Beautifully designed insurance 38 Financial review 38 Group performance 44 Balance sheet management 46 Capital structure 49 Operational update 52 Risk management 58 Responsible business 66 Directors’ report
When complete in 2020 the Jeddah Tower will be the world’s tallest building, soaring more than a kilometre (3,281 feet) above Jeddah, a Red Sea port and Saudi Arabia’s second largest city.
Our business model Reconfirmed annually through the business planning process, our business model is as follows: • Beazley is a specialist insurer. We have a targeted product set, largely in commercial lines of business, and underwrite each risk on its own merits.
• We operate through specific insurance hubs rather than seeking a local presence in every country in which we do business.
Our strategy Our strategy is directed towards the achievement of our vision, which is to become, and be recognised as, the highest performing specialist insurer. To this end, our strategy comprises: • Prudent capital allocation to achieve a well diversified portfolio that is resistant to shocks in any individual line of business.
• Non natural catastrophe risk: This risk is similar to natural catastrophe risk except that multiple losses arise from one event caused by mankind. Given Beazley’s risk profile, examples include a coordinated cyber attack, an act of terrorism, an act of war or a political event.
• Reserve risk: The risk that the reserves put aside for claims to be settled in the future turn out to be insufficient.
The second interim dividend for 2016 is in line with our dividend strategy and has grown by 6%. In addition we are paying a special dividend of 10p.
Diversified business We target a balanced portfolio spanning specialist classes driven by different cycles on an international basis.
Entrepreneurs usually achieve success through collaboration and Beazley underwriters are members of close knit teams. Our claims professionals work closely with our underwriters to understand the intent behind the cover we offer and provide a swift and supportive service to clients. Increasingly, key elements of the customer experience depend on far more than skilled and conscientious underwriters and claims staff: they also depend on advanced systems and skills to make doing business with Beazley as easy and agreeable as possible. We invest what is needed to maintain leadership in these fields.
“ For three decades Beazley has been a leader in professional liability for architects and engineers. I am excited about the opportunity to expand our offering to contractors, a significant growth market., and also developers through our new DeveloPro product.” Michael Attwell Underwriter – A&E and construction, specialty lines, London
During the course of 2016, we also took steps to strengthen our relationships with other insurers and reinsurers whose business goals are complementary to our own. With our deep roots in the Lloyd’s market, we are of course no stranger to partnering with other Lloyd’s insurers – through coinsurance – to cover large, complex risks. But our new partnerships extend the principle more broadly. In April we announced a partnership with the Corporate Insurance Partner unit of Munich Re to expand the cyber cover we could offer to the world’s largest companies.
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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. We insure 60% of the Forbes’ List of the 25 Biggest Public Oil & Gas Companies. We have extensive experience insuring a wide variety of cargoes including project, fine art and specie.
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As Beazley celebrated its 30th anniversary, the division that accounts for some of the company’s longest established lines of business – specialty lines – has enjoyed a highly successful year, reaping the rewards of a long term growth strategy that has seen premiums rise by 76% over the past decade.
Commoditised, price-driven lines of business are not well suited to this approach. Instead, Beazley’s underwriters target more complicated risks where it is possible to forge real partnerships with brokers to develop innovative solutions and explain them to clients. In these areas the major investments Beazley has made in talented individuals can pay off.
Thirty years later, Beazley remains a major market for professionals such as lawyers, architects and engineers. However the company’s interests in specialty lines business – encompassing a wide spectrum of professional and management liability risks – have diversified hugely. The division’s (and Beazley’s) largest single line of business in 2016 – data breach insurance – would have been inconceivable in 1986.
The specialty lines team has also focused successfully on industries and business lines that have strong growth potential. Technology-related risks and the healthcare industry have accordingly been major targets in recent years, with premiums from the former growing 55% over the past three years and from the latter 32%.
Environmental insurance represents a major area of opportunity for Beazley – this is a significant growth market worldwide that has also suffered dislocations as major insurers have withdrawn in recent years. Beazley began underwriting environmental business in the US in 2009 and expanded its team rapidly during the course of 2016, attracting a number of highly experienced and well regarded underwriters. The team, led by Jayne Cunningham, now numbers 13, including 12 underwriters in the US and 1 in London. Premiums grew significantly in 2016 to $61.5m (2015: $25.8m).
In terms of geography, the US has been the most fertile region for the types of insurance that Beazley’s specialty lines underwriters focus on. The division has accordingly been the largest beneficiary of Beazley’s decision, early this century, to establish a local US presence and the capacity to underwrite ‘admitted’ business in the country. Most of the Lloyd’s market’s US business is transacted on a surplus lines basis, meaning that Lloyd’s underwriters can only target business that the local market declines. In 2005 Beazley established Beazley Insurance Company, Inc. as its US admitted carrier.
overnance Financial statem ents 5,000+ The number of data breaches handled by Beazley’s experts by late 2016
In recent years, Beazley’s leadership position in cyber insurance has extended outside the US. This has occurred partly through launches of BBR in other markets (versions of the policy can be purchased through brokers in France, Italy, the UK and Canada) and partly through reinsurance agreements with other insurers through which Beazley’s data breach cover can be embedded in the other insurers’ existing product range.
Turbulent beginnings Beazley began life in a tumultuous decade for world insurance markets. A capacity crisis in US liability markets sent premiums soaring in the US, offering attractive opportunities to the few carriers that had not withdrawn from the market and were able to price risks appropriately.
Terrorism on a new scale The terrorist attacks on the World Trade Center on 11 September 2001 gave rise to the heaviest insurance losses in history, with the Lloyd’s market alone paying out more than $1.98 bn. The security of Lloyd’s held but the shock prompted a review of the market’s governance. Andrew Beazley was a member of the Chairman’s Strategy Group at Lloyd’s, which set down a blueprint for reforms including the creation of the Franchise Board in 2003. With the oversight of the Franchise Board, Lloyd’s has enjoyed a period of exceptional growth and stability.
Terrorist attacks on the World Trade Center and Pentagon kill 2,996.
Superstorm Sandy makes landfall in the US, causing estimated losses of between $25-30bn, the second costliest windstorm in US history.
The board is pleased that Beazley’s execution of its strategy continues to help us deliver strong shareholder value.
The markets within which Beazley operates faced major economic and political uncertainties in 2016 – uncertainties that had not diminished by the year end. It is now clear that the hardship and psychological shocks caused by the 2008 financial crash and subsequent recession have, several years later, had major political repercussions that few expected. In both Britain and the US support for open markets and free trade is more challenged and the economic cost may ultimately be high. The direction of both monetary and fiscal policy in this volatile environment is hard to predict.
Reflecting this trend, Brexit has been a source of concern and considerable uncertainty to many businesses in the City of London. For Beazley the concern is less acute, in part because less than 5% of our business is generated within mainland Europe, but also because we had already planned to develop our presence in Dublin to access more business in continental Europe. In November 2016, we filed an application with the Central Bank of Ireland to obtain approval for Beazley Re dac to become a European insurance company, enabling us to broaden our underwriting platforms to European clients.
For many insurers, the ripple effects of political uncertainty and weak investment returns on performance have been masked by a low incidence of catastrophe claims that has continued largely unbroken since 2011. Premium rates have naturally
Against a background of continued sharply falling premium rates for most large risk business, Beazley delivered a very strong performance in 2016, generating a return on average shareholders’ equity of 18% (2015: 19%) and premium growth of 6%.
Through skilled underwriting and careful rebalancing of our diversified risk portfolio, Beazley once again achieved a combined ratio below 90%, recording 89% in 2016 (2015: 87%). Earnings per share were 48.6c (2015: 48.8c) and net tangible assets per share grew to 268.2c (2015: 263.9c).
Beazley targets dividend growth (excluding special dividends) of between 5% and 10%, a record which we have maintained since flotation. Additional capital is available to be returned to shareholders if cash flow further exceeds the opportunity to invest in profitable growth, plus a prudent buffer. As our specialty lines business continues to grow, and as we continue to reduce our peak natural catastrophe exposure, in part due to the competitive rating
The cyber market continues to grow and evolve rapidly, but in other areas patience can be a virtue. Beazley celebrated 10 year anniversaries in Paris and in Singapore in 2016, hard on the heels of our tenth anniversary as a local insurer in the United States. In each market, we have grown largely or exclusively organically, making only small scale acquisitions, if any. This is not the fastest way to grow, but in insurance it can prove a surer route to profitable growth.
In this work we have benefited greatly from the diverse experience and skillset of board members, including Vincent Sheridan, who has been a Beazley plc non-executive director since 2009, and who resigned from the board and audit and risk committee at the end of the year. He will remain a director of Beazley Re dac, the group’s Irish subsidiary. I am very grateful to Vincent for his valued contribution to the board during his seven year tenure.
We were delighted to welcome three new board members during the course of the year, each of whom brings experience relevant to particular opportunities and challenges the company faces.
John Sauerland joined us in May as a non-executive director and member of the remuneration committee. Based in Ohio, John is currently the chief financial officer of Progressive Insurance, having served in a number of roles across that organisation since 1991. As the US continues to be a strategic focus for the group, John’s experience and skills will prove very valuable to us.
Further reinforcing the board’s US experience, particularly in the broking arena, we welcomed Christine LaSala as a non-executive director and a member of the audit and risk committee in July. Based in New York, Christine recently retired as chair of Willis Towers Watson North America after a long and distinguished career in insurance broking that included leadership roles at Johnson & Higgins and Marsh.
Dividend policy and capital requirements Our capital management strategy is to carry some surplus capital to enable us to take advantage of growth opportunities that may arise; this is further supported by our fully undrawn banking facility. We continue to manage our capital actively, and to the extent that we have surplus capital outside of this range the board will consider means to return this capital to shareholders, as demonstrated once more through the announcement of a special dividend for 2016.
Outlook Profitable growth proved a challenge for many insurers in 2016 and we do not expect it to be any easier to achieve in the coming year. For Beazley, however, there remain significant opportunities to grow in the US and, on a smaller scale, in other markets outside London. Demand for our specialist products, particularly among small and mid sized businesses, remains strong.
That is not Beazley’s approach. Our vision is to become, and be recognised as, the highest performing specialist insurer. As long as we continue to generate good ideas to help clients address their most pressing risks while attracting skilled underwriters who can price their products sustainably, we will continue to make progress towards achieving our vision.
Our strong broker relationships and established position in a diverse range of business lines and geographies enable us to pivot toward more profitable opportunities as margins come under pressure in certain areas. The pattern we have seen in recent years continued in 2016: large risk, catastrophe exposed business, which we mainly underwrite out of London, saw further rate declines, whereas rates for smaller liability business held firm. Our locally underwritten US business – mainly comprising small professional liability, management liability and cyber risks – accordingly grew strongly, by 20% to $695.7m.
Beazley has underwritten US business since the company’s early years, when Andrew Beazley and Nick Furlonge built a strong reputation for the company as a market for large scale professional indemnity risks for US lawyers and for architects and engineers. We continued to build on these very strong foundations in the US during 2016 by opening or expanding offices in Houston, Miami and Atlanta. We also took important steps to increase our presence in other geographies.
Europe will be a major focus for the specialty lines international team, with business underwritten both at the Beazley box at Lloyd’s and through local offices. The team, which is expected to grow in the months ahead, will also be targeting new business opportunities in Asia Pacific and Latin America.
In a low claims environment, the strong temptation for insurers is to chase premium rates down in the hope that profits can still be extracted from underpriced business. This bet may have paid off in 2016 (although an uptick in claims in the second half of the year dented the profitability of some insurers) but we do not see it as a sustainable approach. We have preferred instead to walk away from underpriced business. In this way, we have seen our energy account, written within our marine division, shrink by 65% from its peak of $125.2m in 2012 to $44.3m last year, while our reinsurance business also contracted – albeit to a smaller degree – down 4% from $221.6m in 2013 to $213.4m last year.
Risk management As we help our clients manage and mitigate their risks, we are also mindful of the risks that have the potential to imperil Beazley’s profitability or reputation. Our risk management team, led by our chief risk officer Andrew Pryde, helped us refine or develop prudent approaches to a number of such risks in 2016.
Prior to the referendum on Britain’s participation in the EU, the team conducted a detailed analysis of the potential consequences flowing from a ‘no’ vote. In broad terms, we consider that Beazley’s business is less at risk in the event of the now much-discussed ‘hard Brexit’ scenario than that of many of our competitors, due largely to our strong focus on the US market. However we are not immune to exchange rate and asset risk volatility as negotiations proceed.
In the cyber arena, we continue to monitor aggregation risk closely through the analysis of realistic disaster scenarios, with new scenarios being developed for this fast moving area. The risk management team is also working closely with Beazley’s finance team to ensure that capital is available to support the growth opportunities that we see opening up for our specialty lines division in the international market.
Growth through partnerships Another route to profitable growth which we began to explore more fully in 2016 was the establishment of partnerships with other insurers that have strong distribution capabilities and a powerful brand in markets that are attractive to us. Our first major initiative in this regard began in 2015, when we launched a partnership with Korean Re to provide that company with access to the Lloyd’s market while expanding our distribution capabilities in South Korea and other Asian markets.
We see partnerships of this kind playing an increasing role in helping us harness growth opportunities around the world. For many years now, we have offered other insurers the opportunity to embed Beazley specialty lines products in their own product ranges through reinsurance provided by our specialty treaty team. Late last year, we broadened this initiative, under the name Beazley Product Solutions, to make any Beazley product available to other insurers in this manner.
Investing in our business In building the talent base of our company for the future, we aim to look beyond underwriting cycles. Recent market conditions have not favoured all of our competitors and, as a result, some have merged while others have withdrawn from business lines that remain attractive to us. Underwriters with entrepreneurial ambitions in our target markets have meanwhile found Beazley an attractive, and welcoming, employer. We hired 63 underwriters across our six divisions in 2016, a record number.
Many of our hires have been individuals, but we have also acquired a number of teams with a strong track record of success in their markets. In March, in London, we welcomed a team focusing on small and mid sized (SME) medical malpractice business outside the US, a field in which the team has built a strong reputation.
Talented individuals are a necessary but not sufficient condition for success in our markets and we continued to invest in 2016 in technologies that improve our efficiency and make it easier for brokers to do business with us. This is particularly important in the market for small and mid sized risks, where we see increasing demand for our specialist products, both in the US and Europe. Brokers can afford to spend very little time on individual risks that generate modest brokerage and our priority is to work closely with them to offer beautifully designed products that meet their clients’ needs and are easy to understand and to explain.
As a leading participant in the London market, we at Beazley are also aware that gains in efficiency and improved ease of doing business can often only be achieved by the market working in concert. That is why we have been strong supporters of the London market’s target operating model, designed to deliver more efficient processing supported by electronic data capture of all stages of the journey taken by a piece of business, from placement, through claims, to renewal. This large and complex initiative made encouraging progress in 2016.
Can we do better? I have no doubt that we can. One area we are investigating is the scope to simplify our policy wordings, particularly for small scale business where the recipient of the policy is not an insurance professional well versed in industry jargon.
Beautifully designed insurance This desire to further improve our service was key to another new initiative in 2016. Our market-leading cyber products exemplify our focus on carefully designed products and services that are tailored to meet our clients’ most pressing needs. We have sought to promote this focus through the launch of our new tagline: Beautifully designed insurance. And in an industry that sometimes obscures its true value through its use of impenetrable jargon and over-lengthy policy wordings, we are exploring ways to make our products more accessible.
