Beazley’s diverse portfolio of business, combined with the risk selection skills of its underwriters, has been critical to the company’s track record of profitability through widely varying market conditions.
“We must position the business to gain a competitive advantage by utilising various technological solutions.”
I am also delighted that so many of Beazley’s recent senior executive appointments (six out of eight in the past two years) have been internal. This speaks well to the vibrancy of the company and its success in preparing talented individuals for senior roles.
Beazley Digital Focus on smaller/less complex risks by doing business in a way which maximises the value we get from technology and provides seamless and efficient solutions to brokers and clients.
Q How will the reforms put forward by Lloyd’s in its
Various reasons have been proposed for the rise in large jury awards in the US. Evidence is certainly growing for a shift in sentiment against organisations that are perceived to have failed to protect customers or investors (or patients in the case of hospitals). At Beazley, we have seen the main impact of this trend in our healthcare and management liability books. Other lines of liability business, such as environmental and cyber, have been relatively unaffected.
Rates across the portfolio rose strongly in 2019, up 10% for the mid-sized excess & surplus lines risks written locally in the US and 18% for the large risks business written predominantly in London. We see rate rises as still having further to run.
Most of our large risk business, categorised at Lloyd’s as open market property, continues to be underwritten in London, but we have seen a very positive response from brokers to our decision to underwrite large risk property business in the US, originally taken in 2017. We added two new underwriters to the New York team in 2019.
A significant growth area for Beazley in recent years has been environmental liability business, which we currently write in the US, London and Canada. In 2019, the team unveiled an innovative product, Beazley SLEAP (Site Lender Environmental Asset Protection), to cover lenders against their exposures to property assets that may subsequently be found to be contaminated.
Find out more on page 26 Find out more on page 27 Find out more on page 27 29www.beazley.com Beazley Annual report 2019
The reserve releases in 2019 decreased to $9.5m (2018: $115.0m). Our specialty lines, cyber & executive risk and political, accident & contingency divisions all contributed releases within 2019. Both the specialty lines and cyber & executive risk divisions have been impacted over the past few years by the increased claims seen on their liability books.
Brokerage costs 533.8 461.1 Other acquisition costs 111.6 100.8 Total acquisition costs 645.4 561.9 Administrative expenses 244.3 250.7 Total acquisition costs and administrative expenses 889.7 812.6
Beazley’s overall expense ratio was down by one percent from 39% in 2018 to 38%. In actual terms administrative expenses also decreased to $244.3m (2018: $250.7m) driven primarily by favourable foreign exchange rates on our large sterling expense base. The company has always stressed that improving the expense ratio during the phases of stronger growth was a key objective. By actively managing our expenses we have been able to stop them growing as quickly as earned premium.
To assess the risk within our insurance and investment portfolios, we ran the following three stress tests as part of our General Insurance Stress Test return to the Prudential Regulation Authority: • Scenario A – A sudden transition
• Reserve risk: This is the risk that established reserves are not sufficient to reflect the ultimate impact climate change may have on paid losses. This includes liability risk unanticipated losses arising from our clients facing litigation if they are held to be responsible for contributing to climate change, or for failing to act properly to respond to the various impacts of climate change. With support from our group actuarial team, claims teams and other members of management the group establishes financial provisions for our ultimate claims liabilities. The group maintains a consistent approach to reserving to help mitigate the uncertainty within the reserves estimation process.
Over our three year partnership, we have helped raise over $500,000* for All Hands and Hearts.
Our vision is to use our expertise, influence and passion as a force for good in our local communities around the globe.
All these impacts on insurers may equally be felt by our clients, so we have an interest in working with them to better understand and manage these risks.
As part of our thinking around climate change exposures, we delivered a well-attended workshop on climate change liability for underwriters, with external experts in the subject matter from Clyde and Co, Client Earth and Acclimatise.
Compliance monitoring reviews provide assurance as to how well we are doing and enable us to identify areas that need improvement. By regularly reporting the output of our monitoring activities we also ensure that senior management maintain oversight of compliance risk across the group.
