2 Risk management continued b) Reinsurance risk Reinsurance risk to the group arises where reinsurance contracts put in place to reduce gross insurance risk do not perform as anticipated, result in coverage disputes or prove inadequate in terms of the vertical or horizontal limits purchased. Failure of a reinsurer to pay a valid claim is considered a credit risk which is detailed in the credit risk section on page 157.
The reinsurance security committee examines and approves all reinsurers to ensure that they possess suitable security. The group’s ceded reinsurance team ensures that these guidelines are followed, undertakes the administration of reinsurance contracts and monitors and instigates our responses to any erosion of the reinsurance programmes.
c) Claims management risk Claims management risk may arise within the group in the event of inaccurate or incomplete case reserves and claims settlements, poor service quality or excessive claims handling costs. These risks may damage the group brand and undermine its ability to win and retain business, or incur punitive damages. These risks can occur at any stage of the claims life cycle. The group’s claims teams are focused on delivering quality, reliability and speed of service to both internal and external clients. Their aim is to adjust and process claims in a fair, efficient and timely manner, in accordance with the policy’s terms and conditions, the regulatory environment, and the business’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.
a) Foreign exchange risk The functional currency of Beazley plc and its main trading entities is US dollars and the presentational currency in which the group reports its consolidated results is US dollars. The effect of this on foreign exchange risk is that the group is mainly exposed to fluctuations in exchange rates for non-dollar denominated transactions and to net asset translation risk on non-dollar functional currency entities.
The group also has foreign operations with functional currencies that are different from the group’s presentational currency. The effect of this on foreign exchange risk is that the group is exposed to fluctuations in exchange rates for US dollar denominated transactions and net assets arising in those foreign currency operations. It also gives rise to a currency translation exposure for the group to sterling, euro, Canadian dollars, Norwegian krone, Singapore dollars and Australian dollars on translation to the group’s presentational currency. These exposures are minimal and are not hedged.
Fixed and floating rate debt securities 1,696.1 2,031.7 640.0 484.3 384.3 183.3 – 5,419.7
Cash and cash equivalents 309.5 – – – – – – 309.5 Derivative financial instruments 28.5 – – – – – – 28.5
Fixed and floating rate debt securities 1,530.8 1,650.5 898.0 327.7 304.2 87.6 6.3 4,805.1 Syndicate loans – – – – – – 8.0 8.0 Cash and cash equivalents 278.5 – – – – – – 278.5 Derivative financial instruments 25.5 – – – – – – 25.5
Financial assets include fixed and floating rate debt securities, syndicate loans, 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, syndicate loans, illiquid credit and equity investments is presented below.
Change in fair value of hedge funds, syndicate loans, equity funds and illiquid credit assets www.beazley.com Beazley | Annual report 2020
2 Risk management continued d) Investment risk The value of our investment portfolio is impacted by interest rate and market price risks, as described above. Managing the group’s exposures to these risks is an intrinsic part of our investment strategy.
Beazley’s investment strategy is developed by reference to an investment risk budget, set annually by the board as part of the overall risk budgeting framework of the business. The Solvency II internal model is used to monitor compliance with the budget, which limits the amount by which our reported annual investment return may deviate from a predetermined target, at the 1 in 10 confidence level. In 2020, this permitted deviation was set at † $150m, but ultimately increased to † $180m in the second half of the year. Additionally, a limit is specified for the net interest rate sensitivity of assets and liabilities combined and investments are managed to ensure that this limit is not exceeded.
There are a number of business activities for which the group uses the services of a third-party company, such as investment management, IT systems, data entry and credit control. These service providers are selected against rigorous criteria and formal service level agreements are in place, and regularly monitored and reviewed.
The group also recognises that it is necessary for people, systems and infrastructure to be available to support our operations. Therefore we have taken significant steps to mitigate the impact of business interruption which could follow a variety of events, including the loss of key individuals and facilities. We operate a formal disaster recovery plan which, in the event of an incident, allows the group to move critical operations to an alternative location within 24 hours.
