The group is of the view that some of the above metrics constitute alternative performance measures (APMs). Further information on our APMs can be found in the financial review on page 41 and in the glossary on page 198.
Insurance is a highly collaborative business and much of Beazley’s success is derived from the strength of its relationships with other participants in the market. Strong client relationships are of course crucial and Beazley’s relationships with its clients frequently span many years in some cases, decades. However relationships with other insurers are also important, particularly within the London market.
On occasion a group of Lloyd’s syndicates will come together to form a consortium, increasing the capacity limits they can offer. Such was the case in July 2018 when Beazley spearheaded the creation of a ‘wage & hour’ consortium at Lloyd’s to protect US companies against claims made under the Fair Labor Standards Act. Limits up to $25m are thus available for the costs of defending and indemnifying US organisations that are alleged to have violated their obligations under this extremely complex legislation.
Reinsurance The reinsurance team specialises in writing worldwide property catastrophe, per risk, aggregate excess of loss and pro-rata business, and casualty clash. Approximately 80% of our top clients have reinsured with us for 20 years or more.
Property We’ve protected clients ranging from Fortune 1000 companies to homeowners through 25 years of natural and man-made catastrophes. We underwrite this business through five platforms: London, the US, Canada, Latin America and Singapore, with a business focus on commercial property risks, valuable assets and select homeowners’ business.
Closer to the Client By better understanding our clients’ needs, we will be able to enhance our product design and improve our clients’ experience. Also we look to improve the client experience and strengthen our brand as a client-focused insurer by enhancing our client attraction, retention and cross-selling.
“ We are seeking to offer our early career joiners a broad exposure to the workings of the company.”
Our sustainable business ESG report is described in detail on pages 59 to 73
The value we offer to clients depends of course on our underwriting appetite and the claims service that we provide. However it also depends on how easy it is to do business with us. To improve our overall service we need to stand in our clients’ shoes and this is the focus of a third strategic initiative we are calling Closer to the Client. In parallel with this, we have been working hard to simplify our policies – a drive epitomised in April 2018 by the launch of a digital version of our WeatherGuard policy that dramatically simplifies weather-related cover for event organisers.
With changes to corporate taxation arising within the US, Beazley also revisited and amended its intragroup reinsurance contracts to ensure that they continued to be as efficient as possible in providing the desired effect on capital allocation and risk management.
Q How has syndicate 5623 performed? Has it succeeded in driving the cost of doing business down?
Q Has Beazley’s investment performance in 2018 prompted any changes to your investment strategy?
The final major component of our business – life, accident and health risks – also performed strongly in 2018. We continued to reshape our London book with a focus on improving the balance in the portfolio. We have been adding underwriting talent to our London team, which now numbers seven, including two underwriters focused on sports disability insurance.
I will be leaving Beazley at the end of April after 13 years with the company and seven years at the helm of our property division and I wish the team continuing success.
Gross premiums written 2,615.3 2,343.8 12% Net premiums written 2,248.5 1,978.8 14%
BICI reinsurance business and, from 2018, facilities business; • Syndicate 6050 – special purpose syndicate which has its capital provided by third party names and provided reinsurance to syndicates 623 and 2623 on the 2015, 2016 and 2017 years of account; • Syndicate 5623 – special purpose syndicate writing facilities ceded from syndicate 3623; • Beazley Insurance Company, Inc. (BICI) – insurance company regulated in the US. Licensed to write insurance business in all 50 states; and • Beazley USA Services, Inc. (BUSA) – managing general agent based in Farmington, Connecticut. Underwrites business on behalf of Beazley syndicates and BICI.
We have also supported the launch of several financial lines products in Europe via our Europe based insurance company. Key to growing the distribution of smaller risk business has been the ongoing expansion of our myBeazley.com e-trading platform. The latest e-trading product launches have been for our financial lines market offering, with a new management liability package product delivered in October 2018, with subsequent go-lives planned in early 2019 for France and Spain. Meanwhile in the US, another myBeazley.com product launch was the small enterprise MediaTech package, which provides a quick and simple way for small businesses to access specialist insurance coverage.
We also make use of global outsourcing agreements for business processing support and information technology support. These arrangements have been carefully planned and selected to ensure we can maximise a highly efficient and scalable operating platform to support our business growth. A significant proportion of our IT is now outsourced to specialist technology vendors. Not only has this enabled us to deliver far more for our shareholders’ money, but it has also been a source of expertise and ideas that would have been difficult to build in-house.
