Navigating change Strategic report IFC Highlights Our key performance indicators 01 Our key differentiators 02 Entrepreneurial spirit 03 Strong partnerships 04 Diversified business 08 Our business model 10 Navigating change 12 Management changes 16 Statement of the chair 18 Chief executive’s statement 22 Q&A with the chief executive 24 Chief underwriting officer’s report 28 Performance by division 30 Navigating change for 33 years 32 Financial review 32 Group performance 37 Balance sheet management 39 Capital structure 41 Operational update 44 Risk management 51 Responsible business 66 Section 172 statement 67 Directors’ report
Financial statements 137 Consolidated statement of profit or loss 138 Statements of comprehensive income 139 Statements of changes in equity 141 Statements of financial position 142 Statements of cash flows 143 Notes to the financial statements 207 Glossary
The world is constantly changing. From the Lloyd’s market to climate change, internal structure to management succession, change is a constant and navigating these is something Beazley increased focus on in 2019. Change also brings opportunities and the steps we have taken in preparation over the last year mean we are ready to take advantage of these opportunities in 2020 and beyond.
The interim and second interim dividend for 2019 has grown by 5%, which is in line with our dividend strategy.
Average five year return on equity of 13%. Our combined ratio has averaged 95% over five years.
Find out more within our Financial Statements on pages 136 to 206
We create value through the implementation of three key differentiators – consistently applied and nurtured across our specialist insurance operations around the world.
As companies grow, they often find it harder to maintain the entrepreneurial flame that brought them success in their early days. Below are two ways Beazley has met the challenge of sustaining its entrepreneurial spirit.
First, by a strong cultural bias towards openness and transparency. Organisations in which information is shared reluctantly, if at all, cannot hope to maintain an entrepreneurial culture because new products and new ways of doing business almost invariably spring from people sharing ideas and insights. Transparency is deeply rooted in Beazley’s culture, and information and ideas are widely shared.
One forum that exemplifies Beazley’s commitment to openness is the NexCo, an alternative executive committee comprising high potential employees – usually at an early stage in their careers – from around the company. The NexCo meets monthly and reviews the same briefing papers as Beazley’s executive committee. Its role is to exchange ideas, challenge the senior management team and suggest alternative strategic approaches. The NexCo was first established in 2018 and has made important contributions in a number of areas, including imagining the future skills needed for an underwriter in 2030 and what the roadmap looks like for how to move our talent from where it is today, to where we think it needs to be.
‘Our NexCo provides a platform for us to review the thoughts and views from a more diverse group of employees, enhancing entrepreneurial spirit, and allowing Beazley to make more informed decisions.’ Rachel Turk Head of corporate development 02 Beazley Annual report 2019 www.beazley.com
‘In 2019, we launched myBeazley in Germany and Spain and added new products to our offering in France and the UK. As the platform continues to grow it allows us to strengthen the partnerships we have and form new ones.’
As a leading participant in the Lloyd’s market, Beazley is constantly cooperating – as well as competing – with other Lloyd’s syndicates. Sometimes these relationships are formalised into Lloyd’s consortia or lineslip facilities, whereby syndicates allocate pre-determined capacity to particular classes of business. In 2019, Beazley partnered with other Lloyd’s syndicates to form consortia focusing on reputational risk and technology-enhanced marine cargo insurance.
Specialty lines 33% Cyber & executive risk 27% Property 14% Marine 10% Political, accident & contingency 9% Reinsurance 7%
Every underwriting portfolio will have peaks and troughs and Beazley’s underwriting profit was reduced to $4.8m in 2019. However, achieving an underwriting profit albeit small, is testament to the benefits of a carefully balanced portfolio of non-correlated lines of business that Beazley has built up over many years.
Diversified portfolio The spread of our overall portfolio by division and the impact this diversification has had on our combined ratio over the past ten years can be seen in the chart below.
We help insure in excess of 20% of the world’s ocean-going tonnage and are the pre-eminent leader of voyage and tow business in the London market. The aviation team provides cover for airlines and general aviation clients globally, ranging from start-up operations through to large commercial fleets. We have extensive experience insuring a wide variety of cargoes including project cargo, fine art and specie.
Find out more on page 26 Find out more on page 27 Find out more on page 27 07www.beazley.com Beazley Annual report 2019
Our distinctive brand, and the perceptions it generates, helps us to grow our business, sustain relationships and attract and retain talented people.
Underpinned by a robust, consistent strategy Our strategy is designed to achieve our vision to become, and be recognised as, the highest performing specialist insurer. • Prudent capital allocation to achieve a well diversified portfolio that is resistant to shocks in any individual line of business
• The creation of an environment in which talented individuals with entrepreneurial spirit can build successful business
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.
For staff We employ talented people and invest accordingly in expanding their skills and helping them build rewarding careers. We measure the impact of these investments in two main ways: • Monitoring staff retention levels; and
We target a diverse underwriting portfolio and actively manage the different insurance cycles to achieve consistent results year on year.
Beazley Underwriting Limited Provides capacity to our three Lloyd’s syndicates to write business through the Lloyd’s platform globally.
Find out more in the chief executive’s statement on pages 18 to 21
Over 5,000 brokers provided feedback on our underwriting and claims service 5,000+
For Beazley, the changes to be navigated took three main forms.
Market changes The first was market changes as rates for many lines of business climbed steeply to address surging claims or prolonged underpricing and, in some cases, both.
“International D&O rates are increasing faster than we have seen in many years” says James Eaton, head of Beazley’s specialty lines division. “This is being driven by a combination of losses and capacity withdrawals which we first saw in the London market in late 2018, and which has continued and spread across our regional offices in 2019.”
Speciality lines division brings growth The specialty lines division also includes Beazley’s healthcare liability practices, which have been a major area of growth in recent years and accounted for $198m in gross premiums written or approximately 20% of the division’s premium in 2019. Healthcare and management liability business are the areas most affected by social inflation – a sharp uptick in jury awards resulting in multi-million dollar claims. The phenomenon has been most prevalent in the US, but is manifesting across the world.
What’s driving social inflation The causes of social inflation have been much debated. Generally, they have been attributed to the growing use of third party litigation funding, more aggressive attorney advertising and increasing antagonism from jurors towards organisations that are perceived as having let down their customers or investors. In cases where the victims have also been physically hurt – such as patients injured as a result of hospital errors – jury awards can be particularly heavy.
Adrian Cox, Beazley’s chief underwriting officer, argues that social trends of this kind – which Beazley has witnessed several times in its 33 year history – are usually only resolved by government action, such as tort law reform. However, there is little impetus evident for tighter restrictions on jury awards in the US at present.
“Our healthcare claims team comprises former defence attorneys who are not afraid to take a case to court if a plaintiff’s demands are unreasonable,” says Steve Chang, team leader for healthcare claims. “We work closely with hospitals and other healthcare clients to identify the optimal defence strategy. In many cases, we may have seen similar claims play out in the past, whereas for our client it may well be the first time such an event has occurred.”
Many liability lines of business underwritten at Beazley have been less affected by social inflation and even in the affected lines, such as healthcare liability, the impact has varied by type of risk. Beazley underwrites a large and growing book of miscellaneous medical liability insurance, covering healthcare service providers of various kinds that are not hospitals or physicians, and many parts of this book have seen far lower claims activity than the large hospitals and health systems.
Risk is dynamic so, for any insurer, change is constant and inevitable. However, in 2019 changes came faster than usual, both for Beazley and the broader insurance industry.
The market for large risk property business, which Beazley underwrites in London and New York, is “very dynamic” Montminy says, with rates rising on average by 18% in 2019. “Brokers are looking for homes for clients. Whether or not we want to write them is the question. However, submission flow is strong.”
Exploring new data sources The team behind the Faster, Smarter Underwriting initiative, led by Adrian Cox and chief operating officer Ian Fantozzi, has also been looking to technology to improve the speed of transacting business. In addition, Beazley has been exploring new data sources that will permit existing risks to be written in new ways or enable entirely new risks to be insured.
Again, there is a clear connection between the priorities of Beazley and the ambition of Lloyd’s, as set out in the Blueprint One, “to combine data, technology and new ways of working with our existing strengths to transform … everything we do.”
Beazley has been a strong supporter of the Lloyd’s Lab, which was established in 2018 to help promising technology companies develop and test their solutions, mentored by underwriters and other insurance professionals within the Lloyd’s market. In February 2019 Beazley teamed up with another Lloyd’s insurer to form a new consortium to underwrite marine cargo business. The venture relies on data gathered by sensors installed by data science specialists Parsyl – a graduate of the Lloyd’s Lab programme.
“Change is all around us and we are embracing this in so many different ways.”
What changes would you like to see at Beazley over the next three years? Change is all around us, and we are embracing this in so many different ways at Beazley. We continue to invest in new technology to enable efficiency, enhance our expert underwriting and get closer to our clients with our strategic initiatives. Our largest office, London, is going to move and continue our adoption of new ways of working. We have come so far from an inclusion and diversity perspective, but there is more to do and I would like us to capitalise on the positive momentum that has been created.
What is your background? I began my career as a directors’ & officers’ (D&O) underwriter before joining Marsh. I left Marsh after a 31 year career to join Beazley. My first role at Marsh was as a D&O broker then leading the US FINPRO practice. I left FINPRO to take on P&L leadership roles in the Northwest and Southeast of the US.
What changes would you like to see at Beazley over the next three years? One change that I would really like to see is an even more diverse leadership team. I believe achieving this lends itself to better outcomes. It is also important that we continue to innovate our existing products as well as create game changing new product offerings.
After nine years and working my way up to the head of the architect & engineers (A&E) portfolio at Lexington, I was offered a role at Beazley, along with the chance to return to my family home state of Connecticut.
What have you enjoyed in your first year being on the executive committee? Our US business continues to outperform our expectations, so reporting our progress is a joy. I’m proud of what we have been able to achieve over the past 15 years, facing some challenges and coming out even stronger on the other side.
On the US side, we intend to achieve our goal of $2bn gross premiums written around three years from now. I’m excited to see us accomplish this milestone and am ready to take on the challenge to get us there.
My Beazley career began in 2005, with responsibility for miscellaneous errors and omissions (E&O), tech E&O and A&E admitted business. A year later, I began to focus on building out A&E and in 2010 we launched our environmental focus area. In 2012, I took over the lawyers business and in 2019 I became chair of the US management committee.
What have you enjoyed in your first year being on the executive committee? My initial seven months with Beazley have flown by. The time has been both exciting and challenging learning the interworkings of a new company. I have most enjoyed working with and alongside people that are extremely passionate about not only being highly successful at what we do, but also truly valuing and caring about all the colleagues that help make us successful.
What changes would you like to see at Beazley over the next three years? I believe that we all understand that efficiency and technology will continue to be key drivers of our productivity and profitability. Subsequently we need to adopt process change and improve technology to not only compete with but exceed our competitors. One of the key changes that would help drive success, would be to provide our underwriters with accurate real time risk data and insights on their computers to enable them to complete quicker, smarter analysis and make quicker, smarter decisions.
Beazley delivered strong growth in 2019, with premiums rising 15% to $3,003.9m (2018: $2,615.3m) in a market that saw rates respond sharply to heightened claims activity in many lines of business. Strong investment returns drove pre-tax profits up to $267.7m (2018: $76.4m) offsetting a combined ratio that deteriorated to 100% (2018: 98%). The company generated a return on average shareholders’ equity of 15% (2018: 5%).
Higher return on shareholder equity despite elevated claims activity. David Roberts Chair
The board is pleased to announce a second interim dividend of 8.2p per ordinary share, in line with our strategy of delivering 5-10% dividend growth. Together with the first interim dividend of 4.1p this takes the total dividends declared for 2019 to 12.3p per ordinary share (2018: first interim dividend of 3.9p plus a second interim dividend of 7.8p, totalling 11.7p).
Our deep experience in managing our portfolio of risks through differing market cycles tells us that preparation is critical for a turbulent market of the kind that we saw in 2019 and Beazley has been preparing for more than two years for such a market.
The role of the Beazley board is to challenge, support and advise Beazley’s management as they navigate current market conditions and plan for profitable growth in the future. The board met for three days in the US in May to discuss the changes and disruptors that are reshaping our market and the company’s readiness to adapt to these changes and prosper. We identified three main areas of focus: the impact of new technology and data-driven risk insights; Beazley’s role in the changes taking place at Lloyd’s; and the maintenance and development of the company’s corporate culture, all of which aligns to our strategic initiatives.
Three strategic initiatives at Beazley are, in different ways, focused on operational efficiency and improving the client experience. Through our Closer to the Client initiative we are consulting closely with clients on their evolving needs. While our Faster, Smarter Underwriting and Beazley Digital initiatives are harnessing data and technology to provide an enhanced experience to our large risk clients and our small business clients respectively. The board considers all three initiatives to be well chosen given the winds of change that are blowing through our market.
Finally, Beazley’s transparent, supportive and collaborative culture has been one of the company’s greatest assets since its earliest days: it has served as a magnet for talent in our market. The Lloyd’s culture survey published last September revealed that high standards of behaviour have not been universally upheld across the market. The board strongly supports Beazley’s management in its commitment to ensure no Beazley employee should ever hesitate to report unacceptable or inappropriate behaviour.
The introduction of the 2018 UK Corporate Governance Code reporting requirements has brought the discussion around how the board and its committees ensure Beazley brings value to its various stakeholders into the spotlight.
The insurance market has continued to respond strongly to this unsettled claims environment and we saw renewal rates rise by 6% on average across our business during the course of 2019. In the lines of business most affected by severe claims, we have seen much larger rate rises, as described in our chief underwriting officer’s report on page 24.
Double digit premium growth sets Beazley up well for the future. Andrew Horton Chief executive officer 18 Beazley Annual report 2019 www.beazley.com
Beazley benefits from a well-diversified underwriting portfolio that we have carefully constructed over the years to spread our exposures across geographies, classes of business and size of risk. Our property division, which incurred heavy underwriting losses in 2017 and 2018, returned to profit in 2019 with a combined ratio of 97%, and our political, accident & contingency division delivered a strong performance with a combined ratio of 89%. These results helped to balance deteriorating results in our reinsurance division (where the bulk of the natural catastrophe losses fell) and marine division.
Investing in innovation Brokers around the world look to Beazley as a source of innovation in specialist insurance and we sought to build on this reputation in 2019. In the US our environmental team launched Beazley SLEAP (Site Lender Environment Asset Protection) to protect lenders from pollution risks that could impair the value of property used as collateral for commercial loans. In London our marine underwriters unveiled a new marine cyber insurance product to meet the rapidly developing needs of vessel owners and operators. Also in London our cyber & executive risk team launched a reputational risk product to protect businesses against a peril that is of huge and growing concern to senior executives at our client companies.
Product innovation, although important, is not the only form of innovation that benefits brokers and clients in our markets. The insurance industry has seen heavy investments in technologies designed to make business processes more efficient. Substantial sums have also been invested in harnessing new data sources to improve the speed and accuracy with which risk can be priced.
In 2018, we launched a new Beazley managed syndicate, syndicate 5623, which focuses on writing market facilities business with the aim of reducing the cost of underwriting at Lloyd’s. Underwriting for the account of third party investors, the syndicate aims to offer a low cost mechanism for placing follow business within the Lloyd’s market. In 2019, we underwrote market facilities premiums of $36.0m through the syndicate, up 330% from the previous year.
Our participation in the Lloyd’s market also gives our continental European clients a choice of options to access Beazley products. Business from continental Europe can be placed either with the Beazley Lloyd’s syndicates through the Lloyd’s platform in Brussels or with our European insurance company, Beazley Insurance dac, based in Dublin. We have continued to recruit underwriters across Europe, including in the UK regions, and saw our European business as a whole grow by 17% in 2019.
During 2019 our risk management team worked through a number of long term scenarios around the potential impact of climate change on Beazley. We have also continued to look at ways of acting more responsibly within our business, such as sourcing our office products locally. During 2019 our submission to Climatewise was benchmarked against the framework from the Financial Stability Board’s Taskforce on Climaterelated Financial Disclosures (TCFD) achieving a preliminary score of 39% (compared to the average score within the Lloyd’s Market of 38%). It is clear from this score that we are at the same stage of our development on climate change as many others, but we know that more needs to be done. As such we are currently recruiting a sustainability officer who will oversee our strategy on climate change going forward while building on the progress made so far.
Executive changes In 2019, we welcomed four new members to Beazley’s executive committee. Two of these were individuals who have been with Beazley for more than a decade, and two were external hires. The internal promotions were Sally Lake, who succeeded Martin Bride as group finance director; and Jerry Sullivan, who heads our US management committee, both of which were mentioned in our 2018 annual report. We also announced in 2019 that Beth Diamond, who has recently succeeded Anthony Hobkinson as head of claims, will join the executive committee from 2020. We also announced to employees in early 2020 that Mike Donovan has decided to retire at the end of June 2020 and we will announce his successor in due course.
From outside the company, we recruited Lou Ann Layton, who succeeded Dan Jones as head of broker relations and marketing, and Richard Montminy, who succeeded Mark Bernacki as head of our property division.
Investment performance Beazley’s financial assets have continued to grow in recent years, from $4.9bn in December 2017 to $5.9bn by December 2019. As a result, the returns we achieve on these assets are important to our overall performance. After a challenging year in 2018, financial market conditions in 2019 proved much more supportive and Beazley’s financial assets returned $263.7m, or 4.8% in this period (2018: $41.1m, or 0.8%). The 2019 return is the highest in recent years, supported by falling yields, declining credit spreads and strong equity markets.
Risk management With the recent arrival of new executive committee members, we took the opportunity in 2019 to re-examine the risks we run in different parts of the business and enhance the control environment. As a result of this reassessment, our chief risk officer Andrew Pryde has taken over as chair of the risk and regulatory committee, which is the executive level committee that oversees how the business is managing risk. This has helped the committee to operate as an effective second line of defence to monitor and challenge risk owners across the organisation. Senior risk managers now also attend the committee, alongside risk owners.
We are now part way through a broadbased turn in the market, with rates rising steeply across many lines of business. Over the past two years, we have seen premium rates on renewal business rise cumulatively by more than 10% for half of our book. We expect rates to continue to rise through 2020.
In this environment we will continue to grow our business prudently and anticipate achieving double digit premium growth once again in 2020. However, we continue to believe that some business remains underpriced, notably in the property and treaty reinsurance markets, and our underwriters will continue to walk away from business that does not meet our requirements.
