Strategic report IFC Highlights Our key performance indicators 1 Our key differentiators 2 Entrepreneurial spirit 3 Strong partnerships 4 Diversified business 8 Our business model and strategy 10 Moments of truth 14 Active investors 16 Chairman’s statement 18 Chief executive’s statement 22 Q&A with the chief executive 24 Chief underwriting officer’s report 28 Performance by division 30 Marine 32 Political, accident & contingency 34 Property 36 Reinsurance 38 Specialty lines 40 32 years of profitable growth 42 Financial review 42 Group performance 48 Balance sheet management 50 Capital structure 52 Operational update 55 Risk management 62 Responsible business 70 Directors’ report
Governance 75 Letter from our chairman 76 Board of directors 80 Investor relations 81 Statement of corporate governance 96 Letter from the chairman of our remuneration committee 97 Directors’ remuneration report 117 Statement of directors’ responsibilities 118 Independent auditor’s report
Please turn overleaf for our business model and strategy and key performance indicators.
The interim and second interim dividend for 2017 is in line with our dividend strategy and has grown by 6%.
A little over a decade ago, Mike Donovan joined Beazley’s then fledgling business in the US with similarly large ambitions. In 2009, his team launched Beazley Breach Response, now one of the leading cyber insurance products in a market that has seen explosive growth in demand in recent years.
Beazley is a well regarded company and is perceived as offering a congenial environment in which teams can come and build their business. These teams typically have a strong underwriting track record and excellent market relationships. Beazley’s property and marine divisions have both grown and diversified their books successfully in this way in recent years.
This process continued to take place in 2017. Plans to expand our specialty lines business internationally outside the US are the responsibility of a team led by Gerard Bloom, who joined Beazley in 2016, excited by this entrepreneurial challenge. The team plans to harness technology to maximise the productivity of underwriters and develop Beazley’s products across a number of geographies outside the US. There is also a new focus within the team on providing coverage for financial institutions. Lorena Segovia, pictured left, joined the team in May 2017 to spearhead the growth of Beazley’s financial lines business in continental Europe.
Nearly all of Beazley’s business is transacted through brokers and the quality of our broker relationships influences the business we see at Lloyd’s and around the world. Maintaining those relationships is central to the role of our underwriters and to our growing broker relations team around the world, led by Dan Jones.
Each year, we conduct detailed research with our brokers to understand how they view the service that Beazley offers. Results naturally vary by team and geography, but the view of the company as a whole that emerged from the 2017 survey was very positive. Our net promoter score – a measure of brokers’ willingness to recommend Beazley – was even higher among claims brokers than among the brokers who deal exclusively with our underwriters. Not all insurers see claims service as a source of differentiation: Beazley does.
Many of our client relationships are also long term, and all are underpinned by trust. Our treaty reinsurance team, in particular, has supported many of its cedents for more than two decades. In the summer of 2017, when three major hurricanes hit the Caribbean and south eastern coast of the US in quick succession, the affected insurers backed by Beazley knew that our support would be swift.
Moment of truth Customer relationships can be strengthened – or damaged – in the aftermath of catastrophe events. The reaction from brokers to Beazley’s claims performance was very positive. One observed: “Beazley have been very supportive and proactive pre/post the hurricanes. We are in regular communication on a number of accounts and they are already assisting many clients by advancing funds.”
Diversified business We target a diverse underwriting portfolio and actively manage the different insurance cycles to achieve consistent results year on year
The diversification of an insurer’s portfolio shows its worth most clearly in years in which one or more lines of business incur heavy losses. This proved to be the case in 2017 with the treaty reinsurance division recording a combined ratio of 107% and the property division a combined ratio of 130%. Balancing this, our specialty lines division, the company’s largest, delivered a combined ratio of 89%.
The outcome for Beazley as a whole was a modest underwriting profit in a year in which the Lloyd’s market is expected to incur a material underwriting loss.
Geographic diversification also plays an important role in our business. Beazley’s historical focus primarily on the US market is beginning to weaken due to the growth of our business in Europe, Asia and Latin America. Our specialty lines division, in particular, is driving forward plans for significant growth in these markets that will further reduce our net exposure to claims spikes or economic weakening in the US.
The principle of diversification also extends to the management of our cash and investments. Beazley’s $4.9bn investment portfolio, which generated a return of 2.9% in 2017, includes a variety of uncorrelated asset classes to maximise risk-adjusted performance (see page 47).
Marine We help insure in excess of 20% of the world’s ocean-going tonnage and are the pre-eminent leader of voyage and tow business in the London market. We insure 60% of the Forbes’ List of the 25 Biggest Public Oil & Gas Companies. We have extensive experience insuring a wide variety of cargoes including project cargo, fine art and specie.
In addition to traditional lines such as contract frustration, expropriation and credit, we insure a growing number of businesses against terrorism and political violence. Our personal accident product is written on both an insurance and reinsurance basis and covers a number of niche classes.
Find out more pages 30 to 31 Find out more pages 32 to 33
Given the nature of Beazley’s business, the key risks that impact financial performance arise from insurance activities and fall into the following categories: • Market cycle risk: The risk of systematic mispricing of the medium tailed specialty lines business which could arise due to a change in the US tort environment, changes to the supply and demand of capital, and companies using incomplete data to make decisions; • Natural catastrophe risk: The risk of one large event caused by nature affecting a number of policies and therefore giving rise to multiple losses. Given Beazley’s risk profile, this could be a hurricane, major windstorm or earthquake; • Non natural catastrophe risk: This risk is similar to natural catastrophe risk except that multiple losses arise from one event caused by mankind. Given Beazley’s risk profile, examples include a coordinated cyber attack, an act of terrorism, an act of war or a political event; • Reserve risk: The risk that the reserves put aside for claims to be settled in the future turn out to be insufficient; and
For shareholders We measure our value creation for shareholders through earnings per share, the growth of net assets per share, and total shareholder returns in dollars as this is the currency of the majority of our transactions. Underpinning our strong results against all of these metrics has been our consistently strong underwriting performance, reflected in our combined ratio. Our combined ratio in 2017, a year of exceptionally high natural catastrophes, was 99%. In the five years prior to 2017 it averaged 88%.
Unlike other products and services, the quality of an insurance policy cannot be fully assessed at the time of purchase. However, the natural catastrophes of 2017 gave Beazley’s claims teams ample opportunity to demonstrate the value of the company’s coverage
In the wake of such devastating events, access to relief supplies is critical. In the USVI, this depends heavily on the air and sea ports managed by the Virgin Islands Port Authority. As the port authority’s website puts it: “Just about everything that is used or consumed by the residents of the US Virgin Islands enters the islands through boat or by plane. Food, clothing, machinery, mail, furniture, vehicles, building supplies, medical equipment – it all enters through the ports.”
Beazley was among the insurers that moved swiftly to supply the funds needed to enable the Virgin Islands Port Authority to rebuild. The first cheque – for $5m – for damage from Irma was paid on 20 September and the second – for a further $5m – was paid seven days later. Beazley’s entire limit was thus disbursed within three weeks of the storm.
The inhabitants of the US Virgin Islands (USVI) are used to storms. However, Hurricane Irma, which ripped through the islands as a category five storm on 6 September 2017, was exceptional. Two weeks later, another category five storm – Maria – delivered a second massive blow. In the weeks following the hurricanes, almost a third of the islands’ 108,000 residents applied for assistance from the Federal Emergency Management Agency (FEMA). Two months after the storms, nearly three quarters of the population remained without power.
March of the hurricanes: By early September four named storms were churning across the Gulf of Mexico
Beazley’s exposure to these events was through facultative reinsurance, but the need to respond swiftly was nevertheless pressing. In particular, a number of schools that were destroyed or badly damaged by the quakes were in urgent need of repair.
Cash and cash equivalents 9.0% Hedge funds 7.7% Illiquid credit assets 3.7% Equity funds 3.4% Senior secured loans 1.8% Other credit 1.4%
In the brief window before yields rose significantly – a matter of hours – they reduced the duration of Beazley’s bond portfolio, to protect against losses in this scenario.
Lower investment expenses have also contributed to Beazley’s investment performance. In 2016, management of most of the group’s fixed income portfolio was brought in-house, with significant savings in management fees. Also, many of Beazley’s externally managed investments, including equities, utilise strategies that avoid the high fees associated with active fund management.
Beazley’s overall investment framework (excluding cash and cash equivalents) remains unchanged. Between 75% and 85% is invested conservatively in a core portfolio of government bonds and highly rated corporate debt. That leaves between 15% and 25% available for investments in more volatile capital growth assets with higher expected return, including high yield debt, illiquid credit, equities, hedge funds, and systematic “absolute return” investments, similar to hedge funds but with lower fees.
The value of insurance was brought home to millions of people in 2017 and Beazley’s claims teams responded swiftly, as they did in the wake of comparably severe events in 2011.
Since Beazley’s stock market flotation in 2002, we have aimed to achieve dividend growth (excluding special dividends) of between 5% and 10%, a record we have maintained this year. We identified a number of opportunities to invest further in the business in 2017, particularly in the growth of our specialty lines division outside the US. Our long term approach to capital management is clear. We do not hoard capital and we will continue to distribute excess capital to shareholders if cash flow exceeds the opportunity to invest in profitable growth.
Beazley has a track record of premium growth, even in challenging markets, and in 2017 we delivered the high single digit growth we are targeting, with gross premiums written increasing 7% to $2,343.8m (2016: $2,195.6m). Profitable growth has proved steadily harder for insurers to achieve in recent years as premium rates for short tail, catastrophe exposed business have declined, but 2017’s catastrophe events have arrested these declines and – in the lines of business most directly affected – reversed them. Beazley is accordingly well placed for stronger growth in 2018.
Another building block for future growth was put in place in July, when we received authorisation from the Central Bank of Ireland to convert our long established Dublin-based reinsurance company (Beazley Re dac) into an insurance company (Beazley Insurance dac) permitted to transact business throughout the European Union. Planning for this predated the British referendum vote to withdraw from the European Union in June 2016. We can now offer prospective clients in continental Europe a choice of cover, backed by either the Dublin-based insurance company or by our Lloyd’s syndicates.
Money has continued to pour into so-called insurtech ventures in recent months, but the distinction that is sometimes drawn in the media between disruptive startups and stodgy incumbents oversimplifies and distorts the changes that are taking place. The most successful businesses are likely to be those that combine the expertise of established insurers with new tools and data sources that the insurtech ventures are developing. A priority for Beazley is to increase the volume of business that underwriters can handle without diminishing the focus they can bring to bear on the more complex risks. Advances in areas such as robotics can play an important role here.
David Roberts joined the board in November 2017. I have now served two, three year terms as chairman of Beazley and I am delighted that David will be succeeding me as chairman following the annual general meeting in March 2018.
Claims service is our product and our claims team moved swiftly in 2017 to redeem our promise to our policyholders
Claims service is our product and our claims teams moved swiftly in the wake of the hurricanes, earthquakes and wildfires to redeem our promise to our policyholders. By the end of the year we had disbursed more than $110m in cash advances and claims settlements to help our insureds in the Caribbean and US in the wake of Hurricanes Harvey, Irma and Maria, the two earthquakes that rocked central Mexico in September 2017 and the California wildfires in October and December 2017, the worst in that state’s history.
All told, these claims added roughly 10 percentage points to our combined ratio for last year and directly affected all of our five divisions. The largest claims were, naturally, focused on our reinsurance and property divisions, but our marine division also incurred some cargo claims while our newly amalgamated political, accident & contingency division (PAC) picked up some event cancellation claims due to the storms.
These events were, in aggregate, by far the largest insurance industry losses since 2011, accounting for an estimated $100bn in claims. After five years of largely benign catastrophe experience (superstorm Sandy in 2012 being the only significant exception), it is not surprising that pricing for the affected lines of business had eroded significantly. In the property insurance and reinsurance markets, price declines were aggravated by a large influx of new capital from pension funds and other investors seeking profitable diversification from other asset classes. Across Beazley’s portfolio as a whole, premium rates fell 1% in 2017.
Prudent risk selection and effective cycle management are disciplines that any insurer must get right if it is to prosper in the long term. The events of 2017 punished insurers that had succumbed to the lure of premium growth in short tail lines with inadequate pricing. Beazley’s relatively strong performance in such a challenging year speaks to the resilience of our business model.
It is too early to say how sustainable these price increases will prove to be. Much will depend on the continuing appetite of non-traditional capital providers, who shouldered some of the largest reinsurance losses.
In other areas we expect to see a decline in a practice that frequently undermines pricing discipline in a soft market – the subsidisation of unprofitable lines of business by profitable lines. Prior to last year, this underpinned the willingness of many insurers to countenance combined ratios of over 100% on their marine books, whilst catastrophe-related claims were low or non-existent. Now that offsetting profits from other short tail lines have disappeared, some upward adjustment in marine rates can be expected.
In February 2017 we acquired Creechurch Underwriters, a Canadian managing general agency specialising in small and mid sized specialty business. And in July 2017 we received authorisation from the Central Bank of Ireland to underwrite business through a new Dublin-based insurance company, Beazley Insurance dac, broadening our access to business from continental Europe.
All measures to grow internationally come with risk and they do not always pay off. In 2017 we closed the office in Dubai that we had opened in 2014 and sold the renewal rights to our Australian accident and health portfolio. In both instances we did not see the profit potential as large enough to warrant further investment. Crispin Hodges, who set up our Dubai office, has a strong track record of business development for Beazley in Asia and Europe and upon his return has taken up the position of international business producer as a cross division resource for our marine, political, accident & contingency and property divisions. Also members of our Australian accident and health team joined Blend Insurance Solutions, a Sydney-based Lloyd’s service company, which took over our local portfolio.
All of our business at Beazley is sourced through brokers and, even when we are not offering new products or expanding geographically, we can rely on brokers to show us attractive business in our specialist lines. Our brokers continue to rate our teams highly for service – both in underwriting and claims – and we strive to maintain their confidence and that of their clients. In most of the markets in which we do business, there remains significant headroom for growth, providing pricing levels are attractive – as in many cases they are now becoming.
Investment performance Beazley’s profitability in 2017 was supported by a very strong investment performance. Our financial assets returned $138.3m, or 2.9% (2016: $93.1m, 2.0%). Signs of strength in the global economy helped equities and corporate credit exposures to rally strongly throughout much of the year, generating good returns on these elements of our portfolio. However, expectations of higher US interest rates led to rising yields later in the year, adversely impacting the value of our bond exposures.
The latest chief risk officer report to the board 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 2017.Investment return
Board changes In October 2017, we announced the appointment of David Roberts as a non-executive director. David has been chairman of Nationwide Building Society since July 2015 and during his career has served as an executive director at Barclays Bank and deputy chairman at Lloyds Banking Group. He will take up the position of non-executive chairman following the annual general meeting in March 2018, succeeding Dennis Holt who will step down from the board having served two full three year terms as chairman.
During this period, the board has benefited enormously from his sound judgement and guidance, and his influence has been widely felt and appreciated across the company. The antithesis of an ivory tower chairman, Dennis has engaged consistently with colleagues at all levels within the organisation, always looking for ways in which we can build on our successes and learn from our failures. We are immensely grateful to him.
Clive Washbourn also stepped down from the board in 2017 but will remain an important part of the executive committee heading up our marine division. I am very grateful for Clive’s contribution to the board and am delighted we will continue to benefit from Clive’s expertise through the executive committee.
Outlook Some variations in profitability, year on year, should be expected in a business such as ours that specialises in assuming the risks of others. However over the years we have built a portfolio that is expressly designed to cushion the shocks that will inevitably occur from time to time in individual lines of business. As such we were able to obtain an average combined ratio of 99% across all divisions.
Our business model should, equally, prove well adapted to the more favourable market conditions now prevailing. Our underwriters have shown patience and discipline through a difficult period during which the supply of capital in many parts of our market significantly outstripped demand, resulting in steadily falling prices. Through this period we have continued to invest in talent and today we employ 117 more underwriters than we did in 2011, the last year in which premium rates were significantly affected by catastrophe losses.
