Governance 69 Letter from our chairman 70 Board of directors 72 Investor relations 73 Statement of corporate governance 83 Letter from the chairman of the remuneration committee 85 Directors’ remuneration report 107 Statement of directors’ responsibilities 108 Independent auditor’s report
Please turn overleaf for our business model and strategy, and our key performance indicators
Beazley Annual report 2015 17mm spine 6749 Beazley AR Cover 2015.indd 6-2 04/02/2016 11:25
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
• The creation of an environment in which talented individuals with entrepreneurial spirit can build successful businesses
Given the nature of Beazley’s business, the key risks that impact financial performance arise from insurance activities and fall into the following categories: • Market cycle risk: The risk of systematic mispricing of the medium tailed specialty lines business which could arise due to a change in the US tort environment, changes to the supply and demand of capital, and companies using incomplete data to make decisions
Net assets per share growth reflective of increased profit after tax.
Diversified business We target a balanced portfolio spanning specialist classes driven by different cycles.
Entrepreneurial spirit We look for individuals with a strong sense of ownership for the business they handle who are willing – indeed keen – to be accountable for their decisions.
Many of our employees have a single focus. They possess deep expertise in a particular field and appreciate the opportunity to put it to good use. Other employees might be seen, in career terms, as ‘serial entrepreneurs’. In other words they look for opportunities to work in a range of different fields – and often geographies – during their time at Beazley.
In 2014 I moved to San Francisco as lead underwriter for the West Coast. After a little more than a year, I returned to Atlanta – our biggest office for property insurance – as the focus group leader for E&S Property in the Southeast.
There are major changes taking place in the ways in which data is used by insurers. At Beazley, we are at the beginning of a journey to capture and capitalise on proprietary data, improving both our risk selection and operational capabilities. It’s very exciting.
At Beazley I joined the large risk E&O team. This was before we had the different sub teams we have now focusing on particular E&O lines. We all just worked on the renewals that came in, whether they be lawyers’ professional indemnity, tech E&O, or architects’ and engineers’ professional indemnity.
In 2007 I was asked if I would join the healthcare team, which was expanding. I received great support in learning the ropes of this quite technically complex class of business and became focus group leader for the US hospitals professional liability book, then the largest in the London market. All my travel was to the US.
Our insureds understand that, for us to deliver on this expectation, we need to charge a fair premium to cover the risk even if, for a time, a competitor may be willing to write the same risks for less. By adopting this approach, we have been able to provide insureds with reliable cover, year after year.
We believe that brokers add enormous value to insureds in the purchase of insurance and reinsurance in the areas in which we specialise. All of our underwriters work constantly to strengthen their personal relationships with brokers and our broker relations team, headed by Dan Jones, keeps a close watch on our corporate broker relationships. We understand that the best insurance products in the world will not realise their potential without the support and advocacy of well informed brokers.
On the service side, we are targeting best in class service evaluations from our brokers across all geographies and product lines. This encompasses the service we provide to our insureds as well, because exceptional service for an insured should help the broker retain the business, even in the face of stiff price competition. Service to insureds is therefore a major component of broker service.
A strong focus on service is well suited to our specialist business. By definition, as a specialist insurer we seek lines of business that are not commoditised, where we can add value through more than keen pricing. In recent years, we have expanded the scope of our service to insureds in important ways, beyond the traditional provision of indemnity-based insurance, to provide expert risk management and incident response services.
Our diversified portfolio allows us to implement efficient cycle management and to underwrite more premium and have more invested assets per dollar of capital than our peers. We assess the merits of writing a new line of business very carefully with an eye to the effect on the diversification of our portfolio.
The evolution of our portfolio by line of business and the impact this diversification has had on our combined ratio over the past five years can be seen in the chart on the next page.
Our Singapore office opened in 2006 and Beazley is now one of a number of Lloyd’s insurers writing a wide range of business lines in the region’s leading insurance hub. Beazley’s Paris office celebrates its tenth anniversary this year: in 2015 we continued to build our local team, recruiting French underwriters to write treaty reinsurance and small scale professional indemnity business. The newest of the three offices – Miami – opened in July 2013 and the city’s strategic value as a hub for Latin American insurance and reinsurance business is becoming increasingly clear.
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Reinsurance The reinsurance team specialises in writing worldwide property catastrophe; per risk; aggregate excess of loss and pro-rata business; and casualty clash. Approximately 80% of our top clients have reinsured with us for 20 years or more.
The moment of truth A claim is a moment of truth for both the insurer and the insured. Will the insurer possess the expertise, the capacity and the desire to resolve the claim fairly and expeditiously, supporting the insured through what may well be a stressful time?
Our team Beazley’s claims team comprises over 120 claims managers, based in London, the United States and Australia. We organise ourselves along product lines rather than territories: we believe that this ensures a thorough understanding of the products we sell, enabling us to take a consistent and fair approach with our clients in the application of policy wordings and to support them effectively through the claims process. We currently manage open reserves of over $3bn, gross, and have around 125,000 open claims.
The claims team retains complete independence on claims decisions but a key part of our philosophy is to ensure that claims managers and underwriters work closely together. Claims managers thereby fully understand the product being sold and can ensure that the breadth of coverage intended is respected. In addition, it ensures that emerging claims trends or issues that might have an impact on the book of business beyond the individual claims themselves are flagged promptly and reflected in underwriters’ rating and risk appetite. This is of particular value on longer tail business where the root causes of trends can take time to manifest themselves.
Differentiation through service Brokers have told us they value four key service attributes: expertise, responsiveness, commerciality, and access to empowered claims managers. We focus on these and closely monitor brokers’ opinions of our service.
Differentiation through specialism Claims management is a multi-faceted activity for a specialist insurer with a diverse portfolio such as Beazley, and the skills and knowledge relevant to one line may not apply to another.
We hire seasoned professionals, but we also recognise the need to continue to invest in the skills of our people after they have joined Beazley. To this end, we have over the last 18 months placed an increased focus on our team members’ personal development by developing a claims specific training curriculum. The result is a wide cross-section of specialists who are able to use their skills to make a real difference on claims.
For example, our healthcare claims team is relied upon by major US hospitals confronting multi-million dollar lawsuits. Our claims managers are accordingly sourced from top healthcare defence liability firms, usually possessing six to ten years of litigation experience. (The benefits that this level of expertise can confer in individual claims is illustrated in the case study, see facing page).
Our market leading technology, media and business services team has received numerous accolades from brokers and clients for the dedication with which they have handled complex data breach claims, which combine first party exposures (the costs of responding effectively to a breach) and third party exposures (the risk of lawsuits). In one recent situation, the broker for a large US health insurer, told us that ‘no one else in the market would have, or could have, done what Beazley did for this client’.
Our insured was a developer of solutions for electronic health records (EHR). The insured’s customer, a healthcare institution, sued for breach of contract for failure to properly implement an EHR solution.
Beazley has successfully used the same strategy in similar claims. On one occasion our insured sued for failure to pay $1m in back fees, but was counter sued for $13m. After we showed the claimant the incompatibility of its countersuit with its application for federal dollars to implement EHR technology, the claimant dropped its suit and we ultimately negotiated a payment to our insured.
For first party insurance, such as marine insurance, different skills are required. Our marine team includes a full time marine surveyor who is a qualified engineer. By deploying our own marine engineer to the scene of a casualty we can normally respond far more quickly to the client’s needs and settle the claim rapidly. This approach differentiates Beazley from most of its peers. In a recent case our surveyor flew to South America to negotiate repair costs to a damaged vessel and, to the benefit of all concerned, managed to reduce costs from an estimated $11m to less than $2m and ensured that repairs could be completed swiftly.
In cases such as this, swift claims settlement is a win-win for the client and for Beazley: the longer claims drag out, the more they tend to cost. However, the same is not always true of professional liability claims, where patience can be a virtue. In the case of architects’ and engineers’ (A&E) claims, the length of the ‘tail’ – the period between when cover was underwritten and claims typically are closed – now averages 3.5 years, reflecting the fact that there can often be significant delays between the notification of a circumstance by an insured (namely the possibility of there being a claim) and the time when a claimant proactively pursues its claim.
For A&E claims, our clients look to Beazley as a source of sound advice, backed by our three decades of experience in this class of business. We share our claims data with our clients, enabling them to benchmark themselves against their peers and strengthen their risk management defences where needs be.
These changes are increasing the need for greater scalability and flexibility of our claims resource. We have accordingly created a new portfolio claims team to sit alongside our existing global product teams. Specialist managers will still focus on defined product areas but this change will introduce more cross-team and cross-product working, thus allowing us to flex our resources more easily.
In a recent birth injury claim, our healthcare team found the hospital’s normal defence counsel endorsing a settlement – $10m to $14m – that in our view was far too high and would raise the floor on any subsequent birth injury settlements. Defence counsel further opined that a plaintiffs’ verdict was likely and estimated the verdict value at $25m or more.
At our instigation, the client agreed to our bringing in specialist trial counsel with long experience of defending medical malpractice claims involving catastrophic injuries. Our counsel strengthened possible liability and causation defences and, more importantly, conveyed the position that we were prepared to go to trial. At mediation we were able to settle the insured’s liability for $6m, well below original counsel’s settlement valuation and for a small fraction of the plaintiffs’ original demand of $45m.
Beazley has been underwriting architects’ and engineers’ professional indemnity risks for 30 years, so we have rich claims data to help clients identify trends.
www.beazley.com12 Beazley Annual report 2015 30 years of profitable growth $1,762.0m Managed gross premiums $1,371.0m Group share
Beazley plc becomes the new holding company for the group, incorporated in Jersey and tax-resident in Ireland $2,108.5m Managed gross premiums $1,741.6m Group share
Nick Furlonge, co-founder, retires as an executive member but becomes a non-executive of Beazley Furlonge Limited
Local representation added in Rio to develop Latin American insurance business $2,424.7m Managed gross premiums $2,021.8m Group share
Chairman’s statement The board is pleased that Beazley’s execution of its strategy continues to help us deliver strong shareholder value.
During 2015, the board has considered the feasibility of a movement in the location of the group’s management from Ireland to the UK. Having considered the options, the board will present a proposal to the shareholders at the company’s AGM in March 2016 to effect such a change via the creation of a new UK domiciled holding company. The board believes that this change will increase the operational efficiency of the group.
The relatively weak condition of the global economy and a glut of capital for catastrophe exposed lines of insurance helped prompt a series of mergers and acquisitions among insurers in 2015. We see much of this consolidation as defensive in nature, reflecting the challenge of achieving growth. Beazley is of course not immune to these challenges, but has demonstrated an ability to achieve acceptable growth with strong profitability in current market conditions. As such, we remain confident in the continuing viability of our business model.
For the third year in a row, Beazley achieved a combined ratio below 90%, recording 87% in 2015 (2014: 89%). The quality of the company’s underwriting returns supported earnings per share of 48.8c (2014: 43.1c) and net tangible assets per share of 263.9c (2014: 247.0c).
The board is pleased to announce a second interim dividend of 6.6p per ordinary share plus a special dividend of 18.4p per ordinary share. Together with the first interim dividend of 3.3p this takes the total dividends declared in respect of 2015 to 28.3p per ordinary share (2014: first interim dividend of 3.1p, second interim dividend of 6.2p plus a special dividend of 11.8p, totalling 21.1p).
A number of the innovative products Beazley has developed entail partnering with service providers to implement a more comprehensive solution to address clients’ needs. This partly underlies the success of our data breach response product, Beazley Breach Response (BBR), which depends not only on an insurance policy but leverages a network of relationships with specialist service providers to help clients respond effectively to a data breach. These services are expertly coordinated by a dedicated business unit, BBR Services.
In January 2016 we welcomed Catherine Woods to the board as a non-executive director. Catherine served for nearly 20 years in an executive capacity at JP Morgan and 17 years in private, public and pro-bono non-executive director positions. I am sure she will make a significant contribution to the board.
Dividend policy and capital requirements The board’s strategy is to grow the dividend by between 5% and 10% per year and this has always been achieved. In addition, 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 in 2015.
In this environment, insurers’ best defence is the speed of response they can muster to rapidly changing market conditions – a talent that Beazley’s underwriters have shown they possess. It is against this readiness, as well as a consistent strategy that has proven its worth across market cycles, that Beazley’s aspiration to become and be recognised as the highest performing specialist insurer should be judged.
Chief executive’s statement Our balanced portfolio was a key factor in achieving both modest growth and an improved combined ratio.
By contrast, competition for smaller professional liability and management liability business in the US was less intense, and this was our main engine of growth. Overall, we have seen the balance of our portfolio tilt more towards small and mid-sized risks in recent years as profitable growth opportunities in these segments have been more numerous. Rates across our largest division, specialty lines, rose 2% in 2015 while rates fell across our other five divisions. For Beazley as a whole rates on renewal business fell by 2% year on year.
Our global claims team, under the leadership of Anthony Hobkinson, continues to grow in size and expertise. In alternate years, we hold an ‘expert retreat’ for the large architect and engineering (A&E) firms that have been a mainstay of our professional liability business since Beazley was founded in 1986. This took place in Montreal in May this year, enabling our A&E claims team to analyse complex claims scenarios with our defence law firm partners and longstanding clients. Events of this kind, described in more detail on pages 10 to 11, offer our claims professionals additional opportunities to add value to our client relationships.
We also conducted a detailed review of our data breach and cyber portfolio, which now represents our largest single line of business. Our portfolio is well diversified across industry segments and the short tail nature of data breach claims allows for rapid adjustment of terms and conditions in the event of changes in claim frequency. Nevertheless we continue to model aggregation scenarios carefully (including developing a cyber realistic disaster scenario (RDS)) and cover peak exposures with reinsurance. For further details on this please refer to page 128 in note 2 to the financial statements.
In December, we were delighted to receive confirmation that our Solvency II internal model application was approved by the Central Bank of Ireland (CBI). This represents a key achievement for the group and demonstrates that the significant level of our investments in people, systems and processes over a number of years are bearing fruit.
Growth opportunities Opportunities for growth are naturally constrained in an insurance market that remains awash with capacity, particularly for lines of business that can readily be modelled and are therefore attractive to new capital providers such as pension funds. In this environment, Beazley has four advantages that are not available to all of our competitors.
New products often take time to gain traction, given the limited flexibility of clients’ insurance budgets. An example is regulatory liability insurance for hospitals and other healthcare providers, which we first launched in 2012 and embedded in a comprehensive management liability policy for healthcare providers, Beazley Remedy, last year. This insurance protects healthcare providers against the costs and consequences of erroneously billing US federal benefit programmes like Medicare or Medicaid for patient treatment. The rules governing this are extremely complex, presenting real jeopardy for hospitals. We expect demand for this product to increase significantly in 2016.
The myBeazley system exemplifies our approach to innovation in technology as well as in product design. The system was designed in the light of exhaustive research with brokers into their needs and preferences.
