Financial statements 113 Consolidated statement of profit or loss 114 Statement of comprehensive income 115 Statement of changes in equity 116 Statements of financial position 117 Statements of cash flows 118 Notes to the financial statements 177 Glossary
Part of our growth derived from new products, two of which are referenced in our cover illustration. We began underwriting satellite insurance in 2014 and insurance for pleasure craft in 2015.
• Consistent investment in product innovations to provide better products and services to improve our clients’ risk transfer
• 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
We seek to differentiate ourselves from our competitors in three key ways, all of which are important value drivers for Beazley.
For us entrepreneurial spirit has a very specific meaning, a meaning that guides us in evaluating new hires to our underwriting teams around the world. We look for individuals who have a strong sense of ownership for the business that they underwrite and are willing – indeed keen – to be accountable for their underwriting decisions. We also look for individuals who have a broad understanding of the ways in which economic, political and social changes can impact their book.
As Beazley has grown – the company’s workforce has more than doubled in size since 2007 – our ability to invite high performing employees to obtain experience in different roles and geographies has also grown. On the page opposite we profile three individuals who have chosen varied career paths at Beazley.
I joined Beazley in the summer of 2007 straight out of university. I was Beazley’s 101st employee in the US – we’re now at more than 400. My first job was with the high value homeowners team in Ponte Vedra Beach, Florida. Within two years I was given an opportunity to join the commercial property team as an underwriting assistant.
In 2009 that team of four expanded ten-fold with the acquisition of First State Management Group, a specialist excess and surplus lines (E&S) property insurer, from the Hartford. Shortly after the merger I moved to Atlanta where I was promoted to underwriter. I spent five years in Atlanta with a short stint in New York.
After 11 years working in the London insurance market – initially in underwriting but latterly in finance roles – I joined Beazley’s finance department in 2006. My timing was good: Beazley has grown strongly since, supported by a £150m rights issue in 2009.
I was promoted twice, assuming in 2010 responsibility for all external financial reporting at Beazley. I am proud that Beazley has built a reputation for high quality, transparent reporting to investors.
In October 2015 I moved out of the finance department, accepting the role of head of data management. Reliable and timely data is fundamental to running an organisation such as ours and is key for decision making capability.
“ I love the culture here – people are encouraged to ask questions, take risks, and think unconventionally.”
I joined Beazley in 2004 after eight years at another Lloyd’s syndicate, where I focused mainly on D&O insurance.
Meanwhile, Beazley had identified Singapore as the principal hub for the development of our business in the Asia/Pacific region. In 2014 I was approached to consider moving to Singapore to lead our strategic growth initiative there. I was unfamiliar with the market but reassured that we already had numerous locally recruited, seasoned underwriters in place.
I moved to Singapore in March 2015. I now work with multiple trading teams focusing on a wide spread of the specialist business classes for which Beazley is well known globally. My role encompasses broker relations, marketing, and optimising our infrastructure to enable us to write all our target classes of business efficiently and to high service standards.
The sales and service strategic initiative was launched in the summer of 2015. On the sales side, it aims to significantly improve our ability to deliver profitable top-line growth, achieving a higher ‘close rate’ on opportunities and better retention rates using enhanced sales skills.
“ Many brokers tell us they love our service – the speed with which they can get a response from a Beazley underwriter, the effort we put into resolving a complex claim. Our sales and service initiative is designed to build on these foundations to strengthen our broker relationships still further.” Dan Jones Head of broker relations
Our broker relations team works to strengthen broker relationships globally. From left: Ricardo Ortega (Rio de Janeiro), Rachel Hallett (London), and Will Roscoe (London).
Our approach goes well beyond diversification by line of business. We also diversify by geography and size of clients (smaller risks are often less volatile over the insurance cycle than larger risks). In addition, our business is a balance of ‘short-tail’, meaning that claims usually emerge within a year of the policy’s inception, and ‘medium-tail’, which means that claims on average take up to six years to crystallise fully.
The first decision for Beazley in expanding internationally is: Can we write this business out of London? Lloyd’s remains by far the world’s largest and most vibrant wholesale and reinsurance market and most large risk business can readily be transacted there.
However other regional markets are growing and, particularly for smaller and less complex risks, it often makes sense to have a local underwriting presence. In Singapore, Paris and Miami, Beazley underwriters have been able to access profitable business that they would not have seen at the box at Lloyd’s.
Life, accident & health With an experienced team of leading underwriters who have been together since the early 1990s, our personal accident and specialty life business is written on both an insurance and reinsurance basis and covers a number of niche classes, including sports disability. The business was acquired by Beazley in 2008 and has grown since then organically and through further acquisition.
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 30% of the top 200 oil and gas companies and are a major lead for upstream energy clients. We have extensive experience insuring a wide variety of cargoes including project, fine art and specie.
Property We’ve protected clients ranging from Fortune 1000 companies to homeowners through 23 years of natural and man-made catastrophes. We underwrite this business through three platforms; Lloyd’s, the US and Singapore, with a business focus on commercial property, engineering and construction risks and select homeowners’ business.
Following us winning the 2013 Cuthbert Heath Claims team award from Insurance Insider for our handling of the New York Marathon cancellation in the wake of Superstorm Sandy, we were shortlisted again this year for our handling of claims following the Hatton Garden vault theft, the most ambitious heist in the UK since the Great Train Robbery in 1963. Our team was recognised for its ability to evaluate a complex scenario quickly and then adjust and settle the many individual claims very promptly.
In discovery, we learned that the plaintiff had obtained significant sums from the US federal government as part of a program that incentivises the healthcare sector to implement EHR technology. During mediation, we found the customer’s signed an application for these payments online and we confronted the plaintiff with this application – part of which certified to the federal government that certain EHR solutions were in place.
We argued that if statements in the application were true, then certain allegations against the insured could not be true. In conjunction with defence counsel were able to use the statements in the application to persuade the plaintiff to lower its settlement demand from several million dollars to the low six figures.
Syndicates: 65 $1,919.6m Managed gross premiums $1,561.0m Group share $1,984.9m Managed gross premiums $1,620.0m Group share
US hurricane Ike $20bn $2,121.7m Managed gross premiums $1,751.3m Group share
Beazley’s vision is to become, and be recognised as, the highest performing specialist insurer.
Locally underwritten US business grows 19% to $537m $2,525.6m Managed gross premiums $2,080.9m Group share
Beazley has a proven record of capital management. We constantly identify the investments required to support profitable growth opportunities, but capital that is not thus deployed is returned to shareholders, subject to maintaining a prudent buffer. Our total shareholder return, which cumulatively exceeds 397% over the past five years, reflects this approach.
Beazley maintains an underwriting portfolio that is diversified by geography, product, size of risk, and the duration of the tail on the policies we underwrite. We constantly refine and adjust this portfolio to optimise profitability. For the past two years now we have curtailed our treaty reinsurance underwriting in the face of steeply falling premiums: net of reinsurance, this business accounted for less than 8% of our total premiums in 2015, down from over 10% in 2013. Conversely, we have significantly expanded our locally underwritten US business – focusing mainly on mid-sized professional indemnity, management liability and property risks. This accounted for 19% of our business in 2013 and 26% two years later.
In terms of geography, the US is our largest market, accounting for 58% of our total business, written both locally and in London. This served us well in 2015 as the US economy performed better than most other developed economies. However, we see attractive growth opportunities in other markets, notably Singapore and, selectively, in Europe. By the nature of their business, two of our divisions – marine and political risks and contingency – are extremely well diversified geographically, whereas our largest division – specialty lines – has a stronger US focus.
Your company once again performed very strongly in 2015, generating a return on average shareholders’ equity of 19% (2014: 17%) and growing premiums by 3% in a market largely characterised by continuing competition and, for some insurers, anaemic or no growth.
Operational excellence also remains a key focus, ranging from underwriting discipline to high quality and efficient processing. In this, we place the clients’ needs to the fore in all we do.