At the risk of being accused of crying wolf, I will once again predict margin declines when (and it is a matter of when, not if) claims return to more normal levels. The consolation for Beazley is that the underwriting discipline we have maintained for short tail, catastrophe exposed business should cushion the impact of major claims when they occur.
Andrew Horton reviews Beazley’s performance and describes the risks and opportunities he foresees in 2017.
Q Has the change in domicile implemented in April 2016 delivered the expected benefits? Wasn’t it a mistake to have moved to the UK just before the Brexit vote?
Q How important is the direction of the US economy to Beazley’s business?
A Very important – 65% of our premiums derive from US risks. We see attractive growth opportunities in other parts of the world and will continue to develop them, but the US market will continue to be key for many of our London underwriters as well as our US underwriters.
The direction of the US economy in 2016 was positive for our business – our locally underwritten business grew by 20% last year. We expect this to continue into 2017. As insurers we tend to favour a ‘Goldilocks’ economy with moderate growth, of the kind we have recently seen.
Q Specialty lines has been growing as a proportion of your overall business. Why is that and do you see limits to that growth?
A Demand for the professional indemnity and management liability lines of business that we class as specialty lines has been growing steadily, particularly among smaller companies. Demand has been growing even faster for data breach and other cyber insurance protections, which is another area of focus for the specialty lines division.
The drivers of increasing demand are varied. We see no evidence that the US is becoming a less litigious society, while regulatory risk is growing. In some other markets, such as the UK, people are also becoming more litigious. As explained on pages 8 to 11 we have been quite successful in developing business in those sectors of the US economy, including healthcare and technology, that have been growing fastest. We expect this growth to continue.
A We see partnerships of this kind playing an important role in Beazley’s future. Our first one was forged with Korean Re in 2015 and we are pleased with the results to date. We have sent, so far, three of our underwriters to spend time with Korean Re in Seoul and gain insights into that market, the seventh largest for non life insurance in Asia. We see many of our specialist products holding appeal for Korean buyers, but the reality is that it is not a market we know well and broker penetration is not deep. A partnership with the country’s biggest reinsurer brings us relationships and local credibility that it would take decades for us to develop on our own.
Distribution is critical at this end of the market and we will also be expanding our ability to write risks through managing general agencies (known at Lloyd’s as coverholders) which can write business on a delegated authority basis, within strict underwriting guidelines. The small business unit within our property division has pursued such a strategy very successfully for many years.
We are very open to developing other, similar opportunities, either with existing partners or with new partners. In 2017 we launched a new business unit within specialty lines, Beazley Product Solutions, to identify and develop such opportunities.
Q Beazley has seen far more growth in small and mid sized business in recent years, particularly in the US, than in large risks. Do you see this continuing and what are you doing to increase Beazley’s appeal to small businesses?
A Large risk business has always tended to be more volatile than small risk business. Part of our rationale in establishing a local presence in the US was to win a larger share of small risk business to balance our large risk portfolio and help us ride out periods of competition for large risks. That strategy has worked well for us in recent years.
Q You have talked about increasing pressure on margins for a number of years but Beazley has continued to produce combined ratios of 90% or better. When will this change?
Q Rate pressure in the marine and energy markets has been particularly intense in recent years. Do you see signs of this abating?
The table below shows our retention rates by division compared to 2015.
We are pleased to have achieved another strong underwriting result in 2016, delivering a combined ratio of 89% (2015: 87%) despite the competitive pressures experienced in recent years continuing in 2016. Our underwriting result again benefited from a relatively benign claims environment, while we were also able to grow our gross premiums written by 6% to $2,195.6m (2015: $2,080.9m).
Our property division delivered another profitable underwriting result in 2016, achieving a combined ratio of 87% (2015: 84%) on gross premiums written of $329.7m (2015: $353.1m). Market conditions continue to be challenging, particularly in respect of large risks, with rates on renewal business falling by 4% year on year for the division as a whole (2015: reduction of 4%).
Against the backdrop of this difficult trading environment, we are adapting our underwriting strategy to focus on segmenting our portfolio and giving increasing focus to small and mid-sized risks. We executed this strategy in 2016 by achieving growth in our high value homeowner portfolio in the US, and our fine arts and specie business in London. Our diverse portfolio helps us to offset some of the more competitive conditions we see in the large risk arena, particularly in the open market book written in London.
While profitable growth was difficult to achieve for our marine team as a whole in 2016, we are working hard to ensure that we are well placed to grow in the future when the opportunity is right. We have expanded some of our smaller teams while pulling back in some of the larger risk areas where competition appears to be greatest, and we were also delighted to purchase Leviathan, a long-standing Lloyd’s coverholder focusing on subsea risks.
At Beazley we will continue to prioritise value creation for our shareholders and clients through our underwriting. As we move through 2017, we will continue to focus on the balanced underwriting approach which has aided us in delivering a strong performance over the past 12 months.
Gross premiums written 247.4 269.3 Net premiums written 220.7 239.5 Results from operating activities 34.5 66.9 Claims ratio 44% 38% Expense ratio 46% 39% Combined ratio 90% 77% Rate change (7%) (8%)
Gross premiums written 118.7 123.6 Net premiums written 97.6 105.0 Results from operating activities 31.5 29.0 Claims ratio 29% 29% Expense ratio 46% 47% Combined ratio 75% 76% Rate change (6%) (6%)
Gross premiums written 1,159.8 1,015.2 Net premiums written 999.4 825.2 Results from operating activities 133.9 77.0 Claims ratio 56% 60% Expense ratio 37% 36% Combined ratio 93% 96% Rate change 1% 2%
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PA direct 55% PA reinsurance 22% Life direct 17% Sports 4% Life reinsurance 2%
Approximately two thirds of the division’s premiums were generated by our London underwriters, who write a broad mix of personal accident business (on both a direct and reinsurance basis); personal accident for sports teams; and life business (also both direct and as reinsurance).
Dan Jones, Beazley’s head of broker relations, has been working closely with the US accident and health team in recent months to strengthen the team’s sales capabilities and open up new distribution channels, efforts we expect to bear fruit in 2017. There are now some uncertainties in the US market over the future of President Obama’s healthcare reforms under the new administration, but the pressure on employers to find more cost effective benefit solutions for their employees is likely to remain.
One specialist field in which we have played a role in recent years has been the insurance of subsea equipment such as remotely operated vehicles and seismic streamers for surveying the sea-bed. We have for many years supported Leviathan, a managing general agency that has specialised in these risks for more than two decades. In May we were delighted to announce the acquisition of Leviathan and to welcome its seasoned underwriting team, led by Simon Edwards and Keith Broughton, to Beazley.
Our profile in the marine liability market has grown significantly since Phil Sandle joined us in 2013. The team, which provides a wide range of covers for shipowners, port authorities, freight forwarders, maritime industry financiers and others, had a banner year, growing premiums by 47% to $48.0m.
Our UK marine team, led by Steve Smyth, continued its strong performance in 2016. This business was a slow burn in its early years, as Steve and his team built strong broker relationships through our four regional offices around the UK. In a competitive market environment, the team has been buoyed by both new business and high retention rate for existing accounts and has seen its share of total division premium rise from 3% in 2013 to 6% in 2016 with premium income increasing by 58% to $14.3m in that period.
Our investments in talent do not march in lockstep with market conditions – we hire capable underwriters and claims staff as the opportunity arises. In addition to the Leviathan team we were delighted to welcome Christophe Paulin to our aviation team in 2016.
Adrian Lewers Head of political risks & contingency $118.7m Gross premiums written
Rates for terrorism insurance, the second of our major lines of business, continued their downward trajectory in 2016, despite ample evidence that the world is not becoming any safer. We have seen strong demand for cover in France, where we lead risks on behalf of a consortium of Lloyd’s underwriters, but overall our terrorism book shrank during the course of the year as rates fell by 13%.
As with our contingency business, our global terrorism team has continued to reinforce Beazley’s reputation for innovation, offering clients cover for active shooter events in the US and ‘loss of attraction’ cover for businesses indirectly impacted by a terrorist event.
Increased focus on small and mid-sized risks counter competitive pressures in large scale market.
In common with most other Beazley divisions, the property division currently derives most of its business from the US and UK. Nevertheless we continued to take steps in 2016 to tap new geographic sources of business, including Latin America and the Asia Pacific region. In October we hired Santiago Jaramillo as construction and engineering focus group leader for Latin America, working out of our Miami office. We also made good progress during the course of the year in developing jewellers’ block and other business in Brazil – as the insurer of around half of the jewellers in the UK, we have deep experience and very strong credentials in this line.
At the end of the year in London we welcomed two highly experienced Lloyd’s underwriters, Mark Bosshard and Scott Sellick, to expand our fine art and specie underwriting capabilities. These lines of business are complementary to our jewellers’ block business. Specie risks such as bank vault contents, private art collections and art dealers’ inventory also require significant capacity and we will be offering a maximum line size of $100m in support of this business.
Looking ahead we see overcapacity continuing to depress rates for large scale property business. However with a portfolio that is increasingly diversified by geography, client size and type of risk, we have greater room for manoeuvre in protecting underwriting margins.
Beazley’s property division delivered a strong result in 2016 given market conditions that were increasingly challenging for many lines of business, notably for large scale catastrophe exposed risks written out of London.
In 2016, our UK and US homeowners business performed particularly well, with premiums rising 13% to $38m. In common with all the business we underwrite in the US, we insure homeowners on a surplus lines basis, meaning that we write risks that are not normally attractive to the standard, or ‘admitted’, market. Our clients and brokers in this market value speed of service, both in underwriting and claims, and we made major strides in delivering this in 2016.
Our US commercial property team, under the leadership of Ron Beauregard, focuses on mid sized risks with some catastrophe exposures, performed creditably during the year, although competition was strong. Premiums underwritten by the team were in line with the previous year at $75.5m.
This year, we will be extending our large risk property underwriting capabilities to the US, with a view to accessing business that we do not currently see in London. London will continue to be the main focus for our large risk property business and Simon Jackson, who leads our open market property team in London, will continue to be globally responsible for our large risk business. In 2016, market conditions for this business continued to deteriorate, with rates on renewal business falling 6%.
Our global construction and engineering team, led by Colin Rose, had a mixed year. Our large risk business, much of which we underwrite through the Construction Consortium at Lloyd’s in London and Singapore, performed well. Conditions were more difficult for our builders’ risk team in the US, which focuses on smaller scale business. The team expanded its product range in September, launching five new products that should enhance our ability to offer one-stop solutions for our broker partners and their construction clients across multiple industries.
The reinsurance division delivered another strong underwriting performance in 2016, achieving a combined ratio of 65% (2015: 57%) on premiums marginally higher than the previous year’s at $213.4m (2015: $199.9m).
There is little doubt that reinsurance remains a buyer’s market but it would appear that the sharp rate declines we have seen in recent years are now flattening out. Renewal rates fell 4% in 2016, but this compared with a rate decline of 7% in 2015 and 10% in 2014. We have seen demand for reinsurance edging up in a number of markets, including the US, which is the source of about half the division’s premiums.
Looking ahead, we see the potential for a significant increase in demand for reinsurance cover in developed and less developed markets around the world if the administrators of state-backed insurance programmes seek to transfer some of their exposures to the private sector, as some have been considering doing. If this occurs, the new demand could go a long way towards absorbing the overcapacity that now impacts our market.
Technology, media & business services 27% Small businesses 20% Professions 18% Management liability 17% Healthcare 11% Treaty 6% Crime 1%
Beazley’s largest division continued to grow strongly in 2016, writing gross premiums of $1,159.8m (2015: $1,015.2m). As in recent years, the main engine of growth was the US, where Beazley has had a local presence for over a decade and demand for our specialist products has been strong.
Specialty lines comprises in the main professional and management liability business, underwritten for large, mid sized and small companies and professional services firms around the world. For the most part our London based underwriters focus on the larger and more complex risks, such as large hospitals, law firms and engineering firms, whereas our local US underwriters write smaller scale risks.
Demand for data breach insurance and other forms of cyber cover has been consistently high since we launched our pioneering data breach product, Beazley Breach Response (BBR), in 2009. In 2016, we took a number of steps to capture a larger share of this fast growing market. In April, we announced a partnership with the Corporate Insurance Partner unit of Munich Re, the world’s largest reinsurer, to underwrite large scale cyber risks, offering per risk capacity of up to $100m. This initiative has been very well received by brokers and clients.
During the course of the year we launched a number of other cyber partnerships with insurance companies across the world, from the US to Latin America, mainland Europe and the Middle East, enabling policyholders – largely small and mid sized businesses – to obtain the broad data breach cover and claims service for which Beazley is well known. We see partnerships of this kind as holding great promise in extending our reach cost effectively into markets where Beazley lacks a local presence.
An important element of our long term strategy in specialty lines – described in detail on pages 8 to 11 – is to promote our products and expertise strongly in fast growing industries. Technology is one such industry: our technology, media and business service team that developed BBR also underwrites technology errors & omissions business for many of the world’s largest software and software services companies. Healthcare is another: in 2016, we saw our healthcare liability business grow by 18% to $126.7m. We also broadened our architects & engineers professional liability practice to include contractors who are taking in-house an ever growing proportion of design work that we seek to insure.
Another growth market for us in 2016 was environmental liability. We have taken full advantage of dislocations in this market to hire experienced underwriters and develop our book, mainly in the US. Our team underwrote premiums of $61.5m in 2016, more than double the level of premium income generated in 2015.
Although demand for many of these products often begins in the US, the London insurance market remains a crucible for innovation in our industry and many of our most innovative products and services originate with our London underwriters, working closely with specialist brokers. For example, our healthcare team, led by Nat Cross, has developed over the years a unique way of working with major hospitals to incentivise them to invest in patient safety and quality measures that should also, over time, reduce claims. Premium credits paid to hospitals under this programme now exceed $7m. We believe that our approach, pioneered with some of the most respected hospitals in the US, should also prove valuable to hospitals in other countries.
Profit before tax 293.2 284.0 3% Income tax expense (42.2) (35.0) 21% Profit after tax 251.0 249.0 1%
Claims ratio 48% 48% Expense ratio 41% 39% Combined ratio 89% 87% Rate decrease (2%) (2%) Investment return 2.0% 1.3%
Profit Profit before tax was broadly unchanged in 2016 at $293.2m (2015: $284.0m). The group achieved a combined ratio in line with its long term target of 90% but slightly higher than the 87% seen in 2015. Profits on short tail classes were lower than in 2015 reflecting the reduced margins available following several years of price competition in these areas. Overall, reserve releases were at similar levels to 2015 but with a greater contribution from specialty lines where the prior year releases increased by 77% on 2015. The very strong investment return of 2.0% (2015: 1.3%) compensated for the reduced underwriting contribution.
Premiums Gross premiums written have increased by 6% in 2016 to $2,195.6m. Rates on renewal business on average decreased by 2% across the portfolio. We have continued to adjust our underwriting appetite in areas where competition is most intense.
Reinsurance purchased Reinsurance is purchased for a number of reasons: • to mitigate the impact of catastrophes such as hurricanes; • to enable the group to put down large, lead lines on the risks we underwrite; and • to manage capital to lower levels.
Life, accident & health 6% Marine 11% Political risks & contingency
Releases as a percentage of net earned premium 8.5% 13.7% 9.5% 10.4% 10.2% 10.5%
Brokerage costs 390.0 362.8 Other acquisition costs 82.5 85.8 Total acquisition costs 472.5 448.6 Administrative expenses 247.8 215.2 Total acquisition costs and administrative expenses 720.3 663.8
Brokerage costs are the premium commissions paid to insurance intermediaries for providing business. As a percentage of net earned premium they have increased slightly to 22% in the current year (2015: 21%). Brokerage costs are deferred and expensed over the life of the associated premiums in accordance with the group’s accounting policy.
