Strong partnerships Strong long term relationships with brokers and clients have sustained our business over three decades.
In these cities and in other locations around the world where Beazley has put down roots, our approach is not to make large acquisitions that present complex integration challenges. Instead we aim to hire seasoned professional underwriters who know the market well and possess strong broker relationships. It takes longer to grow this way but it is safer and, we have found, more effective in growing profitably.
At Beazley we believe that claims service should be a positive differentiator in carrier selection by insureds, and we know that, for us, it frequently is. Proactive claims management should also inspire confidence among shareholders and regulators, as should our prudent, timely and consistent approach to establishing claims reserves.
This awareness is reinforced by our underwriting standards, which our risk management team, led by our chief risk officer Andrew Pryde, reviewed in detail in 2015. We found the standards to be effective in the current soft market conditions.
A third advantage for Beazley in pursuing growth opportunities is our attractiveness to talented underwriters, who bring us new broker relationships and income streams. In this way, Simon Jackson and John Brown, who joined our open market property team in London at the beginning of last year, succeeded in reversing what would otherwise likely have been a shrinkage in our large risk property business under the pressure of falling premium rates. In the event, this book grew modestly in 2015.
A For us, underwriting is an active, not a passive, activity. We select our risks carefully, often as the lead underwriter setting the terms and conditions for subscription business at Lloyd’s. This of course is the antithesis of some of the quota share deals that we have seen covering entire classes of business in the London market.
Our property division performed well in 2015, achieving a combined ratio of 84% (2014: 86%) on gross premiums of $353.1m (2014: $344.7m). Demonstrating our focus on segmenting our portfolio, the fastest growing segment of our property portfolio was the division’s small business unit, which derives most of its business from Lloyd’s coverholders around the world. This grew by 3% to $123.7m (2014: $120.3m) and retains, we believe, further growth potential for 2016. We were also pleased to be able to deliver modest growth in our large risk business seen at Lloyd’s, despite seeing rates on renewal business fall by 8% on this business.
In London, home to our largest underwriting team, we delivered another strong performance in very competitive market conditions. We underwrite non standard personal accident business on both a reinsurance and a direct basis through well established broker relationships. There have been numerous new entrants into this market in recent years and competition is accordingly intense.
Commercial property 56% Small property business 21% Jewellers & homeowners 14% Engineering 9%
Nevertheless, all of our teams performed well in 2015 and, should market conditions change, we are well positioned to adjust our underwriting appetite accordingly. Such changes can happen swiftly, as we saw in 2012 when rates were strongest for large risks, rising 8%.
We enjoy strong relationships with the other Lloyd’s syndicates specialising in construction and engineering risks and have formed a consortium in London and Singapore, the Construction Consortium at Lloyd’s, to ensure that we can compete head to head with the largest non Lloyd’s insurers. Both of these ventures performed well in 2015.
Many reinsurance executives have talked about the need to maintain underwriting discipline in the current market, characterised by a large influx of pension fund money seeking returns uncorrelated with other asset classes. At Beazley we have acted, reducing the size of our book by 10% in 2014 and a further 8% last year (excluding the Korean Re transaction).
One other business line that we bracket within our professions team also enjoyed robust growth in 2015. This was our environmental practice, led by Jayne Cunningham, which grew by 40% to $25.9m. The team provides fixed site pollution liability cover to property owners and developers as well as professional liability cover and other forms of protection for environmental services firms. This line of business has been another beneficiary of the recovering US economy, which we underwrite on both our US and Lloyd’s platforms.
Gross premiums written 2,080.9 2,021.8 3% Net premiums written 1,713.1 1,732.7 (1%)
At 31 December 2015, the weighted average duration of our fixed income investments was 1.7 years (2014: 1.8 years).
Our UPR has increased by 4% to $1,060.8m. The majority of the UPR balance relates to current year premiums that have been deferred and will be earned in future periods. Current indicators are that this business is profitable.
Beazley continues to demonstrate profitable growth, and we have developed a diversified underwriting portfolio that distributes globally, through 25 offices. To support this growth we have developed a scalable and efficient operating platform that through focused investment has become an important competitive advantage.
Growing across different markets entails greater operational complexity and a requirement for additional skills in our staff. We do not want to be limited to specific geographic pools of skilled individuals, such as project managers, IT specialists and business analysts. Some locations such as London also have higher unit costs both to hire and to accommodate employees. With this in mind, we continue to improve our sourcing channels to tap into different skilled resource pools. Where possible, if we can deliver a service competently from a remote location, we will aim to do so – better leveraging our more operationally oriented locations, notably Farmington, Connecticut and from 2015, Atlanta.
