Financial statements 131 Consolidated statement of profit or loss 132 Statements of comprehensive income 133 Statements of changes in equity 135 Statements of financial position 136 Statements of cash flows 137 Notes to the financial statements 198 Glossary
Find out more within our Financial Statements on pages 130 to 197
Strong long term relationships have sustained our business over more than three decades
We target a diverse underwriting portfolio and actively manage the different insurance cycles to achieve consistent results year on year
We look for individuals with a strong sense of ownership for the business they are engaged in, who are willing – indeed keen – to be accountable for their decisions
Since Beazley was founded in 1986, the company has relied on the zeal and commitment of people who want to build a business, not just do a job. For the first two decades, most of the individuals who embodied this spirit were underwriters who had deep knowledge of a particular line of business and a vision of how best to grow their book.
Highly motivated entrepreneurial underwriters are still crucial to Beazley’s success. However in recent years other functions within the company, such as IT, operations and marketing, have been encouraged to take a similar broad view of the opportunities Beazley offers. Initiatives such as the launch of the world’s first fully personalised digital insurance policy in 2018 owed their existence to multi-disciplinary teams of individuals from varied backgrounds working towards a common goal.
As the digital transformation of Beazley’s operations gathers pace, driving internal efficiencies and enhancing the experience of brokers and clients, the capability of all Beazley employees to think and act like entrepreneurs will continue to be critical.
In London, most business is transacted on a subscription basis, meaning that large risks are parcelled out among numerous Lloyd’s syndicates and insurance companies. As a widely recognised lead underwriter for many of the classes of business in which we specialise, Beazley sets the price and terms and conditions for most of the business it writes.
The Lloyd’s syndicates The Lloyd’s syndicates managed by Beazley compete vigorously with other syndicates, but they also collaborate with both Lloyd’s syndicates and insurance companies to provide the underwriting capacity that clients need.
It was with the goal of expanding Beazley’s small and mid-sized business that the company established a local underwriting presence in the US market in 2005. The goal was to write business from smaller clients, who would not normally seek cover in the London market, but for the same lines of business for which Beazley was already well known. The strategy has paid off, securing access to significant growth opportunities while balancing the overall underwriting portfolio. Beazley’s US underwriters wrote in excess of $1bn in gross premiums during 2018.
$1bn achievement On 13 December, our US offices celebrated achieving our milestone of $1bn gross premiums written in the US. Since launching in 2005, our US business has grown from a single office to 589 employees across 13 locations. We maintain our A rated status, write over 27 product lines and continue to pursue our vision. In early 2019, we will celebrate this achievement and thank our brokers by hosting them at various events across the US. We are proud of this accomplishment and have already set our sights on our next milestone in the US.Dallas office
Diversified portfolio The spread of our overall portfolio by division and the impact this diversification has had on our combined ratio over the past nine years can be seen in the chart below.
Marine We help insure in excess of 20% of the world’s ocean-going tonnage and are the pre-eminent leader of voyage and tow business in the London market. The energy team work with over 500 oil and gas companies, drilling contractors and service companies globally offering insurance solutions for these complex risks. We have extensive experience insuring a wide variety of cargoes including project cargo, fine art and specie.
• We primarily transact business through brokers and work with selected managing general agencies and managing general underwriters to improve distribution in specialist niches.
For staff Beazley employs talented people and we invest accordingly in expanding their skills and helping them build rewarding careers. We measure the impact of these investments on the perceptions of our people in two main ways: by monitoring staff retention levels and through a detailed employee engagement survey, which we conduct every two years. On both counts, the evidence is strongly positive. Our staff retention levels are very high and the most recent employee engagement survey, conducted in 2017, positioned Beazley in the top quartile of the 6,000 companies surveyed by Aon Hewitt.
For customers Nearly all business at Beazley comes through brokers. We monitor broker and client perceptions of our service – particularly our claims service – in a variety of ways, including through a detailed annual broker survey. This is the third year Beazley have conducted a global survey, and the number of brokers participating continues to increase, reflecting strong engagement. Over 5,000 brokers provided feedback on our underwriting and claims service. Our high Net Promoter Scores in both areas reflect their continued willingness to recommend Beazley to their clients.
In 2018, Beazley’s teams across the US celebrated a landmark achievement – passing the goal of underwriting a billion dollars of US business. From modest beginnings in 2005, when Beazley’s underwriters in Farmington, Connecticut brought in $15.4m in premium, the US business has grown to encompass 13 offices, 589 people, and during 2018 $1,051.2m in gross premiums written.1
With any investments in technology come investments in people, to help them optimise the value of the technology and build satisfying long term careers at the company.
The US has proved the main engine of Beazley’s growth in recent years but since 2017 Beazley has increased its investments elsewhere in the world, notably in continental Europe. “We see strongly growing demand in Europe for many of the lines of business in which we specialise,” says new chief underwriting officer Adrian Cox. “That includes cyber of course, but also specialist liability products for healthcare providers, technology companies and financial institutions.”
Downtown Toronto: Beazley now has a strong platform for growth in Canada
Technology that enhances the speed and agility of Beazley’s workforce also underpins another major innovation designed to sustain future growth. In February 2018 Beazley opened its first office – in Birmingham, England – equipped to provide its 40 occupants with an activity based working (ABW) environment.
“The principle underlying ABW is flexibility,” says Munira Hirji, Beazley’s head of commercial management, who is responsible for the company’s 24 offices worldwide. “Flexibility to work in the way you need to and with the tools you need. So we looked closely at the design of this office to create places that reflected the different activities we do each day: for example quiet areas for calls or focused work, creative areas for collaboration, and social areas for eating and catching up.”
In spring 2019 Beazley’s office in Toronto will move to new premises equipped for ABW. The 190 person New York office will follow suit later in 2019 and in 2020 the company’s London office will move to Twentytwo Bishopsgate, a new development in the City of London, also providing for ABW.
‘‘We have also been looking to harness new sources of data, including social media feeds, that can help us price risks more swiftly. The ultimate effect of all this will be to transform our business, but it’s not a big bang.”
“We are seeking to offer our early career intake a broad exposure to the workings of the company,” says Pippa Vowles, Beazley’s head of talent management. “They need to be well versed in the ways in which technology and new forms of data are reshaping our business, as well as in the traditional but still critical technical pricing and relationship-building skills. It’s a new world.”
For Beazley, being a responsible business means we take our environmental, social and governance (ESG) obligations seriously. As global trends – including climate change – threaten our clients’ interests, it is becoming ever more clear that good business must simply be responsible business.
Global warming may be aggravating flood damage as warm air can hold far more water than cooler air
On the investment side, we believe our strategy should seek to have a positive influence on society and the wider world. For this reason we consider ESG risks as part of our decision making process. We view this approach as consistent with the objective of optimising total return, as companies demonstrating a commitment to a sustainable business strategy and ethical business culture have been shown to enjoy a competitive advantage over time, generating stronger and more stable returns.
As the insurance industry continues to pick up the bill for increasing extreme weather events, it is starting to re-evaluate on how to perform its role as an enabler of economic activity. At Beazley, we are on a journey to explore this further. Our internal sustainability initiative considers how we can use our expertise to support and incentivise improved social and environmental outcomes.
We also aim to support the communities within which we work by using our resources and skills. Whether it’s volunteering with the elderly, feeding the homeless as part of our global Make a Difference programme, working directly with our global charity partner, All Hands and Hearts or indeed making business decisions that take their social and environmental impact into consideration, our aim isn’t just to provide short-term solutions for our communities but to provide sustainable and long-term support through our programmes.
Charitable giving The company and our employees contributed over $300,000 to charitable causes in 2018.
Equal opportunity We work with Stonewall to identify the best support for our colleagues in the LGBT+ community and with Disability Forum to help make our organisation and working environment more ‘disability-smart’. We were the first Lloyd’s managing agent to sign up to the British Government’s Women in Finance Charter.
Prevention of bribery and corruption 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 know that our insurance products perform a vital function in protecting our clients’ interests and helping them to recover from disaster. As a responsible business, we also recognise our role in trying to ensure that the insurance that we provide, and the wider impact of our people, business and assets, serve a positive purpose in this planet on which we all depend.”
Emma Whiteacre Chair of the responsible business committee www.beazley.com Annual report 2018 Beazley 15
I see my role and that of the board as being to challenge, support and advise Beazley’s management as they embark on the next phase of profitable growth. Two prerequisites for this growth are clearly present. In recent months, I have been greatly impressed with the talent of individuals at all levels of the organisation. Beazley also has significant headroom to grow in all its major markets and geographies.
This breadth of opportunity is significant. Cyber insurance is perhaps too often cited as a growth opportunity for Beazley – not because it is unimportant but because it can eclipse other promising opportunities. The growth of the US business has been broad-based and our plans for growth outside of the US equally rely on a diverse product range.
Future growth will also increasingly depend on harnessing new technologies and data sources. Beazley took a number of measures to grasp these opportunities in 2018. In particular, our two new IT related strategic initiatives – Beazley Digital and Faster, Smarter Underwriting – should help capture the benefits of new technology and the availability of new data sources across our product range.
Board changes The changes that Beazley and other insurers are grappling with are more than incremental and they are likely to accelerate. They will necessitate new ways of working, new skills and a new approach to the interaction between people and technology. Succession planning is a critical responsibility for a board, and therefore in the light of planned retirements we have been looking closely at the composition of the Beazley board, taking into account the skills required to compete successfully in this new environment, whilst ensuring we can continue to discharge our responsibility to challenge, support and advise management.
In March 2019, George Blunden will be stepping down from the board, having served for eight years as Beazley’s senior independent director, as well as participating on the audit and risk committee, remuneration committee and nomination committee. He has been an outstanding servant of Beazley, helping to guide the company through a period of sustained growth. George will step down from the board at the conclusion of the annual general meeting, but we will continue to benefit from his counsel as a member of the board of our Lloyd’s managing agency, Beazley Furlonge Limited.
Following the conclusion of two three-year terms, Angela Crawford-Ingle, nonexecutive director and chairman of the audit and risk committee, will step down from the board at the conclusion of the 2018 accounting year and when the handover to her successor is complete. On behalf of the board I would like to extend our considerable gratitude to Angela. She has been an excellent chairman of the audit and risk committee and has made a significant contribution to Beazley.
We announced last March that Adrian Cox would succeed Neil as chief underwriting officer, a role for which he is exceptionally well qualified, having run our largest division, specialty lines, since 2008.
We also announced during 2018 that Martin Bride, our finance director, will retire during 2019 and we are delighted to announce that Sally Lake, currently our group actuary, will take over from Martin during 2019 following a hand over.
Management changes present a twofold opportunity: to bring people with new ideas and experiences into the company and to promote capable and ambitious individuals internally. It is particularly pleasing that the strength of Beazley’s talent – for which the company has long been known – has enabled many of our recent senior appointments to be internal.
Achieving profitable growth while supporting our insureds is key to Beazley maintaining its long term value
Beazley delivered strong premium growth in 2018, with gross premiums written rising 12% to $2,615.3m (2017: $2,343.8m). Profit before income tax declined by 55% to $76.4m (2017: $168.0m) due to a decline in investment returns. Our combined ratio stood at 98% (2017: 99%) and was affected by severe natural catastrophe claims again in 2018.
In November, we estimated the combined cost of two US hurricanes, Florence and Michael, and two Japanese typhoons, Jebi and Trami, at $105m net of reinsurance and reinstatement premiums. As the year drew to a close, we sustained an additional $40m of claims net of reinsurance for the wildfires that blazed with unprecedented ferocity in northern California. The previous year’s exceptionally heavy catastrophe losses had already depleted our catastrophe reserves with the outcome that prior year reserve releases for the group as a whole in 2018 fell to $115.0m (2017: $203.9m).
We are in business to pay claims and the long term value of the company depends on the claims service we provide, which supports strong, enduring relationships with our clients and brokers. When insurers talk of catastrophe claims, they usually mean claims triggered by events such as storms, earthquakes or wildfires. However for our clients any loss may potentially rank as a catastrophe.
We have now seen two years of above average claims for short tail property insurance and reinsurance business, following on from five years of very subdued claims activity. The erosion of premium rates we saw between 2012 and 2016 has, to some extent, been reversed. We hope to build on last year’s price increases during 2019. In particular, numerous competitors have curtailed their property underwriting following heavy losses and this withdrawal of capacity should make recent price rises more sustainable.
Growth opportunities Growth in insurance can be opportunistic – driven by firming premium rates – but it can also be strategic, based on an insurer’s position in growth markets. Over time, the latter is more important. Beazley is well positioned in a wide array of growth markets. The cyber insurance market, showing double digit annual growth, is perhaps the most widely discussed. Nevertheless demand is also very strong for the specialty liability products we offer to healthcare providers, technology companies, and property developers confronting environmental liability risks.
Our position in markets such as these has underpinned the strong growth of our US operations in recent years, which continued in 2018. We saw locally underwritten US premiums grow 20% during the year to $1,051.2m (2017: $878.2m), nearly 90% of which is written on behalf of the group (the balance is attributable to the external investors supporting Beazley syndicate 623). Our US business has grown at an average rate of 18% for the past five years and we foresee further double digit growth during 2019.
Outside the US, we have also been laying the foundations for long term growth. In 2017, our specialty lines division – Beazley’s largest – began a concerted effort to capitalise on the growing demand for specialty liability products that we saw developing outside the US, particularly in continental Europe. We saw opportunities in many of the industries that have also fuelled our US growth, such as healthcare and technology, but we also saw significant growth potential in financial institutions business, which we have not historically underwritten in the US.
As described on page 12 and 13 of this report, we have invested heavily in both people and technology to support the growth of our non-US business, hiring 34 underwriters outside the US in 2018. Although we are a UK-based business, Brexit should not present any insurmountable challenges for Beazley. In July 2017 we secured approval from the Central Bank of Ireland for our Dublin based European insurance company, Beazley Insurance dac, to write insurance business. We are accordingly able to underwrite European business for the account of Beazley Insurance dac – which has branches in Germany, France, Spain and the UK – and for the account of our Lloyd’s syndicates through the Lloyd’s Brussels office.
New strategic initiatives Change is gathering pace in our industry, fuelled by new technologies and new data sources. In 2018 we launched a series of strategic initiatives to help Beazley adjust to these changes and benefit from them. Our overarching goal is to make the company an even better business partner to our clients and brokers.
A key objective of these initiatives will be to lower, over time, the expense ratios that have proved stubbornly high in our industry. Our value to our clients will dramatically increase if we can pay out less in expenses and more in claims. This in turn will depend on enlisting technology to enhance the productivity of our underwriters and other staff, automating manual processes wherever possible.
Two of our strategic initiatives are tackling this challenge in different ways. Our Beazley Digital initiative focuses on small, relatively simple business, where we see significant scope for automation. Our Faster, Smarter Underwriting initiative is tackling the larger, more complex risks that are the historic mainstay of Beazley’s business. We see some opportunities for automation here too, but there is also scope for enlisting new data sources to help us underwrite risks that were previously very hard to price or even deemed uninsurable.
Finally, as a London-based insurer our success is in many respects bound up with the broader success – and particularly the efficiency – of the London insurance market. Last April I was delighted to be invited to chair the London Market Group (LMG), a body that represents all of the market’s businesses. At Beazley our London Market strategic initiative was launched during 2018 to ensure that we benefit to the fullest possible extent from the work that the LMG is doing to modernise and promote the London market.
Executive changes Succession planning is something we take very seriously at Beazley at all levels in the organisation. Some of our plans are currently being executed: we welcomed four new members to the executive committee in 2018 and a further four will join during 2019. I am delighted that more than half of our recent senior appointments are internal promotions, including all of those to senior underwriting roles.
In November 2018, Tim Turner succeeded Clive Washbourn as head of Beazley’s marine division. Tim joined Beazley in 1998 when the marine division was established and has for several years headed the marine, hull and war risk account within the division. He has represented the marine division on Beazley’s underwriting committee since 2016. Clive took the decision to step down for personal reasons. We are however delighted that he has expressed his willingness to continue to offer the team the benefit of his expertise in underwriting and business development.
Mark Bernacki, who joined Beazley in 2005 and has led our property division since 2012, will also be leaving during 2019 and there will be an announcement about his successor as head of property in due course.
Two other key appointments have ensued from the planned retirements of Martin Bride, our finance director, and Dan Jones, who heads our marketing and broker relations functions, in 2019. Martin will be succeeded by Sally Lake in May 2019. Sally has been with Beazley since 2006 in various roles and is the current group actuary. In late 2018, Lou Ann Layton joined us from Marsh as Dan’s successor. Prior to joining Beazley Lou Ann held a series of senior positions at Marsh in the US, most recently as head of the south east region.
Beazley maintains a conservative investment strategy which has served us well over the years. Nevertheless with financial assets of more than $5.1bn, it is clear that sharp gyrations in asset values can significantly affect the company’s overall performance. In 2018, the 70% decline in our investment return was equivalent in effect to a large catastrophe loss on our underwriting portfolio.
Risk management Risk management continued to be an invaluable part of our business model and the team, led by Andrew Pryde, undertook a number of special assignments in 2018. In light of the impending Brexit deadline, Beazley implemented a cross business working group to discuss and work through the various possible outcomes ahead of March 2019. At the time of writing, many outcomes still remain on the table but we believe we are well placed to navigate through the uncertainties.
Outlook Our business confronted some stiff headwinds in 2018, which impacted both our underwriting and investment returns. By contrast, we enter 2019 with some moderate tailwinds: firmer pricing for some lines of business and higher interest rates to underpin our investment returns. However the world remains a very uncertain place, with political risk – the kind that none of us can insure against – threatening global growth through trade wars and protectionism.