In attracting such individuals our strong financial track record is clearly an asset, but I believe the attitude of our existing employees is even more important. In June, we engaged with Aon Hewitt to survey our employees with a view to establishing levels of employee engagement across the company – a metric that is closely correlated to positive business outcomes such as talent retention, customer satisfaction and long term financial performance. The survey was taken by 89% of our employees and positioned Beazley in the top quartile of companies surveyed in terms of employee engagement.
The opinions of our people, as well as the confidence of our brokers and clients, matter more to us than the plaudits of our peers. Nevertheless, we were gratified to receive three accolades as insurance company of the year from Reactions magazine, the Insurance Insider, and Insurance Day.
Outlook Commoditisation is a constant challenge for a specialist insurer, as capital moves ever faster into niche areas, depressing prices. There is clearly a large surfeit of capital relative to demand in many parts of today’s commercial lines insurance market. In the absence of capital-depleting catastrophe losses, it is unrealistic to suppose that even the most nimble and resourceful insurers can maintain the returns on equity that they have achieved in recent years.
Service is a differentiator that may come more to the fore in this environment, when the temptation is to cut back on service levels to save on costs. We are doing the opposite, seeking to deliver a standard of service to our clients and brokers that is appreciably superior to our competitors.
The chairman highlighted that we will be asking shareholders to vote in March 2016 on a scheme of arrangement that will allow us to run the group from the UK going forward. This will simplify the management and decision making of the group and allow the company’s shareholders to access a UK dividend stream and I would thus ask our shareholders to support this change.
Q&A with the chief executive Andrew Horton reviews Beazley’s performance and describes the risks and opportunities he foresees in 2016.
Q What effects do you see portfolio underwriting arrangements negotiated between brokers and certain carriers having on the Lloyd’s market? Would Beazley consider entering into such arrangements?
Q Where do you see the strongest growth opportunities for Beazley in the year ahead?
A In a global economy that is stuttering, the US economy continues to perform strongly and that is where we expect to see the strongest growth in the year ahead. Our US operations grew 19% in 2014 and 21% in 2015. We expect to continue on the same trajectory in 2016.
Starting from a smaller base, we also expect our operations in Europe and Singapore, where we are recruiting new underwriters, to grow quite strongly in 2016.
The challenge remains, of course, large scale catastrophe exposed risks underwritten at Lloyd’s. There are some bright spots in our Lloyd’s business – we are continuing to see growth in reps and warranties business for M&A transactions and Lloyd’s is a major hub for European cyber business. Overall we expect our growth to be modest in 2016 because – barring major catastrophe activity – rates will continue to fall for large risk business.
The idea is simple but of course its implementation in a £45bn insurance market will be far from easy. However, there is universal agreement by brokers and insurers on the need to get this done and we are keen to support it.
A Our vision – to become and be recognised as the world’s highest performing specialist insurer – serves Beazley well because it provides a yardstick against which we can measure ourselves. I think it’s clear that we have been making good progress against this yardstick in recent years.
A Over the past five years, our annual return on shareholders’ equity (ROE) has averaged 16% in an environment of low investment returns. This includes 2011, the worst year on record for insured natural catastrophes, in which our ROE was 6%.
Premium retention rates Retention of business from existing brokers and clients continues to be a key feature of Beazley’s strategy. It enables us to develop a deep understanding of our clients’ businesses and requirements, affording greater insight into the risks involved in each policy we write and enabling us to price risk substantially. The table below shows our retention rates by division compared to 2014.
We would generally expect some level of volatility at individual division level; however we are pleased that our overall premium retention rate remains broadly in line with our five year average.
We are pleased to have achieved a strong underwriting result in 2015, delivering a combined ratio of 87% (2014: 89%) with gross premiums written increasing by 3% to $2,080.9m (2014: $2,021.8m). While the market continued to soften in 2015, resulting in further reductions in premium rates across most lines of business, Beazley was fortunate to identify opportunities for profitable growth. This was particularly the case in our largest division, specialty lines, where gross premiums written increased by 13% year on year.
While the US was the main growth market for specialty lines in 2015, we did see modest growth in London as well. Demand for data breach and cyber cover and response services have increased in Europe and we were delighted to partner with other Lloyd’s syndicates to form the Lloyd’s cyber consortium, targeting large scale European risks, in September. We also established a European media team to complement the strong media errors and omissions capability we have long had in the US.
The performance of our life, accident & health division continued to improve in 2015, with the division returning a modest profit in the past year (2014: an operating loss of $5.8m). The key drivers of this improved result were a significant increase in US gross premiums written from $3.1m in 2014 to $14.8m in the current year, and an improved distribution model in Australia. Overall, gross premiums written by the division in 2015 fell by approximately 9% compared to the prior year, although much of this premium reduction was due to sterling and Australian dollar exchange rate movements. We continue to see significant growth potential in the US for the ‘gap protection’ medical cover that employers are increasingly purchasing to supplement standard employee benefits. This cover helps people protect themselves against the risk of out of pocket medical expenses.
The same is true of our reinsurance business, which saw premium rates on renewal business fall by 7% in 2015. Aided by a relatively benign claims environment, our reinsurance team nonetheless achieved a combined ratio of 57% in 2015 on gross premiums of $199.9m (2014: $200.8m). During the year, the team continued to improve our access to business that we might not otherwise see in London by recruiting a new underwriter in Paris and by nominating Tom Yang as an underwriter for the Beazley Underwriting Division of Lloyd’s China to facilitate the placement of business through the Lloyd’s China platform. In addition, we agreed to provide reinsurance to Korean Re, a top ten global reinsurer, as part of a reinsurance swap and we expect that this collaboration will provide us with opportunities to write more business in Asia in the coming years.
Outlook We expect the highly competitive market conditions experienced in 2015, particularly in relation to large risk business, to continue in 2016. In the current environment, segmenting our portfolio will become increasingly important in delivering strong underwriting results.
Beazley benefits from a well-diversified portfolio which has allowed us to exercise efficient cycle management. We proactively adjust our risk appetite both in areas where we find premium rates have contracted so that certain risks are underpriced, and in markets where we encounter less competitive pressures. The emphasis on disciplined underwriting in areas where competition is greatest will remain a key part of our underwriting strategy as we continue to identify areas of our portfolio where we see the best opportunities for profitable growth.
Gross premiums written 119.8 132.2 Net premiums written 106.6 113.7 Results from operating activities 0.4 (5.8) Claims ratio 58% 60% Expense ratio 45% 47% Combined ratio 103% 107% Rate change (1%) 9%
Gross premiums written 199.9 200.8 Net premiums written 132.0 153.8 Results from operating activities 66.3 60.0 Claims ratio 22% 37% Expense ratio 35% 32% Combined ratio 57% 69% Rate change (7%) (10%)
Gross premiums written 1,015.2 895.7 Net premiums written 825.2 776.5 Results from operating activities 77.0 72.5 Claims ratio 60% 61% Expense ratio 36% 37% Combined ratio 96% 98% Rate change 2% –
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Life, accident & health Improved result as US strategy bears fruit.
The performance of the life, accident & health division continued to improve in 2015 as our US business development strategy began to bear fruit. We achieved a combined ratio of 103% (2014: 107%) on premiums of $119.8m (2014: $132.2m).
Our Australian business saw premiums fall in US dollar terms in 2015 due to the depreciation of the Australian dollar. Under the leadership of Suzie White, we have also been expanding our open market personal accident business through brokers, supplementing the large scale superannuation fund business we already hold. (Australian superannuation funds are government supported retirement funds that also offer disability insurance).
Well designed new products are critical to our ambitions to broaden our appeal to brokers in Australia. In July we launched expatriate medical and corporate travel products, both of which combine elements of health and travel insurance to comprehensively cover expats based overseas for both short and long-term assignments.
Energy 26% Hull & miscellaneous 22% Cargo 19% Liability 12% War 10% Aviation 8% Satellite 2% Kidnap & ransom 1%
Beazley underwrites a broad mix of marine, energy, aviation and satellite business within the marine division. Our underwriters have an unparalleled track record within the Lloyd’s market for identifying profitable business in these classes. The experience of our underwriters is matched by our claims team, who deliver a swift and supportive claims service to clients whose cash flow can often be seriously affected by a major loss.
Marine war risks is another line that has been subject to strong competition. Here claims have fallen very rapidly in recent years, due primarily to improved security on vessels plying the waters off the Horn of Africa, and our book has accordingly contracted.
The explosions in the Chinese port of Tianjin in August are expected to generate some of the largest cargo losses on record, variously estimated at between $1.5bn and $3.3bn. Beazley currently have no notified claims in relation to this event, which is a strong testament to the quality of the underwriting.
The London market remains the unchallenged leader in providing flexible cover with large limits for marine, aviation, energy and satellite risks. Nevertheless, as is the case for other divisions of Beazley, we have found that there are often growing pockets of profitable business – generally for smaller scale risks – that are only accessible to local underwriters. In our case that is true of UK regional marine business, which we access through a network of offices around the UK; Scandinavian energy business, which we access through our Oslo office; and a growing volume of hull and cargo business in Asia, which we access from Singapore.
Building a strong presence in these local markets takes time. In recent years, the strength of our Lloyd’s business has bought us this time, enabling us to take a long term view of our regional and international investments. Our UK regional marine business, led by Steve Smyth, is now performing strongly, generating premium of $15.3m in 2015 (2014: $11.4m). We expanded our appetite for UK regional business in the course of the year, starting a yacht and pleasure craft account for vessels of up to $8.5m in value.
In a rating environment that was challenging for both our political risks and terrorism teams, our contingency team – focusing largely on event cancellation cover – saw strong growth. The division as a whole achieved a healthy combined ratio of 76% (2014: 78%) on premiums that were, overall, flat in relation to 2014.
With a sharp decline in the level of investment in, and trade with, Russia we saw a significant decline in demand for political risks cover for a market that has historically been significant for Lloyd’s underwriters. Competition for the business that remained was challenging, particularly at Lloyd’s. Our operations in Singapore, Paris and, most recently, in the UAE (where we opened an office in Dubai in November 2014) performed well, validating our expectation that there was attractive local business to be underwritten outside London.
There is still business to be underwritten at reasonable rates in the terrorism market, and early in the year we joined a Lloyd’s terrorism consortium focused on providing substantial capacity for terrorism risks to businesses in Europe. Despite this attractive business has been shrinking and we are determined not to chase the market down. We accordingly undershot our budget for terrorism business by 28% in 2015.
By contrast, our contingency business grew by 61% to $40.5m. Rates in this market held more firmly than we had anticipated and our team, led by Chris Rackliffe, was also successful in winning a number of major accounts. Our US contingency team, established in 2012, had a particularly good year, writing $8.9m, up 180% on 2014.
Strong broker relationships are key to our success, as they are to other teams within Beazley. We worked hard to foster these relationships, across our global offices, in 2015. In some cases these relationships will only generate a significant return when market conditions improve, but we can afford to be patient.
However, it was our small business unit that made most of the running last year, growing to $123.7m (2014: $120.3m). The unit comprises various books of business, the largest of which derives from Lloyd’s coverholders, mostly located in the US, who underwrite risks for us under delegated authorities. The key to success in this market segment is to work collaboratively with coverholders and Lloyd’s brokers and monitor their performance closely, which Paul Bromley and his colleagues do particularly well.
Also within the small business unit is our jewellers’ block business, one of the lines of business Beazley is best known for at Lloyd’s. We were able to show the value of our service in April when, following an audacious heist in Hatton Garden, the centre of London’s jewellery trade, we settled our policyholders’ claims within a month. Our jewellers’ block business grew moderately in 2015, boosted by us winning a number of international accounts.
In the US we also welcomed a senior new hire last year: Ron Beauregard, a highly experienced executive with a strong track in building profitable surplus lines property businesses, joined us in April to head our excess and surplus lines (E&S) property team. We see potential growth opportunities in this area of our business, which focuses on mid-sized commercial lines business with some catastrophe exposures.
Looking ahead, we will continue to seek out growth opportunities in the face of market conditions that we expect to remain challenging. We were gratified to be recognised as ‘insurance team of the year’ by Reactions magazine in June: it’s a designation we will strive to merit every year.
Property catastrophe 72% Property risk 16% Korean RE 7% Miscellaneous 4% Casualty clash 1%
Our reinsurance underwriters exercised restraint in 2015 in a market that continued to be oversupplied with capacity. Claims were subdued and we achieved a combined ratio of 57% (2014: 69%) on premiums of $199.9m (2014: $200.8m).
However, our premiums were boosted by a $20m quota share from Korean Re under a partnership we entered into with the company last March. Since this was part of a reinsurance swap, under which Korean Re’s new Lloyd’s syndicate wrote an equivalent quota share of Beazley managed syndicates 623 and 2623, it should not be considered net new premium to Beazley.
In the US, still by far our largest market, accounting for 52% of the division’s premiums, we saw rates decline overall a littleless rapidly than originally anticipated. This was largely because a number of major cedents in Florida increased their reinsurance purchases.
Our professions team insures nearly half of the AmLaw 100 list of the largest US law firms and more than half of the top 50 US architectural and engineering design firms, as ranked by Engineering News-Record. In common with other large risks, competition for this business – which we underwrite out of London – was intense in 2015. Nevertheless our underwriters have weathered soft market conditions before and we were gratified by the loyalty of clients who value the quality of our risk management and claims service.
Hacking and malware accounted for 32% of the breach notifications we received in 2015, up from 18% in 2014 and 10% in 2013. We have been able to address this with premium rate rises where appropriate and have not found our client retention levels appreciably affected. This is in part because the market as a whole has been raising rates but also, we believe, because our comprehensive service proposition continues to be highly valued by clients and brokers.
Our Beazley Breach Response (BBR) Services team, the dedicated business unit that helps our clients manage data breaches effectively, has now helped clients handle more than 3,000 data breaches.
Although market conditions are challenging for many of the large risk classes of business underwritten at Lloyd’s, we saw growth in our Lloyd’s business in 2015.
The past year was an excellent year for product development at Beazley. In specialty lines, we launched new products to meet the specific needs of nutraceutical manufacturers; provide ‘wage and hour’ cover for US employers who fall foul of complex and evolving labour laws; enhance the management liability and cyber liability protection afforded to US law firms; and protect companies from fraudulent instruction – the risk of theft from fraudsters posing as vendors, clients or authorised employees.
In all of these areas we rely heavily on strong broker and client relationships to help us identify the pain points that demand effective solutions. We then put considerable effort into designing cover that effectively addresses the risk, frequently partnering with specialist external service providers to provide risk management or event response services.
Financial review Group performance It was particularly pleasing to see both the claims and expense ratios improving in 2015 in what was another year of strong performance by the company.
Net earned premiums 1,698.7 1,658.9 2% Net investment income 57.6 83.0 (31%)
Profit Profit before tax is up 8% in 2015 to $284m (2014: $261.9m). This increase in profit was driven by an improved combined ratio aided by an increase in releases from prior year claim reserves as well as experiencing a smaller foreign exchange loss in 2015 relative to the prior year, which had a favourable impact on profit of $2.6m. These effects more than compensated for the lower investment return.