The group actively manages operational risks and minimises them where appropriate. This is achieved by implementing and communicating guidelines to staff and other third parties. The group also regularly monitors the performance of its controls and adherence to these guidelines through the risk management reporting process.
Financial investments falling within the unrated category comprise hedge funds and illiquid credit assets for which there is no readily available market data to allow classification within the respective tiers. Additionally, insurance receivables are classified as unrated, due to premium debtors not being credit rated. At 31 December 2020, $1.5m of cash and cash equivalents fell within the unrated category (2019: nil). This is due to the group, transacting with a bank in the US that does not have an external credit rating.
The total impairment in respect of the reinsurance assets, including reinsurers’ share of outstanding claims, at 31 December 2020 was as follows: Individual impairment $m
The total impairment provision in the statement of financial position in respect of reinsurance assets past due (being reinsurance recoverables due on paid claims) by more than 30 days at 31 December 2020 was $3.0m (2019: $3.1m). This $3.0m provision in respect of overdue reinsurance recoverables is included within the total provision of $14.8m shown in the table at the top of the page.
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 are provided on page 150 to 151. 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 51 to 52.
1 For a breakdown of net claims liabilities refer to note 24. 2 From 1 January 2020, the Market Facilities division has been split from Specialty Lines. The prior year comparative has been re-presented to allow comparison.
Other payables 733.9 – – – 733.9 31 December 2019 Within 1 year 1-3 years 3-5 years Greater than 5 years Total
Fixed and floating rate debt securities 1,229.5 1,686.6 954.2 410.2 471.2 27.5 25.9 4,805.1 Syndicate loans – – – – – – 8.0 8.0 Derivative financial instruments 25.5 – – – – – – 25.5 Cash and cash equivalents 278.5 – – – – – – 278.5 Insurance receivables 1,048.0 – – – – – – 1,048.0 Other receivables 72.0 – – – – – – 72.0 Other payables (566.4) – – – – – – (566.4)
b) Reputation Reputation risk is the risk of negative publicity as a result of the group’s contractual arrangements, customers, products, services and other activities. Key sources of reputation risk include operation of a Lloyd’s franchise, interaction with capital markets since the group’s IPO during 2002, and reliance upon the Beazley brand in North America, Europe, South America and Asia. The group’s preference is to minimise reputation risks but where it is not possible or beneficial to avoid them, we seek to minimise their frequency and severity by management through public relations and communication channels.
This is based on the group’s own individual capital assessment. It may be provided in the form of either the group’s cash and investments or debt facilities; • to support underwriting in Beazley Insurance Company, Inc. in the US and Beazley America Insurance Company, Inc.; • to support underwriting in Beazley Insurance dac in Europe; and • to make acquisitions of insurance companies or managing general agents (MGAs) whose strategic goals are aligned with our own.
The board’s strategy is to grow the dividend (excluding special dividend) by between 5% and 10% per year. Our capital management strategy is to carry some surplus capital to enable us to take advantage of growth opportunities which may arise. At 31 December 2020, we have surplus capital of 23% of ECR (on a Solvency II basis), within our current target range of 15% to 25% of ECR.
Property The property segment underwrites commercial and high-value homeowners’ property insurance on a worldwide basis.
3 Segmental analysis continued Specialty Lines This segment underwrites a wide portfolio of business, including architects and engineers, healthcare, lawyers and environmental liability, Market Facilities business and international financial institutions.
Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Those items that are allocated on a reasonable basis are split based on each segments capital requirements which is taken from the group’s most up to date Business plan. The reporting segments do not cross-sell business to each other. There are no individual policyholders who comprise greater than 10% of the group’s total gross premiums written.
3 Segmental analysis continued c) Information about geographical areas The group’s operating segments are also managed geographically by placement of risk. UK earned premium in the analysis below represents all risks placed at Lloyd’s; US earned premium represents all risks placed at the group’s US insurance company, Beazley Insurance Company, Inc; and Europe earned premium represents all risks placed at the group’s European insurance company, Beazley Insurance dac. An analysis of gross premiums written split geographically by placement of risk and by reportable segment is provided in note 2 on page 151.
