial (losses)/gains on defined benefit pension scheme	(10.1)	1.9	8.8	(3.9)
Percentage of the present value of the obligations	(12%)	2%	10%	(4%)

The cumulative amount recognised in the Consolidated Statement of Comprehensive Income since 1 January 2004 is a loss of £6.1m (2007: gain of £4.0m).

(ii) Brit Group Services Limited - Defined Contribution Group Personal Pension Plan

From 5 October 2001, Brit Group Services Limited has operated a defined contribution group personal pension plan. The assets of the scheme are held separately from those of the Group in an independently administered fund. 

The pension cost charge represents contributions payable by Brit Group Services Limited to the fund and amounted to £6.7m (2007: £5.0m).

At 31 December 2008 no contributions were payable to the fund (2007: £nil).

(iii) Brit Insurance Limited - Defined Contribution Scheme

For Brit Insurance Limited employees, the Group operates a defined contribution pension scheme. The assets of the scheme are held separately from those of the Group in an independently administered fund.

The pension cost charge represents contributions payable by Brit Insurance Limited to the fund and amounted to £0.1m (2007: £0.1m).

At 31 December 2008, no contributions were payable to the fund (2007: £nil).

18  Deferred taxation

The movement in deferred tax assets and liabilities during the year, taking into consideration the offsetting of balances within the same tax jurisdiction is as follows:

	Unrealised (profits)/ losses on investments £m	Pensions £m	Foreign exchange (profits)/ losses on non-monetary items £m	Trading losses carried forward £m	Declared underwriting results £m	Other £m	Total £m
As at 1 January 2007	(5.8)	3.7	2.6	-	(5.0)	0.1	(4.4)
Movements in the year:
Credited/(charged) to income statement in respect of current year	2.2	(1.6)	(3.6)	-	(14.6)	1.2	(16.4)
Deferred tax assets previously unrecognised	0.2	(0.1)	-	-	0.9	-	1.0
Other adjustments in respect of prior years	0.1	-	-	-	(0.2)	(0.9)	(1.0)
Credited/(charged) to income statement (Note 9)	2.5	(1.7)	(3.6)	-	(13.9)	0.3	(16.4)
Tax relating to components of other comprehensive income (Note 10)	-	(0.6)	-	-	-	-	(0.6)
At 31 December 2007	(3.3)	1.4	(1.0)	-	(18.9)	0.4	(21.4)

As at 1 January 2008	(3.3)	1.4	(1.0)	-	(18.9)	0.4	(21.4)
Movements in the year:
Credited/(charged) to income statement in respect of current year	4.7	(3.9)	(0.3)	(0.6)	(14.4)	0.1	(14.4)
Effect of proposed change in tax rate	-	-	-	-	0.5	-	0.5
Other adjustments in respect of prior years	(1.4)	-	-	0.6	2.1	1.6	2.9
Credited/(charged) to income statement (Note 9)	3.3	(3.9)	(0.3)	-	(11.8)	1.7	(11.0)
Tax relating to components of other comprehensive income (Note 10)	-	2.9	-	-	-	-	2.9
At 31 December 2008	-	0.4	(1.3)	-	(30.7)	2.1	(29.5)

Deferred tax assets are recognised for temporary differences to the extent that the realisation of the related tax benefit through the future taxable profits is probable.

  

19 Insurance and other payables

	31 December 2008 £m	31 December 2007 £m
Arising out of direct insurance operations	30.4	34.5
Arising out of reinsurance operations	135.8	63.0
Other taxes and social security costs	1.7	1.6
Shares held by third parties - Elite EEA Investment Portfolio	10.4	21.4
Accruals and deferred income	20.5	23.5
Other creditors	3.3	3.2
	202.1	147.2

The carrying amounts disclosed above reasonably approximate fair values.

All amounts are payable within one year of the date of the statement of financial position.

20 Equity dividends

Dividend paid	Amount (pence per ordinary share)	31 December 2008 £m	31 December 2007 £m
Final 2006	7.5	-	24.5
Special 2006	2.0	-	6.5
Interim 2007	7.5	-	23.5
Final 2007	7.5	23.3	-
Special 2007	7.0	21.7	-
Interim 2008	7.5	23.2	-
		68.2	54.5

As at 31 December 2008 the Company had distributable reserves of £255.7m (2007: £154.0m).

The Directors recommend a final dividend of 7.5p per ordinary share for the year ended 31 December 2008. These dividends will be paid on 15 May 2009 to shareholders on the register on 27 March 2009. Based on the number of shares in issue as at 8 March 2009, but excluding treasury shares and those owned by the Group's Employee Share Participation Trust which has waived its entitlement to dividends, this would amount to £23.2m.

21 Share capital

	31 December 2008 £m	31 December 2007 £m	31 December 2008 Number in millions	31 December 2007 Number in millions
Authorised:
Ordinary shares of 75p each	350.0	350.0	466.7	466.7
Allotted, issued and fully paid:
Ordinary shares of 75p each	247.3	247.3	329.8	329.8

  

	31 December 2008 Number	31 December 2007 Number
Number of ordinary shares of 75p each,
allotted, issued and fully paid:
Opening balance	329,780,093	328,142,566
Exercised share options	4,350	1,637,527
Closing balance	329,784,443	329,780,093

As at 31 December 2008 there were 7,305,094 shares (2007: 7,309,444) reserved for issue under options.