Looking ahead, the expertise and dedication of our underwriters will be a necessary but not sufficient condition for profitable growth. We are also looking to our technology and operations teams to enhance our underwriters’ productivity and ensure they have the data they need to make well informed decisions.
Q – Premium rates for US catastrophe-exposed business have reacted to last year’s events. How sustainable do you expect these adjustments to be? Capital has been flowing ever faster into insurance markets in the wake of major catastrophes for many years now, turning what used to be a plateau of higher rates into more of a peak. However the wild card this time will be the attitude of non traditional capital providers, such as pension funds, a number of whom sustained heavy losses last year. We still do not know to what degree they will reload. That could have a major bearing on the levels at which prices settle.
We accordingly launched syndicate 5623 to write a portfolio of facilities supported by external investors with a lower cost of capital. It will, we expect, deliver lower returns and lower volatility than our existing syndicates, which are backed by our own capital. Our own syndicate 3623 will underwrite the facilities and then reinsure them to syndicate 5623. Beazley will retain 25% of the portfolio directly through 3623 as well as having a share of 5623, providing capital through a Beazley corporate member.
Overall, I believe that the costs associated with transacting insurance remain too high, and we hope syndicate 5623 will help lead to a reduction in these costs of doing business in London and, therefore, a widening of our market’s underwriting appetite.
Q – Reserve releases contributed strongly to Beazley’s pre-tax profits in 2017. Can we expect substantial releases to continue? Beazley concentrates on setting reserves consistently over time. If our initial opening reserves are set in a consistent way with a margin for prudence, then, all other things being equal, we’ll continue to see the same levels of reserve release, although there may well be a slight dip in 2018 as we start the year with the margin at the bottom of the range we target following the 2017 catastrophe events.
Q – Is the reinsurance that Beazley buys for itself going to be much more expensive following the catastrophes in 2017? The results of our reinsurers have generally been excellent which is testament to our philosophy of underwriting for profit gross of reinsurance. Quite a lot of our reinsurance is purchased on a proportional basis and so our reinsurers will share any price increases we get. On the non proportional side we have to expect some increases, but the 2017 events didn’t hit our cover very hard, so hopefully nothing too significant.
The thing that definitely does not keep me up at night is the money that we pay out to our clients for claims. I find it odd when people commiserate with me over heavy claims. It is why we’re in business and – more than that – it’s why I’m proud to be in the insurance business.
The combined cost to the insurance industry of Hurricanes Harvey, Irma, Maria, the Mexican earthquakes and the California wildfires is estimated to be around $100bn. The loss to Beazley arising from these events, net of reinsurance, is expected to be between $200m to $300m, with the majority of the impact being felt in our property and reinsurance divisions. Our balanced portfolio, which has underpinned our consistent underwriting performance in recent years, meant we were able to weather the events of 2017, while continuing to support our insureds who have been affected.
Given the level of insured natural catastrophe losses during the year, we were pleased to report a positive underwriting result. This result was driven by a number of factors. In particular, we have benefited from the fact that our largest division, specialty lines, was largely unaffected by these natural disasters. We have also benefited from effective cycle management over the past few years, reducing our exposure to catastrophe business, with our risk budget decreasing from $574m in 2013 to $370m in 2017.
Rating environment The rating environment in 2017 once again proved to be challenging, with an average decrease in rates of 1% (2016: decrease 2%). Most of our lines of business saw decreases in rates compared to 2016, with political, accident & contingency experiencing rate decreases of 4%, marine decreasing by 3% and reinsurance rates decreasing by 2%. Rates on renewals in the property and specialty lines divisions remained stable compared to 2016.
We would generally expect to experience some level of volatility between individual divisions, however, we are pleased that our overall premium retention rate remains broadly in line with our five year average.
Premiums written by our underwriters based locally in the US increased to $778.0m (2016: $695.7m). Despite strong growth in recent years, we continue to see opportunities and our US business remains a key area of focus for us as we move into 2018.
Demand for our cyber product continues to increase and in 2017 we were pleased to relaunch our Beazley Breach Response (BBR) product in the US to address growing demand for robust first party cover. Our offering of BBR, alongside our Beazley InfoSec product and our Vector partnership (a large scale cyber risk facility offering capacity up to $100m) with Munich Re, means that Beazley is a market leader in cyber insurance, able to leverage a depth of expertise within the team.
We continue to look for areas to grow our property business and in 2017 we achieved this in both the US and the UK. In the US, we expanded our local presence by increasing our large risk underwriting capabilities, while outside the US we continued to grow our specialist property lines such as jewellers’ block, fine art and specie, and our small business unit. As has been the case for many years, we remain focused on managing a balanced and diverse book of business.
While market conditions may improve across some of our product lines in 2018, Beazley’s core underwriting philosophy remains stable. Our underwriting approach of exercising discipline across a diverse portfolio of specialist insurance products, particularly in lines of business where competitive pressures are strongest, will remain a key component of our underwriting strategy. This strategy has delivered an underwriting profit in difficult market conditions during 2017 and we are confident that we are well placed as we move into 2018.
Balanced portfolio leads to overall underwriting profit in active catastrophe market
Gross premiums written 362.9 329.7 Net premiums written 300.0 277.1 Results from operating activities (68.3) 51.5 Claims ratio 86% 40% Expense ratio 44% 47% Combined ratio 130% 87% Rate change – (4%)
Liability 25% Cargo 21% Hull & miscellaneous 20% Energy 16% War 8% Aviation 7% Satellite 3%
The exceptional string of storms that buffeted the Caribbean and south eastern coast of the US in August and September 2017 resulted in substantial cargo and pleasure craft losses, neither of which significantly affected Beazley. Despite this, net insurance claims still increased by 26% in 2017 to $124.7m (2016: $98.9m). For the marine market as a whole, the practice of subsidising underperforming marine lines with profits from other lines of business may now become less feasible in the wake of large industry-wide catastrophe losses.
Renewal rates for marine and energy risks at the beginning of 2018 suggest that a period of more disciplined underwriting may indeed be beginning.
In the cargo market, we underwrite both a global account out of London and a UK account from the regional offices located in Ipswich, Manchester, Leeds and Birmingham. Premiums for our UK account have continued to build, rising 30% to $18.6m in 2017. For global business we have found the terms of many of the broker-led market facilities that have proliferated in recent years unattractive. Some of these were only marginally profitable prior to the recent catastrophes.
Our aviation team saw a spike in claims activity earlier in the year, which has now normalised. The aviation market remains exceptionally competitive, a tendency our team counteracts by focusing on smaller, hard to place risks that command higher premiums.
Our satellite book performed well in 2017, avoiding some substantial losses on risks that our underwriter, Denis Bensoussan, had seen but had declined to underwrite.
The quality of our underwriting and the strength of our claims service have long distinguished Beazley’s marine team. We continued to hire highly experienced individuals with exceptional track records. In 2017 we welcomed Stephen Vivian and John Moy in New York to focus on the development of our US business and Richard Young in London, who joined our hull team.
Our political risks team, led by Roddy Barnett, saw its heaviest claims since 2008. Our political risk underwriters take large lines – typically up to $20m – on carefully evaluated risks which unfortunately did not generate the strong returns in 2017 that had been seen previously. This was due to negative developments on risks from prior years.
Contingency claims also rose in 2017 due to the cancellation of a number of events following the devastation wrought by Hurricanes Harvey, Irma and Maria in the US in August and September. Our business exists to pay claims and the events that impacted our results in 2017 were also an opportunity for our claims teams to reinforce the value of the Beazley policy. A survey of brokers specialising in contingency insurance conducted in the second half of the year showed that those brokers who had direct experience of our claims service rated us more highly than those that did not (both categories rated our service highly, however). This came as no surprise.
In May we made the difficult decision to withdraw from the Australian market, selling the renewal rights to our local accident and health business to Blend Insurance Solutions, a Sydney-based Lloyd’s service company. The team in Australia had worked hard to expand our group personal accident business, moving away from unprofitable superannuation fund accounts, but we did not see sufficient scope for growth in this market to warrant continued investment.
The impact of the events on pricing in the market has been material, partly because prices had fallen so low in the relatively benign catastrophe environment over the last decade. Renewal rates on our large risk property book underwritten at Lloyd’s rose 6% at the beginning of 2018. We have seen similar rate rises on our smaller property book, written on a surplus lines basis locally in the US.
Commercial property 57% Small property business 17% Jewellers & homeowners 16% Engineering 10%
In the US, our commercial property team and our homeowners’ team both performed well in 2017, achieving premium growth of 7% and 13% respectively in a challenging market. We were delighted to welcome Joe Morrello back to Beazley at the beginning of the year to lead both teams. We underwrite US business on a surplus lines basis, focusing on risks that are not normally attractive to the standard, or ‘admitted’ market. Our clients and brokers value speed of service, both in underwriting and claims, which we were able to demonstrate in 2017.
In London, we saw growth of 74% in 2017 in specialist property lines such as jewellers’ block, fine art and specie under the leadership of Simon Aitchison. Our small business unit, led by Paul Bromley, grew 21% to $121m, supported by accounts that came to us through our acquisition of Creechurch Underwriters in Canada. Most of the business this team underwrites is sourced from Lloyd’s coverholders, with whom we have strong long term relationships, but we avoided the US flood risks that made coverholder business a source of large losses to some Lloyd’s syndicates in 2017.
Our last major line of business – construction and engineering – saw a decline in demand in Singapore in 2017, where we underwrite risks through the Lloyd’s construction consortium. However, the consortium, which is active in London as well as Singapore, expanded to six syndicates in the course of the year and is now a well recognised lead market for the largest construction risks. As tightening capacity brings rate rises for these large complex risks, our team, led by Colin Rose, should be well positioned.
A tumultuous year for reinsurers resulted in a sharp increase in the combined ratio of Beazley’s reinsurance division, to 107% (2016: 65%) on gross premiums written of $206.8m (2016: $213.4m). However, a combined ratio of 107% is still a good performance in such conditions and was possible because of the balance of the portfolio, which is actively managed.
However, we remain committed to supporting our US cedents and to retaining a strong presence in the world’s largest reinsurance market. In the weeks following Hurricanes Harvey, Irma and Maria, we advanced substantial funds to US insurers who were, themselves, under pressure to respond swiftly to clients’ claims. We did the same in the wake of the wildfires in California in October.
Losses from these events all fell within our expectations and provided an opportunity for the traditional reinsurance market to demonstrate its value and staying power.
Looking ahead, it is possible that the events of 2017 will accelerate changes in the pattern of demand for reinsurance as well as supply. The impact of this year’s storms has refocused attention in the US on the heavy public subsidies which are currently required to maintain the National Flood Insurance Program and the potential partnership role that private sector insurance and reinsurance could play in providing sustainable cover in the future.
Specialty lines, Beazley’s largest division, delivered strong growth in 2017, writing gross premiums of $1,292.2m (2016: $1,159.8m). The division’s most developed geographic market – the US – continued to perform well, while we moved to capitalise on the growing demand for our products in Canada, Europe, Asia and Latin America.
Specialty lines encompasses a diverse portfolio of management liability, professional liability and cyber insurance business, underwritten for companies and professional services firms of all sizes around the world. Our London underwriters tend to mainly focus on large risks, whereas underwriters elsewhere – and particularly in the US – focus more on small and mid sized risks.
We do not expect to see material spill over effects in specialty lines from the large scale catastrophe-related claims that other lines of business experienced in 2017. Nevertheless, the market may show less tolerance for underpricing in our lines, where competition for US business has been particularly acute and the claims environment has deteriorated. These include commercial directors’ and officers’ (D&O) insurance and some large professional liability business.
Technology, media & business services 27% Management liability 18% Small business 17% Professions 16% Healthcare 12% Treaty 8% Crime 1% International financial lines 1%
Beazley maintains a consistent approach to reserving, which means that prior year reserve releases from years with relatively benign claims experience can make a significant contribution to our profits. This proved to be the case in 2017, with reserve releases from recent underwriting years increasing to $121.4m (2016: $68.5m). The more difficult years, from a claims perspective, immediately following the 2008 credit crunch are now well behind us.
Growing international demand for cyber cover is one of the trends that prompted us, early in 2016, to develop plans to accelerate the growth of our international business outside the US. In December that year we hired Gerard Bloom to lead a new team focusing on these international opportunities, including financial institutions risks. Financial institutions can in some respects be seen as ‘regulated technology companies’ and the relevance of our specialist products to their needs – not just cyber insurance but also D&O and professional indemnity cover – is high.
Our product range in all of these markets is geared to local needs but – in addition to cyber cover – we anticipate strong demand in the years to come for D&O cover, and for medical malpractice cover for healthcare providers. Healthcare markets around the world are highly regulated – often a driver of demand for insurance – and we see much of our US medical malpractice experience as relevant to the needs of healthcare clients in other countries.
In all of these markets, we have considerable headroom in which to grow. The same remains true of the US where, despite our strong recent growth, we are far from having exhausted profitable growth opportunities. However, the profitability of our growth will also depend on the efficiency of our operations. With this in mind, we have been investigating opportunities to reduce distribution costs for small business and to streamline and package our products.
One key measure of efficiency is the volume of business that an individual underwriter can transact. This is particularly relevant in the small business arena where a swift response to submissions also boosts the productivity of our brokers. Working closely with Ian Fantozzi and his operations team, we are exploring the scope to apply robotics to many of the repetitive tasks that have historically constrained the productivity of underwriters.
Beazley’s vision is to become, and be recognised as, the highest performing specialist insurer
Raised £150m through rights issue to develop our business at Lloyd’s and in the US
Acquisition of First State Management Group, Inc., a US underwriting manager focusing on surplus lines commercial property business
Beazley, Furlonge & Hiscox established and takes over managing syndicate 623
Reinsurance division broadens access to South East Asia, China and South Korea business with local presence in Singapore
Local representation added in Rio to develop Latin American insurance business
Beazley celebrated its 30th anniversary 10th anniversary of operations in Singapore and Paris
Beazley Insurance dac acquires licence to write business within the EU
Premiums Gross premiums written have increased by 7% in 2017 to $2,343.8m (2016: $2,195.6m). Rates on renewal business on average decreased by 1% across the portfolio (2016: decrease 2%). We have continued to adjust our underwriting appetite in areas where competition is most intense.
The group is of the view that some of the above metrics constitute alternative performance measures (APMs). Further information on our APMs can be found in the key performance indicators section (inside front cover) and in the glossary on page 193.
Reinsurance purchased Reinsurance is purchased for a number of reasons: • to mitigate the impact of natural catastrophes such as hurricanes and non natural catastrophes such as cyber attacks; • to enable the group to put down large lead lines on the risks we underwrite; and • to manage capital to lower levels.
The amount the group spent on reinsurance in 2017 was $365.0m (2016: $341.6m). The increase in purchased reinsurance was in line with our growth in gross premiums written of 7%.
Reserve releases Beazley has a consistent reserving philosophy, with initial reserves being set to include risk margins that may be released over time as and when any uncertainty reduces. Historically these margins have given rise to held reserves within the range of 5-10% above our actuarial estimates, which themselves include some margin for uncertainty. The margin held above the actuarial estimate was 5.0% at the end of 2017 (2016: 6.6%). This margin decreased in 2017 which was in part due to the catastrophe activity in the second half of the year, which resulted in much lower margins than usual in the affected areas. As the overall margin is at the lower end of the range that management target, reserve releases in 2018 may be slightly lower than those over the last three years. However, it is important to recognise that while there is strong correlation between the level of margin and future reserve releases, current year developments can also affect releases either positively or negatively.
The reserve releases in 2017 increased to $203.9m (2016: $180.7m). Our specialty lines division continued to increase its reserve releases as the post recession portfolio from 2012 onwards matures. This division’s releases also included meaningful amounts from the 2014/2015 cyber portfolio, an area that has more year on year variability than the balance of the specialty lines account. This counter-balanced lower releases on short tail classes, where the mechanical effect that reduced margins have on reserve releases, along with the effects of a large series of natural disasters, is now visible.
Please refer to the financial statements for information on reserve releases and loss development tables.