Net earned premiums UK (Lloyd’s) 2,214.6 1,974.3 US (Non-Lloyd’s) 430.7 346.3 Europe (Non-Lloyd’s) 48.1 26.4 $m $m
Capital expenditure Non-US 23.2 13.7 4 Net investment income $m $m
Commissions received by Beazley service companies 23.6 21.2 Profit commissions from syndicates (0.5) 1.0 Agency fees from syndicate 623 3.0 2.5 Other income 3.7 1.1
Profit Commissions: There is an agreement between syndicate 623 and Beazley Furlonge Limited (the managing agent) where the syndicate remunerates Beazley for writing business in parallel with syndicate 2623. As such, profitability of 623 is a performance criterion for this contract. The transaction price represents a fixed percentage on profit by YOA. No other variable considerations (for example: discounts, rebates, refunds, incentives) are attached. The value of a transaction price is derived at each reporting period from the actual profit syndicate 623 has made to date, therefore represents the most likely amount of consideration at the reporting date.
As at 31 December 2020 there is nil (31 December 2019: nil) accrued profit commission at risk of being reversed if there was to be an adverse impact on syndicate 623’s profit. As at 31 December 2020 $0.5m of previously recognised profit commissions from business written by Beazley Canada Limited prior to acquisition by Beazley in 2017 was reversed due to adverse impacts on profit (2019: nil).
Commissions received from service companies: Commission is payable to the group by syndicate 623 due to group service companies writing business on behalf of the syndicate. While the commercial purpose of the contract is to pass business to 623, the remuneration is triggered by incurring expenses, irrespective of volume of business gained. The performance criterion is deemed to be the realisation of expenses.
Operating expenses include: Amounts receivable by the auditor1 and associates in respect of: – audit services for the group and subsidiaries 2.4 1.2 – audit-related assurance services 1.0 0.7 – taxation compliance services – – – other non-audit services 0.5 0.5
The average number of employees for 2020 was 1,497 (2019: 1,399).
Interest expense on financial liabilities 37.8 25.8 Interest expense on lease liabilities 2.4 1.9 9 Income tax expense $m $m
Deferred tax expense Origination and reversal of temporary differences (12.1) 2.3 Impact of change in UK/US tax rates (0.4) (0.5) Prior year adjustments 1.8 (3.0)
9 Income tax expense continued 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 2% (2019: 15.0%), whereas the tax charged for the year 31 December 2020 as a percentage of loss before tax is 8.5% (2019: 12.6%). The reasons for the difference are explained below: $m
(Loss)/profit before tax (50.4) – 267.7 – Tax calculated at the weighted average of statutory tax rate (1.0) 2.0 40.3 15.0
Effects of: – tax relief on share based payments – current and future years (0.4) 0.8 (0.7) (0.3) – over provided in prior years (4.6) 9.1 (7.0) (2.6) – change in UK/US tax rates 1 (0.4) 0.8 (0.5) (0.1) Tax (credit)/charge for the period (4.3) 8.5 33.6 12.6 1 A change to the main UK corporation tax rate, announced in the Budget on 11 March 2020, was substantively enacted on 17 March 2020. The rate applicable from 1 April 2020 now remains at 19 percent, rather than the previously enacted reduction to 17 percent. The 19 percent tax rate has been reflected in the calculation of the deferred tax balance as at 31 December 2020.
Amounts recognised directly in equity Aggregate current and deferred tax arising in the reporting period and not recognised in net profits or loss or other comprehensive income but directly debited or (credited) to equity: $m $m
Basic Basic (loss)/earnings per share are calculated by dividing loss after tax of $46.1m (2019: Profit $234.1m) by the weighted average number of shares in issue during the year of 573.8m (2019: 525.1m). The shares held in the Employee Share Options Plan (ESOP) of 3.8m (2019: 4.8m) have been excluded from the calculation, until such time as they vest unconditionally with the employees.
