23 Equity compensation plans continued Further details of equity compensation plans can be found in the directors’ remuneration report on pages 96 to 124. The total gain on directors’ exercises of share-option plans during the period was £2.7m (2018: £6.3m).
Forfeited during the year 18.9 (3.7) 122.0 (0.5) Exercised during the year 90.5 (2.1) 28.5 (5.0) Granted during the year 68.0 3.9 80.0 4.0
Weighted average share price (pence per option) 445.0 404.0 Weighted average exercise price (pence per option) 50.7 44.7 Average expected life of options 4.4 yrs 4.4 yrs Expected volatility 22.8% 23.5% Expected dividend yield 1.2% 1.3% Average risk-free interest rate 0.8% 0.9%
Recoverable from reinsurers Claims reported and loss adjustment expenses 223.7 231.9 Claims incurred but not reported 845.1 719.8 Reinsurers’ share of claims liabilities 1,068.8 951.7 Unearned premiums 269.4 241.1 Total reinsurers’ share of insurance liabilities 1,338.2 1,192.8 189www.beazley.com Beazley Annual report 2019
Claims reported and loss adjustment expenses 1,263.7 (223.7) 1,040.0 1,171.2 (231.9) 939.3 Claims incurred but not reported 3,196.6 (845.1) 2,351.5 2,869.5 (719.8) 2,149.7 b) Unearned premiums reserve
Notes to the financial statements continued 190 Beazley Annual report 2019 www.beazley.com
24 Insurance liabilities and reinsurance assets continued 24.2 Assumptions, changes in assumptions and claims reserve strength analysis a) Process used to decide on assumptions The peer review reserving process Beazley uses a quarterly dual track process to set its reserves: • the actuarial team uses several actuarial and statistical methods to estimate the ultimate premium and claims costs, with the most appropriate methods selected depending on the nature of each class of business; and • the underwriting teams concurrently review the development of the incurred loss ratio over time, work with our claims managers to set reserve estimates for identified claims and utilise their detailed understanding of both risks underwritten and the nature of the claims to establish an alternative estimate of ultimate claims cost, which is compared to the actuarially established figures.
We also review triangulations of the paid/outstanding claim ratios as a way of monitoring any changes in the strength of the outstanding claim estimates between underwriting years so that adjustments can be made to mitigate any subsequent over/(under) reserving. To date, this analysis indicates no systematic change to the outstanding claim strength across underwriting years.
Since year end 2004, we have identified a range of possible outcomes for each class and underwriting year combination directly from our internal model (previously our individual capital assessment (ICA)) process. Comparing these with our pricing assumptions and reserving estimates gives our management team increased insight into our perceived reserving strength and the relative uncertainties of the business written.
Less unearned portion of ultimate losses ($m) – – – – – – – – – (31.4) (786.3) (817.7)
Gross claims liabilities, group share ($m) 179.9 41.5 72.7 81.4 129.1 136.6 290.8 488.0 909.7 1,217.0 913.6 4,460.3
Less unearned portion of ultimate losses ($m) – – – – – – – – – (40.8) (640.1) (680.9)
Net claims liabilities, group share ($m) 130.8 39.6 57.5 71.0 89.0 107.5 210.3 356.6 696.8 955.4 677.0 3,391.5
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 2019 for each underwriting year.
Cyber & executive risk The employment practice liability book has seen deteriorations on the 2011 and 2015 underwriting years. The cyber book had positive claims experience on the 2017 underwriting year.
Marine All underwriting years of the US trucking liability book are now reinsured, impacting the 2016 to 2018 underwriting years. The 2018 underwriting year has also been affected by poor experience in marine hull, UK marine and energy. Releases continue on older underwriting years as the risk expires.
Reinsurance The 2017 and 2018 underwriting years have experienced increases in the estimates for catastrophe, primarily in respect of Typhoon Jebi, as well as poor experience on risk and aggregate excess of loss business. The 2019 underwriting year has been impacted by Typhoon’s Faxai and Hagibis as well as Storm Dorian.
Debt issuance/(redemption) 297.9 – (98.2) 199.7 Change in fair value 20.7 27.4 – 48.1
In September 2012, the group issued £75m of sterling denominated 5.375% notes due 2019. Interest at a fixed rate of 5.375% was payable in March and September each year. These notes were redeemed in September 2019.
In addition to these borrowings we operate a syndicated short term banking facility, managed through Lloyds Banking Group plc. In July 2019 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 2021, whilst letters of credit issued under the facility can be used to provide capital support for the group’s underwriting at Lloyd’s on the 2019, 2020 and 2021 underwriting years. The facility is currently unutilised.