The role of the Beazley plc board is to approve and oversee the strategy developed by the company’s executive committee, bringing a diverse range of perspectives and experience to bear on our analysis. Regulatory scrutiny of our industry is extensive. In areas such as conduct risk – addressed by Andrew Horton in his statement on page 16 – and in Beazley’s adoption of the capital and other requirements prescribed under the European Union’s Solvency II directive, the board is committed to the maintenance of the highest standards.
One of Beazley’s longest serving employees retired during the year, with Jonathan Gray leaving in June. Jonathan made an immeasurable impact at Beazley, particularly in our property division which he established in 1992. The board is immensely grateful to Jonathan for his contribution to the company over the past 23 years.
The development of Beazley’s US business in recent years has been a major focus of the board’s attention and in this we have benefited greatly from the knowledge and insights of Ken Sroka, who stepped down in December as a non-executive director after almost five years on the board to take on a full time executive role. I am grateful to Ken for his many contributions to our work, including his participation on the remuneration and nomination committees.
In March Padraic O’Connor will also be stepping down from the board after seven years. His wisdom and experience have been greatly valued by all of us, as has his work chairing both the remuneration committee and the board of our material subsidiary, Beazley Re.
Rolf Tolle has informed the board that he will not be seeking reelection at the forthcoming AGM on 24 March 2016. He has served for more than five years on the board and audit and risk committee as well as on the board and audit and risk committees of our managing agency, Beazley Furlonge Limited. Rolf’s extensive knowledge of the insurance market has been a great asset to the group and his contribution has been highly valued.
Outlook We expect the tough market conditions experienced in 2015, particularly in large risk markets, to continue in 2016. There is today a strong consensus in our industry that it would take a catastrophe, or series of catastrophes, on a very large scale to materially turn the market for short tail lines of business and set rates on a sustained upward course. The high aggregation of coastal exposures in the US and other developed markets is one reason why such massive dislocations cannot be ruled out; another, sadly, is the growing threat of man-made catastrophes occurring either by accident or malevolent design.
Beazley delivered another excellent performance in 2015, generating a profit before income tax of $284.0m (2014: $261.9m) on gross premiums that rose by 3% to $2,080.9m (2014: $2,021.8m). Our combined ratio of 87% was slightly lower than our average for the prior five years, reflecting the risk assessment skills of our underwriters at a time of widely declining premium rates, as well as a benign claims environment.
I am particularly pleased that Beazley succeeded in achieving moderate growth in 2015 in a market that denied many insurers the opportunity to grow without sacrificing profitability. In this we were once again supported by our US operations, where premiums rose 21%. This was buoyed by continuing strong demand for data breach insurance, but other specialist management liability and professional liability lines of business have also responded well to the strength of the US economy.
We have now had a local underwriting presence in the US for 11 years and our locally underwritten US premiums accounted for 26% of our total business in 2015, up from 17% five years ago. However, it would be misleading to read the success of our US business as an achievement that is independent of our London operations. We rely on many of the same broker relationships to sustain both our London and US business and most of the lines we offer in the US are underwritten – usually for larger clients – by our London underwriters. Most of our underwriting and claims teams operate on a global basis, sharing knowledge constantly and moving personnel frequently. London continues to serve as a laboratory for innovation in global insurance and reinsurance and that will continue to benefit all our underwriters, wherever they are located.
In 2015, the market trends affecting our six divisions continued, broadly, to follow the trajectories established in recent years. Large, short-tail risks with significant catastrophe exposures faced the toughest market conditions, with rates for energy risks falling by 17%, marine hull risks by 6%, and large scale property risks by 8%. Our reinsurance division saw renewal rates fall by 7%, slightly less than we had expected because demand for US windstorm cover was stronger than anticipated. Competitive pressures were also severe for large scale professional liability risks for clients such as global law firms and major US hospitals and hospital systems.
Prior year reserve releases amounted to $176.3m, up 12% (2014: $158.1m). For our short-tail business, this reflected the benign claims environment we have seen in recent years. Our conservative approach to reserving normally permits us to make reserve releases as the ultimate level of claims becomes clear. In the case of our specialty lines business, which we categorise as ‘medium-tail’, reserve releases generally become available three to six years after the business was underwritten.
Claims activity Catastrophe claims were once again subdued in 2015. An exception was the Tianjin warehouse explosion in China in August, which killed 173 and generated insurance losses currently expected to exceed $3bn. Beazley has seen no significant loss from this event.
The economy in our principal market, the US, continues to rebound from the economic downturn, easing claims activity on our professional liability and management liability books. These claims tend to increase at times of economic stress as potential plaintiffs become more litigious. In our largest line of business, data breach insurance, we have seen an increase in claims driven by hacking and malware attacks. We have been able to address this by raising premium rates selectively, while maintaining high client retention levels. Our data breach business is largely focused on small and mid sized firms, with a relatively low exposure to the large scale breaches that trigger the largest class action lawsuits.
Outside the US, the economic picture was more mixed and this had some repercussions for the frequency of claims notifications. With commodity prices depressed, our political risks underwriters have seen an uptick in trade credit notifications relating to mining companies, but the severity of such claims looks modest and well within existing reserves.
Investment performance Our investment portfolio as a whole returned 1.3% during 2015 (2014: 1.9%). This is a good outcome in the context of low interest rates and volatile risk asset markets, particularly in the second half of the year. All components of our investment portfolio generated positive returns for the year. Stuart Simpson now takes on the role of chief investment officer, following Philip Howard’s decision to step down from this role at the end of 2015. Stuart’s team is responsible for developing our investment strategy, subject to a defined risk appetite and the oversight of the investment committee and board. On page 130 to the financial statements, we have included new disclosures about our approach to investment risk.
Risk management Our biggest risk management focus – given our business – derives from the possibility of our mispricing insurance on a large scale. This is mitigated by the diversification of our portfolio and by the depth of our underwriters’ experience in core lines of business, which means that we have weathered multiple market cycles and are well aware of the perils of a soft market.
Conduct risk is a focus for regulators in our industry. This relates essentially to ensuring we sell appropriate products, to the right customers and that these products achieve a fair outcome for them. For us this is more than a purely regulatory concern – it is an expression of Beazley’s culture and values.
The first and most important of these is the expertise of our underwriters in identifying profitable market niches that present attractive growth potential. We see significant growth opportunities for our environmental risk underwriters, particularly in the US, in the year ahead. We have also seen strong growth in demand for professional liability and other liability covers for healthcare providers that are not hospitals or physicians (a varied market segment known in our industry as miscellaneous medical or allied health), and we expect this to continue.
A second advantage is our track record of innovation, which continues to attract brokers with new or hard-to-place risks to the Beazley box at Lloyd’s and to our underwriters around the world. Our innovations often take the form of one-off manuscripted policy wordings to address unique client needs, but we also continue to design innovative products to tap broader market demand.
Our fourth advantage is our widely recognised position as a leader in the provision of both indemnity cover and response services to companies that fall victim to data breaches. This is both a fast growing and a large market, relevant to any business that holds large volumes of personally identifiable customer information. Already a well-established line of business in the US, data breach insurance is now generating increasing demand in Europe under the influence of high profile data breaches and impending tighter regulation. We are working closely with other Lloyd’s insurers to promote the Lloyd’s market as Europe’s leading hub for cyber insurance.
While seeking to exploit all of these assets, we have also sought to expand our knowledge of promising markets that we know less well. This was part of the rationale for our partnership with Korean Re, announced in March. Korean Re is a top ten global reinsurer, the dominant reinsurer in South Korea and an excellent partner for distributing Beazley products in Asia. We hope this collaboration will enable Beazley to write more business in Asia while we, in turn, help Korean Re to develop a track record at Lloyd’s.
Investing in our business To capitalise on all of these advantages we are continuing to invest heavily in the people and the infrastructure our business requires. Our headcount in the US, where we expect to continue to grow strongly this year, rose from 384 to 421 last year as we continued to build on our successful strategy to equip our offices in six hub cities – New York, Chicago, San Francisco, Los Angeles, Dallas and Atlanta – with the underwriting and claims expertise to offer our brokers a full product range.
