• The creation of an environment in which talented individuals with entrepreneurial spirit can build successful businesses.
We have also entered into a number of relationships with other insurers to embed, through reinsurance, our data breach product in the cover they can offer to their clients.
One of the attractions of the healthcare market, particularly in the US, is the high relevance of a wide range of Beazley products, both from the specialty lines division and further afield. Beazley underwrites medical malpractice, errors & omissions, directors’ & officers’ insurance, employment practices liability and environmental impairment liability for healthcare providers of many kinds. In addition, we have developed a highly innovative regulatory liability product for hospitals held responsible for incorrectly billing US federal healthcare programmes such as Medicare and Medicaid – a constant challenge given the massive complexity of the billing regulations. We have also been able to introduce underwriters from other Beazley divisions to our healthcare clients, including underwriters of commercial property and terrorism risks.
An early area of focus, as had been the case in 1986, was professional indemnity for architects and engineers. However, this time it was far smaller firms that were targeted than had been originally sought out from London.
$1.98bn Lloyd’s market loss as direct result of September 11, 2001 attacks
The most destructive hurricane in US history, Hurricane Andrew, passes through the Bahamas and southern USA in August 1992.
In October 1987, hurricane-force winds sweep across southern England and northern France, killing at least 22 people and leaving a path of destruction in their wake.
Annual report 2016 Beazley 13www.beazley.com 5.5m The number of new devices, including household appliances, that came on line each day in 2016
The calm after the storms Recent years have proved generally profitable for insurers, with relatively subdued claims experience and a steady recovery of the US economy. Investment returns have however been low, benefiting insurers with deep underwriting expertise and the ability to generate strong underwriting returns. Beazley targets a combined ratio of 90% or lower and has achieved this in four consecutive years. In 2011, the worst year on record for insured natural catastrophes, the company’s combined ratio was 99% compared to a combined ratio of 106.8% for the Lloyd’s market as a whole.
The great recession The US financial crisis in 2008 and the global economic slowdown that followed it posed challenges for insurers, with scant growth opportunities and heavy claims in recessionexposed classes of business such as employment practice liability. Beazley adjusted its portfolio accordingly and traded profitably through the downturn.
Beazley has weathered multiple underwriting cycles in three decades and, at this juncture, our focus is on maintaining underwriting discipline across the business classes that have seen rates continue to fall. We have accordingly further trimmed our exposures to energy risks, large scale commercial property, and reinsurance.
At year end we had 495 full time employees in the US, including 138 underwriters, representing five of our six divisions (the exception being marine). We have good geographic coverage through 11 offices, including six ‘hub offices’ – New York, Chicago, San Francisco, Los Angeles, Atlanta and Dallas – where multiple underwriting teams are located. In major product markets, such as non-standard commercial property risks underwritten on a surplus lines basis or environmental liability business, we have ample room to grow. Our specialty lines underwriters have successfully targeted major growth industries such as technology and healthcare, offering clients – and the brokers who serve them – customised and often highly innovative insurance products. (Our growth strategy for specialty lines business is described in more detail on pages 8 to 11).
In both Singapore and Paris we continued to hire experienced, locally knowledgeable underwriters, and in London in July we announced plans to expand our international (non-US) specialty lines business through the arrival of a team headed by Gerard Bloom.
Q You formed a partnership with Munich Re to write large cyber business in 2016. How important do you think partnering with other insurers and reinsurers will be to Beazley in the future?
Rating environment Premium rates on renewal business across our portfolio as a whole fell by an average of 2% during 2016 (2015: a decrease of 2%). Specialty lines, our largest division, saw rates increase by 1% year on year. In all other divisions, rating pressure saw a decrease in rates charged on renewal business compared to 2015, with rates dropping by 2% in life, accident and health, 7% in marine, 6% in political risks & contingency, 4% in property and 4% in reinsurance.