The charts above highlight how we achieve diversification by product mix, geography and type of business.
Combined ratio The combined ratio of an insurance company is a measure of its operating performance and represents the ratio of its total costs (including claims and expenses) to total net earned premium. A combined ratio under 100% indicates an underwriting profit. Consistent delivery of operating performance across the market cycle is clearly a key objective for an insurer. Beazley’s combined ratio has decreased in 2015 to 87% (2014: 89%), maintaining our five year historic average of 90%. It is worth pointing out that the calculation of the combined ratio for Beazley includes all claims and other costs to the group but excludes foreign exchange gains or losses. We believe this represents the most transparent and useful measure of operating performance as it ensures that all of the costs of being in business are captured, whether directly linked to underwriting activity or not.
Life, accident & health 6% Marine 13% Political risks & contingency
Claims Overall, claims have developed favourably during 2015, with claims notifications at normalised levels. There has been minimal exposure to natural catastrophes throughout the year.
Releases as a percentage of net earned premium 13.5% 8.5% 13.7% 9.5% 10.4% 11.1%
Acquisition costs and administrative expenses Business acquisition costs and administrative expenses increased during 2015 to $663.8m from $658.9m in 2014. The breakdown of these costs is shown below: $m $m
Brokerage costs are the premium commissions paid to insurance intermediaries for providing business. As a percentage of net earned premium they remain consistent at 21% year on year. Brokerage costs are deferred and expensed over the life of the associated premiums in accordance with accounting standards.
In 2015 the expense ratio reduced for the first time for a number of years. Exchange rates helped, but not withstanding that, this was a testament to the company’s expense control and was achieved despite increasing the level of investment in the business.
Rising yields and higher credit spreads resulted in modest, but still positive, returns on the fixed income investments which form the largest part of our investment portfolio. These assets returned 0.7% in 2015, helped by having no material exposure to the worst affected high yield debt issuers. An element of our assets is invested in more volatile asset classes, seeking to generate additional return in the medium term. This part of our portfolio performed well in 2015 as equity linked investments returned 4.5% and significantly outperformed the global equity market, while our hedge fund portfolio produced a strong 7.2% return. Our illiquid credit investments have grown, but remain limited, at 2% of portfolio value. They returned 1.4% in this period. Our overall investment return for the year ended 31 December 2015 was 1.3%, or $57.6m (2014: $83.0m; 1.9%). Although the contribution from investments is lower than last year, we believe this is a good outcome in the context of difficult investment conditions.
The table below details the breakdown of our portfolio by asset class: Cash and cash equivalents 676.9 15.0 364.2 8.2 Fixed and floating rate debt securities – Government, quasi-government and supranational 1,857.1 41.1 1,845.6 41.6 – Corporate bonds
Comparison of return by major asset class: In 2015, 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 $4,519.1m at the end of the year (2014: $4,441.6m). The chart on page 43 shows the increase in our group funds since 2011.
In 2015, it was announced that the UK corporation tax rate will be reduced to 18% by 2020. This reduction in the UK tax rate will reduce the group’s future current tax charge. The UK government also passed the diverted profits tax early in 2015. We have considered the implication of this and are of the view that this tax should not apply to Beazley (see note 9).
Net assets per share (pence) 186.5p 170.3p 10% Net tangible assets per share (pence) 174.8p 158.3p 11% Number of shares* 511.7m 505.3m 1%
Financial liabilities Financial liabilities comprise borrowings and derivative financial liabilities. The group utilises three long term debt facilities: • in 2006 we raised £150m of lower tier 2 unsecured fixed rate debt that is payable in 2026 and callable in 2016. In 2012, we bought back a total of £47.3m in two tranches. In 2013 we bought back £26.2m of this debt. The initial interest rate payable is 7.25% and the nominal value of this debt as at 31 December 2015 is £76.5m (2014: £76.5m); • a US$18m subordinated debt facility raised in 2004. This loan is also unsecured and interest is payable at the US$ 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; and
• 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.
Capital structure Beazley has a number of requirements for capital at a group and subsidiary level. Capital is primarily required to support underwriting at Lloyd’s and in the US and is subject to prudential regulation by local regulators (PRA, Lloyd’s, Central Bank of Ireland, and the US state level supervisors).
Beazley is subject to the capital adequacy requirements of the European Union (EU) Insurance Groups Directive (IGD). We comply with all IGD requirements. These requirements will be replaced by Solvency II for year end 2016.
Further capital requirements come from rating agencies who provide ratings for Beazley Insurance Company Inc. We aim to manage our capital levels to obtain the ratings necessary to trade with our preferred client base.
Our funding comes from a mixture of our own equity (on a Solvency II basis) alongside $116.9m of tier 2 subordinated debt, $18m subordinated long term debt, a $112.3m retail bond and an undrawn banking facility of $225m.
At 31 December 2015, we have surplus capital of 49% of ECR, including Solvency II adjustments. Following payment of the second interim dividend of 6.6p and special dividend of 18.4p, this surplus reduces to 35% compared to our current target range of 15% to 25% of ECR.
Individual capital assessment The group is required to produce an individual capital assessment (ICA) 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 ICAs are consistent across the market.
Solvency II The Solvency II regime was implemented on 1 January 2016. During 2015 Beazley obtained approval from the Central Bank of Ireland to calculate the Solvency Capital Requirement at a group level and for Beazley Re dac using our internal model. This model is also used to calculate the Solvency Capital Requirement on an ultimate basis for our managed syndicates, as required for Lloyd’s capital setting. The Prudential Regulatory Authority has also approved the Lloyd’s internal model.
Beazley’s programme to prepare for Solvency II began in 2008 and is now substantially complete. Our project to prepare for the pillar 3 reporting requirements is ongoing and will remain in place until annual reporting for 31 December 2016 is complete. We believe we are strongly positioned to meet all the reporting requirements.
Group structure The group operates across both Lloyd’s and the US through a variety of legal entities and structures. The main entities within the legal entity structure are as follows: • Beazley plc – group holding company and investment vehicle, quoted on the London Stock Exchange; • Beazley Underwriting Limited – corporate member at Lloyd’s writing business through syndicates 2623, 3622 and 3623; • Beazley Furlonge Limited – managing agency for the six syndicates managed by the group (623, 2623, 3622, 3623, 6107 and 6050); • Beazley Re dac – reinsurance company that accepts reinsurance premiums ceded by the corporate member,
Beazley Underwriting Limited; • Syndicate 2623 – corporate body regulated by Lloyd’s through which the group underwrites its general insurance business excluding accident and life. Business is written in parallel with syndicate 623; • Syndicate 623 – corporate body regulated by Lloyd’s which has its capital supplied by third-party names; • Syndicate 6107 – special purpose syndicate writing reinsurance business on behalf of third-party names; • Syndicate 3622 – corporate body regulated by Lloyd’s through which the group underwrites its life insurance and reinsurance business; • Syndicate 3623 – corporate body regulated by Lloyd’s through which the group underwrites its personal accident and
BICI reinsurance business; • Syndicate 6050 – special purpose syndicate which has its capital provided by third-party names and providing reinsurance to syndicates 623 and 2623; • Beazley Insurance Company, Inc. (BICI) – insurance company regulated in the US. Licensed to write insurance business in all 50 states; and • Beazley USA Services, Inc. (BUSA) – managing general agent based in Farmington, Connecticut. Underwrites business on behalf of Beazley syndicates and BICI.
Operational update Technology and operational capability are transforming the way we transact business.
We are a specialist insurer and our success relies heavily upon the expertise of our underwriters and claims managers and their ability to move quickly to meet client needs. A vital role of operations is to give our underwriters and claims professionals the tools and the support to do this job. Equally, we want to ensure that our brokers can access this expertise and our insurance products as easily and efficiently as possible. In view of this, much of our focus in the last year has been on increasing our distribution through the use of technology, whilst capturing valuable data on how our business is transacted. This data can then be used to modify both our products and our services to best meet market demand.
We also continue to explore new ways to improve access to our specialist products. This year we launched a new technology solution called myRate. This is a global rating solution that we are rolling out to our underwriters, starting with our Employment Practices Liability team. This differs from other pricing tools, in its potential to be made ‘outwards facing’ and allow not just underwriters but also brokers and coverholders to access the tool directly – significantly reducing the time taken for them to produce a quote. The myRate technology also underpins another innovative solution that went from strength to strength this year – myBeazley. Now in its second year, we continue to broaden the product set available on the platform. myBeazley was very much designed with ease of use in mind, and we were pleased to receive the Lloyd’s Innovation Award for myBeazley in November 2015.
Supporting business growth relies on effective processes and systems, but it is also important that we have a high quality working environment that is conducive to team working and thought leadership. Our offices are open plan, bright and airy with a style and consistency that supports our global brand. We strive to get the best quality working space at the best lease and facility cost. In 2015, we opened a new office in Los Angeles, and relocated to larger offices in Sydney and Singapore – further improving market access for our underwriters geographically. We have also increased the size of our global processing and support centre based in Farmington, Connecticut, US – a location that benefits from good access to local insurance operations talent.
Cost efficiency Beazley is organised to a large degree around global underwriting and claims teams. This model has served us well in ensuring that products that succeed in one market can be swiftly introduced in others. However it is important that this does not result in back office systems and support resources becoming duplicative or the administration of insurance transactions impeding the business in any way.
In pursuit of greater efficiency and consistency of operational service, we have been centralising operations support or outsourcing it where this brings further value. We want to make sure that operations and processing are done by appropriately skilled people, at the most cost effective location, whilst providing the best service levels. In 2015, we centralised support for our global claims team as we have already done for our underwriting support. This addition to central operations support further enhances our ability to seek economies of scale, and balance support across different functions of the business. Being able to scale up through outsourcing is increasingly important as we further diversify into higher volume market segments, notably via our small business products in the US and Europe. In 2015, we agreed new outsourcing agreements that allow us to more efficiently scale our operational platform whilst maintaining a balance with our in-house expertise.
As we continue to make our operational support more efficient, we have defined clear ownership for processes, establishing clear accountability for process execution and planning. This simplifies operational control reporting and strengthens our ability to provide a coordinated, rapid response to support business growth opportunities.
An area of heightening operational risk for the financial services industry is information security and the risk of a cyber attack. We have a dedicated in-house information security team, which is integrated with our Beazley breach response team. We apply rigour to our information security environment with our infrastructure and controls organised around four key pillars: – Prepare, Protect, Detect, and Improve. We also work closely with a number of industry specialists both to bring additional expertise to our in-house team, and keep us abreast of potential new threats in this rapidly changing landscape.
As with all Beazley talent we recognise the importance of developing attractive career paths. We want to equip our operations team with the right skills for the job. We routinely review our talent for potential skills gaps and then provide the most relevant training to ensure a high standard of service provision.
Looking ahead Two areas of focus for 2016, are firstly, continuing to increase our ability to efficiently scale up operational support in areas where we see greatest growth potential and margin, such as in the US market. Secondly, continuing to research and develop innovative ways to get our products to the customer. Working closely with our broker partners, we want to continue to make best use of technology and data insight to maximise the efficiency of getting the most appropriate insurance cover for our customers.
Charting our risks to chart our course Although the art of navigation has evolved significantly over time, from the early explorers using rudimentary instruments and celestial bodies through to the current sophisticated suite of integrated electronic and GPS systems, its purpose is unchanged – to travel safely and efficiently. An important navigation system for an insurance company is the risk management framework, combining a number of elements to provide a thorough view of our course. For example: • like the use of radar, the emerging and strategic risk review looks over the horizon to identify risks that may impact the course of the company in future years; • like the use of binoculars, the biannual risk reviews seek to identify those risks that are too close for radar to provide meaningful information, but which are still far away; • like the use of one’s own eye, the consolidated assurance report provides detailed information of the immediate surroundings so that precise manoeuvres can be made; and • like the use of hindsight, reviewing risk incidents allows us to learn from our mistakes and use experience to improve future navigation.
This year’s journey As at 31 December 2015, all entities in the Beazley group are operating within risk appetite as set by the board. There have been no new risk areas identified and no major shifts in existing risks. In addition, the control environment has not identified any significant failings or weaknesses in key processes.
We have also complemented our quantitative risk appetite measures by developing qualitative statements which guide on what type of activity would be outside risk appetite using relevant language for that part of the business. This has helped to improve the understanding across the business of how the board expects the company to operate.
We are able to extract conduct related controls from the risk register to provide the board with assurance that the expected behaviours towards customers are being demonstrated.
There is widespread belief that the approach to remuneration is a key determinant of a business’s success or failure. As such, this is now the fifth year that the chief risk officer has provided a detailed report to the remuneration committee to provide assurance that the design of the remuneration structure drives the intended behaviours not only over the next year but also over the next three to five years. Members of the risk management team have visited Beazley offices in the US, Europe, Asia and Australia to identify how we can improve what we do and to observe how consistently the Beazley culture ensures our staff do the right thing.
Turning to capital, we have continued to make minor changes to the internal model during 2015, the last year before the Solvency II regime goes live. Some changes have been in response to regulatory review to ensure that the internal model completely meets all the requirements. Other changes have been made to ensure that the internal model remains aligned to Beazley’s risk profile. We have observed that there is increasing interest across the market in utilising a ‘drivers of risk’ approach, which is used by Beazley to describe how risks interact rather than using a statistical correlation matrices approach. Since we implemented such an approach in 2004, we have found that a ‘drivers of risk’ approach leads to a more informed discussion given the more intuitive approach to aggregating risk. Our focus in 2015 has been on reviewing the universe of risk drivers to ensure that all appropriate drivers have been included in the model and that the emergence of future drivers will be incorporated as necessary.
Beazley received approval for its Solvency II internal model from the Central Bank of Ireland in December 2015. This ensures that Beazley’s capital efficiency is maintained as the company will continue to use a model that more accurately reflects its risk profile to set capital requirements, rather than having to use the standard formula which typically generates higher capital requirements.
Preparing for the future Beazley’s current risk management framework has been successfully operating over the last five years. Although we have continued to enhance the framework during that period, we have undertaken a detailed review in the second half of 2015 of the operation of the risk register and associated reporting. This review has made use of our experiences of operating the framework during that period and has considered how market best practice has developed. We will be implementing changes in the first half of 2016 with the aim of ensuring that the next evolution of the risk management framework is up to the challenge of helping Beazley navigate the next five years.
Risk management strategy The Beazley plc board has delegated executive oversight of the risk management department to the executive committee, which in turn has delegated immediate oversight to the risk and regulatory committee. The Beazley plc board has also delegated oversight of the risk management framework to the audit and risk committee and the primary regulated subsidiary boards have established a board risk committee.
Risk management framework Beazley has adopted the ‘three lines of defence’ framework: namely business risk management, the risk management function and the internal audit function. Within business risk management, there are two defined risk and control roles: risk owner and control reporter. Each risk event is owned by the risk owner who is a senior member of staff. Risk owners, supported by the risk management team, formally perform a risk assessment twice a year, including an assessment of heightened and emerging risks.