Creating the environment for sustainable growth 2018 in review A key design principle of the risk management framework is that all members of staff are responsible for identifying, managing and communicating risk. Whilst this activity is supported by the risk management function, all Beazley staff understand that with the benefits of an empowered culture comes the responsibility for identifying and managing risk. This is particularly important when an organisation is navigating above average levels of change.
We have included a new section within this risk management report (see page 57) covering the impact of climate change on Beazley. A key aspect of Beazley’s business model is to support clients who have been affected by natural catastrophes, helping them return to pre-catastrophe conditions as soon as possible. In addition, we explain how climate change could affect Beazley’s own risk profile, highlighting how we respond to these risks. These include the performance of our insurance contracts, the investments we make, the office spaces we occupy, the companies we partner with and our travel footprint.
A suite of risk management reports are provided to the boards and committees to assist senior management and board members to discharge their oversight and decision making responsibilities. The risk reports include the risk appetite statement, the risk management report, risk profiles, stress and scenario testing, reverse stress testing, an emerging and strategic report, a report to the remuneration committee and the Own Risk and Solvency Assessment (ORSA) report.
The risks and associated capital requirements have been brought together into a five year plan. The main assumption is that the current market conditions will prevail, over which the outcomes of the board’s strategic initiatives are overlaid. In addition, the board has reviewed the sensitivity of key assumptions and has performed scenario testing to understand the impact on cash flows of the key risks of a major natural catastrophe and/or a systemic mispricing of the medium-tailed liability classes.
In 2018 we have been taking a more strategic approach to ESG matters, and overtly linking them to our business: • We have been running a crossbusiness sustainability initiative, exploring how we can embed social and environmental considerations into our products and business practices. With the help of external experts, we held workshops to focus on the insurance angle of the global issues we face, and are consequently pursuing a number of business development opportunities and partnerships across business lines, including clean energy generation and storage, clean technology, climate change adaptation, measures to address marine pollution, support for environmental pollinators, and employment practices liability.
Our risk management of climate change risks is described in detail on pages 57 to 58
Prevention, detection and reporting of bribery and other forms of corruption is the responsibility of all employees. Senior management have overall accountability for ensuring Beazley’s Anti-Bribery and Corruption Policy complies with Beazley’s ethical obligations, and that all those under its control comply with it. We undertake a bribery and corruption risk assessment on an annual basis, analysing our worldwide business for exposure to higher risk jurisdictions, the distribution channels used and the nature and size of business we conduct.
Compliance monitoring policy Beazley’s compliance monitoring team monitor existing business relationships for AML and sanctions purposes.
Directors The directors of the company who served during 2018 and/or to the date of this report were as follows: Dennis Holt Non-executive chairman (resigned 22/03/2018) David Lawton Roberts Non-executive chairman (appointed 22/03/2018) David Andrew Horton Chief executive George Patrick Blunden Non-executive director Martin Lindsay Bride Finance director Adrian Peter Cox Director Angela Doreen Crawford-Ingle Non-executive director Christine LaSala Non-executive director Sir John Andrew Likierman Non-executive director Neil Patrick Maidment Director (resigned 31/12/2018) John Peter Sauerland Non-executive director Robert Arthur Stuchbery Non-executive director Catherine Marie Woods Non-executive director
Board changes I am pleased to report that your board remains highly engaged in fulfilling its principal tasks of leading the company and overseeing the governance of the group. As mentioned on page 87, the board has continued to evolve with a number of changes during the year and further developments planned for the forthcoming year. Neil Maidment retired from the board on 31 December 2018 after having served as an executive director since 2001. We also announced that Martin Bride, the group finance director, will retire from the board in May 2019 following the finalisation of the 2018 accounting year. We were delighted to announce that Martin will be succeeded on the board by Sally Lake. The board would like to express their thanks to Neil and Martin for the immense contribution they have made to the development of the group. The board is looking forward to welcoming Sally to her new role.
Christine LaSala Non-executive director Appointed: 1 July 2016 Experience: Based in New York, Christine 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. Christine’s experience includes board and leadership roles at Johnson & Higgins and Marsh and 10 years as CEO of the WTC Captive. Committee: Audit and risk committee Skills: insurance, strategy, risk management, client leadership, regulatory and governance.