22 Cash flows provided by operating activities

	Year ended 31 December  2008 £m	Year ended 31 December 2007 £m (restated)
Profit on ordinary activities before tax	89.2	191.2
Adjustments for non-cash movements:
Realised and unrealised losses/(gains) on investments	121.2	(19.4)
Realised and unrealised losses on derivatives	19.1	9.7
Loss on sale of property, plant and equipment	0.8	0.5
Amortisation of software	3.9	4.6
Impairment of software	-	4.0
Depreciation of property, plant and equipment	3.1	3.0
Foreign exchange losses/(gains) on financing items	2.9	(0.1)
Foreign exchange gains on cash and cash equivalents	(90.4)	(5.0)
Share of loss/(profit) after tax of associated undertakings	0.5	(2.9)
Charges in respect of employee share schemes	5.2	3.7
Cash contributions in excess of charges in respect of defined benefit pension scheme	(13.8)	(5.3)
Interest income	(124.6)	(112.3)
Dividend income	(4.0)	(5.7)
Finance costs on borrowing	13.1	12.7
Finance income	(7.2)	-
Profit on disposal of subsidiary undertaking	-	(2.3)
Profit on disposal of asset held for sale	-	(2.9)
Profit on disposal and partial disposal of associated undertakings	(4.5)	(1.9)
Changes in working capital:
Deferred acquisition costs	(19.9)	(10.0)
Insurance and other receivables excluding accrued income	(35.6)	75.9
Insurance and reinsurance contracts	552.9	216.2
Financial investments	(515.7)	108.1
Derivative contracts	(14.6)	(9.6)
Insurance and other payables	54.9	(84.4)
Working capital disposed of in sale of subsidiary undertaking	-	0.4
Cash flows provided by operating activities	36.5	368.2

  

23 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 2007 or 2008, but is derived from those accounts. Statutory accounts for 2007 have been delivered to the Registrar of Companies and those for 2008 will be delivered by no later than 30 April 2009. The auditor has reported on those accounts in accordance with Section 235 of the Companies Act 1985; their reports were unqualified and did not contain statements under Section 237(2) or (3). 

The audited Annual Report and Accounts for 2008 are expected to be posted to shareholders by no later than 8 April 2009. Copies of the Report may be obtained from that date by writing to the Company Secretary, Brit Insurance Holdings PLC, 55 Bishopsgate, London, EC2N 3AS. The Annual General Meeting of the Company will be held at the same address at 2.30pm on Tuesday 12 May 2009.

The Preliminary Results were approved by the Board on 8 March 2009.

  

GLOSSARY

A
Aggregate exposure	The maximum total of claims that can be incurred by an insurer in respect of any event or series of similar events. It is usually related to a particular risk type, class of business and/or geographical area. Also see 'realistic disaster scenario'.
Asset allocation	The process of dividing our investments among different kinds of assets, such as stocks, bonds, property and cash, in order to achieve a balance between return and risk.
B
Bordereaux	A detailed list of financial information (eg premiums or claims) prepared by cedants or coverholders for periodic submission to underwriters to advise them of risks covered and claims incurred.
C
Capacity	The maximum premium income which an insurer is permitted to underwrite. For a Lloyd's syndicate, a capacity figure is assigned to each underwriting year and is defined as gross written premiums less commissions payable.
Cell	See 'Protected cell company'
Casualty	A class of insurance, mainly comprising accident and liability business.
Claims	Demand by an insured for indemnity under an insurance contract.
Claims development triangles	Tabulations of claims development data. This data is set out with underwriting years along one axis and years of development (eg calendar year end dates) along the other.
Claims incurred	Claims that have occurred, regardless of whether or not they have been reported to the insurer.
Claims ratio	Ratio, in percent, of net claims incurred to net earned premiums
Combined ratio	Ratio, in percent, of net claims incurred, acquisition costs plus insurance related administrative expenses to net earned premiums. Also the sum of the claims ratio and the expense ratio.
Coverholder	See 'Delegated authority'.
D
Deferred acquisition costs (DAC)	Costs incurred for the acquisition or renewal of insurance policies (eg brokerage and underwriter related costs) which are capitalised and amortised over the term of those policies.
Delegated 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 deals with premium collection, the issue of certificates and the servicing of claims, and 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 the period.
Earnings per share (EPS)	Basic: Ratio, in pence, calculated by dividing the consolidated profit after tax by the weighted average number of ordinary shares issued, excluding shares owned by the Group.  Diluted: For calculating diluted earnings per share the number of shares and profit or loss for the year is adjusted for all dilutive potential ordinary shares such as share options granted to employees.
Expense ratio	Acquisition costs plus insurance related administrative expenses divided by net earned premiums
G
Gearing ratio	Ratio, in percent, of total borrowings to total capital resources.
Gross written premium (GWP)	Amounts payable by the insured, including any brokerage or commission deducted by intermediaries but excluding any taxes or duties levied on the premium.
Gross written premium represented by catastrophe exposed premium	Percentage of Group calendar year GWP with potential exposure to catastrophic events.
H
Hard market	An insurance market where prevalent prices are high, with more restrictive terms and conditions offered by insurers.
I
IFRS	International Financial Reporting Standards - Standards formulated by the International Accounting Standards Board (IASB). UK listed entities have reported on an IFRS basis since 2005.
Incurred but not reported (IBNR)	Anticipated or likely claims that may result from an insured event although no claims have been reported so far.
Investment return	Investment return is calculated using the 'Dietz' method. This method calculates a return percentage for the average funds invested over a month. It assumes that all net contributions take place in the middle of the period. The annual return is calculated by geometrically adding the monthly returns figures.
L
Lead underwriter / 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 and quote an appropriate rate of premium.
LIBOR	London Interbank Offered Rate - An interest rate at which banks can borrow funds, in marketable size, from other banks in the London interbank market.
Line size	The proportion of an insurance or reinsurance risk that is accepted by an underwriter or which an underwriter is willing to accept.
Long tail	The difference between the average claim payment and the average premium payment term. Long tail is over three years.
Long-term subordinated debt	Subordinated borrowings which have at least five years remaining to maturity or call and are of types which qualify as regulatory capital.