The group expense ratio has increased 2% over the last three years to 41%. Average brokerage rates have increased 1% and the other half of the increase is in our own internal expenses. On the internal aspects, we continue to invest in developing Beazley and to experience expense ratio pressure in areas of the portfolio where the top line is shrinking due to market conditions. Our careful expense management, together with sterling weakness, have enabled us to to contain the increase in expense ratio driven by internal costs to only 1%.
In 2016, the funds managed by the Beazley group remained in line with the prior year, with financial assets at fair value and cash and cash equivalents of $4,702.6m at the end of the year (2015: $4,519.1m). The chart above shows the increase in our group funds since 2012.
Tax Beazley is liable to corporation tax in a number of jurisdictions, notably the UK and Ireland. Our effective tax rate is thus a composite tax rate driven by the Irish and UK tax rates. Our effective tax rate for the year was 14.4% (2015: 12.3%). The increase compared to 2015 was due to a number of favourable prior year tax adjustments in 2015 that did not recur in the current year.
In 2016, it was announced that the UK corporation tax rate will be reduced to 17% by 2020. This reduction in the UK tax rate will reduce the group’s future current tax charge. The application of the diverted profits tax passed by the government early in 2015 remains uncertain. We have considered the implication of this and retain the view that this tax should not apply to Beazley (see note 9).
Intangible assets Intangible assets consist of goodwill on acquisitions of $62.0m, purchased syndicate capacity of $10.7m, US admitted licences of $9.3m, renewal rights of $7.0m and capitalised expenditure on IT projects of $7.6m.
Reinsurance assets Reinsurance assets represent recoveries from reinsurers in respect of incurred claims of $853.9m, and the unearned reinsurance premiums reserve of $228.2m. The reinsurance receivables from reinsurers are split between recoveries on claims paid or notified of $201.8m and an actuarial estimate of recoveries on claims that have not yet been reported of $652.1m. 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 45 shows the profile of these assets (based on their S&P rating) at the end of 2016; • 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.
Insurance receivables Insurance receivables are amounts receivable from brokers in respect of premiums written. The balance at 31 December 2016 was $794.7m (2015: $732.7m).
Gross insurance claims reserves are made up of claims which have been notified to us but not yet paid of $949.5m and an estimate of claims incurred but not yet reported (IBNR) of $2,567.4m. These are estimated as part of the quarterly reserving process involving the underwriters and group actuary. Gross insurance claims reserves are broadly unchanged from 2015 at $3,516.9m.
Financial liabilities Financial liabilities comprise borrowings and derivative financial liabilities. The group utilises three long term debt facilities and has increased the aggregate amount of debt during 2016 by $152.8m in anticipation of opportunities to grow the capital supporting group underwriting over the next few years. An overview of our financial liabilities is included below: • in 2006 we raised £150m of lower tier 2 unsecured fixed rate debt that was payable in 2026 and callable in 2016.
• a US$18m subordinated debt facility was raised in 2004. This loan is also unsecured and interest is payable at the US$ London interbank offered rate (LIBOR) plus 3.65%. These subordinated notes are due in 2034 and have been callable at the group’s option since 2009; • during September 2012 we issued a sterling denominated 5.375% retail bond under a £250m euro medium term note programme which raised £75m for the group and is due in 2019. This diversified the source and maturity profile of the group’s debt financing; and
A syndicated short term banking facility led by Lloyds Banking Group plc provides potential borrowings up to $225m. Under the facility $225m may be drawn as letters of credit to support underwriting at Lloyd’s. Of this, 75% may be advanced as cash under a revolving facility. The cost of the facility is based on a commitment fee of 0.4375% per annum and any amounts drawn are charged at a margin of 1.25% per annum. The cash element of the facility will expire on 31 July 2017, whilst letters of credit issued under the facility can be used to provide support for the 2015, 2016 and 2017 underwriting years. The facility is currently unutilised.
AA+ 4% AA 1% AA- 55% A+ 35% A 4% Collateralised 1%
Further capital requirements come from rating agencies who provide ratings for Beazley Insurance Company Inc and Beazley Re dac. We aim to manage our capital levels to obtain the ratings necessary to trade with our preferred client base.
We signalled at the interim results that we expected the Lloyd’s ECR to increase, reflecting our plans for growth, and the final figure at year end 2016 is extremely close to our projection once FX movements are taken into account.
Lloyd’s economic capital requirement (ECR) 1,489.2 1,326.9 Capital for US insurance company 107.7 107.7
Solvency II The Solvency II regime came into force on 1 January 2016. From Q1 2016 Beazley has provided quarterly Solvency II pillar 3 reporting to both Lloyd’s for the Beazley managed syndicates and the Central Bank of Ireland for Beazley Re dac and Beazley plc. Our project to prepare for the pillar 3 reporting requirements is nearing completion and will remain in place until annual reporting for 31 December 2016 is complete. We believe we are well positioned to meet all the reporting requirements.
Solvency capital requirement The group is required to produce a Solvency Capital Requirement (SCR) which sets out the amount of capital that is required to reflect the risks contained within the business. Lloyd’s reviews this assessment to ensure that SCRs are consistent across the market. On 10 December 2015 Beazley received internal model approval from the Central Bank of Ireland (the group supervisor under Solvency II).
• the internal model process is embedded so that teams can see the direct and objective link between underwriting decisions and the capital allocated to that team. This gives a consistent and comprehensive picture of the risk/reward profile of the business and allows teams to focus on strategies that improve return on capital.
Operational update Technology innovation, data analytics, and our ability to scale operationally are key to our business growth.
A high performing global operations function relies on us maintaining consistency in operational standards throughout the group, while, simultaneously, being prepared to try new things and leverage our depth of insurance operations expertise to give us a lead over the competition. In order to achieve this, we pursue our group operations strategy. This has five areas of focus: Supporting growth initiatives In support of our strategic growth initiatives such as in the US, Europe, and Asia Pacific, we have continued to enhance our infrastructure so that we can bring attractive new products to market as efficiently as possible. Enhanced event cancellation cover and professional indemnity cover for design-build contractors are examples of two new types of insurance that we launched in 2016.
We also continue to explore new ways to improve access to our specialist products. In 2016, we launched more products on our core e-trading platform, myBeazley.com. This included marine pleasure craft, professional indemnity, and event cancellation products in both the UK and US. We also developed new business-to-business-to-consumer or ‘B2B2C’ electronic trading products through myBeazley.com. Solutions like this make it easier for brokers to market our products to the end customer, and also increase the efficiency of the end-to-end insurance placement process. Our electronic distribution strategy also includes the rollout of online pricing tools that enable our brokers to quickly price risks for newer types of specialty coverage, such as within the cyber insurance market. These tools have been instrumental in growing our market share whilst also making it quicker for brokers to get risks priced for their customers.
This year we also continued to increase the amount of process automation in our back-office for our higher volume products in the US and Europe. Our investment in process automation is key to supporting increased transaction volumes and revenue, without having to scale up our expense base. Much of our technology architecture uses software components that can be reused across our global platforms, so technology we have built to service our US market is also being used to service our European market, and vice versa. This approach to technology development means we can minimise duplication in implementation cost, and also means we are able to introduce technology solutions that have been successful in one market to another.
This year we completed the final phase of our US data centre upgrade. This converted our disaster recovery capability to an ‘active-active’ configuration. This means if one of our data centres should go offline, such as in the event of a major natural disaster, then another data centre will automatically kick-in and keep our systems running with no noticeable change to our users. In an age where customers expect a high degree of service availability and response time, this type of platform investment could be critical.
Enabling product and service innovation Our strategy focuses on two types of innovation. Firstly, there is insurance product innovation, which requires an operational platform that facilitates an efficient product pipeline – from idea development through to product launch. Secondly, there is the development of new or enhanced tools and support services that enable our employees to perform optimally in their roles.
A continuing focus for us has been strengthening our ability to take new product ideas more quickly from the drawing board to the underwriting stamp. We have built dedicated teams in both London and the US to coordinate the product innovation process, and then to bring all the operational components together for a successful market launch. In advance of further expansion in Europe, such as for financial institutions business, we have been further extending our product delivery capability by working with our outsourcing partners to give additional scale.
Managing for performance A market differentiator for Beazley is the high level of experience that we have built within our global operations team. Whether providing support services or delivering large projects, we know what works and what does not. The operations team and the underwriting teams have developed strong working relationships over the years, and collectively we have developed considerable expertise in bringing new products and distribution channels to fruition.
Design of our risk management framework Given the ‘beautifully designed’ theme of this year’s report and accounts, it is an opportune time to explain the key principles that were used in the design of the risk management framework: • Simple and accessible: The first principle is that the risk management framework is simple to operate and easy to understand. Without this, the framework would not be used widely and would be of little value to the board in overseeing the business. It is true that simplicity is the ultimate form of sophistication; • Risk coverage: The risk management framework covers the complete risk universe. If the management of risk is restricted to say the top ten risks, it will inevitably be the eleventh or twelfth risks that cause problems; • Relevant information: There is a balance to be sought in the calibration of the risk management information reported. If the calibration is too sensitive, issues will be constantly reported and the board will struggle to distinguish between what is important and what is just background noise. If the calibration is not sensitive enough, then the board will not have sight of the important issues and will incorrectly believe everything is fine. At Beazley, the reporting is focussed on managing within the risk appetite established by the board; • Consolidated view: The board receives a consolidated view free of unnecessary contradiction. The consolidated assurance report at Beazley brings together the perspective of the business and the perspective of the assurance functions of compliance, risk management and internal audit in order to provide the board with a holistic view of the risk and control landscape. In addition, the design of the risk management framework aligns with the way that internal audit undertake their reviews and report their findings; and
Good design should be intuitive and effortlessly achieve the desired outcome. In 2016, we completed the first detailed review of the current design of the risk management framework since its implementation in 2010. The result of this review has been just a few fine tuning adjustments as the framework has been demonstrated to be meeting these design principles over the past seven years and has coped well with the continued growth and evolution of the business.
Earlier in the year, the specialty lines division had embarked on developing Europe and the Rest of the World to complement existing distribution at Lloyd’s and in the US for its products. This involved an application to change the Beazley Re dac licence in Ireland to include an insurance licence in addition to the existing reinsurance licence. A secondary benefit of this application is to be able to offer insurance to our European clients in the event that a Lloyd’s licence cannot be utilised, or to provide our European clients with a choice of using either Lloyd’s security or locally capitalised security. The risk management team undertook a transactional ORSA to provide assurance that the risk management framework will evolve appropriately as Beazley’s Irish company starts to underwrite both insurance and reinsurance business.
Premium from Beazley’s market leading cyber product, Beazley Breach Response, continues to grow as new clients purchase this valuable and innovative product. As planned, we have added to our suite of realistic disaster scenarios and have updated the assumptions of existing scenarios to reflect our current understanding of how an aggregated claims event might occur. Given that we have yet to actually observe an aggregated claims event, there is little data available to assist with this modelling. As such, we continue to use external technical expertise to supplement our own views of how such an event could unfold. The scenarios are compared against the board’s risk appetite to ensure that growth in this area remains appropriate within Beazley’s diversified portfolio of other risk types. It is clear that this area continues to evolve at a relatively fast pace which warrants such regular review and oversight.
Risk management facilitated a discussion of emerging and strategic risks at the board strategy day in May. The discussion focused on four topics, namely; the commoditisation of insurance, disintermediation, being the last independent company at Lloyd’s and the impact of a global recession. The analysis performed by board members and the ensuing discussion provided an opportunity to test how Beazley’s strategy may have to evolve if these risks were to emerge.
Although risk appetite is established with reference to earnings volatility, there are a number of risks that do not necessarily have a direct financial consequence. Instead, for example, there may be a reputational impact. We have experienced this year that the qualitative risk appetite statements introduced in 2015 have helped business functions prioritise activity within their teams to ensure that necessary activity is undertaken in a timely manner in order to operate as the board expects.
Clear roles, responsibilities and accountabilities are in place for the management of risks and controls, and all employees are aware of the role they play in all aspects of the risk management process, from identifying sources of risk to their part in the control environment. The impact of each risk is recorded in the risk register on a 1:10 likelihood of that risk manifesting in the next 12 months. A risk owner has been assigned responsibility for each risk, and it is the responsibility of that individual to periodically assess the impact of the risk and to ensure appropriate risk mitigation procedures are in place. External factors facing the business and the internal controls in place are routinely reassessed and changes are made when necessary. On an annual basis, the board agrees the risk appetite for each risk event and this is documented in the risk management framework document. The residual financial impact is managed in a number of ways, including: • mitigating the impact of the risk through the application of controls; • transferring or sharing risk through outsourcing and purchasing insurance and reinsurance; and • tolerating risk in line with the risk appetite.
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 is timely, clear, accurate and appropriately escalated.
In summary, the board identifies risk, assesses risk and sets risk appetite. The business then implements a control environment which describes how the business should operate to stay within risk appetite. Risk management then reports to the board on how well the business is operating using a consolidated assurance report. For each risk, the consolidated assurance 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 improved, through the consideration of stress and scenario testing, themed reviews using risk profiles and an assessment of strategic and emerging risks.
The Chief Risk Officer provides a quarterly own risk and solvency assessment (ORSA) to the board summarising the short term and longer term risks to the group and the capital implications.
• Flight risk: There is a risk that Beazley is unable to deliver its strategy due to the loss of key personnel. Beazley has controls in place to identify and monitor this risk, for example, through succession planning.
• Regulatory and legal risk: This is the risk that Beazley does not operate in line with the relevant regulatory framework in the territories where it operates. Of the eight risk categories, the board has the lowest tolerance for this risk. This risk is monitored by the risk and regulatory committee.
This year we wanted to make an even bigger difference as part of our 30th anniversary celebrations. We’ve donated $362,000 to our charity partners and our Beazley Pacific Cycle challenge alone raised another $18,264, which was used for 18 ShelterBoxes in Haiti following Hurricane Matthew. September was also ‘Making a Bigger Difference’ month, helping the total number of employee volunteers for the year reach 430, from 326 in 2015. It’s all about making sure that everyone – not just ourselves – felt the benefit of our anniversary celebrations.
Thirty is a significant anniversary. As well as looking back and appraising what we’ve done, it’s also a time to look ahead, to the things one aspires to. We pride ourselves on setting ourselves apart. Being different. Doing different. We work hard to give something back, especially in the workplace and with our communities. However, there’s more we can do, particularly in the marketplace and for our impact on the environment.
Our vision is to use our expertise, influence and passion as a force for good in our local communities and the wider world.
“ As market leaders in many of our chosen lines, we have a unique understanding of our clients’ risks. We can use this expertise to create innovative products that encourage behaviour that benefits society as well as our insureds.” Adrian Cox Head of specialty lines
The Quality Indicator Return Premium, or QuIRP, programme is an important element of the specialist healthcare insurance that we offer to hospitals. It offers clients returns on their premiums if they meet pre-agreed patient quality and safety standards. The programme creates an incentive to provide better care for patients. It also shows how specialist insurance designed by experts can be a force for good.
Says Nat: “We’re proud that through QuIRP we have returned more than $7m in premiums to hospitals that have demonstrably improved their practices.”
EPL: fewer claims, ‘phew’ say employees “ By helping employers avoid claims, we are reducing their risk while improving the workplace for everyone,” says Wayne Imrie, EPL & Private company liability underwriter.