In this environment our focus will continue to be on the determinants of growth that we can control, investing in our people, our systems, and in our offices around the world. Emblematic of these investments is our new Birmingham office which opened in February 2018: the first of many new and remodelled offices around the world designed to accommodate the varied workplace needs of our people in the years to come. In 2020, Beazley’s London staff will move into similar, futuristic office space at Twentytwo Bishopsgate in the City of London and our New York and Toronto colleagues are already ahead of us in the queue.
A Lloyd’s is the leading market for specialty insurance. However its profitability as a market has come under pressure with falling rates over the past few years and in 2017 its overall result was an underwriting loss even with the impact of the catastrophe events excluded. On the back of this Lloyd’s has taken action to ensure businesses operating at Lloyd’s, including Beazley, aim to write business profitably. Not surprisingly these actions have had more of an impact on the less profitable operations or lines of business. These challenges to the market have not had a major impact on our growth plans for 2019 but have ensured we remain, as we have always have been, focused on underwriting profitably. Our aim is for each product to secure a profit over the underwriting cycle, which is why we decided in 2018 to withdraw from construction business.
A 2018 is the second consecutive year in which the property division has made a significant loss so, no, we are not satisfied with the performance. Rates in property business had been going down for a number of years and finally in 2018 we saw rates increase. The business has been impacted by the increased cost of attritional claims on top of worse than average catastrophe claims. We started re-underwriting the business in our large risk property book at the end of 2017 and our aim is to see the benefit of this in the improved profitability in 2019 and beyond. We will be closely monitoring the division throughout 2019 to ensure this business returns to acceptable profitability.
A I think we have done everything possible to mitigate the impact of Brexit. Over the past couple of years we have been focusing on growing our business in Europe, expanding our underwriting presence in France, Spain and Germany, and we feel that our specialist products will sell well in those countries. Lloyd’s has set up Lloyd’s Brussels and we are writing business in those countries via that platform and in addition we have our Irish incorporated insurance company with branches in those three countries. So far we have not seen a major negative impact of Brexit on our business although we have seen one or two clients being unwilling to commit their business to Lloyd’s whilst there is uncertainty around the Brexit position. The challenge at the moment is uncertainty – hopefully we will know soon where we are and it will be easier to ensure that our plans are fit for purpose.
Q Do you believe that the specialty insurance business will be materially disrupted by outsiders or will incumbents find ways to hold onto the business?
A I think it is up to the incumbents to ensure that they embrace the use of data and technology better than they have done so far. This means insureds working with their brokers and insurers to determine how best to make the placement chain of insurance as efficient as possible. I feel optimistic that there is more progress on this topic now than there has ever been. If the incumbents do not act quickly and decisively then I am sure disruptors will come in and impact us.
Against the backdrop of an active claims environment, 2018 saw Beazley deliver a combined ratio of 98% (2017: 99%) and gross premiums written of $2,615.3m (2017: $2,343.8m). All five divisions achieved top line growth year on year with political, accident & contingency, property and specialty lines all achieving double digit growth.
Our specialty lines division was the largest contributor to the group’s result achieving a combined ratio of 91% (2017: 89%). The division continued to see strong growth with premiums increasing 14% to $1,469.0m (2017: $1,292.2m) helped by rate increases of 1% (2017: flat). Our US platform continues to be the core driver of the division’s premiums written, contributing $760.7m in 2018 (2017: $632.9m). Our specialty lines international business also began to show promising developments as we saw steady growth in the first full year of underwriting. It is expected that our non-US specialty lines business will become more prominent as we move through 2019.
Outlook Beazley continues to benefit from the diverse portfolio which the group maintains across its underwriting divisions. Our philosophy of effective cycle management has underpinned our underwriting strategy for many years. We actively seek to grow the areas where we see the best opportunities for future profitability and shrink areas where margins are challenged.
As we enter 2019 we continue to see opportunities for high single digit premium growth. Further development of our business written onshore in the US and of our international specialty lines platform will support this.
Gross premiums written 415.4 362.9 Net premiums written 360.2 300.0 Results from operating activities (80.4) (68.3) Claims ratio 84% 86% Expense ratio 41% 44% Combined ratio 125% 130% Rate change 10% –
Gross premiums written 207.4 206.8 Net premiums written 137.3 134.6 Results from operating activities (1.8) 3.8 Claims ratio 70% 71% Expense ratio 33% 36% Combined ratio 103% 107% Rate change 6% (2%)
Beazley is well positioned in this context, achieving consistent underwriting profitability within the marine division over the past 10 years and accounting on average for a quarter of the entire Lloyd’s marine market’s profits between 2013 and 2017.
Political factors, such as tariffs on trade between the US and China, could potentially have a material effect on the volume of goods transported by our clients and thus on demand for hull and cargo cover, but we have yet to see any impact from such trade tensions.
Political 23% Contingency 21% PA direct 18% Stand alone terrorism 14% PA reinsurance 12% Life direct 6% Sports 3% Life reinsurance 3%
Our political risks team had a good year with premium growth of 11% and a far more benign claims environment than we had witnessed in 2017. Only about a third of political risk accounts are renewable so we depend on brokers to bring our teams a steady flow of new business. However, as political tensions rise in many parts of the world, we expect demand for cover to remain strong. Our practice is to reserve prudently for claims, and if the claims do not fully materialise this enables us to make reserve releases in later years: in 2018 we were able to release funds no longer required to meet political risks and trade credit claims on the 2016 and prior underwriting years.
The terrorism market continued to see premium rates decline in 2018, but at a slower rate than in previous years, due to the relative rarity of attacks that result in widespread physical damage. The potential for such attacks of course continues to exist but in recent years terrorists have sadly tended to target people more than property. Attacks of any kind can have a chilling effect on local businesses and we have accordingly been offering loss of attraction cover to companies that may find their business affected by a nearby incident.
Terrorism, or the threat thereof, is also a peril covered by our contingency team, which offers broad cancellation cover for events of widely varying sizes, including some of the world’s largest sports and entertainment events. The team had a good year with premium growth of 25%. Our London team, the largest and most experienced in the market, focuses predominantly on large scale events whereas our US underwriters also underwrite a large volume of smaller risks.
The focus of our US team is purely on accident and health business, and specifically on supplemental health cover for the employees of companies seeking additional protection over and above that provided by high deductible benefit plans. Under the leadership of Brian Thompson, we made excellent progress in carving out a niche for Beazley in this growing market in 2018.
Deteriorating claims experience made 2018 a challenging year for property insurers while ushering in a more favourable pricing environment. At Beazley we saw the cost of the previous year’s catastrophes, notably Hurricane Irma, rise and combine with fresh losses from Hurricanes Michael and Florence in the US. Attritional losses also continued at a higher rate than in recent years.
In light of the scale of the market losses it is not surprising that we saw significant rate rises on renewal business this year. Rates for our large risk open market property team in London rose by 18% and we saw rates rise across the entirety of our portfolio by 10%.
These rate rises have made for a healthier pricing environment after several years of price erosion. We wrote 14% more business in 2018 than the previous year.
Furthermore, in October 2018 we took the difficult decision to exit the market for construction and engineering business around the world, transacted through teams in London, the US (where the business is known as builders’ risk), Singapore and Latin America. This business accounted for approximately 10%, or $35m, of our property division’s premiums in 2017. After careful analysis, we concluded it was unlikely to satisfy our cross-cycle profitability requirements in the foreseeable future.
Also in September, Hurricane Florence came ashore in North Carolina, triggering massive flood damage over a wide area. The following month, Hurricane Michael became the strongest storm ever to hit the Florida panhandle, with wind speeds of 155 mph. For our reinsurance book, Michael was the more expensive storm, generating reinsurance losses of about half those of Hurricane Irma in 2017.
Questions are now being raised about the insurability of wildfires, but our hope is that it will prove possible to identify effective loss control precautions that can continue to make affordable cover available.
The net effect of 2017’s catastrophe losses exerted continued upward pressure on premium renewal rates in January 2018. We saw rate rises averaging 8% for US business, which accounts for approximately 54% of our portfolio, and 5% for non-US business.
Specialty lines accounted for 56% of Beazley’s total premium in 2018, covering a very wide array of types of cover and clients ranging in size from the world’s largest engineering firms, health systems and technology companies to thousands of small businesses requiring specialist liability policies.
The rationale for this grouping is that we saw great value in bringing our management liability and cyber business together ‘under one roof’. Many of our brokers already group cyber and management liability business together and discuss them in the same breath with clients. Both directors’ and officers’ insurance (D&O), a major management liability line, and cyber liability risks rank as boardroom issues in the eyes of many of our clients.
The strength of Beazley’s cyber business is well known. We saw premiums from this line grow by 9% in 2018 and there is further scope to grow significantly, given that more than half the new business we saw in 2018 was from first time buyers. However we see excellent growth opportunities within our management liability portfolio as well, particularly for products such as Beazley Safeguard, which combines risk management advice, crisis response and liability coverage for organisations entrusted with the care of children or vulnerable adults.
Innovation is equally important to the team that will continue to trade under the specialty lines name. These include our professions group, led by Jerry Sullivan, with teams focusing on the professional liability needs of lawyers and architects and engineers, as well as our fast growing environmental liability team.
Another major growth area within specialty lines is in the healthcare space, where we have been expanding our offerings to life sciences companies. This segment currently comprises medical device manufacturers, contract research organisations involved in clinical trials, blood and tissue banks, and a range of service providers to the life services sector. It is a field in which companies collaborate closely, generating complex exposures. Adaptability and willingness to innovate need to be second nature: around two thirds of the risks underwritten by Marc Amis and his life sciences team are tailored to meet the unique needs of the individual clients involved. They are accordingly able to offer clients bundled cover for multiple exposures, which is invaluable when a single claim can span multiple forms of insurance.
Finally, specialty lines will also continue to include our small business teams. Automating the operations of these teams as much as possible is the focus of our Beazley Digital strategic initiative, which should increase the productivity of our underwriters significantly. Like most Lloyd’s businesses, Beazley began life as a large risk insurer but in recent years we have been writing an ever growing volume of small business risks. These clients, and the brokers who serve them, appreciate the quality of our specialist cover and the claims service that supports them, but we do see opportunities to simplify these products and make the placement process more efficient.
In the cyber market, rates have been softening, but we continue to see profitable growth opportunities. The strongest growth we saw last year was outside the US, where the impact of the European Union’s General Data Protection Regulation and similar regulations in other regions is now beginning to bite. The business interruption risk presented by cyber attacks also continues to worry our clients and is no longer exclusively the concern of the larger businesses we insure.
Beazley celebrates its 30th anniversary 10th anniversary of operations in Singapore and Paris
Beazley opens a new office in Barcelona and acquires Creechurch Underwriters in Canada
Profit Profit before tax in 2018 was $76.4m (2017: $168.0m). The group’s combined ratio improved slightly to 98% (2017: 99%) thanks to an improving expense ratio in what was another year of high claims activity. By recording an underwriting profit we once again demonstrated the resilience of our portfolio. Our investment team achieved an investment return of 0.8% (2017: 2.9%) or $41.1m (2017: $138.3m).
The charts overleaf highlight how we achieve diversification by product mix, geography and type of business.
Net insurance claims 1,227.8 1,075.7 14% Acquisition and administrative expenses 812.6 774.4 5% Foreign exchange loss 13.2 3.1 326%
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 key performance indicators section (inside front cover) and in the glossary on page 198.
The amount the group spent on reinsurance in 2018 was $366.8m (2017: $365.0m). As a percentage of gross premiums written it decreased to 14% from 16% in 2017 due to a desire to keep reinsurance spend flat year on year.
Claims Claims activity in 2018 was very similar to that seen in 2017. Hurricanes Florence and Michael hit the US, while Typhoons Jebi and Trami affected Japan. Added to this, wildfires broke out in California for the second year in a row causing widespread damage. Whilst these natural disasters were not quite at the level of the catastrophes experienced in 2017, they combined with higher attritional claims particularly in our property account and the lower reserve releases compared to 2017 that we had signalled, to cause the claims ratio to increase slightly to 59% (2017: 58%).
The reserve releases in 2018 decreased to $115.0m (2017: $203.9m). Our property division strengthened its reserves materially. Approximately half of this was driven by increasing the reserves for the 2017 catastrophes, notably Hurricane Irma, and the balance was due to higher than expected attritional claims in our property division, particularly in relation to the 2016 and 2017 underwriting years. Our overall reserves for the 2017 catastrophes proved sufficient and the downward revisions in our reinsurance division that counter balanced the increases in the property division were the major driver of that division’s release. Our specialty lines division maintained a strong level of reserve release in 2018 at $111.2m (2017: $121.4m) including meaningful amounts from the 2015/2016 cyber portfolio. This part of the specialty lines portfolio is effectively short tail and will show more year on year variability than the balance of the division.
Please refer to the financial statements for further information on reserve releases and loss development tables.
Acquisition costs and administrative expenses Business acquisition costs and administrative expenses increased during 2018 to $812.6m from $774.4m in 2017. The breakdown of these costs is shown below: $m $m
Brokerage costs 461.1 431.1 Other acquisition costs 100.8 88.6 Total acquisition costs 561.9 519.7 Administrative expenses 250.7 254.7 Total acquisition costs and administrative expenses 812.6 774.4
Brokerage costs are the premium commissions paid to insurance intermediaries for providing business. As a percentage of net earned premiums they have decreased slightly to 22% in the current year (2017: 23%). Brokerage costs are deferred and expensed over the life of the associated premiums in accordance with the group’s accounting policy.
Beazley’s overall expense ratio was down by two percent from 41% in 2017 to 39%. It is also flat five years on from 2013 when it was also 39%. The company has always stressed that improving the expense ratio during the phases of stronger growth was a key objective. It is encouraging that this outcome has been achieved whilst at the same time maintaining investment in future growth opportunities.
Investment performance 2018 proved to be a difficult year for investments and many asset classes have produced negative returns. Whilst our absolute return was disappointing, most of the portfolio performed well relative to its benchmarks and the management actions of Stuart Simpson and his team had a positive effect at the margin. US interest rates were increased four times as the Federal Reserve continued to reverse the easing monetary policies of recent years and officials indicated that interest rates would continue to rise through 2019. As a result US bond yields rose throughout most of the year, generating capital losses on these securities. These developments, combined with continuing tensions over international trade and signs that global economic growth may be slowing, has led to growing pessimism about prospects for global economic activity, culminating in a significant correction in risk asset values, including equities and credit, in the final quarter of the year.
We reduced our exposure to more volatile capital growth investments from 14.8% to 12.1% of assets during the year, which was beneficial as these exposures produced a negative return in this period, with equities the worst performing asset class as the global equity index declined by more than 7%. We halved our equity exposure, from 3.4% to 1.7% of assets, during the period. Our fixed income investments grew from 76.0% to 81.1% of assets in 2018 and this portfolio returned 1.3%, held back by rising interest rates and widening credit spreads, but helped by the significant decline in US bond yields during December. Our overall investment return for the year ending 31 December 2018 was 0.8%, or $41.1m (2017: 2.9%, $138.3m). Rising yields in 2018 have increased the average yield of our fixed income investments to 3.3% and this should support better investment returns in future periods.
The table below details the breakdown of our portfolio by asset class: Cash and cash equivalents 336.3 6.7 440.5 9.0 Fixed and floating rate debt securities – Government, quasi-government and supranational 1,410.1 27.9 1,390.6 28.4 – Corporate bonds
During 2018, the funds managed by the Beazley group increased on the prior year, with financial assets at fair value and cash and cash equivalents of $5,052.6m at the end of the year (2017: $4,890.1m). The chart below shows the increase in our group funds since 2014.
Tax Beazley is liable to corporation tax in a number of jurisdictions, notably the UK, the US and Ireland. Beazley’s effective tax rate is thus a composite tax rate mainly driven by the Irish, UK and US tax rates. The weighted average of the statutory tax rates for the year was 18.6% (2017: 18.7%). The effective tax rate has decreased in 2018 to 10.7% (2017: 22.6%). The decrease has been possible thanks to the revision of prior years’ US tax returns to incorporate additional tax deductions for staff costs, including share based payments.
The application of the diverted profits tax legislation passed by the UK government early in 2015 still remains uncertain. We have considered the implication of this and retain the view that this tax should not apply to Beazley (see note 9 to the financial statements). Whilst the uncertainty around the legislation remains, the quantum of our earnings that could theoretically fall within its scope grows as the period since the legislation started to apply lengthens.
Financial assets at fair value and cash and cash equivalents 5,052.6 4,890.1 3%
Net assets per share (pence) 219.6p 215.3p 2% Net tangible assets per share (pence) 200.7p 196.2p 2% Number of shares 1 523.1m 522.0m –
Intangible assets Intangible assets consist of goodwill on acquisitions of $62.0m (2017: $62.0m), purchased syndicate capacity of $10.7m (2017: $10.7m), US admitted licences of $9.3m (2017: $9.3m), renewal rights of $25.2m (2017: $35.2m) and capitalised expenditure on IT projects of $19.3m (2017: $16.3m).
Reinsurance assets Reinsurance assets represent recoveries from reinsurers in respect of incurred claims of $951.7m (2017: $993.2m), and the unearned reinsurance premiums reserve of $241.1m (2017: $237.9m). The reinsurance receivables from reinsurers are split between recoveries on claims paid or notified of $231.9m (2017: $219.4m) and an actuarial estimate of recoveries on claims that have not yet been reported of $719.8m (2017: $773.8m). The group’s exposure to reinsurers is managed through: • minimising risk through selection of reinsurers who meet strict financial criteria (e.g. minimum net assets, minimum ‘A’ rating by S&P). These criteria vary by type of business (short vs medium tail). The chart on page 47 shows the profile of these assets (based on their S&P rating) at the end of 2018; • timely calculation and issuance of reinsurance collection notes from our ceded reinsurance team; and • regular monitoring of the outstanding debtor position by our reinsurance security committee and credit control committee.