Acquisition costs and administrative expenses Business acquisition costs and administrative expenses increased during 2017 to $774.4m from $720.3m in 2016. The breakdown of these costs is shown below: $m $m
Brokerage costs are the premium commissions paid to insurance intermediaries for providing business. As a percentage of net earned premiums they have increased slightly to 23% in the current year (2016: 22%). Brokerage costs are deferred and expensed over the life of the associated premiums in accordance with the group’s accounting policy.
Investment performance Geo-political headlines had limited overall impact on financial markets in 2017. Instead, more traditional macro-economic considerations provided direction: improving global growth, controlled inflation and easy monetary policy helped equities and corporate credit exposures to rally strongly whilst, later in the year, expectations of rising interest rates, particularly in the US, led risk-free yields to increase significantly. Our core portfolio of mainly fixed income assets, which constitute the majority of our investments, returned 1.6% overall in 2017 (2016: 1.5%) helped, as credit spreads declined, by the additional corporate bond exposures which we added in 2016. Our capital growth investments, which target higher returns whilst accepting some additional volatility, increased to 14.8% of assets in 2017 (2016: 12.0%), which was beneficial as these investments returned 11.0% in the period (2016: 5.6%), driven by strong performance from our equity and illiquid credit exposures. Our overall investment return for the year ended 31 December 2017 was 2.9%, or $138.3m (2016: 2.0%, $93.1m). More information about our investment strategy is included on page 14.
Tax Beazley is liable to corporation tax in a number of jurisdictions, notably the UK, the US and Ireland. Beazley’s effective tax rate is thus a composite tax rate mainly driven by the Irish, UK and US tax rates. The weighted average of the statutory tax rates for the year was 18.7% (2016: 14.9%) and has increased over 2016 due to an increased level of US based profits which are taxed at 35%. We expect this rate to be around 16% to 17% in 2018 as the group benefits from a reduced US corporation tax rate and non-US profits hopefully revert to long term levels. Our effective tax rate for the year was 22.6% (2016: 14.4%). The increases compared to 2016 were due to the higher composite tax rate and a reduction of approximately $5m in the value of our US deferred tax asset following the reduction in the US corporation tax rate from 35% to 21%, which was enacted in 2017.
Net assets per share (pence) 215.3p 225.9p (5%) Net tangible assets per share (pence) 196.2p 211.2p (7%)
Intangible assets Intangible assets consist of goodwill on acquisitions of $62.0m (2016: $62.0m), purchased syndicate capacity of $10.7m (2016: $10.7m), US admitted licences of $9.3m (2016: $9.3m), renewal rights of $35.2m (2016: $7.0m) and capitalised expenditure on IT projects of $16.3m (2016: $7.6m).
Insurance receivables Insurance receivables are amounts receivable from brokers in respect of premiums written. The balance at 31 December 2017 was $918.0m (2016: $794.7m).
Other assets Other assets are analysed separately in the notes to the financial statements. The largest items included comprise: • deferred acquisition costs of $281.4m (2016: $242.8m); • profit commissions of $10.1m (2016: $15.2m); and • deferred tax assets available for use against future taxes payable of $6.9m (2016: $11.0m).
Gross insurance claims reserves are made up of claims which have been notified to us but not yet paid of $1,056.3m (2016: $949.5m) and an estimate of claims incurred but not yet reported (IBNR) of $2,852.3m (2016: $2,567.4m). These are estimated as part of the quarterly reserving process involving the underwriters and group actuary. Gross insurance claims reserves have increased 11% from 2016 to $3,908.6m (2016: $3,516.9m).
US$ London interbank offered rate (LIBOR) plus 3.65%. These subordinated notes are due in 2034 and have been callable at the group’s option since 2009; • during September 2012 we issued a sterling denominated 5.375% retail bond under a £250m euro medium term note programme which raised £75m for the group and is due in 2019. This diversified the source and maturity profile of the group’s debt financing; and
• in November 2016, Beazley Insurance dac issued $250m of 5.875% subordinated tier 2 notes due in 2026.
Capital structure Capital structure Beazley has a number of requirements for capital at a group and subsidiary level. Capital is primarily required to support underwriting at Lloyd’s and in the US and is subject to prudential regulation by local regulators (PRA, Lloyd’s, Central Bank of Ireland, and the US state level supervisors). Beazley is subject to the capital adequacy requirements of the European Union (EU) Solvency II regime (‘SII’). We comply with all relevant SII requirements.
In 2017, Beazley acquired 3.0m of its own shares into the employee benefit trust. These were acquired at an average price of 437p and the cost to the group was £13.1m.
Lloyd’s economic capital requirement (ECR) 1,517.2 1,489.2 Capital for US insurance company1 96.5 107.7 1 The A.M. Best rating of our US insurance company Beazley Insurance Company Inc. (BICI) is now maintained via a group support mechanism rather than on a stand alone basis. As a result the capital requirement for BICI is now taken as a minimum realistic risk based capital (RBC) level as opposed to the capital level required to achieve a stand alone A.M. Best rating.
Under Solvency II requirements, the group is required to produce a Solvency Capital Requirement (SCR) which sets out the amount of capital that is required to reflect the risks contained within the business. Lloyd’s reviews the syndicates’ SCRs to ensure that SCRs are consistent across the market. On 10 December 2015 Beazley received internal model approval from the Central Bank of Ireland (the group supervisor under Solvency II).
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 which holds £75m sterling denominated notes; • 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 – reinsurance company that accepts non-life reinsurance premiums ceded by the corporate member,
Beazley Underwriting Limited and writes direct business in Europe; • Syndicate 2623 – corporate body regulated by Lloyd’s through which the group underwrites its general insurance business excluding accident & life. Business is written in parallel with syndicate 623; • Syndicate 623 – corporate body regulated by Lloyd’s which has its capital supplied by third party names; • Syndicate 6107 – special purpose syndicate writing reinsurance business, 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, facilities business; • Syndicate 6050 – special purpose syndicate which has its capital provided by third party names and provides reinsurance to syndicates 623 and 2623 on the 2015, 2016 and 2017 years of account; • Syndicate 5623 – special purpose syndicate writing facilities ceded from syndicate 3623; • Beazley Insurance Company, Inc. (BICI) – insurance company regulated in the US. Licensed to write insurance business in all 50 states; and • Beazley USA Services, Inc. (‘BUSA’) – managing general agent based in Farmington, Connecticut. Underwrites business on behalf of Beazley syndicates and BICI.
Beazley continues to demonstrate profitable growth, and we have developed a diversified portfolio of products that are distributed globally, through 29 locations. To support this growth, we have developed a scalable and efficient operating platform that, through focused investment, has become an important competitive advantage.
In early 2017, we announced the establishment of our European based insurance company, Beazley Insurance dac. The operations team has worked hard to ensure all the necessary operations and technology infrastructure is in place to support this business. As well as supporting the launch of over 40 insurance product coverages as part of the rollout of our new financial institutions business, we have developed our back-office systems to be able to efficiently process both large co-insured business and smaller 100% Beazley written business. Key to growing the distribution of smaller risk business has been the ongoing expansion of our myBeazley.com e-trading platform. The latest e-trading product launches, in the US and in Europe for our German professional indemnity book will support the growth of our small enterprise package products.
In 2017, we commenced a project to build a new operational service centre in Birmingham (UK) to support our London and Rest of World platform growth. This location is proving to be a cost-effective 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 generally. This year we have built our capabilities in software development, robotics, project delivery, as well as multi-lingual underwriting support and credit control at this location. In early 2018, we will open a new Birmingham office to house the operational service teams, as well as underwriters from our UK regional teams.
As we proceed into 2018, we are well placed not only as a high performing specialist insurer, but we also have developed great strength in our operational capability. The changes we have made in 2017, will allow us to build on this operational strength and ensure we are a high performing specialist insurer in an increasingly digital world.
The purpose of performing this modelling and monitoring is to ensure that in the event of a catastrophe occurring, such as those in the second half of 2017, claims can be paid promptly to our policyholders in their time of greatest need and a return can still be provided to the investors who support Beazley’s ongoing business.
Beazley has also established a new special purpose syndicate, syndicate 5623. We have supported the establishment of this syndicate including setting the processes and controls appropriate for the portfolio nature of the underwriting, which is different to the majority of underwriting performed at Beazley.
We have also started a risk review of our US operations. Whilst there were already two risk managers based full time in the US, the chief risk officer is spending nine months, spanning 2017 and 2018, in the US in order to provide assurance to the board that the US operations are working appropriately following the recent growth - we now have over 500 staff, or around 40% of the total workforce, based in the US - and that we are ready for the continued growth planned over the next few years.
Against the backdrop of increased scrutiny of remuneration arrangements by shareholders and regulators, the risk management report to the remuneration committee is now in its seventh year. The analysis performed has confirmed that the design of remuneration at Beazley is driving appropriate risk behaviour.
The latest chief risk officer 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 2017.
Risk management philosophy Beazley’s risk management philosophy is to balance the risks the business takes on with the associated cost of controlling these risks, whilst also operating within the risk appetite agreed by the board. In addition, our risk management processes are designed to continuously monitor our risk profile against risk appetite and to exploit opportunities as they arise.
Risk management strategy The Beazley plc board has delegated executive oversight of the risk management department to the executive committee, which in turn has delegated immediate oversight to the risk and regulatory committee. The Beazley plc board has also delegated oversight of the risk management framework to the audit and risk committee and the primary regulated subsidiary boards have each established a board risk committee.
Clear roles, responsibilities and accountabilities are in place for the management of risks and controls, and all employees are aware of the role they play in all aspects of the risk management process, from identifying sources of risk to their part in the control environment. The impact of each risk is recorded in the risk register on a 1:10 likelihood of that risk manifesting in the next 12 months. A risk owner has been assigned responsibility for each risk, and it is the responsibility of that individual to periodically assess the impact of the risk and to ensure appropriate risk mitigation procedures are in place. External factors facing the business and the internal controls in place are routinely reassessed and changes are made when necessary. On an annual basis, the board agrees the risk appetite for each risk event and this is documented in the risk management framework document. The residual financial impact is managed in a number of ways, including: • mitigating the impact of the risk through the application of controls; • transferring or sharing risk through outsourcing and purchasing insurance and reinsurance; and
• risk management information and reporting is timely, clear, accurate and appropriately escalated.
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 (53 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.
A suite of risk management reports are provided to the boards and committees to assist senior management and board members to discharge their oversight and decision making responsibilities. The risk reports include the risk appetite statement, the consolidated assurance report, risk profiles, stress and scenario testing, reverse stress testing, an emerging and strategic report, a report to the remuneration committee and the ORSA report.
The risks and associated capital requirements have been brought together into a five year plan. The main assumption is that the current market conditions will prevail, over which the outcomes of the board’s strategic initiatives are overlaid. In addition, the board has reviewed the sensitivity of key assumptions and has performed scenario testing to understand the impact on cashflows of the key risks of a major natural catastrophe and/or a systemic mispricing of the mediumtailed liability classes.
The chief risk officer provides a quarterly ORSA to the board summarising the short term and longer term risks to the group and the capital implications.
We began a conversation across the business on how we can design more products that are not only profitable but that also benefit society and the environment.
We are determined to keep our momentum going – throughout this year our volunteering increased by 14% and we want to keep building on that next year. We plan to do more environmentally next year as well as delivering products with a purpose.
However, beyond this, we think there is a huge amount of scope for the insurance industry to bring its expertise in risk management to bear in improving outcomes for our insureds and the societies and environment in which they operate. Our insurance products can work harder to achieve this. We call them ‘Products with a Purpose’ – a positive purpose, beyond the direct cover provided to the insured.
Our charity efforts are overseen by two charity and community committees, one for the US and one for UK, Asia and Europe, made up of volunteers across the business. The committees manage our charity partnerships and this year launched our global charity partnership with All Hands and Hearts. We chose this charity because of their innovative approach focused on deploying volunteers to areas in need and their relatively small size, which means that our involvement can be more impactful.
This is the first time Beazley has had one global charity partner and we have seen strong engagement from our employees in the partnership. In addition to supporting Beazley organised fundraising, we have seen employees fundraise for All Hands and Hearts through individual and group activities. We have also seen the benefit of choosing a charity partner that links to our business, with Texas based colleagues being able to work with All Hands and Hearts to make a difference immediately in Houston following Hurricane Harvey.
As part of our partnership agreement Beazley donated $52,000 to All Hands and Hearts in 2017, a sum which was supplemented by fundraising and matchfunding from our employees.
“ We are truly thankful to Beazley for their support over the past 11 months.”
“ Their (Team Beazley) contribution to the two projects was commendable and is highly appreciated. We miss them all and would love to have them back.”
Also in 2017 we increased our employee matchfunding threshold from $500 to $750 (or local currency equivalent) per employee. We match employee fundraising efforts so that employees are encouraged to make a difference on a local level for charities close to their own hearts. We’ve continued to promote this benefit thoughout the year and have seen a consistently strong level of take up.
> Ten Beazley colleagues, led by Dan Jones, took part in the Rocky Mountain Colorado challenge, raising over $10,000 for All Hands and Hearts, which went towards helping families recover from severe flooding in Louisiana, US.
In addition, examples of other employee led events in 2017 included: > Numerous Cycle for Survival events to raise funds for rare cancer research; Beazley volunteers
Global Crises Response With the support and encouragement of our people, we respond during large scale disasters, particularly if it affects the communities where we work. We have donated over $33,000 to charities, including the relief efforts for the flooding in Peru, South Asia, Quebec, and the aftermath of Hurricanes Harvey and Irma.
Celebrating making a difference in our communities We successfully delivered our global Make a Difference volunteering initiative for a fourth consecutive year, which gives employees up to one day to volunteer in their communities. This year we had nearly 500 employees take part, including employees from Canada and Birmingham who participated for the first time. Activities were selected at a local level, with the support of the Charity and Community Committee, in order to ensure that our people could select activities they were passionate about. Activities ranged from working at a farm to harvest crops for local food pantries, sorting food at food banks, preparing and serving meals to the homeless, spending time with local pensioners, upgrading community facilities likes crèches and parks through to supporting young people to get back to school with school supplies. The Farmington office also hosted 60 of our employees’ children who helped assemble care packages and thank you notes for members of the military. The children also drew pictures for an All Hands and Hearts initiative for families in Nepal.
Educating and supporting the next generation We continued our mentoring programme for a third successful year with 35 Beazley volunteers mentoring Year 10 (15-16 year old) students in East London.
Nineteen local young people were hired as summer interns in our UK and US offices, with seven being returnees from last year. Also, 10 Beazley volunteers helped improve reading and numerical skills for six children in Tower Hamlets.
Scope 3 tCO2e/employee/year 1 For further information, please refer to page 72.
To ensure we support and protect the environment as effectively as possible, we focus on three key areas: 1. Our offices: ensuring the environmental impact from our offices is minimal and finding ways to enhance our buildings so they have a more positive impact; 2. Our procurement: leveraging our buying power and working with suppliers to make a positive environmental impact; for example reviewing packaging from lunch providers to ensure minimum packaging used; if feasible sharing suppliers with other tenants to decrease deliveries; and 3. Our people & communications: engaging our people to help achieve our goals, encourage them to consider their environmental approach outside of work and keep them informed of what we are doing.
Environment We refreshed our Environmental Policy in November 2017, renewing our commitment to managing our environmental impacts, including: > Monitoring environmental performance – Since 2008 we have monitored a range of environmental key performance indicators including energy consumption and greenhouse gas emissions, and are using this information to identify and realise opportunities to improve our performance; > Sustainable procurement – We have developed and implemented formal procedures to ensure that environmental impacts are considered and managed during the procurement process; > Waste management – We actively facilitate recycling of our office waste at all Beazley office locations and review regularly our waste management practices and identify opportunities to improve. Our focus is on reduction and on implementing methods to support this; and > ClimateWise – Beazley has been a signatory to the insurance sector’s ClimateWise initiative since 2007.
This year, the New York office adopted more stringent recycling procedures, following the enactment of a local law in August 2017, which enforces more rigorous procedures within the building and enables Beazley as a tenant to recycle more effectively. Also, in our London office we have implemented ‘follow me’ printing technology and installed hand dryers in our bathrooms to reduce our paper usage.