Premium retention rates Retention of business from existing brokers and clients continues to be a key feature of Beazley’s strategy. It enables us to develop a deeper understanding of our clients’ businesses and requirements, affording greater insight into the risks involved in each policy we write and enabling us to price risk sustainably.
Gross premiums written 329.7 353.1 Net premiums written 277.1 304.8 Results from operating activities 51.5 59.7 Claims ratio 40% 39% Expense ratio 47% 45% Combined ratio 87% 84% Rate change (4%) (4%)
Our contingency team, led by Chris Rackliffe, saw premium decrease in 2016 to $36.2m (2015: $40.5m). The team write mainly large risks out of London, and smaller business in the UK through our myBeazley e-trading platform. In the US, our contingency business has been growing strongly, supported by the release of new products and product extensions and, in December, the launch of our myBeazley platform. In July, the team expanded event cancellation insurance for the sports, entertainment and leisure industries to include riots, civil commotion, strikes, the threat of a terrorist act and other potential disruptions to live events.
Our approach for several years now has been to continue to support our US cedents with reliable, flexible cover while steadily improving access to other markets around the world through local underwriters. We now underwrite European business out of Beazley offices in Munich and Paris (as well as in London); Asian business out of Singapore and through Lloyd’s China in Shanghai; and Latin American business out of Miami.
Beazley began life in 1986 as an insurer of large, complex risks: major US law firms and engineering businesses were among our first clients. However, in recent years, we have seen the strongest demand for our products from far smaller firms. To position ourselves successfully in these markets, we have invested in technology designed to make our brokers’ work easier, mindful of the modest commissions brokers receive on a per client basis for small business risks. We continued in 2016 to explore ways in which we can offer our products through our brokers’ own proprietary channels as well as through our e-trading platform, myBeazley.
Acquisition costs and administrative expenses Business acquisition costs and administrative expenses increased during 2016 to $720.3m from $663.8m in 2015. The breakdown of these costs is shown below: $m $m
In 2016 Beazley Group Limited repaid £76.5m of existing tier 2 subordinated debt at the first call date and Beazley Re dac issued $250m of new tier 2 subordinated debt due 2026, the net proceeds of which will be used along with our retained earnings to support the future growth plans of the group. On issuance of the new tier 2 subordinated debt, Beazley Re dac was assigned an Insurer Financial Strength (‘IFS’) rating of ‘A+’ by Fitch.
2016 in review A key change to the risk environment in 2016 was the outcome of the UK referendum in June to leave the European Union. A risk review had been performed prior to the vote in order to assess the potential impact of either outcome. Given Beazley’s insurance risk profile, the premium at risk if Lloyd’s licences were no longer to be applicable in Europe is relatively low at less than 5%. Therefore, the main short term risks identified for Beazley were asset volatility and exchange rate fluctuations and steps were undertaken prior to the vote to mitigate these risks. Our experience in the period since the referendum has shown that this assessment turned out to be correct and in particular, a weaker sterling has provided a tailwind for us as a dollar denominated company with sterling expenses and dollar profit which is worth more for sterling based investors. Nevertheless, we have established a project team to oversee developments and support Lloyd’s activity to ensure that market participants can continue to trade in Europe in an efficient way.
The latest chief risk officer report to the board confirmed that the control environment has not identified any significant failings or weaknesses in key processes and that Beazley is operating within risk appetite as at 31 December 2016.
The Ann & Robert H. Lurie Children’s Hospital of Chicago is an excellent example. It reinvested part of the rebate it received for meeting safety and quality targets in ‘Baby Beazley’, a simulation mannequin used for training in the main hospital as well as many of its outreach units across the State of Illinois.
“For new buildings to receive LEED status is a big achievement, but for existing buildings to improve their LEED status to Gold is really impressive,” says Munira. “It’s all thanks to our landlord’s and our own colleagues focus on energy and resource-saving ideas such as replacing equipment with more energy-efficient models and installing automated faucets in the restrooms.”