To enable the board to function effectively and directors to discharge their responsibilities, full and timely access is given to all relevant information. In the case of board meetings, this consists of a comprehensive set of papers, including regular business progress reports and discussion documents regarding specific matters. Directors have access to an electronic information repository to support their activities. During 2018 the board continued to support the maintenance and development of Beazley’s information security programme to address changing and emerging cyber security threats. Director training included sessions on IFRS 17, Senior Managers and Certification Regime and refresher training on Solvency II. All directors allocate sufficient time to the company to enable them to discharge their responsibilities effectively. The terms and conditions of appointment for all the non-executive directors set out the expected time commitment and they agree that they have sufficient time to provide what is expected of them.
c) External audit • recommend to the board, to be put to the shareholders for approval, the appointment, reappointment and removal of the external auditors; • oversee the relationship with the external auditor including planning, reviewing of findings and assessing overall effectiveness; • approve auditor’s remuneration for audit, assurance and non-audit services.
During 2018, the committee: • monitored the implementation of the 2018 compliance plan; • reviewed and approved the 2019 annual compliance plan, including the compliance monitoring programme; • reviewed changes in the regulatory environment applicable to Beazley; • received updates on relationships with key group regulators, and oversight of regulatory requests; • provided oversight to regulatory responses to corporate developments; • reviewed updates from the money laundering reporting officer on the adequacy and effectiveness of the company’s anti-money laundering systems and controls; • provided oversight of the progress of the business in addressing identified enhancements to compliance requirements; • approved the group policies and controls in respect of anti-bribery and corruption and anti-fraud; • received updates on the structure and effectiveness of the company’s compliance function; and
The committee has agreed the establishment of goals for gender diversity for both the board and the broader organisation. The board achieved its goals for gender diversity for the Beazley plc board of two female members by AGM 2016, and a third female member by AGM 2017. Female representation on the board went from zero to three in five years. The committee reviewed progress against the group’s 2020 goals for there being a minimum of 35% female senior managers within the organisation by 2020 and 33% female board members at group level by 2021.
The committee continues to welcome the views of our shareholders. We were pleased to see another strong vote of 96% on last year’s directors’ remuneration report and look forward to receiving our shareholders’ support for this year’s report.
Salaries for 2019 will be as follows: • D A Horton: £482,500 • M L Bride: £340,000 • A P Cox: £380,000
Annual bonus awards may be subject to clawback for a period of three years following payment of the cash bonus. These clawback provisions will also extend to any deferred shares delivered before the end of the three year period and to any bonus which is voluntarily deferred as notional capital into the staff underwriting plan (excluding any returns on the investment, which will not be subject to clawback).
Martin L Bride 2 Nov 2015 Adrian P Cox 2 Nov 2015 D Andrew Horton 2 Nov 2015 Neil P Maidment 22 Feb 2016
Share prices The market price of Beazley ordinary shares at 31 December 2018 (the last trading day of the year) was 503.5p and the range during the year was 493.2p to 619.5p.
These judgemental and complex calculations for insurance liabilities are also used to derive the valuation of the related reinsurance assets.
In our evaluation of the Directors’ conclusions, we considered the inherent risks to the Group’s and Company’s business model and analysed how those risks might affect the Group’s and Company’s financial resources or ability to continue operations over the going concern period. The risks that we considered most likely to adversely affect the Group’s and Company’s available financial resources over this period were: — adverse insurance reserves development; — a deterioration in claims experience, potentially caused by market wide catastrophe event(s); and
Our work is limited to assessing these matters in the context of only the knowledge acquired during our financial statements audit. As we cannot predict all future events or conditions and as subsequent events may result in outcomes that are inconsistent with judgments that were reasonable at the time they were made, the absence of anything to report on these statements is not a guarantee as to the Group’s and Company’s longer-term viability.
Secondly, the Group is subject to many other laws and regulations where the consequences of non-compliance could have a material effect on amounts or disclosures in the financial statements, for instance through the imposition of fines or litigation or the loss of the Group’s licence to operate. We identified the following areas as those most likely to have such an effect: UK listing rules, Companies Act, Prudential Regulatory Authority and Lloyd’s of London prudential regulation recognising the financial and regulated nature of the Group’s activities and its legal form. Auditing standards limit the required audit procedures to identify non-compliance with these laws and regulations to enquiry of the directors and other management and inspection of regulatory correspondence, if any. These limited procedures did not identify actual or suspected non-compliance.