Our UPR has increased by 12% to $1,415.5m (2017: $1,259.2m). 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.
In 2018, Beazley acquired 6.0m of its own shares into the employee benefit trust. These were acquired at an average price of 547p and the cost to the group was £32.8m.
The following table sets out the group’s sources of funds: $m $m
The changes in the US tax legislation announced towards the end of 2017 have led us to reconsider how risk is distributed across the group and following changes to Beazley’s internal reinsurance programs, more premium and more risk is retained within the US in our admitted insurance company, BICI. As a result of this, BICI has required a c.$80m increase in its capital, which was partially offset by a decrease in the Lloyd’s ECR. The net impact on the group’s capital requirement was not material. These changes do not impact how Beazley manages its operations. We expect that Beazley’s revised internal reinsurance arrangements may still result in some exposure to the new US BEAT tax, but that it will not have any significant impact on the group’s effective tax rate.
Lloyd’s economic capital requirement (ECR) 1,594.5 1,517.2 Capital for US insurance company 173.4 96.5
Solvency II The Solvency II regime came into force on 1 January 2016. Beazley continue to provide quarterly Solvency II pillar 3 reporting to both Lloyd’s for the Beazley managed syndicates and the Central Bank of Ireland for Beazley Insurance dac and Beazley plc. During 2018 the second annual solvency financial condition report (SFCR) of Beazley plc was published.
A widely discussed topic across our industry is the preparation for the UK departure from the EU. We have worked closely with the Lloyd’s Brussels subsidiary and our regulators to make sure that we are operationally ready for a post Brexit world.
Over the last two years, another area of focus across our industry was the preparation for the General Data Protection Regulation (GDPR) which came into effect in May 2018. We see the privacy of our customer data, and the rights associated to the use of personal data, as very important to preserve. In previous years, Beazley has made significant investment in this area and so our preparation for GDPR had been a continuation of this work. We completed our GDPR readiness project prior to the May deadline and believe that we have put the necessary measures in place to be GDPR compliant.
We can see many applications of data and technology across our business, and there continues to be a flow of technology innovations that we could pursue. However, as we move further into the digital age, we recognise that it’s not just about the technology. To truly transform our business and make it fit for a digital environment, there are other areas we must focus on: 1) Applying technology and data to our business model Our specialist insurance business provides cover for a broad range of client risks – both smaller risks such as those covered by our SME business products, and larger complex risks such as those covered by our marine energy products. Different technology solutions are best applicable to different points on this spectrum of risk size and complexity. So that we best leverage technology, we have created two new strategic initiatives: Beazley Digital to focus on our smaller and higher volume underwriting; and Faster, Smarter Underwriting to focus on our larger and more complex risk underwriting.
2) Building an agile delivery capability One thing is certain in a digital world – business agility is key. Beazley is well regarded for its innovation in specialist insurance. To stay ahead of the competition, we seek to innovate in an increasingly agile way, taking new ideas to the market quickly, gathering feedback, evolving or failing them fast. This is why during 2018 we restructured our operations and technology teams to what we call a platform delivery model.
The move to the platform delivery model has enabled us to increase the speed of process and technology delivery by using an agile approach. This is instead of a more conventional ‘waterfall’ delivery approach which could in the past impede our ability to deliver new ideas quickly. Today, we often start the process of solving a business problem or addressing an opportunity by running a ‘hackathon’, where we put underwriting, operations and technology talent together for a short and intensive period of delivery. An early notable success has been our US operations platform, which has managed to cut its product delivery time by half.
3) Developing our talent to best leverage technology We are investing in our workforce to ensure we have the right blend of skills for the future. This means that our talent development programmes are placing emphasis on cross-skilled staff so they can operate in a more digital insurance market. In practice this means underwriters with increased understanding of technology, and similarly technology teams with greater knowledge of how specialist underwriting works. The outcome we strive for is to put technology and data at the centre of our specialist underwriting proposition. It also means we are increasingly equipped for changes driven by our business partners – ranging from brokers wanting to trial new digital distribution methods to better understanding new insurance risks such as the growth in crypto currencies.
External change The main political change that Beazley continued to navigate in 2018 was Brexit, although this is not a significant risk as only around 4% of Beazley’s premium originates from the EU. Despite the uncertainty throughout the year, a cross functional working group has prepared Beazley for the worst case scenario of a hard Brexit, which is where the UK leaves the EU without agreements and a transitional period. From an underwriting perspective, the EU risks expiring from 1 January 2019 have been successfully renewed. Generally the renewals have been onto the newly established Lloyd’s Brussels platform. However EU renewals within the specialty lines and reinsurance divisions have been written on the Beazley Insurance dac platform where clients have requested it. From a staff perspective, we continue to work with the 40 EU nationals (3% of employees) who are working in our UK offices to minimise the impact of Brexit on them. As such, Beazley has successfully navigated the key risks of a potential hard Brexit. Since such a hard Brexit is not certain, our preparations have also considered two other potential outcomes in order to ensure that the group is able to operate in every eventuality; namely 1) some form of transitional arrangement or 2) the UK decides not to leave the EU prior to Brexit.
In light of political decisions in the US, the group reviewed its intragroup reinsurance arrangements, which resulted in more premium being retained in the US in Beazley Insurance Company Inc. with a corresponding reduction in premium in syndicate 3623 at Lloyd’s of London. Two key consequences of this change are that the group is slightly less capital efficient, as the change has required a c.$80m increase in the US capital which was partially offset by a specific reduction in our Lloyd’s ECR, and the risk profile of syndicate 3623 is more diversified with a relatively equal mix of specialty lines risks and personal accident risks. This was an example of an important use of our internal model to balance risk and capital resources. These changes however did not impact how Beazley manages its operations.
The approach taken to business planning at Lloyd’s of London during the year attracted extensive press coverage and resulted in a number of changes to the marketplace. From a Beazley perspective, the approach taken was closely aligned to our own process of cycle management which has been followed for many years. As a result, we were able to present syndicate business plans and associated capital requirements that were approved by Lloyd’s as being consistent with their objective of improved risk selection and market profitability.
Internal change The Beazley plc board undertook regular reviews of its strategy which culminated in wide ranging discussions at its strategy day in May. As a result, four new strategic initiatives were identified to support our vision. The first, Beazley Digital, looks at how we can use technology to transact and process smaller, simpler business.
The second, Faster, Smarter Underwriting, aims to equip underwriters with data and analytics to better support the underwriting of larger, more complex business. The third is about getting closer to our clients to better understand how we can support their risk management either with existing insurance products or by designing innovative new products to tackle a risk that our clients are worrying about. Finally, the fourth initiative is how we can do more in the London market, particularly because this is the core part of our risk profile.
The group’s risk profile has altered with the exit from the construction and engineering class of business within the property division and the closing the office in Norway, which underwrote part of our energy class of business within the marine division. Growth continues in the US with the $1bn annual managed premiums milestone being reached during 2018. The chief risk officer completed his secondment to the Atlanta office and provided a report to the Beazley plc board. This report provided assurance that the US operations have coped well with the recent growth and that processes and practices have evolved to adapt to the risks and challenges associated with operating a larger company. As such, the US operations are well placed to achieve the planned growth over the next five years.
In addition, the following risk management principles have been adopted: • risk management is a part of the wider governance environment; • techniques employed are fit for purpose and proportionate to the business; • risk management is a core capability for all employees; • risk management is embedded in day-to-day activities; • there is a culture of risk awareness, in which risks are identified, assessed and managed; • risk management processes are robust and supported by verifiable management information; and
• risk management information and reporting are timely, clear, accurate and appropriately escalated.
For each risk, the risk management report brings together a view of how successfully the business is managing risk, qualitative commentary from the assurance functions and whether there have been any events that we can learn from (risk incidents). Finally, the framework is continually evaluated and where appropriate improved, through the consideration of stress and scenario testing, themed reviews using risk profiles and an assessment of strategic and emerging risks. There were no material changes made during 2018.
Business risk management Risk ownership – Identifies risk – Assesses risk – Mitigates risk – Monitors risk – Records status – Remediates when required
Committees 1st line: Underwriting, Investment, Operations, Executive committees 2nd line: Risk and regulatory, Risk committees 3rd line: Audit committees Boards
Viability statement The directors have completed a robust assessment of the viability of the group over a three year period. A period of three future years has been selected to be short enough to be reasonably assessable but long enough to reflect Beazley’s risk profile of a portfolio of diversified short- tailed and medium-tailed insurance liabilities. This three year period also aligns with the length of time over which business underwritten at Lloyd’s, being the majority of our insurance business, is managed. The board has performed an annual risk assessment and the key risks to the group in the future are summarised on pages 56 to 58.
• Natural catastrophe risk: The risk of one or more large events caused by nature affecting a number of policies and therefore giving rise to multiple losses. Given Beazley’s risk profile, such an event could be a hurricane, major windstorm or earthquake. This risk is monitored using exposure management techniques to ensure that the risk and reward are appropriate and that the exposure is not overly concentrated in one area.
• Reserve risk: Beazley has a consistent reserving philosophy. However, there is a risk that the reserves put aside for expected losses turn out to be insufficient. This could be due to any of the three drivers of risk described above. The group uses a range of techniques to mitigate this risk including a detailed reserving process which compares, claim by claim, estimates established by the claims team with a top down statistical view developed by the actuarial team. A suite of metrics is also used to ensure consistency each year.
• Corporate transaction: There is a risk that Beazley could undertake a corporate transaction which did not return the expected value to shareholders. This risk is mitigated through the due diligence performed, the financial structure of transactions and the implementation activity.
• Commercial management risk: The group aims to minimise where possible the environmental impact of our business activities and those that arise from the occupation of our office spaces. As we operate in leased office spaces our ability to direct environmental impacts is limited. However, we do choose office space and engage with our employees, vendors and customers in an effort to reduce overall waste and our environmental footprint.
• Credit risk: As a result of material natural catastrophe events, there is a risk that our reinsurance counterparties are unable to pay reinsurance balances due to Beazley. If the frequency or severity of these events is increased due to climate change this could have a corresponding increase on credit risk. An important consideration when placing our reinsurance programme is evaluation of our counterparty risk. Every potential reinsurer is evaluated through a detailed benchmarking which considers: financial strength ratings, capital metrics, performance metrics as well as other considerations.
• Regulatory and legal risk: Regulators, investors and other stakeholders are becoming increasingly interested in companies’ response to climate change. Failure to appropriately engage with these stakeholders and provide transparent information may result in the risk of reputational damage or increased scrutiny. The group regularly monitors the regulatory landscape to ensure that we can adhere to any changes in relevant laws and regulations. This includes making any necessary regulatory or statutory filings with regard to climate risk.
Our aim isn’t just to provide short-term solutions for our communities but to provide sustainable and long-term support through our programmes. For our Responsible Business strategy, we have six areas of focus: Charity Our global partnership, fundraising and match funding
We aim to support our local and international communities and clients by using our resources and skills – whether it’s through volunteering with the lonely elderly and helping to feed the homeless as part of our global Make a Difference programme, creating bespoke activities such as ‘Maths in insurance’ workshops or finding ways to make existing and new products that have a beneficial impact on our wider society and the environment too.
In 2017 the cost to the insurance industry from natural disasters hit a record $144bn, and 2018 looks set to be similarly catastrophedominated. While our business entails dealing with the financial burden of these losses, we recognise that their impact on lives and livelihoods is far greater. For this reason, we try to align our responsible business efforts with our natural interest and expertise in risk management and mitigation.
Marketplace Our awareness of the social and environmental impact of the business that we conduct, and how we can support global sustainability efforts through the provision of insurance
Inclusivity and diversity Our vision is to inspire and develop people with diverse perspectives to thrive at all levels of our business
Responsible underwriting compliance We are committed to ensure our business is conducted in an ethical and honest manner. It ensures we do the right thing for our stakeholders
Charity Our charity efforts go beyond simply making a donation – we focus on making a difference, both in our local communities and around the globe
“ At Beazley being a responsible business is a core part of our culture. So many employees give up their time to lend their expertise, influence and passion as a force for good, both in our local communities and the wider world. We encourage and support that behaviour, both because it is the right thing to do and it makes business sense too.”
All Hands and Hearts Our global charity partner, All Hands and Hearts, is often there to help communities pick up the pieces when disaster strikes. We chose to work with them because of their innovative approach, focused on deploying volunteers to areas in need, and their relatively small size, which means that our involvement can be more impactful.
Our global partnership with All Hands and Hearts provides different opportunities to use our skills and support international communities impacted by natural disaster. For Beazley, our charity efforts go beyond simply making a donation. We focus on making a difference, both in our local communities and around the globe.
Volunteering in Puerto Rico Hurricane Maria devastated Puerto Rico in 2017. The hurricane was the worst natural disaster ever to hit the island and caused the longest blackout in US history. Thousands died and many more were left homeless or forced to live in damaged homes.
Beazley offered employees the chance to work alongside All Hands and Hearts on a project to help rebuild damaged homes. Over 80 employees expressed interest, and, after a blind application process, eight employees were selected.
Beazley colleagues around the world fundraised over $37,000 through international bake sales and quiz nights to support their colleagues during the two week project.
Highlights Volunteering in Houston: following the aftermath of Hurricane Harvey, our colleagues from Houston and Dallas fundraised and collected toiletries and clothes, and five employees worked with All Hands and Hearts to help restore a damaged family home.
Charity runs: over 80 colleagues took part in the JP Morgan Run in London, raising money for Macmillan Trust in London. Colleagues in the US took part in similar 5k runs for local charities, including The Connection Inc, a Connecticut-based human service and community development agency.
Natural disasters: We respond to large-scale disasters, especially if they affect the communities where we work. We have donated over $15,000 to charities, including the relief efforts following three earthquakes and a tsunami in Indonesia, Hurricane Florence in the US, Storm Mangkhut in the Philippines, the Greek wildfires and Hurricane Lane in Hawaii.
These events not only raise donations and awareness for charities, but also help to strengthen employee engagement.
During their challenge, they burned approximately 14,000 calories, drank 45 litres of water, ate 35 bananas and did over 18,000 kayak paddle strokes. They raised over £10,000 as a result.
“ Thank you so much for your support, I have been working at Hague for 12 years now and we have never had so many supportive reading partners; in addition we have never had so many children asking for reading partners! I have children currently on a ‘wait list’ who I am reading with as they are all desperate to have a reading partner. This is amazing and incredibly motivating for the children who do have one as they feel they have something incredibly special.” Teacher Hague Primary School
“ Access to learning using a class set of professional devices, rather than one per class, is a game changer! Pupils will have more hands on access and teachers will be able to plan better opportunities for children to use ICT across the curriculum. From experience iPads are more instantly accessible meaning more time is spent actually learning than on computers loading up and setting them up.”
Highlights Young people – We partner with a number of educational charities to help support local young individuals from lower socio-economic backgrounds through their education and into the world of work.
Vulnerable adults – It’s important to us and our people to support the elderly and homeless in our communities. We do this through volunteering in programmes to tackle root causes of these issues.
Community We know our communities have many needs. Our long-term global approach focuses on young people, vulnerable adults and conservation
“ I love how open Beazley is and how willing the people here are to get to know you, or to just sit and have a conversation.’’
Make a Difference is our global community volunteering programme. This year marked a successful fifth consecutive year. Over 530 employees took part. Activities were selected based on local need and ranged from working at a farm to harvesting crops for local food pantries, sorting food at food banks, preparing and serving meals to the homeless, spending time with local pensioners and upgrading community facilities likes crèches and parks.
Farmington workshop (sustaining talent) Our colleagues in Farmington hosted a Career Day workshop for students from local high schools.
They spent the day learning about the business along with potential career opportunities within the insurance industry.
“ Internships such as these are essential for the business as they introduce a whole new demographic to the industry. Internships are also very important to young people for a variety of reasons, the first being that they are given an opportunity to work in a professional environment and see whether the corporate world is something they may enjoy as a future career. Also for many, they may not have any previous connections or opportunity to access these types of highly skilled and highly paid jobs.”
‘Maths in Insurance’ workshop, with volunteers supporting 32 aspiring students to learn about mathsrelated roles; • 45 Beazley volunteers mentored 15-16 year old students throughout the year; • 35+ local young people were hired as summer interns in our UK and US offices, and three former interns have been employed in permanent roles; • 25 Beazley volunteers supported reading and numeracy skills for 50 children from our local community partner, Hague School; • we facilitated and hosted four workshops for over 100 young people to increase their knowledge of the insurance sector and career development; and
Our interns worked for teams across the business. As well as having valuable work experience, they spent time volunteering in local food banks and worked in a global project to search for Beazley’s next charity partner.
Environment We are committed to minimising our own environmental footprint, and reducing the adverse impacts arising from office-based activities and business travel as laid out in our Environmental Policy As well as ensuring compliance with all applicable environmental legislation, we: • monitor our energy consumption, greenhouse gas emissions and other environmental criteria, and are using this data to help identify opportunities to improve our performance; • source office space that is LEED or BREEAM certified, where environmental considerations have been factored in; • ensure that environmental impacts are considered and managed during the procurement process. Our focus is on recyclable, recycled, renewable, and low-VOC (volatile organic compound) materials, including, but not limited to, office supplies and lunch providers; • regularly review waste management practices to identify opportunities to improve; • engage our people to help achieve our goals, encourage them to consider their environmental approach outside of work and keep them informed of what we are doing; and
Taking the environmental initiative in Singapore As part of Make a Difference month, our Singapore colleagues spent a day in the blistering heat to clean up a local beach. This inspired another Beazley campaign where colleagues were encouraged to pick up litter during their summer holidays at their own local beach.