Anti-corruption and anti-bribery We are committed to ensuring that our business is conducted in an ethical and honest manner, and to ensuring our continued compliance with all applicable bribery and corruption legislation, including the UK Bribery Act and US Foreign Corrupt Practices Act.
We maintain an anti-bribery and corruption policy, which is communicated to all employees and is supplemented with appropriate training.
Further information regarding our approach to anti-bribery and corruption can be found on our website.
Health & Wellbeing section Beazley supports and encourages employees to have healthy lifestyles and considers their wellbeing a part of Being Beazley. We actively ensure our office environments support a healthy workplace, even down to providing fresh fruit every day in our offices.
We have health and wellbeing champions across the business globally and this year they have organised and promoted a range of health and wellbeing activities in our offices, from informative briefing sessions on healthy living through to massage sessions. We continually update and promote our Beazley health and wellbeing online site so our people have advice and information to hand about healthy lifestyles.
In November we focused on mental health and featured a different article each week on our intranet homepage with colleagues opening up and sharing their stories including depression and obsessive compulsive disorder. We also had colleagues share experiences on living with type 1 diabetes and balancing work and family.
We carry out health and safety risk assessments at all locations to ensure safety and correct protocols are in place at all locations. We also ensure our people are trained in first aid and fire procedures to ensure the safety of our employees.
This has also been demonstrated by people initiating three employee networks, each of which is sponsored by an executive committee member: > PROUD@BEAZLEY for our LGBT+ employees and their allies; > Beazley Young Professionals representing the interests of our young talent; and > Empowered, which supports the varying cultures represented within our organisation.
Disability Forum We have also joined the Disability Forum. Our learning from the forum will help us to make our organisation and working environment more ‘disability smart’.
We believe it is important that our people feel comfortable to be themselves at work. Acknowledging important events in the diversity calendar helps to reinforce our inclusive culture and environment. This is why in 2017 we celebrated across all locations in the group, PRIDE, International Men’s and International Women’s days.
Directors’ responsibilities The statement of directors’ responsibilities in respect of the annual report and financial statements is set out on page 117.
The directors announce a second interim dividend of 7.4p per ordinary share (2016 second interim dividend: 7.0p; 2016 special dividend: 10.0p per ordinary share). The dividend, together with the first interim dividend of 3.7p per ordinary share (2016 first interim dividend: 3.5p), give a total of 11.1p (2016: 20.5p).
Further information can be found in the statement of corporate governance on page 81.
Corporate governance The company’s compliance with corporate governance is disclosed in the statement of corporate governance on pages 81 to 95.
Corporate, social and environmental responsibility The company’s corporate, social and environmental policy is disclosed pages 62 to 69. During 2017 Beazley donated over $417,000 to charities, details of which can be found in the responsible business report on page 64.
Substantial shareholdings As at 7 February 2018, the board had been notified of, or was otherwise aware of, the following shareholdings of 3% or more of the company’s issued ordinary share capital: Number of ordinary shares %
Invesco Perpetual 70,727,770 13.5 MFS Investment Management 62,481,250 11.9 Aberdeen Standard Investment 22,959,155 4.4 Dimensional Fund Advisors 22,798,729 4.3
The directors have pleasure in presenting their report and the audited financial statements of the group for the year ended 31 December 2017
Authority to purchase own shares On 24 March 2017 shareholders approved an authority, which will expire on 24 June 2018 or, if earlier, at the conclusion of the 2018 Annual General Meeting (AGM) for the company to repurchase up to a maximum of 52,335,334 ordinary shares (representing approximately 10% of the company’s issued ordinary share capital). During the year, Beazley acquired 3.0m of its own shares into its employee benefit trust. The board continues to regard the ability to repurchase issued shares in suitable circumstances as an important part of the financial management of the company. A resolution will be proposed at the 2018 AGM to renew the authority for the company to purchase its own share capital up to the specified limits for a further year. More detail of this proposal is given in the notice of AGM.
Significant agreements – change of control Details of an agreement to which the company is party that alters on change of control of the company following a takeover bid are as follows: The amended and restated $225 million multi-currency standby letter of credit and revolving credit facility agreement dated 25 July 2017 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 will amalgamate, merge, 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 13.00 on Thursday 22 March 2018 at Plantation Place South, 60 Great Tower Street, London EC3R 5AD. The notice of the AGM details the business to be put to shareholders.
Greenhouse gas emissions Our latest greenhouse gas (GHG) emissions report showed 2016 UK and European GHG emissions of 5,173.31 tonnes CO2 equivalent (tCO2e) a fall of 19% relative to 2015. This decrease is primarily due to reduced emissions associated with refrigerant losses (Scope 1), electricity consumption (Scope 2) and business travel by air (Scope 3). 2016 GHG emissions for Beazley’s three principal North American offices are reported as 1,653.95 tCO2e. This is 1% lower than 2015 reported emissions and is due to small reductions in Scope 2 and 3 emissions offsetting a small increase in emissions from business travel by air.
ii) GHG emissions are calculated and presented in accordance with DEFRA Environmental Reporting Guidelines, using the UK Government’s GHG Conversion Factors for Company Reporting 2016. iii) Reporting is based on operational control. Beazley does not have operational control over the building infrastructure and plant at its offices due to the presence of facility management companies and shared tenancies; as a result, emissions primarily fall within Scope 2 and 3 of the Greenhouse Gas Protocol. iv) 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 data centres are reported as Scope 2 emissions. Scope 3 sources include: business travel by air, rail and leased cars, and transmission and distribution of electricity. v) UK and European office reporting covers activity associated with our principal UK office, Plantation Place South, and our Dublin office. These sites collectively account for 96% of Beazley’s UK/European permanent and contracted staff in 2016. vi) US office reporting covers activity associated with three US offices, Farmington, New York and Chicago, which in 2016 collectively accounted for 63% of Beazley’s US employees.
By order of the board, covering the strategic report from pages 1 to 69 and the directors’ report from pages 70 to 73.
C P Oldridge Company secretary Plantation Place South 60 Great Tower Street London EC3R 5AD
As part of planning for board succession, the nomination committee led the search for a new chairman and David Roberts was appointed to the board on 1 November 2017. I will step down from the board at the AGM in March 2018, having served two full three year terms as chairman, and David Roberts will take up the role of non-executive chairman. Details of the search process are set out in the nomination committee report.
The company continues to be committed to the highest standards of corporate governance and the group’s robust system of governance has been designed to establish, implement and maintain effective controls, internal reporting and communication of information across all levels within the group. We believe these to be fundamental to the long term success of the company.
We ensure directors continually update their skills through individual development plans and board training. Talent development and succession planning are critical components of sustainable success and this starts at the very top, in the boardroom. On the board it is vital that we have the right balance and diversity of expertise, skills, experience and perspectives, in addition to independence of thought and action.
The group believes that diversity of the board contributes to group effectiveness and has developed a diversity strategy to support our commitment to being an equal opportunities employer. We achieved our goal of three female directors by the 2017 AGM, having gone from none to three within five years. We remain committed to our goal of a minimum of 35% of female senior managers within the organisation by 2020 and of 33% of female board members at group level by 2021. We are nevertheless committed to ensuring appointments are made on merit against selection criteria. Further details of our policy and goals are set out in the nomination committee report.
The board continues to engage with staff and a number of the non-executive directors travelled to various Beazley offices around the globe in 2017, met with staff and witnessed the culture of the company operating in practice.
The provision of timely, accurate and appropriate information to the board and committees is key to good governance. We regularly review the board information to ensure it is in a form, and of a quality, to enable the board to discharge its duties.
I am pleased to confirm the company has complied with the principles and provisions set out in the UK Corporate Governance Code throughout the year ended 31 December 2017. Details of the activities of the board and its committee also are set out on pages 82 to 95.
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 and executive committee succession.
Appointed: 1 January 2010* Experience: George is the senior independent director. He retired as senior vice president and director from AllianceBernstein Ltd in December 2009. He had previously been chief executive of Union plc, and a director of SG Warburg Securities, Seccombe, Marshall and Campion plc and Meridian Investment Performance Services. He is the chairman of the Charity Bank Ltd and chairman of Stonewater Ltd. Committees: Audit and risk committee, remuneration committee, nomination committee
Appointed: 25 March 2015* Experience: Andrew is Professor of Management Practice at the London Business School having served as Dean from 20092017. His career has spanned the public and private sectors as well as academic life, including ten years as Head of the UK Government Accountancy Service. He has had many non-executive director appointments, including the Bank of England, and is currently also a non-executive director of Times Newspapers Ltd. Committees: Remuneration committee (chairman), nomination committee
Appointed: 27 March 2013* Experience: Angela is a chartered accountant with extensive audit experience of multinational and listed companies. She was a partner in PricewaterhouseCoopers specialising in financial services for 20 years during which time she led the insurance and investment management division and retired in 2008. She is currently a partner in Ambre Partners, a firm providing strategic, financial and operational advice. Angela is also currently a non-executive director and audit chair of Swinton Group Ltd and River and Mercantile Group plc. Committee: Audit and risk committee (chairman)
Appointed: 5 May 2009* Experience: Martin joined Beazley in April 2009 as finance director. He began his career in insurance in 1985 and took up his first role as a finance director in 1996. He trained as a general insurance actuary, and his experience spans personal and commercial lines general insurance, the London market, life insurance and asset management in both the UK and France. Committee: Executive committee
Appointed: 6 December 2010* Experience: Adrian joined Beazley in June 2001. Prior to this, Adrian was at General Re for eight years, writing both treaty and facultative business. Since 2001 his responsibilities have included the casualty treaty portfolio and the SME and large risks portfolios, before being promoted to head of specialty lines in 2008. Committee: Executive committee
Appointed: 5 May 2016 Experience: John is chief financial officer of the Progressive Corporation, a US based insurance holding company. Prior to his current role, he was Progressive’s personal lines group president for eight years, responsible for the company’s primary business unit with $17bn in revenues. During his tenure as personal lines group president, he led the introduction of many innovations such as Name Your Price® and Snapshot®, the industry leading pay-as-youdrive offering. He also oversaw significant growth of the company’s direct marketing efforts and consumer facing web and mobile technology. Committee: Remuneration committee
Mutual Funds 52% Retail 12% Pensions 11% SWF 6% Insurance 6% Investment Trusts 5% Trading 4% Directors 1% Hedge 1% Charities 1% ETF 1%
There are currently 14 analysts publishing research notes on the group. In addition to research coverage from Numis and JP Morgan, the company’s joint corporate broker, coverage is provided by Autonomous, Berenberg, Credit Suisse, Jefferies, Keefe Bruyette & Woods, Peel Hunt, Shore Capital, Investec, Sanford Bernstein, Stockdale Securities, UBS and RBC.
Governance framework The company operates through the main board, the managing agent board, the board of the Irish insurance company (that accepts non-life reinsurance premiums ceded by the corporate member, Beazley Underwriting Limited) and their board committees. The group has established properly constituted audit and risk, remuneration and nomination committees of the board. There are terms of reference for each committee and details of their main responsibilities and activities in 2017 are set out on pages 82 to 95. The board has also appointed an executive committee that is chaired by Andrew Horton and acts under delegated authority from the board. The executive committee meets on a monthly basis and is responsible for managing all activities of the operational group. The governance framework of the main board and its committees is shown in the diagram on the following page.
Nomination committee Chairman Dennis Holt Members George Blunden Sir Andrew Likierman Key responsibilities 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.
Executive committee Chairman Andrew Horton Members Mark Bernacki Martin Bride Adrian Cox Mike Donovan Ian Fantozzi Patrick Hartigan Anthony Hobkinson Dan Jones Neil Maidment Penny Malik Andrew Pryde Christian Tolle Clive Washbourn Key responsibilities The executive committee manages all operational activities of the group and acts under the powers delegated by the board. It has responsibility for proposing strategic initiatives and group/syndicate business plans to the board as well as for reviewing the risk management framework and oversight of the group’s sub-committees and business functions.
Chairman Dennis Holt Members George Blunden Martin Bride Adrian Cox Angela Crawford-Ingle Andrew Horton
Company secretary Christine Oldridge Key responsibilities The company secretary’s responsibilities include ensuring good information flows within the board and its committees and between senior management and non-executive directors, as well as advising the board through the Chairman on all governance matters.
The board The board has a schedule of matters reserved for its decision. This includes inter alia: strategic matters; statutory matters intended to generate and preserve value over the longer term acquisitions; approval of financial statements and dividends; appointments and terminations of directors, officers and auditors; and appointments of committees and setting of their terms of reference. It is responsible for: reviewing group performance against budgets; approving material contracts; determining authority levels within which management is required to operate; reviewing the group’s annual forecasts; and approving the group’s corporate business plans, including capital adequacy and the Own Risk and Solvency Assessment. The board is responsible for determining the nature and extent of the principal risks it is willing to take in pursuing its strategic objectives. To this end, the board is responsible for the capital strategy, including the group’s Solvency II internal model.
The board consists of a non-executive chairman, Dennis Holt, together with eight independent non-executive directors, of whom George Blunden is the senior independent non-executive director, and four executive directors, of whom Andrew Horton is chief executive. The non-executive directors, who have been appointed for specified terms, are considered by the board to be independent of management and free of any relationship which could materially interfere with the exercise of their independent judgement.
Board meeting attendance The full board meets at least five times each year and more frequently where business needs require. In 2017, in addition to the five regular board meetings, there were further meetings to consider the Q3 2017 interim statement and director changes. Attendance at the meetings was high. All the directors also attend an annual strategy day. The remuneration, nomination, and audit and risk committees had additional ad hoc meetings with full attendance. The chairman holds meetings as required with the non-executive directors without the executive directors being present.
D Andrew Horton 5 5 – – – – – –
Neil P Maidment 5 5 – – – – – –
2 Clive Washbourn was unable to attend the board meeting on 10 May 2017 due to illness.
Where a director joined or stood down from the board or board committee during the year only the number of meetings following appointment or before standing down are shown.
The Beazley diversity and inclusion steering group provides diversity and inclusion support for all employees and aims to foster open dialogue about gender, social, ethnicity, LGBT+, disability and parental/carer inclusion. Two new networks were recently launched in 2017: the LGBT+ and young professionals networks.
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. 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 may also be provided if requested by any director.
Audit and internal control The respective responsibilities of the directors and the auditors in connection with the accounts are explained in the statement of directors’ responsibilities and the independent auditor’s report, together with the statement of the directors on going concern in the directors’ report.
The board therefore confirms that it has, during 2017, reviewed the effectiveness of the group’s risk management and internal controls (including financial, operational and compliance controls), which have been in place throughout the year under review and continue to operate up to the date of approval of the annual report and accounts.
Shareholder engagement The company places great importance on communication with shareholders. The annual report and accounts and the interim report are available from www.beazley.com and, where elected or on request, will be mailed to shareholders and to stakeholders who have an interest in the group’s performance. The company responds to individual letters from shareholders and maintains a separate investor relations centre within the existing www.beazley.com website, as a repository for all investor relations matters.
The committee’s key overall responsibilities are broadly unchanged from the prior year. The committee’s objective is to assist 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. The committee receives information from, and makes enquiries of, numerous functions across the business with a view to ensuring that the control and risk environment continues to be appropriate for the group. In particular, 2017 saw the committee consider a number of specific issues including our proposed external audit tender strategy, initial discussions and presentations in respect of IFRS 17 including potential areas of impact, the ongoing changes in the regulatory and tax environments, and emerging risks.
The audit and risk committee is required to meet at least quarterly, with meetings scheduled at appropriate intervals in the reporting and audit cycle. Additional meetings are held as required. In 2017 there were a total of 6 meetings, reflecting the workload of the committee during the year.
As part of the appointments process the nomination committee reviewed the membership of the committee during the year. Taken as a whole, the committee has an appropriate balance of skills specific to the industry within which the group operates, including recent and relevant financial experience, as required by the UK Corporate Governance Code. Details of the members’ financial, accounting and other relevant financial experience are given in their biographies under ‘board of directors’ on pages 78 to 79. All committee members are independent non-executives.