Technology plays a major, and growing, role in enhancing the productivity of our people and making it easier for brokers to do business with us. We raised our level of technology investment in 2015. Among an array of initiatives, we upgraded our IT data centres to provide a more scalable infrastructure, with particular emphasis on ensuring we can support long term growth in the US market. We have also invested in increasing the resilience of our data centres so that we minimise downtime, should a business continuity event occur.
In November, we were delighted to win a Lloyd’s Innovation Award for myBeazley, our etrading system for brokers which launched in the UK and France in 2014. We have continued to broaden the range of small business products available to brokers through myBeazley and we plan to make the system available to US brokers in 2016.
Attracting talent We have found that a market in which most insurers struggle to grow has been, for us, a fertile market for talent. The wave of mergers and acquisitions that continues to sweep through our industry has contributed, I believe, to our appeal to individuals with a strong entrepreneurial streak who are dismayed at the prospect of working for far larger insurance companies.
Our vision at Beazley is anchored to our performance relative to the best of our peers in the industry. It is to become, and be recognised as, the highest performing specialist insurer. Against this yardstick, our strategy is working.
Q Beazley received internal model approval in December. How significant an achievement is this for the group?
A We’re delighted the Central Bank of Ireland approved our internal model. It is the culmination of many years of hard work and is testament to the quality embedded in every aspect of Beazley’s operations. Not all the firms that started out on this journey have completed it yet and it is reassuring to be in the first wave of companies to obtain approval. We operate in a world of ever increasing regulatory complexity and achievements like this help build the confidence of our customers, partners and regulators.
So deals of that kind are not of interest to us. However, we are happy to talk to brokers about panels and facilities, whereby brokers place the bulk of their business in a specialist line with pre-selected insurers that have a high level of expertise in the line in question. We participate in a number of these.
Q The London market has ambitious plans to modernise its processes through the London Market Target Operating Model initiative. Is this something you support?
A Definitely. I am on the board of the London Market Group and many of my colleagues, including our chief operating officer Ian Fantozzi, are engaged in this initiative. The idea behind it is simple: more efficient processing supported by electronic data capture for all stages of the journey taken by a piece of business, from placement, through claims, to renewal.
Q Why should an ambitious individual looking to build a career in today’s insurance market consider joining Beazley?
A One of our differentiators, which really dates back to the founding of the company 30 years ago, has been that Beazley provides an attractive home for people with entrepreneurial spirit. Clearly by definition Andrew Beazley and Nick Furlonge, who founded the company together in 1986, were entrepreneurs. Since then many of the people we’ve hired, and continue to hire, are animated by the same ambition to build a highly successful, sustainable business.
I think Beazley has a lot to offer such people. We are large enough to compete in our markets but not too large to act swiftly. We have a flat organisational structure and open lines of communication and as we’ve grown, both geographically and into new lines of business, we’ve been able to offer talented, versatile people more varied career paths. Some of these individuals are profiled on page 3 of this report.
In a nutshell, I’d say that an ambitious individual who wants to make a real contribution to our vision of building the world’s highest performing specialist insurer, should consider joining Beazley. You will make a difference.
Q How close do you think Beazley is to achieving its vision?
The metrics people often think of first relate to our financial performance but, although these are important, they are the result of success in other areas – particularly in providing a first class underwriting and claims service to our clients and brokers. So we measure our performance in these areas closely and have a strategic initiative devoted to identifying how we can continue to improve our performance on service and sales.
With regard to our financial performance, the key performance indicators on the pull out of this report tell a clear and positive story, although we are not complacent. The markets we operate in are dynamic – who could have foretold a decade ago that cyber insurance would be a business worth more than $200m in premium for Beazley in 2015? If we can continue to spot such opportunities and capitalise on them, we will continue to make progress towards achieving our vision.
Q What is a realistic return for investors to look for in a specialist insurer such as Beazley in the current market environment?
In recent years we have experienced a relatively benign claims environment, coupled with a major influx of capital into the catastrophe exposed large risks market. We have accordingly seen premium rates fall sharply in these classes and we expect them to fall further.
In these circumstances it is not realistic to expect specialist insurers’ returns to defy gravity and a strong – top quartile – ROE would likely be in the low double digits. Our focus at Beazley will remain on achieving consistently good returns relative to the overall market.
Q What impact do you see recent M&A activity at Lloyd’s and in the broader insurance market having on Beazley?
A I see it having little impact, except potentially in one area. The key for us is that we are relevant to clients and brokers in our chosen lines of business and that we can return a good profit on the portfolio we underwrite. If we meet both these criteria – which I believe we do – then we see no reason to get involved in the hazardous business of large scale M&A.
However, there is one respect in which the recent wave of M&A in our market may be helpful to Beazley. Our growth relies in part on our being able to attract talented individuals or teams of individuals who like the idea of building a career at Beazley. Working for a large insurance group is not to everyone’s taste so we think that more talent may be available to us in the wake of these mergers.
This growth in specialty lines has helped offset the more difficult market conditions experienced in our short-tail, catastrophe-exposed, lines of business such as marine and reinsurance. We continue to employ a disciplined approach to our underwriting across all divisions, particularly where we are experiencing rating pressure.
Rating environment Premium rates on renewal business across our portfolio as a whole fell by an average of 2% during 2015 (2014: a decrease of 2%). Specialty lines, our largest division, saw rates increase by 2% year on year, while our life, accident and health division saw rates drop by only 1%. In our other divisions, rates declined by varying degrees: 4% for property business; 8% for our marine division, 6% for our political risks & contingency division; and 7% for reinsurance.
* Based on premiums due for renewal in each calendar year.
Market conditions were markedly tougher for much of our marine division, which in addition to a broad range of marine covers also underwrites energy, aviation and – since 2013 – satellite business. A number of factors, including the absence of material large loss activity and the falling price of oil have led to significant pressure on premium rates. The strongest downward rating pressure was felt by our energy team, where rates declined by 17%. The division nevertheless made another substantial contribution to Beazley’s overall result, with a combined ratio of 77% (2014: 78%) on gross premiums of $269.3m (2014: $325.2m).
Our political risks and contingency division underwrites three main categories of business: political risks and trade credit; terrorism and political violence; and contingency. Despite significant pressure on premium rates, the division achieved a strong result in 2015, delivering a combined ratio of 76% (2014: 78%). We continue to invest in new opportunities and products such as the launch of our Beazley Weather Guard product in Australia and our participation in a Lloyd’s terrorism consortium which commenced in early 2015. While we continue to commit capital cautiously, our wide geographic footprint leaves us well placed to take advantage of profitable growth opportunities where they arise.
Performance by division A strong underwriting performance with improved combined ratios in all six divisions.
Gross premiums written 269.3 325.2 Net premiums written 239.5 289.9 Results from operating activities 66.9 71.1 Claims ratio 38% 38% Expense ratio 39% 40% Combined ratio 77% 78% Rate change (8%) (6%)
Gross premiums written 123.6 123.2 Net premiums written 105.0 101.2 Results from operating activities 29.0 26.2 Claims ratio 29% 27% Expense ratio 47% 51% Combined ratio 76% 78% Rate change (6%) (2%)
Gross premiums written 353.1 344.7 Net premiums written 304.8 297.6 Results from operating activities 59.7 54.3 Claims ratio 39% 42% Expense ratio 45% 44% Combined ratio 84% 86% Rate change (4%) (1%)
PA direct 52% PA reinsurance 25% Life direct 15% Sports 6% Life reinsurance 2%
The division operates through experienced teams located in London, Australia and the US. The main operational challenge we have faced in recent years has been weak premium flow in the US to cover the investments we have made there to build a strong accident and health business. That began to change in 2015 with $10.9m of new premium on our books in the first month of the year – an upward trend that has continued in January 2016. Our premium base in the US is now expanding steadily to take advantage of the operations and distribution capabilities that we have established.