With the sustained rate rises we have seen over the past two years, we expect to be able to achieve a combined ratio in the low 90s in the medium term (barring, of course, exceptional catastrophe losses). However, a combined ratio in the mid-90s is a more realistic expectation for 2020 subject to a more normalised claims environment.
To take one example, we saw rates on our US directors’ & officers’ book increase by 30% in 2019.
It is often a fine judgment for a company to decide whether to settle litigation or allow it to proceed to trial, and the stakes can be higher at times such as these. Our seasoned claims professionals are well equipped to help clients make these difficult decisions.
A We put a lot of effort into succession planning. Twice a year
I go through with the board plans for my successor and other senior executive roles. There has been a significant generational shift at Beazley over the past two years as a number of senior executives have retired.
We have as a result welcomed eight new members of the executive committee over the past two years. Of these, six were internal appointments and two were external. All but one of the individuals appointed internally have been with Beazley for more than 10 years.
Q How concerned are you about the increased jury awards and settlements that are pushing claims higher in many liability lines of business?
Q&A with the chief executive 22 Beazley Annual report 2019 www.beazley.com
No matter whether they are internal or external appointments, I have found that our new executive members have brought valuable fresh perspectives to our discussions. I believe firmly that a diverse executive team can only contribute to the quality of our decisions and I am pleased that we now have four female executive committee members, up from one two years ago. Our appointments are always made on merit but we ensure that we have a diverse roster of candidates from whom to choose.
Q Do you believe that the natural catastrophe losses insurers have seen in recent years are due in part to climate change and, if so, how does this affect your underwriting strategy?
Q Are there any areas of technological development that hold particular promise for Beazley?
A There are many, but one I would identify is the opportunity to connect our systems directly to those of our brokers via APIs or ‘application programming interfaces’. We now have APIs in place in three markets – Canada, Spain and Australia – that enable brokers to enter risk submissions onto their own systems, which are then routed straight through into our systems.
We then automatically send back quotes and policy documentation in real time. We are working on several new opportunities with brokers to develop products that connect directly to Beazley via APIs. This approach brings many advantages – a low cost of submission processing, quicker service to clients, and greater Beazley product distribution potential.
Q What do you see as the biggest drivers of premium growth for Beazley in the years ahead?
Beazley’s underwriters achieved strong premium growth of 15% to $3,003.9m (2018: $2,615.3m) in 2019 against a backdrop of increasingly severe claims in a number of lines of business. Although in absolute dollar terms we achieved an underwriting profit, our combined ratio rose to 100% (2018: 98%), due in large measure to a far smaller prior year reserve release than in 2018.
The drivers of rate change varied. In some markets, business had by the end of 2017 become significantly underpriced after a long period of rate erosion. Our marine division, which includes energy and aviation business, saw rates fall for five years in a row from 2012 through 2017. Our reinsurance division saw a similar decline while our property underwriters saw rates begin to fall in 2013 and continue to do so into 2017. The turn in property markets – both insurance and reinsurance – was initially spurred by the intense natural catastrophe experience of 2017 and sustained by further major events in the US and Japan during the course of the following two years.
Equipped with one of the market’s largest claims databases, our healthcare underwriters saw the rise in large hospital claims early and have adjusted their underwriting accordingly. We have a diversified book of US healthcare business and have been able to grow in segments less impacted by social inflation.
The strong premium growth we saw in 2019 was thus not merely the effect of rate rises, but also reflected our success in targeting profitable growth opportunities around the world. Since 2017 we have been investing heavily in the growth of our business – particularly our liability business – outside the US. In many cases, we have been able to adapt products that have been road tested in the US for other markets in Europe, Asia and the Americas. Beazley Breach Response (BBR), our flagship cyber product, is now available in six countries including the US.
In its first year as a standalone division, Beazley’s cyber & executive risk (CyEx) division, led by Mike Donovan, grew premiums by 15% and achieved a combined ratio of 93% (2018: 90%).
Market conditions affecting the division’s two largest lines of business – cyber insurance and D&O liability insurance – were very different. The cyber market continues to grow and, although competition has been intensifying, claims have not been as heavy as in lines such as D&O that have borne the brunt of social inflation. We saw rates remain stable across our cyber book compared with rate rises for US D&O business of 30%.
The new division, which was formally launched in February 2019, has been very well received by brokers. Under the banner of ‘protecting what matters most,’ our cyber and management liability teams address major boardroom issues and purchasing patterns for their products overlap. We have made great strides in cross-selling products offered by the two teams.
Cyber insurance originated in the US in the years following the enactment of the first data breach regulation in California in 2002. Beazley’s flagship cyber product, BBR, was launched in 2009 and, since then, most of the demand for cover has remained in the US. That began to change with the coming into force of the European Union’s General Data Protection Regulation (GDPR) in May 2018 and with the passage of similar laws and regulations elsewhere in the world. In 2019, our international cyber business outside the US grew by 14% (albeit from a relatively low base) compared with growth of 9% for our more mature US business.
We still see considerable opportunities to grow our cyber business in the US where the increasingly sophisticated and frequent attacks, particularly on mid-sized companies, are still significantly underinsured. However, growth opportunities outside the US, where we have been investing for more than five years now, may well prove more significant in the years to come.
The CyEx division offers a range of specialist products under the executive risk banner and many of these have been growing strongly. We saw rapid growth in transaction liability business, which protects the parties in mergers and acquisition deals, in 2019 and the team has also been growing, hiring underwriters in Germany and Singapore.
This increase in premium was due to the division increasing their indemnity appetite, notably in lines such as aviation and marine cargo.
The aviation market, which accounts for approximately 10% of the division’s premiums, has seen the most dramatic rate rises over the past two years. Prices for the business Beazley writes have risen 39% since 2017 and we plan to increase our participation in this business significantly in 2020. Marine cargo rates also rose sharply – by 12% – in 2019, prompting us to re-forecast our underwriting for this class of business upwards during the course of the year.
The authorities at Lloyd’s have been addressing the underperforming classes of business, with the marine classes of business being a particular area of focus. We have seen rates rise faster than would likely have been the case had Lloyd’s not taken action, and the Lloyd’s business planning process has allowed us to increase our underwriting appetite swiftly when market conditions warrant it.
Our political, accident & contingency (PAC) division under the leadership of Christian Tolle had a very good year with strong profitable growth generated by all major lines of business. The division’s combined ratio was 89% (2018: 90%) on premiums that grew 14% to $272.7m (2018: $238.7m).
Our accident and health business in the US, now rebranded Beazley Benefits, had a very good year with premiums growing 20% to $24.7m – the fruits of sustained investment in our team and the operational infrastructure needed to compete in this business.
The small property business we underwrite under binding authorities granted to Lloyd’s coverholders around the world saw continued remediation in 2019 after performing poorly in 2018. In 2018, we cancelled a number of binders that failed to satisfy our cross cycle profitability requirements and this process continued in 2019. Our preference is to lead covers and we have been withdrawing from a number of accounts for which we only provided following capacity. We took action relatively early to tackle poor performance in this part of the market and have since seen a number of other Lloyd’s insurers follow suit.
Catastrophe losses affecting our reinsurance division, led by Patrick Hartigan, were once again severe in 2019, the third year marked by heavy losses across the market. Rates have risen, but in many cases not as far as they need to in our estimation. Our underwriting stance for 2020 is therefore very cautious.
The business of our reinsurance division, which is almost entirely property-focused, generated a combined ratio of 154% in 2019 (2018: 103%) on gross premiums written of $206.0m (2018: $207.4m).
The most significant catastrophe losses for Beazley stemmed from Typhoons Faxai and Hagibis that hit Japan in September and October 2019. Our Japanese treaties include cover for flood, which was a major source of claims in the wake of Hagibis.
Beazley’s share of the Japanese treaty market remains small at approximately 1% - the same level as a decade ago. However, we maintain our very long term relationships in this market, which have proven profitable over time.
Overall, reinsurance rates have yet to respond to recent catastrophe losses as strongly as rates in the primary property market or in the retrocession market. A good deal of reinsurance capital is now trapped following the Japanese catastrophe events and we may see a lower willingness to deploy surplus capital once these losses are fully realised, which will drive rates up further.
Beazley’s specialty lines division, led by James Eaton, saw stronger rate rises than anticipated in 2019, with the team renewing business at prices that were on average 6% higher than in 2018.
This reflected the increased severity of major losses that has affected parts of the market, feeding into a combined ratio of 99% (2018: 92%) on premiums that rose 28% to $967.1m (2018: $755.5m).
Find out more on page 25 Find out more on page 26 Find out more on page 26 $m $m
Gross premiums written 272.7 238.7 Net premiums written 245.8 212.7 Results from operating activities 41.2 24.2 Claims ratio 47% 46% Expense ratio 42% 44% Combined ratio 89% 90% Rate change – (1%)
Strong growth across majority of divisions, with three divisions achieving growth of double digits.
Gross premiums written 967.1 755.5 Net premiums written 834.8 668.0 Results from operating activities 124.1 66.6 Claims ratio 62% 50% Expense ratio 37% 42% Combined ratio 99% 92% Rate change 6% 2%
Beazley began life in 1986 Since then we have grown steadily in terms of the risks we cover, the clients we serve and our geographic reach, and today Beazley is a mature insurance business with a well-diversified portfolio. We have weathered some of the toughest times the Lloyd’s market has seen in more than three centuries and our underwriting activities have an unbroken record of profitability.
US local written premium reaches $1bn, overall gross premiums written grow 12% during 2018
Profit Profit before tax in 2019 was $267.7m (2018: $76.4m). The group’s combined ratio increased to 100% (2018: 98%) due to a lower reserve release being available, although a small underwriting profit was achieved in absolute dollar terms. Unfortunately, three years of heightened claims activity has taken its toll on the reserves of our catastrophe exposed lines leading to lower releases. Our investment team achieved a strong investment return of 4.8% (2018: 0.8%) or $263.7m (2018: $41.1m), which counteracted our reduced underwriting result.
Strong investment return drives profit during changing underwriting environment. Sally Lake Group finance director 32 Beazley Annual report 2019 www.beazley.com
Gross premiums written 3,003.9 2,615.3 15% Net premiums written 2,503.5 2,248.5 11%
Claims ratio 62% 59% Expense ratio 38% 39% Combined ratio 100% 98% Rate increase 6% 3% Investment return 4.8% 0.8%
Claims 2019 was the third year in a row where material natural catastrophe losses were experienced. We estimate the cost of Hurricane Dorian and Typhoons Faxai and Hagibis at $80m net of reinsurance. We have also experienced an increase in attritional claims within our directors’ & officers’, employment practice liability and healthcare liability books driven by social inflation within the US. As a result of these our claims ratio for the year has increased to 62% (2018: 59%).
Both were in books of business where we have taken remedial action, with US trucking being the main driver of the marine division’s increase, while construction and engineering drove the strengthening in property. We have since stopped underwriting both of these lines of business.
Prior year reserve adjustments across all divisions over the last five years are shown below.
Acquisition costs and administrative expenses Business acquisition costs and administrative expenses increased during 2019 to $889.7m from $812.6m in 2018. The breakdown of these costs is shown to the right.
Foreign exchange The majority of Beazley’s business is transacted in US dollars, which is the currency we have reported in since 2010 and the currency in which we hold the company’s net assets. Changes in the US dollar exchange rate with sterling, the Canadian dollar and the euro do have an impact as we receive premiums in those currencies and a material number of our staff receive their salary in sterling. Beazley’s foreign exchange gain taken through the statement of profit or loss in 2019 was $1.1m (2018: loss of $13.2m).
Corporate credit spreads on our fixed income investments were also a major contributor to returns. Rising interest rates in 2018 led to a widening of spreads in the final part of that year and the extra yield available on our investment grade bonds had risen to around 0.8% at the start of 2019, before declining throughout the year to 0.4% as interest rates fell and economic sentiment improved. As a result, the credit element of our investment grade bonds returned 1.5% in this period and our more modest exposure to high yield bonds performed better still, as the credit element of these returned more than 9%.
Our capital growth assets also performed well, returning 8.6% (2018: a loss of 1.0%), again helped by attractive valuations at the beginning of the year, following the market correction in the final quarter of 2018, as well as the easing of monetary policy during the year. We added to our equity investments early in 2019, utilising most of our maximum appetite for investment risk, and this proved beneficial to returns. However, we reduced exposures in the second half of the year, as equity valuations became more expensive and so missed out on some of the available return in this unusual year.
Other capital growth investments include our hedge fund and absolute return portfolios, which target alternative investment strategies, to provide risk diversification against our equity and credit exposures. Maintaining appropriate
The table below details the breakdown of our portfolio by asset class: Cash and cash equivalents 278.5 4.8 336.3 6.7 Fixed and floating rate debt securities – Government and quasi-government 1,870.9 32.0 1,410.1 27.9 – Corporate bonds
Comparison of return by major asset class: levels of cash in the business is a challenge, particularly as our financial assets continue to grow quickly: we need sufficient cash for liquidity purposes, but excess cash balances reduce our opportunity to generate investment returns.
Our total investment return was 4.8%, or $263.7m (2018: 0.8%, $41.1m). The 2019 investment return is the highest we have achieved in recent years. This reflects the current supportive financial market, but the changes we have made to the structure of our investment portfolio in recent years have helped us to take advantage of this environment, extracting the available return in the context of our investment risk appetite. Looking ahead, most investment assets look more expensive following their strong performance in 2019: sovereign yields are 1% lower than a year ago, and credit spreads 0.4% lower, while equity earnings yields are up to 1.5% lower, based on historic earnings.
We are hopeful that macro conditions will remain supportive of investment returns, but these starting conditions lead us to expect a more modest contribution from investments in 2020, with our overall running yield at 2.1% as at 31 December 2019.
Tax Beazley is liable to corporation tax in a number of jurisdictions, notably the UK, the US and Ireland. Beazley’s effective tax rate is thus a composite tax rate mainly driven by the Irish, UK and US tax rates. The weighted average of the statutory tax rates for the year was 15.0% (2018: 18.6%). The effective tax rate has increased in 2019 to 12.6% (2018: 10.7%). The increase has been a result of lower favourable prior year tax adjustments in 2019 as compared to 2018. The application of the diverted profits tax legislation passed by the UK government early in 2015 still remains uncertain. We have considered the implication of this and retain the view that this tax should not apply to Beazley (see note 9 to the financial statements). Whilst the uncertainty around the legislation remains, the quantum of our earnings that could theoretically fall within its scope grows as the period since the legislation started to apply lengthens.
Financial assets at fair value and cash and cash equivalents 5,851.3 5,052.6 16%
Intangible assets Intangible assets consist of goodwill on acquisitions of $62.0m (2018: $62.0m), purchased syndicate capacity of $10.7m (2018: $10.7m), US admitted licences of $9.3m (2018: $9.3m), renewal rights of $17.3m (2018: $25.2m) and capitalised expenditure on IT projects of $22.9m (2018: $19.3m).
Reinsurance assets Reinsurance assets represent recoveries from reinsurers in respect of incurred claims of $1,068.8m (2018: $951.7m), and the unearned reinsurance premiums reserve of $269.4m (2018: $241.1m). The reinsurance receivables from reinsurers are split between recoveries on claims paid or notified of $223.7m (2018: $231.9m) and an actuarial estimate of recoveries on claims that have not yet been reported of $845.1m (2018: $719.8m).
Insurance liabilities Insurance liabilities of $6,059.0m (2018: $5,456.2m) consist of two main elements, being the unearned premium reserve (UPR) and gross insurance claims liabilities. Our UPR has increased by 13% to $1,598.7m (2018: $1,415.5m). The majority of the UPR balance relates to current year premiums that have been deferred and will be earned in future periods. Current indicators are that this business is profitable. Gross insurance claims reserves are made up of claims which have been notified to us but not yet paid of $1,263.7m (2018: $1,171.2m) and an estimate of claims incurred but not yet reported (IBNR) of $3,196.6m (2018: $2,869.5m). These are estimated as part of the quarterly reserving process involving the underwriters and group actuary. Gross insurance claims reserves have increased 10% from 2018 to $4,460.3m (2018: $4,040.7m).
Financial liabilities Financial liabilities comprise borrowings and derivative financial liabilities. The group utilises two long term debt facilities: • in November 2016, Beazley Insurance dac issued $250m of 5.875% subordinated tier 2 notes due in 2026; and
• in September 2019, Beazley Insurance dac issued $300m of 5.5% subordinated tier 2 notes due in 2029.
A syndicated short term banking facility led by Lloyds Banking Group plc provides potential borrowings up to $225m. Under the facility $225m may be drawn as letters of credit to support underwriting at Lloyd’s. Of this, 100% may be advanced as cash under a revolving facility. The cost of the facility is based on a commitment fee of 0.385% per annum and any amounts drawn are charged at a margin of 1.1% per annum.
On issuance of tier 2 subordinated debt in 2016, Beazley Insurance dac was assigned an Insurer Financial Strength (IFS) rating of ‘A+’ by Fitch.
Retail bond (2019) – 95.6 Tier 2 subordinated debt (2029) 297.9 –
Our funding comes from a mixture of our own equity alongside $546.8m ($550.0m gross of capitalised borrowing costs) of tier 2 subordinated debt, and an undrawn banking facility of $225.0m.
The current SCR has been established using our Solvency II approved internal model approved by Central Bank of Ireland (CBI) which has been run within the regime as prescribed by Lloyd’s. In order to perform the capital assessment: • we use sophisticated mathematical models that reflect the key risks in the business allowing for probability of occurrence, impact if they do occur, and interaction between risk types. A key focus of these models is to understand the risk posed to individual teams, and to the business as a whole, of a possible deterioration in the underwriting cycle; and
The project has made good progress during 2019 and Beazley’s preparations for IFRS 17 are on schedule.
Group structure The group operates across Lloyd’s, Europe, Asia, Canada 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 Ireland Holdings plc – intermediate holding company; • Beazley Underwriting Limited – corporate member at Lloyd’s writing business through syndicates 2623, 3622 and 3623; • Beazley Furlonge Limited – managing agency for the seven syndicates managed by the group (623, 2623, 3622, 3623, 6107, 6050 and 5623); • Beazley Insurance dac – insurance company based in Ireland that accepts non-life reinsurance premiums ceded by the corporate member, Beazley Underwriting Limited and also writes business directly from Europe; • Syndicate 2623 – corporate body regulated by Lloyd’s through which the group underwrites its general insurance business excluding accident, life and facilities. 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, and from 2017 cyber, 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, BICI reinsurance business and, from 2018, market facilities business; • Syndicate 6050 – special purpose syndicate which has its capital provided by third party names and provided reinsurance to syndicates 623 and 2623 on the 2015, 2016 and 2017 years of account; • Syndicate 5623 – special purpose syndicate writing market facilities ceded from syndicate 3623; • Beazley America Insurance Company, Inc. (BAIC) - insurance company regulated in the US. In the process of obtaining licenses to write insurance business in all 50 states; • 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, 2623 and 623, BICI and BAIC.