11 Dividends per share In light of the current uncertainty as to the economic impact of the COVID-19 pandemic, the directors do not propose a payment of a dividend in respect of the year ended 31 December 2020 (2019: 12.3p per ordinary share)
Amortisation for the year – – – (8.1) (8.6) (16.7) Foreign exchange loss – – – (0.6) (1.3) (1.9)
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: Cyber & Executive Risk $m Marine $m
Value in use is defined as the present value of the future cash flows expected to be derived from the CGU and represents recoverable amount for goodwill. It is estimated by discounting future cash flows sourced from financial budgets approved by management which cover specific estimates for a five year period. The key assumptions used in the preparation of future cash flows are: premium growth rates, claims experience, retention rates and expected future market conditions.
• Claims experience – the full exposure of COVID-19 related claims ($340m net of reinsurance) has been included in the future net cash flow calculations that derive the value in use for each CGU.
• Future market conditions – to test the segment’s sensitivity to variances (including those caused by the factors listed above) from forecast profits, the discount rate has been flexed to 5% 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 the recoverable amount is deemed to be the fair value. As described above, a WACC discount rate applied to projected future cash flows sourced from management approved budgets. Key assumptions are the same as those outlined above. Based upon all available evidence the results of the testing indicate that no impairment is required.
As at 1 January 0.1 – Investment in CyberAcuView LLC 0.3 – Investment in Pegasus Underwriting Ltd – 0.1 Share of profit after tax (0.1) – As at 31 December 0.3 0.1
All of the investments in associates are unlisted and are equity accounted using available financial information as at 31 December 2020. Falcon Money Management Holdings Limited is an investment management company which also acts in an intermediary capacity.
Amortisation charge (738.9) (645.4) Balance at 31 December 384.9 350.7 16 Financial assets and liabilities 2020 $m $m
The amounts expected to mature before and after one year are: Within one year 11.4 8.0 After one year 547.1 546.8
The tier 2 subordinated debt (2029) was issued in 2019. Tier 2 subordinated debt (2026) was issued in 2016. Please refer to note 25 for further details of our borrowings and associated repayment terms.
Level 2 – Valuations based on quoted prices in markets that are not active, or based on pricing models for which significant inputs can be corroborated by observable market data (e.g. interest rates and exchange rates). Included within level 2 are government bonds and treasury bills, equity funds and corporate bonds, which are not actively traded, hedge funds and senior secured loans.
The group has an established control framework and valuation policy with respect to the measurement of fair values.
The group records the unadjusted price provided and validates the price through various tolerance checks, such as comparison with prices provided by investment custodians and investment managers, to assess the reasonableness and accuracy of the price to be used to value each security. In the rare case that a price fails the tolerance test, it is escalated and discussed internally. We would not normally override a price retrospectively, but we would work with the administrator and pricing vendor to investigate the difference. This generally results in the vendor updating their inputs. We also review our valuation policy on a regular basis to ensure it is fit for purpose. For the year ended 31 December 2020, no adjustments have been made to the prices obtained from the independent sources.
16 Financial assets and liabilities continued Additional information is obtained from fund managers relating to the underlying assets within individual hedge funds. We identified that 81% (31 December 2019: 83%) of these underlying assets were level 1 and the remainder level 2. This enables us to categorise our hedge fund as level 2. Prior to any new hedge fund investment, extensive due diligence is undertaken on each fund to ensure that pricing and valuation is undertaken by an independent administrator and that each fund’s valuation policy is appropriate for the financial instruments the manager will be employing to execute the investment strategy. Fund liquidity terms are reviewed prior to the execution of any investment to ensure that there is no mismatch between the liquidity of the underlying fund assets and the liquidity terms offered to fund investors. As part of the monitoring process, underlying fund subscriptions and redemptions are assessed by reconciling the increase or decrease in fund assets with the investment performance in any given period.