Reinsurance premiums payable 214.1 183.8 Accrued expenses including staff bonuses 169.0 138.3 Other payables 81.5 48.4 Due to syndicate 623 21.0 5.0 Due to syndicate 6107 65.5 65.1 Due to syndicate 6050 – 0.4 Due to syndicate 5623 15.3 1.6
Present value of funded obligations 54.7 47.0 Fair value of plan assets (60.1) (44.6) Retirement benefit (asset)/liability in the statement of financial position (5.4) 2.4
Amounts recognised in the statement of profit or loss Interest cost 1.3 1.3 Expected return on plan assets (1.3) (1.3)
The scheme is administered by a trust that is legally separated from the group. The trustees consist of both employee and employer representatives and an independent chair, all of whom are governed by the scheme rules.
Contributions to the scheme are determined by a qualified actuary using the projected unit credit method as set out in the scheme rules and the most recent valuation was at 31 December 2019. According to the Schedule of Contributions, the group expects to contribute approximately $1.3m in each of the next two years.
Trustees obligations Under section 222 of the Pension Act 2004, every scheme is subject to the Statutory Funding Objective (SFO), which is to have sufficient and appropriate assets to cover its technical provisions, which represent the present value of benefits to which members are entitled based on pensionable service to the valuation date. This is assessed at least every three years using assumptions agreed between the Trustees and the employer as set out in the Statement of Funding Principles produced in accordance with the Occupational Pensions (Scheme Funding) Regulations 2005 (OP(SF)R 2005) Regulation 6.
The Trustees written Statement of Funding Principles is dated 27 December 2017 and it sets out their policy for securing that the SFO is met (that the scheme will have sufficient assets to cover its technical provisions). In accordance with the OP(SF)R 2005 Regulation 5(2) trustees have chosen the Defined Accrued Benefit Method, a variant of the projected unit credit method where accrual has ceased.
Movement in fair value of plan assets recognised in the statement of financial position Balance at 1 January 44.6 53.6 Expected return on plan assets 1.3 1.3 Actuarial gain/(loss) 11.9 (8.0) Employer contributions 1.3 1.0 Benefits paid (0.4) (1.1) Foreign exchange gain/(loss) 1.4 (2.2) Balance at 31 December 60.1 44.6
At 31 December 2019, the weighted-average duration of the defined benefit obligation was 22.5 years (2018: 23.2 years).
Net deferred income tax account (3.0) 18.8 4.2 (0.2) 19.8 202 Beazley Annual report 2019 www.beazley.com
28 Deferred tax continued The group has tax adjusted losses carried forward giving rise to a deferred tax asset of $0.7m, measured at the UK corporation tax rate of 17%. The deferred tax asset has not been recognised on the group statement of financial position in the current year as losses are not expected to be utilised in the foreseeable future based on the current taxable profit estimates and forecasts of the underlying entity in question.
29 Leases Leases as lessee (IFRS 16) The group leases offices, IT equipment and motor vehicles. The leased offices are in several locations and the leases of large offices such as London and New York typically run for a period of 10 years with an option to renew the lease after that date or continue on a rolling month by month basis. Lease payments are renegotiated as agreed in the lease contracts. Previously, all office leases were classified as operating leases under IAS 17.
During 2019, the New York office was derecognised as the lease contract ended and was not renewed. Following the move to a new office location, the group recognised the New York office lease, recognising a right of use asset of $14.3m and a liability of $14.8m. Additionally, the office in Barcelona was recognised as a right of use asset of $1.0m and a liability of $1.1m.
During 2019, the lease of the San Francisco extension has been sub-let by the group. The lease and sub-lease expire in 2022. The right of use asset was therefore recognised as an investment asset of $0.5m.
The leases of IT equipment and motor vehicles were previously recognised as operating leases in the statement of profit and loss. The long term leases have been categorised as leases under IFRS 16.
Leases under IFRS 16 Interest on lease liabilities (1.8) Depreciation (10.1) Income from sub-leasing right of use assets 0.1 Expenses relating to low value leases (0.4) Expenses relating to short-term leases (0.2) Total recognised in profit/(loss) (12.4)
Extension options Some property leases contain extension options exercisable by the group before the end of the non-cancellable contract period or the option to continue with the lease on a monthly rolling basis. The group reassess whether it is reasonably certain to exercise the options if there is a significant event or changes in circumstances within its control.
Leases as lessor The group sub-leases leased property, which is classified as a investment asset. The group recognised $0.5m in 2019. The sub-lease contract ends in 2022.