The internal and external auditors attend committee meetings and regularly meet in private with the committee. In addition the chairman of the audit and risk committee has regular contact with the external and internal auditors throughout the year and members of the committee met individually with the Central Bank of Ireland and the Prudential Regulation Authority during 2017.
Responsibilities of the committee The committee’s main audit-related responsibilities are broadly unchanged from the prior year and are detailed in the section below.
Angela Crawford-Ingle 27 March 2013 6/6 George Blunden 1 October 2010 6/6 Christine LaSala 1 July 2016 6/6 Robert Stuchbery1 11 August 2016 5/6 Catherine Woods 11 March 2016 6/6 1 Robert Stuchbery was unable to attend the audit and risk committee meeting on 27 January 2017 due to a scheduling conflict
• advise the board on whether, taken as a whole, the annual report is fair, balanced and understandable and provides the information necessary for shareholders to assess the company’s performance, business model and strategy.
d) Internal audit • recommend the appointment or termination of appointment of the head of internal audit; • monitor and review the effectiveness of the company’s internal audit function; • receive a report on the results of the internal auditor’s work, review internal audit reports and make recommendations to the board on a periodic basis; and
e) External audit • recommend to the board, to be put to the shareholders for approval, the appointment, reappointment and removal of the external auditors; • oversee the relationship with the external auditor including planning, reviewing of findings and assessing overall effectiveness; • approve auditor’s remuneration for audit, assurance and non-audit services.
• review the findings of the audit with the external auditor.
On the basis of the information provided by the group actuary throughout the year and at the year end, the consistent application of Beazley’s reserving philosophy, and the review work carried out by our external auditor, the committee was satisfied that the reserves held on the group statement of financial position at 31 December 2017 are reasonable.
iv) Recoverability of insurance receivables During 2017, management noted, in part due to the continued growth of the group, a number of additional controls and data enhancements which could be made to aid the process of aged debt analysis, as well as the end to end processing and monitoring of debtor balances. The committee noted the additional efficiencies and the enhanced control environment expected to be delivered as a result of these changes.
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 in particular the impact of the natural catastrophe activity during the second half of 2017. 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.
• the consideration of strategic, emerging and heightened risks identified by management and the group’s risk management team, along side the processes and controls in place to mitigate these risks.
• emerging risk: The committee supported the identification of strategic and emerging risks which were discussed at the board meeting in May 2017 and have been subsequently monitored and reported in the quarterly Own Risk and Solvency Assessment (ORSA); • oversight of the control environment: The committee has received a quarterly consolidated assurance report which provides commentary on the status of the control environment with perspective from the business, risk management, compliance and internal audit. It also includes entries from the risk incident log; • reverse stress testing: The committee has received the results of the reverse stress testing exercise, which explores what would have to happen for the group to be unviable and has been able to provide assurance to the board that this work has been performed with the appropriate level of depth and expertise; and
• oversight of the internal model: The committee and the risk committees of the subsidiary boards have reviewed regular reports associated with the internal model. These have included a standing report on internal model output, and a validation report featuring both internal and independent validation and themed reviews, for example, on the approach used to aggregate risk in individual entities which consolidate up to the group level. These assessments have supported the boards’ use of the internal model; and
• received updates on the structure and effectiveness of the company’s compliance function.
c) 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 chairman. The committee has reviewed the effectiveness of the function and remains satisfied that the internal audit function had sufficient resources during the year to undertake its duties.
• monitored the timely implementation of agreed management actions and reviewing the status of the same.
During the course of 2017 a number of internal audit recommendations were made to management in relation to its systems of control which have been subsequently implemented. Overall the internal audit function was able to report that for those areas it reviewed, the design and operation of our risk management framework, controls and processes have supported the group in operating within its risk appetite d) External audit i) Audit tendering KPMG have been the group’s auditors since its listing and, while KPMG were requested to submit a non-competitive tender in 2016, the provision of external audit services has not been subject to a formal tender process since 2002. The current audit partner is Mr. Daniel Cazeaux and the 2017 financial year was his first year as Beazley’s engagement partner.
• discussing the output of the FRC’s Audit Quality Review (AQR) with our auditors.
KPMG is a panel member eligible to provide services under our cyber breach response service to policy holders. To date KPMG has not been called upon to provide any services under this arrangement and the committee receives regular updates to monitor the level of activity and to ensure conflicts of interest do not occur.
None of the non-audit services provided are considered by the audit and risk committee to affect the auditor’s independence or objectivity.
Furthermore, the audit committee notes the receipt of correspondence from the Financial Reporting Council (FRC) in June 2017 in respect of the group’s annual report and accounts for the year ended 31 December 2016. We note that the FRC carried out a high level review of the annual report and raised no questions or queries requiring a response from the board or the audit committee. The FRC did make a small number of minor recommendations which could be included in future reports to aid the users of the accounts, and the committee is pleased that these recommendations have been implemented in the 2017 annual report and accounts. We note that the review carried out by the FRC was not a full review and was based solely on the group’s report and accounts without the benefit of detailed knowledge of the group’s business or a detailed understanding of the underlying transactions entered into during the year. We remain committed to continuous improvement in the quality and transparency of information included in the group’s annual report.
Competition and Markets Authority Order 2014 statement of compliance The committee confirms that during 2017 the group complied with the mandatory audit processes and audit committee responsibilities provisions of the Competition and Markets Authority Statutory Audit Services Order 2014 as presented in this report.
Key activities in 2017 During 2017 the committee: • reviewed the key aspects of the remuneration policy, and oversaw its implementation and application; • satisfied itself that the current remuneration structure is appropriate to attract and retain talented people; • considered the chief risk officer’s report which confirmed that the design of remuneration promotes appropriate risk behaviour throughout the organisation. In addition, the analysis considered the performance of the control environment, profit related pay targets, calculation of the bonus pool, share awards, a suite of risk metrics for each Solvency II member of staff and any individual who has created a higher than expected level of risk; • ensured incentives continued to be appropriate and to align company and shareholders; • approved the grant of share awards under the group’s deferred, retention and LTIP plans; • considered the salary and bonus awards for 2017 for executive directors, heads of control functions, material risk takers and other officers; • considered the actions required in relation to gender pay gap reporting; • approved the chairman’s fees; and • reviewed the executive director employment contracts.
Responsibilities of the committee The committee’s main responsibilities are to, inter alia: • set the remuneration policy for the group for approval at the annual general meeting. The objective of such policy shall be to ensure that members of the executive management of the company are provided with appropriate incentives to encourage enhanced performance and are, in a fair and responsible manner, rewarded for their individual contributions to the success of the company; • recommend and where appropriate approve targets for performance related pay schemes and seek shareholder approval for any long term incentive arrangements; • recommend and approve the remuneration of the chairman of the company; Sir Andrew Likierman
Sir Andrew Likierman 25 March 2015 6/6 George Blunden 1 January 2011 6/6 John Sauerland 11 May 2016 6/6
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 of 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 chairman and chief executive, senior executives and any other member of the senior management that it is relevant to consider; • 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 chairman as well as membership of board committees; and
• recommend, if appropriate, all directors for re-election by shareholders under the annual re-election provisions of the UK Corporate Governance Code.
Dennis Holt 21 July 2011 5/5 George Blunden 1 January 2010 5/5 Sir Andrew Likierman 25 March 2015 5/5
Salary increases The average executive director salary increase for 2018 was 2.6%, below the average salary increase for the rest of the organisation.
Performance out-turns The average executive director bonus this year is 38% of the maximum reflecting ROE for the year of 9%. In addition, directors will receive the second tranche (instalment) of the 2013 long term incentive plan (LTIP) and the first tranche of the 2015 LTIP. The tranches are due to vest (pay out) at 100% and 96.3% of the maximum respectively. These percentages reflect sustained growth in net asset value of 18.1% p.a and 16.1% p.a for the five and three year performance periods. We will award a 2018 LTIP subject to performance conditions in line with our usual policy level.
Gender pay We will soon publish our first gender pay gap report on the Beazley website. We have plans to reduce the gap as an important part of our diversity agenda, reinforced by signing the HM Treasury Women in Finance charter.
Executive director change In July 2017 Clive Washbourn, head of marine, stepped down from the board having served as an executive director since 2006. He remains a member of the executive committee of Beazley and a board member of Beazley Furlonge Ltd. He did not receive any payment for loss of office. He did, however, receive the final tranche of the legacy marine share incentive plan.
Developments The committee is keeping in mind the Government’s proposed corporate governance reforms and the Financial Reporting Council’s consultation on the changes to the UK Corporate Governance Code.
2017 was the second year for which the remuneration requirements of Solvency II applied. As you would expect, the committee ensures that Beazley complies with evolving best practice and the Prudential Regulatory Authority’s guidance. We get regular updates on wider executive pay market practice to make sure our policies remain aligned to best practice.
Shareholders The committee monitors remuneration developments and considers – indeed welcomes – the views of shareholders. We were grateful for a favourable vote of 98% on last year’s annual remuneration report, and one of 95% on our remuneration policy.
Remuneration policy Our policy, which remains unchanged for 2018, has two guiding principles: alignment to shareholders’ interests and performance of the group. The key features and basis of alignment are: • key performance indicators used in incentives. Two important factors in the determination of the annual bonus pool are profit before tax and return on equity, both of which are key performance indicators for the company. In addition the long term incentive plan (LTIP) uses another key performance indicator, net asset value per share (NAVps) growth, since it is aligned to shareholders’ interest. For the maximum awards to vest, NAVps growth of 15% above the risk-free return has to be sustained for five years; • five year performance. For a number of years we have operated an LTIP where performance is measured over five years as well as three. This longer period aligns reward with the long term performance of the business and the additional clawback period for executive directors, taking reclaim provisions to seven years, ensures alignment with longer term decision-taking. Further strengthening alignment with longer term decision making is the company’s policy to defer a portion of annual bonuses into shares and our shareholding guidelines; and
• risk. The features which align remuneration with risk include a long time horizon, deferral of bonus into shares and personal shareholding requirements. The committee receives an annual report from the chief risk officer on remuneration policy to ensure it is consistent with, and promotes, effective risk management.
■ Special dividend ■ Interim and second interim dividend ■ Net asset per share
Salaries for 2017 were as follows: • D A Horton: £457,000 • M L Bride: £320,000 • A P Cox: £342,500 • N P Maidment: £342,500 • C A Washbourn: £342,500
A portion is generally deferred into shares for three years (between 0% and 37.5% of bonus) dependent on level of bonus.
50% of awards are subject to performance over three years and 50% over five years.
In 2017, the following grants as a percentage of base salary were made, subject to the usual NAVps performance condition: • D A Horton: 200% • M L Bride: 150% • A P Cox: 175% • N P Maidment: 150% • C A Washbourn: 150%
LTIP awards may be forfeited if shareholding requirements are not met.
Executive directors Fixed pay Pay for performance £ Salary Benefits Pension
2 A significant portion of the single figure values shown arises from the substantial share price appreciation over the period. For 2017 the share price at the time LTI awards were made was 204.2p for the 2013 award and 295.73p for the 2015 award, while the average share price in the last three months of 2017 was 496.34p. This represents share price growth of 60% and 41% over the five and three year periods respectively.
Catherine M Woods 6 1 Other than for the chairman, fees include fees paid for chairmanship of the audit and risk and remuneration committees, and for the role of senior independent director, as well as fees, where relevant, for membership of the subsidiary boards of Beazley Furlonge Limited (BFL) and Beazley Insurance dac and the chairmanship of the BFL risk committee.
3 David Roberts was appointed to the board on 1 November 2017 and the figure in the table above represents his fees from this date.
4 John Sauerland was appointed to the board on 5 May 2016 and the figure in the table above represents his fees from this date.
5 Robert Stuchbery was appointed to the board on 11 August 2016 and the figure in the table above represents his fees from this date including fees for membership of the subsidiary boards of BFL and the chairmanship of the BFL risk committee.
6 For Catherine Woods, her non-executive director fee was based on €84,750 (2016: €77,500) and has been converted into sterling for this table at the average exchange rate of 1.15 (2016: the fee was converted into £62,500 at the average exchange rate of 1.24).
The base salaries for the executive directors in 2017 and 2018 are as set out below: base salary £
A broad senior management team, beyond executive directors, participate in the bonus pool, reinforcing the company’s collegiate culture.
Performance out-turn for 2017 The process for determining 2017 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. • ROE for 2017 was 9% and the overall enterprise bonus pool (in which executive directors as well as other senior employees
• in considering individual awards in respect of executive directors for 2017, the committee had regard to the broad framework detailed below: At the beginning of the financial year, the risk-free return (RFR) was set at 1.5% taking into account the yield on US treasuries of two to five year maturities. This resulted in the following ROE hurdles and guideline bonus awards: ROE performance hurdles ROE performance Guideline/illustrative bonus award as a % of maximum
These percentages are indicative only and based on broad group results. Within the pool framework bonus out-turns may be higher or lower taking into account divisional, strategic and personal performance.
■ 2016 performance range ■ 2016 ROE performance 2016 ROE performance (%)
substantial claims due to the natural catastrophes in the second half of the year; • delivery of growth in our gross premiums written of 7% in a market where premium rates continued to be under pressure; • extending the reach of our market leading products in the US, such as cyber, management liability and medical malpractice,
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: Martin L Bride • Continued successful management of the European strategic initiative • Conversion of the Dublin based reinsurance company into an insurance company permitted to transact business throughout the European Union
Neil P Maidment • Achievement of underwriting profit with a combined ratio of 99%, despite paying substantial claims due to natural catastrophes
The following graph and table set out the out-turn for 2017 against performance and illustrate the way in which bonuses over time reflect profit and ROE performance.
■ Profit before tax (PBT) $ Average executive director bonus as a % of salary
Average executive director bonus as a percentage of salary c.64% c.272% c.333% c.294% c.291% c.272% c.150%
The key features of the plan are as follows: • 50% of the award is measured after three years and 50% after five years; • awards are in the form of nil-cost options with a ten-year term; and • participants are expected to build a shareholding in Beazley equal to their annual award level. For example the CEO has a shareholding requirement of 200% of salary. Participants have three years to build this shareholding. LTIP awards may be forfeited if shareholding requirements are not met.
NAVps growth < average risk-free rate +7.5% p.a. 0% NAVps growth = average risk-free rate +7.5% p.a. 10% NAVps growth = average risk-free rate +10% p.a. 25% NAVps growth = average risk-free rate +15% p.a. 100% Straight-line vesting between points
The ROE performance condition for this award is as follows: Average annual pre tax divisional ROE performance % of award vesting
Average annual pre tax ROE <15% p.a. 0% Average annual pre tax ROE = 15% p.a. 20% Average annual pre tax ROE = 25% p.a. 100% Straight-line vesting between points
Adrian P Cox Deferred shares 75,979 330,000 – – – D Andrew Horton Deferred shares 86,339 375,000 – – – Neil P Maidment Deferred shares 67,690 294,000 – – – Clive A Washbourn Deferred shares 48,350 210,000 – – –
1 Clive Washbourn stepped down from the board effective 20 July 2017. He remains employed by the group but no reporting will be due for 2018.
LTIP awards may be subject to clawback for a period of two years following vesting.
Pensions ▪ The pension benefits for executive directors and staff are provided by way of a defined contribution scheme arranged through Fidelity, which is non-contributory. The company contributes 15% of salary for directors.
Details of the defined benefit entitlements of those who served as directors during the year are as follows: Accrued benefit at
We believe reward at Beazley is appropriately balanced in light of risk considerations, particularly taking into account the following features: Features aligned with risk considerations Share deferral A portion of the LTIP has performance measured over an extended five-year period. Extended performance periods A portion of the LTIP has performance measured over an extended five-year period. Shareholding requirements Executive directors are expected to build up and maintain a shareholding of 150% of salary (200% for the CEO).