• As was stated in the 2017 annual report, the group chose to apply the temporary exemption permitted by IFRS 4 from applying IFRS 9: Financial Instruments. The group qualifies for this exemption as at 31 December 2015 $5,040.7m or 95% of its total liabilities were connected with insurance. There has been no change in the group’s activities since 31 December 2015, therefore the exemption still remains. The group has also disclosed information in relation to specific types of financial instruments to ensure the comparability with the entities applying IFRS 9. As such, fair values are disclosed separately for the group’s financial assets which are managed and evaluated on a fair value basis and those which meet the solely payments of principal and interest (SPPI) test under IFRS 9. Beazley plc as a standalone company adopted IFRS 9 from 1 January 2018. However, as the standalone company has no financial investments the adoption had no effect on its financial statements. Below is a table outlining the fair value of assets which are managed and evaluated on a fair value basis and those which meet the SPPI test under IFRS 9. The information on credit exposures can be found in note 2 to the financial statements on page 156.
b) Syndicate capacity The syndicate capacity represents the cost of purchasing the group’s participation in the combined syndicates. The capacity is capitalised at cost in the statement of financial position. It has an indefinite useful life and is carried at cost less accumulated impairment. It is annually tested for impairment by reference to the latest auction prices provided by Lloyd’s.
d) Fair value measurement Fair value is the price at which an orderly transaction to sell an asset or to transfer a liability would take place between market participants at the measurement date.
Assets and long positions are measured at a bid price; liabilities and short positions are measured at an asking price. These prices are monitored and deemed to approximate exit price. Where the group has positions with offsetting risks, mid-market prices are used to measure the offsetting risk positions and a bid or asking price adjustment is applied only to the net open position as appropriate. Fair values reflect the credit risk of the instrument and include adjustments to take account of the credit risk of the group entity and counterparty where appropriate. Fair value estimates obtained from models are adjusted for any other factors, such as liquidity risk or model uncertainties, to the extent that the group believes a third-party market participant would take them into account in pricing a transaction.
Impact on profit after income tax for the year Impact on net assets $m $m $m $m
The group makes additional interest payments for borrowings. Further details are provided in notes 8 and 25.
Financial statem ents www.beazley.com Annual report 2018 Beazley 161 3 Segmental analysis continued b) Segment information
Diluted Diluted earnings per share are calculated by dividing profit after tax of $68.2m (2017: $130.0m) by the adjusted weighted average number of shares of 533.1m (2017: 533.6m). The adjusted weighted average number of shares assumes conversion of dilutive potential ordinary shares, being shares from the SAYE, retention and deferred share schemes. The shares held in the ESOP of 4.7m (2017: 3.8m) have been excluded from the calculation, until such time as they vest unconditionally with the employees.
11 Dividends per share A second interim dividend of 7.8p per ordinary share (2017: 7.4p) will be payable on 27 March 2019 to Beazley plc shareholders registered at 5.00pm on 1 March 2019 in respect of the six months ended 31 December 2018. No special dividend was declared in 2018 (2017: nil). The company expects the total amount to be paid in respect of the second interim dividend to be approximately £40.6m. These financial statements do not provide for the second interim dividend as a liability.
Level 3 investments During 2018, the group’s investment committee approved additional allocations to an illiquid asset portfolio comprising investments in funds managed by third party managers (generally closed end limited partnerships or open ended funds). While the funds provide full transparency on their underlying investments, the investments themselves are in many cases private and unquoted, and are therefore classified as level 3 investments.
Financial assets measured at fair value Fixed and floating rate debt securities – Government issued 1,384.2 – – 1,384.2 – Quasi-government 25.9 – – 25.9 – Corporate bonds – Investment grade – 2,525.3 – 2,525.3 – High yield – 32.7 – 32.7 – Senior secured loans – 132.1 – 132.1 Equity funds – 85.4 – 85.4 Hedge funds – 337.2 – 337.2 Illiquid credit assets – – 186.6 186.6 Derivative financial assets 6.9 – – 6.9 Total financial assets measured at fair value 1,417.0 3,112.7 186.6 4,716.3
Financial liabilities measured at fair value Derivative financial liabilities 12.4 – – 12.4
Foreign exchange forward contracts 205.6 9.6 361.7 1.3 Bond futures contract 189.2 2.8 – –
Three years’ service + NAV + minimum shareholding requirement 10 years
Principal actuarial assumptions Discount rate 2.8% 2.4% Inflation rate 3.5% 3.4% Expected return on plan assets 2.8% 2.4% Future salary increases 3.5% 3.4% Future pensions increases 3.0% 3.3% Life expectancy for members aged 60 at 31 December 90 years 90 years Life expectancy for members aged 40 at 31 December 93 years 93 years
Salaries and other short term benefits 11.8 16.4 Post-employment benefits 0.5 0.6 Share based remuneration 5.9 9.8