A number of initiatives were undertaken during the year which help support inclusion and diversity at Beazley. We launched training focusing on how unconscious bias impacts our working lives, in order to help with making fair decisions. The year also saw the continuation of our roll-out of agile ways of working which allows us to attract and retain diverse talent by providing our people more control over their working day.
Our LGBT+ network, Proud@beazley, has continued to go from strength to strength. During 2019 they hosted a number of internal events which included an awareness event to celebrate world AIDS day. Additionally, we collaborated with our brokers and fellow insurers to represent the industry at Pride celebrations in both London and New York. Additionally, we also have an active Young Professionals Network (YPN) which connects our people across the globe. The network aims to increase networking opportunities, develop skills, build career profiles and widen access to the information and opportunities within the insurance sector. In 2019, YPN ran a number of events including career discussions with executive members.
Beazley’s core values, which are professionalism, integrity, effectiveness and dynamic, reflect the company’s commitment to do the right thing simply because it is the right thing to do. The requirement to adhere to this principle is embedded within all job descriptions across the group.
Substantial shareholdings As at 5 February 2020, the board had been notified of, or was otherwise aware of, the following shareholdings of 3% or more of the company’s issued ordinary share capital: Number of ordinary shares %
In relation to performance relating to reward, our employees’ annual bonus relates to the performance of the company as well as their own performance, colleagues in the UK, the US, Ireland and Singapore are able to join our Save As You Earn scheme and a long term incentive share plan is offered to senior employees.
The board continues to regard the ability to repurchase issued shares in suitable circumstances as an important part of the financial management of the company. A resolution will be proposed at the 2020 AGM to renew the authority for the company to purchase its own share capital up to the specified limits for a further year. More detail of this proposal is given in the notice of AGM.
• US office electricity use (Scope 2), where the EPA ‘US Average’ emission factor for CO2 + CH4 + N2O is used; • US grid electricity transmission and distribution (Scope 3) where the UK Government emission factor is for carbon dioxide only (tCO2).
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 over 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. Committees: Audit and risk committee, nomination committee and remuneration committee Skills: insurance, strategy, risk management, client leadership, regulatory, governance and talent and leadership development.
Key responsibilities The executive committee manages all operational activities of the group and acts under the powers delegated by the board. It has responsibility for proposing strategic initiatives and group/ syndicate business plans to the board as well as for reviewing the risk management framework and oversight of the group’s sub-committees and business functions.
b) Other updates During 2019, in addition to the financial reporting matters mentioned above, the following items were key topics of discussion for the committee: • oversight of the reporting and control processes and procedures relating to Solvency II reporting requirements; • overview of key reporting and regulatory updates, including updates on accounting standards, changes in tax legislation, changes in regulatory requirements and the issuance of changes to the UK Corporate Governance Code in particular; • compliance, financial crime and assurance reporting including risk incident information; • the group’s appointment of EY as external auditors (discussed further below); • quarterly reserving and actuarial data; • the consideration of strategic, emerging and heightened risks identified by management and the group’s risk management team, alongside the processes and controls in place to mitigate these risks; and
From 2020 the portion of the bonus that can be deferred into shares will be increased from 0%-37.5% of bonus to 20%-40% of bonus.
NAVps performance % of award vesting < average risk-free rate +7.5% p.a. 0% = average risk-free rate +7.5% p.a. 10% = average risk-free rate +10% p.a. 25% = average risk-free rate +15% p.a. 100% Straight-line vesting between points
Salaries are normally reviewed annually. Salaries for 2020 will be as follows: D A Horton: £495,000 A P Cox: £390,000 S M Lake: £350,000
Annual bonus To link reward to short term financial performance and individual contribution. Additional alignment with shareholders’ interests through the operation of bonus deferral.