Syndicate 5623** Syndicate 5623 is supported by both Beazley capital and third party capital. Quota share
We continue to grow our market reach in the small business segment with product launches on our myBeazley e-trading platform. In 2019, we launched our management liability package offering in Spain, Germany and France. While in the US, another important myBeazley product launch was Beazley Breach Response. The myBeazley portal provides a quick and simple way for brokers to access our flagship products.
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. In 2019, we opened new larger offices in New York, Toronto and Barcelona. These offices bring greater access to local markets and are located in areas proximate to our broker partners. We put a great deal of time and effort towards selecting locations that will attract new business, and negotiating lease arrangements that represent good value to our shareholders.
In pursuit of greater efficiency and consistency of operational service, we have centralised operations support or outsourced 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. To help achieve this we have operations service centres in Connecticut and Georgia in the US, and are currently trialling a new support centre in Phoenix, Arizona. In the UK, the Birmingham office provides a costeffective alternative to London. It also benefits from excellent access to skills relevant to Beazley’s future growth plans, for example in technology, data analytics and financial services support more generally.
Operational efficiency and digital transformation are key to our future success and performance in an increasingly digital world.
Beazley’s digital transformation We can see many applications of data and technology across our business, and there continues to be a flow of new technology innovations that we could pursue. However, as we move further into the digital age, we recognise that it is not just about the technology. To truly transform our business and make it fit for a digital environment, there are several areas we must focus on: 1) Applying technology and data to our business model Our specialist insurance business provides cover for a broad range of client risks – both smaller risks such as those covered by our SME business products, and larger complex risks such as those covered by our open market property products. Different technology solutions are best applicable to different points on this spectrum of risk size and complexity. So that we best leverage technology, we have two strategic initiatives: Beazley Digital to focus on our smaller and higher volume underwriting; and Faster, Smarter Underwriting to focus on our larger and more complex risk underwriting.
The goal of Beazley Digital is to take out any unnecessary points of manual interaction in the underwriting process, which is key to writing profitable business and to minimising response times for our higher volume products. The main technologies that we are applying here are: myBeazley, for our brokers wanting an end-to-end electronic trading portal; natural language processing, to enable us to quickly extract underwriting data from the high volumes of submission emails we receive; and Application Programming Interfaces (APIs), so that we can interface directly with broker IT systems and provide quotes or policies without any re-keying required by either the broker or Beazley staff.
In an increasingly connected world, we see APIs as a critical technology for transacting insurance business going forward. We have APIs in place with broker systems in several regions now, and demand continues to grow strongly for transacting business in this way.
3) Developing our talent to best leverage technology We are investing in our workforce to ensure we have the right blend of skills for the future. This means that our talent development programmes are placing emphasis on cross-skilled staff so they can operate in a more digital insurance market. In practice this means underwriters with increased understanding of technology, and similarly technology teams with greater knowledge of how specialist underwriting works. The outcome we strive for is to put technology and data at the centre of our specialist underwriting proposition.
4) Creating the optimum physical environment Although Beazley receives plenty of interest when attracting new operations and technology talent, we recognise that our working environment needs to keep evolving to maintain this attraction and to then retain and further motivate this talent. Although one benefit of activity based working (ABW) is a more efficient use of office space, it also creates a physical and technological environment that maximises the potential for our staff to carry out their daily activities.
As we proceed into 2020, we are well placed not only as a high performing specialist insurer, but also because we have developed great strength in our operational capability. The changes we have made in 2019 will allow us to build on this operational strength and ensure we remain a high performing specialist insurer in an increasingly digital world.
2019 in review In 2018, I focused on the impact of external and internal change on the group and this change has continued into 2019.
With the change in chief underwriting officer, we have taken the opportunity to split the underwriting committee into two separate committees. The underwriting committee will continue to be chaired by the chief underwriting officer and will focus on developing and delivering the business plan. The newly formed underwriting governance committee is chaired by me and will focus on oversight of the quality of the information used by the underwriting committee. The benefits created from this split are having the most appropriate people present at each committee and having sufficient time to focus on the relevant topics. The chief underwriting officer and myself are present at both committees, which provides a conduit of information.
The exposure management function now reports to me. Whilst the identification and management of aggregated exposure remains the responsibility of the underwriting teams and the chief underwriting officer remains the risk owner, the change in reporting line means that the exposure management team can move to more of an oversight role and challenge the underwriting teams to ensure that the methods and assumptions used to manage exposure remain appropriate.
I have taken on the executive sponsorship of the newly formed mental wellbeing and mental health initiative. Mental wellbeing is about educating the organisation on how to take care of themselves, since our people are our most important asset. Sleep deprivation and stress are two issues which can reduce the effectiveness of a workforce and their effects can be particularly dangerous because they are not always visible like a physical condition. Mental health is about providing a support network for situations where a mental health incident has occurred. This initiative has the secondary benefit of helping to support the risk culture at Beazley.
In 2019, a number of new ways of working were introduced at Beazley. Activity based working provides members of staff with different work spaces that are more conducive to the activity being undertaken, from a quiet room for high focused activity such as reading and reviewing to a collaborate space for group discussion, innovation and brainstorming. Remote working means that advances in technology allow our staff to continue to work seamlessly when away from Beazley offices. This reduces the need to rearrange meetings which would have caused a delay and reduces the risk that a meeting does not include an important participant. Finally, a number of change programmes are now being undertaken using an agile approach. This simply means that a cross functional team is formed to deliver change using a shared vision from the outset rather than one function delivering on behalf of another function. The core team meet on a more frequent basis so that activity is undertaken and overseen more regularly and any issues or decisions can be considered and made by all stakeholders in a timely manner, thereby increasing the likelihood of a successful outcome.
Whilst new ways of working can create risk, our assessment is that these changes are actually reducing operational risk.
Brexit Beazley has prepared for the UK leaving the EU, assuming a hard Brexit. European clients have the choice of either using the Lloyd’s Brussels platform, which has been operating successfully since 1 January 2019, or using our European insurance company in Dublin, Beazley Insurance dac, which is authorised to underwrite all of Beazley’s non-life products. We have also received authorisation of our European based service company, Beazley Solutions International Limited, which will underwrite risks from our European offices onto the Lloyd’s Brussels platform. As such, Beazley remains prepared for whatever the Brexit outcome.
(a Minsky moment), ensuing from rapid global action and policies, and materialising over the medium-term business planning horizon that results in achieving a temperature increase being kept below 2 degrees celsius (relative to pre-industrial levels) but only following a disorderly transition.
• Scenario C – A scenario with failed future improvements in climate policy, reaching a temperature increase in excess of 4 degrees celsius (relative to pre-industrial levels) by 2100 assuming no transition and a continuation of current policy trends.
To illustrate, whilst the average claims costs would increase 15% under scenario A, the cost of a 1:100 event would only increase 9%. This is because some of the policies will have been exhausted in the more extreme 1:100 event and so the additional effect of climate change will not increase the claims costs by as much. We also completed a pilot assessment, investigating the impact of climate change on the liability lines offered by our US architects and engineers team. The steps of the assessment were: • Step 1 – Identify the uncertainty • Step 2 – Create a scale of threat or opportunity • Step 3 – Quantify the impact on the class, both present and future • Step 4 – Implement changes where agreed appropriate
Conclusion Dealing with change can create debilitating inertia for a company and significantly increase risk or it can create the catalyst for improvement and ultimately reduce risk. My assessment is that Beazley is harnessing the opportunities created by change.
My latest report to the board has confirmed that the control environment has not identified any significant failings or weaknesses in key processes and that Beazley is operating within risk appetite as at 31 December 2019.
In addition, the following risk management principles have been adopted: • risk management is a part of the wider governance environment; • techniques employed are fit for purpose and proportionate to the business; • risk management is a core capability for all employees; • risk management is embedded in dayto -day activities; • there is a culture of risk awareness, in which risks are identified, assessed and managed; • risk management processes are robust and supported by verifiable management information; and
Risk management framework Beazley takes an enterprise-wide approach to managing risk following the group’s risk management framework. The framework establishes our approach to identifying, measuring, mitigating and monitoring the group’s key risks. Beazley has adopted the ‘three lines of defence’ framework. Across the business, there are two defined risk related 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, perform a risk assessment twice a year, including an assessment of heightened and emerging risks.
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 (52 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 which is monitored and signed-off by control reporters.
The board has reviewed the financial impact of climate change, based on three scenarios, and has concluded that it does not currently impact viability. Further enhancements are planned in the future and these will feature in each annual assessment.
I provide a quarterly ORSA to the board summarising the short-term and longer term risks to the group and the capital implications.
Other risks The remaining six risk categories monitored by the board are: • Market (asset) risk: This is the risk that the value of investments could be 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. An example would be a cyber-attack having a detrimental impact on our operations.
• Group risk: The structure of the Beazley group is not complex and so the main group risk is that one group entity might operate to the detriment of another group entity or entities. The Beazley plc board monitors this risk through the reports it receives from each entity.
Considerations relevant to this risk include the nature, size and type of transactions, the jurisdiction in which transactions occur, and the degree to which agents or third parties are used during such transactions.
• Catastrophe risk: This is the risk that current models do not adequately capture the impact of climate change on the frequency, severity or nature of natural catastrophes or other extreme weather events (eg wildfires) that could drive higher-than-expected insured losses. The group utilises commercial catastrophe models to facilitate the estimation of aggregate exposures based on the group’s underwriting portfolio. These catastrophe models are updated to reflect the latest scientific perspectives. Catastrophe models are evolving to include new or secondary perils which may be related to climate change. In addition, the group runs a series of Natural Catastrophe Realistic Disaster Scenarios (RDS’s) on a monthly basis which monitors the group’s exposure to certain scenarios that could occur. These RDS’s include hurricanes in the US, typhoons in Japan, European windstorms and floods in the UK.
• Liquidity risk: Linked to the underwriting and credit risks noted above, there is a risk that losses resulting from unprecedented natural disasters or extreme weather could erode our ability to pay claims and remain solvent. The group establishes capital at a 1:200 level based on the prevailing business plan.
Our aim isn’t just to provide short-term solutions for our communities but to provide sustainable and long-term support through our programmes. For our responsible business strategy, we have six areas of focus: We aim to support our local and international communities and clients by using our resources and skills – whether it’s through volunteering with the elderly and helping to feed the homeless as part of our global Make a Difference programme, creating bespoke activities such as ‘Maths in Insurance’ workshops or finding ways to make existing and new products that have a beneficial impact on our wider society and the environment too.
Environment Taking responsibility for our own use of resources as we conduct our business, to minimise our environmental footprint.
Marketplace Our awareness of the social and environmental impact of the business that we conduct, and how we can support global sustainability efforts through the provision of insurance.
The impact of insurance goes beyond the financial impacts of remunerating policyholders for losses. There is an impact on lives and livelihoods which far outweighs the financial burden. At Beazley we are committed to addressing these non-financial impacts through our interaction with charities, the community, our environment, the wider market place and our employees. By being a responsible business we can bring value to our stakeholders in more ways than just monetary.
Our charity efforts go beyond simply making a donation – we focus on making a difference, both in our local communities and around the globe.
All Hands and Hearts Our global charity partner, All Hands and Hearts, addresses the immediate and long-term needs of communities impacted by natural disasters. 2019 marks the end of our three year partnership with All Hands and Hearts. In 2017 we chose to partner with them because of their innovative approach focused on deploying volunteers to areas in need, and their relatively small size meant that our involvement was more impactful.
“I am proud to have been executive sponsor of Beazley’s responsible business activity for the last few years. We have continued to invest not just financially but by encouraging employees to take paid leave to support local communities.”
A donation of £350,000 is equivalent to funding an entire school in Nepal, impacting more than 360 students in the next 10 years.
Volunteering in Nepal In 2015, a 7.8 magnitude earthquake hit Nepal near the capital city of Kathmandu. The impact was devastating, with almost 9,000 people losing their lives and a further 23,000 being injured. There was major destruction of infrastructure, with more than 5,000 schools being damaged or destroyed.
Beazley colleagues around the world fundraised over $15,000 through bake sales, quiz nights, and global competitions to support their colleagues during their two week project in Nepal.
Match funding The charity committee also provides match funding for Beazley employees that undertake their own charity fundraising activities. We offer $750 (or local currency equivalent) per employee and up to $5,000 per team of three employees or more. Some examples of colleagues who used this are: Emma Whiteacre took part in a 10km swim in the River Dart, raising over £1,540 for Level Water, a charity which provides swimming lessons for children with physical and sensory disabilities.
Chris Booth ran a half marathon a month across the UK, France, Portugal and the Canary Islands. He has raised over £500 so far.
Beazley Hiking Challenge Over three days in late August ten Beazley climbers raised over $16,000 (match funded $5,000) for All Hands and Hearts, while scaling four of Colorado’s mighty Fourteeners.
Charity runs JP Morgan London run 46 employees, including our CEO Andrew Horton, took part in the JP Morgan run in London, raising money for Macmillan Trust. Colleagues around the globe took part in similar runs for local charities, including ‘Strides of Insurance’ in Paris, the Inside Ride in Toronto, and the Tunnels to Towers run in Manhattan.
Highlights: Young people – We partner with a number of educational charities to help support local young individuals from lower socio-economic backgrounds through their education and into the world of work.
Our global community partnerships Our London colleagues partner with East London Business Alliance (ELBA) to work on community projects, including our Make a Difference activities and student workshops, meaning communities will be better able to enjoy these areas.
Our Birmingham office began a new partnership in September with Smiling Families. Since then, they have hosted a Children’s cinema event and run a toy appeal.
Our Chicago office started a new partnership with 826CHI and have raised over $7,000 for the charity. They have also completed their training and have started volunteering for field trips and tutoring.
Our Farmington colleagues partnered with Camp Courant and throughout the year have packed over 3,500 bags for campers, participated in the annual run, and raised over $1,000 with internal fundraisers.
Our Dallas and Houston offices have begun a partnership with Mission Squash and are currently in the onboarding stage. They intend to develop this partnership through 2020.
Make a Difference More than 420 employees took part in Make a Difference during 2019.
Hague Primary School A group of Year 6 students from our school partner visited the Beazley office and were introduced to the world of insurance.
Reading Partners programme We had 16 volunteers for our Reading Partners programme in London and another 6 in New York.
“ I enjoy reading with my reading partner because we laugh and play games together, and it helps me with my reading. It helps me understand my book and clarify things in my head.”
Our interns worked for teams across the business. As well as having valuable work experience, they spent time volunteering in local food banks, engaged in social activities, and worked on a Global Innovation Challenge.
“ Beazley’s ‘Summer Internship Programme’ has provided valuable insight as to how the insurance industry works. Being able to work on real cases and meet with clients has allowed me to develop necessary skills in communication and business acumen. Furthermore, having the opportunity to shadow people in other departments has definitely opened up the idea of working in the insurance industry after University.”
In 2019 we significantly increased our focus on the environment and employee engagement, establishing an Environment Working Group (EWG) in May which has a remit to materially reduce the environmental footprint of our operations. The group is led by Kelly Malynn and has grown to more than 60 people globally.
We have removed desk bins in favour of centralised trash and recycling in Atlanta (2016), Barcelona (2019), Toronto (2019) and New York (2019), and following an awareness drive by the EWG, around 80% of individual bins in London. All US offices have recycling bins and we have revitalised and redistributed recycling plans; Singapore and Barcelona are following suit.
We are working to reduce paper towel usage in rest rooms, while all new offices (Dublin, Munich, Birmingham, New York, Toronto, and Houston) are installed with hand dryers.
Suppliers We are conscious of the environmental impact of our suppliers, and continue to work to reduce emissions and pollutants by, for example, sourcing office and kitchen goods locally across all offices, using local taxi services or Uber and switching to environmentally friendly cleaning products in all US, London, Birmingham and Dublin offices.
Key developments in 2019 included: Reports We produced our annual Greenhouse Gas Report employing 2018 data for our non-US operations and for the four largest offices in the US (Atlanta, NY, Farmington and Chicago). We saw a significant reduction in the emissions associated with our UK electricity consumption due to the reduced carbon intensity of the UK grid. Business travel fell from 2017 figures, but were in line with travel pre-2017 levels.
Our offices We moved from serviced offices to Beazley offices in Birmingham (2018) and Barcelona (2019), allowing us to enhance recycling and green initiatives. New builds in Munich and Birmingham (2018), Barcelona (2019), New York (2019) and Toronto (2019) enabled a switch to appropriate sustainable materials including LED lighting.
We have been closely analysing the sustainability of our offices and commercial operations. We continue to prioritise sourcing sustainable office space, using sustainable products in our fit-outs and furniture choices, reducing our paper usage and increasing recycling opportunities.
Scope 2 722.81 Scope 1 and 2 emissions increased due to expanded scope of reporting
The EWG is researching suppliers of corporate gifts and kitchen items, with a view to eliminating unnecessary packaging, single-use plastics and non-sustainable palm oil.
Awareness raising During its first six months the EWG has run two intranet takeovers, the first on waste reduction and the second on carbon emissions. It has also hosted a number of live events, which have been well attended.
Climate change is clearly a major challenge for many of our clients but we see it yielding business opportunities for Beazley. Beazley will be hiring a sustainability officer in 2020 who will support many of the objectives of this workstream.
Transition The business impact of the decarbonisation process, which may entail extensive policy, legal, technology and market changes, disruption to established business models and potential obsolescence and stranded assets and a switch to appropriate sustainable materials.
We have reported into ClimateWise, the insurance industry’s initiative to monitor climate risks, since 2008.
In 2019, the reporting framework was adapted to more closely align with the recommendations of the Financial Stability Board’s Taskforce on Climate-related Financial Disclosures (TCFD). Reflecting the fact that we are still in the early stages of our thinking on TCFD reporting, the preliminary score for our submission was 39%. This compares with an average score for Lloyd’s market entities of 38%.