We see great potential for our US business. We offer ‘gap medical protection’ cover to individuals through their employers to supplement the cover provided by those employers under standard benefit plans. This protection helps people to guard against the financial risks associated with paying out of pocket medical expenses. With healthcare costs continuing to rise (US healthcare spending topped $3 trillion in 2014 according to the Centers for Medicare and Medicaid Services), we expect employers to continue to trim benefits packages and offer employees gap protection products.
We are relying on a variety of distribution channels to offer our gap protection products. One of the most promising is through agreements with large insurers currently offering other lines of business to our target customers. We have entered into distribution agreements with two major insurers to expand our reach.
We also underwrite a modest aviation war risks account, where rates are slightly firmer, due to recent losses This has unfortunately had negligible knock-on effect on the broader aviation market, where rates remain extremely depressed.
Political risks & contingency Strong growth in contingency business balances continued rating pressure in terrorism.
We underwrite three main categories of business: political risks and trade credit; terrorism and political violence; and contingency – predominantly event cancellation cover for trade fairs and conferences and major sporting events. In terms of our geographic footprint, the division is one of the most diversified at Beazley, with underwriters in six countries: the UK, US, France, Australia, Singapore and the United Arab Emirates (UAE).
Clearly the world did not become a safer place in 2015, either for businesses or their employees, although claims remained subdued for both our political risks and terrorism accounts. In the trade credit segment of our political risks business, we saw an increase in claims notifications – principally relating to mining businesses pressured by falling commodity prices – but claims severity remained well below the level we saw in 2009. Reserve releases from prior years were slightly down at $18.1m (2014: $20.1m).
Our terrorism account continued the long slide in rates that we have seen since 2001, with rates last year falling by 9%. Awareness of the terrorism threat unquestionably grew in 2015, but the main targets of the attacks we have seen have – tragically – been people rather than property.
We have seen strong demand in the US and UK for Beazley Weather Guard, our product to protect businesses such as hotels and golf courses from revenue losses due to poor weather. We launched this product in Australia towards the end of the year.
The property division delivered another strong performance in 2015, making the second largest contribution to group profits in our history, despite continuing rating pressure affecting the large risks business we underwrite at Lloyd’s.
In recent years, the balance of our book has evolved as we have expanded in market segments that afford profitable growth opportunities and exercised discipline in segments exposed to intense competition. This has resulted in our small business unit, led by Paul Bromley, becoming the largest single segment of our portfolio.
A fast growing segment of our small business book is homeowners’ insurance for properties located both in the UK and the US: this book grew 25% to $64.9m last year.
Our construction and engineering insurance business had a good year. We focus on all types of construction risks, written out of London, Singapore and the US. (The US business is commonly known as builders’ risk). The growth of the US economy spurred demand for our products and our Singapore business continued to benefit from the growing strength of Lloyd’s franchise in the region and is one of the few places in the world, outside London, where Lloyd’s underwriters are located under one roof.
At the same time, we have continued to adjust the geographic balance of our book to take advantage of untapped opportunities in Europe and elsewhere. To achieve this, we have been locating underwriters in reinsurance hubs around the world, where they can access business that would not normally be seen by our underwriters in London. We now underwrite around 20% of our total book outside London. In September we appointed Benoit Goureau to lead the development of our business in France and Belgium, following on from the success of our Munich office established in 2008. Benoit’s strategy will be similar to the one we have pursued in Munich, focusing on building long term relationships with local cedents – many of them small mutual insurers – and brokers.
On the other side of the world, we nominated Tom Yang as an underwriter for the Beazley Underwriting Division of Lloyd’s China to facilitate the placement of business through the Lloyd’s China platform. He knows the local market well and will help us ascertain the scale of local opportunities for Beazley.
Latin America is another market that presents growth opportunities. We see much of this business at the Beazley box at Lloyd’s, but we also have a presence in Miami, which continues to grow as a hub for Latin American reinsurance business. We underwrote $7m in premium last year in Miami, up from $4.7m the year before.
In the absence of a major natural or man-made catastrophe, we do not expect to see material changes in the market rating environment in 2016. Underwriting is challenging in such an environment but our underwriters have the skills needed.
Specialty lines Strong US demand for specialist products fuels third year of growth.
Most of the business we underwrite takes some time to generate claims and we therefore frequently have an opportunity to release prior year reserves into our earnings as claims crystallise. These reserve releases contributed $38.7m to our result in 2015 (2014: $29.7m).
In recent years, we have expanded our capabilities in serving two of the largest and fastest growing industries in the US, technology and healthcare. In the technology sector, we have long been recognised as a leading provider of technology errors and omissions insurance for software services companies, including many of the world’s largest. We are now also recognised as a pioneer and market leader in data breach insurance.
In the healthcare market, we insure many of the largest hospitals in the US and around the world. In recent years, we have also developed a fast growing business as a miscellaneous medical insurer of the wide array of healthcare providers that are neither hospitals nor physicians. This business grew by 27% in 2015 to $51.3m, buoyed by continued growth in US healthcare spending that outstripped growth in the broader economy.
Management liability 20% Small businesses 19% Professions 16% Healthcare 11% Treaty 6% Crime 1%
Specialty lines, Beazley’s largest division, grew for the third consecutive year in 2015, writing gross premiums of $1,015.2m (2014: $895.7m). Most of this growth derived from the US, where we have been building momentum since the end of the recession.
Our focus in specialty lines is on professional and management liability business that demands strong underwriting skills and high standards of claims service. Our clients want to know that they have a seasoned and knowledgeable insurer in their corner in the event of being sued. We deliver on this requirement, having specialised in this business since the company was founded in 1986.
Our management liability team confronted a more challenging rating environment in 2015, with competition for large public company directors’ and officers’ (D&O) risks being particularly fierce. However, in this area we have a number of strings to our bow, and demand for employment practices liability (EPL) and private company D&O insurance was strong. EPL claims are very sensitive to the broader economic environment and we have seen claims levels decline steadily since the recession.
Our largest single business line – data breach insurance – continued to grow strongly in 2015. Across all our teams, we increased the amount of data breach and cyber liability business we underwrote in 2015 by 52% compared to 2014. 2015 was notable for two developments: a continued increase in the number of data breaches attributable to hacking or malware, and a strong uptick in demand for cover outside the US.
We believe this experience will increasingly be relevant to clients in Europe and elsewhere outside the US. Privacy regulation is tightening around the world, although it may never prove quite as complex to navigate as in the US, where 47 states now have their own data breach regulations. We expect to see particularly strong growth in the European Union, where an EU-wide regulation threatens to add steep financial penalties to the already high reputational risks of mishandling a data breach. We were delighted to launch the cyber consortium at Lloyd’s in partnership with syndicates managed by Brit and Aspen. The consortium will focus on providing cover to large businesses domiciled outside the US, bringing additional premium capacity of up to $60m to this market.
Product innovation of this kind is frequently initially most appealing to the larger clients employing risk managers who are most sensitive to the potential impact of emerging risks. For smaller business, and particularly for the brokers that serve them, the most valuable innovations frequently takes the form of technologies that make it easier to do business. We were particularly pleased to win in November an innovation award from Lloyd’s for myBeazley, our etrading platform for brokers to access our broadening range of specialist products tailored to the needs of small businesses.
Net insurance claims 813.9 817.9 – Acquisition and administrative expenses 663.8 658.9 1% Foreign exchange loss 9.7 12.3
Share of loss of associates (0.5) (1.1) Finance costs (15.3) (16.4) Profit before tax 284.0 261.9 8% Income tax expense (35.0) (44.1) (21%) Profit after tax 249.0 217.8 14%
Claims ratio 48% 49% Expense ratio 39% 40% Combined ratio 87% 89% Rate decrease (2%) (2%) Investment return 1.3% 1.9%
Premiums Gross premiums written have increased by 3% in 2015 to $2,080.9m. Rates on renewal business on average decreased by 2% across the portfolio. We have continued to adjust our underwriting appetite in areas where competition is most intense.