ShelterBox is an international disaster relief charity that responds to natural and man-made disasters by delivering boxes of aid – ShelterBoxes. It became our UK charity partner in 2013, and in 2015 our global charity partner. Every ShelterBox contains items families need to survive in the immediate aftermath of a disaster, such as special tents, blankets, groundsheets, water-filtration equipment, a tool-kit and mosquito nets. All ShelterBoxes are distributed by specially trained volunteers. These volunteers are based all over the world and are ready to deploy at a moment’s notice to get aid to families who need it most.
Annual general meeting The annual general meeting of the company will be held at 14:30hrs on Friday 24 March 2017 at Plantation Place South, 60 Great Tower Street, London, EC3R 5AD. The notice of the AGM details the business to be put to shareholders.
Appointed: 1 July 2016 Experience: Based in New York, Christine recently retired as chair of Willis Towers Watson North America. She has 40 years of management, client leadership and financial experience in the insurance industry including work as an underwriter and 27 years as an insurance broker working with large corporate and public institution clients designing their risk management programmes which included leadership roles at Johnson & Higgins and Marsh. Committee: Audit and risk committee
Key responsibilities The audit and risk committee assists the board of directors in fulfilling its oversight responsibilities for the financial reporting process, the system of internal control, the audit process and the company’s process for monitoring compliance with laws and regulations and the code of conduct. It also ensures that an effective risk management process exists in the major regulated subsidiaries and that the Beazley group has an effective framework and process for managing its risks.
Remuneration committee Chairman Sir Andrew Likierman Members George Blunden John Sauerland Key responsibilities The remuneration committee ensures that remuneration arrangements support the strategic aims of the business and enable the recruitment, motivation and retention of senior executives while complying with the requirements of regulatory and governance bodies, satisfying the expectations of shareholders and remaining consistent with the expectations of the wider employee population.
c) Compliance • review the arrangements by which employees of the company may, in confidence, raise concerns about possible improprieties in matters of financial reporting or other areas; • review procedures and systems relating to fraud detection, prevention of bribery and money laundering; and
a) Significant financial statement reporting issues The significant financial statement reporting issues, along with the significant matters and accounting judgements that the committee considered during the year under review, are set out below.
On the basis of the information provided by the group actuary throughout the year and at the year end, the consistent application of Beazley’s reserving philosophy, and the review work carried out by our external auditor, the committee is satisfied that the reserves held on the group statement of financial position at 31 December 2016 are reasonable.
To assist the board the committee receives reports and updates from the compliance function on various issues including, but not limited to, regulatory developments, routine and non-routine interactions with the group’s regulators, any significant instances of noncompliance with regulatory or internal compliance requirements.
Fair, balanced and understandable assessment It is a key compliance requirement of the group’s financial statements to be fair, balanced and understandable. The annual report is prepared following a well documented process and is performed in parallel with the formal process undertaken by the external auditor. The committee has reviewed a report presenting the approach taken during the preparation of the annual report. Following its review, the committee is satisfied that the annual report is fair, balanced and understandable, and provides the information necessary for shareholders and other stakeholders to assess the company’s position and performance, business model and strategy, and has advised the board accordingly.
Currently the membership of the remuneration committee comprises Sir Andrew Likierman (chairman), George Blunden and John Sauerland.
Responsibilities of the committee The committee’s main responsibilities are to, inter alia: • set the remuneration policy for the group for approval at the annual general meeting. The objective of such policy shall be to ensure that members of the executive management of the company are provided with appropriate incentives to encourage enhanced performance and are, in a fair and responsible manner, rewarded for their individual contributions to the success of the company; • recommend and where appropriate approve targets for performance related pay schemes and seek shareholder approval for any long term incentive arrangements; • recommend and approve the remuneration of the chairman of the company; • recommend the remuneration of the chief executive, the executive directors, the direct reports to the chief executive, the company secretary and such other members of the executive management as it is designated to consider. No director or manager shall be involved in any decisions as to his or her own remuneration; • obtain reliable, up-to-date information about remuneration in other companies; and
The specific responsibilities and duties of the committee are set out in its terms of reference which were updated in July 2016 to include specific responsibility to keep under review the leadership needs of the organisation, both executive and non-executive, with a view to ensuring the continued ability of the organisation to compete effectively in the market place. The terms of reference are available to download from the company’s website.