For further detail on Beazley’s focus on climate change, please see our standalone 2019 Sustainability report 60 Beazley Annual report 2019 www.beazley.com
Further analysis and reporting is taking place across different parts of the business, and will be a growing area of focus for the group in 2020. As well as the 2019 General Insurance Stress Tests, which for the first time included climate change scenarios, our architects and engineers professional liability team is conducting a pilot project to understand how climate change may impact on the liability exposures of architects, engineers, contractors and other related service providers we insure. It is expected that this work will help to develop a framework for reporting across all business lines.
Our US Innovation Group is also exploring how to support insureds with services that boost sustainability and facilitate climate change adaptation in anticipation of regulatory and industry requirements. The group aims to take a more proactive, rather than reactive, approach to supporting insureds in risk mitigation following such successful examples as our healthcare underwriters working with hospitals to improve patient safety, and our cyber security risk advisory offering.
We believe in doing business in a manner that observes applicable law and regulation and pays due regard to the interests of our stakeholders. To ensure that we consistently meet this standard we operate a group-wide compliance framework designed to measure risk exposure, govern decision-making and monitor performance.
Staff training The compliance framework is supported by an annual staff training programme covering topics such as our approach to financial crime, underwriting due diligence, conduct risk and data security. We provide training to staff when they join Beazley and frequently throughout the course of their employment to ensure that we continue to operate in a responsible manner.
Sanctions As a responsible business, we adhere to all applicable financial and trade sanctions. We closely monitor sanctions developments and are primed to respond when changes occur. To ensure compliance with applicable regimes, we have embedded sanctions due diligence procedures into our underwriting and claims processes and ensure continued understanding of sanctions developments through staff training.
• conflicts of interest policy • customer conduct protocol • broker services protocol • acquisition cost protocol • anti-fraud policy
Anti-money laundering We have no appetite for Beazley being used as a vehicle for financial crime. Our controls include monitoring transactions and ascertaining the identity of our counterparties. Instances of suspicious activity are acted on in accordance with the Beazley Financial Crime Policy, which reflects the requirements of money laundering and tax legislation in the jurisdictions in which we operate. Staff are trained to refrain from entering into suspicious transactions and to report all such activity to the compliance team so that any necessary notifications can be made to external agencies.
Conduct We pride ourselves on how well we can meet the needs of our customers; conduct is therefore a core aspect of our business. It permeates our culture and informs how we design, market and service our products. We ensure the application of good conduct principles by: • promoting a top down culture that places the customer centre stage; • ensuring rigorous assessment, design and review of our products; • clearly and fairly marketing all products and services; • insisting on transparent commission and remuneration structures; • maintaining oversight of delegated authorities and other distribution channels; • operating a fair and responsive claims and complaints handling process; and
The following policies govern our management of data: • information security strategy • information security policy • information security risk assessment and management policy • global privacy policy and privacy notice
In all, our information security and privacy programme is built around a framework of prepare, protect, detect, respond and recover. This enables us to take precautions, act decisively and protect the interests of our data subjects.
Senior management oversight Beazley’s executive management is ultimately responsible for the success of our compliance framework and there is top down commitment to ensuring good conduct and regulatory compliance across the group. Effective oversight of the framework is achieved by analysing our transactional data and monitoring business operations.
Our key differentiators; Our business model; Statement of the chair; Chief executive’s statement; Q&A with the chief executive; Operational update; Risk management; Responsible business; Section 172 statement; Directors’ report; Letter from our chair; Board of directors; Statement of corporate governance; Letter from the chair of our remuneration committee; Directors’ remuneration report 01-09; 16-23; 41-77; 79-124
An initiative for everyone At Beazley we appreciate and support the mix of cultures, backgrounds and experiences which represent our organisation. Our clients welcome having a diverse representation of talent that draws from a combination of perspectives. Our people also value our inclusive culture and the efforts being made in this area with 83% of staff reporting being engaged by our approach to inclusion and diversity in the 2019 employee survey.
Celebrating our differences We are proud of our culture which allows our people to feel included and empowered to make changes and drive progress in areas that are important to them. This is demonstrated by the success of our employee led networks and initiatives.
In the spirit of inclusion, we want to recognise calendar events that are important to a range of our people. During the year, our people shared their personal stories related to black history month, the festival of Diwali and world mental health day among others. We continue to encourage personal story telling as a way to ensure we maintain celebrating each other, bringing us closer together and embodying our inclusive culture.
“ During 2019 there has been visible progress on inclusion and diversity at Beazley, particularly in relation to gender diversity. Additionally, there is strong evidence that we are becoming an employer of choice for individuals from a wide variety of diverse backgrounds. We are proud of the progress made so far while recognising we must strive for continuous development and improvement in all that we do. In 2020 our aim is to continue to attract and retain the best possible talent so we benefit from a range of perspectives.”
Sarah Booth Chair of the diversity steering group 65www.beazley.com Beazley Annual report 2019
Throughout the year the board considered the wider impact of strategic and operational decisions on the company’s stakeholders. Examples included the various board changes undertaken throughout the year, the change of auditors, the approval of the Tier 2 debt raising by its subsidiary Beazley Insurance dac, and the renewal of the letter of credit and revolving credit facility. The remuneration committee also began consultation on updating the company’s remuneration policy which will be put to a shareholder vote at the 2020 AGM. The board believes that the interests of all stakeholders are aligned in these decisions. The company complies with the Prompt Payment Code reporting requirements and publishes its average payment times for supplier invoices. Where a supplier proposes payment terms that differ from our standard terms, the company uses its best endeavours to accommodate the supplier’s terms.
The board receives reports on the results of the survey together with the action plans that management intend to take forward. The areas that had the greatest improvement from the prior survey were inclusion and diversity, work/life balance, and empowerment and autonomy, which reflects the efforts that were made in these areas. In addition, there are regular presentations and updates given to staff, and feedback is actively encouraged. When travelling to Beazley’s offices, the executive committee members and nonexecutive directors will actively engage with staff and often host question and answer sessions. Emanating from the requirements of the UK Governance Code, enhancements were made to employee engagement mechanisms in 2019, with the introduction of the ‘Sounding Board’ which is chaired by Bob Stuchbery. Bob is the non-executive director nominated by the board to bring the views of the workforce to the boardroom. Bob has met with the group twice in 2019 and will continue to meet with the group ahead of board meetings and the board strategy day in 2020. The board sees the input of this group as being particularly important in discussions on the group’s strategy, and acknowledges this input will evolve over time. For further information please see pages 64 to 65.
• Our shareholders: The support and engagement of our shareholders is imperative to the future success of our business. In all of their decision making, the board ensured that they acted fairly with regard to members of the company. We have productive ongoing dialogue with a number of our investors. We are in touch with all of our shareholders at least three times per annum with information about shareholder meetings, dividend payments and the company’s financial results. We have regular meetings with institutional investors and analysts to understand their views and address any concerns. Towards the end of 2019 we entered into consultation with over 20 of our largest shareholders and three proxy advisory agencies explaining proposed changes to our remuneration policy. Having taken the feedback of our shareholders on board, further changes were made to the recommended policy. These changes included lowering the pension contributions for executive directors to be in line with the contribution available to the wider workforce, and the introduction of a minimum bonus deferral. The remuneration committee remains cognisant that it must ensure that the remuneration policy remains fit for purpose in order to attract and retain the best talent. Other engagement included the company’s chair meeting with five of our significant shareholders to understand their views on the company.
• Our broker partners: There is regular, coordinated engagement with our key broker partners which is facilitated through our broker relations team. There are a number of annual industrywide events that bring our senior management together with the senior leaders of the broking firms. The board receives updates on our key broker relationships.
• Regulators: We have transparent communication with our key regulators which is facilitated through our compliance team. Our business teams and the non-executive directors of our regulated entities have ongoing engagement with our regulators on an ad hoc basis, including when requested to discuss specific matters. Any significant regulatory engagements are reported to the board.
Management report The directors’ report, together with the strategic report on pages 1 to 70, serves as the management report for the purpose of Disclosure and Transparency Rule 4.1.8R.
Directors’ responsibilities The statement of directors’ responsibilities in respect of the annual report and financial statements is set out on page 125.
Review of business A more detailed review of the business for the year and a summary of future developments are included in the statement of the chair, the chief executive’s statement and the financial review.
Results and dividends The consolidated profit before taxation for the year ended 31 December 2019 amounted to $267.7m (2018: $76.4m).
The directors announce a second interim dividend of 8.2p per ordinary share (2018 second interim dividend: 7.8p). The dividend, together with the first interim dividend of 4.1p per ordinary share (2018 first interim dividend: 3.9p), gives a total of 12.3p (2018: 11.7p).
The aforementioned second interim dividend will be paid on 30 March 2020 to shareholders on the register on 28 February 2020.
In accordance with provision C.2.2 of the UK Corporate Governance Code, the directors have assessed the viability of the group. The viability statement, which supports the going concern basis mentioned above, is included in the risk management section on page 48.
Further information can be found in the statement of corporate governance on page 79.
Directors’ interests The directors’ interests in shares of the company, for those directors 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 pages 96 to 124.
Corporate governance The company was compliant with corporate governance during 2019. More information on compliance is disclosed in the statement of corporate governance on pages 79 to 93.
Risk management The group’s approach to risk management is set out on pages 44 to 50 and further detail is contained in note 2 to the financial statements on pages 155 to 168.
Note: All interests disclosed to the company in accordance with DTRs that have occurred can be found on the news and alerts section of our corporate website: www.beazley.com
Part of our Beazley culture is creating an open and inclusive environment for all of our employees, celebrating our differences and creating internal networks to help us connect. We treat everyone equally irrespective of age, sex, sexual orientation, race, colour, nationality, ethnic origin, religion, religious or other philosophical belief, disability, gender identity, gender reassignment, marital or civil partner status, or pregnancy or maternity. We hire people with wider perspectives, leading to a more dynamic, innovative, and responsive organisation in touch with the changing world and marketplace. All applications for employment are fully considered on the basis of the skills and aptitudes of the applicant concerned, including those candidates with disabilities. In the event an employee becomes disabled, every effort is made to ensure that their employment with the group continues, and that appropriate support is arranged. It is the policy of the group that the training, career development and promotion of disabled persons should, so far as possible, be identical to that of other employees.
Authority to purchase own shares On 21 March 2019 shareholders approved an authority, which will expire on 21 June 2020 or, if earlier, at the conclusion of the 2020 Annual General Meeting (AGM) for the company to repurchase up to a maximum of 52,776,127 ordinary shares (representing approximately 10% of the company’s issued ordinary share capital). During the year, Beazley acquired 2,000,000 of its own shares into its employee benefit trust.
The agreement, which is between the company, other members of the group and various banks, provides that if any person or groups of persons acting in concert gains control of the company or another group obligor, then: (a) the banks are thereafter not obliged to participate in any new revolving advances or issue any letter of credit; and (b) the facility agent may: (i) require the group obligors to repay outstanding revolving advances made to them together with accrued interest; and (ii) ensure that the liabilities under letters of credit are reduced to zero or otherwise secured by providing cash collateral in an amount equal the maximum actual and contingent liabilities under such letters of credit.
Furthermore, the facility agreement includes a covenant that no group obligor (other than a wholly owned subsidiary) will, without prior consent of the banks, amalgamate, merge (within the meaning of generally accepted accounting principles in the UK), consolidate or combine by scheme of arrangement or otherwise with any other corporation or person. If this covenant was breached without prior consent, then the facility agent may: (a) require the group obligors to repay outstanding revolving advances made to them together with accrued interest; (b) ensure that the liabilities under letters of credit are reduced to zero or otherwise secured by providing cash collateral in an amount equal the maximum actual and contingent liabilities under such letters of credit; (c) declare that any unutilised portion of the facility is cancelled; and (d) give a notice of non-extension to Lloyd’s in respect of any letter of credit.
Annual general meeting The AGM of the company will be held at 14.30 on Wednesday 25 March 2020 at Plantation Place South, 60 Great Tower Street, London EC3R 5AD. The notice of the AGM details the business to be put to shareholders.
i) Beazley’s European office reporting covers activity associated with our principal UK office and Dublin data centre. These sites collectively accounted for 86% of Beazley’s European employees in 2018.
ii) Beazley’s US office reporting covers activity associated with our four principal US offices, Farmington, New York, Chicago Atlanta office. These sites collectively accounted for 75% of Beazley’s US employees in 2018.
iii) The scope of reporting for Beazley Group’s European activities is the same as that used for reporting 2017 GHG emissions. The 2018 scope of reporting for the US offices expanded from that for 2017 to include emissions associated with personal car use for business travel.
iv) Greenhouse gas emissions are calculated and presented in accordance with DEFRA Environmental Reporting Guidelines, using the UK Government’s GHG Conversion Factors for Company Reporting where possible.
• US office business travel by rental car, personal car and rail (Scope 3) where the US Environment Protection Agency (EPA, 2018) emission factors are used.
vi) Reporting is based on operational control. Beazley Group does not have operational control over the building infrastructure and plant at its offices due to the presence of facility management companies and shared tenancy; as a result, emissions primarily fall within Scope 2 and 3 of the Greenhouse Gas Protocol.
vii) Reported Scope 1 sources are: company cars, fuel use in back-up generators and fugitive refrigerant losses from AC systems. Emissions associated with electricity used in Beazley’s offices and Dublin data centre are reported as Scope 2 emissions. Scope 3 sources include business travel by air, rail, taxi and leased cars.
2018 GHG emissions for Beazley Group’s four principal North American offices are reported as 2,032.23 tCO2, 7% lower than those reported for 2017, which had an expanded scope of reporting relative to 2016. 2018 Scope 1 and 2 emissions (195.59 tCO2) are 9% lower than those reported for 2017 – due to a combination of reduced electricity consumption and lower carbon intensity grid electricity.
Scope 1 emissions 2016: 51.48 2017: 39.47 2018: 34.17 2016: data not available 2017: data not available 2018: data not available
Scope 3 emissions 2016: 4,235.00 2017: 5,380.06 2018: 4,801.04 2016: 1,483.74 2017: 1,977.05 2018: 1,836.64
On behalf of the board of directors, I am pleased to present the governance report in which we describe our governance arrangements, the operation of the board and its committees and how the board discharged its responsibilities throughout the year.
Company purpose The company has had a long established vision, and in addition, the board this year discussed how to articulate the company’s purpose in the most appropriate way. The board established the company’s purpose as follows: “ To provide innovative risk transfer solutions and deliver excellent claims service to our clients by creating a sustainable business for the benefit of all our stakeholders.”
The company has an open culture where there is regular communication with the workforce. These mechanisms are well embedded in the organisation and were enhanced this year when the board appointed non-executive director Bob Stuchbery to bring workforce feedback into the boardroom. In addition to the regular engagement that the executive team has with staff in all jurisdictions, the non-executive directors periodically travel to Beazley’s offices to meet with staff. Each year there is an employee roadshow that showcases a number of presentations on strategy and interactive sessions on areas such as inclusion and diversity. In May 2019, the board held some of its meetings, including the board strategy day, in the US. During this visit, the board hosted a social event with all employees from our Farmington, CT office. The board also received a number of presentations from US employees which gave them a broader view of the US succession pipeline. The board were also able to meet with a number of employees working in the New York City offices during their time there. The US now has over 600 employees and the US is an important market for the group.
Further details of the actions taken this year to improve the board’s performance can be found in the corporate governance section of the report on page 83. The 2019 board and committee effectiveness reviews were carried out by way of internal questionnaires. The board and its committees continue to operate effectively, but will be agreeing the actions that will be taken forward in 2020 to further enhance performance. We will report on the progress in implementing the recommendations made in the 2020 annual report.
Company culture An update on culture is provided to the board on an annual basis, and it was also a topic of discussion at the board strategy day. A number of information sources are used to gauge the company’s culture and these include: the employee engagement and leadership surveys, grievances raised, feedback from leavers and customer complaints. During 2019, the communications, culture and engagement team also ran informal sessions with employees across a number of locations to solicit anecdotal feedback on the way employees perceive the culture of Beazley. An integral component of our culture is to empower our people to find the best way to deliver results for the business, without confining them to a ‘one size fits all’ mentality. Beazley’s values - professionalism, integrity, effectiveness and dynamic - support Beazley’s culture.
Our committees and committee chairs The audit and risk committee assists the board of directors in fulfilling its oversight responsibilities for the financial reporting process, the system of internal control, the audit process, and the company’s process for monitoring compliance with laws and regulations and the code of conduct. It also ensures that an effective risk management process exists in the major regulated subsidiaries and that the Beazley group has an effective framework and process for managing its risks.
The nomination committee is focused on evaluating the board of directors, ensuring an appropriate balance of skills, considering and recommending board and committee candidates and considering board succession.
Governance framework Board of directors Audit and risk committee The audit and risk committee is chaired by John Reizenstein.
Robert Stuchbery Non-executive director and employee voice of the board Appointed: 11 August 2016 Experience: Bob had previously been appointed as a non-executive director to the board of Beazley Furlonge Ltd, the group’s Lloyd’s managing agency, where he chairs the risk committee. He brings extensive Lloyd’s experience, having been chief executive officer of Chaucer until 2015, and a deep knowledge of the Lloyd’s market and distribution and operational strategies. Committee: Audit and risk committee Skills: insurance, risk management and strategy.
Mutual Funds 54% Retail 13% Pensions 9% SWF 7% Insurance 6% Investment Trusts 4% Trading 2% ETF 2% Directors 1% Charities 1% Hedge funds 1%
There are currently 13 analysts publishing research notes on the group. In addition to research coverage from Numis and JP Morgan, the company’s joint corporate broker, coverage is provided by Autonomous, Credit Suisse, Investec, Jefferies, Keefe Bruyette & Woods, Morgan Stanley, Peel Hunt, Shore Capital, Exane Paribas, UBS and RBC.
Financial calendar 28 February 2020 Second interim dividend record date 25 March 2020 Annual general meeting 30 March 2020 Second interim dividend payment date for the six months ended 31 December 2019 23 July 2020 First interim dividend announcement for the six months ended 30 June 2020 78 Beazley Annual report 2019 www.beazley.com
The Code can be viewed on the www.frc.org.uk website. The governance section, together with the directors’ and remuneration reports, describes how we have applied the main principles of the Code and complied with its detailed provisions.
Key responsibilities The disclosure committee has responsibility to oversee the implementation of the governance and procedures associated with the assessment, control and disclosure of inside information in relation to the company.