Our portfolio by business division has remained broadly unchanged from 2014. We continue to operate a diversified portfolio by type of business and geographical location, and have grown our business across three of the six divisions during 2015.
The amount the group spent on reinsurance in 2015 was $367.8m (2014: $289.1m). The increased purchases in 2015 reflects Beazley’s strategy of implementing reductions in risk appetite by increasing reinsurance rather than reducing our market profile via lower gross writings.
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 5-10% above the actuarial estimates, which themselves include some margin for uncertainty. The margin held above the actuarial estimate was 8.2% at the end of 2015 (2014: 7.1%). This margin has remained stable over time and is a lead indicator for the sustainability of reserve releases. However, it is important to recognise that claims reserve uncertainty is significant for Beazley and a positive lead indicator will not always equate to future releases.
Reserve monitoring is performed at a quarterly ‘peer review’, which involves a challenge process contrasting the claims reserves of underwriters and claim managers, who make detailed claim-by-claim assessments, and the actuarial team, who provide statistical analysis. This process allows early identification of areas where claims reserves may need adjustment.
The reserve releases in 2015 totalled $176.3m. There was an overall increase in reserve releases in 2015 compared to 2014. This was driven by the reinsurance division experiencing a benign claims environment in both 2014 and 2015, thus allowing further reserves to be released. The increase was also attributable to our specialty lines division increasing their reserve releases as the post recession portfolio from 2012 onwards matures; a trend which we expect to see continuing.
Brokerage costs 362.8 349.7 Other acquisition costs 85.8 91.5 Total acquisition costs 448.6 441.2 Administrative expenses 215.2 217.7 Total acquisition costs and administrative expenses 663.8 658.9
Other acquisition costs comprise costs that have been identified as being directly related to underwriting activity (e.g. underwriters’ salaries and Lloyd’s box rental). These costs are also deferred in line with premium earning patterns.
Investment performance Financial markets saw significant volatility in 2015, influenced by slowing economic growth in China, and emerging markets more generally, as well as the associated fall in commodity, and particularly energy, prices. The prospects for an increase in US interest rates, which eventually happened in December, also affected markets throughout the year. Against this background global equities, in local currency terms, ended 2015 just 1.3% higher, having been down more than 6% earlier in the year. Credit spreads on corporate debt widened significantly, particularly at lower credit ratings, where deteriorating conditions for energy related issuers had a significant effect. Risk free yields in the US also moved higher, with shorter maturities most impacted as the yield curve flattened in anticipation of higher interest rates.
Looking ahead to 2016, available yields on high quality debt investments remain low, but are generally expected to rise, whilst ongoing concerns about the prospects for global economic growth will create continuing headwinds for equity and corporate debt investments. In this environment it will remain very difficult to generate significant investment returns.
Beazley sold most of its asset backed securities during 2015 in preparation for revised regulatory requirements under Solvency II. The significant increase in the cash and cash equivalent position of $676.9m (2014: $364.2m) is temporary and was the result of some movements of funds between Beazley Re and Beazley plc in December in preparation for Solvency II going live on 1 January 2016. We expect the cash position to reduce back towards normal levels during 2016 following the significant special dividend payment and the reinvestment of the asset backed securities proceeds.
Tax Beazley is liable to corporation tax in a number of jurisdictions, notably the UK and Ireland. Our effective tax rate is thus a composite tax rate driven by the Irish and UK tax rates. Our effective tax rate for the year was 12.3% (2014: 16.9%). The reduction compared to 2014 was due to a number of prior year tax adjustments in 2015 that were all in the group’s favour where as in 2014 the reverse was true.
Financial assets at fair value and cash and cash equivalents 4,519.1 4,441.6 2%
Net assets per share (cents) 281.7c 265.7c 6% Net tangible assets per share (cents) 263.9c 247.0c 7%
* Excludes shares held in the employee share trust and treasury shares.
Intangible assets Intangible assets consist of goodwill on acquisitions of $62m, purchased syndicate capacity of $10.7m, US admitted licences of $9.3m and capitalised expenditure on IT projects of $9m.
Reinsurance assets Reinsurance assets represent recoveries from reinsurers in respect of incurred claims of $868.4m, and the unearned reinsurance premiums reserve of $231.3m. The reinsurance receivables from reinsurers are split between recoveries on claims paid or notified of $210.3m and an actuarial estimate of recoveries on claims that have not yet been reported of $658.1m. The group’s exposure to reinsurers is managed through: • minimising risk through selection of reinsurers who meet strict financial criteria (e.g. minimum net assets, minimum ‘A’ rating by S&P). These criteria vary by type of business (short vs medium tail). The chart on page 45 shows the profile of these assets (based on their S&P rating) at the end of 2015; • timely calculation and issuance of reinsurance collection notes from our ceded reinsurance team; and • regular monitoring of the outstanding debtor position by our reinsurance security committee and credit control committee.
We continue to provide against impairment of reinsurance recoveries, and at the end of 2015 our provision had reduced to $13.7m (2014: $14.1m) in respect of reinsurance recoveries, following a partial recovery during the year in relation to Lehman Re.
Insurance receivables Insurance receivables are amounts receivable from brokers in respect of premiums written. The balance at 31 December 2015 was $732.7m (2014: $587m). In order to meet with the accelerated regulatory reporting deadlines under Solvency II, Beazley now makes an earlier determination of how much of written premiums are received versus receivable. As a result, our premium receivables have grown by 25% year on year whilst gross premiums written have only grown 3% relative to the prior year.
Other assets Other assets are analysed separately in the notes to the financial statements. The largest items included comprise: • deferred acquisition costs of $226.2m; • profit commissions of $12.6m; and • deferred tax assets available for use against future taxes payable of $7.1m.
Insurance liabilities Insurance liabilities of $4,586.7m consist of two main elements, being the unearned premium reserve (UPR) and gross insurance claims liabilities.
Gross insurance claims reserves are made up of claims which have been notified to us but not yet paid of $937.5m and an estimate of claims incurred but not yet reported (IBNR) of $2,588.4m. These are estimated as part of the quarterly reserving process involving the underwriters and group actuary. Gross insurance claims reserves are broadly unchanged from 2014 at $3,525.9m.
Beazley holds a level of capital over and above its regulatory requirements. The amount of surplus capital held is considered on an on going basis in light of the current regulatory framework, (and the changes in regulation currently taking place, i.e. Solvency II) and opportunities for organic or acquisitive growth and a desire to maximise returns for investors.
In 2015, Beazley acquired 0.8m of its own shares into the employee benefit trust. These were acquired at an average price of 326p and the cost to the group was £2.6m.
Lloyd’s economic capital requirement (ECR) 1,326.9 1,359.0 Capital for US insurance company 107.7 107.7
The current capital assessment has been established using our Solvency II internal model which has been run within the ICA regime as prescribed by Lloyd’s. In order to determine the capital assessment, we have made significant investments in both models and process: • we use sophisticated mathematical models that reflect the key risks in the business allowing for probability of occurrence, impact if they do occur, and interaction between risk types. A key focus of these models is to understand the risk posed to individual teams, and to the business as a whole, of a possible deterioration in the underwriting cycle; and
• the internal model process is embedded so that teams can see the direct and objective link between underwriting decisions and the capital allocated to that team. This gives a consistent and comprehensive picture of the risk reward profile of the business and allows teams to focus on strategies that improve return on capital.
A high performing global operations function relies on us maintaining consistency in operational standards throughout the group, while, simultaneously, being prepared to try new things and leverage our depth of insurance operations expertise to give us a lead over the competition. In order to achieve this, we pursue our group operations strategy. This has five areas of focus: Supporting growth initiatives In support of our strategic growth initiatives such as in the US, Europe, and Asia Pacific, we have continued to enhance our infrastructure so that we can bring attractive new products to market as efficiently as possible – Beazley best practice protect, and marine pleasure craft are examples of two new types of insurance product that we launched in 2015.