– Independently tests control design – Independently tests control operation – Reports to committees and board
The risk management framework comprises a number of risk management components, which when added together describe how risk is managed on a day to day basis. The framework includes a risk register that captures the risk universe (55 risk events grouped into eight risk categories: insurance, market, credit, liquidity, operational, regulatory and legal, group and strategic), the risk appetite set by the Beazley plc board, and the control environment that is operated by the business to remain within the risk appetite. The following diagram illustrates the components of the risk management framework.
Viability statement The directors have completed a robust assessment of the viability of the group over a three year period. A period of three future years has been selected to be short enough to be reasonably assessable but long enough to reflect Beazley’s risk profile of a portfolio of diversified short-tailed and medium-tailed insurance liabilities. This three year period also aligns with the length of time over which business underwritten at Lloyd’s, being the majority our insurance business, is managed. The board has performed an annual risk assessment and the key risks to the group in the future are summarised on pages 56 and 57.
Insurance risk Given the nature of Beazley’s business, the key risks that impact financial performance arise from insurance activities. The main insurance risks can be summarised in the following categories: • Market cycle risk: The risk of systematic mispricing of the medium tailed specialty lines business which could arise due to a change in the US tort environment, changes to the supply and demand of capital, and companies’ using incomplete data to make decisions. This risk would affect multiple classes within the specialty lines division across a number of underwriting years. The group uses a range of techniques to mitigate this risk including sophisticated pricing tools, analysis of macro trends, analysis of claim frequency and the expertise of our experienced underwriters and claims managers.
• Single risk losses: Given the size of policy limits offered on each risk, it is unlikely that the poor performance of one policy will have a material impact on the group’s financial performance.
• Environment: There is a risk that the chosen strategy cannot be executed because of the current environmental conditions within which Beazley operates, thereby delaying the timing of the strategy.
• Senior management performance: There is a risk that senior management is overstretched or does not perform, which would have a detrimental impact on the group’s performance. The performance of the senior management team is monitored by the CEO and talent management team and overseen by the nomination committee.
Other risks The remaining six risk categories monitored by the board are: • Market (asset) risk: This is the risk that the value of investments is adversely impacted by movements in interest rates, exchange rates, default rates or external market forces. This risk is monitored by the investment committee.
• Operational risk: This risk is the failure of people, processes and systems or the impact of an external event on Beazley’s operations, and is monitored by the operations committee.
• 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.
Responsible business Our vision is to use our expertise, influence and passion as a force for good in our local communities and the wider world.
Eighty-nine percent of our employees completed our employee engagement survey this year. They told us that our being a responsible business was of overriding importance to them – a finding strongly reinforced by the high level of employee participation in charitable and community outreach efforts around the world in the course of 2015.
Make a difference 2015 A third of our employees around the world volunteered to help in over 30 projects in Australia, Ireland, Singapore, the UK and US, making a positive difference in their communities.
Supporting our communities Our goal is to increase the skills and expertise of children and young people (six years old to graduate level) from lower socio-economic backgrounds, with an emphasis on helping school leavers and graduates enter the workforce. By community, we mean the cities where we have offices, and within those cities we then identify particular communities/ suburbs that most need our support. We’ve found this not only has a positive impact on our communities but also our employees have told us it builds pride in working for Beazley, enhances their skills and builds motivation.
Greater Chicago Food Depository Beazley volunteers sorted donated food at Greater Chicago Food Depository, ready to be distributed for people in need.
Teesdale & Hollybush Tenants and Resident Association (TRA) The TRA is made up of 13 estates in East London. Beazley volunteers helped with maintenance projects around the estates.
Internships and work experience We want to provide talented individuals who would not normally have access to jobs in the cities where we work, the chance to gain work experience with us. This year we increased the number of interns at Beazley through our partnership with the charity, The Brokerage CityLink, from six to nine.
We also extended our internships this year to include our New York and San Francisco offices as well as London, employing three more interns. The 12 internships last around ten weeks and give the students access to the corporate environment, an insight into the insurance world and the opportunity to learn vital business skills.
City Giving day We took part in City Giving day in London, to join other organisations in making an even bigger impact in London.
Our strategy focuses on three key areas: • Our offices: ensuring the environmental impact from our offices is minimal and finding ways to enhance them so they have a more positive impact
Every day our people do a range of things to reduce our carbon footprint – from using public transport on business trips to booking Addison Lee (who have acquired Climatecars), who provides electric and hybrid vehicles and is our preferred car transportation company in the UK. Our latest greenhouse gas (GHG) emissions report, from 2014, showed that in the UK we decreased our emissions by 6% compared to 2013 which is due to decreased air travel and taxi use. In the US we increased our emissions by 6% compared to 2013. This is largely attributable to increased air travel due to growth in office locations. We held our annual strategy event in-house in each of our offices, reducing the necessity for travel.
We have also undertaken initiatives such as arranging presentations from local recycling companies. These presentations involved outlining the recycling and composting process to create a greater understanding among our employees of what can be recycled. We have decreased the number of stationery deliveries across the US and London, reduced the monitor power output on PC’s and ensured LED lighting is installed in our new offices to reduce emissions.
We have influence in other sectors in different ways; insurance contracts can include incentives to improve risk including imposing contractual obligations on the insured and requiring compliance with laws and good practice. For example, we include technical requirements for our insured to increase safety in products lines including airlines, marine, personal accident and construction and engineering. In terms of social welfare and employee safeguarding, our Employment Practices Liability cover gives a helpline for SME employers and victim support service.
Within our daily activities we always look for options that generate additional benefits from our spending, for example by choosing conferencing or entertainment venues that support charities and local communities.
We value diversity and inclusion because it leads to a more dynamic, innovative, responsive organisation. It allows us to fully represent our existing client base and better connect with different communities of potential customers.
This year we established women’s networking forums in the US and UK, which are open to everyone to attend. The forums provide a chance for a cross section of employees to meet monthly to discuss development and hear from external speakers. We will continue to establish further networks as our people request them.
In addition, we provided training to managers on leading a multi-generational and diverse workforce and created an interactive online portal for people to collaborate and share ideas on diversity.
Review of business A more detailed review of the business for the year and a summary of future developments are included in the chairman’s statement, the chief executive’s statement and the financial review.
Results and dividends The consolidated profit before taxation for the year ended 31 December 2015 amounted to $284m (2014: $261.9m).
Going concern and viability statement A review of the financial performance of the group is set out on pages 38 to 48. The financial position of the group, its cash flows and borrowing facilities are included therein.
Further information can be found in the statement of corporate governance on page 73.
Directors’ interests The directors’ interests in shares of the company, in office at the end of the year, including any interests of a connected person (as defined in the Disclosure and Transparency Rules of the UK’s Financial Conduct Authority), can be found in the directors’ remuneration report on page 85.
Corporate, social and environmental responsibility The company’s corporate, social and environmental policy is disclosed on pages 58 to 63.
No political donations were made by the group in either the current or prior reporting period.
Likely future developments Information relating to likely future developments can be found in the strategic report.
Greenhouse gas emissions Information relating to greenhouse gas emissions can be found in the responsible business section on page 62.
Annual general meeting The annual general meeting of the company will be held at 12:00hrs on Thursday 24 March 2016 at 2 Northwood Avenue, Santry, Dublin. The notice of the AGM details the business to be put to shareholders.
Auditors KPMG have indicated their willingness to continue in office. Accordingly, a resolution to reappoint KPMG as auditors of the company will be proposed at the annual general meeting.
The board’s role is to set the company’s strategic aim, scrutinise management’s performance and ensure that the necessary financial and human resources are in place for the company to meet its objectives. The board met regularly through the year, set direction and risk appetite and provided oversight and control of management in the day-to-day running of the business. As chairman, I seek to ensure open and collective discussion and debate of significant issues 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. In May, we held a board strategy day and reviewed the current and expected business conditions against our strategic objectives and long term plan.
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. During 2015, we set gender diversity goals for the group and board. Of the last three appointments to the plc board, two were made to female non-executive directors. 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.
Appointed: 12 June 2003* Experience: Andrew joined Beazley in June 2003 as finance director. Prior to that he held various financial positions within ING, NatWest and Lloyds Bank and was the chief financial officer for the UK wholesale banking division of ING immediately prior to joining Beazley. He qualified as a chartered accountant with Coopers and Lybrand in 1987. He joined the board of Man Group plc in 2013 as a non-executive director. Committee: Executive committee (chair)
Appointed: 04 December 2006* Experience: Clive has over 30 years’ experience in the marine insurance industry and actively underwrites marine hull, marine liability and marine war risks. Committee: Executive committee
Appointed: 13 March 2009* Experience: Padraic is chairman of the Irish Stock Exchange as well as a non-executive director of Rabobank Ireland plc and a number of other companies. He was managing director of NCB Group between 1991 and 1999, prior to which he was chief economist at the firm. Before joining NCB, Padraic worked at the Department of Finance and the Central Bank of Ireland. He holds primary and postgraduate degrees in economics from University College Dublin. Committee: Remuneration committee (chair)
Appointed: 1 January 2010 Experience: George is the senior independent director. He retired as senior vice president and director from AllianceBernstein Ltd in December 2009. He had previously been chief executive of Union plc, and a director of SG Warburg Securities, Seccombe, Marshall and Campion plc and Meridian Investment Performance Services. He is the chairman of the Charity Bank Ltd and chairman of Stonewater Ltd. Committees: Audit and risk committee, remuneration committee, nomination 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: 6 December 2010 Experience: Rolf joined the board of Beazley Furlonge Limited in June 2010. He retired as franchise performance director at Lloyd’s in December 2009 after nearly seven years in the role, during which time he was widely credited with establishing a new and successful partnership between the Corporation of Lloyd’s and the market. Prior to that, he served as chief underwriting officer of Faraday Group, General Re’s Lloyd’s insurance and reinsurance operation. Committee: Audit and risk committee
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, nomination committee
There is a regular dialogue with institutional shareholders, as well as general presentations 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 questions at the company’s annual general meeting.
Financial calendar 26 February 2016 Second interim dividend and special dividend record date 24 March 2016 Annual general meeting 31 March 2016 Second interim dividend and special dividend payment date for the six months ended 31 December 2015 22 July 2016 First interim dividend announcement for the six months ended 30 June 2016
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.
The board The board consists of a non-executive chairman, Dennis Holt, together with five independent non-executive directors, of whom George Blunden is the senior independent non-executive director, and five executive directors, of whom Andrew Horton is chief executive. The non-executive directors, who have been appointed for specified terms, are considered by the board to be independent of management and free of any relationship which could materially interfere with the exercise of their independent judgement.
The board extended the appointments of two directors who would be serving terms in excess of six years from the 2016 AGM. George Blunden continues to bring strong challenge to the board and its committees and his appointment has been extended for a further three years, subject to annual reappointment at the AGM. The nomination committee carried out a rigorous assessment of George Blunden’s continuing independence, taking into account the length of his tenure on the boards of both Beazley plc and Beazley Furlonge Ltd, and concluded that he remained independent. Vincent Sheridan joined the board in 2009, and his appointment has been extended for a further one year term to ensure continuity across its board and committees.
Biographies of current board members appear in the ‘board of directors’ section of this report. The biographies indicate the high level and wide range of business experience that are essential to manage a business of this size and complexity. A well defined operational and management structure is in place and the roles and responsibilities of senior executives and key members of staff are clearly defined.
The full board meets at least five times each year and more frequently where business needs require. 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 which received regulatory approval in December 2015.
The composition of, and appointments to, the board of both executive and non-executive directors are considered by the nomination committee. The recommendations of the nomination committee are ultimately made to the full board, which considers them before any change is made. All directors receive a full, formal and tailored induction on joining the board and the chairman regularly reviews and agrees with each director their training needs to ensure that they continually update their skills, knowledge and familiarity with the company, as required to fulfil their role both on the board and on any board committee of which they are a member. The remuneration committee considers any remuneration package of executive directors before it is offered to a potential appointee.
Meetings with non-executive directors The chairman holds meetings as required with the non-executive directors without the executive directors being present.
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. The board confirms that the recommendations from the 2014 self-assessment have been implemented. 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. Further details of the review are included in the nomination committee report.
Individual attendance by directors at regular meetings of the board and of committees In addition to the five regular board meetings, there were further meetings to consider the Q3 2015 interim statement and director changes. Attendance at the meetings was high. All the directors also attend an annual strategy day. The remuneration, nomination, and audit and risk committees had additional ad hoc meetings with full attendance.
Attendance at the regular board and committee meetings is set out in the table below: Board Audit and risk committee Remuneration committee Nomination committee
Clive A Washbourn 5 5 – – – – – –
The board is responsible for the group’s system of internal control and for reviewing its effectiveness. However, such a system can only provide reasonable, not absolute, assurance against material misstatement or loss. The system is designed to manage, rather than eliminate, the risk of failure to achieve business objectives within the risk appetite set by the board.
Statement of corporate governance continued 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 2015, 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.
• recommend to the board of directors the appointment, reappointment and termination of external auditors and approve their remuneration and terms of engagement.
The board has delegated oversight of audit and risk matters to the audit and risk committee which currently comprises Angela Crawford-Ingle (committee chairman), Vincent Sheridan, George Blunden and Rolf Tolle.
Since my appointment to the committee in 2013, I have worked collaboratively with the committee members, management and both internal and external assurance providers to make an effective assessment of the way in which governance operates, risks are assessed and managed and financial reporting or control matters are dealt with. The audit committee plays an integral role in the monitoring, review and challenge of the controls, processes and conduct of the group’s management and external auditor. All committee members are independent non-executives and, in the opinion of the board, have recent and relevant financial experience to carry out this role effectively.
The principal activities undertaken by the committee in discharging its responsibilities in 2015 are described below.
Significant financial statement reporting issues for the 2015 year The significant financial statement reporting issues, along with the significant matters and accounting judgements that the committee considered during the year under review, are set out below.
The audit committee receives summarised reporting from the group actuary in respect of these premium projections and related monitoring activity. In this regard, the audit committee is satisfied that the written premiums recognised in the financial statements are materially correct.
The committee receives a report from the external auditors twice a year setting out all non-audit services undertaken, so that it can monitor the types of services being provided, and the fees incurred for that work. The aim is to limit the total spend on non-audit services to a maximum of the annual audit fee, unless it is deemed that not doing so is in the shareholders’ interest from an efficiency and effectiveness point of view.
The split between audit and non-audit fees for the year under review is disclosed in note 6 to the financial statements. None of the non-audit services provided are considered by the audit and risk committee to affect the auditors’ independence or objectivity.