LTIP awards may be forfeited if shareholding requirements are not met. Investment in underwriting Management and underwriters may defer part of their bonuses into the Beazley staff underwriting plan, providing alignment with capital providers. Capital commitments can be lost if underwriting performance is poor. Underwriters’ remuneration aligned with profit achieved
Retention shares To retain key staff. Used in certain circumstances. Full vesting dependent on continued employment over six years.
CEO pay increase in relation to all employees Percentage change in remuneration from 31 Dec 2016 to 31 Dec 2017
The table below shows the total number of directors’ interests in shares as at 31 December 2017 or date of cessation as a director.
Angela D Crawford-Ingle 34,207 – – – – – Christine LaSala 14,300 – – – – – Sir J Andrew Likierman 10,000 – – – – –
David L Roberts 41,300 – – – – – John P Sauerland 30,000 – – – – – Robert A Stuchbery 53,000 – – – – –
No changes in the interests of directors have occurred between 31 December 2017 and 7 February 2018.
Clive A Washbourn1 1 The options stated in the table above for Clive Washbourn are representative of the values at the time he stepped down from the board (20 July 2017). However, since then Clive has exercised his SAYE options (4,354) over shares.
Deferred bonus Deferred bonus awards are made in the form of conditional shares that normally vest three years after the date of award.
LTIP 2012 – 3/5 year Awards were made on 30 March 2012 at a mid-market share price of 143.43p. Performance conditions: all of the award is subject to NAVps performance, with 50% measured over a three year period and 50% measured over a five year period. NAVps < RFR+7.5% p.a. equates to 0% vesting, NAVps = RFR+7.5% p.a. equates to 10% vesting, NAVps = RFR+10% p.a. equates to 25% vesting, NAVps = or > RFR+15% p.a. equates to 100% vesting, with straight-line pro-rated vesting between these points.
MSIP 3/5 year MSIP awards were made on 5 April 2013 to C A Washbourn. Details of the plan are set out in the policy report, under legacy matters in the remuneration policy table.
LTIP 2015 – 3/5 year Awards were made on 10 February 2015 at a mid-market share price of 295.73p. Performance conditions: all of the award is subject to NAVps performance, with 50% measured over a three year period and 50% measured over a five year period. NAVps < RFR+7.5% p.a. equates to 0% vesting, NAVps = RFR+7.5% p.a. equates to 10% vesting, NAVps = RFR+10% p.a. equates to 25% vesting, NAVps = or > RFR+15% p.a. equates to 100% vesting, with straight-line pro-rated vesting between these points.
LTIP 2016 – 3/5 year Awards were made on 9 February 2016 at a mid-market share price of 354.1p. Performance conditions: all of the award is subject to NAVps performance, with 50% measured over a three year period and 50% measured over a five year period. NAVps < RFR+7.5% p.a. equates to 0% vesting, NAVps = RFR+7.5% p.a. equates to 10% vesting, NAVps = RFR+10% p.a. equates to 25% vesting, NAVps = or > RFR+15% p.a. equates to 100% vesting, with straight-line pro-rated vesting between these points.
Share prices The market price of Beazley ordinary shares at 29 December 2017 (the last trading day of the year) was 534.5p and the range during the year was 381.9p to 534.5p.
Remuneration committee The committee consists of only non-executive directors and during the year the members were Sir Andrew Likierman (chairman), George Blunden and John Sauerland. The board views each of these directors as independent.
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 2017 can be found within the statement of corporate governance on page 93.
Statement of shareholder voting The voting outcomes of the 2016 annual remuneration report and remuneration policy were as follows: Votes for % for Votes against % against Total votes cast Votes withheld
Annual general meeting At the forthcoming annual general meeting to be held on 22 March 2018, an advisory resolution will be proposed to approve this annual remuneration report.
The directors are responsible for the maintenance and integrity of the corporate and financial information included on the company’s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
We have audited the financial statements of Beazley plc (“the Company”) for the year ended 31 December 2017 which comprise the consolidated statement of profit or loss, statement of comprehensive income, statement of changes in equity, statements of financial position, statements of cash flows, and the related notes, including the accounting policies in note 1.
— 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.
2. Key audit matters: our assessment of risks of material misstatement
Refer to page 88 (Audit and Risk Committee Report), page 135 (Statement of accounting policies) and page 175 (financial disclosures).
Our procedures included: — Sector experience and benchmarking: Performed benchmarking of Beazley’s ultimate loss ratios, initial expected loss ratios, premium rate change, expectations of total losses on natural catastrophes, the rate at which IBNR has been utilised in the year and reserve releases in comparison to the rest of the market, in order to identify specific trends and outliers.
— Re-projections: Used our projection of premiums and claims (on a gross and net basis) that we carried out as part of our overall actuarial audit testing and compared these with the Group’s estimates.
— Methodology assessment: Assessed the reserving assumptions and methodology (on a gross basis and net of outwards reinsurance) for reasonableness using our professional and sector experience and for consistency year on year, including inspecting the Group’s margin paper.
— We found the resulting estimate of insurance liabilities to be acceptable (2016 result: acceptable).
— Insurance receivables: The ability to identify, monitor and age insurance debtors relies on the timely availability of reliable data. The availability of this data is also impacted by the source, being either settled direct through intermediaries or through Xchanging.
Reinsurance contracts are often complex. The calculations of recoveries includes a number of judgements, and an assessment of the risk transferred.
— Assessing future premium debtors: Performed an analysis over the unsigned debtors within the insurance receivables balance in order to assess the valuation and recoverability of these debtors.
— Provisioning analysis: Critically assessed, based on our sector experience, the adequacy of the provisioning policy in place for Beazley by assessing and investigating any material movements in policy and the overall percentage of bad debt during the reporting period.
— We found the resulting estimate of the recoverability of insurance and reinsurance debtors to be acceptable (2016 result: acceptable).
— Comparing valuations: For investments in hedge funds we inspected the financial statements of the underlying funds to confirm that the valuation approach was acceptable.
— Roll forward testing: Assessed the quantum of change in the valuation of investments between the early close date and the period end date to consider whether there was a material movement post the early close date that required adjustment.
— We found the resulting estimate of the valuation of hedge fund and illiquid credit assets to be acceptable (2016 result: acceptable).
Refer to page 89 (Audit and Risk Committee Report), page 136 (Statement of accounting policies) and page 155 (financial disclosures).
There is a large proportion of premium written through the group syndicates via binders. Such premiums are uncertain at inception and the model used in the recognition and earning of such premiums is subject to judgement and estimation.
There is an increased risk of premium estimates being misstated as a result of the early close process which requires Beazley to estimate the premiums relating to the month of December and where necessary make adjustments at the period end.
— Independent reperformance: Recalculated, on a sample basis, the earning of premium and investigated any changes to earnings patterns.
— We found the resulting estimate of the valuation of estimated premium to be acceptable (2016 result: acceptable).
Refer to page 134 (Statement of accounting policies) and page 190 (financial disclosures).
The carrying amount of the parent company’s investments in subsidiaries represents 97% (2016: 98%) of the company’s total assets. Their recoverability is not at a high risk of significant misstatement or subject to significant judgement. However, due to their materiality in the context of the parent company financial statements, this is considered to be the area that had the greatest effect on our overall parent company audit.
Our procedures included: — Tests of detail: Comparing the carrying amount of 100% of investments with the relevant subsidiaries’ financial statements/draft balance sheet to identify whether their net assets, being an approximation of their minimum recoverable amount, were in excess of their carrying amount and assessing whether those subsidiaries have historically been profit-making.
We agreed to report to the Audit and Risk Committee any corrected or uncorrected identified misstatements exceeding $1m ($0.5m for non-technical) (31 December 2016: $1m ($0.5m for non-technical)) in addition to other audit misstatements below that threshold that we believe warranted reporting on qualitative grounds.
The work on 3 of the 17 components (2016: 3 of the 18 components) was performed by component auditors and the rest, including the audit of the parent company, was performed by the group audit team. The group audit team instructed the component team as to the significant areas to be covered, including the relevant risks detailed above and the information to be reported back. The group audit team approved the component materialities, which ranged from $0.1m to $16m (31 December 2016: $0.1m to $18m), having regard to the mix of size and risk profile of the Group across the components. All other work, including the audit of the parent company, was performed by the group audit team.
In regards to the US component team (covering Beazley Holdings Inc., Beazley Services USA and Beazley Insurance Company Inc.) the interaction with the Group team included status update calls along with remote inspection of the component team’s audit files.
We are required to report to you if: — we have anything material to add or draw attention to in relation to the directors’ statement in note 1 to the financial statements on the use of the going concern basis of accounting with no material uncertainties that may cast significant doubt over the Group and Company’s use of that basis for a period of at least twelve months from the date of approval of the financial statements; or
5. We have nothing to report on the other information in the Annual Report
— we have not received all the information and explanations we require for our audit.
As explained more fully in their statement set out on page 117, the directors are responsible for: the preparation of the financial statements including being satisfied that they give a true and fair view; such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error; assessing the Group and parent Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and using the going concern basis of accounting unless they either intend to liquidate the Group or the parent Company or to cease operations, or have no realistic alternative but to do so.
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud, other irregularities (see below), or error, and to issue our opinion in an auditor’s report. Reasonable assurance is a high level of assurance, but does not guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud, other irregularities or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. A fuller description of our responsibilities is provided on the FRC’s website at www.frc.org.uk/auditorsresponsibilities.
We considered the extent of compliance with those laws and regulations that directly affect the financial statements, being the UK listing rules and the Companies Act, as part of our procedures on the related financial statement items. For the remaining laws and regulations, we made enquiries of directors and other management (as required by auditing standards), and inspected correspondence with regulatory authorities.
We communicated identified laws and regulations throughout our team and remained alert to any indications of non-compliance throughout the audit. This included communication from the group to component audit teams of relevant laws and regulations identified at group level, with a request to report on any indications of potential existence of irregularities in these areas, or other areas directly identified by the component team.
8. The purpose of our audit work and to whom we owe our responsibilities
Daniel Cazeaux (Senior Statutory Auditor) for and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants 15 Canada Square London, E14 5GL 7 February 2018
Change in gross provision for unearned premiums (118.4) (83.4) Reinsurer’s share of change in the provision for unearned premiums 9.0 (2.4) Change in net provision for unearned premiums (109.4) (85.8)
Insurance claims 1,388.0 1,027.3 Insurance claims recoverable from reinsurers (312.3) (171.7) Net insurance claims 3 1,075.7 855.6
Items that may be reclassified subsequently to profit or loss: Foreign exchange translation differences 2.9 (10.1) Total other comprehensive income 2.3 (16.2) Total comprehensive income recognised 132.3 234.8
Company Profit for the year attributable to equity shareholders 134.8 18.2
Issue of shares 0.1 – – – – 0.1 Equity settled share based payments 22 – – – 24.5 – 24.5 Acquisition of own shares in trust 22 – – – (16.2) – (16.2) Tax on share option vestings 9 – – – 4.3 4.0 8.3 Transfer of shares to employees 22 – – – (4.0) 6.1 2.1 1 During the first half of 2016, 1.9m new ordinary shares were issued, as well as 0.1m of preference shares prior to a scheme of arrangement. The preference shares were redeemed by the company in 2016.
2 Subsequent to a scheme of arrangement, a capital reduction was executed in April 2016 which involved a reduction in the nominal value of the shares in the new parent from 90 pence per share to 5 pence per share.
Statement of changes in equity for the year ended 31 December 2017
Issue of shares 21 0.1 – – – – 0.1 Equity settled share based payments 22 – – – 24.5 – 24.5 Acquisition of own shares in trust 22 – – – (16.2) – (16.2) Transfer of shares to employees 22 – – – (4.0) 6.1 2.1 1 On 13 April 2016, the company issued 523.3m ordinary shares at a nominal value of 90 pence per share.
Plant and equipment 13 4.4 – 5.4 – Deferred tax asset 28 6.9 – 11.0 – Investment in subsidiaries 31 – 724.6 – 724.6 Investment in associates 14 7.0 – 9.9 – Deferred acquisition costs 15 281.4 – 242.8 –
Merger reserve – 55.4 – 55.4 Foreign currency translation reserve (93.8) 0.7 (96.7) 0.7
Retirement benefit liability 27 2.3 – 6.2 – Deferred tax liability 28 9.9 – 12.8 –
The financial statements were approved by the board of directors on 7 February 2018 and were signed on its behalf by: D Holt Chairman
Statements of cash flows for the year ended 31 December 2017
Cash flow from operating activities Profit before income tax 168.0 133.3 293.2 18.2 Adjustments for: Amortisation of intangibles 12 11.6 – 5.3 – Equity settled share based compensation 22 23.6 24.5 23.0 22.5 Net fair value gain on financial assets (69.6) – (28.9) – Share of (profit)/loss in associates 14 (0.1) – 0.2 – Depreciation of plant and equipment 13 2.7 – 1.8 – Impairment of reinsurance assets recognised/(written back) 6 0.6 – (1.1) – Increase/(decrease) in insurance and other payables 534.4 (0.2) 72.4 0.6 Increase in insurance, reinsurance and other receivables (295.9) (7.0) (59.3) (13.0) Increase in deferred acquisition costs (38.6) – (16.6) –
Income tax paid (27.9) – (39.8) – Net cash generated from operating activities 254.3 14.7 193.9 5.2
Issuance of shares 2.2 2.2 – – Net cash (used in)/from investing activities (167.9) 139.0 (263.6) 23.9
A number of new standards and interpretations adopted by the EU which are not mandatorily effective, as well as standards and interpretations issued by the IASB but not yet adopted by the EU, have not been applied in preparing these financial statements. The group does not plan to adopt these standards early; instead it will apply them from their effective dates as determined by their dates of EU endorsement. The group is still reviewing the upcoming standards to determine their impact: • IFRS 2: Amendment: Classification and Measurement of Share-based Payment Transactions (IASB effective date: 1 January 2018);* • IFRS 9: Financial Instruments (EU effective date: 1 January 2018, deferred in line with implementation of IFRS 17); • IFRS 15: Revenue from Contracts with Customers (EU effective date: 1 January 2018); • IFRS 16: Leases (EU effective date: 1 January 2019); • IFRS 17: Insurance Contracts (IASB effective date: 1 January 2021);* • IAS 40: Amendment: Transfers of Investment Property (IASB effective date: 1 January 2018);* • IFRS 9: Amendment: Prepayment Features with Negative Compensation (IASB effective date: 1 January 2019);* • IAS 28: Amendment: Long-term Interests in Associates and Joint Ventures (IASB effective date: 1 January 2019);* • Annual Improvements to IFRSs 2014-2016 Cycle (IASB effective date: 1 January 2018);* • IFRIC 22 Foreign Currency Transactions and Advance Consideration (IASB effective date: 1 January 2018);* and • IFRIC 23 Uncertainty over Income Tax Treatments (IASB effective date: 1 January 2019).*
Of the upcoming accounting standard changes that we are aware of, we anticipate that IFRS 17, IFRS 9 and IFRS 16 will have the most material impact on the financial statements’ presentation and disclosures. The accounting developments and implementation timelines of these standards are being closely monitored and the impacts of the standards themselves are being assessed. Full impact analysis in respect of these standards is in the process of being completed. The impact of IFRS 15 has been assessed, and the impact is deemed to be immaterial. A brief overview of the standards is provided below: • IFRS 17, effective from 1 January 2021, will fundamentally change the way insurance contracts are accounted for and reported.
Revenue will no longer be equal to premiums written but instead reflect a change in the contract liability on which consideration is expected. On initial assessment the major change will be on the presentation of the statement of profit or loss with premium and claims figures being replaced with insurance contract revenue, insurance service expense and insurance finance income and expense. It is not currently known what impact the new requirements will have on the group’s profit and financial position, but it is expected that profit recognition will be altered with expenses for onerous contracts being accelerated and recognised upfront rather than being spread over the term of the insurance contract. We are currently carrying out an impact assessment to identify the main areas within the group that the standard will affect, as well as assessing whether any synergies, potentially with Solvency II, can be achieved. A more detailed update will be provided after the assessment has been completed;
Notes to the financial statements continued 1 Statement of accounting policies continued a) Estimates Estimates are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected.
b) Judgements Information about significant areas of critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the financial statements are described in this statement of accounting policies and specifically in the following notes: • note 1a: accounting treatment for the group’s interest in managed syndicates; and • note 12: intangible assets including goodwill (assumptions underlying recoverable amounts).