• all buyout awards would normally be liable to forfeiture or ‘clawback’ on early departure. For executive directors early departure is defined as being within the first two years of employment; • the maximum level of variable remuneration which may be granted in the first year (excluding buyouts) is in line with the aggregate maximums set out in the policy table. The committee retains the flexibility to determine that for the first year of appointment any annual bonus award will be subject to such conditions as it may determine; and
Consideration of shareholders views The remuneration committee also regularly reviews guidance from shareholder advisory bodies such as the Investment Association, PLSA and ISS, as well as the specific policies of our shareholders. Changes to our policy such as the introduction of a bonus cap have been incorporated into Beazley’s policies as a result of these reviews. The committee periodically undertakes gap analyses of Beazley policy against the guidance from shareholder bodies and wider shareholder views.
Adrian P Cox • Strong growth in the core specialty lines book in respect of both income and profit • Continued growth of cyber including partnerships with other insurance companies • Successful realisation of opportunities in market segments such as environmental liability and healthcare liability
Actual NAVps growth achieved in the five years to 31 December 2016 was 19.85% p.a. which resulted in 100% of the second tranche of the 2012 awards vesting.
NAV target range (RFR +7.5% p.a. to RFR +15% p.a.) TSR growth (1 month average) NAV growth (including dividends)
The standard approach for non-executive director appointments is that the appointment expires at the AGM following the end of the three year term, notwithstanding the fact that each non-executive director is subject to annual re-election at each AGM.
The table below shows the total number of directors’ interests in shares as at 31 December 2016 or date of cessation as a director.
In our opinion: • the financial statements give a true and fair view of the state of the group’s and of the parent company’s affairs as at 31 December 2016 and of the group’s profit for the year then ended; • the group financial statements have been properly prepared in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs as adopted by the EU); • the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the EU and as applied in accordance with the provisions of the Companies Act 2006; and • the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the group financial statements, Article 4 of the IAS Regulation.
• Recent growth in new/innovative products with limited availability of loss experience increases the need to focus on evolving reserving practice, especially in the area of cyber risk.
• Beazley has increased its allocation to illiquid credit assets in recent years, which could be subject to greater volatility in pricing.
• The investments are subject to variations in value between the investment early close date and the period end date. These variations where applicable may require adjustments to the investment carrying values at the period end.
Controls • Tested the design and operating effectiveness of controls for monitoring performance and the data integrity in the investment records. • We reconciled the figures booked in the general ledger to information provided by the external custodian and enquired whether reconciling differences were identified and actioned.
Substantive • Agreed the completeness, existence and valuation of the listed investment portfolio to custodian statements and our own revaluation of the portfolio. • For illiquid credit assets where active prices were not readily available we performed a reconciliation to the latest available third party fund manager valuation reports.
• There is an increased risk of premium estimates being misstated as a result of the early close process which requires Beazley to estimate the premiums relating to the month of December and where necessary make adjustments at the period end.
• Continued to challenge and critically assess premium recognition relating to binders through comparison of estimates and actuals for prior years. • We have inspected the binder adjustment calculation and agreed that the methodology remains consistent and appropriate in the context of the timing of business written throughout the year.
In regards to the Beazley Insurance Company Inc. component team the interaction with the Group team included calls along with review of the audit work performed.
