• We transact business through brokers and work with selected managing general agencies and managing general underwriters to improve distribution in specialist niches.
Most of the growth resulting from this strategy is likely to be organic, but small scale acquisitions where there is an excellent strategic fit can also contribute. Our acquisition of Creechurch Underwriters, a managing general agency in Canada that we have supported for many years, fell into this category. Beazley now has an underwriting platform for growth in Canada which would have taken far longer to establish organically.
Sometimes product adaptation can be as important as pure innovation. In November, we relaunched our market-leading cyber product for small and mid sized businesses, Beazley Breach Response (BBR). When the product was first launched in 2009, the strongest demand was for liability cover and breach response services following the loss or theft of large numbers of customer records. This need has not gone away, but recent cyber attacks have sensitised other organisations, such as manufacturers, to the operational risks they face. The new BBR offers far broader protection against first party risks such as business interruption.
Dennis took on the role of non-executive chairman in March 2012. During his tenure, Beazley has achieved premium growth of 37% in often challenging market conditions, an average return on equity of 17%, and ordinary dividend growth of 5-6% annually.
In a catastrophe year such as that of 2017, a short term reduction in profits is inevitable. However, with appropriate cycle management and a balanced portfolio of business, the temporary reduction in profits can be minimised before deploying resources to take advantage of improving underwriting conditions.
One of Beazley’s great strengths is our presence in a wide range of different specialist markets driven by different cycles and trends. Whilst the total reserve release at Beazley is very consistent, the teams that contribute the most can change quite markedly over a period of two or three years.
Premium retention rates In 2017, we were able to maintain a strong retention of business from existing clients and brokers. We believe that being able to work with clients and brokers for a number of years has enabled Beazley to provide coverage which was sustainably priced while still covering the insureds’ needs.
Gross premiums written 267.6 247.4 Net premiums written 233.2 220.7 Results from operating activities 19.3 34.5 Claims ratio 55% 44% Expense ratio 43% 46% Combined ratio 98% 90% Rate change (3%) (7%)
Our marine liability account performed well in 2017. The team, led by Phil Sandle, provides liability cover for shipowners and a wide variety of marine and other businesses. In the US, we write a substantial trucking account in Texas through a Lloyd’s coverholder. We see some potential to expand our US liability and hull business through local underwriters accessing business that would not normally come to London.
In April, we extended our large risk property underwriting capabilities to the US in order to obtain access to business that we were not seeing in London. London will continue to be the main focus for our large risk property business with Simon Jackson retaining global responsibility for this segment. In the past, Beazley has found that the flow of US risks to our London underwriters has continued to grow in tandem with the development of our locally underwritten US business, and we expect that this will also prove the case for large property risks given the stronger demand now in evidence.
Overall, we expect market conditions and margins to improve in 2018, which will positively impact most of our trading teams.
All of these were material events for the reinsurance market. Current estimates of the total insured cost of the 2017 Atlantic hurricane season stand between $90bn and $95bn. The two Mexican earthquakes are expected to cost insurers between $2.5bn and $5bn, while the Californian wildfires, which destroyed or damaged more than 14,000 homes, are expected to add a further $10bn to the total insurance bill. These events contributed to an increase of $57.3m to the division’s net insurance claims in 2017.
Beazley in Hong Kong takes full ownership of APUA and renames it Beazley Limited
Profit Profit before tax in 2017 was $168.0m (2016: $293.2m). The group’s combined ratio increased to 99% (2016: 89%) off the back of an active catastrophe environment. However, to achieve an underwriting profit in such conditions is testament to our underwriting and active cycle management. Our investment team contributed a strong investment return of 2.9% (2016: 2.0%) or $138.3m (2016: $93.1m).
Profit before tax 168.0 293.2 Income tax expense (38.0) (42.2) Profit after tax 130.0 251.0
We continue to provide against impairment of reinsurance recoveries, and at the end of 2017 our provision in respect of reinsurance recoveries totalled $13.2m (2016: $12.6m).
The group actively seeks to manage its capital structure. Our preferred use of capital is to deploy it on opportunities to underwrite profitably. However, there may be times in the cycle when the group will generate excess capital and not have the opportunity to deploy it. At such points in time the board will consider returning capital to shareholders.