(i) Illiquid credit assets Within the groups’ level 3 investments we have a diversified portfolio of illiquid credit fund investments managed by third party managers (generally closed ended limited partnerships or open ended funds). While the funds provide full transparency on their underlying investments, the investments themselves are predominantly in private and unquoted instruments and are therefore classified as level 3 investments. Closed-ended funds that are still in their investment period continue to draw down capital, whilst funds that are in their harvest period distribute capital as the underlying investments are realized.
The valuation techniques used by the fund managers to establish the fair value of the underlying private/unquoted investments may incorporate discounted cash flow models or a more market based approach, whilst the main inputs might include discount rates, fundamental pricing multiples, recent transaction prices, or comparable market information to create a benchmark multiple. We take the following steps to ensure accurate valuation of these level 3 assets. A substantial part of the pre-investment due diligence process is dedicated to a comprehensive review of each fund’s valuation policy and the internal controls of the manager. In addition to this, confirmation that the investment reaches a minimum set of standards relating to the independence of service providers, corporate governance, and transparency is sought prior to approval. Post investment, quarterly capital statements are reviewed to ensure consistency between audited and unaudited valuations and compare the updated values to the estimated figures used in previous valuations in order to highlight and explain any discrepancies. Particular emphasis is placed on identifying assets that have been either marked up or down, as well as whether any specific assets are at particular risk due to prevailing economic/market conditions. The review also involves regular conversations with the managers and industry sources, particularly in times of market stress. Audited financial statements are received and reviewed on an annual basis, with the valuation of each transaction being confirmed. For the group’s annual and interim accounts, we use the latest fund valuation statements, which are typically as at the previous quarter or month end.
Total financial liabilities not measured at fair value 11.4 591.5 – 602.9
– High yield – 235.8 – 235.8 Syndicate loans – 8.0 – 8.0 Equity funds – 163.6 – 163.6 Hedge funds – 354.0 – 354.0 Illiquid credit assets – – 216.6 216.6 Derivative financial assets 25.5 – – 25.5 Total financial assets measured at fair value 3,108.7 2,247.5 216.6 5,572.8
Total financial liabilities not measured at fair value 8.0 595.4 – 603.4 www.beazley.com Beazley | Annual report 2020
31 December 2019 vs 31 December 2020 transfer from level 1 to level 2 Level 1 $m Level 2 $m
31 December 2019 vs 31 December 2020 transfer from level 2 to level 3 Level 2 $m Level 3 $m
Reclass from level 2 8.2 – Total net gains recognised in profit or loss 6.2 9.1 As at 31 December 268.5 216.6
16 Financial assets and liabilities continued As at 31 December the investments comprising the group’s unconsolidated structured entities are as follows: $m $m
17 Derivative financial instruments In 2020 and 2019 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.
Group $m $m Cash at bank and in hand 309.5 276.9 Short term deposits and highly liquid investments – 1.6
Company $m $m Cash at bank and in hand 0.9 –
Share based payments 2.8 – 2.8 Acquisition of own shares held in trust – (13.6) (13.6) Tax on share option vestings (5.4) – (5.4) Transfer of shares to employees (17.0) 20.2 3.2
The terms and conditions of the grants are as follows: Share option plan Grant date No. of options
SAYE (Others) 04/04/2018 0.2 Three years’ service n/a Total share options outstanding 14.1
Vesting conditions In summary the vesting conditions are defined as: • two years’ service – an employee has to remain in employment until the second anniversary from the grant date; • three years’ service – an employee has to remain in employment until the third anniversary from the grant date; and • NAV – the NAV growth, after adjusting for the effect of dividends, is greater than the risk-free rate of return plus a premium per year.