Employee tribunals are stressful events for everyone. Our Employment Practices Liability (EPL) policy aims to reduce the risk of situations ending up in court. As well as providing typical insurance, BeazleySure, our online risk management platform, offers policyholders comprehensive risk management training, a dedicated telephone hotline, wage and hour tutorials as well as model policies and procedures.
“ We want to minimise our business’s environmental impact. We’re focused on making our offices efficient. We work with suppliers to make our procurement sustainable. We engage our people to help achieve our goals. Looking after our environment is core to ‘Being Beazley’ – we do the right thing not because the rule book tells us to, but because it’s right.” Ian Fantozzi Chief operating officer
Refreshing our environmental policy “As tenants there’s a limit to what we can do environmentally to affect the buildings we are in,” says Munira Hirji, Head of commercial management, and Responsible Business Committee member for the environment. “But what we can do we will – principally working closely with our landlords and building management companies to ensure that together we promote and implement building initiatives that support the environment. In addition, we encourage our colleagues to save energy and minimise waste both within our own spaces and outside.”
We consider our environmental impact when we open new offices and aim to select sustainable and energy saving materials to minimise these impacts. For example, this year we replaced the lighting in our London office with energy efficient LED lights.
Our procurement We leverage our buying power and work with suppliers to make a positive environmental impact.
Green goes Gold in Chicago Almost half of our US offices are in Leadership in Energy and Environmental Developments (LEED) certified buildings. This is a coveted industry standard. Where possible we open new offices in LEED or local equivalent certified buildings. Our Chicago office is a LEED-certified building and has been recently upgraded to Gold status.
The board has agreed to adopt a similar approach to the gender diversity of our senior management with the aim of building a diverse talent pipeline for the future. The board is committed to having at least 35% of female senior management at Beazley by 2020. In line with our vision, the board is also committed to promoting the recruitment and retention of people from different backgrounds. This approach is underpinned by our commitment to maintaining our meritocratic approach to diversity while ensuring that we are avoiding unconscious bias in our selection criteria. We’re also doing our best to give people from all backgrounds the right level of support to progress within the group.
“ We plan to expand our efforts to recruit and promote people from an increasingly diverse population. Externally, that includes continuing to investigate recruitment partners who share our diversity and inclusion vision and goals.” Rob Anarfi Chair of the diversity and inclusion steering group
• Working parents. We have linked up with Talking Talent in the UK and the National Parenting Education network in the US, which provides support for new parents and their line managers. We have also provided links to similar support programmes in Singapore and Australia.
Statement on the Modern Slavery Act 2015 We abide by and are committed to the requirements of the Modern Slavery Act. We continue to work to ensure there is no slavery, human trafficking or any forced labour in our supply chains.
Throughout the year we continued to promote the Beazley health and wellbeing site with healthy initiatives, including ‘reclaim your lunch break’ which promoted ideas such as walking and cycling trails in the areas local to each office, lunchtime talks outside the office, Beazley lunchtime clubs and gym membership.
The number of Health and Wellbeing champions has grown in line with the business and they continue to support and promote the initiative around the globe.
Giving the next generation a step up “Mentoring is one of the most valuable ways we can contribute to our communities,” says Iain Newton, Research and development manager, and Responsible Business Committee member for community. “It means we can share our skills and expertise in a very meaningful way.”
“I’m reading Maths and Economics at the University of Surrey and last year I got a placement with healthcare, specialty lines,” says Nida Jafri, returning intern. “I’ve had more training at Beazley than my friends elsewhere. Having worked here, I feel more equipped for the path I’d like to pursue.”
“ We aim to go beyond employment, and improve opportunities for all those who live and work around our offices. Many of our employees volunteer their time through mentoring and partnership programmes which increase the skills and expertise of local children and young people. Beazley people also support our communities by contributing to our corporate charity partner and to dozens of causes close to their homes or hearts.” Clive Washbourn Head of marine
Samira, from Sarah Bonnell School in London who attended one of our workshops said: “Thank you for the amazing presentation about insurance and women in the workplace. It really got me interested in the concept of insurance and I am now considering going into the insurance industry.”
Beazley team conquers four Colorado ‘fourteeners’ for Shelterbox A team of eight Beazley employees raised more than $15,000 for ShelterBox by climbing four ‘fourteeners’ (14,000 ft+ mountains) in southern Colorado in August.
“Current cancer treatments are not enough, and new approaches beyond chemotherapy, radiation and surgery are needed to help save more lives,” says Jill O’Donnell-Tormey, CEO of Cancer Research Institute. “Beazley’s support provides much needed funding, which allows us in turn to aid scientists to research cures for cancer by giving grants. These grants are crucial in allowing talented scientists to conduct laboratory research and clinical trials leading to life-saving immunotherapies for all cancers.”
Aspiring to define, develop and deliver “Marketplace is core to our Responsible Business strategy because it underpins the way we write business and has a far-reaching impact,” says Andrew Horton, CEO. “Wherever possible we want to use our expertise as a force for good. Our aim is to understand the full reach of our existing business practices and highlight the positive influence we can have when underwriting as well as finding innovative ways to deliver responsible, profitable business.”
In 2016 we focused on phase one of our Marketplace strategy, and in 2017 we will focus on phases two and three: 1. Research: to get a better understanding of what we currently do and explore what other opportunities there are across the business, so we can then focus on delivering two or three initiatives 2. Define and develop: run a workshop with representatives from across the business, to identify and agree two or three initiatives to develop in to product offerings/variations 3. Deliver: deliver the two or three initiatives chosen as above.
‘Make a Difference’ 2017 The benefits of getting involved with our local communities has a positive impact not only on them but also on our people too. Our colleagues have said that community volunteering is valuable for us as an organisation. It has helped build pride in working for Beazley as well as enhancing their skills and building and strengthening relationships across the business. We look forward to building further on this rewarding area of involvement by delivering another successful ‘Make a Difference’ month in September 2017.
Directors’ report The directors have pleasure in presenting their report and the audited financial statements of the group for the year ended 31 December 2016.
The directors announce both a second interim dividend of 7.0p per ordinary share (2015 second interim dividend: 6.6p) and a special dividend of 10.0p per ordinary share (2015 special dividend: 18.4p per ordinary share). These dividends, together with the first interim dividend of 3.5p per ordinary share (2015 first interim dividend: 3.3p), give a total of 20.5p (2015: 28.3p).
The aforementioned second interim and special dividends will be paid on 29 March 2017 to shareholders on the register on 3 March 2017.
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 at page 55.
Substantial shareholdings As at 2 February 2017, the board had been notified of, or was otherwise aware of, the following shareholdings of 3% or more of the company’s issued ordinary share capital: Number of ordinary shares %
By order of the board, covering the strategic report from pages 1 to 65 and the directors’ report from pages 66 to 69.
Governance 71 Letter from our chairman 72 Board of directors 76 Investor relations 77 Statement of corporate governance 92 Letter from the chairman of our remuneration committee 94 Directors’ remuneration report 94 Directors’ remuneration policy 102 Annual remuneration report 119 Statement of directors’ responsibilities 120 Independent auditor’s report
The board and its committees met regularly during the year to set direction and risk appetite and provided oversight and control of management in the day-to-day running of the business. We promote a culture of openness and debate at each meeting and seek to receive constructive challenge from the non-executive directors to help develop proposals on strategy and other matters. As chairman, I seek to ensure this is achieved, that appropriate decisions are then reached, and that we empower management to then execute those decisions, with our on-going oversight and support. Each of the strategic initiatives has been assigned a non-executive sponsor. In May, we held our annual board strategy day and topics included were emerging risks and trends, two new strategic initiatives and the current mergers and acquisitions environment within the insurance industry.
The group believes in the importance of diversity for board and group effectiveness and has developed a diversity strategy to support our commitment to being an equal opportunities employer. We achieved our goal of three female directors by the 2017 AGM, having gone from none to three within five years. We have now set a new goal of a minimum of 35% of female senior managers within the organisation by 2020 and of 33% of female board members at group level by 2021. We are committed to ensuring appointments are made on merit against selection criteria. Further details of our policy and goals are set out in the nomination committee report.
I am pleased to confirm the company has complied with the principles and provisions set out in the UK Corporate Governance Code throughout the year ended 31 December 2016. Details of the activities of the board and its committee also are set out on pages 72 to 75.
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.
* Where the appointment date of a director pre-dates 13 April 2016 (being the date that Beazley plc became the holding company of Beazley Group) this appointment date refers to their representation on the Beazley Ireland Holdings plc board (formerly Beazley plc).
Appointed: 15 March 2001* Experience: Neil joined Beazley in 1990 and was appointed to the board in 1993. He has over 30 years of Lloyd’s experience and, in 2011, joined the board of the Lloyd’s Market Association, becoming chairman on 1 January 2016. Neil was elected to the Council of Lloyd’s with effect from 1 February 2016. Committee: Executive committee
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 (chair)
Appointed: 21 July 2011* Experience: Dennis has more than 45 years’ experience in financial services markets. He was formerly a main board executive director at Lloyds TSB (2000-2001), chief executive of AXA UK and a member of AXA’s Global executive committee (2001-2006). He has been chairman of Liverpool Victoria and deputy chairman of Bank of Ireland. Dennis was appointed chairman of The Co-operative Bank plc in 2014. Committee: Nomination committee (chair)
Appointed: 25 March 2015* Experience: Andrew is dean of London Business School. He was founding director of the Executive MBA programme and has been a professor at the School for many years. His research interests are in the field of the measurement of performance. Andrew’s career has spanned the public and private sectors: he has run a textile plant in Germany, been head of the Government Accountancy Service and was managing director of the UK Treasury. Committees: Remuneration committee (chair), nomination committee
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
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’ syndicate 623 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.
There are currently 12 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, Keefe Bruyette & Woods, Peel Hunt, Shore Capital, Cannaccord, Sanford Bernstein, Collins Stewart, Stockdale Securities, UBS and RBC.
The board considers that the annual report and accounts, taken as a whole, are fair, balanced and understandable; and that they provide the information necessary for shareholders to assess the company’s performance, business model and strategy. The company’s auditors have reviewed the company’s compliance to the extent required by the UK listing rules for review by auditors of UK listed companies.
Executive committee Chairman Andrew Horton Members Adrian Cox Adrian Lewers Andrew Pryde Anthony Hobkinson Clive Washbourn Dan Jones Ian Fantozzi Mark Bernacki Martin Bride Mike Donovan Neil Maidment Patrick Hartigan Penny Malik Key responsibilities The executive committee manages all operational activities of the group and acts under the powers delegated by the board. It has responsibility for proposing strategic initiatives and group/syndicate business plans to the board as well as for reviewing the risk management framework and oversight of the group’s subcommittees and business functions.
Chairman Dennis Holt Members Adrian Cox Andrew Horton Sir Andrew Likierman Angela Crawford-Ingle Catherine Woods
Shareholders 1 Vincent Sheridan resigned from the Beazley plc board and audit and risk committee with effect from 31 December 2016.
The board The board has a schedule of matters reserved for its decision. This includes: inter alia, strategic matters; statutory matters intended to generate and preserve value over the longer term; approval of financial statements and dividends; appointments and terminations of directors, officers and auditors; and appointments of committees and setting of their terms of reference. It is responsible for: the review of group performance against budgets; approving material contracts; determining authority levels within which management is required to operate; reviewing the group’s annual forecasts; and approval of the group’s corporate business plans, including capital adequacy and the Own Risk Solvency Assessment. The board is responsible for determining the nature and extent of the principal risks it is willing to take in pursuing its strategic objectives. To this end, the board is responsible for the capital strategy, including the group’s Solvency II internal model.
1 Vincent Sheridan was unable to attend the board and audit and risk committee meetings on 6 December 2016 due to a scheduling conflict.
During the year, the board has spent time particularly on: • review of strategic initiatives and Brexit impacts; • review of the competitive landscape; • discussions over prioritisation of investment expenditure; solvency II reporting; • review of risk management framework, including risk appetite; • careful monitoring of market conditions prior to and following the UK referendum and consideration of the implications of its result; • understanding the EU Market Abuse Regulation; • ORSA; • discussion on capital position and dividends; • cyber and cyber security; • new acquisitions; • review of developments in corporate governance and receipt of key legal and regulatory updates; and • discussion of the outcome of the board evaluation and effectiveness review and agreement of improvement opportunities.
Training, information and support New directors will receive appropriate induction training when they join the board of Beazley plc. They will be asked to complete a skills and knowledge assessment and the company secretary with talent management will arrange and coordinate the appropriate training. There are a number of modules available to the directors which are regularly reviewed to ensure they meet best practice. Where appropriate, mentoring will be provided to new directors by an external provider.
There is an agreed principle that directors may take independent professional advice if necessary at the company’s expense, on the basis that the expense is reasonable. This is in addition to the access which every director has to the company secretary. The secretary is charged by the board with ensuring that board procedures are followed.
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 for this to be externally facilitated every three years. In 2015 an assessment of the effectiveness of the board and its committees was externally facilitated by Deloitte LLP. The board considered the results of the assessment and confirmed that there were no significant matters to be addressed. A self-assessment of the board and its committees was carried out in 2016 as described in the nomination committee report on page 90.
The board agreed the 2016 risk appetite for the group at the end of 2015 and, throughout 2016, the board has considered and acted upon the information presented to it in order to make risk based decisions against the 2016 risk appetite. Key components of the risk management framework include monthly control self assessments and six monthly risk assessments, with ad hoc risk assessments being conducted when required. These matters have been considered by the executive risk and regulatory committee each month and the audit and risk committee and board quarterly. In addition, the board has considered the quarterly Own Risk and Solvency Assessment report in the past year. This risk management framework has provided the board with an ongoing process for identifying, assessing, monitoring and managing the risks to the company, and accords with the UK Financial Reporting Council’s ‘Guidance on Risk Management, Internal Control and Related Financial Business Reporting’.
The key procedures that the board has established to ensure that internal controls are effective and commensurate with a group of this size include: • day-to-day supervision of the business by the executive directors; • review and analysis by the various group committees of standard monthly, quarterly and periodic reporting, as prescribed by the board; • review of financial, operational and assurance reports from management; and • review of any significant issues arising from internal and external audits.
The board therefore confirms that it has, during 2016, 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.
Details of the members’ financial, accounting and other relevant financial experience are given in their biographies under ‘board of directors’ on pages 74 to 75.
The audit and risk committee is required to meet at least quarterly, with meetings scheduled at appropriate intervals in the reporting and audit cycle. Additional meetings are held as required. In 2016 there were a total of six meetings, reflecting the workload of the committee during the year.
Only members of the committee have the right to attend meetings; however standing invitations are extended to the chief executive officer, the group finance director, the chief underwriting officer, the chief risk officer, the head of internal audit and the head of compliance. Other non-members may be invited to attend all or part of any meeting as and when appropriate. The company secretary acts as secretary to the committee. The internal and external auditors attend committee meetings and regularly meet in private with the committee. In addition the chairman of the audit and risk committee has regular contact with the external and internal auditors throughout the year and members of the committee met individually with the Central Bank of Ireland and the Prudential Regulation Authority during 2016.
During the year the committee has remained focused on its key responsibilities relating to financial reporting, internal controls, compliance and risk management; working collaboratively with management and internal and external assurance providers to make an effective assessment of the governance framework. The committee has received and challenged a variety of information in order to ensure that the internal risk and control framework is appropriate for the group. The control and risk environment is continuing to change and the committee is working actively with the group to ensure a robust internal control and risk environment is maintained.