A high performing global operations function relies on us maintaining consistency in operational standards throughout the group, while simultaneously being prepared to try new things and leverage our depth of insurance operations expertise to give us a lead over the competition. In order to achieve this, we pursue our group operations strategy. This focuses on the areas below.
Supporting growth initiatives In support of our strategic growth initiatives in areas such as the US, Europe, Asia Pacific, and small enterprise we have continued to enhance our infrastructure so that we can bring attractive new products to market as efficiently as possible. Virtual Care and Execuguard are examples of two new types of insurance that we launched in 2017.
Although Beazley receives plenty of interest when attracting new operations and technology talent, we recognise that our working environment needs to keep evolving to remain attractive, and to then retain and further motivate this talent. In 2017, after a successful pilot with our London based IT team, we commenced a project to develop our larger offices into activity based working (ABW) environments. Although a benefit of ABW is more efficient use of office space, it also creates an environment where our workforce has a physical space and technology environment that maximises the potential for them to carry out their daily activities. Our first ABW environment will be the new Birmingham office opening in 2018, followed by a new location in New York. We are also reviewing ABW options for our London based teams.
We have also reorganised the way our IT systems fit together, moving from a model with a number of separate components towards a customer centric model. This means we have created a new global IT platform, which went into production in July 2017, that provides a single customer and broker record onto which we can attach all our business activity associated with them. Ultimately, this means we will be able to give our customers a more joined up digital service experience, and crucially it will enable us to optimise our response times.
In the US and the UK we have facilitated and hosted four workshops for over 90 young people to increase their knowledge of the insurance sector and how to build their careers as part of our aim to inspire interest in the insurance market within our community. We have expanded our community focus in the US, after initially focusing on our offices in Farmington and Atlanta.
In January 2018 we will be moving to a new office in Birmingham and have created a green environment which features recyclable furniture and energy-saving initiatives.
Executive directors Non-executive directors * Where the appointment date of a director pre-dates 13 April 2016 (being the date that Beazley plc became the holding company of the Beazley group) this appointment date refers to their representation on the parent company of the Beazley group.
Appointed: 1 July 2016 Experience: Based in New York, Christine retired as chair of Willis Towers Watson North America in 2016. She has 40 years of management, client leadership and financial experience in the insurance industry. This has included 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
Compliance with Code provisions The board confirms that the company and the group have complied with the provisions set out in the 2014 version of the Financial Reporting Council’s UK Corporate Governance Code (the Code) throughout the year ended 31 December 2017. The company has not, however, tendered for audit services in the past ten years as explained on page 91. An audit tender will be carried out in 2018 with a view to appointing a new external auditor for the 2019 accounting year.
Audit and risk committee Chairman Angela Crawford-Ingle Members George Blunden Christine LaSala Robert Stuchbery Catherine Woods 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 Beazley 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.
The chairman of the audit and risk committee also had regular contact with external and internal auditors during 2017 and members of the audit and risk committee met individually with the Central Bank of Ireland and the Prudential Regulation Authority.
Further information on the role of the audit and risk committee is set out on page 87 and further information on risk management at Beazley is set out in the risk management report.
During 2017, the committee: • considered the results of all internal audit reports, and the finding and themes emerging from them; • monitored the implementation of the 2017 internal audit plan; • reviewed and approved the basis for internal audit planning. This included reviewing and approving the group’s risk-based audit universe and the internal audit plan, and reviewing other business developments which could also potentially be the subject of internal audit work in the coming year. This included challenging the frequency of audits in certain areas of the business, and challenging the balance between thematic reviews and full end-to-end audits; • reviewed and approved the internal audit charter; • reviewed and approved the internal audit budget for 2018; • received information relating to the internal audit functions quality assurance activities; • reviewed how the internal audit, risk management and compliance functions contributed information and assurance relating to the group’s control effectiveness; • received and reviewed an overall summary assessment of 2017 internal audit activity; and
LTIP performance 2012-2017 NAV and TSR growth 31 Dec 31 Dec 31 Dec 31 Dec
The NAVps performance conditions for both these awards are as follows: NAVps performance award vesting
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 2017 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
— Actual versus expected testing: Challenged the quality of Beazley’s historical reserving estimates by monitoring progression of loss ratios against expectations.