Forfeited during the year 60.2 (3.1) 18.9 (3.7) Exercised during the year 84.7 (2.0) 90.5 (2.1) Granted during the year 84.4 4.1 68.0 3.9
Gross Claims reported and loss adjustment expenses 1,507.3 1,263.7 Unexpired risk reserve 91.5 – Claims incurred but not reported 3,855.3 3,196.6 Gross claims liabilities 5,454.1 4,460.3 Unearned premiums 1,924.3 1,598.7 Total insurance liabilities, gross 7,378.4 6,059.0
Claims reported and loss adjustment expenses 1,263.7 (223.7) 1,040.0 1,171.2 (231.9) 939.3 Claims incurred but not reported 3,196.6 (845.1) 2,351.5 2,869.5 (719.8) 2,149.7
Increase in claims – Arising from current year claims 2,698.2 (646.8) 2,051.4 1,860.6 (398.6) 1,462.0 – Arising from prior year claims (109.8) 16.7 (93.1) (18.2) 8.7 (9.5)
Net $m 24.2 Assumptions, changes in assumptions and claims reserve strength analysis a) Process used to decide on assumptions The peer review reserving process Beazley uses a quarterly dual track process to set its reserves: • the actuarial team uses several actuarial and statistical methods to estimate the ultimate premium and claims costs, with the most appropriate methods selected depending on the nature of each class of business; and • the underwriting teams concurrently review the development of the incurred loss ratio over time, work with our claims managers to set reserve estimates for identified claims and utilise their detailed understanding of both risks underwritten and the nature of the claims to establish an alternative estimate of ultimate claims cost, which is compared to the actuarially established figures.
Where significant large losses impact an underwriting year (e.g. first-party COVID-19 losses, the events of 11 September 2001, the hurricanes in 2004, 2005, 2008, 2012, 2017, 2018 and 2019, the typhoons in 2018 and 2019, or the earthquakes in 2010, 2011 and 2017), the development is usually very different from the attritional losses. In these situations, the large loss total is extracted from the remainder of the data and analysed separately by the respective claims managers using exposure analysis of the policies in force in the areas affected.
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.
– Cyber & Executive Risk – Marine – Market Facilities – Political, Accident & Contingency – Property – Reinsurance – Specialty Lines
24 Insurance liabilities and reinsurance assets continued d) Claims reserve strength analysis The estimation of IBNR reserves for future claim notifications is subject to a greater degree of uncertainty than the estimation of the outstanding claims already notified. This is particularly true for the Specialty Lines and executive risk business, which will typically display greater variations between initial estimates and final outcomes as a result of the greater degree of difficulty in estimating these reserves. The estimation of IBNR reserves for other business written is generally subject to less variability as claims are generally reported and settled relatively quickly.
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 and executive risk classes.
Property 24 Insurance liabilities and reinsurance assets continued www.beazley.com Beazley | Annual report 2020
Estimated total ultimate losses ($m) 5,127.5 723.7 723.4 798.4 836.5 868.9 1,015.2 1,362.6 1,547.4 1,793.0 1,886.5 16,683.1 Less paid claims ($m) (4,987.0) (669.8) (658.9) (709.1) (766.2) (715.0) (806.3) (892.6) (750.2) (403.7) (90.3) (11,449.1) Less unearned portion of ultimate losses ($m) – – – – – – – – (28.0) (215.4) (842.1) (1,085.5) Net claims liabilities ($m) 140.5 53.9 64.5 89.3 70.3 153.9 208.9 470.0 769.2 1,173.9 954.1 4,148.5
24 Insurance liabilities and reinsurance assets continued Analysis of movements in loss development tables We have updated our loss development tables to show the ultimate loss ratios as at 31 December 2020 for each underwriting year. The impact of amounts reported in respect of the unexpired risk reserve are embedded within the loss ratios presented.
Market Facilities The loss development tables are presented gross of acquisition costs. Due to the Market Facilities division being significantly reinsured and this reinsurance being ceded net of acquisition costs, the net of reinsurance loss development values are much lower than the gross of reinsurance. The release on the 2018 underwriting year arises as risk expires.
Political, Accident & Contingency The contingency, accident and life classes within this division have been significantly impacted by COVID-19 claims, which has led to strengthening on the 2018 to 2020 underwriting years. The contingency class benefits from clash reinsurance, causing this effect to be less pronounced net of reinsurance.