Angela Crawford-Ingle 27 March 2013 (Chair) 6/6 George Blunden 1 October 2010 6/6 Christine LaSala 1 July 2016 3/3 Vincent Sheridan 1 9 June 2009 5/6 Robert Stuchbery 11 August 2016 3/3 Rolf Tolle 1 6 December 2010 1/1 Catherine Woods 11 March 2016 6/6 1 Vincent Sheridan and Rolfe Tolle resigned from the committee on 31 December and 10 March 2016 respectively.
Responsibilities of the committee The committee’s main audit-related responsibilities are detailed in the section below: The primary role of the audit and risk committee in relation to financial reporting is to monitor the integrity of the financial statements of the group and any formal announcements relating to the group’s financial performance, and to review significant financial reporting judgements. The committee has continued to approach its review of the annual report as a whole with focus on behalf of the board on considering the concept of ‘fair, balanced and understandable’. We have challenged ourselves to ensure the key messages about the performance of the business are delivered in a manner consistent with our own understanding and interpretation of the information we receive.
e) External audit • recommend to the board, to be put to the shareholders for approval, the appointment, reappointment and removal of the external auditors; • oversee the relationship with the external auditor including planning, reviewing of findings and assessing overall effectiveness; and
Full details of the terms of reference of the committee are available at www.beazley.com
Principal activities The principal activities undertaken by the committee in discharging its responsibilities in 2016 are described below.
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, which formed the basis for a robust discussion. Management confirmed that they remain satisfied that the outstanding claims reserves included in the financial statements provide an appropriate margin over projected ultimate claims costs to allow for the risks and uncertainties within the portfolio, and the committee was satisfied that there were no errors or inconsistencies that were material in the context of the financial statements as a whole.
The external auditor has also used the group’s data to re-project the reserves using its own methodologies and the comparison presented to the committee has provided an additional level of challenge to the result. On the basis of its audit work, the auditor reported no misstatements that were material in the context of the financial statements as a whole.
During the year and at year end, we received updates from management on the level of estimations used in our close process and the controls carried out to review these estimates retrospectively. As mentioned in note 1 to the financial statements, IBNR represents the most crucial estimate included within the group’s financial position and our claims reserves are specifically discussed in point a)i) on the previous page. Aside from claims, the audit committee also reviewed process and control information around expenses, actuarial premium projections and other premium adjustments, investments and other key income statement and balance sheet captions.
On the basis of the reporting received and reviewed during the last 12 months, the audit and risk committee remains satisfied that the estimation and control processes deployed by the group are appropriate and leave us well placed to meet the increasingly challenging reporting deadlines under Solvency II.
iii) Valuation of 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 receives updates from the group finance director and/or the chief investment officer and it has reported for 2016 that the investment portfolio is in line with the board approved risk appetite and that carrying values of the portfolio as at 31 December 2016 are appropriate. 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 is satisfied with the approach employed by management in valuing the financial assets at fair value on the balance sheet at 31 December 2016.
iv) Recoverability of insurance receivables Management has continued the progress made in the prior year in respect of aged debt analysis and reporting, and we note that management continues to focus attention and resource on our processes and reporting of aged debt as the group continues to grow. The analysis reviewed in 2016 did not identify any material instances of default in relation to our insurance debtors.
v) Recoverability of reinsurance assets The committee received confirmation from management that the majority of Beazley’s reinsurance receivables are due from highly rated institutions. Based on previous experience, the committee has not noted any instances where poor quality reinsurers have led to a material financial loss and is comfortable with the monitoring processes management have described and put in place to ensure this continues.
vi) Dividends, going concern and viability During key reporting periods, management outlined to the committee in detail their support for the basis of preparation adopted in the financial statements and any statements around the future viability of the group. In addition, the committee considers the appropriateness of management’s dividend strategy of growing the ordinary dividend each year and the appropriateness of applying this strategy in the current year.
The committee reviews detailed projections of future cash flows, profit forecasts and capital requirements under various scenarios, including scenarios stressed in terms of claims frequency and liquidity. In the current year, we also considered, and discussed with management, the impact of the result of the EU referendum in June. We also consider the appropriateness of management’s viability statement and the period over which this analysis is performed. The committee is satisfied by the level of analysis presented during the year, and the related approach taken and statements made in the group’s key external reporting.
viii) Intangible asset valuation The audit and risk committee received an overview of management’s valuation of intangibles. The audit and risk committee discussed the carrying value of goodwill, in particular relating to the group’s life, accident and health division and is satisfied that the underlying assumptions used by management in respect of future profitability and cash flows were reasonable. The committee also reviewed management’s accounting for movements in other intangibles during the year and is satisfied that management’s accounting for these intangibles appears appropriate.
• the consideration of emerging risks and the processes and controls in place to mitigate these risks.
Function updates The Beazley plc board has delegated a number of oversight responsibilities to the audit and risk committee in relation to the risk management framework, compliance, internal audit and external audit.
Financial statem ents b) Compliance The group head of compliance has direct access to the committee members and attends all committee meetings.
During 2016, the committee: • monitored the implementation of the 2016 compliance plan; • reviewed and approved the 2017 annual compliance plan, including the compliance monitoring programme; • reviewed changes in the regulatory environment applicable to Beazley; • received updates on relationships with key group regulators, and oversight of regulatory requests; • provided oversight to regulatory responses to corporate developments; • reviewed updates from the Money Laundering Reporting Officer on the adequacy and effectiveness of the company’s anti-money laundering systems and controls; • provided oversight of the progress of the business in addressing identified enhancements to compliance requirements; • approved the group policies and controls in respect of whistleblowing, anti-bribery and corruption, and fraud; 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.
c) Internal audit The group’s internal audit function reports directly to the committee, in addition the head of internal audit has direct access to the committee chairman and is accountable to the committee. The committee has reviewed the effectiveness of the function and remains satisfied that the internal audit function had sufficient resources during the year to undertake its duties.
• monitored on-going amendments to the internal audit function’s activities in light of emerging best practice in the financial sector.
ii) Assessing the effectiveness of the external auditor The committee places great emphasis on ensuring there are high standards of quality and effectiveness in the external audit process. Audit quality is assessed throughout the year, with a focus on strong audit governance and the quality of the team. 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
These considerations are taken in to account by the committee when determining whether to reappoint the external auditor.
Committee effectiveness The committee considers its effectiveness regularly. An assessment was facilitated in November 2016 using an online survey completed by members of the committee. The review concluded that the committee was operating effectively and efficiently and there were no major issues highlighted for attention. It was noted there had been an increase in the work load of the committee driven by Solvency II and other regulatory requirements and additional training may be useful.
Key activities in 2016 During 2016 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 that 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; • approved the grant of share awards under the group’s deferred, retention and LTIP plans; • considered the salary and bonus awards for 2016 for executive directors, heads of control functions, material risk takers and other officers; • reviewed remuneration policies in light of emerging requirements for Solvency II; • approved the chairman’s fees; and • reviewed the executive director employment contracts.
Further information on the work of the remuneration committee is set out in the directors’ remuneration report.
Sir Andrew Likierman 25 March 2015 4/4 George Blunden 1 January 2011 4/4 Padraic O’Connor 13 March 2009 1/1 John Sauerland 1 11 May 2016 3/3 1 Where a director joined or stood down from the board or board committee during the year only the number of meetings following appointment or before standing down are shown.
The nomination committee meets at least twice annually and at such other times during the year as is necessary to discharge its duties. In 2016 there were five 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.
The nomination committee is chaired by Dennis Holt and currently comprises George Blunden and Sir Andrew Likierman.
The policy has two guiding principles – alignment to shareholders’ interests and performance of the group. The key features and basis of alignment are: Net Asset Value per share (NAVps) growth. This is a key performance indicator, and is the measure used for our Long term Incentive Plan (LTIP) since it is aligned to shareholders’ interest. For the maximum awards to vest, NAVps growth of 15% above the risk-free return has to be sustained for five years.
Solvency II This was the first year in which the remuneration requirements of Solvency II applied. The committee reviewed remuneration across Beazley in 2015 and found that we were already significantly compliant with the Prudential Regulatory Authority’s (PRA’s) guidance based on existing risk-aligned features. There was more guidance from the PRA during 2016. No substantive changes were needed as a result.
Changes to the remuneration policy The key change between this policy and the policy which was approved by shareholders at Beazley’s 2014 AGM is that clawback provisions, which were introduced in 2016, will now form part of the policy.
Salaries for 2017 are: • D A Horton: £457,000 • M L Bride: £320,000 • A P Cox: £342,500 • N P Maidment: £342,500 • C A Washbourn: £342,500
In certain circumstances deferred share awards may be subject to malus provisions and annual bonus payments may be subject to clawback.
Solvency II requires that performance measures for incentives be based on a combination of group, business unit and individual performance.
No more than 25% of the award may vest for threshold performance.
Benefits include, but are not limited to, a company car or car allowance, season ticket, private medical insurance, death in service benefit and income protection insurance. Further benefits may be provided, if the committee considers it appropriate.
Legacy defined benefit pension arrangements are in place for certain executives (A P Cox, N P Maidment and C A Washbourn). Further service accruals ceased on 31 March 2006.
Legacy matters Payments can also be made to executive directors under the following legacy remuneration arrangements. It is not intended that these components of remuneration policy will be used to grant any future awards.
500,000 shares. The remaining award is subject to pre-tax divisional return on equity (ROE) performance and continued employment, measured over five years: 20% vesting for 15% divisional ROE performance, 100% vesting for 25% divisional ROE performance, with straight line vesting between points.
Additional fees are paid to reflect additional responsibilities of certain non-executive directors, as follows: – senior independent director – audit and risk committee chairman – remuneration committee chairman – subsidiary board membership and chairmanship fees.
LTIP, MSIP and deferred share awards will be operated in accordance with the rules of the plan. In accordance with those rules the committee has discretion in the following areas: • in the event of a variation of Beazley’s share capital or a demerger, delisting, special dividend, rights issue or other similar event, which may, in the committee’s opinion, affect the current or future value of shares, the number of shares subject to an award and/or any performance condition attached to awards, may be adjusted. Awards under Beazley’s other share plans have similar adjustment provisions; • the committee may determine that awards may be settled in cash; • the committee may substitute or amend a performance condition if one or more events occur which cause the committee to consider that a substituted or amended condition would be more appropriate and would not be materially more or less difficult to satisfy; • the committee may determine the treatment of awards on a winding up, a change of control or similar event in accordance with the rules of the plan; and
• the committee may determine the basis on which dividends will be calculated which may include notional reinvestment.
Legacy commitments The committee reserves the right to make any remuneration payments and payments for loss of office (including exercising any discretions available to it in connection with such payments) notwithstanding that they are not in line with the policy set out in this report where the terms of the payment were agreed (i) before 26 March 2014 AGM (the date Beazley’s first shareholder-approved directors’ remuneration policy came into effect); (ii) before the policy set out in this report comes into effect, provided that the terms of the payment were consistent with the shareholder-approved directors’ remuneration policy in force at the time they were agreed; or (iii) at a time when the relevant individual was not a director of Beazley and, in the opinion of the committee, the payment was not in consideration for the individual becoming a director of Beazley. For these purposes ‘payments’ includes the committee satisfying awards of variable remuneration and, in relation to an award over shares, the terms of the payment are ‘agreed’ at the time the award is granted.
Long term incentive plan Growth in net asset value per share (NAVps) over three years and five years.
Note that, as prescribed by the legislation, the illustrations are based on initial award value and therefore do not reflect potential share price growth or any dividends received over deferral periods, which may impact the overall value of deferred annual and long term remuneration delivered.
Approach to recruitment remuneration The committee would have regard to the following principles when agreeing the components of a remuneration package upon the recruitment of a new director: • in order to facilitate the future success of the company it is important that we are able to recruit directors of the calibre required to deliver our strategic priorities. Although the company operates in a highly competitive market for executive talent, the committee remains conscious of the need to avoid paying more than is necessary on recruitment; • the committee will, so far as practical, seek to align the remuneration package for any incoming executive with the remuneration policy table set out above; • on recruitment salaries will be set to take into account role and responsibilities. For interim positions a cash supplement may be paid rather than salary (for example a non-executive director taking on an executive function on a short term basis); • the committee may, on appointing an executive director, need to ‘buy out’ remuneration arrangements forfeited on joining the company; • any buyout would take into account the terms of the arrangements (e.g. form of award, performance conditions, timeframe) being forfeited in the previous package. The form of any award would be determined at the time and the committee could if necessary make use of LR 9.4.2 of the Listing Rules (for the purpose of buyout awards only). The committee would seek to structure buyout awards to be in line with Beazley’s remuneration framework so far as practical. The overriding principle will be that any replacement buyout awards would be of comparable commercial value to the awards which had been forfeited;
• where an executive is appointed from within the organisation, the normal policy of the company is that any legacy arrangements would be honoured in line with the original terms and conditions. Similarly, if an executive director is appointed following Beazley’s acquisition of or merger with another company, legacy terms and conditions would be honoured.
Service contracts and loss of office payment policy It is company policy that service contracts with executive directors contain notice periods, from the company or employee, of not more than 12 months. The company may at its absolute discretion elect to terminate an executive director’s employment by making a payment in lieu of notice of the individual’s salary for that period.
The following principles apply for the treatment of remuneration elements following loss of office for a director: Remuneration element Treatment upon loss of office
If a director dies his or her awards will vest in full.
An individual is a good leaver if employment ceases because of death, ill-health, injury, disability, the sale of the individual’s employing company or business out of the group or for any other reason at the committee’s discretion (except where a participant is dismissed lawfully without notice). Awards will vest on the normal vesting date, unless the committee determines that awards should vest at the time the individual ceases employment. If the participant dies awards will vest as soon as practicable after the date of death.
Awards will vest taking into account the satisfaction of any performance condition and, unless the committee determines otherwise, the period of time that has elapsed since the award was granted until the date of cessation of employment.
This part of the report, the annual remuneration report, sets out the remuneration out-turns for 2016 (and how these relate to our performance in the year) and details of the operation of our policy for 2017.
Remuneration principles The remuneration committee has oversight of the remuneration policy. The general philosophy underlying the reward strategy for executive directors is the same as that applied to all other employees. Pay and employment conditions elsewhere in the company and data on comparable positions in other similar organisations are taken into consideration when determining executive directors’ remuneration. The main aim of the policy is to ensure that management and staff are remunerated fairly and in such a manner as to facilitate the recruitment, retention and motivation of suitably qualified personnel.
We believe that: • performance-related remuneration is an essential motivation to management and staff and should be structured to ensure that executives’ interests are aligned with those of shareholders; • individual rewards should reflect the group objectives but be dependent on the profitability of the group and should be appropriately balanced against risk considerations; • the structure of packages should support meritocracy, an important part of Beazley’s culture; • reward potentials should be market-competitive; and • executives’ pay should include an element of downside risk.
Long term incentive plan • Three and five year LTIP time horizons • Performance against long term NAVps targets
Shareholding guidelines • LTIP awards may be forfeited if shareholding guidelines are not met
Single total figure of remuneration ▪ The tables below set out the single figure of total remuneration for executive directors and non-executive directors for the financial years ending 31 December 2016 and 31 December 2015.
2 Benefits for Adrian Cox in 2015 included an allowance of £95,335 in respect of his secondment in the US. His secondment ended in June 2015.
3 £864,006 of the 2016 single figure for Andrew Horton is a direct result of the significant share price appreciation over the LTI periods, which is directly aligned to shareholders’ experience. All other executive directors have corresponding amounts in relation to share price appreciation in their single figure amounts.