The group received management fees and profit commissions for providing a range of management services to syndicates 623, 6107 and 6050, which are all managed by the group. In addition, the group ceded portions or all of a group of insurance policies to syndicates 6107, 5623 and 6050. The participants on syndicates 623, 6107 and 6050 are solely third party capital.
Written premium ceded to syndicates 96.3 65.0 Other income received from syndicates 25.8 29.0 Services provided 33.1 36.3
30 Related party transactions continued 30.2 Key management compensation $m $m
The total number of Beazley plc ordinary shares held by key management was 4.4m. Apart from the transactions listed in the table above, there were no further related party transactions involving key management or a close member of their family. Further details of directors’ shareholdings and remuneration can be found in the directors’ remuneration report on pages 96 to 124.
31 Parent company and subsidiary undertakings Beazley plc, a company incorporated in England and Wales and resident for tax purposes in the United Kingdom, is the ultimate parent and the ultimate controlling party within the group.
The following is a list of all the subsidiaries in the group as at 31 December 2019: Country/region 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’managing 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% 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 Holdings, Inc. Digital LLC USA 100% Insurance services 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 Beazley Labuan Limited Malaysia 100% Insurance services USD
31 Parent company and subsidiary undertakings continued The following is a list of group registered office locations: Address City Postcode Country/region
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 Kensington Gardens, No. I1317, Lot 7616, Jalan Jumidar Buyong Labuan 87000 Malaysia Australia Level 15, 1 O’Connell Street Sydney NSW 2000 Australia 32 Contingencies Funds at Lloyd’s The following amounts are held in trust by Lloyd’s to secure underwriting commitments: Underwriting year £m
Alternative performance measures (APMs) The group uses APMs to help explain its financial performance and position. These measures, such as combined ratio, expense ratio, claims ratio, investment return and underwriting profit, are not defined under IFRS. The group is of the view that the use of these measures enhances the usefulness of the financial statements. Definitions of key APMs are included within the glossary.
Claims ratio Ratio, in percentage terms, of net insurance claims to net earned premiums. The calculation is performed excluding the impact of foreign exchange. In 2019, this ratio was 62% (2018: 59%). This represented total claims of $1,452.5m (2018: $1,227.8m) divided by net earned premiums of $2,347.0m (2018: $2,084.6m).
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 2019, this ratio was 100% (2018: 98%). This represents the sum of net insurance claims of $1,452.5m (2018: $1,227.8m), expenses for acquisition of insurance contracts of $645.4m (2018: $561.9m) and administrative expenses of $244.3m (2018: $250.7m) to net earned premiums of $2,347.0m (2018: $2,084.6m). This is also the sum of the expense ratio 38% (2018: 39%) and the claims ratio 62% (2018: 59%).
Incurred but not reported (IBNR) These are anticipated or likely claims that may result from an insured event but which have not yet been reported.
International Accounting Standards (IAS)/ International Financial Reporting Standards (IFRS) Standards formulated by the IASB with the intention of achieving internationally comparable financial statements. Since 2002, the standards adopted by the IASB have been referred to as International Financial Reporting Standards (IFRS). Until existing standards are renamed, they continue to be referred to as International Accounting Standards (IAS).
Investment return Ratio, in percentage terms, calculated by dividing the net investment income by the average financial assets at fair value, including cash. In 2019, this was calculated as net investment income of $263.7m (2018: $41.1m) divided by average financial assets at fair value, including cash, of $5,452.0m (2018: $4,791.4m).
Managed premiums Managed premium refers to all gross premiums written by Beazley’s underwriters. In addition to gross premiums written on behalf of the group managed premium includes gross premiums written in syndicate 623 by Beazley’s underwriters on behalf of third party capital providers.
Return on equity (ROE) Ratio, in percentage terms, calculated by dividing the consolidated profit after tax by the average daily total equity. In 2019, this was calculated as profit after tax of $234.1m (2018: $68.2m) divided by average equity of $1,538.6m (2018: $1,444.8m).
Sidecar special purpose syndicate Specialty reinsurance company designed to provide additional capacity to a specific insurance company. It operates by purchasing a portion or all of a group of insurance policies, typically catastrophe exposures. These companies have become quite prominent in the aftermath of Hurricane Katrina as a vehicle to add risk-bearing capacity, and for investors to participate in the potential profits resulting from sharp price increases.
Treaty reinsurance A reinsurance contract under which the reinsurer agrees to offer and to accept all risks of a certain size within a defined class.
Underwriting profit This is calculated as net earned premiums, less net insurance claims, acquisition costs and administrative expenses.
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