Property The 2019 and 2020 underwriting years have been impacted by COVID-19 as well as the recent US hurricane events. The mature underwriting years continue to see adverse development from the construction and engineering book, which is now in run off.
Claim releases The table on the next page analyses our net claims between current year claims and adjustments to prior year net claims reserves. These have been broken down by segment and underwriting year. Beazley’s reserving policy is to maintain catastrophe reserve margins either until the end of the exposure period or until catastrophe events occur. Therefore margins have been released from prior year reserves where risks have expired during 2020.
Debt redemption/(redemption) 297.9 – (98.2) 199.7 Change in fair value 20.7 27.4 – 48.1
Reinsurance premiums payable 393.9 214.1 Accrued expenses including staff bonuses 172.1 169.0 Other payables 57.3 81.5 Due to syndicate 623 – 21.0 Due to syndicate 6107 51.9 65.5 Due to syndicate 5623 58.7 15.3
27 Retirement benefit obligations continued Trustees obligations Under section 222 of the Pension Act 2004, every scheme is subject to the Statutory Funding Objective (SFO), which is to have sufficient and appropriate assets to cover its technical provisions, which represent the present value of benefits to which members are entitled based on pensionable service to the valuation date. This is assessed at least every three years using assumptions agreed between the Trustees and the employer as set out in the Statement of Funding Principles produced in accordance with the Occupational Pensions (Scheme Funding) Regulations 2005 (OP(SF)R 2005) Regulation 6.
A recovery plan was agreed between the Trustees and the employer on 27 December 2017 in accordance with OP(SF)R 2005 Regulation 8. These arrangements were formalised in a schedule of contributions which the scheme Actuary certified on 27 December 2017 in accordance with OP(SF)R 2005 Regulation 9.
Movement in present value of funded obligations recognised in the statement of financial position Balance at 1 January 54.7 47.0 Interest cost 1.1 1.3 Actuarial gain – Demographic assumptions – (2.7) Actuarial loss – Financial assumptions 8.5 8.0 Benefits paid (1.5) (0.5) Foreign exchange loss 2.0 1.6 Balance at 31 December 64.8 54.7 $m $m
Movement in fair value of plan assets recognised in the statement of financial position Balance at 1 January 60.1 44.6 Expected return on plan assets 1.2 1.3 Actuarial gain 6.3 11.9 Employer contributions 1.4 1.3 Benefits paid (1.5) (0.4) Foreign exchange gain 2.1 1.4 Balance at 31 December 69.6 60.1
Discount rate (0.5% decrease) 6.8 – Inflation rate (0.3% decrease) – (2.4) Future salary changes (0.5% decrease) – (0.4) Life expectancy (1 year increase) 2.1 –
The movement in the net deferred income tax is as follows: Balance at 1 January 21.5 19.8 Income tax charge 10.7 1.2 Amounts recorded through equity (5.4) 0.9 Foreign exchange translation differences (0.6) (0.4) Balance at 31 December 26.2 21.5
Plant and equipment 0.7 (0.6) – – 0.1 Intangible assets (1.9) 0.4 – – (1.5) Underwriting profits 15.5 9.8 – – 25.3 Deferred acquisition costs (7.6) 0.1 – – (7.5) Tax losses carried forward – 6.3 – – 6.3 Share based payments 14.3 (1.3) (5.4) (0.6) 7.0 Other 0.5 (4.0) – – (3.5) Net deferred income tax account 21.5 10.7 (5.4) (0.6) 26.2
Additionally during 2020, the group also entered into five new IT leases which are the result of a Data migration project improving the group IT infrastructure capabilities which resulted in recognising a right of use asset of $17.3m and a liability of $18.7m.
Right of use assets Right of use assets related to leased properties that do not meet the definition of investment property are presented as property, plant and equipment.
Income from sub-leasing right of use assets 0.1 0.1 Expenses relating to low value leases (0.3) (0.4) Expenses relating to short-term leases (0.1) (0.2) Total recognised in profit or loss (15.7) (12.4)
Leases as lessor The group sub-leases leased property, which is classified as a investment asset. The group recognised $0.1m in 2020 ($0.5m 2019). The sub-lease contract ends in 2022.