4 The LTI figure for Clive Washbourn for 2015 includes the vesting of the first tranche of the MSIP award granted in 2013 to address a commercial risk to the business. For Clive Washbourn, £1,316,643 of the 2015 single figure is also as a direct result of the significant share price appreciation, which is directly aligned to shareholders’ experience.
per annum and 19.85% 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.
1 Other than for the chairman, fees include fees paid for chairmanship of the audit and risk and remuneration committees, and for the role of senior independent director, as well as fees, where relevant, for membership of the subsidiary boards of Beazley Furlonge Limited (BFL) and Beazley Re dac and the chairmanship of the BFL risk committee.
3 Sir Andrew Likierman was appointed the chairman of the remuneration committee on 24 March 2016 and the figure in the table above includes fees paid for the chairmanship of the remuneration committees from this date.
4 Padraic O’Connor resigned on 24 March 2016 and the figure in the table above represents his fees to this date.
6 For Padraic O’Connor, Vincent Sheridan and Catherine Woods, their non-executive director fee was based on €22,587 (2015: €94,000), €77,500 (2015: €76,000) and €77,500 (2015: €0) respectively and has been converted into sterling for this table at the average exchange rate of 1.24 (2015: the fee was converted into £68,613 and £55,474 respectively at the average exchange rate in 2015 of 1.37).
The base salaries for the executive directors in 2016 and 2017 are as set out below: base salary £
Benefits ▪ Benefits include private medical insurance for the director and his immediate family, income protection insurance, death in service benefit at four times annual salary, travel insurance, health-club membership, season ticket and the provision of either a company car or a monthly car allowance.
The approach to the calculation of bonuses is aligned to shareholders’ interests and ensures that bonuses are affordable, while the ROE targets increase the performance gearing. The committee reviews the bonus pool framework each year to ensure it remains appropriate, taking into account the prevailing environment, interest rates and expected investment returns, headcount and any other relevant factors.
Corporate achievements that the committee took into account for the year included the following: • the delivery of profit after tax of $251.0m, and the return of $132.9m to shareholders by way of dividends; • delivery of growth in our gross premiums written of 6% in a market where premium rates were under increasing pressures; • continued strong growth of the US business, with gross premiums written growing 20% in 2016; • continued focus on attracting new talent including the strengthening of our environmental business in the US and recruitment of team to develop our international specialty lines business; • continued expansion of new partnerships; and • successful refinancing including raising $250m of debt giving the group capital to grow in the future.
While a number of the specific individual objectives of the executive directors are considered commercially sensitive, the following provides details of executive director achievements which the committee took into account: Martin L Bride • Management of the European strategic initiative • Successfully managed and implemented the re-domiciliation of the group from Ireland to the UK • Investment return of 2% in a very uncertain market • Active capital management including raising $250m of debt
D Andrew Horton • Delivery of sustained strong performance and dividends to shareholders of $132.9m in a very competitive market • Premium growth of 20% in our US business • Good organic growth, attracting people to the organisation and maintaining a low turnover particularly in underwriting and claims • Robust risk management in the face of a highly volatile and competitive market
• Growth of 6% in overall portfolio in environment of falling rates in many classes • Active role in achievements in innovation and product development • Acting CEO for two months covering the CEO’s sabbatical
Clive A Washbourn • Achievement of a combined ratio of 90% despite further steep decline in rates • Acquisition and integration of Leviathan, an MGA focussing on underwater vehicles • Growth in marine liability and UK cargo
Under the framework of the annual bonus, in respect of individual performance and achievements, awards are dependent on a profit pool and minimum level of ROE performance.
The following graph and table sets out the out-turn for 2016 against performance and illustrates the way in which bonuses over time reflect profit and ROE performance.
For 2016, the portion of each director’s annual bonus deferred into shares was as follows: Deferred into shares
Martin L Bride £240,000 Adrian P Cox £330,000 D Andrew Horton £375,000 Neil P Maidment £294,000 Clive A Washbourn £210,000
Growth in NAVps is calculated taking into account any payment of dividends by the company. In line with our reporting to shareholders, NAVps is denominated in US dollars.
LTIP awards vesting in respect of the year ▪ The LTIP awards shown in the single total figure of remuneration for 2016 include: • the second tranche of awards granted on 30 March 2012. These are due to vest on 30 March 2017, subject to the achievement of a NAVps growth performance condition over the five years ended 31 December 2016; and • the first tranche of awards granted on 11 February 2014. These are due to vest on 13 February 2017, subject to the achievement of a NAVps growth performance condition over the three years ended 31 December 2016.
1 The face value of shares awarded was calculated using the three day average share price prior to grant, which was 357.83p.
NAVps growth < risk-free rate +7.5% p.a. 0% NAVps growth = risk-free rate +7.5% p.a. 10% NAVps growth = risk-free rate +10% p.a. 25% NAVps growth = risk-free rate +15% p.a. 100% Straight-line vesting between points
The following executive directors participated in syndicate 623 through Beazley Staff Underwriting Limited: Total bonuses deferred £
The executive directors are currently fully funded in the plan and no further bonus deferral was made in 2016.
Annual bonus awards may be subject to clawback for a period of three years following payment of the cash bonus. These clawback provisions will also extend to any deferred shares delivered before the end of the three year period and to any bonus which is voluntarily deferred as notional capital into the staff underwriting plan (excluding any returns on the investment which will not be subject to clawback).
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 were £35,292.
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 in addition 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.
Beazley operates across Lloyd’s and the US markets through a variety of legal entities and structures. Non-executive directors, in addition to the plc board, typically sit on either one of our key subsidiary boards, namely Beazley Furlonge Ltd, our managing agency at Lloyd’s, or Beazley Re dac, our reinsurance company. As a result of developments in regulation, the degree of autonomy in the operation of each board has increased in recent years, with a consequent increase in time commitment and scope of the role.
CEO pay increase in relation to all employees Percentage change in remuneration from 31 Dec 2015 to 31 Dec 2016
1 Note: An individual overall cap of 400% of salary was introduced from 2013. Prior to this date and in line with industry practice, there was no formal limit on individual bonuses. To enable comparison, the above graphs assume that a maximum annual variable award of 400% of salary also applied for years prior to 2013.
The committee considers the individual remuneration packages of the chief executive, executive directors and executive committee members. It also has oversight of the salary and bonus awards of individuals outside the executive committee who either directly report to executive committee members or who have basic salaries over £200,000, as well as the overall bonus pool and total incentives paid by the group. The terms of reference of the committee are available on the company’s website.
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 2011 – 3/5 year Awards were made on 14 February 2011 at a mid-market share price of 132.7p.
LTIP 2013 – 3/5 year Awards were made on 13 February 2013 at a mid-market share price of 204.2p. Performance conditions: all of the award is subject to NAVps performance, with 50% measured over a three year period and 50% measured over a five year period. NAVps < RFR+7.5% p.a. equates to 0% vesting, NAVps = RFR+7.5% p.a. equates to 10% vesting, NAVps = RFR+10% p.a. equates to 25% vesting, NAVps = or > RFR+15% p.a. equates to 100% vesting, with straight-line pro-rated vesting between these points. Awards expire in February 2023.
LTIP 2014 – 3/5 year Awards were made on 11 February 2014 at a mid-market share price of 273.13p. Performance conditions: all of the award is subject to NAVps performance, with 50% measured over a three year period and 50% measured over a five year period. NAVps < RFR+7.5% p.a. equates to 0% vesting, NAVps = RFR+7.5% p.a. equates to 10% vesting, NAVps = RFR+10% p.a. equates to 25% vesting, NAVps = or > RFR+15% p.a. equates to 100% vesting, with straight-line pro-rated vesting between these points. Awards expire in February 2024.
LTIP 2015 – 3/5 year Awards were made on 10 February 2015 at a mid-market share price of 295.73p. Performance conditions: all of the award is subject to NAVps performance, with 50% measured over a three year period and 50% measured over a five year period. NAVps < RFR+7.5% p.a. equates to 0% vesting, NAVps = RFR+7.5% p.a. equates to 10% vesting, NAVps = RFR+10% p.a. equates to 25% vesting, NAVps = or > RFR+15% p.a. equates to 100% vesting, with straight-line pro-rated vesting between these points. Awards expire in February 2025.
Annual general meeting At the forthcoming annual general meeting to be held on 24 March 2017, a binding resolution will be proposed to approve the directors’ remuneration policy and an advisory resolution will be proposed to approve this annual remuneration report.
Statement of directors’ responsibilities in respect of the annual report and the financial statements
Independent auditor’s report to the members of Beazley plc Opinions and conclusions arising from our audit 1. Our opinion on the financial statements is unmodified We have audited the financial statements of Beazley plc (‘Beazley’) for the year ended 31 December 2016 set out on pages 127 to 196.
Risks of material misstatement vs 2015 Recurring risks Valuation of insurance liabilities ◄►
Financial statem ents 3. Our assessment of risks of material misstatement 3.1 Valuation of insurance liabilities ($4,657.7m gross, $3,575.6m net; 2015: $4,586.7m gross, $3,487.0m net) Refer to page 83 (audit committee report), pages 134 to 145 (accounting policy) and pages 127 to 196 (financial disclosures).
Key issues which increase the level of judgement required and subjectivity inherent in the estimation of insurance liabilities: • The assumptions applied for consistent reserving across underwriting years and lines of business, particularly in setting the estimates of both the gross and net liabilities that have been incurred but not reported (IBNR) and assessing the evidence for the release of provisions for claims set aside in prior years.
• The level of subjectivity in the estimated impact of uncertain or unknown future events.
Our approach included both controls and substantive testing, with more emphasis given to substantive testing.
• Assessed whether the group’s actuarial team retain the appropriate level of competence, capability, capacity and objectivity.
• Assessed the reserving assumptions and methodology (on a gross basis and net of outwards reinsurance) for reasonableness and consistency, including inspecting the group’s margin paper.
• Used our projection of premiums and claims (on a gross and net basis) that we carried out as part of our overall actuarial audit testing and compared these with the actuarial and syndicate estimates, to challenge the estimates made taking into account our wider market knowledge and expertise.
Insurance – key issues: • The ability to identify, monitor and age insurance debtors relies on the timely availability of reliable data.
• Major catastrophes could impair the group’s ability to recover incurred losses from its reinsurers, depending on the financial strength of the counterparties, which would then impact the recoverability of reinsurance assets.
Controls: • Evaluated and tested the data flows and the design and operating effectiveness of key controls in place for: – The credit control procedures, which included the ageing of debtors and matching of cash.
– Reconciliations of settlement messages from Lloyd’s. – Reinsurance exposures and the monitoring of bad debts, relating to both insurance and reinsurance.
• Inspected minutes of the Reinsurance Security Committee for evidence of assignment of approved exposures and risk ratings for reinsurers.
Substantive: • Performed procedures on the debtor settlement reconciliations including reperformance of the group’s prepared reconciliation. • Considered Beazley’s own analysis of aged debt in light of the ageing profile of the debt and challenged the assumptions made in conducting this analysis.
• Performed testing over the ageing of debtors. • Performed an analysis over the future premiums and associated debtor balances in order to assess the accuracy of the premiums and the recoverability of the debtors.
• Recalculated the profit commission of reinsurance policies on a sample basis.
Financial statem ents 3.3 Existence and valuation of investments (financial assets at fair value – $4,195.4m, 2015: $3,842.2m; including hedge funds – $317.1m, 2015: $329m; illiquid credit assets – $132.4m, 2015: $92.3m; equity linked funds – $116.3m, 2015: 147.5m)
Beazley holds and manages a significant amount of investments to meet its obligations under insurance contracts and for shareholder investment purposes.
Key issues which increase the level of judgement required and subjectivity inherent in the valuation of investments include: • Use is made of third party pricing sources in the valuation of investments. The reconciliation process between the third party data and the general ledger is of high importance, as is testing the accuracy of these price estimates in investment valuation.
• Assessed the quantum of change in the valuation of investments between the investment early close date and the period end date to consider whether there was a material movement post the early close date that required adjustment.
• Critically assessed the results of the allocation of assets into the fair value hierarchies, placing specific emphasis on the higher credit risk assets, hedge funds and illiquid credit assets.
• Reinstatement premiums and adjustments to ultimate premiums constitute estimates which can be significant.
• Some judgement also underpins the model adopted to recognise inward premiums written and earned through binding authority contracts – the ‘binder adjustment’. A large proportion of premium is written through the group syndicates via binders. It is therefore important that this methodology is appropriate when applied to inwards business and consistently applied period on period.
• Performed a more in-depth analysis over data flows, with a particular focus on the classes of business where there has been a recent history of sizeable premium adjustments.
• Critically assessed the group’s analysis of the historical accuracy of the premium estimates by comparing prior year estimates to premium received.
Audit work to support this opinion is undertaken primarily by an audit team based at Beazley’s head office in London. Of the group’s reporting components, we subjected Beazley Holdings Inc, Beazley Services USA and Beazley Insurance Company Inc. to specified risk-focused audit procedures. These entities were not individually financially significant enough to require an audit for group reporting purposes, but did present specific individual risks that needed to be addressed and reported to the group and component auditor. The group audit team instructed component teams as to the significant areas to be covered, including the relevant risks detailed above and the information to be reported back. The group audit team also determined the component’s materiality. For components outside the scope of our group audit we performed analytical procedures at the aggregated group level. The group audit team approved component materiality, which was set at $18m (31 December 2015: $20m).
We reported to the audit and risk committee all corrected and uncorrected misstatements we identified through our audit with an individual value in excess of $1m ($0.5m for non-technical) (31 December 2015: $1m ($0.5m for non-technical)) in addition to other audit misstatements below that threshold that we believe warranted reporting on qualitative grounds.
Independent auditor’s report continued 5. Our opinion on other matters prescribed by the Companies Act 2006 is unmodified In our opinion: • the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006; and • the information given in the Strategic Report and the Directors’ Report for the financial year is consistent with the financial statements.
6. We have nothing to report on the disclosures of principal risks Based on the knowledge we acquired during our audit, we have nothing material to add or draw attention to in relation to: • the directors’ statement of viability on pages 55 to 57 concerning the principal risks, their management, and, based on that, the directors’ assessment and expectations of the group’s continuing in operation over the 3 years to 2019; or • the disclosures in note 1 of the financial statements concerning the use of the going concern basis of accounting.
The Listing Rules require us to review: • the directors’ statement, set out on page 119, in relation to going concern and long term viability on page 55; and • the part of the corporate governance statement on page 77 relating to the parent company’s compliance with the eleven provisions of the 2014 UK Corporate Governance Code specified for our review.
Stuart Crisp (Senior Statutory Auditor) for and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants 15 Canada Square London, E14 5GL
Financial statements 128 Consolidated statement of profit or loss 129 Statement of comprehensive income 130 Statement of changes in equity 132 Statements of financial position 133 Statements of cash flows 134 Notes to the financial statements 195 Glossary
Gross premiums written 3 2,195.6 2,080.9 Written premiums ceded to reinsurers (341.6) (367.8) Net premiums written 3 1,854.0 1,713.1
Statement of comprehensive income for the year ended 31 December 2016 $m $m
Company Profit for the year attributable to equity shareholders 18.2 –
3 Subsequent to the scheme of arrangement, a capital reduction was executed in April 2016 which involved a reduction in the nominal value of the shares in the new parent from 90 pence per share to 5 pence per share. Please refer to note 1.