Approach to recruitment remuneration The committee would have regard to the following principles when agreeing the components of a remuneration package upon the recruitment of a new director: • in order to facilitate the future success of the company it is important that we are able to recruit directors of the calibre required to deliver our strategic priorities. Although the company operates in a highly competitive market for executive talent, the committee remains conscious of the need to avoid paying more than is necessary on recruitment; • the committee will, so far as practical, seek to align the remuneration package for any incoming executive with the remuneration policy table set out above; • on recruitment, salaries will be set to take into account role and responsibilities. For interim positions a cash supplement may be paid rather than salary (for example a non-executive director taking on an executive function on a short term basis); • the committee may, on appointing an executive director, need to ‘buy out’ remuneration arrangements forfeited on joining the company; • any buyout would take into account the terms of the arrangements (e.g. form of award, performance conditions, timeframe) being forfeited in the previous package. The form of any award would be determined at the time and the committee could if necessary make use of LR 9.4.2 of the Listing Rules (for the purpose of buyout awards only). The committee would seek to structure buyout awards to be in line with Beazley’s remuneration framework so far as practical. The overriding principle will be that any replacement buyout awards would be of comparable commercial value to the awards which had been forfeited; • 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 Following the committee’s review of the remuneration policy we wrote to our major shareholders with the proposed changes in order to gather their views. A number of shareholders provided feedback on the proposals for which we are very grateful. We were pleased to find that the majority of shareholders were supportive of our new policy and its continued alignment with our longterm strategic priorities. The committee carefully considered the feedback received and made certain adjustments to our proposals to take into account the views of our shareholders.
• Good progress made on Faster, Smarter Underwriting with new tools launched to aid underwriting.
• Stakeholder relationships being enhanced and has a key role on the Lloyd’s Market Association.
We believe reward at Beazley is appropriately balanced in light of risk considerations, particularly taking into account the following features: Features aligned with risk considerations Share deferral A portion of bonus is normally deferred into shares for three years. These deferred shares, together with shares awarded under the LTIP, mean that a significant portion of total remuneration is delivered in the form of shares deferred for a period of years.
There is no unexpired term as each of the executive directors’ contracts is on a rolling basis.
The table below shows the total number of directors’ interests in shares as at 31 December 2019 or date of cessation as a director.
Audit scope • We performed an audit of the complete financial information of one component (Syndicate 2623), and audit procedures on specific balances for a further 4 components. (Syndicate 3623, Beazley Insurance DAC (‘BIDAC’), Beazley Insurance Company Inc (‘BICI’) and Group Function)
We determined, based on our audit work, that the data used for the actuarial model inputs was materially consistent and accurate to data tested for completeness in respect of case claims, reinsurance and premiums.
Based on the results of the procedures performed we concluded that premium estimates had been recorded appropriately.
We calculated materiality at the planning stage of the audit and then during the course of our audit, we reassessed initial materiality based on average of profit before tax over a 5 year period taking into account the year ended 31 December 2019.
Statement of comprehensive income for the year ended 31 December 2019 138 Beazley Annual report 2019 www.beazley.com
1 A merger reserve was created through a scheme of arrangement on 13 April 2016, in which Beazley plc became the parent company of the group.
The financial statements of Beazley plc have been prepared on a going concern basis. The directors of the company have a reasonable expectation that the group and the company have adequate resources to continue in operational existence for the foreseeable future. In accordance with the requirements of IAS 1 the financial statements’ assets and liabilities have been presented in order of liquidity which provides information that is more reliable and relevant for a financial institution.
A defined benefit plan is a pension plan that defines an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation. The pension costs are assessed using the projected unit credit method. Under this method the costs of providing pensions are charged to the statement of profit or loss so as to spread the regular costs over the service lives of employees in accordance with the advice of the qualified actuary, who values the plans annually. The net pension obligation is measured at the present value of the estimated future net cash flows and is stated net of plan assets.