Consolidation a) Subsidiary undertakings Subsidiary undertakings are entities controlled by the group. The group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. In assessing control, the group takes into consideration potential voting rights that are currently exercisable. The acquisition date is the date on which control is transferred to the acquirer. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. Losses applicable to the non-controlling interests in a subsidiary are allocated to the non-controlling interests even if doing so causes the noncontrolling interests to have a deficit balance.
Such amounts are recognised in profit or loss; and (iii) Any contingent consideration is measured at fair value at the acquisition date.
b) Unearned premiums A provision for unearned premiums (gross of reinsurance) represents that part of the gross premiums written that it is estimated will be earned in the following financial periods. It is calculated using the daily pro-rata method, under which the premium is apportioned over the period of risk.
For more recent underwriting years, regard is given to the variations in the business portfolio accepted and the underlying terms and conditions. Thus, the critical assumptions used when estimating provisions are that past experience is a reasonable predictor of likely future claims development and that the rating and business portfolio assumptions are a fair reflection of the likely level of ultimate claims to be incurred for the more recent years.
The group assesses its reinsurance assets for impairment. If there is objective evidence of impairment, then the carrying amount is reduced to its recoverable amount and the impairment loss is recognised in the statement of profit or loss.
Financial statem ents www.beazley.com Annual report 2017 Beazley 137 1 Statement of accounting policies continued Plant and equipment All plant and equipment is recorded at cost less accumulated depreciation and any impairment losses. Depreciation is calculated using the straight-line method to allocate the cost of the assets to their residual values over their estimated useful lives as follows: Fixtures and fittings Three to ten years Computer equipment Three years
The carrying values of plant and equipment are reviewed for impairment when events or changes in circumstances indicate that the carrying value may be impaired. If any such condition exists, the recoverable amount of the asset is estimated in order to determine the extent of impairment and the difference is charged to the statement of profit or loss.
Notes to the financial statements continued 1 Statement of accounting policies continued a) Financial assets On acquisition of a financial asset, the group is required to classify the asset into one of the following categories: financial assets at fair value through the statement of profit or loss, loans and receivables, assets held to maturity and assets available for sale. The group does not make use of the held to maturity and available for sale categories.
Financial statem ents www.beazley.com Annual report 2017 Beazley 139 1 Statement of accounting policies continued e) Hedge funds, equity funds and illiquid credit assets The group invests in a number of hedge funds, equity funds and illiquid credit assets for which there are no available quoted market prices. The valuation of these assets is based on fair value techniques (as described above). The fair value of our hedge fund portfolio is calculated by reference to the underlying net asset values (NAVs) of each of the individual funds. Consideration is also given to adjusting such NAV valuations for any restriction applied to distributions, the existence of side pocket provisions and the timing of the latest available valuations. At certain times, we will have uncalled unfunded commitments in relation to our illiquid credit assets. These uncalled unfunded commitments are actively monitored by the group and are disclosed in the notes 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.
Leases Leases where a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made by the group for operating leases are charged to the statement of profit or loss on a straight-line basis over the period of the lease.
A defined benefit plan is a pension plan that defines an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors like age, years of service and compensation. The pension costs are assessed using the projected unit credit method. Under this method the costs of providing pensions are charged to the statement of profit or loss so as to spread the regular costs over the service lives of employees in accordance with the advice of the qualified actuary, who values the plans annually. The net pension obligation is measured at the present value of the estimated future net cash flows and is stated net of plan assets.
Financial statem ents www.beazley.com Annual report 2017 Beazley 141 1 Statement of accounting policies continued Net interest expense/(income) is recognised in the statement of profit or loss.
Notes to the financial statements continued 2 Risk management The group has identified the risks arising from its activities and has established policies and procedures to manage these items in accordance with its risk appetite. The group categorises its risks into eight areas: insurance, strategic, market, operational, credit, regulatory and legal, liquidity and group risk. The sections below outline the group’s risk appetite and explain how it defines and manages each category of risk.
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.
The group’s high level catastrophe risk appetite is set by the board and the business plans of each team are determined within these parameters. The board may adjust these limits over time as conditions change. In 2017 the group operated to a catastrophe risk appetite for a probabilistic 1-in-250 years US event of $370.0m (2016: $412.0m) net of reinsurance. This represented a reduction in our catastrophe risk appetite of 10% compared to 2016.
Financial statem ents www.beazley.com Annual report 2017 Beazley 143 2 Risk management continued Lloyd’s has also defined its own specific set of RDS events for which all syndicates with relevant exposures must report. Of these the three largest, net of reinsurance, events which could have impacted Beazley in 2016 and 2017 are: Unaudited 2017
Beazley also reports on cyber exposure to Lloyd’s using the three largest internal realistic disaster scenarios and seven prescribed scenarios which include both data breach and property damage related cyber exposure. Given Beazley's risk profile, the quantum from the internal data breach scenarios is larger than any of the cyber property damage related scenarios.
To manage underwriting exposures, the group has developed limits of authority and business plans which are binding upon all staff authorised to underwrite and are specific to underwriters, classes of business and industry. In 2017, the maximum line that any one underwriter could commit the managed syndicates to was $100m. In most cases, maximum lines for classes of business were much lower than this.
Notes to the financial statements continued 2 Risk management continued These authority limits are enforced through a comprehensive sign-off process for underwriting transactions including dual sign-off for all line underwriters and peer review for all risks exceeding individual underwriters’ authority limits. Exception reports are also run regularly to monitor compliance.
Financial statem ents www.beazley.com Annual report 2017 Beazley 145 2 Risk management continued c) Claims management risk Claims management risk may arise within the group in the event of inaccurate or incomplete case reserves and claims settlements, poor service quality or excessive claims handling costs. These risks may damage the group brand and undermine its ability to win and retain business, or incur punitive damages. These risks can occur at any stage of the claims life cycle. The group’s claims teams are focused on delivering quality, reliability and speed of service to both internal and external clients. Their aim is to adjust and process claims in a fair, efficient and timely manner, in accordance with the policy’s terms and conditions, the regulatory environment, and the business’s broader interests. Case reserves are set for all known claims liabilities, including provisions for expenses, as soon as a reliable estimate can be made of the claims liability.
The objective of the group’s reserving policy is to produce accurate and reliable estimates that are consistent over time and across classes of business. The estimates of gross premiums written and claims prepared by the actuarial department are used through a formal quarterly peer review process to independently test the integrity of the estimates produced by the underwriting teams for each class of business. These meetings are attended by senior management, senior underwriters, and actuarial, claims, and finance representatives.
Senior management performance Management stretch is the risk that business growth might result in an insufficient or overly complicated management team structure, thereby undermining accountability and control within the group. As the group expands its worldwide business in the UK, North America, Europe, South America and Asia, management stretch may make the identification, analysis and control of group risks more complex.
2.3 Market risk Market risk arises where the value of assets and liabilities or future cash flows changes as a result of movements in foreign exchange rates, interest rates and market prices. Efficient management of market risk is key to the investment of group assets. Appropriate levels of investment risk are determined by limiting the proportion of forecast group earnings which could be at risk from lower than expected investment returns, using a 1 in 10 confidence level as a practical measure of such risk. In 2017, this permitted variance from the forecast investment return was set at $126.0m (unaudited). For 2018, the permitted variance is likely to be moderately higher following the adoption of a new economic scenario generator (ESG) that currently callibrates the risk of any given portfolio at a higher level than the previous ESG primarily because it uses longer periods of historic data. Investment strategy is developed to be consistent with this limit and investment risk is monitored on an ongoing basis, using outputs from our internal model.
Borrowings consist of three items as at 31 December 2017. The first is $18.0m of a subordinated debt facility raised in 2004 which is unsecured. The subordinated notes are due in 2034 and have been callable at the group’s option since 2009. The second is $250.0m of subordinated tier 2 debt raised in November 2016. This debt is due in 2026 and has annual interest of 5.875% payable in May and November of each year. The third is a £75m sterling denominated 5.375% notes due in 2019 with interest payable in March and September each year.
Financial assets include fixed and floating rate debt securities, hedge funds, illiquid credit assets, equity investments and derivative financial assets. The price of debt securities is affected by interest rate risk, as described above, and also by issuer's credit risk. The sensitivity to price risk that relates to the group’s hedge fund, illiquid credit and equity investments is presented below.
Listed investments that are quoted in an active market are recognised in the statement of financial position at quoted bid price, which is deemed to be approximate exit price. If the market for the investment is not considered to be active, then the group establishes fair value using valuation techniques (refer to note 16). This includes comparison of orderly transactions between market participants, reference to current fair value of other investments that are substantially the same, discounted cash flow models and other valuation techniques that are commonly used by market participants.
Beazley use an Economic Scenario Generator (ESG) to simulate multiple simulations of financial conditions, to support stochastic analysis of market risk. Beazley use 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, but 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.
An approval system also exists for all new brokers, and broker performance is carefully monitored. Regular exception reports highlight trading with non-approved brokers, and the group’s credit control function frequently assesses the ageing and collectability of debtor balances. Any large, aged items are prioritised and where collection is outsourced incentives are in place to support these priorities.
Notes to the financial statements continued 2 Risk management continued The following tables summarise the group’s concentrations of credit risk: Tier 1 $m Tier 2 $m Tier 3 $m Tier 4 $m Unrated $m Total $m
The largest counterparty exposure within tier 1 is $936.7m of US Treasuries (2016: $788.4m).
Financial statem ents www.beazley.com Annual report 2017 Beazley 151 2 Risk management continued An analysis of the overall credit risk exposure indicates that the group has reinsurance assets that are impaired at the reporting date. The total impairment in respect of the reinsurance assets, including reinsurer's share of outstanding claims, at 31 December 2017 was as follows: Individual impairment $m
The group’s approach is to manage its liquidity position so that it can reasonably survive a significant individual or market loss event (details of the group’s exposure to realistic disaster scenarios (RDS) are provided on page 143). This means that the group maintains sufficient liquid assets, or assets that can be converted into liquid assets at short notice and without any significant capital loss, to meet expected cash flow requirements. These liquid funds are regularly monitored using cash flow forecasting to ensure that surplus funds are invested to achieve a higher rate of return. The group also makes use of loan facilities and borrowings, details of which can be found in note 25. Further information on the group’s capital resources is contained on pages 50 to 51.
The following table is an analysis of the net contractual cash flows based on all the liabilities held at 31 December: Within 1 year 1-3 years 3-5 years
The next two tables summarise the carrying amount at reporting date of financial instruments analysed by maturity date.
Financial statem ents www.beazley.com Annual report 2017 Beazley 153 2 Risk management continued
Fixed and floating rate debt securities 925.0 695.6 816.8 522.4 485.2 172.4 – 3,617.4 Derivative financial instruments 12.2 – – – – – – 12.2 Cash and cash equivalents 507.2 – – – – – – 507.2 Insurance receivables 794.7 – – – – – – 794.7 Other receivables 46.4 – – – – – – 46.4
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.
Political, accident & contingency During 2017, the life, accident & health division and political risks & contingency division were combined to form the political, accident & contingency division. This segment underwrites terrorism, political violence, expropriation and credit risks as well as contingency and risks associated with contract frustration. In addition, this segment underwrites life, health, personal accident, sports and income protection risks.
Property The property segment underwrites commercial, high-value homeowners’ and construction and engineering property insurance on a worldwide basis.
2 In July 2017 the group sold its share in associate, Equinox Global Limited, to Nexus Underwriting Management Limited.
Expenses for the acquisition of insurance contracts 65.9 67.1 88.8 34.7 216.0 472.5
Share of loss of associates – – – – (0.2) (0.2)
Increase in intangibles 8.0 – – – – 8.0 1 During 2017, the life, accident & health division and political risks & contingency division were combined to form the political, accident & contingency division. Comparative figures for 31 December 2016 have been re-presented to reflect this change in structure and allow comparability.
Capital expenditure Non-US 10.2 5.1 4 Net investment income $m $m
Interest and dividends on financial investments at fair value through profit or loss 76.1 70.9 Interest on cash and cash equivalents 0.5 0.6 Net realised gain/(losses) on financial investments at fair value through profit or loss 23.1 (4.9) Net unrealised fair value gains on financial investments at fair value through profit or loss 46.5 33.8 Investment income from financial investments 146.2 100.4 Investment management expenses (7.9) (7.3)
Notes to the financial statements continued 5 Other income $m $m
Operating expenses include: Amounts receivable by the auditor and associates in respect of: – audit services for the group and subsidiaries 0.9 1.0 – audit-related assurance services 0.7 0.3 – taxation compliance services 0.1 – – other assurance services – 0.5 – other non-audit services 0.6 0.4
Wages and salaries 142.4 134.6 Short term incentive payments 70.2 77.8 Social security 18.2 18.3 Share based remuneration 21.1 23.0
Financial statem ents www.beazley.com Annual report 2017 Beazley 159 8 Finance costs $m $m
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 18.7% (2016: 14.9%), whereas the tax charged for the year 31 December 2017 as a percentage of profit before tax is 22.6% (2016: 14.4%). The increases compared to 2016 were due to a higher weighted average statutory tax rate and a reduction of approximately $5m in deferred tax assets (see below): $m
Profit before tax 168.0 293.2 Tax calculated at the weighted average of statutory tax rates 31.4 18.7 43.6 14.9
Effects of: – non-taxable gains on foreign exchange (0.5) (0.3) (5.6) (1.9) – tax relief on share based payments – current and future years – – (0.6) (0.2) – under provided in prior years 0.9 0.5 3.8 1.3 – change in UK/US tax rates 1 5.3 3.2 (0.8) (0.3) Tax charge for the period 38.0 22.6 42.2 14.4 1 The Finance Act 2015, which provided for a reduction in the UK corporation tax rate to 19% effective from 1 April 2017 was substantively enacted on 26 October 2015. The Finance Act 2016, which provides for a reduction in the UK corporation tax rate to 17% effective from 1 April 2020 was substantively enacted on 6 September 2016. These rate reductions to 19% and 17% will reduce the group’s future current tax charge and have been reflected in the calculation of the deferred tax balance as at 31 December 2017.
As noted on page 47, the group has assessed the potential impact of the diverted profits tax (DPT) following the enactment of new legislation in April 2015 and is of the view that no liability arises. The ultimate outcome may differ and any profits that did fall within scope of DPT would potentially be taxed at a rate of 25% rather than 12.5% (the current rate of tax on corporate earnings in Ireland).
Notes to the financial statements continued 12 Intangible assets continued Impairment tests Goodwill, syndicate capacity and US insurance authorisation licences are deemed to have indefinite life as they are expected to have value in use that does not erode or become obsolete over the course of time. Consequently, they are not amortised but annually tested for impairment. For the purpose of impairment testing, they are allocated to the group’s cash-generating units (CGUs) as follows: Marine $m
Significant changes in the economic and regulatory environment, such as US legislation and Brexit, could impact the amount of premiums written and investment income per each CGU. This could potentially have an impact on the carrying value of the CGU.
To test the segment’s sensitivity to variances from forecast profits, the discount rate has been flexed to 10% above and 5% below the central assumption. Within this range, the recovery of goodwill was stress tested and remains supportable across all CGUs. Headroom was calculated in respect of the value in use of all the group’s other intangible assets.
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 outline above. Based upon all available evidence the results of the test indicate that no impairment is required.
Depreciation charge for the year – (1.0) (0.8) (1.8) Write off – – 0.4 0.4 Foreign exchange gain – 1.4 0.7 2.1
As at 1 January 9.9 10.0 Investment in Equinox Global Limited – 0.1 Sale of share in Equinox Global Limited (3.0) – Share of profit/(loss) after tax 0.1 (0.2) As at 31 December 7.0 9.9
Notes to the financial statements continued 14 Investment in associates continued The group’s investment in associates consists of: Country of incorporation
In July 2017 Beazley Investments Limited, part of the Beazley group, sold its share in Equinox Global Limited to Nexus Underwriting Management Limited. In return, Beazley Investments Limited received cash consideration of £2.1m. The sale included an additional consideration of £4.5m subject to meeting of earnings targets over the next four years. This £4.5m has not been recognised as management is of the opinion that reaching the earnings targets is not probable.