Statement of changes in equity for the year ended 31 December 2016
Company Balance at 4 September 20151 – – – – – –
Equity settled share based payments 22 – – – 22.5 – 22.5 Acquisition of own shares in trust 22 – – – (4.6) – (4.6) Transfer of shares to employees 22 – – – 2.0 (1.8) 0.2 1 Date of incorporation of Beazley plc (formerly Swift No.3 Limited).
2 On 13 April 2016, the company issued 523.4m ordinary shares at a nominal value of 90 pence per share.
Retirement benefit liability 27 6.2 – 0.7 – Deferred tax liabilities 28 12.8 – 6.0 –
Statements of cash flows for the year ended 31 December 2016
Cash flow from operating activities Profit before income tax 293.2 18.2 284.0 – Adjustments for: Amortisation of intangibles 12 5.3 – 5.0 – Equity settled share based compensation 22 23.0 22.5 17.5 – Net fair value (gain)/loss on financial assets (28.9) – 3.0 – Share of loss in associates 14 0.2 – 0.5 – Depreciation of plant and equipment 13 1.8 – 2.1 – Impairment of reinsurance assets written back 6 (1.1) – – – Increase in insurance and other liabilities 72.4 0.6 235.7 – Increase in insurance, reinsurance and other receivables (59.3) (13.0) (203.5) – Increase in deferred acquisition costs (16.6) – (3.5) –
Income tax paid (39.8) – (89.8) – Net cash from operating activities 193.9 5.2 195.5 –
Cash flow from investing activities Purchase of plant and equipment 13 (2.9) – (2.5) – Expenditure on software development 12 (4.7) – (5.0) – Purchase of investments (5,985.4) – (3,659.7) – Proceeds from sale of investments 5,666.0 – 3,892.2 – Investment in associate 14 (0.1) – – – Acquisition of renewal rights 12 (8.0) – – – Interest and dividends received 4 71.5 23.9 70.8 – Net cash (used in)/from investing activities (263.6) 23.9 295.8 –
Cash flow from financing activities Acquisition of own shares in trust 22 (9.7) (4.6) (3.9) – Repayment of borrowings 25 (107.1) – – – Proceeds from debt issue 25 248.7 – –
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 2016. The new effective requirements are: • IFRS 10, 12 and IAS 28: Amendment: Investment entities: Applying the consolidation exception (EU effective date: 1 January 2016); • IFRS 11: Amendment: Accounting for acquisitions of interests in joint operations (EU effective date: 1 January 2016); • IFRS 14: Regulatory deferral accounts (EU effective date: 1 January 2016); • IAS 1: Amendment: Disclosure initiative (EU effective date: 1 January 2016); • IAS 27: Amendment: Equity method in separate financial statements (EU effective date: 1 January 2016); • IAS 16 and 38: Amendment: Clarification of acceptable methods of depreciation and amortisation (EU effective date: 1 January 2016); and • IAS 16 and 41: Amendment: Bearer plants (EU effective date: 1 January 2016).
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 2: Amendment: Classification and measurement of share-based payment transactions (IASB effective date: 1 January 2018); • IFRS 9: Financial instruments (IASB effective date: 1 January 2018); • IFRS 15: Revenue from contracts with customers (EU effective date: 1 January 2018); • IFRS 16: Leases (IASB effective date: 1 January 2019); • IAS 7: Amendment: Disclosure Initiative (IASB effective date: 1 January 2017); and • IAS 12: Amendment: Recognition of deferred tax assets for unrealised losses (IASB effective date: 1 January 2016).
The group is also awaiting the issuance of IFRS 17 ‘Insurance contracts’, the new accounting standard in respect of insurance contracts. Once issued, the group will assess the full impact of this standard. As mentioned above, the effective date of this standard will be 1 January 2021.
In order to appropriately reflect the substance of the transaction outlined above the insertion of a new holding company has been accounted for as a continuation of the previous group using the principles of reverse acquisition accounting, with the existing group being accounted for at its existing book values. ‘New’ Beazley plc has been incorporated into the group with its identifiable assets and liabilities incorporated at fair value.
Notes to the financial statements continued 1 Statement of accounting policies continued In order to present the equity balances of the group on a continuation basis, the equity balances on the group statement of financial position as at 1 January 2015 have been re-presented as follows: Share capital $m
Re-presentation of previous merger reserve – – (15.4) – 15.4 – – Cancellation of shares in the former parent company (521.4m x 5 pence per share) (41.6) (12.0) 15.4 – – – (38.2) Issuance of shares in the new parent company (521.4m x 90 pence per share) 666.7 – (628.5) – – – 38.2
In particular, information about significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the financial statements are described in this statement of accounting policies and specifically in the following notes: • note 1a: accounting treatment for group’s interest in managed syndicates; • note 12: intangible assets including goodwill (assumptions underlying recoverable amounts); • note 16: financial assets and liabilities (valuations based on models and unobservable inputs); • note 23: equity compensation plans (assumptions used to calculate fair value of share options granted); • note 24: insurance liabilities and reinsurance assets (estimates for losses incurred but not reported); and • note 27: retirement benefit obligations (actuarial assumptions).
The most critical estimate included within the group’s financial position is the estimate for insurance losses incurred but not reported. The total estimate for insurance losses incurred but not reported gross of reinsurers’ share as at 31 December 2016 is $2,567.4m (2015: $2,588.4m). The total estimate for insurance losses incurred but not reported net of reinsurers’ share as at 31 December 2016 is $1,915.3m (2015: $1,930.3m) and is included within total insurance liabilities and reinsurance assets in the statement of financial position.
Financial statem ents 1 Statement of accounting policies continued Consolidation a) Subsidiary undertakings Subsidiary undertakings are entities controlled by the group. The group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. In assessing control, the group takes into consideration potential voting rights that are currently exercisable. The acquisition date is the date on which control is transferred to the acquirer. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. Losses applicable to the non-controlling interests in a subsidiary are allocated to the non-controlling interests even if doing so causes the noncontrolling interests to have a deficit balance.
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.
www.beazley.com138 Beazley Annual report 2016 1 Statement of accounting policies continued Foreign currency translation a) Functional and presentational currency Items included in the financial statements of the parent and the subsidiaries are measured using the currency of the primary economic environment in which the relevant entity operates (the ‘functional currency’). The group financial statements are presented in US dollars, being the functional and presentational currency of the parent and its main trading subsidiaries.
On disposal of foreign operations, cumulative exchange differences previously recognised in other comprehensive income are recognised in the statement of profit or loss as part of the gain or loss on disposal.
Net earned premiums a) Premiums Gross premiums written represent premiums on business commencing in the financial year together with adjustments to premiums written in previous accounting periods and estimates for premiums from contracts entered into during the course of the year. Gross premiums written are stated before deduction of brokerage, taxes, duties levied on premiums and other deductions.
Dividends paid Dividend distributions to the shareholders of the group are recognised in the period in which the dividends are paid, as a first interim dividend, second interim dividend or special dividend. The second and special dividends are approved by the group’s shareholders at the group’s annual general meeting.
b) Syndicate capacity The syndicate capacity represents the cost of purchasing the group’s participation in the combined syndicates. The capacity is capitalised at cost in the statement of financial position. It has an indefinite useful life and is carried at cost less accumulated impairment. It is annually tested for impairment by reference to the expected future profit streams to be earned by those syndicates in which the group participates, namely 2623, 3622 and 3623, and provision is made for any impairment.
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.
f) Insurance receivables and payables Insurance receivables and payables are recognised when due. These include amounts due to and from agents, brokers and insurance contract holders. Insurance receivables are classified as ‘loans and receivables’ as they are non-derivative financial assets with fixed or determinable payments that are not quoted on an active market. Insurance receivables are measured at amortised cost less any impairment losses. Insurance payables are stated at amortised cost.
Financial statem ents 1 Statement of accounting policies continued j) Other payables Other payables are stated at amortised cost determined according to the effective interest rate method.
m) Cash and cash equivalents Cash and cash equivalents consist of cash held at bank, cash in hand, deposits held at call with banks, cash held in Lloyds trust accounts and other short term highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. These investments have less than three months maturity from the date of acquisition. Cash and cash equivalents are measured at fair value through the profit and loss account.
n) Unfunded commitment capital Unfunded committed capital arising in relation to certain financial asset investments is not shown on the statement of financial position as unfunded committed capital represents a loan commitment that is scoped out of IAS 39.
Net interest expense/(income) is recognised in the statement of profit or loss.
Financial statem ents 1 Statement of accounting policies continued Income taxes Income tax on the profit or loss for the period comprises current and deferred tax. Income tax is recognised in the statement of profit or loss except to the extent that it relates to items recognised in other comprehensive income or directly in equity, in which case it is recognised respectively in other comprehensive income or directly in equity.
Earnings per share Basic earnings per share are calculated by dividing profit after tax available to shareholders by the weighted average number of ordinary shares in issue during the period.
Contingent liabilities are present obligations that are not recognised because it is not probable that an outflow of resources will be required to meet the liabilities or because the amount of the obligation cannot be measured with sufficient reliability.
We manage and model these four elements in the following three categories; attritional claims, large claims and catastrophe events.
The annual business plans for each underwriting team reflect the group’s underwriting strategy, and set out the classes of business, the territories and the industry sectors in which business is to be written. These plans are approved by the board and monitored by the underwriting committee.
The group uses a number of modelling tools to monitor its exposures against the agreed risk appetite set and to simulate catastrophe losses in order to measure the effectiveness of its reinsurance programmes. Stress and scenario tests are also run using these models. The range of scenarios considered includes natural catastrophe, cyber, marine, liability, political, terrorism and war events.
The group’s high level catastrophe risk appetite is set by the board and the business plans of each team are determined within these parameters. The board may adjust these limits over time as conditions change. In 2016 the group operated to a catastrophe risk appetite for a probabilistic 1-in-250 years US event of $412.0m (2015: $462.0m) net of reinsurance. This represented a reduction in our catastrophe risk appetite of 11% compared to 2015.
Financial statem ents 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 2015 and 2016 are: Unaudited 2016
San Francisco quake (2016: $78.0bn) 647.1 219.0 Gulf of Mexico windstorm (2016: $112.0bn) 622.8 215.3 Los Angeles quake (2016: $78.0bn) 674.6 213.9
To manage the potential exposure, the board has established a risk budget for the aggregation of data breach related claims which is monitored by reference to the largest of nine realistic disaster scenarios that have been developed internally. These scenarios have been peer reviewed by an external technical expert and include the failure of a data aggregator, the failure of a shared hardware or software platform and the failure of a cloud provider. Whilst it is not possible to be precise, as there is sparse data on actual aggregated events, these severe scenarios are expected to be very infrequent. The largest realistic disaster scenario is currently lower than the exposure to the Lloyd’s prescribed natural catastrophe events listed above for the group as at 31 December 2016. However, the cost of these scenarios will increase as Beazley continues to grow its data breach product. The clash reinsurance programme that protects the specialty lines account would partially mitigate the cost of most, but not all, data breach catastrophes.
Beazley also reports on cyber exposure to Lloyd’s using the three largest internal realistic disaster scenarios and seven prescribed scenarios which include both data breach and property damage related cyber exposure. Given Beazley risk profile, the quantum from the internal data breach scenarios is larger than any of the cyber property damage related scenarios.
2.2 Strategic risk † This is the risk that the group’s strategy is inappropriate or that the group is unable to implement its strategy. Where events supersede the group’s strategic plan this is escalated at the earliest opportunity through the group’s monitoring tools and governance structure.
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 2016, this permitted variance from the forecast investment return was set at $126.0m. For 2017, the permitted variance will be similar. 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.
Changes in interest rates also impact the present values of estimated group liabilities, which are used for solvency and capital calculations. Our investment strategy reflects the nature of our liabilities, and the combined market risk of investment assets and estimated liabilities is monitored and managed within specified limits.
In 2016, 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 all 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 as at the balance sheet date.
The following table shows the average duration at the reporting date of the financial instruments that are exposed to movements in market interest rates. Duration is a commonly used measure of volatility and we believe gives a better indication than maturity of the likely sensitivity of our portfolio to changes in interest rates.
<1 yr $m 1-2 yrs $m 2-3 yrs $m 3-4 yrs $m 4-5 yrs $m 5-10 yrs $m >10 yrs $m Total $m
As at 31 December 2015, borrowings included tier 2 subordinated debt that was due in October 2026 with a first call at the group’s option in October 2016, which was exercised. As the debt was recalled in October 2016 it is not included within any of the categories in the 31 December 2016 table (2015: <1 yr category). Borrowings consist of three items as at 31 December 2016. The first is $18.0m of a subordinated debt facility raised in 2004 which is unsecured. The subordinated notes are due in 2034 and have been callable at the group’s option since 2009. This debt was also present within borrowings as at 31 December 2015. The second is $250.0m 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 third is a £75m sterling denominated 5.375% notes due in 2019 with interest payable in March and September each year.
Change in fair value of hedge funds, equity linked funds and illiquid credit assets d) Investment risk Managing investment risk is central to the operation and development of our investment strategy. Our internal model includes an asset risk module, which uses an Economic Scenario Generator (ESG) to simulate multiple simulations of financial conditions, to support stochastic analysis of investment risk. We use internal model outputs to assess the value at risk (VAR) of our investments, at different confidence levels, including ‘1 in 200’, which reflects Solvency II modelling requirements, and ‘1 in 10’, identifying a level of investment losses which are more likely to occur in practice. Risk is typically considered to a 12 month horizon. It is assessed for investments in isolation and also in conjunction with net present value of our insurance liabilities, to help us monitor and manage market risk across both sides of the balance sheet.
Financial statem ents 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.
www.beazley.com154 Beazley Annual report 2016 2 Risk management continued The following tables summarise the group’s concentrations of credit risk: Tier 1 $m Tier 2 $m Tier 3 $m Tier 4 $m Unrated $m Total $m
The largest counterparty exposure within tier 1 is $788.4m of US Treasuries (2015: $568.6m).
Financial statem ents 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 at 31 December 2016 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 (RDS) are provided on page 147). 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 46 to 48.
1 For a breakdown of net claims liabilities refer to note 24.
As at 31 December 2015, borrowings included tier 2 subordinated debt that was due in October 2026 with a first call at the group’s option in October 2016 which was exercised. As the debt was recalled in October 2016 it is not included within any of the categories in the 31 December 2016 table (2015: <1 yr category). Borrowings consist of three items as at 31 December 2016. The first is $18m of a subordinated debt facility raised in 2004 which is unsecured. The subordinated notes are due in 2034 and have been callable at the group’s option since 2009. This debt was also present within borrowings as at 31 December 2015. The second is $250.0m 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 third is a £75m sterling denominated 5.375% notes due in 2019 with interest payable in March and September each year.
Illiquid credit assets, hedge funds and equity linked funds are not included in the maturity profile because the basis of maturity profile can not be determined with any degree of certainty.
b) Reputation Reputation risk is the risk of negative publicity as a result of the group’s contractual arrangements, customers, products, services and other activities. Key sources of reputation risk include operation of a Lloyd’s franchise, interaction with capital markets since the group’s IPO during 2002, and reliance upon the Beazley brand in the US, Europe, Asia, South America, Asia, Australia and the Middle East. The group’s preference is to minimise reputation risks but where it is not possible or beneficial to avoid them, we seek to minimise their frequency and severity by management through public relations and communication channels.