The directors have concluded, based on this review, that there is a reasonable expectation that the group will be able to continue in operation and meet its liabilities as they fall due over the three year period of assessment.
Building partnerships with charities Our passionate employees on our charity committees in the UK and the US are responsible for encouraging and supporting employees to participate in charitable and community activities; managing Beazley’s corporate charitable partnerships and overseeing Beazley’s response to large scale disasters.
Green office programme This year our San Francisco team worked with their building management company to put forth a voluntary ‘Green Office’ programme for all tenants in the building.
Our aim is to build an open and collaborative culture generating contagious energy and a real sense of creativity. In 2015 our focus on diversity and inclusion was rated one of our strengths in the employee survey, with 80% of our people agreeing we have a work environment that is open and accepts individual differences.
Principal activity Beazley plc is the ultimate holding company for the Beazley group, a global specialist risk insurance and reinsurance business operating through its managed syndicates at Lloyd’s in the UK and Beazley Insurance Company, Inc., a US admitted carrier, in the US.
Risk management The group’s approach to risk management is set out on pages 52 to 57 and further detail is contained in note 2 to the financial statements on pages 128 to 139.
Appointed: 21 July 2011 Experience: Dennis has more than 45 years’ experience in financial services markets. He was formerly a main board executive director at Lloyds TSB (2000-2001), chief executive of AXA UK and a member of AXA’s Global executive committee (2001-2006). He has been chairman of Liverpool Victoria and deputy chairman of Bank of Ireland. Dennis was appointed chairman of The Co-operative Bank plc in 2014. Committee: Nomination committee (chair)
The key procedures that the board has established to ensure that internal controls are effective and commensurate with
a) Valuation of insurance liabilities As further explained in note 1 to the financial statements, the group’s policy is to hold sufficient provisions, including those to cover claims which have been incurred but not reported (IBNR) to meet all liabilities as they fall due. 2015 has seen a number of individual risk losses but has otherwise been a relatively benign year. Our consideration of catastrophe losses has therefore been restricted to developments in relation to the more significant catastrophes of previous years.
As demonstrated by historic bonus payments, our bonuses are strongly aligned with ROE performance. Individual allocations for the senior team are based upon their contribution and performance during the course of the year, not through any pre-determined formula.
Last year we significantly increased the disclosure of our annual bonus performance framework and targets. We provide full details of the ROE targets underpinning our bonus approach along with the guideline levels which are used by the committee in their determination for each executive director. We hope that shareholders continue to find this helpful in demonstrating the link between pay and performance.
LTIP awards may be forfeited if shareholding requirements are not met. Investment in underwriting Management and underwriters may defer part of their bonuses into the Beazley staff underwriting plan, providing alignment with capital providers. Capital commitments can be lost if underwriting performance is poor.
Rolf A W Tolle 1 Other than for the chairman, fees include fees paid for chairmanship of the audit and risk and remuneration committees, and for the role of senior independent director, as well as fees, where relevant, for membership of the subsidiary boards of Beazley Furlonge Limited (BFL) and Beazley Re dac and the chairmanship of the BFL risk committee.
Share price at grant Share price appreciation 2011 award 2013 award
For 2015, the portion of each director’s annual bonus deferred into shares was as follows: Deferred into shares
Adrian P Cox Deferred shares 101,443 300,000 – – – D Andrew Horton Deferred shares 131,877 390,000 – – – Neil P Maidment Deferred shares 101,443 300,000 – – – Clive A Washbourn Deferred shares 101,443 300,000 – – –
While bonus awards are determined by reference to the profit pool, the bonus plan is discretionary and the committee may take into account any other factors it considers appropriate.
LTIP awards from 2012 are subject to a malus provision. The committee may determine that unvested shares will be forfeited in certain circumstances, such as a material misstatement of accounts or a significant adverse group development.
A portion of the award is subject to performance over three years and a portion over five years.
Existence and valuation of investments (financial assets at fair value ($3,842.2m; 2014: $4,077.4m)) Refer to page 77 (audit committee report), pages 118 to 127 (accounting policy) and pages 112 to 176 (financial disclosures). The risk Our procedures to address this risk The group holds and manages a significant investment portfolio to meet its obligations under insurance contracts and for shareholder investment purposes. The size of the portfolio; the exposure to hedge funds; and the strategy employed to increase the allocation of assets with a higher credit risk to improve investment return all contribute to making the existence and valuation of investments key areas of focus within our audit. The use and oversight of outsourced service providers remains an element of the group’s approach to investment management. Continuing the trend from 2015, Beazley continued to expand its portfolio of assets with a higher credit risk which includes investments subject to greater complexity of valuation including private equity and structured credit positions.