Loss after tax (1.0) (0.7) Share of other comprehensive income – – Share of total comprehensive income (1.0) (0.7)
Financial assets at fair value Fixed and floating rate debt securities: – Government issued 1,345.4 1,180.0 – Quasi-government 24.1 62.0
Equity funds 168.3 116.3 Hedge funds 377.4 317.1 Illiquid credit assets 180.4 132.4 Total capital growth assets 726.1 565.8 Total financial investments at fair value through statement of profit or loss 4,440.8 4,183.2
The amounts expected to mature before and after one year are: Within one year 1.3 2.8 After one year 366.0 361.0
A breakdown of the group’s investment portfolio is provided on page 47. A breakdown of derivative financial instruments is disclosed in note 17.
If the inputs used to measure the fair value of an asset or a liability can be categorised in different levels of the fair value hierarchy, then the fair value measurement is categorised in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement.
Financial statem ents www.beazley.com Annual report 2017 Beazley 167 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.
Level 3 investments During 2017, the group’s investment committee approved additional allocations to an illiquid asset portfolio comprising investments in funds managed by third party managers (generally closed end limited partnerships or open ended funds). While the funds provide full transparency on their underlying investments, the investments themselves are in many cases private and unquoted, and are therefore classified as level 3 investments.
Financial assets measured at fair value Fixed and floating rate debt securities – Government issued 1,345.4 – – 1,345.4 – Quasi-government 24.1 – – 24.1
– High yield – 58.8 – 58.8 – Senior secured loans – 85.6 – 85.6 Equity funds – 168.3 – 168.3 Hedge funds – 377.4 – 377.4 Illiquid credit assets – – 180.4 180.4 Derivative financial assets 8.8 – – 8.8 Total financial assets measured at fair value 1,414.6 2,854.6 180.4 4,449.6
Financial statem ents www.beazley.com Annual report 2017 Beazley 169 16 Financial assets and liabilities continued
Financial liabilities not measured at fair value Retail bond – 100.8 – 100.8
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 1 in both the current and prior year.
As part of its standard investment activities the group holds fixed interest investments in high yield bond funds and asset backed securities, 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.
Apart from a relatively small exposure to high yield bond funds and asset backed securities, 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.
Notes to the financial statements continued 16 Financial assets and liabilities continued All the investee funds in the investment portfolio are managed by portfolio managers who are compensated by the respective investee funds for their services. Such compensation generally consists of an asset-based fee and a performance-based incentive fee and is reflected in the valuation of the fund’s investment in each of the investee funds. The right to sell or request redemption of investments in high yield bond funds, asset backed securities, equity funds and hedge funds ranges in frequency from daily to semi-annually. The group did not sponsor any of the respective structured entities.
Financial statem ents www.beazley.com Annual report 2017 Beazley 171 17 Derivative financial instruments In 2017 and 2016 the group entered into over-the-counter and exchange traded derivative contracts. The group had the right and the intention to settle each contract on a net basis.
Foreign exchange forward contracts 361.7 1.3 278.6 2.8 Bond futures contract – – – –
Notes to the financial statements continued 19 Reinsurance assets $m $m
Cash at bank and in hand 376.2 374.6 Short term deposits and highly liquid investments 64.3 132.6
1 Subsequent to a scheme of arrangement, a capital reduction was executed in April 2016 which involved a reduction in the nominal value of the shares in the new parent from 90 pence per share to 5 pence per share.
Financial statem ents www.beazley.com Annual report 2017 Beazley 173 22 Other reserves Employee share options reserve $m
Share based payments 26.0 – 26.0 Acquisition of own shares held in trust – (9.7) (9.7) Transfer of shares to employees (17.5) 17.9 0.4
Share based payments 24.5 – 24.5 Acquisition of own shares held in trust – (16.2) (16.2) Transfer of shares to employees (24.4) 20.4 (4.0)
The shares are owned by the employee share trust to satisfy awards under the group’s deferred share plan, retention plan, marine share incentive plan (MSIP) and long term incentive plan (LTIP). These shares are purchased on the market and carried at cost.
On the third anniversary of an award the shares under the deferred share plan are transferred from the trust to the employee. Under the retention plan, on the third anniversary, and each year after that up to the sixth anniversary, 25.0% of the shares awarded are transferred to the employee.
23.2 Employee share option plans The group has a long term incentive plan (LTIP), marine share incentive plan (MSIP), deferred share plan, retention plan and SAYE plan that entitle employees to purchase shares in the group.
Financial statem ents www.beazley.com Annual report 2017 Beazley 175 23 Equity compensation plans continued Further details of equity compensation plans can be found in the directors’ remuneration report on pages 97 to 116. The number and weighted average exercise prices of share options are as follows: Weighted average exercise price (pence per share)
Forfeited during the year 68.6 (0.6) 74.8 (0.4) Exercised during the year 35.7 (5.7) 12.9 (4.5) Granted during the year 71.1 4.7 34.2 5.0
Weighted average share price (pence per option) 333.4 274.9 Weighted average exercise price (pence per option) 34.6 27.8 Average expected life of options 4.3yrs 4.6yrs Expected volatility 24.4% 25.0% Expected dividend yield 1.9% 3.2% Average risk-free interest rate 1.1% 1.7%
Gross Claims reported and loss adjustment expenses 1,056.3 949.5 Claims incurred but not reported 2,852.3 2,567.4 Gross claims liabilities 3,908.6 3,516.9 Unearned premiums 1,259.2 1,140.8 Total insurance liabilities, gross 5,167.8 4,657.7
Notes to the financial statements continued 24 Insurance liabilities and reinsurance assets continued $m $m
During the year the claims incurred but not reported (IBNR) estimate calculation was amended to bring our calculations in line with new guidance received from Lloyd’s. This change in estimation has no impact to profit and loss and a movement on the statement of financial position of $45.9m between insurance receivables and technical provisions, and $5.0m between insurance liabilities and reinsurance assets.
Claims reported and loss adjustment expenses 949.5 (201.8) 747.7 937.5 (210.3) 727.2 Claims incurred but not reported 2,567.4 (652.1) 1,915.3 2,588.4 (658.1) 1,930.3
Chain-ladder techniques are most appropriate for classes of business that have a relatively stable development pattern. Chain-ladder techniques are less suitable in cases in which the insurer does not have a developed claims history for a particular class of business or for underwriting years that are still at immature stages of development where there is a higher level of assumption volatility.
We also review triangulations of the paid/outstanding claim ratios as a way of monitoring any changes in the strength of the outstanding claim estimates between underwriting years so that adjustments can be made to mitigate any subsequent over/ (under)reserving. To date, this analysis indicates no systematic change to the outstanding claim strength across underwriting years.
Notes to the financial statements continued 24 Insurance liabilities and reinsurance assets continued b) Major assumptions The main assumption underlying these techniques is that the group’s past claims development experience (with appropriate adjustments for known changes) can be used to project future claims development and hence ultimate claims costs. As such these methods extrapolate the development of premiums, paid and incurred losses, average costs per claim and claim numbers for each underwriting year based on the observed development of earlier years.
Throughout, judgement is used to assess the extent to which past trends may or may not apply in the future; for example, to reflect changes in external or market factors such as economic conditions, public attitudes to claiming, levels of claims inflation, premium rate changes, judicial decisions and legislation, as well as internal factors such as portfolio mix, policy conditions and claims handling procedures.
As such, our reserving assumptions contain a reasonable margin for prudence given the uncertainties inherent in the insurance business underwritten, particularly on the longer tailed specialty lines classes.
Financial statem ents www.beazley.com Annual report 2017 Beazley 179 24 Insurance liabilities and reinsurance assets continued
Less unearned portion of ultimate losses ($m) – – – – – – – – – (29.4) (853.6) (883.0)
Gross claims liabilities, group share ($m) 188.9 140.9 160.2 96.3 107.6 124.8 248.1 361.5 663.9 973.3 843.1 3,908.6 24 Insurance liabilities and reinsurance assets continued
Net claims liabilities, group share ($m) 123.4 88.9 84.5 79.5 91.9 117.0 200.1 285.5 498.2 750.7 595.7 2,915.4 24 Insurance liabilities and reinsurance assets continued
Marine There was deterioration in the energy book in 2008 in respect of a specific claim. The 2009 to 2015 underwriting years have delivered releases, but at lower levels than in recent years due to an increase in claim activity. The recent catastrophe events have led to the deterioration of the 2016 underwriting year, and resulted in the 2017 underwriting year opening higher than previous years.
Political, accident & contingency The increases on the 2013 and 2014 underwriting years follow deterioration on specific underlying claims within the political book. This has been offset by reductions on the 2015 and 2016 underwriting years, mainly from the terrorism account.
Reinsurance The 2016 and prior underwriting years have seen material releases driven by reductions in reserves for catastrophe claims and the release of catastrophe margins. The 2017 underwriting year has opened higher than previous years reflecting the impact of the recent catastrophe events.
Specialty lines Strong reserve releases on prior years from the traditional specialty lines business have been supplemented by releases from the 2014 and 2015 underwriting years of the cyber business, where the risk has expired.
The 2017 underwriting year has opened lower than previous years, reflecting the improved experience emerging within the more recent underwriting years, particularly on the cyber book.
The net of reinsurance estimates of ultimate claims costs on the 2016 and prior underwriting years have improved to $203.9m during 2017 (2016: $180.7m). This movement arose from a combination of better than expected claims experience coupled with small changes to the many assumptions resulting from the observed experience.
The movements shown on 2014 and earlier are absolute claim movements and are not impacted by any current year movements in premium on those underwriting years.
Amortisation of capitalised borrowing costs – 0.2 0.2 0.4 Foreign exchange loss – – 4.6 4.6
Reinsurance premiums payable 182.8 177.8 Accrued expenses including staff bonuses 165.7 148.0 Other payables 100.1 100.4 Deferred consideration payable on acquisition of MGAs 0.3 1.4 Due to syndicate 6107 52.2 47.0 Due to syndicate 6050 11.4 9.7
Amounts recognised in the statement of profit or loss Interest cost 1.4 1.4 Expected return on plan assets (1.3) (1.4)
Beazley Furlonge Limited operates a defined benefit pension scheme (‘the Beazley Furlonge Limited Pension Scheme’). The scheme provides the following benefits: • an annual pension payable to the member from his or her normal pension age (60th birthday) of generally 1/60th of final pensionable salary for each year of pensionable service up to 31 March 2006; • a spouse’s pension of 2/3rds of the member’s pension payable on the member’s death after retirement; • a lump sum of four times current pensionable salary for death in service at the date of death; and • a pension of 2/3rds of the member’s prospective pension at the date of death, payable to the spouse until their death. This pension is related to salary at the date of death.
Movement in fair value of plan assets recognised in the statement of financial position Balance at 1 January 42.0 42.4 Expected return on plan assets 1.3 1.4 Actuarial gains 4.2 3.7 Employer contributions 4.4 1.6 Benefits paid (0.4) (0.3) Foreign exchange gain/(loss) 2.1 (6.8) Balance at 31 December 53.6 42.0
Plan assets are comprised as follows: Cash 3.4 – UCITS funds 7.1 6.3
Financial statem ents www.beazley.com Annual report 2017 Beazley 187 27 Retirement benefit obligations continued The actual gain on plan assets was $5.5m (2016: $5.1m).
At 31 December 2017, the weighted-average duration of the defined benefit obligation was 9.7 years (2016: 10.7 years).
Notes to the financial statements continued 28 Deferred tax continued Balance $m
No later than one year 10.3 9.4 Later than one year and no later than five years 26.9 27.0 Later than five years 8.5 6.8
Balances due: Due from syndicate 623 30.6 4.7 Due to syndicate 6107 (52.2) (47.0) Due to syndicate 6050 (11.4) (9.7)
The total number of Beazley plc ordinary shares held by key management was 8.1m. Apart from the transactions listed in the table above, there were no further related party transactions involving key management or a close member of their family. Further details of directors’ shareholdings and remuneration can be found in the directors’ remuneration report on pages 97 to 116.
30.3 Other related party transactions At 31 December 2017, the group had purchased services from the associate of $2.5m (2016: $2.5m) throughout the year. All transactions with the associate and subsidiaries are priced on an arm’s length basis. In 2017 the group sold its share in Equinox thus ceasing Equinox being a related party. Equinox repaid a loan of £1.5m and the interest accrued thereon up to the date of completion.
The following is a list of all the subsidiaries in the group as at 31 December 2017: Country of incorporation
The funds are held in trust and can be used to meet claims liabilities should syndicates’ members fail to meet their claims liabilities. The funds can only be used to meet claim liabilities of the relevant member.
The acquisition had the following effect on the group’s assets and liabilities: Net assets acquired
Intangible assets – renewal rights – 34.4 34.4 Fixed assets 0.1 – 0.1 Cash and cash equivalents 2.6 – 2.6 Other receivables 0.3 – 0.3 Other payables (1.0) – (1.0) Deferred tax liability – (2.6) (2.6) Value of net assets acquired 2.0 31.8 33.8 Intangible assets – goodwill – Consideration paid 33.8
As per the recognition principle, we have identified separate intangible assets. These intangibles meet the separability criterion and represent renewal rights which comprise future profits relating to insurance contracts acquired and the expected renewal of those contracts. The fair value of renewal rights of $31.8m was derived from the profits (net of tax) expected to be earned from these contracts over a 5 year period, discounted using a weighted average cost of capital of 10.4%. Renewal rights are being amortised over a 5 year period, starting from February 2017. A related deferred tax liability has been recognised. No further fair value adjustments were made in relation to other assets and liabilities acquired.
Claims ratio Ratio, in percentage terms, of net insurance claims to net earned premiums. The calculation is performed excluding the impact of foreign exchange. In 2017, this ratio was 58% (2016: 48%). This represented total claims of $1,075.7m (2016: $855.6m) divided by net earned premiums of $1,869.4m (2016: $1,768.2m).
Expense ratio Ratio, in percentage terms, of the sum of expenses for acquisition of insurance contracts and administrative expenses to net earned premiums. The calculation is performed excluding the impact of foreign exchange on non-monetary items. In 2017, the expense ratio was 41% (2016: 41%). This represents the sum of expenses for acquisition of insurance contracts of $519.7m (2016: $472.5m) and administrative expenses of $254.7m (2016: $247.8m) to earned premiums of $1,869.4m (2016: $1,768.2m).
Gross premiums written Amounts payable by the insured, excluding any taxes or duties levied on the premium, including any brokerage and commission deducted by intermediaries.
International Accounting Standards (IAS)/International Financial Reporting Standards (IFRS) Standards formulated by the IASB with the intention of achieving internationally comparable financial statements. Since 2002, the standards adopted by the IASB have been referred to as International Financial Reporting Standards (IFRS). Until existing standards are renamed, they continue to be referred to as International Accounting Standards (IAS).
Private enterprise The private enterprise team offers specialised professional and general liability coverage supported by a high service proposition, focusing on meeting the needs of small businesses with assets up to $35.0m and up to 500 employees.
Retrocessional reinsurance The reinsurance of the reinsurance account. It serves to ‘lay off’ risk.
Return on equity (ROE) Ratio, in percentage terms, calculated by dividing the consolidated profit after tax by the average daily total equity. In 2017, this was calculated as profit after tax of $130.0m (2016: $251.0m) divided by average equity of $1,429.5m (2016: $1,381.6m).
Sidecar special purpose syndicate Specialty reinsurance company designed to provide additional capacity to a specific insurance company. It operates by purchasing a portion or all of a group of insurance policies, typically cat exposures. These companies have become quite prominent in the aftermath of Hurricane Katrina as a vehicle to add risk-bearing capacity, and for investors to participate in the potential profits resulting from sharp price increases.
Total shareholder return (TSR) The increase in the share price plus the value of any first and second dividends paid and proposed during the year.
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