George Blunden stepped down from the board on 21 March 2019 and was replaced as senior independent non-executive director by Christine LaSala. As senior independent director Christine will, if required, deputise for the chair. She is available to talk to shareholders if they have any issues or concerns or if there are any unresolved matters that shareholders believe should be brought to her attention. Angela Crawford-Ingle also stepped down from the board and as chair of the audit and risk committee on 31 May 2019. On 10 April 2019, the board appointed Nicola Hodson and John Reizenstein as non-executive directors. John Reizenstein was also appointed as chair of the audit and risk committee following Angela Crawford-Ingle’s retirement.
Martin Bride retired as an executive director on 23 May 2019 and was replaced by Sally Lake, as group finance director on the same date.
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.
Adrian P Cox 5 5 – – – – – –
1 George Blunden resigned as a director on 21 March 2019. 2 Martin Bride resigned as a director on 23 May 2019. 3 Angela Crawford-Ingle resigned as a director on 31 May 2019.
Beazley continues to work with Stonewall and the Business Disability Forum. Both organisations work closely with Beazley to identify the best support for our colleagues in the LGBT+ community, and for those living with disabilities, to help Beazley become a more inclusive and supportive place to work.
Training, information and support New directors receive appropriate induction training when they join the board of Beazley plc. They are asked to complete a skills and knowledge assessment and the company secretary, in conjunction with talent management, arranges and coordinates the appropriate training. There are a number of modules available to the directors which are regularly reviewed to ensure they meet best practice and the changing business environment. Where appropriate, mentoring is provided to new directors by an external provider. Annual training is provided for all directors. The training sessions include business and industry specific topics and information on changes to director duties and responsibilities and to legal, accounting, information security and tax matters. Bespoke training will also be provided if requested by any director.
To enable the board to function effectively and directors to discharge their responsibilities, full and timely access is given to all relevant information. In the case of board meetings, this consists of a comprehensive set of papers, including regular business progress reports and discussion documents regarding specific matters. Directors have access to an electronic information repository to support their activities. During 2019, the board continued to support the maintenance and development of Beazley’s information security programme to address changing and emerging cyber security threats. Director training included sessions on governance, investments and on the capital model. All directors allocate sufficient time to the company to enable them to discharge their responsibilities effectively. The terms and conditions of appointment for all the non-executive directors set out the expected time commitment and they agree that they have sufficient time to provide what is expected of them.
Audit and internal control Following the audit tender carried out in 2018, EY have been appointed as the new external auditor for the 2019 accounting year, as approved by the shareholders at the 2019 AGM. Further details of the transition of the audit from KPMG to EY can be found in the audit and risk committee report.
The board agreed the 2019 risk appetite for the group at the end of 2018 and, throughout 2019, the board has considered and acted upon the information presented to it in order to make risk based decisions against the 2019 risk appetite. Key components of the risk management framework include monthly control self assessments and six monthly risk assessments, with ad hoc risk assessments being conducted when required. These matters have been considered by the executive risk and regulatory committee each month and the audit and risk committee and board quarterly. In addition, the board has considered the quarterly Own Risk and Solvency Assessment report in the past year. This risk management framework has provided the board with an ongoing process for identifying, assessing, monitoring and managing the risks to the company, and accords with the UK Financial Reporting Council’s ‘Guidance on Risk Management, Internal Control and Related Financial Business Reporting’ document.
As part of the appointments process the nomination committee reviewed the membership of the committee during the year. Taken as a whole, the committee has an appropriate balance of skills specific to the industry within which the group operates, including recent and relevant financial experience, as required by the UK Corporate Governance Code. Details of the members’ relevant financial experience are given in their biographies under ‘board of directors’ on pages 76 and 77. All committee members are independent nonexecutives.
There is regular attendance by plc audit and risk committee members at the group’s regulated subsidiary audit and/ or risk committees. The committee also receive regular updates from the audit and risk committees of the group’s regulated subsidiaries. This further demonstrates our proactive approach to understanding our control and risk environment at all levels of the organisation.
The internal and external auditors attend committee meetings and regularly meet in private with the committee. In addition the chair of the audit and risk committee has regular contact with the external and internal auditors throughout the year and members of the committee met individually with the Central Bank of Ireland and the Prudential Regulation Authority during 2019.
We have challenged ourselves to ensure the key messages about the performance of the business are delivered in a manner consistent with our own understanding and interpretation of the information we receive.
On the basis of the information provided by the group actuary throughout the year and at the year end and the consistent application of Beazley’s reserving philosophy, the committee was satisfied that the reserves held on the group statement of financial position at 31 December 2019 were appropriate.
ii) Financial close process The audit and risk committee continues to focus on the group’s close and estimation processes generally, and the related controls carried out by the business and specifically the finance team. The close process is particularly important in the current environment where insurers are being required to adhere to increasingly tight regulatory reporting timelines and the audit and risk committee remains committed to ensuring that the robust nature of our control environment is not compromised during this period of change.
During the year and at year end, the committee received updates from management on the level of estimations used in the close process and the controls carried out to review these estimates retrospectively. The main areas of estimation and judgement remain materially consistent with prior years, with IBNR representing the most crucial estimate within the group’s financial statements. The committee also reviews the process and controls related to actuarial and underwriting estimates of written premium. The committee continued to receive periodic reporting from both the finance and actuarial functions on our estimation process, and the related controls, in respect of claims reserves, premium income estimates and other key financial statement captions. The committee was satisfied that, based on the information provided to them, the estimates used in the financial close process are appropriate.
The committee notes that the overall investment strategy is broadly unchanged from prior periods. The committee receives updates from the group finance director and/or the chief investment officer and it has reported for 2019 that the investment portfolio is in line with the board approved risk appetite, that carrying values of the portfolio as at 31 December 2019 are appropriate and that the valuation methodologies applied to each hierarchy level are consistent with the accounting policies. Committee members are invited to and regularly attend the investment committee.
No misstatements that were material in the context of the financial statements as a whole were identified and the committee was satisfied with the approach employed by management in valuing the financial assets at fair value on the balance sheet at 31 December 2019.
Statement of corporate governance continued Audit and risk committee continued v) Recoverability of reinsurance assets The committee received confirmation from management that over 90% of Beazley’s reinsurance receivables are due from highly rated institutions. During the year, the committee has not noted any instances where poor quality reinsurers have led to a material financial loss and is comfortable with the monitoring processes management have described and put in place to ensure this continues.
vi) Dividends, going concern and viability During key reporting periods, management outlined to the committee in detail their support for the basis of preparation adopted in the financial statements and any statements around the future viability of the group.
The committee reviews detailed projections of future cash flows, profit forecasts and capital requirements under various scenarios, including scenarios stressed in terms of claims frequency and liquidity. In the current year, we considered the group’s capital position with regards to the group’s £75m retail bond maturing and the issuance of new debt of $300m. We also consider the appropriateness of management’s viability statement and the period over which this analysis is performed. The committee was satisfied by the level of analysis presented during the year and the related approach taken and statements made in the group’s key external reporting.
vii) Tax The committee continues to monitor the evolving tax environment and in particular considered management’s approach to Diverted Profits Tax in the UK and BEAT in the US. The committee is of the view that the approach taken by management, as outlined in note 9 to the financial statements, is reasonable.
viii) Intangible asset valuation The audit and risk committee received an overview of management’s valuation of intangible assets. The committee was satisfied that management’s approach in respect of the carrying value of all of the group’s intangible assets is reasonable.
The work undertaken and key matters considered during the year in these areas are set out below: Audit and financial reporting a) Internal audit The group’s internal audit function reports directly, and is accountable to, the committee and the head of internal audit has direct access to the committee chair. In 2019, John Beauchamp was appointed to lead the internal audit function. The committee has reviewed the effectiveness of the function and remains satisfied that the internal audit function had sufficient resources during the year to undertake its duties.
During 2019 the committee: • considered the results of all internal audit reports, and the findings and themes emerging from them; • monitored the implementation of the 2019 internal audit plan; • reviewed and approved the basis for internal audit planning. This included reviewing and approving the group’s risk-based audit universe and the internal audit plan, and reviewing other business developments which could also potentially be the subject of internal audit work in the coming year. It also included challenging the frequency of audits in certain areas of the business and challenging the balance between thematic reviews and full end-to-end audits; • reviewed and approved the internal audit charter; • reviewed and approved the internal audit budget for 2019; • received information relating to the internal audit functions quality assurance activities; 88 Beazley Annual report 2019 www.beazley.com
• reviewed the output of the external quality assessment carried out during the year on internal audit.
The committee oversaw the transition from KPMG to EY during the year and considered the transition to be effective.
These considerations are taken into account by the committee when determining whether to reappoint the external auditor.
iii) Non-audit services The audit and risk committee’s responsibility to monitor and review the objectivity and independence of the external auditor is supported by a policy that we have developed in relation to the provision of non-audit services by the auditor. During 2019, our non-audit services policy was updated, enhanced and reviewed by the committee.
Solvency II reporting During 2019 the committee has reviewed and approved the group’s 2018 Solvency and Financial Condition Report and Regular Supervisory Report as well as approving the Solvency II policy documentation for the group.
To assist the board the committee receives reports and updates from the compliance function on various issues including, but not limited to, regulatory developments, routine and non-routine interactions with the group’s regulators, any significant instances of non- compliance with regulatory or internal compliance requirements.
Competition and Markets Authority Order 2014 statement of compliance The committee confirms that during 2019 the group complied with the mandatory audit processes and audit committee responsibilities provisions of the Competition and Markets Authority Statutory Audit Services Order 2014 as presented in this report.
Sir Andrew Likierman 25 March 2015 6/6 George Blunden (resigned 21 March 2019) 1 January 2011 2/2 Christine LaSala 21 March 2019 4/4 John Sauerland 11 May 2016 6/6 Catherine Woods 1 October 2018 5/6 91www.beazley.com Beazley Annual report 2019
Responsibilities of the committee The committee’s main responsibilities are to, inter alia: • regularly review the structure, size and composition (including the skills, knowledge, experience and diversity) required by the board compared to its current and projected position; • give full consideration to succession planning for executive and nonexecutive directors and in particular for the key roles of chair and chief executive, senior executives and any other member of the senior management that it is relevant to consider whilst considering a diverse pipeline of talent; • ensure the directors have the required skills and competencies; • review annually the time required from non-executive directors; • review the results of the board performance evaluation process that relate to the composition and skills and competencies of the board and ensure an appropriate response to development needs; • recommend to the board appointments to the role of senior independent director and chair as well as membership of board committees; and
The committee had a busy 2019 overseeing the changes to Beazley’s management.
We have a defined policy and strategy that will enable us to: • nurture diverse individuals across all areas of the business and encourage them to grow into senior positions within our organisation; • develop plans on how to best support diversity in a way that is both locally relevant and globally impactful; • support, mentor and encourage individuals from diverse backgrounds to grow and develop within Beazley; • have leadership and sponsorship of our vision at the most senior level of our organisation; • regularly review our employment policies and practices. We expect our people to work with us to further enhance our diversity objectives; and
David Roberts 22 March 2018 5/5 Christine LaSala 21 March 2019 4/4 Sir Andrew Likierman 25 March 2015 5/5 George Blunden (resigned 21 March 2019) 1 January 2011 1/1 Catherine Woods 1 October 2018 4/5 93www.beazley.com Beazley Annual report 2019
Dear shareholder On behalf of the board, I am pleased to present the 2019 directors’ remuneration report. I would like to take this opportunity to thank shareholders for the strong level of support we received last year when our 2018 directors’ remuneration report was approved by nearly 98% of shareholders.
Remuneration policy In accordance with the normal three-year cycle, our shareholders will have an opportunity to vote on a revised remuneration policy at the 2020 AGM. Over the last 12 months the remuneration committee has undertaken a full review of the policy to ensure that it supports our strategy, promotes Beazley’s long-term success and is aligned with our purpose. During our review we also took into account the changes to the UK Corporate Governance Code and evolving shareholder views on remuneration.
Following our review we concluded that our existing policy was fit for purpose and well aligned to our purpose, culture and values. The basis of our policy will continue to be, to attract and keep those who are among the best in the world in specialist insurance, rewarding sustained performance and keeping the company competitive. The committee does, however, think that a number of minor changes are appropriate to reflect emerging views on executive pay and to meet the new requirements of the UK Corporate Governance Code. Immediately following this letter we have set out further details on how our policy aligns with good UK corporate governance. The changes we are proposing include the introduction of a post-employment shareholding requirement, alignment of executive directors pension contributions to the level available to the majority of the UK workforce (currently 12.5% of salary) and increased bonus deferral. We have also taken into account the views of our shareholders and are proposing to enhance our disclosure to provide additional information on our approach to determining bonus awards. Further detail on the proposed changes can be found in the policy itself and we have set out an explanation of the strategic rationale for the policy in the directors’ remuneration report.
Directors will receive the second tranche (instalment) of the 2015 LTIP and the first tranche of the LTIP for 2017. The tranches are due to vest (pay out) at 55.0% and 0% of the maximum respectively. These percentages reflect sustained growth in net asset value per annum of 13.7% and 9.5% respectively for the five and three year performance periods.
Executive salaries for 2020 The average executive director salary increase for 2020 was 2.7%, which was below the average increase for the wider workforce.
Shareholders I would like to thank those shareholders who took the time to discuss the proposed changes to our policy during the year. We value the views of our shareholders highly and hope to receive your support for both the new policy and the directors’ remuneration report at the 2020 AGM.
The following table summarises how the committee addressed the factors set out in the UK Corporate Governance Code when determining the remuneration policy: Factor Details
At Beazley performance-related remuneration is an essential motivation to management and staff and is structured to ensure that executives’ interests are aligned with those of our shareholders. The committee is mindful that we operate an atypical bonus with awards to individuals made from a profit pool and determined taking into account financial, corporate/ strategic and individual performance. A key principle is that the committee exercises its judgement in determining individual awards. We have expanded our disclosure to provide shareholders with further clarity on the way in which we determine annual bonuses.
In determining our remuneration framework the committee was mindful of avoiding complexity and making arrangements easy to understand for both participants and our shareholders.
Predictability The range of possible values of rewards to individual directors and any other limits or discretions should be identified and explained at the time of approving the policy
■ Share price at grant ■ Share price appreciation 2015 award 2017 award
LTIP performance 2016-2019 NAV and TSR growth 97www.beazley.com Beazley Annual report 2019
Element Overview of policy Implementation and outcomes during 2019 Implementation for 2020
Salaries for 2020 will be as follows: • D A Horton: £495,000 • A P Cox: £390,000 • S M Lake: £350,000
ROE in the year was 15%. Profit for the year was $267.7m.
In 2019, the following grants as a percentage of base salary were made, subject to the usual NAVps performance condition: • D A Horton: 200% • A P Cox: 150% • S Lake: 150%
In 2020, the following grants as a percentage of base salary will be made, subject to the usual NAVps performance condition
From 2020 the requirement for all executive directors will be 200% of salary.
The CEO and CUO met their shareholding guidelines. The CFO was appointed during the year and has made progress towards meeting her guideline.
From 2020, we have introduced post-employment shareholding guidelines. Executive directors are expected to maintain 100% of their shareholding requirement for the first year post-departure and 50% of their shareholding requirement for the second year post-departure.
Directors’ remuneration policy This part of the report sets out Beazley’s directors’ remuneration policy which will be subject to a binding vote at the 2020 AGM.
Changes to the remuneration policy The remuneration committee followed a robust decision-making process to determine the new remuneration policy, including an in-depth review of the current policy taking into account input from management and our independent advisors. The committee also sought the views of the group’s major shareholders and took these into account in determining the final policy. The key changes between this policy and the policy which was approved by shareholders at Beazley’s 2017 AGM are as follows: • From 2020 the disclosure of our approach used to determine annual bonuses will be enhanced by providing additional information on financial, corporate/strategic and individual performance. An incentive pool will continue to be calculated as a percentage of profit with reference to return on equity.
• Shareholding requirements, which have operated for a number of years, will now form part of the policy. The shareholding requirement for the chief executive will continue to be 200% of salary and the requirement for other executive directors will be increased from 150% of salary to 200% of salary.
• The holding period that was introduced to the three year portion of the LTIP in 2019 will now form part of the policy.
• Post-employment shareholding requirements will be introduced whereby executives are expected to maintain a shareholding in the company for two years following cessation.
Other minor amendments have been made to aid the administration of the new policy, to reflect the changes referred to above and to reflect changes in practice since 2017.
Remuneration policy table The following tables set out descriptions of each component of director remuneration packages comprised in the Beazley directors’ remuneration policy.
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; • development of the individual in the role; • increased size, scope or complexity of the organisation; and
An individual overall cap of 400% of salary will apply. Cash bonuses will normally be capped at 240% of salary with any amount above this deferred into shares.
LTIP To align the senior management team’s interests to the long term performance of the group by linking reward to performance over the longer term.
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.
There is no overall maximum as the cost of insurance benefits will vary depending on the individual’s circumstances and the cost of relocation will vary depending upon the jurisdiction. The limits on participation in all-employee share plans reflect the rules of those plans and any limits imposed by applicable tax legislation from time to time.
Current policy is to contribute to a defined contribution pension plan. An equivalent cash alternative may be offered. Legacy defined benefit pension arrangements are in place for A P Cox. Further service accruals ceased on 31 March 2006.
Non-executive directors Non-executive directors’ fees comprise payment of an annual basic fee and additional fees to reflect specific responsibilities, where applicable. No non-executive director participates in the group’s incentive arrangements or pension plan.
Additional fees are paid to reflect additional responsibilities of certain non-executive directors, as follows: • senior independent director fee • audit and risk committee chair fee • remuneration committee chair fee • subsidiary board membership and chair fees • membership fee for non-executive directors on the audit and risk committee • membership fee for non-executive directors on the remuneration committee • fee for non-executive director representing employee voice Non-executive directors may receive additional fees in the future if in the view of the board this was considered appropriate, including in circumstances of additional committees, other non-executive director positions, or to reflect additional time commitments in appropriate circumstances. 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. Non-executive directors do not normally receive any benefits however these may be provided in the future if in the view of the board this was considered appropriate. Total fees paid to non-executive directors will remain within the limit stated in the Articles of Association.
Notes to the remuneration policy table Recovery provisions (clawback and malus) apply as follows to awards granted from 1 January 2020 onwards (provisions applying to previous awards are described in previous Directors’ remuneration reports).