Financial statem ents 1 Statement of accounting policies continued Of the upcoming accounting standard changes that we are aware of, we anticipate that IFRS 9 and IFRS 15 will have the most material impact on the financial statements’ presentation and disclosures. The accounting developments and implementation timelines of these standards are being closely monitored and the impacts of the standards themselves are being monitored. Full impact analysis in respect of these standards is in the process of being completed. A brief overview of these standards is provided below: • IFRS 9 provides a reform of financial instruments accounting to supersede IAS 39: Financial instruments: recognition and measurement. The standard contains the requirements for a) the classification and measurement of financial assets and liabilities; b) a new impairment methodology, and c) general hedge accounting. During 2016, the IASB confirmed that the effective date of IFRS 17 ‘Insurance Contracts’ will be 1 January 2021. The IASB also amended IFRS 4 to permit certain entities/groups that issue insurance contracts within the scope of IFRS 4 to defer application of IFRS 9 (Financial instruments) until accounting periods beginning on or after 1 January 2021 (the deferral approach), in order to align with IFRS 17 implementation. This option is subject to the entity/group meeting criteria relating to the predominance of insurance activity. Beazley expects to be eligible to apply this deferral approach and intends to do so, thus IFRS 9 is not expected to impact the group’s financial statements until accounting periods beginning on or after 1 January 2021.
• IFRS 15 establishes a single comprehensive model for entities to use in accounting for revenue from contracts with customers. Revenue from contracts accounted for under IFRS 4 ‘Insurance contracts’ is outside the scope of IFRS 15. However, the group will have to apply the new revenue recognition standard to non-insurance contracts. Furthermore, the group may have to apply the new standard to non-insurance components of contracts traditionally considered to be insurance contracts. The new standard’s requirement for accounting for variable consideration could change the timing of revenue recognition for noninsurance contracts issued by the group.
Los Angeles quake (2015: $78.0bn) 630.0 224.8 Gulf of Mexico windstorm (2015: $112.0bn) 563.7 222.7 US Northeast windstorm (2015: $78.0bn) 488.2 220.5 1 Probable market loss.
b) Reinsurance risk Reinsurance risk to the group arises where reinsurance contracts put in place to reduce gross insurance risk do not perform as anticipated, result in coverage disputes or prove inadequate in terms of the vertical or horizontal limits purchased. Failure of a reinsurer to pay a valid claim is considered a credit risk which is detailed in the credit risk section on page 153.
The group also entered into interest rate futures contracts to manage the interest rate risk on bond portfolios.
Operating expenses include: Amounts receivable by the auditor and associates in respect of: – audit services for the group and subsidiaries 1.0 1.1 – audit-related assurance services 0.3 0.3 – taxation compliance services – 0.1 – other assurance services 0.5 – – other non-audit services 0.4 0.4
A breakdown of the group’s investment portfolio is provided on page 43. A breakdown of derivative financial instruments is disclosed in note 17.
Financial assets at fair value Fixed and floating rate debt securities 261.6 140.7 142.5 544.8 2,724.0 3,268.8
Ordinary shares of 5p each 1 Authorised 2 – – 700.0 895.1 Issued and fully paid 523.3 37.7 521.4 666.7
www.beazley.com192 Beazley Annual report 2016 27 Retirement benefit obligations continued Sensitivity analyses Changes in the relevant actuarial assumptions would result in a change in the value of the funded obligation as shown below: Increase $m Decrease $m
Financial statem ents 28 Deferred tax continued The group has tax adjusted losses carried forward giving rise to a deferred tax asset of $1.2m, measured at the UK corporation tax rate of 17.0%. The deferred tax asset has not been recognised on the group statement of financial position in the current year as losses are not expected to be utilised in the foreseeable future based on the current taxable profit estimates and forecasts of the underlying entity in question.
Lead underwriter The underwriter of a syndicate who is responsible for setting the terms of an insurance or reinsurance contract that is subscribed by more than one syndicate and who generally has primary responsibility for handling any claims arising under such a contract.