With each year, we transact more business electronically in our markets. This brings greater efficiency but also places more emphasis on the need to have a scalable and resilient technology infrastructure. In 2015, we upgraded our global IT data centres to ensure a system with further resilience and scalability.
A continuing focus for us has been strengthening our ability to take new product ideas more quickly from the drawing board to the underwriting stamp. We have built dedicated teams in both London and the US to co-ordinate the product innovation process, and then to bring all the operational components together for a successful market launch.
In 2015, we were able to offer a new type of electronic distribution channel to our UK brokers. Termed business-to-business-tocustomer or ‘B2B2C’. Using the myBeazley platform, our UK brokers can now deliver electronic insurance risk submission and pricing screens straight to the customer. This interfaces directly with our internal IT platforms, creating a highly efficient model for our brokers and also for our own internal processing. In parallel, we are able to track data about how our products are selling and make adjustments with great speed.
In today’s turbulent world, perhaps being able to identify, understand and adapt to risks that arise along the journey is just as important as knowing our destination.
Risk management has undertaken two key risk profile reviews. The first was to review the design and operation of the underwriting standards, particularly in soft market conditions. Whilst the conclusion was that the underwriting standards remain appropriately designed, we have increased the focus on oversight of policy wordings (which can become a target in a soft market) and monitoring more closely the 28 new underwriters who have joined Beazley in 2015. The second risk profile review was an annual review of Beazley’s cyber exposure with the aim of improving our understanding of how an aggregation of claims across a number of policies could be triggered by a single cause or event. We used external technical expertise to benefit from the latest thinking on what is possible, which has led to the development of five new realistic disaster scenarios that will be monitored. We have also developed a cyber risk budget which the new scenarios will be compared against to assist the board in overseeing the growth of our cyber premium.
In 2015, we reviewed the way we manage conduct risk. Conduct risk describes Beazley’s behaviour that aims to provide appropriate products to the right group of consumers that achieve fair outcomes. Beazley’s approach starts with culture. The Professional and Integrity elements of our PIED values and the Honourable and Deliver elements of Being Beazley mean we consider and understand the needs of our customers and form an important cultural base to getting this right. This is supported by product specific activity dependent on the type of customer. From a risk management perspective, we facilitated the development of the conduct objective, the conduct risk appetite and the standards required to remain within this risk appetite.
Risk management facilitated the discussion of emerging and strategic risks at the board strategy day in May 2015. The discussion focused on four strategic risks; a deterioration of relationships between some of the G20 countries, failure to harness the benefit of technological advances, the commoditisation of specialist insurance products and the operational consequences if premium income were to reduce materially.
The quarterly Own Risk and Solvency Assessment (ORSA) report captures and explains the current and prospective risks and associated capital requirements. Since 2010, the board has received 20 regular quarterly ORSAs and three ad hoc transactional ORSAs and these reports have proved to be one of the key benefits arising from the introduction of the Solvency II regime.
The board has received a detailed validation report to provide assurance that the model design and its output are appropriate. This report, coupled with a programme of regular and tailored director briefings called “KRAM”, ensure that the internal model is widely understood and actively used.
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 framework document. The residual financial impact is managed in a number of ways, including: • mitigating the impact of the risk through the application of controls; • transferring or sharing risk through outsourcing and purchasing insurance and reinsurance; and • tolerating risk in line with the risk appetite.
In addition, the following risk management principles have been adopted: • risk management is a part of the wider governance environment; • techniques employed are fit for purpose and proportionate to the business; • it is a core capability for all employees; • risk management is embedded in day-to-day activities; • there is a culture of risk awareness, in which risks are identified, assessed and managed; • risk management processes are robust and supported by verifiable management information; and • risk management information and reporting is timely, clear, accurate and appropriately escalated.
In summary, the board identifies risk, assesses risk and sets risk appetite. The business then implements a control environment which describes how the business should operate to stay within risk appetite. Risk management then reports to the board on how well the business is operating using a consolidated assurance report. For each risk, the consolidated assurance report brings together a view of how successfully the business is managing risk, qualitative commentary from the assurance function and whether there have been any events that we can learn from (risk incidents). Finally, the framework is continually improved, through the consideration of stress and scenario testing, themed reviews using risk profiles and an assessment of strategic and emerging risks.
The 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 medium-tailed liability classes.
The chief risk officer provides a quarterly ORSA report to the board summarising the short term and longer term risks to the group and the capital implications.
• 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. This risk is monitored using exposure management techniques to ensure that the risk and reward are appropriate and that the exposure is not overly concentrated in one area.
• Communication: Having the right strategy and environment is of little value if it is not communicated internally so that the whole group is heading in the same direction, or if key external stakeholders are not aware of Beazley’s progress against its strategy.
• Reputation: Although reputational risk is a consequential risk, i.e. it emerges upon the occurrence of another risk manifesting, it has the potential to have a significant impact on an organisation. Beazley expects its staff to act honourably (one of seven ingredients of Being Beazley) by doing the right thing.
Under the environmental risk heading, the board monitors five categories of emerging and strategic risk on a quarterly basis, namely; socio-political risk, distribution, market conditions, talent and regulation.
• Liquidity risk: This is the risk that the group does not have sufficient liquid funds following a catastrophic event. The investment committee monitors this risk which, given the nature of the asset portfolio, is currently small.
• Group risk: The structure of the Beazley group is not complex and so the main group risk is that one group entity operates to the detriment of another group entity or entities. Although this risk is currently small, the Beazley plc board monitors this risk through the reports it receives from each entity.
Our aim for 2016 is to continue to build on the initiatives described in the pages that follow. Our responsible business committee, chaired by Pippa Vowles with Clive Washbourn as executive sponsor, sets our global strategy, focusing on: • support for our charity partners; • our role in the communities where our people live and work; • the environmental sustainability of our business; • our beneficial influence in the markets in which we operate; • our people’s health, wellbeing and safety; and • the diversity and inclusion of our workforce.
Oz Harvest Beazley volunteers prepared hot meals for the vulnerable in their community.
Women in the workplace Beazley volunteers led workshops to help 90 young adults consider their career options and showcase what roles are available in insurance.
Our aim is to introduce this to even more of our offices globally next year.
Dragon Award finalist We entered our community efforts in the Lord Mayor’s Dragon Awards this year in the Best New Community Programme category and were proud of our people’s efforts to be shortlisted in this category.
Beazley interns The City of London recognised our leadership and partnership with the Brokerage CityLink by awarding Beazley the Employer of the Year in September.
ShelterBox app As one of the leading speciality insurers in data breach response insurance we know the importance of data. We supported Shelterbox to develop an app, which helps to transform data capture and analyse operational information. The app helps measure impact of disasters, allowing Shelterbox to improve on future disaster relief operations.
Natural disaster relief Beazley donated over $10,000 to relief work after natural disasters this year, including the Vanuatu and Nepal earthquakes and flooding in Texas.
• Our procurement: leveraging our buying power and working with suppliers to make a positive environmental impact
• Our people and communications: engaging our people to help achieve our goals, consider their environmental approach outside work and keep them informed of what we are doing.
Our strategy for 2016 is to continue the momentum and create clear targets for what we want to achieve in the future.
Last year we joined the London Living Wage Foundation and we continue to be a member this year, ensuring we pay a minimum wage beyond the legal requirements for all our employees, contractors and third party employees.
The products we offer and the way we do business also have an impact on our partners and peers. Our aim is to identify and increase the ways in which we can influence others to do the right thing through our business activities.
We are well known in the healthcare sector for encouraging safe behaviour and processes. We are taking that one stage further in conjunction with Palo Alto Research Center (PARC) doing analysis of large data sets with a view to improve loss avoidance and share best practice amongst our insureds.