M
Medium tail	The difference between the average claim payment and the average premium payment term. Medium tail is 1.5 to three years.
MMI scale	The Modified Mercalli Intensity (MMI) scale measures the shaking severity generated by an earthquake. The scale ranges from 'I' (not felt) to 'XII' (damage nearly total).
Monoline insurers	An insurer who has exposure to only one line of business.
N
Net tangible assets per share	Shareholder funds less intangible assets divided by the number of shares in issue at the balance sheet date less own shares.
Net written premiums	Gross premiums written less outwards reinsurance premiums.
O
Outstanding claims	Claims which have been notified at the balance sheet date but not settled.
P
Protected cell company (PCC)	A company that has been separated into legally distinct portions or cells. The revenue streams, assets and liabilities of each cell are kept separate from all other cells. Each cell has its own separate portion of the PCC's overall share capital, allowing shareholders to maintain sole ownership of an entire cell while owning only a small proportion of the PCC as a whole. PCCs can provide a means of entry into captive insurance markets to entities for which it was previously uneconomic.
R
Rating model	A formal, structured tool to assist an underwriter in setting a price for a risk.
Realistic disaster scenario (RDS)	A stress test for underwriting entities to show how they withstand accumulated exposure. Levels of claims are assessed in respect of a number of hypothetical disaster scenarios, using consistent and appropriate methods and assumptions. Also see 'aggregate exposure'.
Reserves	Outstanding claims and claims incurred but not reported (IBNR).
Retention ratio	Ratio, in percent, of the value of premiums written in one year renewed in the following year.

Retrocession/retrocessional	Reinsurance of the reinsurance account.
Return on equity (RoE)	Profit after tax achieved by the Group adjusted for movements charged to the income statement in respect of intangible assets, divided by opening net tangible assets adjusted on a weighted average basis for share issues or buy-backs during the period.

S
Short tail	The difference between the average claim payment and the average premium payment term. Short tail is under 1.5 years.
Soft market	An insurance market where prevalent prices are low, and terms and conditions offered by insurers are less restrictive.
Solvency II	Initiative launched by the European Commission to revise current EU insurance solvency rules. Solvency II focuses on capital requirements, risk modelling, prudential rules, supervisory control, market discipline and disclosure and is currently forecast to apply from 2012.
Specialised investment funds	Investments in assets with low correlation to interest rate and equity price movements.
SS scale	The Saffir-Simpson (SS) scale is used to classify hurricanes from category 1 (wind speed 74 to 95 mph) to category 5 (wind speed 156+ mph). The SS scale evaluates winds and storm surge generated by the hurricane over open water pre-landfall.
Strategic Business Unit (SBU)	Underwriting division of Brit Insurance. Brit Insurance underwrites through three SBUs: Brit Global Markets, Brit Reinsurance and Brit UK.
T
Tail	See 'short tail', 'medium 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.
Total capital resources	Net tangible assets plus long-term subordinated debt.
Total invested assets	The sum of 'financial investments', 'assets held for sale' and 'cash and cash equivalents'.
U
Ultimate loss ratio (ULR)	The ratio of the sum of paid claims, outstanding claims and IBNR to premiums, all of which can be expressed either gross or net of reinsurance recoveries and reinsurance premiums.
Underlying premium growth	Increase in Gross Written Premium between two calendar years where the earlier year is restated using the exchange rates applicable to the latter year.
Underwriting profit	Profit before tax arising from each SBU less investment return.
Unearned premium reserve (UPR)	The portion of premium income written in the calendar year that is attributable to periods after the balance sheet date. It is accounted for as unearned premiums in the underwriting provisions.

ENDFR ZGGGFFRLGLZZ