Environmental governance Environmental and sustainability issues are primarily the responsibility of the Commercial Management team, who set objectives and targets and manage deadlines. Beazley communicates our Environmental Policy to all employees through the company intranet, as well as through employee induction and training.
We comply with all Lloyd’s Minimum Standards on outsourcing, and oversee our outsourcing arrangements with annual reviews and updates to our operations committee. An executive committee member retains full responsibility for each outsourced relationship.
Scope 3 emissions increased due to increased business travel by air
Latest Greenhouse Gas Emission figures (tonnes CO2 equivalent)1 1 For further information, please refer to pages 76 to 77.
• 2018 was a pivotal year in marine sustainability. The headline item is the shipping industry defining how the low sulphur fuel regulations will be implemented and analysis of how this will affect the shipping industry as a whole. More renewable farms have being completed, with offshore wind leading from the front. The subsea team have underwritten a number of accounts which have shown increased activity in the preparation and completion of renewable infrastructure. Also the hull, liability, cargo and subsea teams will be working with a key oceanographic organisation, supporting their scientific research efforts to better understand the ocean.
As climate change risks rise up the public agenda, the insurance industry is taking steps to ensure that we are sufficiently prepared for both the potential physical impacts of more frequent and severe extreme weather events, and the transition risks arising from the shift to a low-carbon economy.
The remaining assets are outsourced to external investment managers and invested across a range of asset classes. We have undertaken an audit of the ESG policy of each manager to understand how they incorporate an assessment of sustainability into their investment process and over time we may realign our mandates to ensure a consistent approach is applied.
Our risk management team assesses and monitors the broad array of risks presented by climate change, including: • Pricing risk; • Catastrophe risk; • Reserve risk; • Asset risk; • External event risk; • Commercial management risk; • Credit risk; • Regulatory and legal risk; • Liquidity risk; and • Strategic risk.
We have reported into ClimateWise, the insurance industry’s initiative to monitor and disclose the risks and opportunities associated with the climate risk protection gap, since 2007.
As ClimateWise shifts to incorporate anticipated greater regulatory disclosure requirements and the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD), we are preparing to significantly increase our reporting efforts in 2019, with assigned board and executive committee level oversight.
Inclusivity and diversity Our vision of inspiring and developing people with diverse perspectives
During 2018, we continued our journey towards our vision of inspiring and developing people with diverse perspectives to thrive at all levels of our business, in an environment that supports and celebrates differences.
On gender diversity, the executive committee agreed a range of initiatives including diverse recruitment slates and increased senior leadership accountability for creating and maintaining genderdiverse teams. We made good progress with our Her Majesty’s treasury (HMT) Women in Finance Charter target, which is to increase the women in our senior leadership team to at least 35% by the end of 2020. At the beginning of 2019, 32% of our senior leadership team will be women, compared to 29% at the beginning of 2018.
Other actions we have taken to enhance gender diversity at all levels of our organisation include development, networking and mentoring opportunities for our female talent facilitated by Women in Banking and Finance, which we joined in 2018. Our chief executive officer and chairman are members of the 30% Club, demonstrating our most senior leaders’ commitment to gender diversity.
During 2018: PROUD@Beazley supported our talent management team’s review of our employee handbooks to be more inclusive from an LGBT+ perspective and facilitated Beazley joining a leading online LGBT+ recruitment and networking hub called myGwork.
Beazley Young Professionals continued its expansion into our offices across the group. The network arranged lunch and learn sessions, networking events, panel discussions, and screened relevant TED talks, all targeted at the development needs and interests of our younger talent.
Empowered@Beazley launched and welcomed its first members. The network is focused on helping to create an environment where colleagues from different races and ethnicities feel empowered to showcase their skills and reach for opportunities across the group.
NexCo NexCo is a group drawn from our younger talent who each represent one of the executive committee members. The group works through the monthly executive committee papers, reviewing them and challenging them in a similar way to the executive committee. The main aims of the idea are to: • garner more diverse perspectives on important Beazley matters; • provide a wider understanding of Beazley strategies and key issues/ opportunities for this group; and
We are committed to ensuring that our business is conducted in an ethical and honest manner, and to ensuring our continued compliance with all applicable bribery and corruption legislation, including the UK Bribery Act and US Foreign Corrupt Practices Act. Our Code of Conduct policy details our core values and the behaviours to which we require all employees to adhere, with reference to: • Customer conduct protocol
These are communicated to all employees and are available on our intranet. Executive responsibility for our Code of Conduct policy is with the head of talent management.
Our Whistleblowing Policy allows for anonymous reporting; all reports are treated with the utmost confidentiality. A record of concerns raised and their resolution is maintained and considered annually by the relevant audit and risk committee. An annual report is made to the Beazley Insurance dac, Beazley Furlonge Ltd and Beazley plc boards on the operation and effectiveness of our systems and controls in relation to whistleblowing.
The Financial Crime Policy outlines the reporting requirements that the company must adhere to depending on the nature of the irregularity.
Non-financial information statement Beazley presents its non-financial information (NFI) statement in compliance with sections 414CA & 414CB of the Companies Act 2006. The content required for this statement can be found throughout the report as per the below: Chapter Page reference
Environmental matters Sustainability overview; Risk management; Sustainable business; Directors’ report 14-15; 53-77
Data security We have a mandatory annual training and assessment programme on data security and privacy, enriched by regular awareness campaigns.
An information security and privacy assessment process is embedded into our business and technology change projects.
The group’s internal audit department undertakes IT related audits as part of it’s risk-based schedule of audit work. This includes annual audits of IT security and information security. Internal audit also undertakes annual reviews of the group’s risk management framework.
Beazley has a governance structure which enable the information security and privacy function to report on data privacy and security issues without restraint. We are committed to the rights of a data subject and follow our legal and regulatory obligations within the various jurisdictions in which we operate. We have a global privacy policy aligned to European, North American, Canadian and Singaporean privacy and breach notification requirements.
We are committed to informing data subjects about what data on them we collect and process, ensuring we only collect what is required to deliver the services back to them. We are committed to protecting customer and personnel data by having appropriate organisational, people and technical controls and delivering an information security programme built around a framework of prepare, protect, detect, respond and recover.
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; Beazley Insurance Company, Inc., an admitted insurance carrier in the US; and Beazley Insurance dac, a European insurance company in Ireland.
Management report The directors’ report, together with the strategic report on pages 1 to 77, serves as the management report for the purpose of Disclosure and Transparency Rule 4.1.8R.
The directors announce a second interim dividend of 7.8p per ordinary share (2017 second interim dividend: 7.4p). The dividend, together with the first interim dividend of 3.9p per ordinary share (2017 first interim dividend: 3.7p), gives a total of 11.7p (2017: 11.1p).
In accordance with provision C.2.2 of the UK Corporate Governance Code, the directors have assessed the viability of the group. The viability statement, which supports the going concern basis mentioned above, is included in the risk management section on page 56.
The board is complying with the provision on annual re-election of all directors in accordance with the UK Corporate Governance Code. The appointment and replacement of directors is governed by the Company’s Articles of Association (the Articles), the UK Corporate Governance Code (the Code), the Companies Act 2006 and related legislation. The Articles may be amended by a special resolution of the shareholders. Subject to the Articles, the Companies Act 2006 and any directions given by special resolution, the business of the company will be managed by the board who may exercise all the powers of the company.
Further information can be found in the statement of corporate governance on page 85.
Details of directors’ service contracts are given in the directors’ remuneration report. The directors’ biographies are set out in the board of directors section of this report.
Corporate governance The company was compliant with corporate governance during 2018. More information on compliance is disclosed in the statement of corporate governance on pages 85 to 99.
Corporate, social and environmental responsibility The company’s corporate, social and environmental policy is disclosed on pages 59 to 73. During 2018 Beazley donated over $300,000 to charities, details of which can be found in the sustainable overview report on pages 14 and 15.
Risk management The group’s approach to risk management is set out on pages 53 to 58 and further detail is contained in note 2 to the financial statements on pages 148 to 160.
MFS Investment Management 46,080,688 8.7 Invesco Perpetual 44,909,637 8.5 Fidelity Management & Research 36,899,614 7.0
Recent developments and post balance sheet events Recent developments and post balance sheet events are given in note 34 to the financial statements on page 197.
Diversity and inclusion Information concerning diversity and inclusion can be found in the sustainable business section on pages 70 and 71 and in the statement on corporate governance on page 85.
Share capital As at 31 December 2018, the company’s issued shared capital comprised 527,761,271 ordinary shares, each with a nominal value of 5p and representing 100% of the total issued share capital. Details of the movement in ordinary share capital during the year can be found in note 21 on page 178. There are no restrictions on the transfer of shares in the company other than as set out in the articles of association and certain restrictions which may from time to time be imposed by law and regulations.
Greenhouse gas emissions Our latest greenhouse gas (GHG) emissions report showed 2017 UK and European GHG emissions of 6,103.16 tonnes CO2 equivalent (tCO2e) an increase of 18% relative to 2016. This increase is primarily due to increased business travel by air (Scope 3). 2017 GHG emissions for Beazley’s four principal North American offices are reported as 2,191.96 tCO2e. This is 33% higher than 2016 reported emissions and is due to the expansion of the scope of reporting for 2017. 2017 Scope 1 and 2 emissions (214.91 tCO2e) are 26% higher than those reported for 2016 – also due to the expanded scope of reporting.
Scope 3 emissions 2016: 4,235.00 2017: 5,380.06 2016: 1,483.74 2017: 1,977.05
Total 2016: 5,173.31 2017: 6,103.16 2016: 1,653.95 2017: 2,191.96 tCO2e/employee/year 2016: 7.1 2017: 7.7
The scope of 2017 reporting is consistent with that for 2016. Our 2017 scope of reporting has been expanded to include our Atlanta office; this takes US office coverage to 80% of employees (based on 2016 occupancy).
Auditor The group undertook an audit tender process during 2018 in respect of external audit services. EY will be proposed for appointment, for financial periods on or after 1 January 2019, to shareholders at the 2019 AGM. KPMG will resign as auditor following completion of the 31 December 2018 audit.
In accordance with the group’s policy on Director independence and rotation, non-executive directors George Blunden (senior independent director) and Angela Crawford-Ingle (chair of the audit and risk committee) will be stepping down from the board during 2019. George will stand down at the conclusion of the AGM in March 2019 and Angela will stand down following the conclusion of the 2018 accounting year and following a handover to her successor. The board is immensely grateful to both George and Angela for being such tremendous servants to the company during their tenure. A search for a successor to chair the audit and risk committee is well progressed and the board expects to make an appointment in due course. As previously reported, Dennis Holt, our previous chairman stepped down following the conclusion of the 2018 AGM and I took up the role of board chairman.
Christine LaSala will succeed George Blunden and will assume the role of senior independent director following the AGM. Christine will also join the nomination and remuneration committees from the same date. Catherine Woods joined both the nomination and remuneration committees with effect from 1 October 2018. We have increased diversity across all of the board’s subcommittees during the year.
The board is well supported through continuous group development and training as well as individual development programs. The board continues to devote significant attention to developing robust succession plans for both the board and senior management. This will be increasingly important to ensure the optimum balance of expertise, skills and experience is available across the group in a fast changing marketplace.
Board evaluation This year, we appointed Boardroom Review Limited to undertake the triennial externally facilitated board evaluation. I am pleased to report that the review concluded that the board, its committees and its individual members continue to operate effectively. The review highlighted the following key areas that the board will focus on in the coming year: • reviewing the governance structure and information flows between our regulated subsidiary boards in light of the changing business and political landscape; • considering whether a risk committee should be established, separating out the risk and audit agendas and continued development of the role of internal audit; and • continuing monitoring of corporate culture, and board engagement with executive development, diversity and talent.
We will report on the progress in implementing the recommendations made in the 2020 annual report.
Governance The company continues to be committed to the highest standards of governance and I am pleased to confirm that the company has complied with the principles and provisions that are set out in the 2016 UK Corporate Governance Code throughout the year ended 31 December 2018. The board has also considered the changes introduced in the 2018 UK Governance Code (the Code) and it is pleasing to note that the company had a number of processes already in place to assist compliance with the principles and provisions of the Code and we will report fully on our compliance in the 2019 annual report. Details of the activities of the board and its committees are also set out on pages 86 to 99. All directors will attend this year’s AGM, either in person or via teleconference, which will again provide an opportunity for all shareholders to hear more about our performance and to ask questions of the board.
Our committees and committee chairmen 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.
Martin Bride Group finance director Appointed: 5 May 2009* Experience: Martin joined Beazley in April 2009 as finance director. He began his career in insurance in 1985 and took up his first role as a finance director in 1996. He trained as a general insurance actuary, and his experience spans personal and commercial lines general insurance, the London market, life insurance and asset management in both the UK and France. Martin has 34 years’ experience in insurance and his career includes a number of senior level finance and general management roles in the sector. He has also held directorships at Société Foncière Lyonnaise and Union Financière de France Banque. Martin has been group finance director at Beazley for 10 years joining from Zurich Financial Services where he was Chief Financial Officer for the UK Life Business. Prior to that, he spent 17 years at Aviva both in France and the UK. Committee: Executive committee Skills: finance, insurance, mergers and acquisitions and leadership.
Angela Crawford-Ingle Non-executive director Appointed: 27 March 2013* Experience: Angela is a chartered accountant with extensive audit experience of multinational and listed companies. She was a partner in PricewaterhouseCoopers specialising in financial services for 20 years during which time she led the insurance and investment management division and retired in 2008. She is currently a partner in Ambre Partners, a firm providing strategic, financial and operational advice. Angela is also currently a non-executive director and audit chair of Swinton Group Ltd and River and Mercantile Group plc. Committee: Audit and risk committee (chairman) Skills: finance, governance, audit and strategy.
Sir Andrew Likierman Non-executive director Appointed: 25 March 2015* Experience: Andrew is Professor of Management Practice at the London Business School having served as Dean 2009-2017. His career has spanned the public and private sectors as well as academic life, including 10 years as head of the UK Government Accountancy Service. He has had many non-executive director appointments, including at the Bank of England, and is currently also a non-executive director of Times Newspapers Ltd. Committees: Remuneration committee (chairman), nomination committee Skills: accountancy, financial services, parliamentary advice and governance.
John Sauerland Non-executive director Appointed: 5 May 2016 Experience: John is chief financial officer of the Progressive Corporation, a US based insurance holding company. Prior to his current role, he was Progressive’s personal lines group president for eight years, responsible for the company’s primary business unit with $17bn in revenues. During his tenure as personal lines group president, he led the introduction of many innovations such as Name Your Price® and Snapshot®,the industry-leading pay-as-you-drive offering. He also oversaw significant growth of the company’s direct marketing efforts and consumer-facing web and mobile technology. Committee: Remuneration committee Skills: finance, pricing, marketing and distribution.
Catherine Woods Non-executive director Appointed: 1 January 2016* Experience: Catherine has over 30 years’ experience in financial services as well as significant governance experience. Her executive career was with JP Morgan in the City of London, specialising in European financial institutions. She is a former vice president and head of the JP Morgan European Banks equity research team. She currently holds a number of non-executive directorships including deputy chairman of AIB Group plc and is a director of AIB Mortgage Bank EBS DAC, Black Rock Asset Management (Ireland) and EBS DAC. She was previously appointed by the Irish Government to the Electronic Communications Appeals Panel and the Adjudication Panel to oversee the rollout of the National Broadband scheme. Catherine is a former Chairman of EBS DAC and former director of An Post. Committees: Audit and risk committee, remuneration committee, nomination committee Skills: insurance, strategy, stakeholder management, finance, governance, leadership and management.
Financial reporting for insurance companies can seem to be complex. In order to help shareholders and potential investors better understand the key drivers of the business and its prospects, we have endeavoured to provide increasing levels of transparency and explanation in our communications. As a result, in addition to enhancing the information contained in the annual and interim reports, the investor relations centre on the company website contains a substantial amount of relevant information for investors, including key corporate data and news, presentations to analysts, information for the names’ of syndicates 623 and 5623 and special purpose syndicate 6107, analyst estimates and a financial calendar. The website also gives investors the opportunity to sign up for an alert service as new information becomes available.
The company’s shares are listed on the London Stock Exchange. Prices are given daily in newspapers including the Financial Times, The Times, the Daily Telegraph, the Daily Mail and the Evening Standard.
There are currently 13 analysts publishing research notes on the group. In addition to research coverage from Numis and JP Morgan, the company’s joint corporate broker, coverage is provided by Autonomous, Berenberg, Canaccord, Credit Suisse, Jefferies, Keefe Bruyette & Woods, Peel Hunt, Shore Capital, Investec, UBS and RBC.
Financial calendar 1 March 2019 Second interim dividend record date 21 March 2019 Annual general meeting 27 March 2019 Second interim dividend payment date for the six months ended 31 December 2018 23 July 2019 First interim dividend announcement for the six months ended 30 June 2019
Compliance with Code provisions The board confirms that the company and the group have complied with the provisions set out in the 2016 version of the Financial Reporting Council’s UK Corporate Governance Code (the Code) throughout the year ended 31 December 2018. The new reporting requirements of the UK Corporate Governance Code 2018 will be fully reported on in the 2019 annual report.
The board is accountable to the company’s shareholders for good governance and the statements set out below describe how the main principles identified in the Code have been applied by the group.
Governance framework The company operates through the main board, the managing agent board, the board of the Irish insurance company (that accepts non-life reinsurance premiums ceded by the corporate member, Beazley Underwriting Limited), the board of the US admitted insurance company and their board committees. The group has established properly constituted audit and risk, remuneration, nomination and disclosure committees of the board. There are terms of reference for each committee and details of their main responsibilities and activities in 2018 are set out on pages 86 to 99. The board has also appointed an executive committee that is chaired by Andrew Horton and acts under delegated authority from the board. The executive committee meets on a monthly basis and is responsible for managing all activities of the operational group. The governance framework of the main board and its committees is shown in the diagram on the following page.