LTIP and deferred share awards will be operated in accordance with the rules of the relevant plan. In accordance with those rules the committee has discretion in the following areas: • in the event of a variation of Beazley’s share capital or a demerger, delisting, special dividend, rights issue or other similar event, which may, in the committee’s opinion, affect the current or future value of shares, the number of shares subject to an award and/or any performance condition attached to awards, may be adjusted. Awards under Beazley’s other share plans have similar adjustment provisions; • the committee may determine that awards may be settled, in whole or in part, in cash, but would only do so in exceptional circumstances such as where there is a regulatory restriction on the delivery of shares; • the committee may substitute or amend a performance condition if one or more events occur which cause the committee to consider that a substituted or amended condition would be more appropriate and would not be materially more or less difficult to satisfy; • the committee may in its discretion, adjust the vesting level of LTIP awards, including to reflect underlying financial or non-financial performance or if the vesting level would otherwise not be appropriate in the circumstances; • the committee may determine the treatment of awards on a winding up, a change of control or similar event in accordance with the rules of the relevant plan; and
• the committee may determine the basis on which dividend equivalents will be calculated, which may include notional reinvestment.
Financial performance (including profit and ROE), corporate/strategic performance (including risk adjustment) and individual performance.
• A key principle of the process is that the committee exercises its judgement in determining individual awards taking into account the individual’s contribution and performance.
Growth in net asset value per share (NAVps) over three years (as regards a portion of the award) and five years (as regards the balance of the award).
• Creates alignment to Beazley’s central key performance indicator, and recognises that NAVps is a key item supporting increases in share price and shareholder returns.
• The committee reviews the NAVps targets periodically to ensure they remain appropriate with reference to the internal business plan, the external environment and market practice.
• The Beazley staff underwriting plan provides for participants to contribute personal capital to Beazley syndicates. Selected staff are invited to participate through bonus deferral with an element of cash incentives ‘at risk’ as capital commitments.
All employees in the group may participate in a defined contribution pension plan, and are offered benefits such as private medical insurance and permanent health insurance. Beazley also operates all-employee share plans to create staff alignment and promote a sense of ownership.
■ Minimum remuneration ■ Annual variable remuneration ■ Long term remuneration ■ Share price appreciation
The committee reserves the right to make any other payments in connection with a director’s cessation of office or employment where the payments are made in good faith in discharge of an existing legal obligation (or by way of damages for breach of such an obligation) or by way of a settlement of any claim arising in connection with the cessation of a director’s office or employment. Any such payments may include amounts in respect of accrued leave, paying any fees for outplacement assistance and/or the director’s legal or professional advice fees in connection with his or her cessation of office or employment.
In the event of a director’s departure any outstanding share awards will be treated in accordance with the relevant plan rules.
Bonus There is no automatic entitlement to annual bonus. Taking into account the circumstances of leaving, the committee retains the discretion to award a bonus in respect of performance in the financial year with appropriate consideration of time pro-rating.
Deferred shares If a director ceases office or employment with the group any unvested awards will lapse unless the individual is a good leaver. Good leaver circumstances are cessation by reason of injury, ill-health, permanent disability or retirement (with the agreement of the employing company) and, if the committee so determines, redundancy, the sale of the individual’s employing company or business out of the group, or such other circumstances as the committee may determine. In these good leaver circumstances awards may vest in full or be time pro-rated, and be delivered on cessation or at the normal time. If a director dies his or her awards will vest in full.
LTIP If a director ceases office or employment with the group any unvested awards will lapse unless the individual is a good leaver. An individual is a good leaver if employment ceases because of death, ill-health, injury, disability, the sale of the individual’s employing company or business out of the group or for any other reason at the committee’s discretion (except where a participant is dismissed lawfully without notice). Awards will vest on the normal vesting date, unless the committee determines that awards should vest at the time the individual ceases employment. Any applicable holding period will ordinarily continue to apply, although the committee may bring the holding period to an end early in exceptional circumstances (for example in the event of termination due to ill health). If the participant dies awards will vest as soon as practicable after the date of death and the holding period will cease to apply. Awards will vest taking into account the satisfaction of any performance condition and, unless the committee determines otherwise, the period of time that has elapsed since the award was granted until the date of cessation of employment.
Pension The director will be eligible to receive the standard contribution to the defined contribution pension plan during the notice period, or cash equivalent. Under the Beazley Furlonge Limited Final Salary Pension Scheme, on early retirement the director receives a pension which is reduced to reflect early payment in accordance with the rules of the scheme.
In the event of a change of control or winding up of the company, treatment of share awards will be in accordance with the relevant plan rules. In these circumstances unvested LTIP awards and deferred shares may vest early. The extent to which unvested LTIP vest would be determined by the committee taking into account the satisfaction of any performance conditions, the period of time that has elapsed since the award was granted until the date of the event and any other factors the committee considers relevant. Deferred shares will vest to the extent determined by the committee taking into account any factors it considers relevant. Alternatively, the committee may determine that LTIP awards or deferred shares may be exchanged for equivalent awards on such terms as agreed with the acquiring company. If there is a demerger, delisting or other event which may materially affect the company’s share price, LTIP awards may vest on the same basis as for a takeover. In the event of a change of control or other relevant event during the holding period applying to an LTIP award, the holding period will come to an end.
The remuneration committee also regularly reviews guidance from shareholder advisory bodies such as the Investment Association, ISS and Glass Lewis, as well as the specific policies of our shareholders. These guidelines and policies were also carefully considered in developing the policy.
Minor changes The committee may make minor amendments to the policy set out above (for regulatory, exchange control, tax, or administrative purposes, or to take account of a change in legislation) without obtaining shareholder approval for such amendments.
Single total figure of remuneration ▪ The tables below set out the single figure of total remuneration for executive directors and non-executive directors for the financial years ending 31 December 2019 and 31 December 2018.
1 A portion of the bonus awards shown in the table above is deferred into shares for three years. Details of the deferral in respect of 2019 awards can be found on page 113. 2 A significant portion of the single figure values shown arises from the substantial share price appreciation over the period. For 2019 the share price at the time
LTI awards were made was, 295.73p for the 2015 award and 434.33p for the 2017 award, while the average share price in the last three months of 2019 was 564.6p. For 2019 the proportion of the LTI figures shown attributable to share price appreciation was £116,000 for Martin L Bride, £135,000 for Adrian P Cox, £238,000 for D Andrew Horton and £28,000 for Sally M Lake.
Catherine M Woods8 2019 80,134 1 Other than for the chair, fees include fees paid for chair of the audit and risk and remuneration committees, and for the role of senior independent director, as well as fees, where relevant, for membership of the subsidiary boards of Beazley Furlonge Limited (BFL) and Beazley Insurance dac, the chair of the BFL risk committee and Beazley Insurance Company, Inc. (BICI).
2 George P Blunden stepped down from the plc board and as senior independent director (SID) effective 21 March 2019.
3 Angela D Crawford-Ingle stepped down from the plc board and as chair of the audit and risk committee effective 31 May 2019.
4 Nicola Hodson joined the plc board on 10 April 2019 and the figure in the table above represents her fees from this date.
5 Christine LaSala received fees of $10,500 for her role on the BICI board which are represented in the table above. The fees for this role have been converted at an exchange rate of 1.27. Christine also joined the remuneration committee and nomination committee as well as becoming the SID on 21 March 2019.
8 Catherine M Woods’ non-executive director fee was based on €89,750 (2018: €87,000) and has been converted into sterling for this table at the average exchange rate of 1.12 (2018: the fee was converted into £76,788 at the average exchange rate of 1.13).
Following changes to pension tax legislation that came into force from April 2011, if an individual exceeds the lifetime or annual allowance, an equivalent cash alternative is offered. For the directors that were in place prior to 2019, Andrew Horton and Adrian Cox, the cash alternative is equal to 13.2% of salary.
Following her appointment to the board in 2019 Sally Lake’s pension level was set at 12.5% of salary, which is aligned with the rate available to the majority of the UK workforce.
Once the annual bonus pool has been calculated the committee determines individual allocations taking into consideration corporate/ strategic achievements and individual achievements. 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.
Annual bonus out-turn for 2019 The process for determining 2019 bonuses is described below, including full details of the ROE targets underpinning our bonus approach along with the guideline levels which are used by the committee in its determination for each executive director.
Assessment of corporate achievements In determining annual bonuses for 2019 the committee took into account a range of financial and strategic elements as set out below. Element Achievements
• The delivery of a profit after tax of $234.1m and the return of $83.2m to shareholders by way of dividend as a result of strong investment returns and rates responding sharply to heightened claims activity in many lines of business.
• Launched new products including the Site Lender Environment Asset Protection, to protect lenders from pollution risks that could impair the value of property used as collateral for commercial loans. • Opened offices in Seattle, Denver and Phoenix as part of expanding our presence in the US. • Moved to a new Activity Based Working (ABW) office in New York. ABW is being rolled out across the business as we move or open new offices, giving employees greater options for working in the most productive way.
• Beazley Digital has successfully trialled across several product lines new ways to maximise use of technology to give seamless and efficient solutions to clients and brokers.
• Faster, Smarter Underwriting has focused on larger more complex risks and is increasing our efficiency and quality of complex risk underwriting and claims settlement.
• Closer to the Client has identified a group of clients to pilot a new way of working with and has increased cross-selling and client retention across the business.
• London Market has focused on promoting London as a great place to write specialist insurance and is working on improving the efficiency of the London market.
Assessment of individual contributions While a number of the specific individual objectives of the executive directors are considered commercially sensitive, the following provides details of executive director achievements which the committee took into account.
• Deliver 2019 business plan KPI’s. • Strengthen capabilities in third party capital management.
• Focus on underperforming classes of business saw Beazley exit US trucking, construction and engineering and UK cargo and freight portfolio, along with the fishing vessels and UK commercial hull.
• Development plans in place and being implemented for all executive committee members.
• Delivered five year plan for syndicate 5623 • Strong succession plans delivered during 2019, with three internal successors for five executive committee roles. New succession plans have been created and development plans now being implemented for individuals identified.
Group finance director (Martin L Bride to May 2019 Sally M Lake from May 2019)
Finance Charter. • Ensure the business is prepared for IFRS 17.
• Strong capital management, with debt raised as planned. • Competitive investment return delivered. • Good focus across the business on expense management.
■ Pre tax profit Average director bonus as a percentage of salary $m
Average executive director bonus as a percentage of salary c.64% c.272% c.333% c.294% c.291% c.272% c.150% c.73% c.212%
For 2019, the portion of each director’s annual bonus deferred into shares was as follows: Deferred into shares
Martin L Bride £110,000 Adrian P Cox £270,000 D Andrew Horton £330,000 Sally M Lake £111,300 113www.beazley.com Beazley Annual report 2019
Bonus awards for 2020 The annual bonus for 2020 will operate within a similar framework as set out above however we will enhance the disclosure of our approach by providing additional information on financial, corporate/strategic and individual performance. In addition, a 20% minimum deferral in to shares will be in operation with the maximum portion of the bonus that can be deferred into shares will be increased from 37.5% of the bonus to 40% of the bonus. The level of deferral will continue to depend on the level of the bonus.
• in accordance with the updated UK Corporate Governance Code, since 2019, the first tranche of LTIP awards has been subject to a further two year holding period taking the total time frame for the entire award to five years.
LTIP awards vesting in respect of the year ▪ The LTIP awards shown in the single total figure of remuneration for 2019 include: • the second tranche of awards granted on 10 February 2015. These are due to vest on 10 February 2020, subject to the achievement of a NAVps growth performance condition over the five years ended 31 December 2019; and • the first tranche of awards granted on 8 February 2017. These are due to vest on 8 February 2020, subject to the achievement of a NAVps growth performance condition over the three years ended 31 December 2019.
Actual NAVps growth achieved in the five years to 31 December 2019 was 13.7% p.a. which resulted in 55.0% of the second tranche of the 2015 awards vesting.
LTIP awards for 2019 ▪ During 2019 LTIP awards with a face value equal to 200% of salary for the CEO and 100% to 150% of salary were granted to executive directors. The awards were as shown in the table below.
LTIP Martin L Bride Nil cost option (LTIP) 150% of salary – – 10% 31/12/2021 31/12/2023 Adrian P Cox Nil cost option (LTIP) 150% of salary 111,729 570,000 10% 31/12/2021 31/12/2023 D Andrew Horton Nil cost option (LTIP) 200% of salary 189,156 965,000 10% 31/12/2021 31/12/2023 Sally M Lake Nil cost option (LTIP) 100% of salary 37,243 190,000 10% 31/12/2021 31/12/2023 Deferred bonus (in respect of 2019 bonus) Martin L Bride Deferred shares n/a – – – – – Adrian P Cox Deferred shares n/a 8,820 45,000 – – – D Andrew Horton Deferred shares n/a 10,290 52,500 – – – Sally M Lake Deferred shares n/a 3,430 17,500 – – – 1 The face value of shares awarded was calculated using the three day average share price prior to grant, which was 510.16p.
The executive directors who are participating in the 2018 and 2019 year of account, are currently fully funded in the plan and no further bonus deferral was made in 2019. Sally Lake will be participating in the plan for the first time for the 2020 year of account.
From 2020 executive directors are expected to maintain a shareholding post-departure.
Martin Bride stepped down from the board at the conclusion of its meeting on 23 May 2019 and retired on 31 August 2019. The remuneration committee determined that Martin would be treated as a good leaver for the purposes of his incentives. Martin remained eligible for a pro-rated bonus for the year as shown on page 108. Martin’s outstanding share awards subsist to their normal release/vesting date subject to performance where applicable.
Christine LaSala 1 Jul 2016 AGM 2020 Sir J Andrew Likierman 25 Mar 2015 AGM 2021 David L Roberts 1 Nov 2017 AGM 2021 John P Sauerland 5 May 2016 AGM 2020 Robert A Stuchbery 11 Aug 2016 AGM 2020 Catherine M Woods 1 Jan 2016 AGM 2022 A John Reizenstein 10 Apr 2019 AGM 2022 Nicola Hodson 10 Apr 2019 AGM 2022
Other incentive arrangements at Beazley (not applicable to executive directors): Element Objective Summary Profit related pay plan To align underwriters’ reward with the profitability of their account.
Angela D Crawford-Ingle4 34,207 – – – – – Christine LaSala 40,000 – – – – – Sir J Andrew Likierman 10,000 – – – – – David L Roberts 50,750 – – – – – John P Sauerland 30,000 – – – – – Robert A Stuchbery 62,500 – – – – – Catherine M Woods 30,000 – – – – – A John Reizenstein5 10,000 – – – – – Nicola Hodson – – – – – – 1 George P Blunden ceased to be a director on 21 March 2019. 2 Martin L Bride ceased to be a director on 23 May 2019. 3 Sally M Lake was appointed as a director on 23 May 2019. 4 Angela D Crawford-Ingle ceased to be a director on 31 May 2019. 5 John Reizenstein and Nicola Hodson were appointed as directors on 10 April 2019.
1 An individual overall cap of 400% of salary was introduced from 2013. Prior to this date and in line with industry practice, there was no formal limit on individual bonuses. To enable comparison, the above table assumes that a maximum annual variable award of 400% of salary also applied for years prior to 2013.
The employees used for the purposes of the table above were identified on a full-time equivalent basis as at 31 December 2019. Option A was chosen as it is considered to be the most accurate way of identifying the relevant employees. This captures all relevant pay and benefits and aligns to how the single figure table is calculated.
Sally M Lake Deferred bonus: 13,160 – – – 13,160 LTIP (see notes): 162,465 – – – 162,465 1 Sally M Lake’s interest is shown from her date of appointment to the board, 23 May 2019. 2 Martin L Bride’s interest is shown until his date of resignation from the board, 23 May 2019.
The committee considers the individual remuneration packages of the chief executive, executive directors and executive committee members. It also has oversight of the salary and bonus awards of individuals outside the executive committee who either directly report to executive committee members or who have basic salaries over £200,000, as well as the overall bonus pool and total incentives paid by the group. The terms of reference of the committee are available on the company’s website. The committee met six times during the year. Further information on the key activities of the committee for 2019 can be found within the statement of corporate governance on page 91.
During the year the committee was advised by remuneration consultants from Deloitte LLP. Total fees in relation to executive remuneration consulting were £91,800. Deloitte LLP also provided advice in relation to share schemes, tax, internal audit and compliance support.
Engagement with the workforce As part of the regular cycle, the committee is informed of pay and employment conditions of wider employees in the group and takes these into account when determining the remuneration for executive directors.
Annual general meeting At the forthcoming annual general meeting to be held on 25 March 2020, a binding resolution will be proposed to approve the directors’ remuneration policy and an advisory resolution will be proposed to approve this annual remuneration report.
J A Likierman Chair of the remuneration committee 124 Beazley Annual report 2019 www.beazley.com
The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the parent company’s transactions and disclose with reasonable accuracy at any time the financial position of the parent company and enable them to ensure that its financial statements comply with the Companies Act 2006. They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the group and to prevent and detect fraud and other irregularities.
• the financial statements have been prepared in accordance with the requirements of the Companies Act 2006, and, as regards the group financial statements, Article 4 of the IAS Regulation.
The financial reporting framework that has been applied in their preparation is applicable law and IFRSs as adopted by the European Union and, as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006.
Conclusions relating to principal risks, going concern and viability statement We have nothing to report in respect of the following information in the annual report, in relation to which the ISAs(UK) require us to report to you whether we have anything material to add or draw attention to: • the disclosures in the Annual Report set out on pages 155 to 168 that describe the principal risks and explain how they are being managed or mitigated; • the Directors’ confirmation set out on page 48 in the Annual Report that they have carried out a robust assessment of the principal risks facing the entity, including those that would threaten its business model, future performance, solvency or liquidity; • the Directors’ statement set out on page 67 in the Annual Report about whether they considered it appropriate to adopt the going concern basis of accounting in preparing them, and their identification of any material uncertainties to the entity’s ability to continue to do so over a period of at least twelve months from the date of approval of the financial statements; • whether the Directors’ statement in relation to going concern required under the Listing Rules in accordance with Listing Rule 9.8.6R(3) is materially inconsistent with our knowledge obtained in the audit; or
In May 2019, we held our global team planning event attended by the audit partners and senior staff responsible for auditing the main business function and significant overseas components of the Group. This provided the opportunity for the entire team to prepare themselves for the audit including the alignment of our audit approach. Our global audit team has deep knowledge of the insurance industry and has been involved in the audits of large International financial services companies.