30 Related party transactions The group and company have related party relationships with syndicates 623, 6107, 5623, its subsidiaries, associates and its directors.
Written premium ceded to syndicates 148.6 96.3 Other income received from syndicates 22.9 25.8 Services provided 33.4 33.1
United Kingdom and Continental Europe 60 Great Tower Street London EC3R 5AD England 2 Northwood Avenue Dublin D09 X5N9 Ireland 22 Grenville Street Saint Helier JE4 8PX Jersey North America 1209 Orange Street* Wilmington, Delaware 19801 USA 2711 Centerville Road Suite 400** Wilmington, Delaware 19808 USA 30 Batterson Park Road*** Farmington, Connecticut 06032 USA 160 Greentree Drive, Suite 101**** Dover, Delaware 19904 USA 55 University Avenue, Suite 550 Toronto, Ontario M5J 2HJ Canada Asia 138 Market Street, 03-04 Capita Green Singapore 048946 Singapore 36/F., Tower Two, Times Square, 1 Matheson Street, Causeway Bay Hong Kong – Hong Kong Kensington Gardens, No. I1317, Lot 7616, Jalan Jumidar Buyong Labuan 87000 Malaysia Australia Level 15, 1 O’Connell Street Sydney NSW 2000 Australia 32 Contingencies Funds at Lloyd’s The following amounts are held in trust by Lloyd’s to secure underwriting commitments: As at 31 December $m
Financial assets at fair value and cash 1,563.3 1,702.8 1,017.7 Letters of credit (‘LOC’) 225.0 – – Total Funds at Lloyd’s 1,788.3 1,702.8 1,017.7
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 2020, this ratio was 73% (2019: 62%). This represented total claims of $1,958.3m (2019: $1,452.5m) divided by net earned premiums of $2,693.4m (2019: $2,347.0m).
Combined ratio Ratio, in percentage terms, of the sum of net insurance claims, expenses for acquisition of insurance contracts and administrative expenses to net earned premiums. This is also the sum of the expense ratio and the claims ratio. The calculation is performed excluding the impact of foreign exchange. In 2020, this ratio was 109% (2019: 100%). This represents the sum of net insurance claims of $1,958.3m (2019: $1,452.5m), expenses for acquisition of insurance contracts of $738.9m (2019: $645.4m) and administrative expenses of $235.5m (2019: $244.3m) to net earned premiums of $2,693.4m (2019: $2,347.0m). This is also the sum of the expense ratio 36% (2019: 38%) and the claims ratio 73% (2019: 62%).
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 2020, the expense ratio was 36% (2019: 38%). This represents the sum of expenses for acquisition of insurance contracts of $738.9m (2019: $645.4m) and administrative expenses of $235.5m (2019: $244.3m) to earned premiums of $2,693.4m (2019: $2,347.0m).
Gross premiums written Amounts payable by the insured, excluding any taxes or duties levied on the premium, but including any brokerage and commission deducted by intermediaries.
Investment return Ratio, in percentage terms, calculated by dividing the net investment income by the average financial assets at fair value, including cash. In 2020, this was calculated as net investment income of $188.1m (2019: $263.7m) divided by average financial assets at fair value, including cash, of $6,261.4m (2019: $5,452.0m).
Return on equity (ROE) Ratio, in percentage terms, calculated by dividing the consolidated profit after tax by the average daily total equity. In 2020, this was calculated as loss after tax of $46.1m (2019: Profit $234.1m) divided by average equity of $1,792.7m (2019: $1,538.6m). Risk This term may refer to: a) the possibility of some event occurring which causes injury or loss; b) the subject matter of an insurance or reinsurance contract; or c) an insured peril.
Surplus lines insurer An insurer that underwrites surplus lines insurance in the US. Lloyd’s underwriters are surplus lines insurers in all jurisdictions of the US except Kentucky and the US Virgin Islands.
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