3. Our application of materiality and an overview of the scope of our audit
Materiality for the group financial statements as a whole was set at $20m (31 December 2016: $20m), determined with reference to a benchmark of group gross premiums written (of which it represents 1%; 31 December 2016: 1%). Gross premiums written was used as the benchmark as it is a more stable metric year on year than profit before tax. In addition, we applied materiality of $10m (31 December 2016: $10m) for UK balances other than insurance and reinsurance technical balances and investments, for which we believe misstatements of lesser amounts than materiality for the financial statements as a whole could be reasonably expected to influence the company’s members’ assessment of the financial performance of the group.
Based on the knowledge we acquired during our financial statements audit, we have nothing material to add or draw attention to in relation to: — the directors’ confirmation within the viability statement on page 59 that they have carried out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency and liquidity; — the key risks disclosures describing these risks and explaining how they are being managed and mitigated; and
Notes to the financial statements continued 1 Statement of accounting policies continued l) Impairment of financial assets The group considers evidence of impairment for financial assets measured at amortised cost at both a specific asset and a collective level. The group assesses at each reporting date whether there is objective evidence that a specific financial asset measured at amortised cost is impaired. A financial asset is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that have occurred after the initial recognition of the assets and that event has an impact on the estimated cash flows of the financial asset that can be reliably estimated. Assets that are not individually significant are collectively assessed for impairment by grouping together assets with similar risk characteristics.
a) Contagion Contagion risk is the risk arising from actions of one part of the group which could adversely affect any other part of the group. As the two largest components of the group, this is of particular relevance for actions in any of the US operations, which could adversely affect the UK operations, and vice versa. The group has limited appetite for contagion risk and minimises the impact of this occurring by operating with clear lines of communication across the group to ensure all group entities are well informed and working to common goals.
Financial statem ents www.beazley.com Annual report 2017 Beazley 161 12 Intangible assets
All of the investments in associates are unlisted and are equity accounted using available financial information as at 31 December 2017. Falcon Management Holdings Limited is an investment management company which also acts in an intermediary capacity.
Financial liabilities measured at fair value Derivative financial liabilities 2.8 – – 2.8
Recoverable from reinsurers Claims reported and loss adjustment expenses 219.4 201.8 Claims incurred but not reported 773.8 652.1 Reinsurers’ share of claims liabilities 993.2 853.9 Unearned premiums 237.9 228.2 Total reinsurers’ share of insurance liabilities 1,231.1 1,082.1
Increase in claims – Arising from current year claims 1,737.4 (457.8) 1,279.6 1,314.0 (277.7) 1,036.3 – Arising from prior year claims (349.4) 145.5 (203.9) (286.4) 105.7 (180.7)
The 2017 underwriting year has opened lower than 2016, where the life, accident & health book has reduced exposure to underperforming accounts.
Movement in present value of funded obligations recognised in the statement of financial position Balance at 1 January 48.2 43.1 Interest cost 1.4 1.4 Actuarial gains 4.2 10.9 Benefits paid (0.4) (0.3) Foreign exchange gain/(loss) 2.5 (6.9) Balance at 31 December 55.9 48.2
Discount rate (0.5% decrease) 7.7 – Inflation rate (0.3% decrease) – (1.1) Future salary changes (0.5% decrease) – (0.7) Life expectancy (1 year increase) 2.0 –
Financial statem ents www.beazley.com Annual report 2017 Beazley 191 31 Parent company and subsidiary undertakings continued The following is a list of group registered office locations: Address City Postcode Country United Kingdom and Continental Europe 60 Great Tower Street London EC3R 5AD England 2 Northwood Avenue Dublin D09 X5N9 Ireland 22 Grenville Street Saint Helier JE4 8PX Jersey North America 1209 Orange Street* Wilmington, Delaware 19801 USA 2711 Centerville Road Suite 400** Wilmington, Delaware 19808 USA 30 Batterson Park Road*** Farmington, Connecticut 06032 USA 160 Greentree Drive, Suite 101**** Dover, Delaware 19904 USA 55 University Avenue, Suite 550 Toronto, Ontario M5J 2HJ Canada Asia 138 Market Street, 03-04 Capita Green Singapore 048946 Singapore 36/F., Tower Two, Times Square, 1 Matheson Street Causeway Bay – Hong Kong Australia Level 20, 133 Castlereagh Street Sydney NSW 2000 Australia 32 Contingencies Funds at Lloyd’s The following amounts are controlled by Lloyd’s to secure underwriting commitments: Underwriting year £m