• The risk that IBNR loss reserve estimates in respect of catastrophe and large claims losses as well as classes which are inherently uncertain such as Speciality lines are accurate, particularly as they are often estimated based on limited data.
• The areas we consider as key areas of judgement include the tail development and consistency of case reserves, allowance of social inflation and other inflationary trends at a reserving class level which are key assumptions used in management’s projections.
To obtain sufficient audit evidence to conclude on the appropriateness of actuarial assumptions, we engaged our actuaries as part of our audit team and performed the following procedures: • Obtained an understanding and tested the design and operating effectiveness of key controls over management’s process in respect of the valuation of claims liabilities on a gross and net of reinsurance basis including the setting and updating of actuarial assumptions.
• Assessed and challenged the reserving methodology on both a gross and net of reinsurance basis. This has also involved comparing the Group’s reserving methodology with industry practice and understanding the rationale for key differences.
• Performed independent re-projections of IBNR applying our own assumptions, across all classes of business for attritional claims on a net and gross basis and compared these to management’s results as at 31 December 2019.
• Challenged and assessed whether the assumptions, such as inflationary trends, applied to key areas of uncertainties were appropriate based on our knowledge of the Group, industry practice and regulatory and financial reporting requirements.
Independent Auditors report to the members of Beazley plc continued 128 Beazley Annual report 2019 www.beazley.com
To obtain sufficient audit evidence to assess the integrity of premium and case gross and net of reinsurance claims data we performed the following procedures: • Obtained an understanding of the process and tested the design and operating effectiveness of key controls over management’s data collection, extraction and validation process.
• Tested the completeness and accuracy of the claims, reinsurance and premium data used within the reserving process by reconciling the data used in the actuarial projections to the underlying policy administration and finance systems.
Our procedures included: • Obtained an understanding of the process and testing the design effectiveness of key controls.
• Performing independent re-projections of ultimate premium per underwriting year for the 2018 and prior underwriting years, applying our own assumptions and comparing these to the Group’s booked ultimate premium. Where there were significant variances we challenged management’s assumption.
• Performing analytical review procedures at a class of business level, comparing actual premium to management’s business forecasts.
• With support from our valuation specialists we assessed the need for their input in the valuation of level 3 investments.
An overview of the scope of our audit Tailoring the scope Our assessment of audit risk, our evaluation of materiality and our allocation of performance materiality determine our audit scope for each entity within the Group. Taken together, this enables us to form an opinion on the consolidated financial statements. We take into account size, risk profile, the organisation of the Group and effectiveness of Group-wide controls, changes to the business environment and other factors when assessing the level of work to be performed at each reporting component.
Details of the five reporting components are set out below: Component Scope Auditor
The reporting components where we performed audit procedures accounted 97% of the Group’s Profit before Income Tax measure used to calculate materiality, 98% of the Group’s Gross Written Premium and 99% of the Group’s Total assets. For the current year, the full scope component contributed 61% of the Group’s Profit before Income Tax, 79% of the Group’s Gross Written Premium and 8% of the Group’s Total assets. The specific scope components contributed 36% of the Group’s PBT measure used to calculate materiality, 19% of the Group’s Gross written Premium and 91% of the Group’s Total assets. The audit scope of these components may not have included testing of all significant accounts of the component but will have contributed to the coverage of significant accounts tested for the Group.
Full scope component: Syndicate 2623 79% Specific scope components: BICI, BIDAC, Syndicate 3623 and Group Function
Full scope component: Syndicate 2623 8% Specific scope components: BICI, BIDAC, Syndicate 3623 and Group Function
For the one full scope component (Syndicate 2623) and 3 specific scope components (Syndicate 3623, BIDAC, and Group function), audit procedures were performed directly by the primary audit team whilst the other specific scope component (BICI) was audited by an overseas component audit team. For other companies, where the work was performed by component auditors, we determined the appropriate level of involvement to enable us to determine that sufficient audit evidence has been obtained as a basis for our opinion on the Group as a whole.
The primary audit team followed a programme of planned visits that has been designed to ensure that the Senior Statutory Auditor visits each component where the Group audit scope was focused at least once every year. For the specific scope component where we instructed an EY network firm, the primary audit team have reviewed the audit procedures performed by the component team on the specific accounts and attended key Audit Committee meetings at the component.
We determined materiality for the Group to be $11 million, which is 5% of average profit before income tax over the last 5 years. We considered that profit before income tax is the most relevant performance measure used by investors, regulators and other stakeholders when assessing the Group. Given the level of large losses in 2017 and 2018 and fluctuation in investment return, average profit before tax over the last 5 years is reflective of the Group’s profitability.
Performance materiality The application of materiality at the individual account or balance level. It is set at an amount to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality.
Audit work at component locations for the purpose of obtaining audit coverage over significant financial statement accounts is undertaken based on a percentage of total performance materiality. The performance materiality set for each component is based on the relative scale and risk of the component to the Group as a whole and our assessment of the risk of misstatement at that component. In the current year, the range of performance materiality allocated to components was $4.5m to $1.4m.
We agreed with the Audit and Risk Committee that we would report to them all uncorrected audit differences in excess of $0.5m, which is set at 5% of planning materiality, as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds.
Other information The other information comprises the information included in the Annual Report set out on pages 1 to 125, other than the financial statements and our auditor’s report thereon. The Directors are responsible for the other information.
In this context, we also have nothing to report in regard to our responsibility to specifically address the following items in the other information and to report as uncorrected material misstatements of the other information where we conclude that those items meet the following conditions: • Fair, balanced and understandable set out on page 79 – the statement given by the Directors that they consider the Annual
• Directors’ statement of compliance with the UK Corporate Governance Code set out on page 79 – the parts of the directors’ statement required under the Listing Rules relating to the company’s compliance with the UK Corporate Governance Code containing provisions specified for review by the auditor in accordance with Listing Rule 9.8.10R(2) do not properly disclose a departure from a relevant provision of the UK Corporate Governance Code.
In preparing the financial statements, the Directors are responsible for assessing the group and parent company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the group or the parent company or to cease operations, or have no realistic alternative but to do so.
Our approach was as follows: • We obtained an understanding of the legal and regulatory frameworks that are applicable to the company and its subsidiaries and determined that the relevant laws and regulations related to elements of company law and tax legislation, and the financial reporting framework. Our considerations of other laws and regulations that may have a material effect on the financial statements included permissions and supervisory requirements of the Prudential Regulation Authority (‘PRA’) and the Financial Conduct Authority (‘FCA’). We obtained a general understanding of how Beazley plc is complying with those frameworks by making enquiries of management and those responsible for legal and compliance matters. We also reviewed correspondence between the Company and regulatory bodies, reviewed minutes of the Board and Executive Committee, and gained an understanding of the Company’s approach to governance demonstrated by the Board’s approval of the Company’s governance framework.
Independent Auditors report to the members of Beazley plc continued 134 Beazley Annual report 2019 www.beazley.com
• We assessed the susceptibility of the consolidated financial statements to material misstatement, including how fraud might occur by considering the controls that the Group has established to address risks identified by the entity, or that otherwise seek to prevent, deter or detect fraud. We also considered areas of significant judgement, including complex transactions, performance targets, external pressures and the impact these have on the control environment. Where this risk was considered to be higher we performed audit procedures to address each identified fraud risk (valuation of insurance liabilities). These procedures included journal entry testing, with a focus on manual journals and were designed to provide reasonable assurance that the financial statements were free from fraud or error.
Financial statements 137 Consolidated statement of profit or loss 138 Statements of comprehensive income 139 Statements of changes in equity 141 Statements of financial position 142 Statements of cash flows 143 Notes to the financial statements 207 Glossary 136 Beazley Annual report 2019 www.beazley.com
Change in gross provision for unearned premiums (184.5) (167.6) Reinsurer’s share of change in the provision for unearned premiums 28.0 3.7 Change in net provision for unearned premiums (156.5) (163.9)
Earnings per share (cents per share): Earnings per share (pence per share): Consolidated statement of profit or loss for the year ended 31 December 2019 137www.beazley.com Beazley Annual report 2019
Impact of adoption of IFRS 16 – – – – 0.3 0.3
Statement of changes in equity for the year ended 31 December 2019
Merger reserve – 55.4 – 55.4 Foreign currency translation reserve (94.1) 0.7 (95.9) 0.7
Total equity and liabilities 8,873.7 725.7 7,733.9 727.3 No income statement is presented for the parent company as permitted by Section 408 of the Companies Act 2006. The profit after tax of the parent company for the period was $75.7m (2018: $81.7m).
The financial statements were approved by the board of directors on 5 February 2020 and were signed on its behalf by: D Roberts Chair
Foreign exchange on financial liabilities (3.2) – (4.1) – Income tax paid (6.8) – (21.1) – Net cash generated from operating activities 460.2 11.5 278.7 43.3
Cash flow from investing activities Purchase of plant and equipment 13 (6.3) – (2.6) – Expenditure on software development 12 (12.3) – (7.2) – Purchase of investments (4,824.5) – (2,686.2) – Proceeds from sale of investments 4,125.3 – 2,376.9 –
Net (decrease)/increase in cash and cash equivalents (68.6) (1.8) (101.4) 1.7 Cash and cash equivalents at beginning of year 336.3 2.4 440.5 0.7 Effect of exchange rate changes on cash and cash equivalents 10.8 (0.6) (2.8) – Cash and cash equivalents at end of year 20 278.5 – 336.3 2.4 1 2018 increase in insurance and other payables is net of $1.9m of dividend accruals on share schemes settled through equity.
1 Statement of accounting policies Beazley plc (registered number 09763575) is a company incorporated in England and Wales and is resident for tax purposes in the United Kingdom. The company’s registered address is Plantation Place South, 60 Great Tower Street, London EC3R 5AD, United Kingdom. The group financial statements for the year ended 31 December 2019 comprise the parent company, its subsidiaries and the group’s interest in associates. The principal activity of the company and its subsidiaries (the ‘group’) is to participate as a specialist insurer which transacts primarily in commercial lines of business through its subsidiaries and through Lloyd’s syndicates.
Apart from IFRS 16, these amendments did not result in a material impact on the financial statements of the group.
• IAS 1 and IAS 8: Amendment: Definition of Material (IASB effective date: 1 January 2020);1
effective date: optional );1 and • Amendments to References to the Conceptual Framework in IFRS Standards (IASB effective date: 1 January 2020);1 1 Have not been endorsed by EU.
1 Statement of accounting policies continued Of the upcoming accounting standard changes that we are aware of, we anticipate that IFRS 17 and IFRS 9 will have the most material impact on the financial statements’ presentation and disclosures. The accounting developments and implementation timelines of IFRS 17 and IFRS 9 are being closely monitored and the impacts of the standards themselves are being assessed and prepared for. A brief overview of each of these standards is provided below: • IFRS 17 will fundamentally change the way insurance contracts are accounted for and reported. Revenue will no longer be equal to premiums written but instead reflect a change in the contract liability on which consideration is expected. On initial assessment the major change will be on the presentation of the statement of profit or loss, with premium and claims figures being replaced with insurance contract revenue, insurance service expense and insurance finance income and expense. It is not currently known what impact the new requirements will have on the group’s profit and financial position, but it is expected that the timing of profit recognition will be altered. During 2019, the group continued to undertake a number of tasks in preparation for IFRS 17. These tasks included completing various modelling exercises to understand the data requirements needed under IFRS 17. As part of this process various decisions have also been made such as unit of account and the model to use for recognising insurance contracts. A more detailed update will be provided after the full assessment has been completed.
On 27 June 2019 the International Accounting Standards Board (IASB) published an exposure draft proposing limited amendments to IFRS 17, including an extension of the effective date of IFRS 17 and IFRS 9 to 1 January 2022.
1 Statement of accounting policies continued IFRS 16 The group has applied, for the first time, IFRS 16 Leases. As required by IAS 8, the nature and effect of these changes are disclosed below. • IFRS 16 supersedes IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC-15 Operating Leases-
Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for all leases under a single on-balance sheet model; and
• The group adopted IFRS 16 using the modified retrospective method with a date of initial application of 1 January 2019. Under this method, the standard is applied retrospectively with the cumulative effect of initially applying the standard recognised at the date of initial application. The group elected to use the practical expedient on transition allowing the standard to be applied only to contracts that were previously identified as leases under IAS 17 and IFRIC 4 at the date of initial application. The group also elected to use the recognition exemptions for lease contracts where the underlying asset is of low value (‘low-value assets’).
Nature of the effect of adoption of IFRS 16 The group has lease contracts for various items of property, vehicles and IT equipment. Before the adoption of IFRS 16, the group classified each of its leases at the inception date as either a finance lease or an operating lease. As at 1 January 2019, the group held operating leases only. The operating lease payments were recognised as rent expense in profit or loss on a straight-line basis over the lease term. Any prepaid rent and accrued rent were recognised under other payables.
The group also applied the available practical expedients wherein it: • used a weighted average incremental borrowing rate as the discount rate to a portfolio of leases with similar characteristics; • relied on its assessment of whether leases are onerous immediately before the date of initial application; • used hindsight in determining the lease term where the contract contains options to extend or terminate the lease.
Leases not qualifying under IFRS 16 were included in short-term leases.
The lease liabilities as at 1 January 2019 can be reconciled to the operating lease commitments as of 31 December 2018 as follows: $m
Property operating lease commitments reported as at 31 December 2018 32.9 Less: Commitments relating to assets not qualifying as leases under IFRS 16 (1.2) Add: Adjustments on adoption of IFRS 16 6.3 Total lease commitments under IFRS 16 as at 31 December 2018 38.0 Weighted average incremental borrowing rate as at 1 January 2019 4.6% Lease liabilities as at 1 January 2019 33.2
Another estimate used by Beazley is the assumptions underlying the recoverable amounts used in assessing the impairment of goodwill as per note 12.
c) Foreign operations 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 as at the statement of financial position date; • income and expenses for each statement of profit or loss are translated at average exchange rates for the reporting period where this is determined to be a reasonable approximation of the actual transaction rates; and • all resulting exchange differences are recognised in other comprehensive income and as a separate component of equity.
1 Statement of accounting policies continued Deferred acquisition costs (DAC) Acquisition costs comprise brokerage, premium levy and staff-related costs (excluding performance related pay) of the underwriters acquiring new business and renewing existing contracts. The proportion of acquisition costs in respect of unearned premiums is deferred at the reporting date and recognised in later periods when the related premiums are earned.
Any benefits to which the group is entitled under its reinsurance contracts held are recognised as reinsurance assets. These assets consist of balances due from reinsurers and include reinsurers’ share of provisions for claims. These balances are based on calculated amounts of outstanding claims and projections for IBNR, net of estimated irrecoverable amounts, having regard to the reinsurance programme in place for the class of business, the claims experience for the period and the current security rating of the reinsurer involved. Reinsurance liabilities are primarily premiums payable for reinsurance contracts and are recognised as an expense when due.
In respect of equity accounted associates, the carrying amount of any goodwill is included in the carrying amount of the associate, and any impairment is allocated to the carrying amount of the associate as a whole.
1 Statement of accounting policies continued to the group’s key management. The group’s investment strategy is to invest and evaluate their performance with reference to their fair values.
e) Hedge funds, equity funds and illiquid credit assets The group invests in a number of hedge funds, equity funds and illiquid credit assets for which there are no available quoted market prices. The valuation of these assets is based on fair value techniques as described above. The fair value of our hedge fund portfolio is calculated by reference to the underlying net asset values (NAVs) of each of the individual funds. Consideration is also given to adjusting such NAV valuations for any restriction applied to distributions, the existence of side pocket provisions and the timing of the latest available valuations. At certain times, we will have uncalled unfunded commitments in relation to our illiquid credit assets. These uncalled unfunded commitments are actively monitored by the group and are disclosed in the notes 2 and 16 to the financial statements. The additional investment into our illiquid credit asset portfolio is recognised on the date that this funding is provided by the group.
1 Statement of accounting policies continued f) Insurance receivables and payables Insurance receivables and payables are recognised when due. These include amounts due to and from agents, brokers and insurance contract holders. Insurance receivables are classified as ‘loans and receivables’ as they are non-derivative financial assets with fixed or determinable payments that are not quoted on an active market. Insurance receivables are measured at amortised cost less any impairment losses. Insurance payables are stated at amortised cost.
• Lease liabilities At the commencement date of the lease, the group recognises a lease liability measured at the present value of the lease payments to be made over the lease term.
• Short-term leases and leases of low-value assets The group applies the short-term lease recognition exemption to its short-term leases of property (i.e., those leases that have a lease term of 12 months or less from the commencement date and do not contain a purchase option). It also applies the lease of low-value assets recognition exemption to leases that are considered of low value. Lease payments on short-term leases and leases of low-value assets are recognised as an expense in the profit or loss on a straight-line basis over the lease term.
The group has the option, under some of its leases to lease the assets for various additional terms. The group applies judgement in evaluating whether it is reasonably certain to exercise the option to renew. After the commencement date, the group reassesses the lease term if there is a significant event or change in circumstances that is within its control and affect its ability to exercise (or not to exercise) the option to renew (e.g., a change in business strategy).
1 Statement of accounting policies continued Employee benefits a) Pension obligations The group operates a defined benefit pension plan that is now closed to future service accruals. The scheme is generally funded by payments from the group, taking account of the recommendations of an independent qualified actuary. All employees now participate in defined contribution pension arrangements, to which the group contributes.
Past service costs are recognised as an expense at the earlier of the date when a plan amendment or curtailment occurs and the date when an entity recognises any termination benefits.
2.1 Insurance risk † The group’s insurance business assumes the risk of loss from persons or organisations that are directly exposed to an underlying loss. Insurance risk arises from this risk transfer due to inherent uncertainties about the occurrence, amount and timing of insurance liabilities. The four key components of insurance risk are underwriting, reinsurance, claims management and reserving. Each element is considered below.
a) Underwriting risk Underwriting risk comprises four elements that apply to all insurance products offered by the group: • cycle risk – the risk that business is written without full knowledge as to the (in)adequacy of rates, terms and conditions; • event risk – the risk that individual risk losses or catastrophes lead to claims that are higher than anticipated in plans and pricing; • pricing risk – the risk that the level of expected loss is understated in the pricing process; and • expense risk – the risk that the allowance for expenses and inflation in pricing is inadequate.