The Listing Rules require us to review: • the directors’ statement, set out on page 107, in relation to going concern and long term viability on page 55; and • the part of the corporate governance statement on page 73 relating to the parent company’s compliance with the provisions of the 2014 UK Corporate Governance Code specified for our review.
Earnings per share (cents per share): Earnings per share (pence per share): Consolidated statement of profit or loss for the year ended 31 December 2015
Cash flow from investing activities Purchase of plant and equipment 13 (2.5) – (0.4) – Expenditure on software development 12 (5.0) – (5.3) – Purchase of investments (3,659.7) – (2,832.7) – Proceeds from sale of investments 3,892.2 – 2,773.3 – Investment in associate 14 – – (3.2) – Interest and dividends received 4 70.8 – 67.7 – Net cash from/(used in) investing activities 295.8 – (0.6) –
In accordance with the requirements of IAS 1 the financial statements assets and liabilities have been presented based on order of liquidity which provides information that is more reliable and relevant for a financial institution.
Financial statem ents 1 Statement of accounting policies continued e) Renewal rights Renewal rights comprise future profits relating to insurance contracts acquired and the expected renewal of those contracts. The costs directly attributable to acquire the renewal rights are recognised as intangible assets where they can be measured reliably and it is probable that they will be recovered by directly related future profits. These costs are subject to impairment and are amortised on a straight-line basis, based on the estimated useful life of the assets, which is estimated to be between five and ten years.
Our investment strategy is developed by reference to an investment risk budget, set annually by the board as part of the overall risk budgeting framework of the business. The internal model is used to monitor compliance with the budget. In 2015, the investment risk budget was set at a level such that investment losses should not cause the group financial result to deviate from the planned level by more than $120m, at the 1 in 10 confidence level, or $300m at the 1 in 200 confidence level. This compares to a planned investment result in the current low interest rate environment of 1.25% or $50m. The investment risk budget will be at a similar level in 2016. It is important to note that stochastic risk modelling is not a precise discipline. Our ESG outputs are regularly validated against actual market conditions, but we also use a number of other, qualitative, measures to support the monitoring and management of investment risk. These include stress testing, as well as selected historic and prospective scenario analysis.
Illiquid credit assets are not included in the maturity profile because the basis of maturity profile can not be determined with any degree of certainty.
The Internal Model Solvency Capital Requirement is a dedicated quantitative review of syndicate models and it sets outs to be a key input to the Lloyds Internal Model.
Operating expenses include: Amounts receivable by the auditor and associates in respect of: – the auditing of accounts of the company’s subsidiaries 1.3 1.2 – taxation compliance services 0.1 0.1 – all other assurance services not included above 0.4 0.4 – all other non-audit services not included above – –
When testing for impairment, the recoverable amount of a CGU is determined based on value in use. Value in use is calculated using projected cash flows based on financial budgets approved by management covering a five-year period taking into account historic growth rates and expected future market conditions. A pre tax discount rate of 9% (2014: 10%) has been used to discount the projected cash flows of each CGU. The same discount rate has been applied to all operating segments as these segments all undertake underwriting activities supported by the same capital base. The discount rate of 9% (2014: 10%) reflects the group’s expected return on equity and cost of borrowing and has been calculated using independent measures of the risk-free rate of return and the group’s risk profile relative to the risk-free and market rates of return and, as such, is considered representative of the rate appropriate to the risk specific to the CGU.
Falcon Money Management Holdings Limited (and subsidiaries) Malta 25% – Capson Corp., Inc. (and subsidiary) USA 31% 7.5 Equinox Global Limited (and subsidiary) UK 36% 2.5
Financial liabilities not measured at fair value Retail bond – 114.4 – 114.4 Tier 2 subordinated debt – 119.7 – 119.7 Total financial liabilities not measured at fair value – 234.1 – 234.1
Financial statem ents 23 Equity compensation plans 23.1 Employee share trust
Less unearned portion of ultimate losses ($m) – – – – – – – – – (12.9) (730.8) (743.7)
The movements shown on 2012 and earlier are absolute claim movements and are not impacted by any current year movements in premium on those underwriting years.
Discount rate (0.5% decrease) 5.9 – Inflation rate (0.3% decrease) – 3.1 Future salary changes (0.5% decrease) – 0.2 Life expectancy (1 year increase) 1.1 –
Return on equity (ROE) Ratio, in percentage terms, calculated by dividing the consolidated profit after tax by the average daily total equity.