Our two main aims for 2016 are: • continued development of products that have a greater positive impact than simply risk transfer; and • focus on the healthcare, management liability and employment practice sectors to drive positive behaviours.
Matters that are deemed to be material in relation to human rights are reflected in a number of our group policies, our values, and our code of conduct.
Focus on health and wellbeing Colleagues take part in various challenges.
* Catherine Woods joined the board on 1 January 2016, raising the quotient of female board members at the date of approval of this report to two.
We continue to ensure all employees, contractors and visitors are given an induction, training and supervision in aspects of health and safety, ensuring we are up-to-date and compliant with current laws. We also conduct risk assessments in all offices.
In 2015 we launched our on-going Health & Wellbeing initiative, designed to: • raise awareness about the wellbeing benefits we offer to our employees; and • promote a healthy lifestyle.
We have health and wellbeing champions across Beazley globally who design a programme of topics to focus on each month.
We are an equal opportunities employer, ensuring we offer equal treatment to employees and prospective employees. We treat all employees fairly, with dignity and respect.
We are actively implementing our diversity strategy to increase all aspects of diversity across the organisation. In particular we have focused on gender diversity in areas such as underwriting and claims that have traditionally not been as gender diverse as other areas of the business. As a result of these efforts we are pleased that the number of female underwriters employed by the group has increased by 17% and the number of female claims managers has increased by 14% during the course of the year.
The group has agreed to establish goals for gender diversity for both the board and broader organisation. The board approved the goals for gender diversity of the Beazley plc board containing two female members by AGM 2016, and a third female member by AGM 2017.
The directors have pleasure in presenting their report and the audited financial statements of the group for the year ended 31 December 2015.
Management report The directors’ report, together with the strategic report on pages 1 to 64, serves as the management report for the purpose of Disclosure and Transparency Rule 4.1.8R.
Directors’ responsibilities The statement of directors’ responsibilities in respect of the annual report and financial statements is set out on page 107.
The aforementioned second interim and special dividends will be paid on 31 March 2016 to shareholders on the register on 26 February 2016 (save to the extent that shareholders on the register of members on 26 February 2016 are to be paid a dividend by a subsidiary of the company (being Beazley DAS Limited) resident for tax purposes in the United Kingdom pursuant to elections made or deemed to have been made and such shareholders shall have no right to this second interim dividend).
Directors The directors of the company who served during 2015 and/or to the date of this report were as follows: Dennis Holt Non-executive chairman David Andrew Horton Chief executive George Patrick Blunden Non-executive director Martin Lindsay Bride Finance director Adrian Peter Cox Director Angela Doreen Crawford-Ingle Non-executive director Sir John Andrew Likierman Non-executive director (appointed 25/03/2015) Neil Patrick Maidment Director Padraic Joseph O’Connor Non-executive director Vincent Joseph Sheridan Non-executive director Kenneth Paul Sroka Non-executive director (resigned 04/12/2015) Rolf Albert Wilhelm Tolle Non-executive director Clive Andrew Washbourn Director Catherine Marie Woods Non-executive director (appointed 01/01/2016)
The board is complying with the provision on annual re-election of all directors introduced by the UK Corporate Governance Code.
On 3 February 2016 the board approved, after rigorous review by the nomination committee, that Angela Crawford-Ingle and George Blunden stand for re-election at the forthcoming AGM for three years, and that Vincent Sheridan stand for re-election for one year.
Corporate governance The company’s compliance with corporate governance is disclosed in the statement of corporate governance on pages 73 to 76.
Substantial shareholdings As at 3 February 2016, 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 101,400,652 19.4 MFS Investment Management 49,623,657 9.5 Woodford Investment Management 24,859,717 4.8 Dimensional Fund Advisors 23,111,889 4.4 Standard Life Investments 19,612,425 3.8
Recent developments and post balance sheet events Recent developments and post balance sheet events are given in note 34 in the financial statements on page 176.
Diversity and inclusion Information concerning diversity and inclusion can be found in the responsible business section on page 63 and in the statement on corporate governance on page 74.
Authority to purchase own shares On 25 March 2015 shareholders approved an authority, which will expire on 25 June 2016 or, if earlier, at the conclusion of the 2016 AGM for the company to repurchase up to a maximum of 52,143,943 ordinary shares (representing approximately 10 per cent of the company’s issued ordinary share capital). During the year, Beazley acquired 0.8m of its own shares into the employee benefit trust. The board continues to regard the ability to repurchase issued shares in suitable circumstances an important part of the financial management of the company. A resolution will be proposed at the 2016 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.
Share capital The company has ordinary shares in issue. Ordinary shares therefore represent 100% of the total issued share capital as at 31 December 2015 and 3 February 2016. Details of the movement in ordinary share capital during the year can be found in note 21 on page 157.
As at 3 February 2016 there were outstanding options to subscribe for 19.5m ordinary shares pursuant to employee share schemes, representing 3.7% of the issued share capital. If the authority to purchase shares were exercised in full, these options would represent 3.7% of the enlarged issued share capital.
S A Coope Company secretary 2 Northwood Avenue Northwood Park Santry Demense Santry Dublin 9
Governance 69 Letter from our chairman 70 Board of directors 72 Investor relations 73 Statement of corporate governance 83 Letter from our chairman of the remuneration committee 85 Directors’ remuneration report 107 Statement of directors’ responsibilities 108 Independent auditor’s report
The board and its committees met regularly during the year with near 100% attendance from all members. We promote a culture of openness and debate at each meeting and seek to receive constructive challenge from the non-executive directors to help develop proposals on strategy and other matters. Each of the strategic initiatives has been assigned a non-executive sponsor.
During 2015, we welcomed Sir Andrew Likierman to the board and appointed Catherine Woods to the board with effect from 1 January 2016. Details of the search process are set out in the nomination committee report. Ken Sroka left the board in December, and we would like to thank him for his valuable contribution during his time on the board.
The group recognises the value from regularly reviewing the effectiveness of the board. We commissioned an external review of the effectiveness of the board and its committees in 2015. Deloitte LLP conducted the review which included interviews and observation of board and committee meetings. Whilst there are no matters of significance to report, we have developed some actions to support continuous improvement in our governance processes. Details of Deloitte LLP’s other connections with the company is explained in the directors’ remuneration report on page 99.
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 2015 and explained the independence of Rolf Tolle on page 73. The appointment of George Blunden and Vincent Sheridan for terms of longer than six years is explained on page 73. Details of the activities of the board and its committee also are set out on pages 70 to 71.
Board of directors * Where the appointment date of a director pre-dates 9 June 2009 (being the date that Beazley plc became the holding company of Beazley Group) this appointment date refers to their representation on the Beazley Group Limited board (formerly Beazley Group plc).
Our committees and committee chairmen The audit and risk committee assists the board of directors in fulfilling its oversight responsibilities for the financial reporting process, the system of internal control, the audit process, the company’s process for monitoring compliance with laws and regulations and the code of conduct. It also ensures that an effective risk management process exists in the major regulated subsidiaries and that the Beazley group has an effective framework and process for managing its risks.
The executive committee is chaired by Andrew Horton and acts under delegated authority from the board.
Appointed: 5 May 2009* Experience: Martin joined Beazley in May 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, before pursuing a career in the composite insurance sector with Aviva and Zurich Financial Services. 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: 9 June 2009 Experience: Vincent is currently chairman of Mercer (Ireland) Limited and Mercer Global Investments Europe Limited. He is also a director of FBD Insurance plc, Canada Life Assurance Europe Limited, Canada Life International Assurance Limited and a number of other companies. He retired as chief executive of Vhi Healthcare in 2008 and, prior to that, was group chief executive of the Norwich Union Insurance Group in Ireland for ten years from 1991 to 2001. He is a past president of the Institute of Chartered Accountants in Ireland and a former director of the Irish Stock Exchange. Committee: Audit and risk committee
Appointed: 1 January 2016 Experience: Catherine is the senior independent non-executive director and audit committee chairman of AIB plc, a nonexecutive director of AIB Mortgage Bank and chairman of EBS Limited. She is the finance expert on the adjudication panel established by the Irish Government to oversee the rollout of the national broadband scheme and is a former vice president and head of the European Banks equity research team at JP Morgan. Catherine is a former director of An Post, and a former member of the Electronic Communications Appeals Panel.