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.
Chief executive Andrew Horton Key responsibilities The chief executive is responsible for the implementation and delivery of the strategy agreed by the board and the day to day management of the business.
The board consists of a non-executive chairman, David Roberts, together with seven independent non-executive directors, of whom George Blunden is the senior independent non-executive director, and four executive directors, of whom Andrew Horton is chief executive. Following the retirement of Neil Maidment on 31 December 2018, there are now three executive directors. The non-executive directors, who have been appointed for specified terms, are considered by the board to be independent of management and free of any relationship which could materially interfere with the exercise of their independent judgement.
Board meeting attendance The full board meets at least five times each year and more frequently where business needs require. In 2018, in addition to the five regular board meetings, there were further meetings to consider the Solvency II annual return and the Q3 2018 interim statement. There was nearly full attendance at all meetings. All the directors also attend an annual strategy day. The remuneration, nomination, and audit and risk committees had additional ad hoc meetings with full attendance. The chairman holds regular meetings with the non-executive directors without the executive directors being present.
2 Catherine Woods was appointed to the remuneration committee and nomination committee on 1 October 2018.
3 David Roberts was appointed to the nomination committee on 22 March 2018.
Board discussions during the year At each scheduled meeting the board receives reports from the chief executive and finance director on the performance and results of the group and also receives reports from the chief underwriting officer and the chief risk officer and any board committees following their meetings. In addition the board receives updates from the group operating functions on major projects and corporate governance matters.
During the year, the board has spent time particularly on: • review of strategic initiatives; • review of the competitive landscape; • discussions over prioritisation of investment expenditure; • Solvency II reporting; • review of risk management framework, including risk appetite; • continued monitoring of developments and responding to requirements for Brexit; • understanding the General Data Protection Regulation implemented in May 2018; • review of the Own Risk and Solvency Assessment (ORSA); • discussion on capital position and dividends; • cyber product development and cyber security; • review of developments in corporate governance and receipt of key legal and regulatory updates including the PRA/FCA Senior
Beazley is signed up to HM Treasury’s Women in Finance Charter. The aim of the Charter is to help build a more balanced and fair financial services industry, by working together with other signatories to see gender balance at all levels across the sector. We are also a member of the 30% Club, which further demonstrates our commitment to gender diversity.
Board performance evaluation Under the UK Corporate Governance Code, the board is required to undertake formal and rigorous evaluation of its own performance and that of its committees and individual directors, and this should be externally facilitated every three years. The board and its committees consider their effectiveness regularly. An assessment was externally facilitated in 2018 by Boardroom Review Limited; The review concluded that the board and its committees continue to operate effectively. However, it is intended that the recommendations of the Boardroom Review Limited review will be implemented and reported on in the 2019 annual report.
Audit and internal control A comprehensive audit tender was carried out in 2018 (details of this process can be found in the audit committee report on pages 94 and 95) and EY have been appointed as the new external auditor for the 2019 accounting year, subject to shareholder approval at the 2019 AGM.
The board therefore confirms that it has, during 2018, reviewed the effectiveness of the group’s risk management and internal controls (including financial, operational and compliance controls), which have been in place throughout the year under review and continue to operate up to the date of approval of the annual report and accounts.
There is regular dialogue with institutional shareholders, as well as general presentations attended by executive directors, after the preliminary and interim results. The board is advised of any specific comments from institutional investors, to enable it to develop an understanding of the views of major shareholders. All shareholders have the opportunity to put forward questions at the company’s annual general meeting.
The board has delegated oversight of audit and risk matters to the audit and risk committee which currently comprises Angela CrawfordIngle (chairman), George Blunden, Catherine Woods, Christine LaSala and Robert Stuchbery.
The role of the committee is to assist the board of directors in fulfilling its oversight duties 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. This role is unchanged from previous years and in order to perform this role effectively the committee works with management and key stakeholders to ensure that the risk and control framework within Beazley remains robust and appropriate for the group in the current environment. In addition to assessing the risk and control framework, in 2018 the committee also considered a number of specific topics such as the external audit tender process, monitoring of changes in regulatory and tax environments, and assessing emerging risks such as Brexit.
As part of the appointments process the nomination committee reviewed the membership of the committee during the year. Taken as a whole, the committee has an appropriate balance of skills specific to the industry within which the group operates, including recent and relevant financial experience, as required by the UK Corporate Governance Code. Details of the members’ financial, accounting and other relevant financial experience are given in their biographies under ‘board of directors’ on pages 82 and 83. All committee members are independent non-executives.
There is regular attendance by plc audit and risk committee members at the group’s regulated subsidiary audit and/or risk committees. The committee also receive regular updates from the audit and risk committees of the group’s regulated subsidiaries. This further demonstrates our proactive approach to understanding our control and risk environment at all levels of the organisation.
d) Actuaries • recommend to the board the appointment and termination of any firm of consulting actuaries used for the provision of Syndicate Actuarial Opinions and/or review of insurance reserving; and
b) 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
Principal activities The principal activities undertaken by the committee in discharging its responsibilities in 2018 are described below: 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.
i) 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. The reserving for these claims represents the most critical estimate in the group’s financial statements. In both 2017 and 2018, we observed a significant amount of natural catastrophe activity which impacted many lines of business underwritten by Beazley. While there remains uncertainty around the final cost of these events to the company, the committee notes that Beazley continues to adopt a prudent approach where uncertainty exists as to the final cost of settlement.
The audit and risk committee receives regular reports from both the internal group actuary and the external audit team, as the output of independent projections are reviewed at key reporting quarters. In the latter part of the year, the group actuary has reported both informally and formally on the results of the third quarter reserving process, which the committee considers to be a key control as this process provides a level of informed independent challenge for the reserve position. To support the year end view, the committee has received a detailed paper in support of the level of margin held within technical reserves in the group’s statement of financial position. Management confirmed that they remain satisfied that the outstanding claims reserves included in the financial statements provide an appropriate
The committee also discussed the likely impact of IFRS 17 and in particular the impact that this new standard would have on the current financial close process, including data flows and controls. The committee expects that this new standard will remain a key focus over the next 3-4 years. The committee notes that there is a proposed delay in the implementation to 1 January 2022. As such the committee will continue to monitor the progress for implementing IFRS 17 during 2019.
iii) Valuation of financial assets at fair value As the group’s business model is to predominantly issue insurance contracts, the group have taken the option to defer the effective date of IFRS 9 until January 2021, as per the amendment to IFRS 4. As such the group continues to report its financial assets at fair value. The board is responsible for setting the investment strategy, defining the risk appetite and overseeing the internal and outsourced providers via the chief investment officer. The committee notes that the overall investment strategy is broadly unchanged from prior periods. The committee receives updates from the group finance director and/or the chief investment officer and it has reported for 2018 that the investment portfolio is in line with the board approved risk appetite, that carrying values of the portfolio as at 31 December 2018 are appropriate and that the valuation methodologies applied to each hierarchy level are consistent with the accounting policies. Committee members are invited to and regularly attend the investment committee.
No misstatements that were material in the context of the financial statements as a whole were identified and the committee was satisfied with the approach employed by management in valuing the financial assets at fair value on the balance sheet at 31 December 2018.
iv) Recoverability of insurance receivables Following a review of the group’s year end debtor position, the committee is comfortable that the level of insurance receivables on the group’s balance sheet are appropriate and do not require adjustment.
viii) Intangible asset valuation The audit and risk committee received an overview of management’s valuation of intangibles. The committee was satisfied that management’s approach in respect of the carrying value of all of the group’s intangible assets, is reasonable.
b) Other updates During 2018, 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 the increased 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 implementation of General Data Protection Regulation in particular; • compliance, financial crime and assurance reporting including risk incident information; • the group’s external audit tender (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, along side the processes and controls in place to mitigate these risks; and
During 2018, the committee: • considered the results of all internal audit reports, and the findings and themes emerging from them; • monitored the implementation of the 2018 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 2019; • 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 2018 internal audit activity; • monitored the timely implementation of agreed management actions and reviewing the status of the same; • following the resignation of the head of internal audit who left in August 2018, representatives from the committee interviewed candidates to fill the vacancy. An appointment was agreed subject to regulatory approval required by Beazley’s UK and Irish regulators; and
• requested and reviewed a report regarding the group’s control environment as a whole.
During the course of 2018 a number of internal audit recommendations were made to management in relation to its systems of control which have been subsequently implemented. Overall the internal audit function was able to report that for those areas it reviewed, the design and operation of our risk management framework, controls and processes have supported the group in operating within its risk appetite.
b) External audit i) Audit tender As disclosed in the group’s annual report for the year ended 31 December 2016, the board committed to changing group auditor no later than for the 2019 financial year.
During 2017 the audit committee reviewed management’s tender strategy and in 2018 a comprehensive audit tender was conducted by a selection panel, acting with delegated responsibility and authority of the audit committee.
Throughout the tender the committee were pleased to receive reassurance that the current audit framework within Beazley is aligned with market expectations.
The effectiveness of the audit is assessed through discussion throughout the year, taking into account considerations such as: • reviewing the quality and scope of the audit planning and its responsiveness to changes in the business; • monitoring of the auditor’s independence; • considering the level of challenge evidenced in discussions and reporting; and
The committee reviews the terms of such proposed services to ensure they have been robustly justified.
The committee receives a report from the external auditors three times a year setting out all non-audit services undertaken, so that it can monitor the types of services being provided, and the fees incurred for that work. The aim is to limit the total spend on non-audit services to a maximum of the annual audit fee, unless it is deemed that not doing so is in shareholders’ interest from an efficiency and effectiveness point of view.
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.
Risk management and compliance a) Risk management To assist the board, the committee, supported by the risk committees of the subsidiary boards, receives and reviews reports from the risk management function focusing on the following areas: • risk appetite: The committee has monitored the actual risk profile against risk appetite throughout 2018 and can confirm that Beazley plc has been operating within risk appetite as at 31 December 2018. The committee has also reviewed the proposed 2019 risk appetite; • risk assessment: The committee has performed a review of the group’s risk profile to assess its coverage of the universe of risk and that major underlying risks are visible and are being monitored; • risk profiles: The committee and the risk committees of the subsidiary boards have reviewed Beazley’s risk profiles, which are focused risk assessments of specific topics. In 2018, the committee received a review of cyber risk aimed at ensuring our suite of realistic disaster scenarios are appropriate. There was also a number of other operational risk profiles presented which supported the committee’s oversight of the on-going business processes; • emerging risk: The committee supported the identification of strategic and emerging risks which were discussed at the board meeting in May 2018 and have been subsequently monitored and reported in the quarterly Own Risk and Solvency Assessment (ORSA); • oversight of the control environment: The committee has received a quarterly consolidated assurance report which provides commentary on the status of the control environment with perspective from the business, risk management, compliance and internal audit. It also includes entries from the risk incident log; • reverse stress testing: The committee has received the results of the reverse stress testing exercise, which explores what would have to happen for the group to be unviable and has been able to provide assurance to the board that this work has been performed with the appropriate level of depth and expertise; and
In addition, the risk committees and/ or boards of the group’s regulated subsidiaries receive more locally-focused compliance reports which are specific to those entities.
Committee effectiveness The committee considers its effectiveness regularly. An assessment was externally facilitated in 2018. Whilst the review concluded that the committee was operating effectively, a recommendation is being considered regarding the establishment of a separate risk committee.
Competition and Markets Authority Order 2014 statement of compliance The committee confirms that during 2018 the group complied with the mandatory audit processes and audit committee responsibilities provisions of the Competition and Markets Authority Statutory Audit Services Order 2014 as presented in this report.
Key activities in 2018 During 2018 the committee: • reviewed the key aspects of the remuneration policy, and oversaw its implementation and application; • satisfied itself that the current remuneration structure is appropriate to attract and retain talented people; • considered the chief risk officer’s report which confirmed that the design of remuneration promotes appropriate risk behaviour throughout the organisation. In addition, the analysis considered the performance of the control environment, profit related pay targets, calculation of the bonus pool, share awards, a suite of risk metrics for each Solvency II member of staff and any individual who has created a higher than expected level of risk; • ensured incentives continued to be appropriate and to align company and shareholders; • reviewed methodology of reporting of bonus disclosures with the objective of improving transparency; • approved the grant of share awards under the group’s deferred, retention and LTIP plans; • considered the salary and bonus awards for 2018 for executive directors, heads of control functions, material risk takers and other officers; • approved the gender pay gap report; • approved the chairman’s fees; • reviewed the executive director employment contracts; and • considered the effects of the 2018
Sir Andrew Likierman 25 March 2015 6/6 George Blunden 1 January 2011 6/6 John Sauerland 11 May 2016 6/6 Catherine Woods 1 October 2018 1/1
The nomination committee is chaired by David Roberts, who took over from Dennis Holt in March 2018, and currently also comprises George Blunden, Sir Andrew Likierman and Catherine Woods.
The nomination committee meets at least twice annually and at such other times during the year as are necessary to discharge its duties. In 2018 there were six scheduled meetings, reflecting the workload of the committee during the year. Only members of the committee have the right to attend meetings; however other individuals, such as the chief executive and external advisers, may be invited to attend for all or part of any meeting.
Dennis Holt 21 July 2011 22 March 2018 2/2 David Roberts 22 March 2018 4/4 George Blunden 1 January 2010 6/6 Sir Andrew Likierman 25 March 2015 6/6 Catherine Woods 1 October 2018 1/1
The committee will oversee the implementation of the resulting action plan and will report on the progress made in implementing the recommendations made in the 2019 annual report. Boardroom Review Limited has no other connection with the company.
Dear shareholder The basis of the remuneration policy remains to attract and keep those who are among the best in the world in specialist insurance, rewarding sustained performance and keeping the company competitive.
Business performance and incentive out-turns The commercial background to this year’s remuneration report is, as you will have seen from the results, strong premium growth but profitability affected by increased claims and a decline in investment returns. The decline in the average director’s bonus from 38% to 18% of the maximum reflects these results.
Executive salaries for 2019 The average executive director salary increase for 2019, excluding the effects of the promotion to chief underwriting officer (see below), was 3.0%, less than the average salary increase for the rest of the organisation.
The committee will be considering other matters, including the remuneration reporting requirements and the approach to post-employment shareholding guidelines. There will be an opportunity to vote on a revised remuneration policy at the 2020 Annual General Meeting.
Gender pay During the year Beazley published its second gender pay gap report. While we were pleased to see a minor improvement, we are determined to do more. Details of the work in progress are set out in the 2018 UK gender pay report.
Shareholders In light of our shareholders’ feedback this year we have provided more detail of the corporate performance and individual contributions that resulted in the annual bonus outturns. This, as well as a graph that compares financial out-turns, is on page 107.
■ Share price at grant ■ Share price appreciation 2014 award 2016 award
LTIP performance 2013-2018 NAV and TSR growth 31 Dec 31 Dec 31 Dec 31 Dec
■ NAV target range (RFR +7.5% p.a. to RFR +15% p.a.) ■ TSR growth (1 month average) ■ NAV growth (including dividends)
Salaries for 2018 were as follows: • D A Horton: £468,500 • M L Bride: £330,000 • A P Cox: £351,000 • N P Maidment: £351,000
D A Horton and M L Bride each received a salary increase of c.3%, below the average for the wider employee workforce.
The role of the chief underwriting officer has been restructured to include additional responsibilities. The role already included responsibility for treaty and political, accident and contingency and will now include oversight of property, marine and specialty lines. To recognise the increased responsibility and scope of the role, A P Cox’s salary was increased by c.8.3%.
Pension To provide market levels of pension provision through contributions to a defined contribution pension plan.
ROE in the year was 5%. Profit for the year was $76.4m.
In 2018, the following grants as a percentage of base salary were made, subject to the usual NAVps performance condition: • D A Horton: 200% • M L Bride: 150% • A P Cox: 150% • N P Maidment: 150%
In accordance with the updated UK Corporate Governance Code the first tranche of the 2019 LTIP award will be subject to a further two year holding period taking the total time frame for the entire award to five years.
The symbol ▪ by a heading indicates that the information in that section has been audited.
This part of the report, the annual remuneration report, sets out the remuneration out-turns for 2018 (and how these relate to our performance in the year) and details of the operation of our policy for 2019.
D Andrew Horton 1 A portion of the bonus awards shown in the table above is deferred into shares for three years. Details of the deferral in respect of 2018 awards can be found on page 109.
2 A significant portion of the single figure values shown arises from the substantial share price appreciation over the period. For 2018 the share price at the time LTI awards were made was, 273.13p for the 2014 award and 354.10p for the 2016 award, while the average share price in the last three months of 2018 was 533.00p. This represents share price growth of 95% and 51% over the five and three year periods respectively.
The figures in the preceding table reflect the following: • salaries for 2018 increased by an average of 2.6%, which was below the average increase for all employees; • annual bonus out-turns were lower than last year, commensurate with group performance; and • LTI out-turns reflect that the second tranche of the 2014 LTI award vested at 63.4% of maximum and that the first tranche of the 2016 LTI award vested at 17.8% of maximum. Beazley achieved sustained NAV growth of 10.6% per annum and 14.2% per annum over the three and five year periods respectively. Beazley also achieved significant share price appreciation as detailed in the notes to the table.
Catherine M Woods7 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 Insurance dac, the chairmanship of the BFL risk committee and BICI.
2 George Blunden will be stepping down from the plc board and as SID effective 21 March 2019.
4 Christine LaSala was appointed to the BICI board on 1 January 2018 and received fees of $10,000 from this date which are represented in the table above. The fees for this role have been converted at an exchange rate of 1.30. Christine will also be joining the remuneration committee and nomination committee as well as becoming the senior independent director (SID) effective 21 March 2019. She will receive additional fees for the SID role from this date of £8,546 (pro-rated).