2 Risk management continued The tables on the previous page show each event independent of each other and considered on their own. The impacts would be different if all three occurred within the same year.
Net of reinsurance exposures for the two California quakes have reduced in 2019, which is being driven by the property division reducing exposures in this region and buying additional reinsurance. The increase in gross exposures is being driven by the reinsurance division, who have increased their writings in this region but this had not lead to an increase in net as the additional exposure is contained within the reinsurance programme. Windstorm exposures have reduced in the Gulf of Mexico during 2019, which has resulted in the US Northeast windstorm scenario replacing the Gulf of Mexico windstorm scenario as being the third largest scenario. The natural catastrophe risk appetite has remained unchanged in 2019.
The group’s reinsurance programmes complement the underwriting team business plans and seek to protect group capital from an adverse volume or volatility of claims on both a per risk and per event basis. In some cases the group deems it more economic to hold capital than purchase reinsurance. These decisions are regularly reviewed as an integral part of the business planning and performance monitoring process.
To manage reserving and ultimate reserves risk, our actuarial team uses a range of recognised techniques to project gross premiums written, monitor claims development patterns and stress-test ultimate insurance liability balances. The group aims to hold reserves within a range of 5-10% above the actuarial estimates, which themselves include some margin for uncertainty.
The group operates in four main currencies: US dollars, sterling, Canadian dollars and euros. Transactions in all currencies are converted to US dollars on initial recognition with any resulting monetary items being translated to the US dollar spot rate at the reporting date. If any foreign exchange risk arises it is actively managed as described below.
In 2019, the group managed its foreign exchange risk by periodically assessing its non-dollar exposures and hedging these to a tolerable level while targeting to have net assets that are predominantly denominated in US dollar. As part of this hedging strategy, exchange rate derivatives were used to rebalance currency exposure across the group. Details of foreign currency derivative contracts entered into with external parties are disclosed in note 17. On a forward looking basis an assessment is made of expected future exposure development and appropriate currency trades put in place to reduce risk.
The group’s underwriting capital is matched by currency to the principal underlying currencies of its written premiums. This helps to mitigate the risk that the group’s capital required to underwrite business is materially affected by any future movements in exchange rates.
The group also has foreign operations with functional currencies that are different from the group’s presentational currency. The effect of this on foreign exchange risk is that the group is exposed to fluctuations in exchange rates for US dollar denominated transactions and net assets arising in those foreign currency operations. It also gives rise to a currency translation exposure for the group to sterling, euro, Norwegian krone, Canadian dollars, Singapore dollars and Australian dollars on translation to the group’s presentational currency. These exposures are minimal and are not hedged.
2 Risk management continued b) Interest rate risk Some of the group’s financial instruments, including cash and cash equivalents, certain financial assets at fair value and borrowings, are exposed to movements in market interest rates.
<1 yr $m 1-2 yrs $m 2-3 yrs $m 3-4 yrs $m 4-5 yrs $m 5-10 yrs $m >10 yrs $m
Fixed and floating rate debt securities 1,530.8 1,650.5 898.0 327.7 304.2 87.6 14.3 4,813.1 Cash and cash equivalents 278.5 – – – – – – 278.5 Derivative financial instruments 25.5 – – – – – – 25.5
Fixed and floating rate debt securities 1,566.0 831.0 963.8 467.4 188.2 83.8 – 4,100.2 Cash and cash equivalents 336.3 – – – – – – 336.3 Derivative financial instruments 6.9 – – – – – – 6.9
Sensitivity analysis Changes in yields, with all other variables constant, would result in changes in the capital value of debt securities as well as subsequent interest receipts and payments. This would affect reported profits and net assets as indicated in the table below: Impact on profit after income tax for the year Impact on net assets $m $m $m $m
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.
Beazley uses an Economic Scenario Generator (ESG) to simulate multiple simulations of financial conditions, to support stochastic analysis of market risk. Beazley uses these outputs to assess the value at risk (VAR) of its investments, at different confidence levels, including ‘1 in 200’, which reflects Solvency II modelling requirements, and ‘1 in 10’, reflecting scenarios which are more likely to occur in practice. Risk is typically considered to a 12 month horizon. It is assessed for investments in isolation and also in conjunction with the present value of our liabilities, to help us monitor and manage market risk for solvency and capital purposes. By its nature, stochastic modelling does not provide a precise measure of risk, ESG outputs are regularly validated against actual market conditions, and Beazley also uses a number of other, qualitative, measures to support the monitoring and management of investment risk. These include stress testing and scenario analysis.
Beazley’s investment strategy is developed by reference to an investment risk budget, set annually by the board as part of the overall risk budgeting framework of the business. The Solvency II internal model is used to monitor compliance with the budget, which limits the amount by which our reported annual investment return may deviate from a predetermined target, at the 1 in 10 confidence level. In 2019, the permitted deviation was $150.0m (unaudited). Additionally, a limit is specified for the net interest rate sensitivity of assets and liabilities combined and investments are managed to ensure that this limit is not exceeded.
Financial assets at fair value – fixed and floating rate debt securities 3,544.0 1,269.1 – – – 4,813.1 – equity funds – – – – 163.6 163.6 – hedge funds – – – – 354.0 354.0 – illiquid credit assets – – – – 216.6 216.6 – derivative financial instruments – – – – 25.5 25.5 Insurance receivables – – – – 1,048.0 1,048.0 Reinsurance assets 1,338.2 – – – – 1,338.2 Other receivables 72.0 – – – – 72.0 Cash and cash equivalents 278.5 – – – – 278.5
The largest counterparty exposure within tier 1 is $1,599.9m of US treasuries (2018: $1,106.5m).
Financial investments falling within the unrated category comprise hedge funds and illiquid credit assets for which there is no readily available market data to allow classification within the respective tiers. Additionally, insurance receivables are classified as unrated, due to premium debtors not being credit rated.
The group has insurance receivables and reinsurance assets that are past due at the reporting date. An aged analysis of these is presented below: Up to 30 days past due $m 30-60 days past due $m 60-90 days past due $m
The total impairment provision in the statement of financial position in respect of reinsurance assets past due (being reinsurance recoverables due on paid claims) by more than 30 days at 31 December 2019 was $3.1m (2018: $3.1m). This $3.1m provision in respect of overdue reinsurance recoverables is included within the total provision of $13.7m shown in the table at the top of the page.
2.7 Liquidity risk Liquidity risk arises where cash may not be available to pay obligations when due at a reasonable cost. The group is exposed to daily calls on its available cash resources, principally from claims arising from its insurance business. In the majority of the cases, these claims are settled from the premiums received.
The next two tables summarise the carrying amount at reporting date of financial instruments analysed by maturity date. Maturity
Fixed and floating rate debt securities 1,229.5 1,686.6 954.2 410.2 471.2 27.5 33.9 4,813.1 Derivative financial instruments 25.5 – – – – – – 25.5 Cash and cash equivalents 278.5 – – – – – – 278.5 Insurance receivables 1,048.0 – – – – – – 1,048.0 Other receivables 72.0 – – – – – – 72.0 Other payables (566.4) – – – – – – (566.4)
The group has several requirements for capital, including: • to support underwriting at Lloyd’s through the syndicates in which it participates, being 2623, 3623, 3622 and 5623.
For more detail on the value of capital managed, please see pages 39 to 40.
2 Risk management continued The Internal Model Solvency Capital Requirement is a dedicated quantitative review of syndicate models and it sets outs to be a key input to the Lloyd’s Internal Model.
The operating segments are based upon the different types of insurance risk underwritten by the group, as described below: Cyber & executive risk This segment underwrites management liabilities such as employment practices risks and directors and officers, alongside cyber and technology, media and business services.
Expenses for the acquisition of insurance contracts 143.2 82.4 76.4 110.3 30.6 202.5 645.4
Expenses for the acquisition of insurance contracts 122.1 74.5 63.3 103.5 33.2 165.3 561.9
Segment assets UK (Lloyd’s) 8,046.5 7,213.2 US (Non-Lloyd’s)1 762.4 482.1 Europe (Non-Lloyd’s) 64.8 38.6 1 Increase in US net earned premiums and assets is driven by a change of internal reinsurance contract. As a result of this, more premiums are retained in the US.
Capital expenditure Non-US 13.7 9.5 4 Net investment income $m $m
Interest and dividends on financial investments at fair value through profit or loss 120.6 102.1 Interest on cash and cash equivalents 0.3 0.5 Net realised gains on financial investments at fair value through profit or loss 21.5 12.4 Net unrealised fair value gains/(losses) on financial investments at fair value through profit or loss 130.1 (66.1) Investment income from financial investments 272.5 48.9 Investment management expenses (8.8) (7.8)
Commissions received by Beazley service companies 21.2 20.7 Profit commissions from syndicates 623 1.0 7.5 Agency fees from 623 2.5 2.5 Other income 1.1 3.0
As at 31 December 2019 there was no accrued profit commission at risk of being reversed if there were to be an adverse impact on syndicate 623’s profit (31 December 2018: nil). We have not experienced any deterioration to profits on these contracts recognised previously.
Operating expenses include: Amounts receivable by the auditor1 and associates in respect of: – audit services for the group and subsidiaries 1.2 1.0 – audit-related assurance services 0.7 0.6 – taxation compliance services – 0.1 – other non-audit services 0.5 0.8
Impairment loss recognised/(written back) on reinsurance assets 1.5 (1.0) 1 In 2018 the group’s auditor was KPMG but for 2019 it is EY.
Deferred tax expense Origination and reversal of temporary differences 2.3 (14.6) Impact of change in UK/US tax rates (0.5) 0.7 Prior year adjustments (3.0) (4.9)
Reconciliation of tax expense The weighted average of statutory tax rates applied to the profits earned in each country in which the group operates is 15.0% (2018: 18.6%), whereas the tax charged for the year 31 December 2019 as a percentage of profit before tax is 12.6% (2018: 10.7%). The reasons for the difference are explained below: $m
Profit before tax 267.7 – 76.4 – Tax calculated at the weighted average of statutory tax rates 40.3 15.0 14.2 18.6
In addition, the group recognised deferred tax amounts directly in retained earnings as a result of the changes in accounting policy in relation to leases (see note 1).
Basic Basic earnings per share are calculated by dividing profit after tax of $234.1m (2018: $68.2m) by the weighted average number of shares in issue during the year of 525.1m (2018: 523.2m). The shares held in the Employee Share Options Plan (ESOP) of 4.8m (2018: 4.7m) have been excluded from the calculation, until such time as they vest unconditionally with the employees.
11 Dividends per share A second interim dividend of 8.2p per ordinary share (2018: 7.8p) will be payable on 30 March 2020 to Beazley plc shareholders registered at 5.00pm on 1 March 2020 in respect of the six months ended 31 December 2019. No special dividend was declared in 2019 (2018: nil). The company expects the total amount to be paid in respect of the second interim dividend to be approximately £42.8m. These financial statements do not provide for the second interim dividend as a liability.
Other additions – – – 12.3 – 12.3 Foreign exchange gain – – – 0.5 1.0 1.5
Amortisation for the year – – – (3.8) (8.8) (12.6) Foreign exchange gain – – – 2.9 0.8 3.7
Amortisation for the year – – – (5.6) (8.5) (14.1) Foreign exchange loss – – – (3.6) (0.4) (4.0)
Value in use is defined as the present value of the future cash flows expected to be derived from the CGU and represents recoverable amount for goodwill. It is estimated by discounting future cash flows sourced from financial budgets approved by management which cover specific estimates for a five year period. A terminal growth rate of 0% has been used to extrapolate projections beyond the covered five year period. The key assumptions used in the preparation of future cash flows are: premium growth rates, claims experience, retention rates and expected future market conditions.
A discount rate, based on weighted average cost of capital (WACC) of 7% (2018: 9%) has been applied to projected future cash flows. This has been calculated using independent measures of the risk-free rate of return and is indicative of the group’s risk profile relative to the market. The impairment test for goodwill confirms that no impairment is required.
Significant changes in the economic and regulatory environment, such as US legislation and Brexit, could impact the amount of premium written and investment income for each CGU. This could potentially have an impact on the carrying value of the CGU, however this remains remote.
US insurance authorisation licences represent the privilege to write insurance business in particular states in the US. Licences are allocated to the relevant CGU. There is no active market for licences, therefore value in use is deemed to be fair value. As described above, a WACC rate is applied to projected future cash flows sourced from management approved budgets. Key assumptions are the same as those outlined above. Based upon all available evidence the results of the testing indicate that no impairment is required.
14 Investment in associates Associates are those entities over which the group has power to exert significant influence but which it does not control. Significant influence is generally presumed if the group has between 20% and 50% of voting rights.
As at 1 January – 7.0 Impairment of Capson Corp., Inc. – (7.0) Investment in Pegasus Underwriting Ltd 0.1 – Share of profit after tax – – As at 31 December 0.1 –
The aggregate financial information for all associates (100%) held at 31 December 2019 is as follows: 2019 $m $m
Derivative financial assets 25.5 6.9 Total financial assets at fair value 5,572.8 4,716.3
Our capital growth assets have no defined maturity dates and have thus been excluded from the above maturity table. However, all $163.6m (2018: $85.4m) of equity funds could be liquidated within two weeks, $272.8m (2018: $256.5m) of hedge fund assets within six months and the remaining $81.2m (2018: $80.7m) of hedge fund assets within 18 months, in normal market conditions. Illiquid credit assets are not readily realisable and principal will be returned over the life of these assets, which may be up to 12 years.
As noted on page 151 consideration is also given when valuing the hedge funds to the timing of the latest valuations, and the impact of any significant market stress events. The adjustment to the underlying net asset value of the funds as a result of these considerations was $nil at 31 December 2019 (2018: $nil).
The amounts expected to mature before and after one year are: Within one year 8.0 108.0 After one year 546.8 248.7
The group has given a fixed and floating charge over certain of its investments and other assets to secure obligations to Lloyd’s in respect of its corporate member subsidiary. Further details are provided in note 32.
Level 2 – Valuations based on quoted prices in markets that are not active, or based on pricing models for which significant inputs can be corroborated by observable market data (e.g. interest rates, exchange rates). Included within level 2 are government bonds and treasury bills, equity funds and corporate bonds, which are not actively traded, hedge funds and senior secured loans.
16 Financial assets and liabilities continued Level 2 investments For the group’s level 2 debt securities our fund administrator obtains the prices used in the valuation from independent pricing vendors such as Bloomberg, Standard and Poor’s, Reuters, Markit and International Data Corporation. The independent pricing vendors derive an evaluated price from observable market inputs. The market inputs include trade data, two-sided markets, institutional bids, comparable trades, dealer quotes, and other relevant market data. These inputs are verified in their pricing engines and calibrated with the pricing models to calculate spread to benchmarks, as well as other pricing assumptions such as weighted average life (WAL), discount margins (DM), default rates, and recovery and prepayment assumptions for mortgage securities. While such valuations are sensitive to estimates, it is believed that changing one or more of the assumptions to reasonably possible alternative assumptions would not change the fair value significantly.
For our hedge funds and equity funds, the pricing and valuation of each fund is undertaken by administrators in accordance with each underlying fund’s valuation policy. For the equity funds, the individual fund prices are published on a daily, weekly or monthly basis via Bloomberg and other market data providers such as Reuters. For the hedge funds, the individual fund prices are communicated by the administrators to all investors via the monthly investor statements. The fair value of the hedge fund and equity fund portfolios are calculated by reference to the underlying net asset values of each of the individual funds.
Additional information is obtained from fund managers relating to the underlying assets within individual hedge funds. We identified that 83% (2018: 83%) of these underlying assets were level 1 and the remainder level 2. This enables us to categorise hedge funds as level 2.
Level 3 investments During 2019, 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.
– High yield – 235.8 – 235.8 Equity funds – 163.6 – 163.6 Hedge funds – 354.0 – 354.0 Illiquid credit assets – – 216.6 216.6 Derivative financial assets 25.5 – – 25.5 Total financial assets measured at fair value 3,108.7 2,247.5 216.6 5,572.8
Total financial liabilities not measured at fair value – 595.4 – 595.4
16 Financial assets and liabilities continued The table above does not include financial assets and liabilities that are, in accordance with the group’s accounting policies, recorded at amortised cost, if the carrying amount of these financial assets and liabilities approximates their fair values at the reporting date. Cash and cash equivalents have not been included in the table above; however, the full amount of cash and cash equivalents would be classified under level 2 in both the current and prior year.
For the period ended 31 December 2019, enhanced understanding of vendor pricing methodologies and the purchase of a new valuation tool have provided better quality data used in determining the fair value hierarchy classification, which has resulted in the following transfers between levels 1 & 2 for the period ended 31 December 2019: 31 December 2018 vs 31 December 2019 transfer from level 1 to level 2 Level 1 $m Level 2 $m
Level 3 investment reconciliations The table below shows a reconciliation from the opening balances to the closing balances of level 3 fair values.
Total unrealised gain on level 3 investments included into net gains above was $9.1m (2018: loss of $0.7m).
Unconsolidated structured entities A structured entity is defined as an entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity, such as when any voting rights relate to administrative tasks only, or when the relevant activities are directed by means of contractual arrangements.
As part of its standard investment activities the group holds fixed interest investments in high yield bond funds, as well as capital growth investments in equity 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.
16 Financial assets and liabilities continued Apart from a relatively small exposure to high yield bond funds, our unconsolidated structured entity exposures fall within our capital growth assets. The capital growth assets are held in investee funds managed by asset managers who apply various investment strategies to accomplish their respective investment objectives. The group’s investments in investee funds are subject to the terms and conditions of the respective investee fund’s offering documentation and are susceptible to market price risk arising from uncertainties about future values of those investee funds. Investment decisions are made after extensive due diligence on the underlying fund, its strategy and the overall quality of the underlying fund’s manager and assets.
Financial assets at fair value Fixed and floating rate debt securities 21.7 198.8 – 220.5 4,592.6 4,813.1
17 Derivative financial instruments In 2019 and 2018 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.
Ordinary shares of 5p each Issued and fully paid 529.7 38.1 527.8 38.0 186 Beazley Annual report 2019 www.beazley.com
The shares are owned by the employee share trust to satisfy awards under the group’s deferred share plan, retention plan, one-off share incentive plan and long term incentive plan (LTIP). These shares are purchased on the market and carried at cost.
SAYE (Others) 13/04/2017 0.1 Three years’ service N/A Total share options outstanding 14.6