Other updates During 2015, in addition to the financial reporting matters mentioned above the following items were key topics of discussion for the committee: • oversight of the reporting and control processes and procedures relating to the increased Solvency II reporting requirements; • updates on the group’s Solvency II internal model application, which resulted in the approval of the internal model in December 2015; • overview of key reporting and regulatory updates, including updates on accounting standards, changes in tax legislation, tax uncertainties and changes in regulatory requirements; • potential enhancements to key reconciliation and review procedures, in particular in relation to technical balances due to/from internal coverholders; and
• the consolidation of emerging risks and the processes and controls in place to mitigate these risks.
Internal audit The Beazley plc board has delegated oversight of the group’s internal audit function and its work to the audit and risk committee; the function reports directly to the committee. The committee’s terms of reference include approving the appointment or termination of appointment, of the head of internal audit and monitoring and reviewing the effectiveness of the company’s internal audit function. In reviewing the effectiveness of the function the audit and risk committee remained satisfied that the internal audit function had sufficient resources during the year to undertake its duties.
During 2015, the committee: • considered and appointed a new head of internal audit; • considered the results of all internal audit reports and monitored the progress of the business in addressing the findings of internal audit; • monitored the implementation of the 2015 internal audit plan and approved the 2016 internal audit plan; • reviewed and approved the internal audit charter; • oversaw the implementation of recommendations from the external quality assessment undertaken in 2014; and • monitored ongoing amendments to the internal audit function’s activities in light of emerging best practice in the financial sector.
Risk management The Beazley plc board has delegated oversight of the risk management framework to the audit and risk committee. To assist the board, the committee, supported by the risk committees of the subsidiary boards, receives and reviews reports from the risk management function focusing on the following areas: • risk appetite: The committee has monitored the actual risk profile against risk appetite throughout 2015 and can confirm that Beazley plc has been operating within risk appetite. The committee has also reviewed the proposed 2016 risk appetite and commended it to the Beazley plc board for approval; • risk assessment: The committee has performed a review of the group’s risk profile to ensure it covers the complete universe of risk and that all major underlying risks are visible and are being monitored; • risk profiles: The committee and the risk committees of the subsidiary boards have reviewed Beazley’s risk profiles, which are focused risk assessments of specific topics. In 2015, the committee received a review of the underwriting standards to ensure that they remained robust in soft market conditions. The committee also received an update on the annual cyber review, focussing this year on how exposure could aggregate from a single event. There were also a number of other operational risk profiles presented which supported the committee’s oversight of the ongoing business processes; • emerging risk: The committee supported the identification of strategic and emerging risks which were discussed at the board meeting in May and have been subsequently monitored and reported in the quarterly Own Risk and Solvency Assessment (ORSA); • oversight of the control environment: The committee has received a quarterly consolidated assurance report which provides commentary on the status of the control environment with perspective from the business, risk management, compliance and internal audit. It also includes entries from the risk incident log; • reverse stress testing: The committee has received the results of the reverse stress testing exercise, which explores what would have to happen for the group to be unviable and has been able to provide assurance to the board that this work has been performed with the appropriate level of depth and expertise; • oversight of the internal model: The committee and the risk committees of the subsidiary boards have reviewed regular reports associated with the internal model. These have included a standing report on internal model output, and a validation report featuring both internal and independent validation and themed reviews, for example, on the approach used to aggregate risk. These assessments have supported the boards’ use of the internal model; and
• appoint and review the performance of remuneration committee consultants, currently Deloitte LLP.
The committee has agreed the establishment of goals for gender diversity for both the board and the broader organisation. The board approved goals for gender diversity for the Beazley plc board of two female members by AGM 2016, and a third female member by AGM 2017. The initial goal has been achieved through the recent appointment of Catherine Woods. The committee reviewed progress against the group’s 2020 goals for increasing diversity across the wider organisation through a series of initiatives looking at recruitment, development and succession.
Key activities in 2015 The 2015 board review was overseen by the committee and was facilitated by Deloitte LLP. No material matters were identified and the committee will oversee the implementation of an action plan to strengthen the board’s overall effectiveness in 2016. Tasks which the committee carried out in 2015 were to: • search for additional non-executive directors which resulted in the nomination committee’s recommendation that Sir Andrew Likierman and Catherine Woods be appointed to the board. The appointments to the board were made on merit and against objective criteria. The nomination committee engaged the specialist search firm Zygos to support the search for directors. Zygos is wholly independent of the company and of the group; • review the performance of management by inviting all non-executive directors to attend a nomination committee meeting to review the performance of the executive management team; • consider the board and committee succession plans; • assess the collective skills and competency of the board and consider the proposed reappointment of all directors, ensuring that the proposed reappointment of two directors for a term beyond six years was robustly reviewed and challenged; • ensure that director development plans were implemented and that the board collectively received relevant training; and
• ensure board members were able to allocate sufficient time to the company to discharge their responsibilities effectively.
Policy on gender, diversity and inclusion We believe having a diverse and inclusive workplace will support our vision for growth and outperforming the market. We continually review our approach to diversity and our aim is to have nurtured diverse employees across the business who are given the tools and opportunities to progress their career within Beazley. We believe employing individuals with wider perspectives and from a broader skill base will lead to a more dynamic, innovative, responsive organisation in touch with changes and developments in our business environment.
The importance of talent at Beazley Talent management remains one of the cornerstones of Beazley’s business success, as we seek to recruit and retain people who rank among the best insurance professionals in the world. The main focus of our retention strategy is through our culture and shared values. Ensuring Beazley has a competitive remuneration mix that rewards sustainable performance remains important to our future success.
Remuneration policy and link to strategy Our executive remuneration policy is governed by two guiding principles – alignment to shareholders’ interests and performance of the group. The following are some of the key features of our policy and the way that it is aligned to our strategy: • NAVps growth – growth in NAVps is a key performance indicator for Beazley, and is the measure used for our LTIP. The framework is simple and aligned to shareholders’ interests. For maximum awards to vest NAVps growth of 15% above the risk-free return must be sustained for five years; • Five year performance – for a number of years now we have operated an LTIP where performance is measured over five years as well as three years. This longer term performance period means that out-turns are aligned with the long term performance of the business; and
• Risk – our remuneration structure incorporates a number of features which are aligned with risk. These include longer time horizons, deferral of bonus into shares and shareholding requirements. The committee receives an annual report from the chief risk officer on remuneration policy to ensure it is consistent with and promotes effective risk management.
DRR reporting and operation of our policy In the interests of succinct reporting we have not reproduced the full policy report. The approved policy table is included at the end of this report for ease of reference. The full policy report can be found on our website.
Culturally, one of Beazley’s strengths is teamwork at every level. Our approach to the annual bonus reflects this culture through the operation of our bonus pool. The pool is based on profit before tax and ROE out-turns and is strongly aligned to outcomes for shareholders. A broad senior management team, beyond executive directors, is then made awards from the pool. This reinforces the collegiate culture at Beazley.
Performance out-turns Beazley sustained strong performance in 2015 with a pre-tax profit of $284m and ROE of 19%. The remuneration out-turns, as reported in the single total figure of remuneration, reflect that performance. Bonus out-turns were comparable to last year reflecting the sustained performance year on year. This is in line with our bonus framework. In terms of LTIP out-turns, the second tranche of our five year LTIP is due to vest during 2016, reflecting an excellent sustained NAVps outcome for shareholders of 16.80% p.a.
Shareholders Each year the committee pays careful attention to shareholders’ views, not only in terms of developing best practice, but also by considering the views and voting of our shareholders on director remuneration at Beazley. We continue to welcome our shareholders’ views on our remuneration policies and practices.
Base salary • Salary increases generally in line with all-employee increases
Extended performance periods A portion of the LTIP has performance measured over an extended five-year period.
For deferred share awards and LTIP awards (from 2012) malus provisions were introduced. For LTIP awards from 2015 and annual bonus in respect of 2015, clawback provisions also apply.
Executive directors Fixed pay Pay for performance £ Salary Benefits Pension Cash bonus
Neil P Maidment 1 A significant portion of the single figure values shown arises due to the substantial share price appreciation over the period. The share price at the time LTI awards were made was 132.7p for the 2011 award and 204.2p for the 2013 award, while the average share price in the last three months of 2015 was 372.8p. This represents share price growth of 180% and 83% over the five and three year periods respectively.
3 £1,093,657 of the 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.
The figures in the preceding table reflect the following: • salaries for 2015 increased by an average of 1.1%, which was below the average increase for all-employees; • annual bonus out-turns were similar to last year, with Beazley delivering another strong performance in 2015; and • LTI out-turns reflect that the LTI performance targets were met in full. Beazley achieved sustained NAV growth of 20.14% per annum and 16.80% 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.
3 For Padraic O’Connor and Vincent Sheridan, their non-executive director fee was based on €94,000 (2014: €92,250) and €76,000 (2014: €74,500) respectively and has been converted into sterling for this table at the average exchange rate of 1.37 (2014: the fee was converted into £74,395 and £60,081 respectively at the average exchange rate in 2014 of 1.24).
4 Kenneth Sroka stepped down as a non-executive director on 4 December 2015 and the figure in the table above represents his fees to this date.
The base salaries for the executive directors in 2015 and 2016 are as set out below: base salary £
Recommended awards to individuals from the available pool are determined by taking into account performance based on each individual’s contribution to the group, including a review of performance against individual objectives. For heads of the business divisions, divisional performance is also taken into account. The bonus is discretionary and, rather than adopting a prescriptive formulaic framework, the committee considers wider factors in its deliberations at the end of the year, for example quality of profit and risk considerations.
• in considering individual awards in respect of executive directors for 2015, the committee had regard to the following broad framework: ROE performance hurdles Guideline/illustrative bonus award as a % of maximum
Corporate achievements that the committee took into account for the year included the following: • the delivery of profit after tax of $249m, and the return of $219.5m to shareholders by way of dividends; • delivery of growth in our gross premiums written of 3% in a market where premium rates were under increasing pressure; • continued acceleration of growth in the US in line with our strategic objective, where gross premiums written grew 21% in 2015; and
• continued focus on attracting and retaining the best talent, including strengthening our Asia based underwriting team to support our Asia Pacific growth.
The resultant bonuses were as follows: Bonus (delivered as a mix of cash and deferred shares)
Martin L Bride £800,000 258% Adrian P Cox £1,000,000 300% D Andrew Horton £1,300,000 293% Neil P Maidment £1,000,000 300% Clive A Washbourn £1,000,000 300%
The following graph and table sets out the out-turn for 2015 against performance and illustrates the way in which bonuses over time reflect profit and ROE performance.
Profit before tax (PBT) $ Executive director bonus as a % of salary
A portion of bonus may also be deferred under the investment in underwriting plan, and this capital can be lost if underwriting performance is poor. No such deferral was made in 2015 (see investment in underwriting on page 93 for further details).
Long term incentive plan (LTIP) ▪ Under the LTIP, executive directors, senior management and underwriters receive awards of shares subject to the achievement of stretching performance conditions measured over three and five years.
Given the five year performance period for 50% of the award, as well as the significant shareholding requirement and additional clawback provisions (which extend to seven years from date of award), the committee considers that the LTIP is significantly aligned to long term performance. Against that background it does not consider that further holding periods are required.
The NAVps performance conditions for these awards are as follows: 2011 awards – second tranche (five years)
MSIP award vesting in respect of the year ▪ The MSIP award shown in the single total figure of remuneration for 2015 includes: • the first tranche of the award granted on 5 April 2013. This is due to vest on 5 April 2016, subject to pre-tax divisional ROE
Average annual pre tax ROE <15% p.a. 0% Average annual pre tax ROE =15% p.a. 20% Average annual pre tax ROE =25% p.a. 100% Straight-line vesting between points
The graph below illustrates Beazley’s NAVps and TSR performance over the period, where the shaded area represents the LTIP NAVps growth target range for awards to vest.
Awards for 2015 ▪ During 2015 the LTIP awards with a face value equal to 150% of salary were granted to executive directors (200% for CEO), as shown in the table below.
LTIP Martin L Bride Nil cost option (LTIP) 150% of salary 157,238 465,000 10% 31/12/2017 31/12/2019 Adrian P Cox Nil cost option (LTIP) 150% of salary 168,802 499,200 10% 31/12/2017 31/12/2019 D Andrew Horton Nil cost option (LTIP) 200% of salary 299,935 887,000 10% 31/12/2017 31/12/2019 Neil P Maidment Nil cost option (LTIP) 150% of salary 168,802 499,200 10% 31/12/2017 31/12/2019 Clive A Washbourn Nil cost option (LTIP) 150% of salary 168,802 499,200 10% 31/12/2017 31/12/2019 Deferred bonus (in respect of 2014 bonus) Martin L Bride Deferred shares
1 The face value of shares awarded was calculated using the three day average share price prior to grant, which was 295.73p.
LTIP performance 2010-2015 NAV and TSR growth 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec
NAV target range (RFR +10% p.a. to RFR +15% p.a.) TSR growth (1 month average) NAV growth (including dividends)
The performance condition for LTIP awards was as follows: NAVps performance award vesting
Dilution The share plans permit 10% of the company’s issued share capital to be issued pursuant to awards under the LTIP, SAYE and option plan in a ten-year period.
Malus and clawback For incentives in respect of 2015 clawback provisions will operate. Under these provisions the committee has the discretion to require clawback in certain circumstances for a defined period following payment or vesting.
Following changes to pension tax legislation that came into force from April 2011, an equivalent cash alternative may be offered if an individual exceeds the lifetime or annual allowance.
Payments for loss of office No loss of office payments have been made in the year.
• notional capital which was voluntarily deferred into the staff underwriting plan will continue until the closure of the relevant underwriting years, when he will receive repayment of notional capital, along with any profit results payable or reduction for any loss result.
External appointments Andrew Horton has been a non-executive director of Man Group plc since 3 August 2013, and he retains the fees in respect of this appointment. Fees for the year were £80,000.
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 nonexecutive director. No non-executive director is involved in the determination of their fees. The board reviews fees annually.
Non-executive directors are appointed for fixed terms, normally for three years, and may be reappointed for future terms. Non-executive directors are typically appointed through a selection process that assesses whether the candidate brings the desired competencies and skills to the group. The board has identified several key competencies for non-executive directors to complement the existing skill-set of the executive directors. These competencies may include: • insurance sector expertise; • asset management skills; • public company and corporate governance experience; • risk management skills; • finance skills; and • IT and operations skills.
For executive directors there is no unexpired term as each of the executive directors’ contracts is on a rolling basis.
Other incentive arrangements at Beazley (not applicable to executive directors): Element Objective Summary
In addition to profit related pay, underwriters are also eligible to receive a discretionary bonus, based upon performance, from the enterprise bonus pool. A proportion of this bonus may be paid in deferred shares, which vest after three years subject to continued employment.
CEO pay increase in relation to all employees Percentage change in remuneration from 31 Dec 2014 to 31 Dec 2015
Padraic J O'Connor 30,000 – – – – – Vincent J Sheridan 20,000 – – – – – Kenneth P Sroka – – – – – – Rolf A W Tolle 60,000 – – – – –
Notes to share plan interests table 1 2010 LTIP award details. Awards were made on 18 February 2010 at a mid-market share price of 107.2p (110.13p D A Horton only). 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. The 50% remaining award is measured over a five year period. NAVps < RFR +10% p.a. equates to 0% 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.