5 David Roberts was appointed as chairman of Beazley plc and Beazley Furlonge Limited on 22 March 2018 and the figure in the table above represents his increase in fees from this date.
6 John Sauerland was appointed to the BICI board on 1 January 2018 and received fees of $10,000 from this date which are represented in the table above. The fees for this role have been converted at an exchange rate of 1.30.
Salary ▪ The committee reviews salaries annually taking into consideration any changes in role and responsibilities, development of the individual in the role, and levels in comparable positions in similar financial service companies. It also considers the performance of the group and the individual as well as the average salary increase for employees across the whole group. Salary reviews take place in December of each year, with new salaries effective from 1 January.
The base salaries for the executive directors in 2018 and 2019 are as set out below: base salary £
Financial performance At the beginning of the financial year, the risk-free return (RFR) was set at 2% taking into account the yield on US treasuries of two to five year maturities. This resulted in the following ROE hurdles and guideline bonus awards: 2018 ROE hurdles and guideline bonus awards
G ui de lin e ill us tr at iv e bo nu s aw ar d as a %
The framework is used by the committee as a broad guideline rather than being formulaic and applies to a broader group of executives than board directors. A key principle of the process is that the committee exercises its judgement in determining individual awards taking into account the individual’s contribution and performance. In particular, there may be a diverse spread of returns earned across the various divisions within the business which will be reflected in bonus out-turns achieved. The table therefore provides full retrospective disclosure of all the group financial targets that determine the annual bonuses.
Corporate achievements Corporate achievements that the committee took into account for the year included the following: Financial performance • The delivery of a profit after tax of $68.2m and the return of $67.6m to shareholders by way of dividend despite paying
• Lead European strategic initiative • Ensure Beazley is prepared for IFRS 17 and achieve
changes • Strong leadership and plans in place to help Beazley achieve
• Deliver specialty lines 2018 plan and continue the development of international business
• Completed year one of life sciences plan • Capital raising for Beazley smart tracker completed. • Target operating model principles agreed • Plan successfully created for 2019
• Good progress and momentum with business growing outside of the US by 7%
• Led a very strong team effort with board support of the new strategic initiatives, focusing on data and technology.
• Internal audit of culture shows good progress has been made • Plans in place for digital and agile culture
• Deliver 2018 business plan GAAP and YoA profitability targets and key business objectives
Average executive director bonus as a percentage of salary c.64% c.272% c.333% c.294% c.291% c.272% c.150% c.73%
The key features of the plan are as follows: • 50% of the award is measured after three years and 50% after five years; • awards are in the form of nil-cost options with a 10-year term; • participants are expected to build a shareholding in Beazley equal to their annual award level. For example the CEO has a shareholding requirement of 200% of salary. Participants have three years to build this shareholding. LTIP awards may be forfeited if shareholding requirements are not met; and
• three year awards to executive directors are subject to a further two year holding period from 2019.
LTIP awards vesting in respect of the year ▪ The LTIP awards shown in the single total figure of remuneration for 2018 include: • the second tranche of awards granted on 11 February 2014. These are due to vest on 11 February 2019, subject to the achievement of a NAVps growth performance condition over the five years ended 31 December 2018; and • the first tranche of awards granted on 9 February 2016. These are due to vest on 11 February 2019, subject to the achievement of a NAVps growth performance condition over the three years ended 31 December 2018.
To date over 300 employees of the group have committed to put at risk £14.8m of bonuses to the underwriting results of syndicate 623. Of the total at risk, £12.5m has already been deferred from the bonuses awarded.
The executive directors are currently fully funded in the plan and no further bonus deferral was made in 2018.
• where the committee considers it is necessary in order to comply with a law or regulatory requirement.
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
LTIP holding period From 2019 the first tranche of the LTIP will be subject to a further two-year holding period. Extended performance periods A portion of the LTIP has performance measured over an extended five-year period. Shareholding requirements Executive directors are expected to build up and maintain a shareholding of 150% of salary (200% for the CEO).
Having been with Beazley since 1990, Neil Maidment retired from Beazley effective 31 December 2018 and stepped down from the board. Neil’s outstanding share awards subsist to their normal release/vesting date subject to performance where applicable.
External appointments Andrew Horton has been a non-executive director of Man Group plc since 3 August 2013, and he retains the fees in respect of this appointment. Fees for the year 2018 were £92,500.
Neil Maidment was appointed to the Council of Lloyd’s on 1 February 2016, and he retains the fees in respect of this appointment. Fees for the year 2018 were £52,500.
Non-executive directors’ fees The fees of non-executive directors are determined by the board. When setting fee levels consideration is given to levels in comparable companies for comparable services and also to the time commitment and responsibilities of the individual non-executive director. No non-executive director is involved in the determination of their fees. The board reviews fees annually.
Chairman fee £200,000 £206,000 Basic fee £59,500 £61,500 Senior independent director fee (additional) £10,500 £11,000 Chairman of audit and risk committee fee (additional) £17,750 £18,500 Chairman of remuneration committee fee (additional) £16,500 £17,000
David L Roberts 41,300 – – – – – John P Sauerland 30,000 – – – – – Robert A Stuchbery 62,500 – – – – – Catherine M Woods 30,000 – – – – –
1 Dennis Holt ceased to be a director on 22 March 2018.
Directors’ share plan interests ▪ Details of share plan interests of those directors who served during the period are as follows: Outstanding options at
Notes to share plan interests table Deferred bonus Deferred bonus awards are made in the form of conditional shares that normally vest three years after the date of award. LTIP 2013 – 3/5 year Awards were made on 13 February 2013 at a mid-market share price of 204.2p.
Remuneration committee The committee consists of only non-executive directors and during the year the members were Sir Andrew Likierman (chairman), George Blunden, John Sauerland and Catherine Woods. The board views each of these directors as independent.
Statement of shareholder voting The voting outcomes of the 2017 annual remuneration report and 2016 remuneration policy were as follows: Votes for % for Votes against % against Total votes cast Votes withheld
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 2018 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
Key audit matters are those matters that, in our professional judgment, were of most significance in the audit of the financial statements and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by us, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. We summarise below the key audit matters (unchanged from 2017), in decreasing order of audit significance, in arriving at our audit opinion above, together with our key audit procedures to address those matters and, as required for public interest entities, our results from those procedures. These matters were addressed, and our results are based on procedures undertaken, in the context of, and solely for the purpose of, our audit of the financial statements as a whole, and in forming our opinion thereon, and consequently are incidental to that opinion, and we do not provide a separate opinion on these matters.
Subjective valuation: Insurance liabilities represent the single largest liability for the Group. valuation of these liabilities is highly judgemental because it requires a number of assumptions to be made with high estimation uncertainty such as expected loss ratios, estimates of ultimate premium and of the frequency and severity of claims and, where appropriate, the discount rate for longer tail classes of business by territory and line of business. The determination and application of the methodology and performance of the calculations are also complex.
Our procedures included: — Sector experience and benchmarking: Performed benchmarking of the Group’s ultimate loss ratios, initial expected loss ratios, premium rate change and expectations of total losses on natural catastrophes, in order to identify specific trends and outliers; — Re-projections: Used our projection of premiums and claims (on a gross and net basis) and compared these with the Group’s estimates to assess their reasonableness.
— Methodology assessment: Assessed the reserving assumptions and methodology (on a gross basis and net of outwards reinsurance) for reasonableness and consistency year on year, including inspecting the Group’s margin paper.
— Actual versus expected testing: Challenged the quality of the Group’s historical reserving estimates by monitoring progression of loss ratios against expectations.
The effect of these matters is that, as part of our risk assessment, we determined that the recoverability of insurance receivables and reinsurance assets has a high degree of estimation uncertainty, with a potential range of reasonable outcomes greater than our materiality for the financial statements as a whole, and possibly many times that amount.
— Recoverability assessment: Considered potential indications of non-recovery for a sample of reinsurance assets, in light of the credit standing of the counterparty and age of the debt.
— Assessing transparency: Considered the adequacy of the Group’s disclosures in respect of the recoverability of insurance receivables and reinsurance assets.
Our procedures included: — Data reconciliation: Reperformed the Group’s prepared reconciliations between Xchanging and the Group’s financial systems; — Assessing future premium debtors: Performed an analysis over the unsigned debtors within the insurance receivables balance in order to assess the valuation and recoverability of the debtors.
— We found the resulting estimate of the recoverability of insurance and reinsurance debtors to be acceptable (2017 result: acceptable).
2. Key audit matters: our assessment of risks of material misstatement (cont.)
— We found the resulting estimate of the valuation of hard to value investments to be acceptable. (2017 result: acceptable).
The effect of these matters is that, as part of our risk assessment, we determined that the valuation of hard to value investments has a high degree of estimation uncertainty, with a potential range of reasonable outcomes greater than our materiality for the financial statements as a whole, and possibly many times that amount.
— Assessing transparency: Considered the adequacy of the Group’s disclosures in respect of the valuation of hard to value investments.
Refer to page 93 (Audit and Risk Committee Report), page 141 (Statement of accounting policies) and page 161 (financial disclosures).
Subjective valuation: There are adjustments made to gross premiums written to reflect adjustments to ultimate premium estimates, binding authority contract (‘binders’) adjustments, reinstatement premiums and other ad hoc adjustments to premium income.
There is a large proportion of premium is written through the Group syndicates via binders. Such premiums are uncertain at inception and the model used in the recognition and earning of such premiums is subject to judgement and estimation.
— We found the resulting estimate of the valuation of estimated premium to be acceptable. (2017 result: acceptable).
Refer to page 140 (Statement of accounting policies) and page 196 (financial disclosures).
The carrying amount of the parent company’s investments in subsidiaries represents 99% (2017: 97%) of the company’s total assets. Their recoverability is not at a high risk of significant misstatement or subject to significant judgement. However, due to their materiality in the context of the parent company financial statements, this is considered to be the area that had the greatest effect on our overall parent company audit.
— Assessing subsidiary audits: Assessing the findings of the audit work performed by the relevant component auditors and whether these findings provide any indicators that the value of the subsidiaries may be impaired.
— We found the Group’s assessment of the recoverability of the parent company’s investment in subsidiaries to be acceptable. (2017 result: acceptable).
Materiality for the Group financial statements as a whole was set at $20m (31 December 2017: $20m), determined with reference to a benchmark of 2017 Group gross premiums written (of which it represents 1%; 31 December 2017: 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 2017: $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.
Materiality for the parent company financial statements as a whole was set at $7m (31 December 2017: $7m), determined with reference to a benchmark of 2017 total assets (of which it represents 1%, 31 December 2017 1%). We have used total assets as the benchmark rather than profit before tax because the purpose of the entity is to act as the ultimate parent company of the Group and hold investments in other Group companies and not to generate profits.
We agreed to report to the Audit and Risk Committee any corrected or uncorrected identified misstatements exceeding $1m ($0.5m for non-technical) (31 December 2017: $1m ($0.5m for non-technical)) in addition to other identified misstatements that warranted reporting on qualitative grounds.
Of the Group’s 32 (2017: 33) reporting components, we subjected 16 (2017: 17) to full scope audits for Group purposes and 3 (2017: 3) to specified riskfocused audit procedures. These entities were not individually financially significant enough to require a full scope audit for Group purposes, but did present specific individual risks that needed to be addressed.
The components within the scope of our work accounted for the percentages illustrated opposite. For the residual components, we performed analysis at an aggregated Group level to re-examine our assessment that there were no significant risks of material misstatement within these. The work on 3 of the 16 components (2017: 3 of the 17 components) was performed by component auditors and the rest, including the audit of the parent company, was performed by the Group team. The Group audit team instructed the component team as to the significant areas to be covered, including the relevant risks detailed above and the information to be reported back.
$18m Range of materiality at 16 components ($0.1m-$16m) (2017: $0.1m to $16m)
The Group team visited 3 (2017: 0) component locations in the United States of America (2017: none) to assess the audit risk and scoping. Telephone conference meetings were also held with these component auditors. At these visits and meetings, the findings reported to the Group team were discussed in more detail, and any further work required by the Group team was then performed by the component auditor
The Directors have prepared the financial statements on the going concern basis as they do not intend to liquidate the Company or the Group or to cease their operations, and as they have concluded that the Company’s and the Group’s financial position means that this is realistic. They have also concluded that there are no material uncertainties that could have cast significant doubt over their ability to continue as a going concern for at least a year from the date of approval of the financial statements (“the going concern period”).
— a deterioration in the valuation of the Group and Company’s investments.
Our responsibility is to read the other information and, in doing so, consider whether, based on our financial statements audit work, the information therein is materially misstated or inconsistent with the financial statements or our audit knowledge. Based solely on that work we have not identified material misstatements in the other information.
— the section of the annual report describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee.
As explained more fully in their statement set out on page 121, the directors are responsible for: the preparation of the financial statements including being satisfied that they give a true and fair view; such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error; assessing the Group and parent Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and using the going concern basis of accounting unless they either intend to liquidate the Group or the parent Company or to cease operations, or have no realistic alternative but to do so.
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or other irregularities (see below), or error, and to issue our opinion in an auditor’s report. Reasonable assurance is a high level of assurance, but does not guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud, other irregularities or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.
We identified areas of laws and regulations that could reasonably be expected to have a material effect on the financial statements from our general commercial and sector experience and through discussion with the directors and other management (as required by auditing standards), and from inspection of the Group’s regulatory correspondence and discussed with the directors and other management the policies and procedures regarding compliance with laws and regulations. We communicated identified laws and regulations throughout our team and remained alert to any indications of non-compliance throughout the audit. This included communication from the Group to component audit teams of relevant laws and regulations identified at Group level.
Owing to the inherent limitations of an audit, there is an unavoidable risk that we may not have detected some material misstatements in the financial statements, even though we have properly planned and performed our audit in accordance with auditing standards. For example, the further removed non-compliance with laws and regulations (irregularities) is from the events and transactions reflected in the financial statements, the less likely the inherently limited procedures required by auditing standards would identify it. In addition, as with any audit, there remained a higher risk of non-detection of irregularities, as these may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal controls. We are not responsible for preventing non-compliance and cannot be expected to detect non-compliance with all laws and regulations.
Income tax expense 9 (8.2) (38.0) Profit for the year attributable to equity shareholders 68.2 130.0
Group Profit for the year attributable to equity shareholders 68.2 130.0 Other comprehensive income Items that will never be reclassified to profit or loss: Loss on remeasurement of retirement benefit obligations (1.5) (0.6)
Company Profit for the year attributable to equity shareholders 81.7 134.8
Issue of shares 0.1 – – – – 0.1 Equity settled share based payments 22 – – – 24.5 – 24.5 Acquisition of own shares in trust 22 – – – (16.2) – (16.2) Tax on share option vestings 9 – – – 4.3 4.0 8.3 Transfer of shares to employees 22 – – – (4.0) 6.1 2.1
Equity settled share based payments 22 – – – 18.7 – 18.7 Acquisition of own shares in trust 22 – – – (44.9) – (44.9) Tax on share option vestings 9 – – – 4.1 6.1 10.2 Transfer of shares to employees 22 – – – 6.6 (8.5) (1.9)
Total comprehensive income recognised – – – – – 81.7 81.7
Equity settled share based payments 22 – – – – 18.7 – 18.7 Acquisition of own shares in trust 22 – – – – (44.9) – (44.9) Transfer of shares to employees 22 – – – – 6.6 (8.5) (1.9)
Financial assets at fair value 16, 17 4,716.3 – 4,449.6 –
Retirement benefit liability 27 2.4 – 2.3 – Deferred tax liability 28 9.1 – 9.9 –
The financial statements were approved by the board of directors on 6 February 2019 and were signed on its behalf by: D Roberts Chairman
Statements of cash flows for the year ended 31 December 2018
Cash flow from investing activities Purchase of plant and equipment 13 (2.6) – (1.7) – Expenditure on software development 12 (7.2) – (9.3) – Purchase of investments (2,686.2) – (3,299.3) – Proceeds from sale of investments 2,376.9 – 3,093.7 – Sale of associate 14 – – 3.0 – Sale of LAH renewal rights – – 0.8 – Acquisition of subsidiaries (net of cash) – – (31.8) –
Cash flow from financing activities Acquisition of own shares in trust 22 (44.9) (44.9) (16.2) (16.2) Repayment of borrowings 25 (18.0) – – –
Net (decrease)/increase in cash and cash equivalents (101.4) 1.7 (81.8) 0.7 Cash and cash equivalents at beginning of year 440.5 0.7 507.2 – Effect of exchange rate changes on cash and cash equivalents (2.8) – 15.1 – Cash and cash equivalents at end of year 20 336.3 2.4 440.5 0.7 1 2018 increase in insurance and other payables is net of $1.9m of dividend accruals on share schemes settled through equity.
Financial statem ents www.beazley.com Annual report 2018 Beazley 137 1 Statement of accounting policies Beazley plc (registered number 09763575) is a company incorporated in England and Wales and is resident for tax purposes in the United Kingdom. The company’s registered address is Plantation Place South, 60 Great Tower Street, London EC3R 5AD, United Kingdom. The group financial statements for the year ended 31 December 2018 comprise the parent company, its subsidiaries and the group’s interest in associates. The principal activity of the company and its subsidiaries (the ‘group’) is to participate as a specialist insurer which transacts primarily in commercial lines of business through its subsidiaries and through Lloyd’s syndicates.