The following table summarises the carrying value of total assets and total liabilities categorised by the group’s main currencies: UK £
Other payables 566.4 – – – 566.4 31 December 2018 Within 1 year 1-3 years 3-5 years Greater than 5 years Total
Net earned premiums UK (Lloyd’s) 1,974.3 1,821.8 US (Non-Lloyd’s)1 346.3 260.2 Europe (Non-Lloyd’s) 26.4 2.6 $m $m
Diluted Diluted earnings per share are calculated by dividing profit after tax of $234.1m (2018: $68.2m) by the adjusted weighted average number of shares of 532.4m (2018: 533.1m). 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 4.8m (2018: 4.7m) have been excluded from the calculation, until such time as they vest unconditionally with the employees.
The group’s investment in associates consists of: Country/region of incorporation % interest held Carrying value $m
Tier 2 subordinated debt (2029) 297.9 – Derivative financial liabilities 8.0 12.4 Total financial liabilities 554.8 356.7
A breakdown of the group’s investment portfolio is provided on page 36. A breakdown of derivative financial instruments is disclosed in note 17.
Fixed and floating rate debt securities – Government issued (8.1) 8.1 – Investment grade (4.8) 4.8 31 December 2018 vs 31 December 2019 transfer from level 2 to level 1 Level 1 $m Level 2 $m
Cash at bank and in hand – 2.4 – 2.4 21 Share capital
Share based payments 18.7 – 18.7 Acquisition of own shares held in trust – (44.9) (44.9) Tax on share option vestings 4.1 – 4.1 Transfer of shares to employees (25.5) 32.1 6.6
Share based payments 18.7 – 18.7 Acquisition of own shares held in trust – (44.9) (44.9) Transfer of shares to employees (25.5) 32.1 6.6
Claims reported and loss adjustment expenses 1,171.2 (231.9) 939.3 1,056.3 (219.4) 836.9 Claims incurred but not reported 2,869.5 (719.8) 2,149.7 2,852.3 (773.8) 2,078.5
Where significant large losses impact an underwriting year (e.g. the events of 11 September 2001, the hurricanes in 2004, 2005, 2008, 2012, 2017, 2018 and 2019, the typhoons in 2018 and 2019, or the earthquakes in 2010, 2011 and 2017), the development is usually very different from the attritional losses. In these situations, the large loss total is extracted from the remainder of the data and analysed separately by the respective claims managers using exposure analysis of the policies in force in the areas affected.
24 Insurance liabilities and reinsurance assets continued b) Major assumptions The main assumption underlying these techniques is that the group’s past claims development experience (with appropriate adjustments for known changes) can be used to project future claims development and hence ultimate claims costs. As such these methods extrapolate the development of premiums, paid and incurred losses, average costs per claim and claim numbers for each underwriting year based on the observed development of earlier years.
To illustrate the robustness of our reserves, the loss development tables below provide information about historical claims development by the six segments – marine, political, accident & contingency, property, reinsurance, specialty lines and cyber & executive risk. The tables are by underwriting year which in our view provides the most transparent reserving basis. We have supplied tables for both ultimate gross claims and ultimate net claims.
Specialty lines Older underwriting years continue to release as claims mature. Strengthening on the 2012 underwriting year is driven by a specific claim on the healthcare book and the deterioration seen on the 2018 underwriting year is driven by the US architects & engineers business. The difference between the opening position in 2019 compared to 2018 is driven by mix changes between the more traditional, cyber and market facilities businesses.
24 Insurance liabilities and reinsurance assets continued Claim releases The table below analyses our net claims between current year claims and adjustments to prior year net claims reserves. These have been broken down by segment and underwriting year. Beazley’s reserving policy is to maintain catastrophe reserve margins either until the end of the exposure period or until catastrophe events occur. Therefore margins have been released from prior year reserves where risks have expired during 2018.
Plan assets are comprised as follows: The actual gain on plan assets was $13.2m (2018: gain of $6.8m).
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
Salaries and other short term benefits 16.4 11.8 Post-employment benefits 0.6 0.5 Share based remuneration 1.1 5.9