2 2011 LTIP award details. Awards were made on 14 February 2011 at a mid-market share price of 132.7p. 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 +10% p.a. equates to 0% 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.
3 2012 LTIP award details. Awards were made on 30 March 2012 at a mid-market share price of 143.43p. 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.
4 2013 LTIP award details. 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.
8 2014 LTIP award details. 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.
9 2015 LTIP award details. 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.
10 Share prices. The market price of Beazley ordinary shares at 31 December 2015 was 390.7p and the range during the year was 273.6p to 398.9p.
Annual general meeting At the forthcoming annual general meeting to be held on 24 March 2016, an advisory resolution will be proposed to approve this annual remuneration report.
Salaries for 2016 are: • D Andrew Horton: £448,000 • Martin L Bride: £313,100 • Adrian P Cox: £336,200 • Neil P Maidment: £336,200 • Clive A Washbourn: There is no maximum salary opportunity. Any salary increases will generally reflect our standard approach to all-employee salary increases across the group. Higher increases may be made in a range of circumstances where the committee considers that a larger increase is appropriate, including (but not limited to): • a new appointment • a change in role or adoption of additional responsibilities
To link reward to short term financial performance and individual contribution.
Additional alignment with shareholders’ interests through the operation of bonus deferral.
Deferred share awards are subject to a malus provision, whereby the committee may determine that unvested shares will be forfeited in certain circumstances, such as a material misstatement of accounts or a significant adverse group development.
Individual payouts to executive directors are discretionary and take into account the individual’s contribution and, where relevant, the performance of their division.
LTIP To align the senior management team’s interests to the long term performance of the group by setting performance targets over the longer term.
Awards are normally in the form of nil-cost options with a ten-year term, but may also be in the form of a conditional award.
For 2014, awards of 200% of salary for the CEO and 150% of salary for other executive directors.
Under the plan executive directors and selected staff may voluntarily defer part of their bonus into an underwriting syndicate. Capital commitments can be lost if underwriting performance is poor.
Payments are limited to the returns on the investment in the underwriting syndicate. The level of capital commitment is limited by the bonus opportunity.
Legacy defined benefit pension arrangements are in place for certain executives (Adrian P Cox, Neil P Maidment and Clive A Washbourn). Further service accruals ceased on 31 March 2006.
SAYE To create staff alignment with the group and promote a sense of ownership.
Monthly contribution limit at a level that is broadly in line with the UK SAYE plan.
To create staff alignment with the group and promote a sense of ownership.
Executive directors may participate in any all-employee HMRC approved share plans adopted by the company.
Executive directors would participate on the same terms as all employees.
1,000,000 shares. The award is subject to pre-tax divisional return on equity (ROE) performance and continued employment, measured over three years (50%) and five years (50%): 20% vesting for 15% divisional ROE performance, 100% vesting for 25% divisional ROE performance, with straight line vesting between points.
Conditional awards were made on 27 April 2009 at the time of M L Bride’s recruitment. The 150,000 shares vest in four equal tranches on each of the third, fourth, fifth and sixth anniversaries.
Expenses incurred in the performance of non-executive duties for the company may be reimbursed or paid for directly by the company, including any tax due on the expenses.
Total fees paid to non-executive directors will remain within the limit stated in the articles of association.
Company law requires the directors to prepare group and parent company financial statements for each financial year. Under that law they are required to prepare the group financial statements in accordance with IFRSs as adopted by the EU and applicable law and have elected to prepare the parent company financial statements on the same basis.
Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the group and parent company and of their profit or loss for that period. In preparing each of the group and parent company financial statements, the directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and estimates that are reasonable and prudent; • state whether they have been prepared in accordance with IFRSs as adopted by the EU; and • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the group and the parent company will continue in business.
The directors are responsible for the maintenance and integrity of the corporate and financial information included on the company’s website. Legislation in the UK and Jersey governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Our opinion on the financial statements is unmodified We have audited the financial statements of Beazley plc (‘Beazley’) for the year ended 31 December 2015 which comprise the consolidated statement of profit or loss, the consolidated and parent company statements of comprehensive income, the consolidated and parent company statements of financial position, the consolidated and parent company statements of cash flows, the consolidated and parent company statements of changes in equity and the related notes. Our audit was conducted in accordance with International Standards on Auditing (ISAs) (UK and Ireland).
• assessment of the allocation of assets into the fair value hierarchy as disclosed in note 16, placing specific emphasis on the classification of hedge funds and higher credit risk assets where a greater degree of judgment is required.
The risks in these areas include the valuation of reinsurance assets and insurance receivables, being the recoverability of insurance and reinsurance debtors (notes 18, 19 and 24) and the appropriateness of premium estimates (note 3). All of these balances require judgement to be applied by the group to the valuation and, in terms of processing, require manual adjustments to be made, which we consider on a substantive basis.
Reinsurance assets and insurance receivables • Evaluation and testing of key controls over the processes designed to record and monitor insurance and reinsurance debtors; • inspection of management’s aged analysis for recoveries as at 31 December 2015; • understanding the terms of the reinsurance programmes in place and conducting relevant substantive procedures and substantive analytical procedures to assess the reasonableness of the reinsurance assets relative to gross provisions; • considering credit ratings for reinsurers; • benchmarking with other market participants where possible (e.g. to consider the bad debt provision percentages applied to counterparties) and against past experience; and
Premium estimates • Evaluation of controls around premium estimates across all lines of business; • assessment of the internal peer review process in place at Beazley to challenge the premium estimates established and the timeliness of updates; • testing by our actuarial specialists in assessing these amounts where the nature or calculation of the amounts is complex and/or judgmental; • critical assessment of the estimates involved in recording business written by binders to ensure the methodology was appropriate in the context of the timing of business written throughout the year; and
We report 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 2014: $1m ($0.5m for non-technical)) in addition to other audit misstatements below that threshold that we believe warranted reporting on qualitative grounds.
The audit work performed by the group and component auditors covered 99.7% of group revenue, 99.9% of profit before tax and 96.8% of group total assets.
Our opinion on other matters prescribed under the terms of our engagement is unmodified In addition to our audit of the financial statements, the directors have engaged us to audit the information in the directors’ remuneration report that is described as having been audited, which they have decided to prepare as if the company were required to comply with the requirements of Schedule 8 to The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (SI 2008 No. 410) made under the UK Companies Act 2006.
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 2018; or • the disclosures in note 1 of the financial statements concerning the use of the going concern basis of accounting.
We have nothing to report in respect of matters on which we are required to report by exception ISAs (UK and Ireland) require that we report to you if, based on the knowledge we acquired during our audit, we have identified other information in the annual report that contains a material inconsistency with either that knowledge or the financial statements, a material misstatement of fact, or that is otherwise misleading.
In particular, we are required to report to you if: • we have identified material inconsistencies between the knowledge we acquired during our audit and the directors’ statement that they consider that the annual report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the group’s performance, business model and strategy; or
Under the Companies (Jersey) Law 1991 we are required to report to you if, in our opinion: • adequate accounting records have not been kept by the parent company; • returns adequate for our audit have not been received from branches not visited by us; • the parent company financial statements are not in agreement with the accounting records and returns; or • we have not received all the information and explanations we require for our audit.
Responsibilities of our report, responsibilities and restriction on use As explained more fully in the directors’ responsibilities statement set out on page 107, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the group and parent company financial statements in accordance with applicable law and International Standards on Auditing (ISAs) (UK & Ireland). Those standards require us to comply with the Financial Reporting Council’s Ethical Standards for Auditors.
Our report is made solely to the parent company’s members, as a body, in accordance with Article 113A of the Companies (Jersey) Law 1991. Our audit work has been undertaken so that we might state to the parent company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the parent company and the parent company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
Financial statements 113 Consolidated statement of profit or loss 114 Statement of comprehensive income 115 Statement of changes in equity 116 Statements of financial position 117 Statements of cash flows 118 Notes to the financial statements 177 Glossary www.beazley.com112 Beazley Annual report 2015
Gross premiums written 3 2,080.9 2,021.8 Written premiums ceded to reinsurers (367.8) (289.1) Net premiums written 3 1,713.1 1,732.7
Insurance claims 974.1 899.5 Insurance claims recoverable from reinsurers (160.2) (81.6) Net insurance claims 3 813.9 817.9
Company Profit for the year attributable to equity shareholders 379.7 207.8 Total comprehensive income recognised 379.7 207.8
Statement of changes in equity for the year ended 31 December 2015
Deferred tax asset 28 7.1 – 9.0 – Investment in subsidiaries 31 – 747.2 – 747.2 Investment in associates 14 10.0 – 10.5 – Deferred acquisition costs 15 226.2 – 222.7 –
The financial statements were approved by the board of directors on 3 February 2016 and were signed on its behalf by: D Holt Chairman
Cash flow from financing activities Acquisition of own shares in trust 22 (3.9) (3.9) (12.5) (12.5) Repayment of borrowings 25 – – – –
Notes to the financial statements 1 Statement of accounting policies Beazley plc is a company incorporated in Jersey and domiciled in Ireland. The group financial statements for the year ended 31 December 2015 comprise the parent company, its subsidiaries and the group’s interest in associates.
The principal activity of the company and its subsidiaries (the group) is to participate as a specialist insurer which transacts primarily commercial lines of business through its subsidiaries and through Lloyd’s syndicates.
Of the upcoming accounting standard changes that we are aware of, we anticipate that IFRS 4 Phase II, IFRS 9 and IFRS 15 will have the most material impact to the financial statements presentation and disclosures. The accounting developments and implementation timelines of these standards are being closely monitored and the impacts of the standards themselves are being monitored. Full impact analysis in respect of these standards is expected to be completed at least 12 months prior to the effective date of each standard. A brief overview of these standards is provided below; • IFRS 4 Phase II will replace IFRS 4 Phase I (An interim standard that allows insurers to continue to use various accounting practices already in place) with a single principle based accounting framework applicable to all types of insurance contracts (including reinsurance contracts); • IFRS 9 provides a reform of financial instruments accounting to supersede IAS 39 financial instruments: recognition and measurement. The standard contains the requirements for a) the classification and measurement of financial liabilities; b) a new impairment methodology and c) general hedge accounting. EU endorsement of IFRS 9 may continue to be delayed for insurers to align better with the release and adoption of IFRS 4 Phase II; and
Revenue from contracts accounted for under IFRS 4 is outside the scope of IFRS 15 however the group will have to apply the new revenue recognition standard to non-insurance contracts. Furthermore, the group may have to apply the new standard to non-insurance components of contracts traditionally considered to be insurance contracts. The new standard’s requirement for accounting for variable consideration could change the timing of revenue recognition for non-insurance contracts issued by the group.
www.beazley.com120 Beazley Annual report 2015 1 Statement of accounting policies continued For all business combinations from 1 January 2010: (i) Transaction costs, other than those associated with the issue of debt or equity securities, that the group incurs in connection with a business combination, are expensed as incurred.
(ii) In addition, any consideration transferred does not include amounts related to the settlement of pre-existing relationships.
Such amounts are recognised in profit or loss. (iii) Any contingent consideration is measured at fair value at the acquisition date.
Equity accounting is discontinued when the group no longer has significant influence over the investment.
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.
c) Group companies The results and financial position of the group companies that have a functional currency different from the group presentational currency are translated into the presentational currency as follows: • assets and liabilities are translated at the closing rate ruling at the statement of financial position date; Notes to the financial statements continued
b) Unearned premiums A provision for unearned premiums (gross of reinsurance) represents that part of the gross premiums written that it is estimated will be earned in the following financial periods. It is calculated using the daily pro-rata method under which the premium is apportioned over the period of risk.
Claims These include the cost of claims and claims handling expenses paid during the period, together with the movements in provisions for outstanding claims, claims incurred but not reported (IBNR) and claims handling provisions. The provision for claims comprises amounts set aside for claims advised and IBNR, including claims handling expenses.
Liability adequacy testing At each reporting date, liability adequacy tests are performed to ensure the adequacy of the claims liabilities net of DAC and unearned premium reserves. In performing these tests, current best estimates of future contractual cash flows, claims handling and administration expenses as well as investment income from the assets backing such liabilities are used. Any deficiency is immediately charged to the statement of profit or loss, initially by writing off DAC and subsequently by establishing a provision for losses arising from liability adequacy tests (‘unexpired risk provision’).
Ceded reinsurance These are contracts entered into by the group with reinsurers under which the group is compensated for losses on contracts issued by the group that meet the definition of an insurance contract. Insurance contracts entered into by the group under which the contract holder is another insurer (inwards reinsurance) are included with insurance contracts.
Goodwill has an indefinite life and is annually tested for impairment. Goodwill is allocated to each cash-generating unit (being the group’s operating segments) for the purpose of impairment testing. Goodwill is impaired when the net carrying amount of the relevant cash-generating unit (CGU) exceeds its recoverable amount, being the higher of its value in use and fair value less costs to sell. Value in use is defined as the present value of the future cash flows expected to be derived from the CGU. On transition to IFRS at 1 January 2004, any goodwill previously amortised or written off was not reinstated.
b) Financial assets at fair value through profit or loss Except for derivative financial instruments and other financial assets listed in policies (f) and (g) below, all financial assets are designated as fair value through the statement of profit or loss upon initial recognition because they are managed and their performance is evaluated on a fair value basis. Information about these financial assets is provided internally on a fair value basis to the group’s key management. The group’s investment strategy is to invest and evaluate their performance with reference to their fair values.
When available, the group measures the fair value of an instrument using quoted prices in an active market for that instrument. A market is regarded as active if quoted prices are readily and regularly available as well as representing actual and regularly occurring market transactions on an arm’s length basis.
Notes to the financial statements continued 1 Statement of accounting policies continued Assets and long positions are measured at a bid price; liabilities and short positions are measured at an asking price. These prices are monitored and deemed to approximate exit price. Where the group has positions with offsetting risks, mid-market prices are used to measure the offsetting risk positions and a bid or asking price adjustment is applied only to the net open position as appropriate. Fair values reflect the credit risk of the instrument and include adjustments to take account of the credit risk of the group entity and counterparty where appropriate. Fair value estimates obtained from models are adjusted for any other factors, such as liquidity risk or model uncertainties, to the extent that the group believes a third-party market participant would take them into account in pricing a transaction.
e) Hedge funds, equity linked funds and illiquid credit assets The group invests in a number of hedge funds, equity linked funds and illiquid credit assets for which there are no available quoted market prices. The valuation of these assets is based on fair value techniques (as described above). The fair value of our hedge fund portfolio is calculated by reference to the underlying net asset values (NAVs) of each of the individual funds. Consideration is also given to adjusting such NAV valuations for any restriction applied to distributions, the existence of side pocket provisions and the timing of the latest available valuations. At certain times, we will have uncalled unfunded commitments in relation to our illiquid credit assets. These uncalled unfunded commitments are actively monitored by the group and are disclosed in the notes to the financial statements. The additional investment into our illiquid credit asset portfolio is recognised on the date that this funding is provided by the group.