In the current year, the group has applied amendments to IFRSs issued by the IASB that are mandatorily effective for an accounting period that begins on or after 1 January 2018. The new effective requirements are: • IFRS 2: Amendment: Classification and Measurement of Share-based Payment Transactions (EU effective date: 1 January 2018); • IFRS 4: Amendment: Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts (EU effective date: 1 January 2018); • IFRIC 22: Foreign Currency Transactions and Advance Consideration (EU effective date: 1 January 2018); • IAS 40: Amendment: Transfers of Investment Property (EU effective date: 1 January 2018); • Annual Improvements to IFRS Standards 2014-2016 Cycle (EU effective date: 1 January 2018); and • Clarifications to IFRS 15: Revenue from Contracts with Customers (EU effective date: 1 January 2018).
An additional standard, IFRS 15: Revenue from Contracts with Customers, has been applied when preparing these financial statements. The new standard has no material impact on the financial statements. Note 5 provides an income breakdown for each contract type within the scope of IFRS 15. When recognising profit commission from syndicate 623, the revenue is recognised on a year of account basis as soon as the year of account becomes profitable. No other significant judgements were made when recognising income from other contracts. All related balances are classified as receivables and included within the other receivables line in the statement of financial position.
A number of new standards and interpretations adopted by the EU which are not mandatorily effective, as well as standards and interpretations issued by the IASB but not yet adopted by the EU, have not been applied in preparing these financial statements. The group does not plan to adopt these standards early; instead it will apply them from their effective dates as determined by their dates of EU endorsement. The group is still reviewing the upcoming standards to determine their impact: • IFRS 9: Financial Instruments (EU effective date: 1 January 2018, deferred in line with implementation of IFRS 17); • IFRS 9: Amendment: Prepayment Features with Negative Compensation (EU effective date: 1 January 2019); • IFRIC 23: Uncertainty over Income Tax Treatments (EU effective date: 1 January 2019); • IFRS 17: Insurance Contracts (IASB effective date: 1 January 2021);1 • IAS 19: Amendment: Plan Amendment, Curtailment or Settlement (IASB effective date: 1 January 2019);1 • IAS 28: Amendment: Long-term Interests in Associates and Joint Ventures (IASB effective date: 1 January 2019);1 • Annual Improvements to IFRS Standards IFRS Standards 2015-2017 Cycle (IASB effective date: 1 January 2019);1 • Amendments to References to the Conceptual Framework in IFRS Standards (IASB effective date: 1 January 2020); • IFRS 3: Amendment: Business Combinations (IASB effective date: 1 January 2020);1 and • IAS 1 and IAS 8: Amendment: Definition of Material (IASB effective date: 1 January 2020).1 1 Have not been endorsed by EU.
The following upcoming standards have been reviewed: • IFRS 16: Leases (EU effective date: 1 January 2019).
www.beazley.com138 Beazley Annual report 2018 1 Statement of accounting policies continued Of the upcoming accounting standard changes that we are aware of, we anticipate that IFRS 17, IFRS 9 and IFRS 16 will have the most material impact on the financial statements’ presentation and disclosures. For IFRS 16 a full impact assessment has been carried out and processes put in place for transition on 1 January 2019. The accounting developments and implementation timelines of IFRS 17 and IFRS 9 are being closely monitored and the impacts of the standards themselves are being assessed. A brief overview of each of these standards is provided below: • IFRS 17, effective from 1 January 2021, will fundamentally change the way insurance contracts are accounted for and reported. Revenue will no longer be equal to premiums written but instead reflect a change in the contract liability on which consideration is expected. On initial assessment the major change will be on the presentation of the statement of profit or loss, with premium and claims figures being replaced with insurance contract revenue, insurance service expense and insurance finance income and expense. It is not currently known what impact the new requirements will have on the group’s profit and financial position, but it is expected that profit recognition will be altered with expenses for onerous contracts being accelerated and recognised upfront rather than being spread over the term of the insurance contract. During 2018, the group undertook a number of tasks in preparation for IFRS 17. These tasks included completing various modelling exercises to understand the data requirements needed under IFRS 17. Various assumptions have also been agreed upon such as unit of account and whether to pursue the general measurement model (building block approach) or the simplified model (premium allocation approach) or to use both for different contracts. A more detailed update will be provided after the implementation has been completed.
Financial assets managed and evaluated on a fair value basis Cash and cash equivalent 336.3 440.5 Fixed and floating rate debt securities: – Government issued 1,384.2 1,345.4 – Quasi-government 25.9 24.1 – Supranational – 21.1 – Corporate bonds – Investment grade 2,525.3 2,179.7
The most critical estimate included within the group’s financial position is the estimate for insurance losses incurred but not reported, which is included within total insurance liabilities and reinsurance assets in the statement of financial position and in note 24. This estimate is critical as it outlines the current liability for future expenses expected to be incurred in relation to claims. If this estimation was to prove inadequate then an exposure would arise in future years where a liability has not been provided for. The total estimate for insurance losses incurred but not reported gross of reinsurers’ share as at 31 December 2018 is $2,869.5m (2017: $2,852.3m). The total estimate for insurance losses incurred but not reported net of reinsurers’ share as at 31 December 2018 is $2,149.7m (2017: $2,078.5m) and is included within total insurance liabilities and reinsurance assets in the statement of financial position and in note 24.
The claims handling expense provision is based on a set percentage of IBNR which is reviewed on an annual basis.
Financial statem ents www.beazley.com Annual report 2018 Beazley 141 1 Statement of accounting policies continued b) Associates Associates are those entities over which the group has power to exert significant influence but which it does not control. Significant influence is generally presumed if the group has between 20% and 50% of voting rights. Investments in associates are accounted for using the equity method of accounting. Under this method the investments are initially measured at cost and the group’s share of post-acquisition profits or losses is recognised in the statement of profit or loss. Therefore the cumulative post-acquisition movements in the associates’ net assets are adjusted against the cost of the investment.
b) Transactions and balances Foreign currency transactions are translated into the functional currency using average exchange rates applicable to the period in which the transactions take place and where the group considers these to be a reasonable approximation of the transaction rate. Foreign exchange gains and losses resulting from the settlement of such transactions and from translation at the period end of monetary assets and liabilities denominated in foreign currencies are recognised in the statement of profit or loss. Non-monetary items recorded at historical cost in foreign currencies are translated using the exchange rate on the date of the initial transaction.
www.beazley.com142 Beazley Annual report 2018 1 Statement of accounting policies continued Deferred acquisition costs (DAC) Acquisition costs comprise brokerage, premium levy and staff-related costs (excluding performance related pay) of the underwriters acquiring new business and renewing existing contracts. The proportion of acquisition costs in respect of unearned premiums is deferred at the reporting date and recognised in later periods when the related premiums are earned.
If a market for a financial instrument is not active, the group establishes fair value using a valuation technique. Valuation techniques include using recent orderly transactions between market participants (if available), reference to the current fair value of other instruments that are substantially the same, discounted cash flow analyses and option pricing models. The chosen valuation technique makes maximum use of market inputs, relies as little as possible on estimates specific to the group, incorporates all factors that market participants would consider in setting a price, and is consistent with accepted economic methodologies for pricing financial instruments. Inputs to valuation techniques reasonably represent market expectations and measures of the risk return factors inherent in the financial instrument. The group calibrates valuation techniques and tests them for validity using prices from observable current market transactions in the same instrument or based on other available observable market data.
Financial statem ents www.beazley.com Annual report 2018 Beazley 145 1 Statement of accounting policies continued e) Hedge funds, equity funds and illiquid credit assets The group invests in a number of hedge funds, equity funds and illiquid credit assets for which there are no available quoted market prices. The valuation of these assets is based on fair value techniques as described above. The fair value of our hedge fund portfolio is calculated by reference to the underlying net asset values (NAVs) of each of the individual funds. Consideration is also given to adjusting such NAV valuations for any restriction applied to distributions, the existence of side pocket provisions and the timing of the latest available valuations. At certain times, we will have uncalled unfunded commitments in relation to our illiquid credit assets. These uncalled unfunded commitments are actively monitored by the group and are disclosed in the notes 2 and 16 to the financial statements. The additional investment into our illiquid credit asset portfolio is recognised on the date that this funding is provided by the group.
k) Hedge accounting and derivative financial instruments Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at their fair value. The best evidence of fair value of a derivative at initial recognition is the transaction price. The method of recognising the resulting fair value gains or losses depends on whether the derivative is designated as a hedging instrument and, if so, the nature of the item being hedged. Fair values are obtained from quoted market prices in active markets, recent market transactions, and valuation techniques which include discounted cash flow models. All derivatives are carried as assets when fair value is positive and as liabilities when fair value is negative.
Remeasurements of the net defined benefit liability, which comprise actuarial gains and losses, the return on plan assets (excluding interest) and the effect of the asset ceiling (if any, excluding interest), are recognised immediately in other comprehensive income.
The symbol † by a heading indicates that the information in that section has not been audited.
Financial statem ents www.beazley.com Annual report 2018 Beazley 149 2 Risk management continued Lloyd’s has also defined its own specific set of RDS events for which all syndicates with relevant exposures must report. Of these the three largest, net of reinsurance, events which could have impacted Beazley in 2017 and 2018 are: Unaudited † 2018
San Francisco quake (2018: $78.0bn) 704.4 236.9 Gulf of Mexico windstorm (2018: $112.0bn) 595.1 199.0 Los Angeles quake (2018: $78.0bn) 697.2 235.9
San Francisco quake (2017: $78.0bn) 676.9 228.2 Gulf of Mexico windstorm (2017: $112.0bn) 609.0 163.3 Los Angeles quake (2017: $78.0bn) 637.3 218.5 1 Probable market loss.
The net of reinsurance exposures for all three scenarios have increased during 2018, with the Gulf of Mexico windstorm increasing the most, by 22%. These increases are being driven by less reinsurance being purchased by the reinsurance division, which was in line with the plan to increase the natural catastrophe risk appetite in 2018.
Beazley also reports on cyber exposure to Lloyd’s using the three largest internal realistic disaster scenarios and three prescribed scenarios which include both data breach and property damage related cyber exposure. Given Beazley’s risk profile, the quantum from the internal data breach scenarios is larger than any of the cyber property damage related scenarios.
www.beazley.com150 Beazley Annual report 2018 2 Risk management continued These authority limits are enforced through a comprehensive sign-off process for underwriting transactions including dual sign-off for all line underwriters and peer review for all risks exceeding individual underwriters’ authority limits. Exception reports are also run regularly to monitor compliance.
Operating divisions In 2018, the group’s business consisted of five operating divisions. The following table provides a breakdown of gross premiums written by division, and also provides a geographical split based on placement of risk.
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 155.
2.3 Market risk Market risk arises where the value of assets and liabilities or future cash flows changes as a result of movements in foreign exchange rates, interest rates and market prices. Efficient management of market risk is key to the investment of group assets. Appropriate levels of investment risk are determined by limiting the proportion of forecast group earnings which could be at risk from lower than expected investment returns, using a 1 in 10 confidence level as a practical measure of such risk. In 2018, this permitted variance from the forecast investment return was set at $150.0m (unaudited). For 2019, the permitted variance is likely to be at the same level. Investment strategy is developed to be consistent with this limit and investment risk is monitored on an ongoing basis, using outputs from our internal model.
In 2018, the group managed its foreign exchange risk by periodically assessing its non-dollar exposures and hedging these to a tolerable level while targeting to have net assets that are predominantly denominated in US dollar. As part of this hedging strategy, exchange rate derivatives were used to rebalance currency exposure across the group. Details of foreign currency derivative contracts entered into with external parties are disclosed in note 17. On a forward looking basis an assessment is made of expected future exposure development and appropriate currency trades put in place to reduce risk.
Sensitivity analysis Fluctuations in the group’s trading currencies against the US dollar would result in a change to profit after tax and net asset value. The table below gives an indication of the impact on profit after tax and net assets of a percentage change in the relative strength of the US dollar against the value of sterling, the Canadian dollar and the euro, simultaneously. The analysis is based on information on net asset positions as at the balance sheet date.
Dollar weakens 30% against other currencies (7.5) 19.6 (11.5) 11.8 Dollar weakens 20% against other currencies (5.0) 13.0 (7.7) 7.9 Dollar weakens 10% against other currencies (2.5) 6.5 (3.8) 3.9 Dollar strengthens 10% against other currencies 2.5 (6.5) 3.8 (3.9) Dollar strengthens 20% against other currencies 5.0 (13.0) 7.7 (7.9) Dollar strengthens 30% against other currencies 7.5 (19.6) 11.5 (11.8)
The group manages interest rate risk by primarily investing in short duration financial assets along with cash and cash equivalents. The investment committee monitors the duration of these assets on a regular basis.
Listed investments that are quoted in an active market are recognised in the statement of financial position at quoted bid price, which is deemed to be approximate exit price. If the market for the investment is not considered to be active, then the group establishes fair value using valuation techniques (refer to note 16). This includes comparison of orderly transactions between market participants, reference to the current fair value of other investments that are substantially the same, discounted cash flow models and other valuation techniques that are commonly used by market participants.
Beazley’s 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 Solvency II internal model is used to monitor compliance with the budget, which limits the amount by which our reported annual investment return may deviate from a predetermined target, at the 1 in 10 confidence level. In 2018, the permitted deviation was $150.0m. Additionally, a limit is specified for the net interest rate sensitivity of assets and liabilities combined and investments are managed to ensure that this limit is not exceeded.
2.4 Operational risk † Operational risk arises from the risk of losses due to inadequate or failed internal processes, people, systems, service providers or external events.
Financial statem ents www.beazley.com Annual report 2018 Beazley 155 2 Risk management continued The group also recognises that it is necessary for people, systems and infrastructure to be available to support our operations. Therefore we have taken significant steps to mitigate the impact of business interruption which could follow a variety of events, including the loss of key individuals and facilities. We operate a formal disaster recovery plan which, in the event of an incident, allows the group to move critical operations to an alternative location within 24 hours.
The group has developed processes to formally examine all reinsurers before entering into new business arrangements. New reinsurers are approved by the reinsurance security committee, which also reviews arrangements with all existing reinsurers at least annually. Vulnerable or slow-paying reinsurers are examined more frequently.
To assist in the understanding of credit risks, A.M. Best, Moody’s and Standard & Poor’s (S&P) ratings are used. These ratings have been categorised below as used for Lloyd’s reporting: A.M. Best Moody’s S&P
www.beazley.com156 Beazley Annual report 2018 2 Risk management continued The following tables summarise the group’s concentrations of credit risk: Tier 1 $m
Financial assets at fair value – fixed and floating rate debt securities 2,840.0 874.7 – – – 3,714.7 – equity funds – – – – 168.3 168.3 – hedge funds – – – – 377.4 377.4 – illiquid credit assets – – – – 180.4 180.4 – derivative financial instruments – – – – 8.8 8.8 Insurance receivables – – – – 918.0 918.0 Reinsurance assets 1,231.1 – – – – 1,231.1 Other receivables 68.6 – – – – 68.6 Cash and cash equivalents 440.5 – – – – 440.5
Financial statem ents www.beazley.com Annual report 2018 Beazley 157 2 Risk management continued An analysis of the overall credit risk exposure indicates that the group has reinsurance assets that are impaired at the reporting date. The total impairment in respect of the reinsurance assets, including reinsurer's share of outstanding claims, at 31 December 2018 was as follows: Individual impairment $m
The group’s approach is to manage its liquidity position so that it can reasonably survive a significant individual or market loss event (details of the group’s exposure to realistic disaster scenarios are provided on page 149). This means that the group maintains sufficient liquid assets, or assets that can be converted into liquid assets at short notice and without any significant capital loss, to meet expected cash flow requirements. These liquid funds are regularly monitored using cash flow forecasting to ensure that surplus funds are invested to achieve a higher rate of return. The group also makes use of loan facilities and borrowings, details of which can be found in note 25. Further information on the group’s capital resources is contained on pages 48 to 49.
Borrowings consist of two items as at 31 December 2018. The first is $250m of subordinated tier 2 debt raised in November 2016. This debt is due in 2026 and has annual interest of 5.875% payable in May and November of each year. The second comprises a of £75m sterling denominated 5.375% notes due in 2019 with interest payable in March and September each year.
is based on the group’s own individual capital assessment. It may be provided in the form of either the group’s cash and investments or debt facilities;
The operating segments are based upon the different types of insurance risk underwritten by the group, as described below: Marine This segment underwrites a broad spectrum of marine classes including hull, energy, cargo and specie, piracy, satellite, aviation, kidnap & ransom and war risks.
Political, accident & contingency This segment underwrites terrorism, political violence, expropriation and credit risks as well as contingency and risks associated with contract frustration. In addition, this segment underwrites life, health, personal accident, sports and income protection risks.
Additional information Impairment of associate1 – – – – (7.0) (7.0)
Share of loss of associates – 0.4 – – (0.3) 0.1
Additional information Investment in associates1 – – – – 7.0 7.0
Segment assets UK (Lloyd’s) 7,213.2 7,207.3 US (Non-Lloyd’s)1 482.1 351.4 Europe (Non-Lloyd’s) 38.6 –
Segment assets are allocated based on where the assets are located.
Interest and dividends on financial investments at fair value through profit or loss 102.1 76.1 Interest on cash and cash equivalents 0.5 0.5 Net realised gains on financial investments at fair value through profit or loss 12.4 23.1 Net unrealised fair value (losses)/gains on financial investments at fair value through profit or loss (66.1) 46.5 Investment income from financial investments 48.9 146.2 Investment management expenses (7.8) (7.9)
1 Pension costs refer to the contributions made under the defined contribution scheme. Further information on the defined benefit pension scheme can be found in note 27.
Financial statem ents www.beazley.com Annual report 2018 Beazley 165 8 Finance costs $m $m
During 2018, Beazley redeemed debt with a nominal value of $18.0m and a market value of $18.0m in the form of subordinated debt using its call right. No profit or loss was realised at redemption as there was no difference between the carrying value and market value of the debt. Please refer to note 25 for further detail on subordinated debt.