The group has several requirements for capital, including: • to support underwriting at Lloyd’s through the syndicates in which it participates, being 2623, 3623 and 3622. This 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; • to support underwriting in Beazley Insurance Company, Inc. in the US; and • to make acquisitions of insurance companies or MGAs whose strategic goals are aligned with our own.
www.beazley.com158 Beazley Annual report 2016 2 Risk management continued The board’s strategy is to grow the dividend by between 5% and 10% per year. Our capital management strategy is to carry some surplus capital to enable us to take advantage of growth opportunities which may arise. At 31 December 2016, we have surplus capital of 44% of ECR (unaudited), including Solvency II adjustments. Following payment of the second interim dividend of 7.0p per share and special dividend of 10.0p per share, the surplus reduces to 36% (unaudited) compared to our current target range of 15% to 25% of ECR.
3 Segmental analysis a) Reporting segments Segment information is presented in respect of reportable segments. These are based on the group’s management and internal reporting structures and represent the level at which financial information is reported to the board, being the chief operating decision-maker as defined in IFRS 8.
Expenses for the acquisition of insurance contracts 36.9 65.9 30.2 88.8 34.7 216.0 472.5
Share of loss of associates – – – – – (0.2) (0.2)
Additional information Investment in associates – – 2.6 – – 7.3 9.9 Impairment of non-financial assets – – – – – – –
Net earned premiums UK (Lloyd’s) 1,697.5 1,637.8 US (Non-Lloyd’s) 70.7 60.9 $m $m
Wages and salaries 134.6 123.6 Short-term incentive payments 77.8 75.6 Social security 18.3 17.7 Share-based remuneration 23.0 17.5
During 2016, Beazley bought back debt with a remaining nominal amount of $107.1m at a market value of $107.1m in the form of fixed/floating rate subordinated notes using its first call right. No profit or loss was realised as there was no difference between carrying value and market value of the debt bought back. Please refer to note 25 for further detail on subordinated debt.
Deferred tax expense Origination and reversal of temporary differences 2.1 (2.9) Impact of change in UK tax rates (0.8) (0.2) Prior year adjustments 1.7 2.3
Profit before tax 293.2 284.0 Tax calculated at the weighted average of statutory tax rates 43.6 14.9 43.2 15.2
As noted on page 43, the group has assessed the potential impact of the diverted profits tax following the enactment of new legislation in April 2015 and is of the view that no liability arises. The ultimate outcome may differ and, should this tax be applicable to Beazley, we would expect a provision would need to be recognised. However, this provision would not have a material impact on the group’s financial position.
Diluted Diluted earnings per share are calculated by dividing profit after tax of $251.0m (2015: $249.0m) by the adjusted weighted average number of shares of 531.0m (2015: 527.3m). The adjusted weighted average number of shares assumes conversion of dilutive potential ordinary shares, being shares from the SAYE, retention and deferred share schemes. The shares held in the ESOP of 6.1m (2015: 9.7m) have been excluded from the calculation, until such time as they vest unconditionally with the employees.
The aforementioned interim and special dividends will be payable on 29 March 2017 to shareholders registered at 5.00pm on 3 March 2017.
Other additions – – – 5.0 – 5.0 Write off – – – (3.2) – (3.2) Foreign exchange loss – – – (5.3) – (5.3)
Amortisation for the year – – – (5.0) – (5.0) Write off – – – 3.2 – 3.2 Foreign exchange gain – – – 1.7 – 1.7
Amortisation for the year – – – (4.6) (0.7) (5.3) Write off – – – – – – Foreign exchange gain – – – 9.4 0.1 9.5
When testing for impairment, the recoverable amount of a CGU is determined based on value in use. Value in use is calculated using projected cash flows based on financial budgets approved by management covering a five-year period. Key assumptions used in preparation of projected cash flow include premium growth rates, claims experience, retention rates and expected future market conditions. For prudence purposes, a growth rate of 0% is used to extrapolate projections beyond the covered period. A pre tax discount rate of 7% (2015: 9%) has been used to discount the projected cash flows of each CGU. The discount rate of 7% (2015: 9%) reflects the group’s expected cost on equity and cost of borrowing and has been calculated using independent measures of the risk-free rate of return and the group’s risk profile relative to the risk-free and market rates of return and, as such, is considered representative of the rate appropriate to the risk specific to the CGU. As all segments undertake underwriting activities supported by the same capital base, the same discount rate has been applied to all operating segments.
The impairment tests have been performed assuming the group’s operating segments are the CGUs to which the intangible assets have been allocated. As at 31 December 2016, the financial budgets for the life, accident & health segment, in particular, have been challenged in light of the losses incurred over past 12 months and management are comfortable the forecast profits are achievable, supporting the recoverability of the goodwill balance held. To test this segment’s sensitivity to variances from forecast profits, the discount rate has been flexed to 10% above and 5% below the central assumption. Within this range, the recovery of goodwill remains supportable. Headroom was calculated in respect of the value in use of all the group’s other intangible assets.
Falcon Money Management Holdings Limited (and subsidiaries) Malta 1 25% – Capson Corp., Inc. (and subsidiary) USA 2 31% 7.3 Equinox Global Limited (and subsidiary) UK 3 37% 2.6 1 259 St. Paul street, Valletta, Malta.
Financial statem ents 16 Financial assets and liabilities 2016 $m $m
– Corporate bonds – Investment grade 2,158.0 1,215.8 – High yield 97.1 68.3 – Senior secured loans 96.2 114.9 – Asset backed securities 4.6 12.7 Total fixed and floating rate debt securities 3,617.4 3,268.8
Equity linked funds 116.3 147.5 Hedge funds 317.1 329.0 Illiquid credit assets 132.4 92.3 Total capital growth assets 565.8 568.8 Total financial investments at fair value through statement of profit or loss 4,183.2 3,837.6
Derivative financial assets 12.2 4.6 Total financial assets at fair value 4,195.4 3,842.2
Retail bond 94.7 112.3 Subordinated debt 18.0 18.0 Tier 2 subordinated debt (2026) – recalled in 2016 – 116.9 Tier 2 subordinated debt (2026) – issued in 2016 248.3 – Derivative financial liabilities 2.8 0.1 Total financial liabilities 363.8 247.3
The retail bond was issued by the company in 2012. The tier 2 subordinated debt was issued by the company in 2016. Please refer to note 25 for further details of our borrowings and associated repayment terms.
Valuation hierarchy The table below summarises financial assets carried at fair value using a valuation hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy has the following levels: Level 1 – Valuations based on quoted prices in active markets for identical instruments. An active market is a market in which transactions for the instrument occur with sufficient frequency and volume on an ongoing basis such that quoted prices reflect prices at which an orderly transaction would take place between market participants at the measurement date. Included within level 1 are bonds and treasury bills of government and government agencies which are measured based on quoted prices in active markets.
– High yield – 97.1 – 97.1 – Senior secured loans – 96.2 – 96.2 – Asset backed securities – 4.6 – 4.6 Equity linked funds – 116.3 – 116.3 Hedge funds – 317.1 – 317.1 Illiquid credit assets – 6.3 126.1 132.4 Derivative financial assets 12.2 – – 12.2 Total financial assets measured at fair value 1,318.7 2,750.6 126.1 4,195.4
Asset backed securities 4.6 12.7 Equity linked funds 116.3 147.5 Hedge funds 317.1 329.0 Illiquid credit assets 132.4 92.3 Investments through unconsolidated structured entities 570.4 581.5
Cash at bank and in hand 374.6 585.8 Short term deposits and highly liquid investments 132.6 91.1
Total cash and cash equivalents include $44.5m (2015: $56.2m) held in Lloyd’s Singapore trust accounts. These funds are only available for use by the group to meet local claim and expense obligations.
1 In order to present equity balances of the group on a continuation basis, the share capital balance as at 1 January 2015 has been re-presented. In effect, this reflects the cancelling of 521.4m shares in the former parent company at 5p per share and issuance of 521.4m shares in the new parent company at 90p per share. These shares were reduced during 2016 through a capital reduction to 5p a share. Please refer to note 1 for further details. In addition 0.1m preference shares at £1 a share were issued and redeemed within 2016.
The shares are owned by the employee share trust to satisfy awards under the group’s deferred share plan, retention plan and long term incentive plan (LTIP). These shares are purchased on the market and carried at cost.
23.2 Employee share option plans The group has a long term incentive plan (LTIP), deferred share plan, retention plan and SAYE plan that entitle employees to purchase shares in the group.
The expected volatility is based on historic volatility over a period of at least two years.
Recoverable from reinsurers Claims reported and loss adjustment expenses 201.8 210.3 Claims incurred but not reported 652.1 658.1 Reinsurers’ share of claims liabilities 853.9 868.4 Unearned premiums 228.2 231.3 Total reinsurers’ share of insurance liabilities 1,082.1 1,099.7
Claims reported and loss adjustment expenses 937.5 (210.3) 727.2 984.7 (195.0) 789.7 Claims incurred but not reported 2,588.4 (658.1) 1,930.3 2,540.2 (665.7) 1,874.5
Increase in claims – Arising from current year claims 1,314.0 (277.7) 1,036.3 1,218.4 (228.3) 990.1 – Arising from prior year claims (286.4) 105.7 (180.7) (244.6) 68.3 (176.3)
d) Sensitivity 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.
To illustrate the robustness of our reserves, the loss development tables below provide information about historical claims development by the six segments – life, accident & health, marine, political risks & contingency, property, reinsurance and specialty lines. The tables are by underwriting year which in our view provides the most transparent reserving basis. We have supplied tables for both ultimate gross claims and ultimate net claims.
Gross claims liabilities, group share ($m) 140.5 80.2 140.8 187.5 148.0 177.2 172.6 406.7 562.0 895.6 605.8 3,516.9 24 Insurance liabilities and reinsurance assets continued
Less unearned portion of ultimate losses ($m) – – – – – – – – – (23.9) (700.4) (724.3)
Net claims liabilities, group share ($m) 99.9 64.0 89.6 93.5 119.6 126.0 172.6 323.1 466.4 670.6 437.7 2,663.0 24 Insurance liabilities and reinsurance assets continued
Financial statem ents 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 2016 for each underwriting year.
Life, accident & health The 2014 and prior underwriting years have delivered releases resulting in a very similar overall release position as last year.
Marine There was a gross deterioration in the energy book in 2009 as a liability claim settled, with no corresponding movement on a net basis. The 2015 and prior years have delivered releases but at lower levels than in recent years. This is due to an increase in claims activity and also reflects the fact that premium rates have reduced substantially in some areas in recent years.
Political risks & contingency Prior year reserve releases were strong particularly in the 2007 to 2010 underwriting years, with continued recoveries within the political book. The 2015 underwriting year release was quite low as there have been more claims on the terrorism account than previously.
Reinsurance Strong releases were made from the reinsurance book in 2016, where claims experience was better than anticipated within the reserves being held following another relatively benign period for catastrophe claims.
Specialty lines There have been reserve releases across the 2011 to 2013 years, reflecting favourable experience within both the traditional specialty lines business and the cyber portfolio. Releases from cyber have also been made on the 2014 year as risk has expired. The increases in the gross position for the 2007 and 2009 underwriting years were driven by deteriorations in specific claims. These increases are not seen in the net loss ratios due to reinsurance.
www.beazley.com188 Beazley Annual report 2016 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 2016.
The movements shown on 2013 and earlier are absolute claim movements and are not impacted by any current year movements in premium on those underwriting years.
Financial statem ents 25 Borrowings The carrying amount and fair values of the non-current borrowings are as follows: $m $m
Carrying value Subordinated debt 18.0 18.0 Tier 2 subordinated debt (2026) – recalled in 2016 – 116.9 Tier 2 subordinated debt (2026) – issued in 2016 248.3 – Retail bond 94.7 112.3
Present value of funded obligations 48.2 43.1 Fair value of plan assets (42.0) (42.4) Retirement benefit liability in the statement of financial position 6.2 0.7
Amounts recognised in the statement of profit or loss Interest cost 1.4 1.4 Expected return on plan assets (1.4) (1.5)
Movement in present value of funded obligations recognised in the statement of financial position Balance at 1 January 43.1 43.6 Interest cost 1.4 1.4 Actuarial gains/(losses) 10.9 (0.1) Benefits paid (0.3) (0.4) Foreign exchange gain (6.9) (1.4) Balance at 31 December 48.2 43.1
Principal actuarial assumptions Discount rate 2.8% 3.5% Inflation rate 3.5% 3.1% Expected return on plan assets 2.8% 3.5% Future salary increases 3.5% 3.1% Future pensions increases 3.0% 2.7% Life expectancy for members aged 60 at 31 December 90 years 90 years Life expectancy for members aged 46 at 31 December 92 years 92 years
The movement in the net deferred income tax is as follows: Balance at 1 January 1.1 0.5 Income tax (charge)/credit (3.0) 0.8 Amounts recorded through equity 1.5 (0.1) Foreign exchange translation differences (1.4) (0.1) Balance at 31 December (1.8) 1.1
Plant and equipment 0.5 (0.2) – – 0.3 Intangible assets 1.2 – – – 1.2
No later than one year 9.4 8.3 Later than one year and no later than five years 27.0 31.1 Later than five years 6.8 3.2 30 Related party transactions The group and company have related party relationships with syndicates 623, 6107, 6050, its subsidiaries, associates and its directors.
Details of transactions entered into and the balances with these syndicates are as follows: $m $m
Balances due: Due from/(to) syndicate 623 4.7 (2.9) Due to syndicate 6107 (47.0) (34.8) Due to syndicate 6050 (9.7) (3.9)
Salaries and other short term benefits 21.0 21.0 Post-employment benefits 0.6 0.7 Share-based remuneration 12.7 12.7
30.4 Scheme of arrangement As mentioned in note 1 to the financial statements, the group executed a scheme of arrangement in April 2016, the effect of which was the establishment of a new ultimate holding company of the Beazley group. As at 31 December 2016, the ultimate holding company, named Beazley plc, is a company incorporated in England and Wales. The previous holding company of the group is now owned 100% by Beazley plc and has changed its name to Beazley Ireland Holdings plc.
Financial statem ents 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 9 Ireland 22 Grenville Street Saint Helier JE4 8PX Jersey United States 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 Middle East Precinct Building 2, Dubai international financial centre Dubai PO Box 506929 UAE Asia 8 Marina View Singapore 018960 Singapore 36/F., Tower Two, Times Square, 1 Matheson Street Causeway Bay – Hong Kong Australia Level 20, 133 Castlereagh Street Sydney NSW 2000 Australia 32 Contingencies Funds at Lloyd’s The following amounts are controlled by Lloyd’s to secure underwriting commitments.
www.beazley.com196 Beazley Annual report 2016 34 Subsequent events There are no other events that are material to the operations of the group that have occurred since the reporting date.
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 2016, this ratio was 89% (2015: 87%). This represents the sum of net insurance claims of $855.6m (2015: $813.9m), expenses for acquisition of insurance contracts of $472.5m (2015: $448.6m) and administrative expenses of $247.8m (2015: $215.2m) to net earned premiums of $1,768.2m (2015: $1,698.7m). This is also the sum of the expense ratio 41% (2015: 39%) and the claims ratio 48% (48%).
Economic Capital Requirement (ECR) The capital required by a syndicate’s members to support their underwriting. Calculated as the uSCR ‘uplifted’ by 35% to ensure capital is in place to support Lloyd’s ratings and financial strength.
Managing agent A company that is permitted by Lloyd’s to manage the underwriting of a syndicate.
Short tail A type of insurance where claims are usually made during the term of the policy or shortly after the policy has expired. Property insurance is an example of short tail business.
Surplus lines insurer An insurer that underwrites surplus lines insurance in the USA. Lloyd’s underwriters are surplus lines insurers in all jurisdictions of the USA except Kentucky and the US Virgin Islands.