Finance costs comprise interest, fees paid for the arrangement of debt and letter of credit facilities, and commissions charged for the utilisation of letters of credit. These costs are recognised in the statement of profit or loss using the effective interest method.
In addition, finance costs include gains on the early redemption of the group’s borrowings. These gains are recognised in the statement of profit or loss, being the difference between proceeds paid plus related costs and the carrying value of the borrowings redeemed.
Derivative assets and liabilities are offset and the net amount reported in the statement of financial position when there is a legally enforceable right to set off the recognised amounts and the parties intend to settle on a net basis, or realise the assets and settle the liability simultaneously.
l) Impairment of financial assets The group considers evidence of impairment for financial assets measured at amortised cost at both a specific asset and collective level. The group assesses at each reporting date whether there is objective evidence that a specific financial asset measured at amortised cost is impaired. A financial asset is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that have occurred after the initial recognition of the assets and that event has an impact on the estimated cash flows of the financial asset that can be reliably estimated. Assets that are not individually significant are collectively assessed for impairment by grouping together assets with similar risk characteristics.
If there is objective evidence that impairment exists, the amount of the loss is measured as the difference between the asset’s carrying amount and the value of the estimated future cash flows discounted at the financial asset’s original effective interest rate. The amount of the loss is recognised in the statement of profit or loss.
In assessing collective impairment, the group uses historical trends of the probability of default, the timing of recoveries and the amount of loss incurred, adjusted for management’s judgement as to whether current economic and credit conditions are such that the actual losses are likely to be greater or lesser than those suggested by historical trends.
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.
Notes to the financial statements continued 1 Statement of accounting policies continued A defined benefit plan is a pension plan that defines an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors like age, years of service and compensation. The pension costs are assessed using the projected unit credit method. Under this method the costs of providing pensions are charged to the statement of profit or loss so as to spread the regular costs over the service lives of employees in accordance with the advice of the qualified actuary, who values the plans annually. The net pension obligation is measured at the present value of the estimated future net cash flows and is stated net of plan assets.
The grant-date fair value of share-based payment awards granted to employees is recognised as an employee expense, with a corresponding increase in equity, over the period that the employees become unconditionally entitled to the awards. The amount recognised as an expense is adjusted to reflect the number of awards for which the related service and non-market performance conditions are expected to be met, such that the amount ultimately recognised as an expense is based on the number of awards that meet the related service and non-market performance conditions at the vesting date. For share-based payment awards with non-vesting conditions, the grant-date fair value of the share-based payment is measured to reflect such conditions and there is no true-up for differences between expected and actual outcomes.
Provisions and contingencies Provisions are recognised when the group has a present legal or constructive obligation as a result of a past event, it is probable that an outflow of resources or economic benefits will be required to settle the obligation, and a reliable estimate of the obligation can be made. Where the group expects a provision to be reimbursed, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain.
The eight categories of risk have been considered in context of the company (Beazley plc); the following areas are applicable to the company: market, operational, regulatory and legal and liquidity. The following disclosures cover the company to the extent that these areas are applicable.
Notes to the financial statements continued 2 Risk management continued Our underwriters calculate premiums for risks written based on a range of criteria tailored specifically to each individual risk. These factors include but are not limited to the financial exposure, loss history, risk characteristics, limits, deductibles, terms and conditions and acquisition expenses.
To address this, the group sets out the exposure that it is prepared to accept in certain territories to a range of events such as natural catastrophes and specific scenarios which may result in large industry losses. This is monitored through regular calculation of realistic disaster scenarios (RDS). The aggregate position is monitored at the time of underwriting a risk, and reports are regularly produced to highlight the key aggregations to which the group is exposed.
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 2015 the group operated to a catastrophe risk appetite for a probabilistic 1-in-250 years US event of $462.0m net of reinsurance. This represented a reduction in our catastrophe risk appetite of 13% compared to 2014.
Los Angeles quake (2014: $78.0bn) 575.1 229.5 Gulf of Mexico windstorm (2014: $112.0bn) 562.9 241.9 US Northeast windstorm (2014: $78.0bn) 497.2 243.9
The net exposure of the group to each of these modelled events at a given point in time is a function of assumptions made about how and where the event occurs, its magnitude, the amount of business written that is exposed to each event and the reinsurance arrangements in place.
Financial statem ents 2 Risk management continued The board has also established a risk budget for the aggregation of data breach exposure arising from our cyber policies. This risk budget is monitored by reference to the largest of seven realistic disaster scenarios which are run to estimate the total loss arising from specified scenarios including; the failure of a data aggregator, the failure of a shared hardware or software platform and the failure of a cloud provider. Whilst the development of this analysis is still in its infancy, given the scarcity of actual events observed against which to calibrate, it starts to provide an objective mechanism for the board to understand, monitor and manage the risk of aggregated losses from this peril
b) Reinsurance risk Reinsurance risk to the group arises where reinsurance contracts put in place to reduce gross insurance risk do not perform as anticipated, result in coverage disputes or prove inadequate in terms of the vertical or horizontal limits purchased. Failure of a reinsurer to pay a valid claim is considered a credit risk which is detailed in the credit risk section on page 134.
Notes to the financial statements continued 2 Risk management continued The reinsurance security committee (RSC) examines and approves all reinsurers to ensure that they possess suitable security. The group’s ceded reinsurance team ensures that these guidelines are followed, undertakes the administration of reinsurance contracts and monitors and instigates our responses to any erosion of the reinsurance programmes.
c) Claims management risk Claims management risk may arise within the group in the event of inaccurate or incomplete case reserves and claims settlements, poor service quality or excessive claims handling costs. These risks may damage the group brand and undermine its ability to win and retain business, or incur punitive damages. These risks can occur at any stage of the claims life cycle. The group’s claims teams are focused on delivering quality, reliability and speed of service to both internal and external clients. Their aim is to adjust and process claims in a fair, efficient and timely manner, in accordance with the policy’s terms and conditions, the regulatory environment, and the business’ broader interests. Prompt and accurate case reserves are set for all known claims liabilities, including provisions for expenses, as soon as a reliable estimate can be made of the claims liability.
Senior management performance Management stretch is the risk that business growth might result in an insufficient or overly complicated management team structure, thereby undermining accountability and control within the group. As the group expands its worldwide business in the UK, the US, Europe, South America, Asia, Australia and the Middle East, management stretch may make the identification, analysis and control of group risks more complex.
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 2015, this permitted variance from the forecast investment return was set at $120.0m. For 2016, 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.
Financial statem ents 2 Risk management continued a) Foreign exchange risk The functional currency of Beazley plc and its main trading entities is the US dollar and the presentational currency in which the group reports its consolidated results is the US dollar. The effect of this on foreign exchange risk is that the group is mainly exposed to fluctuations in exchange rates for non-dollar denominated transactions and to net asset translation risk on non-dollar functional currency entities.
In 2015, 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 current information.
Fixed and floating rate debt securities 1,246.5 600.7 465.3 422.0 322.6 211.7 – 3,268.8 Cash and cash equivalents 676.9 – – – – – – 676.9 Derivative financial instruments 4.6 – – – – – – 4.6
Fixed and floating rate debt securities 1,531.7 765.6 558.0 269.5 254.7 137.8 – 3,517.3 Cash and cash equivalents 364.2 – – – – – – 364.2 Derivative financial instruments 0.8 – – – – – – 0.8
Borrowings include tier 2 subordinated debt that is due in October 2026 with a first call at the group’s option in October 2016. If the debt is settled when due in October 2026 the duration of the debt falls within the >10 yrs category. If the debt is called in October 2016, the duration of the debt falls within the <1 yr (2014: 1-2 yrs) category. Also included in borrowings 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.
Financial statem ents 2 Risk management continued c) Price risk Financial assets and derivatives that are recognised in the statement of financial position at their fair value are susceptible to losses due to adverse changes in prices. This is referred to as price risk.
Notes to the financial statements continued 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.
2.5 Credit risk Credit risk arises where counterparties fail to meet their financial obligations in full as they fall due. The primary sources of credit risk for the group are: • reinsurers – whereby reinsurers may fail to pay valid claims against a reinsurance contract held by the group; • brokers and coverholders – whereby counterparties fail to pass on premiums or claims collected or paid on behalf of the group; • investments – whereby issuer default results in the group losing all or part of the value of a financial instrument and derivative financial instrument; and • cash and cash equivalents.
The group limits exposure to a single counterparty or a group of counterparties and analyses the geographical locations of exposures when assessing credit risk.
An approval system also exists for all new brokers, and broker performance is carefully monitored. Regular exception reports highlight trading with non-approved brokers, and the group’s credit control function frequently assesses the ageing and collectability of debtor balances. Any large, aged items are prioritised and where collection is outsourced, incentives are in place to support these priorities.
Financial assets at fair value – fixed and floating rate debt securities 3,273.3 235.5 8.5 – – 3,517.3 – equity linked funds – – – – 145.9 145.9 – hedge funds – – – – 367.0 367.0 – illiquid credit assets – – – – 45.9 45.9 – derivative financial instruments – – – – 1.3 1.3 Insurance receivables – – – – 587.0 587.0 Reinsurance assets 1,053.2 – – – – 1,053.2 Other receivables 20.2 – – – – 20.2 Cash and cash equivalents 364.2 – – – – 364.2
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 128). 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.
Financial statem ents 2 Risk management continued The following is an analysis by business segment of the estimated timing of the net cash flows based on the net claims liabilities* balance held at 31 December: Within 1 year $m 1-3 years $m 3-5 years $m
Notes to the financial statements continued 2 Risk management continued The next two tables summarise the carrying amount at reporting date of financial instruments analysed by maturity date.
Fixed and floating rate debt securities 978.4 618.4 568.5 474.6 336.6 292.3 – 3,268.8 Derivative financial instruments 4.6 – – – – – – 4.6 Cash and cash equivalents 676.9 – – – – – – 676.9 Insurance receivables 732.7 – – – – – – 732.7 Other receivables 31.5 – – – – – – 31.5
Fixed and floating rate debt securities 805.6 833.1 690.2 395.6 370.3 422.5 – 3,517.3 Derivative financial instruments 0.8 – – – – – – 0.8 Cash and cash equivalents 364.2 – – – – – – 364.2 Insurance receivables 587.0 – – – – – – 587.0 Other receivables 20.2 – – – – – – 20.2 Other payables (255.5) – – – – – – (255.5)
Borrowings include tier 2 subordinated debt that is due in October 2026 with a first call at the group’s option in October 2016. If the debt is settled when due in October 2026 the maturity date of the debt falls within the >10 yrs category. If the debt is called in October 2016, the maturity date of the debt falls within the <1 yr (2014: 1-2 yrs) category.
Financial statem ents 2 Risk management continued 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.
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 2015, we have surplus capital of 49% of ECR, including Solvency II adjustments. Following payment of the second interim dividend of 6.6p per share and special dividend of 18.4p per share, the surplus reduces to 35% compared to our current target range of 15% to 25% of ECR.
2.10 Company risk † The company is exposed to the same interest rate and liquidity risk exposure experienced on its mutual borrowings with the group. The company’s exposure can be seen in section 2.3b and 2.7. The company also experiences operational, regulatory and legal risks as defined in section 2.4 and 2.6.
Reinsurance This segment specialises in writing property catastrophe, property per risk, casualty clash, aggregate excess of loss and pro-rata business.
Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. The reporting segments do not cross-sell business to each other. There are no individual policyholders who comprise greater than 10% of the group’s total gross premiums written.
Notes to the financial statements continued 3 Segmental analysis continued b) Segment information
Segment results Gross premiums written 119.8 269.3 123.6 353.1 199.9 1,015.2 2,080.9
Additional information Investment in associates – – 2.5 – – 7.5 10.0 Impairment of non-financial assets – – – – – – –
Share of loss of associates – – (0.3) – – (0.8) (1.1)
Net earned premiums UK (Lloyd’s) 1,637.8 1,617.2 US (Non-Lloyd’s) 60.9 41.7 $m $m
Capital expenditure Non-US 2.7 5.5 4 Net investment income $m $m
Interest and dividends on financial investments at fair value through profit or loss 70.3 67.1 Interest on cash and cash equivalents 0.5 0.6 Realised losses on financial investments at fair value through profit or loss (18.5) (16.3) Net unrealised fair value gains on financial investments at fair value through profit or loss 15.5 41.9 Investment income from financial investments 67.8 93.3 Investment management expenses (10.2) (10.3)
Commissions received from Beazley service companies 16.4 14.2 Profit commissions from syndicates 623/6107 12.4 9.9 Agency fees from 623 1.9 2.3 Other income 0.2 0.2 6 Operating expenses $m $m
Wages and salaries 123.6 120.7 Short term incentive payments 75.6 68.7 Social security 17.7 18.7 Share-based remuneration 17.5 15.6 Pension costs* 10.4 10.0
* Pension costs refer to the contributions made under the defined contribution scheme. Further information on the defined benefit pension scheme can be found in note 27.
Notes to the financial statements continued 8 Finance costs $m $m
Effects of: – tax rates in foreign jurisdictions 7.7 4.9 – non-deductible expenses 0.8 3.5 – tax relief on share based payments – current and future years (2.3) (1.4) – (over)/under provided in prior years (6.5) 3.3 – change in UK tax rates* (0.2) 0.4 – foreign exchange on tax – 0.7 Tax charge for the period 35.0 44.1
The weighted average applicable tax rate was 15.2% (2014: 14.8%). This is the weighted average of the statutory tax rates applied to the profits earned in each country in which the group operates.
As noted on page 43, the group has assessed the potential impact of diverted profits tax for the current year and is of the view that no liability arises. The ultimate outcome may differ, however it is unlikely to have a material effect on the group’s financial performance for the current year.
* The Finance Act 2015, which provides for reduction in the UK Corporation tax rate down to 19% effective from 1 April 2017 and to 18% effective from 1 April 2020, was substantively enacted on 26 October 2015. These rate reductions to 19% and 18% will reduce the company’s future current tax charge and have been reflected in the calculation of the deferred tax balance at 31 December 2015.
Basic Basic earnings per share are calculated by dividing profit after tax of $249.0m (2014: $217.8m) by the weighted average number of shares in issue during the year of 510.4m (2014: 505.4m). The shares held in the Employee Share Options Plan (ESOP) of 9.7m (2014: 16.0m) have been excluded from the calculation, until such time as they vest unconditionally with the employees.
Other additions – – – 5.3 – 5.3 Foreign exchange loss – – – (0.8) – (0.8)
Amortisation for the year – – – (4.6) – (4.6) Foreign exchange gain – – – 3.1 – 3.1
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 2015, the financial budgets for the life, accident & health segment, in particular, have been challenged in light of the losses incurred in the previous two years 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.