Current tax expense Current year 32.3 35.4 Prior year adjustments (5.3) (0.6)
Profit before tax 76.4 – 168.0 – Tax calculated at the weighted average of statutory tax rates 14.2 18.6 31.4 18.7
Effects of: – non-taxable losses/(gains) on foreign exchange 0.3 0.4 (0.5) (0.3) – tax relief on share based payments – current and future years 0.2 0.3 – – – (over)/under provided in prior years (10.2) (13.4) 0.9 0.5 – change in UK/US tax rates 1 0.7 0.9 5.3 3.2 Tax charge for the period 8.2 10.7 38.0 22.6 1 The Finance Act 2016, which provides for reduction in the UK Corporation tax rate down to 17% effective from 1 April 2020, was substantively enacted on 6 September 2016. This 17% tax rate will reduce the company’s future current tax charge and has been reflected in the calculation of the deferred tax balance as at 31 December 2018.
As noted on page 45, the group has assessed the potential impact of the diverted profits tax (DPT) following the enactment of new legislation in April 2015 and is of the view that no liability arises. The ultimate outcome may differ and any profits that did fall within the scope of the DPT would potentially be taxed at a rate of 25% rather than 12.5% (the current rate of tax on corporate earnings in Ireland). The earnings that would potentially be taxed at 25% are the relevant earnings from 2015 to 2018. The relevant earnings are determined in relation to 75% of the profits and losses in Beazley’s syndicates potentially starting with a proportion of the profits on the 2013, 2014 and 2015 years of account and 75% of all profits and losses in Beazley’s syndicates on years of account from 2016 onwards.
www.beazley.com168 Beazley Annual report 2018 12 Intangible assets continued Impairment tests Goodwill, syndicate capacity and US insurance authorisation licences are deemed to have indefinite life as they are expected to have value in use that does not erode or become obsolete over the course of time. Consequently, they are not amortised but annually tested for impairment. For the purpose of impairment testing, they are allocated to the group’s cash-generating units (CGUs) as follows: Marine $m
A discount rate, based on weighted average cost of capital (WACC) of 9% (2017: 6%) has been applied to projected future cash flows. This has been calculated using independent measures of the risk-free rate of return and is indicative of the group’s risk profile relative to the market. The impairment test for goodwill confirms that no impairment is required.
To test the segment’s sensitivity to variances (including those caused by the factors listed above) from forecast profits, the discount rate has been flexed to 5% above and 5% below the central assumption. Within this range, the recovery of goodwill was stress tested and remains supportable across all CGUs. Headroom was calculated in respect of the value in use of all the group’s other intangible assets.
www.beazley.com170 Beazley Annual report 2018 14 Investment in associates Associates are those entities over which the group has power to exert significant influence but which it does not control. Significant influence is generally presumed if the group has between 20% and 50% of voting rights.
Falcon Money Management Holdings Limited (and subsidiaries) Malta 1 25% – Capson Corp., Inc. (and subsidiary) USA 2 31% –
2 221 West 6th Street, Suite 301, Austin TX 78701, USA.
In March 2018 the group took the decision to write down its investment in Capson Corp., Inc. to $2.8m. In December the group took the further decision to fully write down its investment in Capson Corp., Inc. to nil. This is deemed to be an appropriate value for Beazley’s share in Capson.
Profit/(loss) after tax 0.9 (1.0) Share of other comprehensive income – – Share of total comprehensive income 0.9 (1.0)
Financial statem ents www.beazley.com Annual report 2018 Beazley 171 16 Financial assets and liabilities 2018 $m $m
Financial assets at fair value Fixed and floating rate debt securities: – Government issued 1,384.2 1,345.4 – Quasi-government 25.9 24.1 – Supranational – 21.1 – Corporate bonds – Investment grade 2,525.3 2,179.7 – High yield 32.7 58.8 – Senior secured loans 132.1 85.6 Total fixed and floating rate debt securities 4,100.2 3,714.7
Equity funds 85.4 168.3 Hedge funds 337.2 377.4 Illiquid credit assets 186.6 180.4 Total capital growth assets 609.2 726.1 Total financial investments at fair value through statement of profit or loss 4,709.4 4,440.8
Derivative financial assets 6.9 8.8 Total financial assets at fair value 4,716.3 4,449.6
Quasi-government securities include securities which are issued by non-sovereign entities but which have an explicit sovereign guarantee. Supranational securities are issued by institutions sponsored by more than one sovereign issuer. Investment corporate bonds are rated BBB-/Baa3 or higher by at least one major rating agency, while high yield corporate bonds have lower credit ratings. Senior secured loans are tradeable, floating rate debt obligations of corporate issuers, with credit ratings of BB+/Ba1 or below. Hedge funds are investment vehicles pursuing alternative investment strategies, structured to have minimal correlation to traditional asset classes. Equity funds are investment vehicles which invest in equity securities and provide diversified exposure to global equity markets. Illiquid credit assets are investment vehicles that predominantly target private lending opportunities, often with longer investment horizons. The fair value of these assets at 31 December 2018 excludes an unfunded commitment of $81.8m (2017: $63.0m).
www.beazley.com172 Beazley Annual report 2018 16 Financial assets and liabilities continued
The retail bond was issued in 2012. The subordinated debt was issued in 2004 and redeemed in 2018. Tier 2 subordinated debt was issued in 2016. Please refer to note 25 for further details of our borrowings and associated repayment terms.
The availability of financial data can vary for different financial assets and is affected by a wide variety of factors, including the type of financial instrument, whether it is new and not yet established in the marketplace, and other characteristics specific to each transaction. To the extent that valuation is based on models or inputs that are unobservable in the market, the determination of fair value requires more judgement. Accordingly the degree of judgement exercised by management in determining fair value is greatest for instruments classified in level 3. The group uses prices and inputs that are current as of the measurement date for valuation of these instruments.
www.beazley.com174 Beazley Annual report 2018 16 Financial assets and liabilities continued The following table shows the fair values of financial assets and financial liabilities, including their levels in the fair value hierarchy.
Financial liabilities not measured at fair value Retail bond – 98.2 – 98.2
Total financial liabilities not measured at fair value – 347.6 – 347.6
Financial statem ents www.beazley.com Annual report 2018 Beazley 175 16 Financial assets and liabilities continued
Financial liabilities not measured at fair value Retail bond – 104.1 – 104.1
As at 31 December the investments comprising the group’s unconsolidated structured entities are as follows: $m $m
Apart from a relatively small exposure to high yield bond funds, our unconsolidated structured entity exposures fall within our capital growth assets. The capital growth assets are held in investee funds managed by asset managers who apply various investment strategies to accomplish their respective investment objectives. The group’s investments in investee funds are subject to the terms and conditions of the respective investee fund’s offering documentation and are susceptible to market price risk arising from uncertainties about future values of those investee funds. Investment decisions are made after extensive due diligence on the underlying fund, its strategy and the overall quality of the underlying fund’s manager and assets.
www.beazley.com176 Beazley Annual report 2018 16 Financial assets and liabilities continued All the investee funds in the investment portfolio are managed by portfolio managers who are compensated by the respective investee funds for their services. Such compensation generally consists of an asset-based fee and a performance-based incentive fee and is reflected in the valuation of the fund’s investment in each of the investee funds. The right to sell or request redemption of investments in high yield bond funds, asset backed securities, equity funds and hedge funds ranges in frequency from daily to semi-annually. The group did not sponsor any of the respective structured entities.
Financial assets at fair value Fixed and floating rate debt securities 12.4 161.1 – 173.5 3,541.2 3,714.7
The assets and liabilities of these contracts at 31 December are detailed below: Derivative financial instrument assets
Foreign exchange forward contracts 365.1 6.9 446.7 7.2 Bond futures contract – – (341.4) 1.6
Bond futures positions The group entered in bond futures transactions for the purpose of efficiently managing the term structure of its interest rate exposures. A negative gross contract amount represents a notional short position that generates positive fair value as interest rates rise.
Total cash and cash equivalents include $10.4m (2017: $9.0m) held in Lloyd’s Singapore trust accounts. These funds are only available for use by the group to meet local claim and expense obligations.
Share based payments 24.5 – 24.5 Acquisition of own shares held in trust – (16.2) (16.2) Tax on share option vestings 4.3 – 4.3 Transfer of shares to employees (24.4) 20.4 (4.0)
One-off share incentive plan 10/02/2015 0.2 Five years’ service + ROE 10 years LTIP 13/02/2018 17/02/2017 09/02/2016 10/02/2015 11/02/2014
The number and weighted average exercise prices of share options are as follows: Weighted average exercise price (pence per share)
Gross Claims reported and loss adjustment expenses 1,171.2 1,056.3 Claims incurred but not reported 2,869.5 2,852.3 Gross claims liabilities 4,040.7 3,908.6 Unearned premiums 1,415.5 1,259.2 Total insurance liabilities, gross 5,456.2 5,167.8
Recoverable from reinsurers Claims reported and loss adjustment expenses 231.9 219.4 Claims incurred but not reported 719.8 773.8 Reinsurers’ share of claims liabilities 951.7 993.2 Unearned premiums 241.1 237.9 Total reinsurers’ share of insurance liabilities 1,192.8 1,231.1
www.beazley.com182 Beazley Annual report 2018 24 Insurance liabilities and reinsurance assets continued $m $m
Claims reported and loss adjustment expenses 1,056.3 (219.4) 836.9 949.5 (201.8) 747.7 Claims incurred but not reported 2,852.3 (773.8) 2,078.5 2,567.4 (652.1) 1,915.3
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 b) Unearned premiums reserve
Where significant large losses impact an underwriting year (e.g. the events of 11 September 2001, the hurricanes in 2004, 2005, 2008, 2012, 2017 and 2018 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.
Given the range of assumptions used, the group’s profit or loss is relatively insensitive to changes to a particular assumption used for an underwriting year/class combination. However, the group’s profit or loss is potentially more sensitive to a systematic change in assumptions that affect many classes, such as judicial changes or when catastrophes produce more claims than expected. The group uses a range of risk mitigation strategies to reduce such volatility including the purchase of reinsurance. In addition, the group holds capital to absorb volatility.
d) Claims reserve strength analysis The estimation of IBNR reserves for future claim notifications is subject to a greater degree of uncertainty than the estimation of the outstanding claims already notified. This is particularly true for the specialty lines business, which will typically display greater variations between initial estimates and final outcomes as a result of the greater degree of difficulty in estimating these reserves. The estimation of IBNR reserves for other business written is generally subject to less variability as claims are generally reported and settled relatively quickly.
While the information in the table provides a historical perspective on the adequacy of the claims liabilities established in previous years, users of these financial statements are cautioned against extrapolating past redundancies or deficiencies on current claims liabilities. The group believes that the estimate of total claims liabilities as at 31 December 2018 is adequate. However, due to inherent uncertainties in the reserving process, it cannot be assured that such balances will ultimately prove to be adequate.
Financial statem ents www.beazley.com Annual report 2018 Beazley 185 24 Insurance liabilities and reinsurance assets continued
Net claims liabilities, group share ($m) 129.3 52.1 50.8 71.7 85.6 141.1 215.9 297.7 550.6 871.5 622.7 3,089.0 24 Insurance liabilities and reinsurance assets continued
Financial statem ents www.beazley.com Annual report 2018 Beazley 189 24 Insurance liabilities and reinsurance assets continued Analysis of movements in loss development tables We have updated our loss development tables to show the ultimate loss ratios as at 31 December 2018 for each underwriting year.
Political, accident & contingency The 2017 underwriting year has reduced supported by benign claims activity on the terrorism book, and a number of older years of the political risks account have contributed small claims recoveries.
Reinsurance The 2017 underwriting year is showing improvement generated by redundancy in the 2017 catastrophe estimates.
Specialty lines Releases have been made from underwriting years as they mature and claims crystallise. The more recent years have also benefited from the release of cyber catastrophe margin. The most recent underwriting year has been opened slightly higher in order to maintain margin.
www.beazley.com190 Beazley Annual report 2018 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.
Debt redemption (18.0) – – (18.0) Amortisation of capitalised borrowing costs – 0.2 0.2 0.4 Foreign exchange gain – – (4.1) (4.1)
In November 2004, the group issued subordinated debt of $18m to JPMorgan Chase Bank, N.A., JPMorgan. The loan is unsecured and interest is payable at the USD London interbank offered rate (LIBOR) plus a margin of 3.65% per annum. In October 2018, the group exercised its call option and redeemed the full nominal amount of debt of $18.0m on 26 November 2018. Please refer to note 8 for further detail on debt buyback.
In addition to these borrowings we operate a syndicated short term banking facility, managed through Lloyds Banking Group plc. In July 2017 we renewed our syndicated short term banking facility led by Lloyds Banking Group plc. The facility provides potential borrowings up to $225m. The agreement is based on a commitment fee of 0.385% per annum and any amounts drawn are charged at a margin of 1.1% per annum. The cash element of the facility will last for three years, expiring on 31 July 2019, whilst letters of credit issued under the facility can be used to provide support for the 2017, 2018 and 2019 underwriting years. The facility is currently unutilised.
Notes to the financial statements continued 27 Retirement benefit obligations $m $m
Financial statem ents www.beazley.com Annual report 2018 Beazley 193 27 Retirement benefit obligations continued $m $m
The actual loss on plan assets was $6.8m (2017: gain of $5.5m).
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
29 Operating lease commitments The group leases land and buildings under non-cancellable operating lease agreements.
No later than one year 9.8 10.3 Later than one year and no later than five years 16.6 26.9 Later than five years 6.5 8.5
Key management include executive and non-executive directors and other senior management.
The following is a list of all the subsidiaries in the group as at 31 December 2018: Country of incorporation
Beazley Ireland Holdings plc Jersey 100% Intermediate holding company USD 724.6 Beazley Group Limited England 100% Intermediate holding company USD Beazley Furlonge Holdings Limited England 100% Intermediate holding company USD Beazley Furlonge Limited England 100% Lloyd’s underwriting agents GBP Beazley Investments Limited England 100% Investment company USD Beazley Underwriting Limited England 100% Underwriting at Lloyd’s USD Beazley Management Limited England 100% Intermediate management company GBP Beazley Staff Underwriting Limited England 100% Underwriting at Lloyd’s USD Beazley Solutions Limited England 100% Insurance services GBP Beazley Underwriting Services Limited England 100% Insurance services GBP Beazley Corporate Member (No.2) Limited England 100% Underwriting at Lloyd’s USD Beazley Corporate Member (No.3) Limited England 100% Underwriting at Lloyd’s USD Beazley Corporate Member (No.6) Limited England 100% Underwriting at Lloyd’s USD Beazley Leviathan Limited England 100% Underwriting at Lloyd’s GBP Beazley Canada Limited Canada 100% Insurance services CAD Beazley Insurance dac Ireland 100% Insurance and reinsurance company USD Beazley Solutions International Limited Ireland 100% Insurance services USD Beazley Underwriting Pty Ltd Australia 100% Insurance services AUD Beazley USA Services, Inc.* USA 100% Insurance services USD Beazley Holdings, Inc.* USA 100% Holding company USD Beazley Group (USA) General Partnership** USA 100% General partnership USD Beazley Insurance Company, Inc.*** USA 100% Underwriting admitted lines USD Beazley America Insurance Company, Inc.*** USA 100% Underwriting admitted lines USD Lodestone Securities LLC**** USA 100% Consultancy services USD Beazley Limited Hong Kong 100% Insurance services HKD Beazley Pte. Limited Singapore 100% Underwriting at Lloyd’s SGD
Financial statem ents www.beazley.com Annual report 2018 Beazley 197 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 – Hong Kong Australia Level 15, 1 O’Connell 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
33 Foreign exchange rates The group used the following exchange rates to translate foreign currency assets, liabilities, income and expenses into US dollars, being the group’s presentational currency: Average Year end spot Average Year end spot 34 Subsequent events There are no events that are material to the operations of the group that have occurred since the reporting date.
Aggregates/aggregations Accumulations of insurance loss exposures which result from underwriting multiple risks that are exposed to common causes of loss.
Aggregate excess of loss The reinsurer indemnifies an insurance company (the reinsured) for an aggregate (or cumulative) amount of losses in excess of a specified aggregate amount.
Capital growth assets These are assets that do not pay a regular income and target an increase in value over the long term. They will typically have a higher risk and volatility than that of the core portfolio. Currently these are the hedge funds, equity funds and illiquid credit assets.
Combined ratio Ratio, in percentage terms, of the sum of net insurance claims, expenses for acquisition of insurance contracts and administrative expenses to net earned premiums. This is also the sum of the expense ratio and the claims ratio. The calculation is performed excluding the impact of foreign exchange. In 2018, this ratio was 98% (2017: 99%). This represents the sum of net insurance claims of $1,227.8m (2017: $1,075.7m), expenses for acquisition of insurance contracts of $561.9m (2017: $519.7m) and administrative expenses of $250.7m (2017: $254.7m) to net earned premiums of $2,084.6m (2017: $1,869.4m). This is also the sum of the expense ratio 39% (2017: 41%) and the claims ratio 59% (2017: 58%).
International Accounting Standards Board (IASB) An independent accounting body responsible for developing IFRS (see below).
Net premiums written Net premiums written is equal to gross premiums written less outward reinsurance premiums written.
Soft market An insurance market where prevalent prices are low, and terms and conditions offered by insurers are less restrictive.
Solvency Capital Requirement on an ultimate basis (uSCR) The capital requirement under Solvency II calculated by Beazley’s internal model which captures the risk in respect of the planned underwriting for the prospective year of account in full, covering ultimate adverse development and all exposures.