Depreciation charge for the year (0.2) (1.6) (0.8) (2.4) Foreign exchange gain/(loss) (0.1) 0.7 0.3 1.0
As at 1 January 10.5 8.4 Investment in Equinox Global Limited – 1.6 Investment in Capson Corp. Inc – 1.6 Share of loss after tax (0.5) (1.1) As at 31 December 10.0 10.5
The investment in the associate is unlisted and is equity accounted using unaudited financial information as at 31 December 2015.
Notes to the financial statements continued 16 Financial assets and liabilities 2015 $m $m
Derivative financial assets 4.6 1.3 Total financial assets at fair value 3,842.2 4,077.4
The amounts expected to mature within and after one year are: $m $m
As noted on page 124 consideration is also given when valuing the hedge funds to any restriction applied to distributions, the existence of side pocket provisions and the timing of the latest valuations. The adjustment to the underlying net asset value of the funds as a result of these considerations was $nil at 31 December 2015 (2014: $nil).
The retail bond was issued by the company in 2012. Refer to note 25 for further details of our borrowings and associated repayment terms.
Level 3 – Valuations based on inputs that are unobservable or for which there is limited market activity against which to measure fair value.
Level 3 investments During 2015, the group’s investment committee approved additional allocations to an illiquid asset portfolio comprising investments in funds managed by third party managers (generally closed end limited partnerships or open ended funds). While the funds provide full transparency on their underlying investments, the investments themselves are in many cases private and unquoted, and are therefore classified as level 3 investments.
Financial statem ents 16 Financial assets and liabilities continued The following table shows the fair values of financial assets and financial liabilities, including their levels in the fair value hierarchy.
Financial assets measured at fair value Fixed and floating rate debt securities
Financial liabilities measured at fair value Derivative financial liabilities 0.1 – – 0.1
– High yield – 80.1 – 80.1 – Senior secured loans – 101.5 – 101.5 – Asset backed securities – 378.6 – 378.6 Equity linked funds – 145.9 – 145.9 Hedge funds – 367.0 – 367.0 Illiquid credit assets – 7.9 38.0 45.9 Derivative financial assets 1.3 – – 1.3 Total financial assets measured at fair value 1,462.7 2,576.7 38.0 4,077.4
Financial liabilities not measured at fair value Retail bond – 124.7 – 124.7 Tier 2 subordinated debt – 127.1 – 127.1 Total financial liabilities not measured at fair value – 251.8 – 251.8
As part of its standard investment activities the group holds fixed interest investments in asset backed securities, as well as capital growth investments in equity linked funds, hedge funds and illiquid credit assets which in accordance with IFRS 12 are classified as unconsolidated structured entities. The group does not sponsor any of the unconsolidated structured entities. The assets classified as unconsolidated structured entities are held at fair value on the statement of financial position.
Asset backed securities 12.7 378.6 Equity linked funds 147.5 145.9 Hedge funds 329.0 367.0 Illiquid credit assets 92.3 45.9 Investments through unconsolidated structured entities 581.5 937.4
Capital growth assets represent 98% of investments through unconsolidated structured entities as at 31 December 2015. The capital growth assets are held in investee funds managed by asset managers who apply various investment strategies to accomplish their respective investment objectives. The group’s investments in investee funds are subject to the terms and conditions of the respective investee fund’s offering documentation and are susceptible to market price risk arising from uncertainties about future values of those investee funds. Investment decisions are made after extensive due diligence on the underlying fund, its strategy and the overall quality of the underlying fund’s manager and assets. All of the investee funds in the investment portfolio are managed by portfolio managers who are compensated by the respective Investee funds for their services. Such compensation generally consists of an asset-based fee and a performance-based incentive fee and is reflected in the valuation of the fund’s investment in each of the investee funds. The right to request redemption of investments in asset backed securities, equity linked funds and hedge funds ranges in frequency from daily to semi-annually. The group did not sponsor any of the respective structured entities.
Sales (11.0) Total net gains recognised in profit or loss 3.4 – As at 31 December 89.7 38.0
Financial assets at fair value Fixed and floating rate debt securities 307.3 155.4 182.3 645.0 2,872.3 3,517.3
Notes to the financial statements continued 17 Derivative financial instruments In 2015 and 2014 the group entered into over-the-counter and exchange traded derivative contracts. The group had the right and the intention to settle each contract on a net basis.
Foreign exchange forward contracts 131.0 0.1 44.6 0.4 Bond future contract – – – 0.1
Cash at bank and in hand 585.8 261.0 Short term deposits and highly liquid investments 91.1 103.2
Cash at bank and in hand 18.4 1.2 21 Share capital
Share based payments – 17.5 – 17.5 Acquisition of own shares held in trust – – (3.9) (3.9) Transfer of shares to employees – (11.2) 21.0 9.8
Share based payments – 15.3 – 15.3 Acquisition of own shares held in trust – – (12.5) (12.5) Transfer of shares to employees – (11.6) 14.5 2.9
The merger reserve has arisen as a result of historic Beazley group restructuring. The most significant item is the reverse acquisition that occurred in 2009.
More information on the employee share trust reserve is included in note 23.
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. These shares are purchased on the market and carried at cost.
Notes to the financial statements continued 23 Equity compensation plans continued Further details of equity compensation plans can be found in the directors’ remuneration report on pages 85 to 106. The number and weighted average exercise prices of share options are as follows: Weighted average exercise price (pence per share)
Gross Claims reported and loss adjustment expenses 937.5 984.7 Claims incurred but not reported 2,588.4 2,540.2 Gross claims liabilities 3,525.9 3,524.9 Unearned premiums 1,060.8 1,022.5 Total insurance liabilities, gross 4,586.7 4,547.4
Financial statem ents 24 Insurance liabilities and reinsurance assets continued $m $m
A formal internal peer review process is then undertaken to determine the reserves held for accounting purposes which, in totality, are not lower than the actuarially established figure. The group also commissions an annual independent review to ensure that the reserves established are reasonable or within a reasonable range.
The group has a consistent reserving philosophy with initial reserves being set to include risk margins which may be released over time as uncertainty reduces.
– Premium rate change – Claims inflation – Mix of business – Reporting patterns – Settlement patterns – Judicial decisions – Professional judgement
– Life, accident & health – Marine – Political risks & contingency – Property – Reinsurance – Specialty lines
Since year end 2004, we have identified a range of possible outcomes for each class and underwriting year combination directly from our internal model (previously our individual capital assessment (ICA)) process. Comparing these with our pricing assumptions and reserving estimates gives our management team increased clarity into our perceived reserving strength and the relative uncertainties of the business written.
Notes to the financial statements continued 24 Insurance liabilities and reinsurance assets continued
Gross claims liabilities, group share ($m) 116.6 62.9 108.7 162.0 230.0 218.1 278.4 332.6 592.0 813.9 610.7 3,525.9 24 Insurance liabilities and reinsurance assets continued
Life, accident & health Most underwriting years have remained stable or have improved, with the exception of to 2014 which strengthened marginally following worse than anticipated experience on personal accident and income protection books.
Marine Positive claims experience on all underwriting years has led to improvements on the majority of underwriting years, in particular the release on earned catastrophe margin on 2014 due to benign experience. 2011 strengthened due to an increase within the Energy book.
Reinsurance Due to the continued benign catastrophe environment, 2014 saw a large improvement over the year. Other years improved where certainty increase on outstanding claims. Despite a gross release on the 2010 and 2011 underwriting years, the reinsurance on the large losses in these years lead to the net position remaining broadly stable in aggregate.
The fair values of the tier 2 subordinated debt and retail bond are based on quoted market prices. For the subordinated debt that is not quoted, a discounted cash flow model is used based on a current yield curve appropriate for the remaining term to maturity.
In November 2004, the group issued subordinated debt of $18m to JPMorgan Chase Bank, N.A. (JPMorgan). The loan is unsecured and interest is payable at the USD London interbank offered rate (LIBOR) plus a margin of 3.65% per annum. The subordinated notes are due in November 2034 and have been callable at the group’s option since 2009.
In September 2012, the group issued £75m of sterling denominated 5.375% notes due 2019. Interest at a fixed rate of 5.375% is payable in March and September each year.
In addition to these borrowings we operate a syndicated short term banking facility, managed through Lloyds Banking Group plc. In July 2015 we renewed our syndicated short term banking facility led by Lloyds Banking Group plc. The facility provides potential borrowings up to $225m. The agreement is based on a commitment fee of 0.4375% per annum and any amounts drawn are charged at a margin of 1.25% per annum. The cash element of the facility will last for three years, expiring 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.
The scheme exposes the group to additional actuarial, interest rate and market risk.
Contributions to the scheme are determined by a qualified actuary using the projected unit credit method as set out in the scheme rules and the most recent valuation was at 31 December 2015. The group expects to pay $1.5m in contributions to the scheme in 2015.
Movement in present value of funded obligations recognised in the statement of financial position Balance at 1 January 43.6 39.9 Interest cost 1.4 1.7 Actuarial (losses)/gains (0.1) 5.2 Benefits paid (0.4) (0.4) Foreign exchange gain (1.4) (2.8) Balance at 31 December 43.1 43.6
Movement in fair value of plan assets recognised in the statement of financial position Balance at 1 January 41.0 37.5 Expected return on plan assets 1.5 1.7 Actuarial gains 0.2 3.2 Employer contributions 1.5 1.7 Benefits paid (0.4) (0.4) Foreign exchange loss (1.4) (2.7) Balance at 31 December 42.4 41.0
Plan assets are comprised as follows: The actual gain on plan assets was $1.7m (2014: $4.9m).
Principal actuarial assumptions Discount rate 3.5% 3.4% Inflation rate 3.1% 3.0% Expected return on plan assets 3.5% 3.4% Future salary increases 3.1% 3.0% Future pensions increases 2.7% 2.6% 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
Financial statem ents 27 Retirement benefit obligations continued Sensitivity analyses Changes in the relevant actuarial assumptions would result in a change in the value of the funded obligation as shown below: Increase $m Decrease $m
Discount rate (0.5% increase) 5.9 – Inflation rate (0.3% decrease) – (3.0) Future salary changes (0.5% decrease) – (0.2 Life expectancy (1 year increase) 1.1 –
The movement in the net deferred income tax is as follows: Balance at 1 January 0.5 (56.3) Income tax credit 0.8 57.0 Amounts recorded through equity (0.1) 0.3 Foreign exchange translation differences (0.1) (0.5) Balance at 31 December 1.1 0.5
Balances due: Due (to)/from syndicate 623 (2.9) 7.3 Due to syndicate 6107 (34.8) (21.1) Due to syndicate 6050 (3.9) –
31 Parent company and subsidiary undertakings Beazley plc, a Jersey incorporated Irish domiciled company, is the ultimate parent and the ultimate controlling party within the group.
The following is a list of all the subsidiaries in the group: Country of incorporation
Beazley Group Limited* England 100% Intermediate holding company USD * Beazley Furlonge Holdings Limited England 100% Intermediate holding company USD Beazley Furlonge Limited England 100% Lloyd’s underwriting agents GBP Beazley Investments Limited England 100% Investment company USD Beazley Underwriting Limited England 100% Underwriting at Lloyd’s USD Beazley Management Limited England 100% Intermediate management company GBP Beazley Staff Underwriting Limited England 100% Underwriting at Lloyd’s USD Beazley Solutions Limited England 100% Insurance services GBP Beazley Underwriting Services Limited England 100% Insurance services GBP Beazley DAS Limited England 100% Dividend access scheme GBP Beazley Corporate Member (No.2) Limited England 100% Underwriting at Lloyd’s USD Beazley Corporate Member (No.3) Limited England 100% Underwriting at Lloyd’s USD Beazley Corporate Member (No.4) Limited England 100% Underwriting at Lloyd’s USD Beazley Corporate Member (No.5) Limited England 100% Underwriting at Lloyd’s USD Beazley Corporate Member (No.6) Limited England 100% Underwriting at Lloyd’s USD Beazley Re dac Ireland 100% Reinsurance of Lloyd’s business USD 747.2 Beazley Underwriting Pty Ltd Australia 100% Insurance services AUD Australian Income Protection Pty Ltd Australia 100% Insurance services AUD Beazley USA Services, Inc. USA 100% Insurance services USD Beazley Holdings, Inc. USA 100% Holding company USD Beazley Group (USA) General Partnership USA 100% General partnership USD Beazley Insurance Company, Inc. USA 100% Underwriting admitted lines USD First State Management Group, Inc. USA 100% Insurance services USD Beazley Limited Hong Kong 100% Insurance services HKD Beazley Middle East Limited Dubai 100% Insurance services USD Beazley Pte. Limited Singapore 100% Underwriting at Lloyd’s SGD Swift No.1 Limited** England 100% Intermediate holding company USD Swift No.2 Limited** England 100% Intermediate holding company USD
* Beazley plc holds direct investment in Beazley Group Limited of $2.
The funds are held in trust and can be used to meet claims liabilities should syndicates members fail to meet their claims liabilities. The funds can only be used to meet claim liabilities of the relevant member.
There are no other events that are material to the operations of the group that have occurred since the reporting date.
Capital growth assets These are assets that do not pay a regular income and target an increase in value over the long term. They will typically have a higher risk and volatility than that of the core portfolio. Currently these are the hedge funds, equity linked funds and illiquid credit assets.
Catastrophe reinsurance A form of excess of loss reinsurance which, subject to a specified limit, indemnifies the reinsured company for the amount of loss in excess of a specified retention with respect to an accumulation of losses resulting from a catastrophic event or series of events.
Expense ratio Ratio, in percentage terms, of the sum of expenses for acquisition of insurance contracts and administrative expenses to net earned premiums. The calculation is performed excluding the impact of foreign exchange on non-monetary items.
Medium tail A type of insurance where the claims may be made a few years after the period of insurance has expired.
Reinsurance to close (RITC) A reinsurance which closes a year of account by transferring the responsibility for discharging all the liabilities that attach to that year of account (and any year of account closed into that year), plus the right to buy any income due to the closing year of account, into an open year of account in return for a premium.
Treaty reinsurance A reinsurance contract under which the reinsurer agrees to offer and to accept all risks of certain size within a defined class.
• We employ highly skilled, experienced and specialist underwriters and claims managers
• We transact business through brokers and work with selected managing general agencies and managing general underwriters to improve distribution in specialist niches
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
Strategic report IFC Our business model and strategy Our key performance indicators 01 Our key differentiators 02 Entrepreneurial spirit 04 Strong partnerships 06 Diversified business 10 The moment of truth 12 30 years of profitable growth 14 Chairman’s statement 16 Chief executive’s statement 20 Q&A with the chief executive 22 Chief underwriting officer’s report 24 Performance by division 26 Life, accident & health 28 Marine 30 Political risks & contingency 32 Property 34 Reinsurance 36 Specialty lines 38 Financial review 38 Group performance 44 Balance sheet management 46 Capital structure 49 Operational update 52 Risk management 58 Responsible business 64 Directors’ report