There are currently 13 analysts publishing research notes on the group. In addition to research coverage from Numis and JP Morgan, the company’s joint corporate broker, coverage is provided by Nomura, Keefe Bruyette & Woods, Peel Hunt, Shore Capital, Espirito Santo Investment Bank Research, Cannaccord, Sanford Bernstein, Collins Stewart, Stockdale Securities, UBS and RBC.
Mutual funds 52% Retail 12% Pensions 11% Insurance 7% Investment trusts 5%
Compliance with code provisions The board confirms that the company and the group have complied with the provisions set out in the 2014 version of the Financial Reporting Council’s UK Corporate Governance Code throughout the year ended 31 December 2015 and have explained the independence of Rolf Tolle in the board review section below.
The board considers that the annual report and accounts, taken as a whole, are fair, balanced and understandable; and that they provide the information necessary for shareholders to assess the company’s performance, business model and strategy.
Rolf Tolle has informed the board that he will not be seeking reelection at the forthcoming AGM. The following paragraph explains the reasons for the board’s assessment of Rolf Tolle’s independence for the purposes of the UK Corporate Governance Code.
Rolf Tolle was appointed as a non-executive director in December 2010. With his considerable market experience, Rolf has performed a valuable role in bringing challenge to the boardroom based on his in depth understanding of the key drivers and challenges faced by the group. Rolf Tolle’s son, Christian Tolle, joined the company in 2009, and is head of life, accident and health. Christian reports to the chief underwriting officer and does not currently sit on the executive committee. The board values the independence of its non-executive directors and considered carefully the appointment of Rolf Tolle, acknowledging that his relationship with his son could call his independence into question. The board believes that the position that his son holds within Beazley does not impact Rolf’s independence of judgement. The board meets the independence criteria for Rolf Tolle by ensuring that when life, accident & health is a specific board matter Rolf Tolle excuses himself from the discussion and any board or committee decision. This occurs less than 5% of the time set aside for board meetings. The board believes that this practice is consistent with the spirit of the UK Corporate Governance Code and the principle of independence. The chairman oversees this potential conflict of interest and ensures that the matter is revisited annually as part of the board effectiveness review.
The board has also appointed an executive committee with delegated responsibility for particular matters such as considering the business plan, underwriting, risk and regulations (including the effectiveness of the internal control and risk management systems), investments and operations.
To enable the board to function effectively and directors to discharge their responsibilities, full and timely access is given to all relevant information. In the case of board meetings, this consists of a comprehensive set of papers, including regular business progress reports and discussion documents regarding specific matters. Directors have access to an electronic information repository to support their activities. During 2015 the board continued to support the maintenance and development of Beazley’s information security programme to address changing and emerging cyber security threats. All directors allocate sufficient time to the company to enable them to discharge their responsibilities effectively. The terms and conditions of appointment for all the non-executive directors set out the expected time commitment and they agree that they have sufficient time to meet what is expected of them. The nomination committee actively reviews the activities and time commitments of members and any changes to other significant commitments of the chairman and the non-executive directors would be reported to the board as they arose.
Full details of directors’ remuneration and a statement of the company’s remuneration policy are set out in the directors’ remuneration report.
Martin L Bride 5 5 – – – – – – Adrian P Cox 5 5 – – – – – –
* Kenneth Sroka resigned from the board effective 4 December 2015. On 25 March 2015 Sir Andrew Likierman was appointed to the board and to the remuneration committee on 7 May 2015. On 4 December 2015 he was appointed to the nomination committee. Dennis Holt resigned from the remuneration committee on 7 May 2015. 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.
** Vincent Sheridan’s absence from the board meeting and audit and risk committee meeting on 3 December 2015 was due to illness.
The board confirms that there is a continuous process for identifying, evaluating and managing any significant compliance issues and risks facing the group. All significant known risks are captured in the Beazley risk register and monitored on a monthly basis. The risk register and the related internal capital assessment process are subject to review, challenge and approval by the board.
Further information on the role of the audit and risk committee is set out on page 77 and further information on risk management at Beazley is set out in the risk management report.
Shareholder communication 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.
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 2015 are set out on pages 77 to 82.
Responsibilities of the committee The committee’s main audit-related responsibilities are to, inter alia: • monitor the integrity of the company’s financial statements and any other formal announcements relating to the company’s financial performance; • review the annual report before submission to and approval by, the board, and before clearance by the external auditors. This covers critical accounting policies, significant financial reporting judgements, the going concern assumption, compliance with accounting standards and other requirements under applicable law, regulations and governance codes applicable to the financial statements. In the past year, the committee has also reviewed the viability statement prepared by the group along with the analysis and evidence supporting this statement; • review the company’s internal financial controls and the company’s internal control and risk management systems; • approve the appointment or termination of the appointment of the head of internal audit and monitor and review the effectiveness of the company’s internal audit function; • review the arrangements by which employees of the company may, in confidence, raise concerns about possible improprieties in matters of financial reporting or other areas; and
The committee’s main risk-related responsibilities are to, inter alia: • advise the board on the company’s risk management framework, which includes the risk management objectives, risk appetite, risk culture and assignment of risk management responsibilities; • review risk reports and management information to enable a clear understanding of the key risks and controls in the business; • review any breaches of risk appetite and the adequacy of proposed action; • review the identification of future risks, including considering emerging trends and future risk strategy; • review the remit of the risk management function and ensure it has adequate resources and appropriate access to information to enable it to perform its function effectively; and
• provide oversight of the output of the Beazley plc capital model.
Full details of the terms of reference of the committee are available at www.beazley.com.
The primary role of the audit and risk committee in relation to financial reporting is to monitor the integrity of the financial statements of the group and any formal announcements, such as our interim statement released in July 2015, relating to the group’s financial performance and to review significant financial reporting judgements. In light of the changes to the UK Corporate Governance Code in 2014, the committee has continued to approach its review of the annual report as a whole with focus on behalf of the board on considering the concept of ‘fair, balanced and understandable’. We have challenged ourselves to ensure the key messages about the performance of the business are delivered in a manner consistent with our own understanding and interpretation of the information we receive. Set out in this section are the detailed responsibilities of the committee, as well as the specific considerations that have been on our agenda for 2015.
The audit committee receives regular reports from both the internal group actuary and the external audit team, as the output of independent projections are reviewed at key reporting quarters. In the latter part of the year, the group actuary has reported both informally and formally on the results of the Q3 peer review process, which the committee considers to be a key control as it provides a level of informed independent challenge for the reserve position. To support the year end view, the committee has received a detailed paper in support of the level of margin held within technical reserves in the group’s statement of financial position, which formed the basis for a robust discussion. Management confirmed that they remain satisfied that the outstanding claims reserves included in the financial statements provide an appropriate margin over projected ultimate claims costs to allow for the risks and uncertainties within the portfolio, and none of the committee’s other enquiries identified any errors or inconsistencies that were material in the context of the financial statements as a whole.
The external auditor have also used the group’s data to re-project the reserves using their own methodologies and the comparison presented to the committee has provided an additional level of challenge to the result. On the basis of their audit work, the auditor reported no inconsistencies or misstatements that were material in the context of the financial statements as a whole.
On the basis of the information provided by the group actuary throughout the year and at the year end, the consistent application on Beazley’s reserving philosophy, and the review work carried out by our external auditor, the committee is satisfied that the reserves held on the group statement of financial position at 31 December 2015 are reasonable.
b)Written premium estimates Written premiums for business incepting in 2015 are based on underwriting estimates on a risk by risk basis and actuarial premium projections based on signed premium information. In addition actuarial projections are used to validate the aggregate risk by risk estimations provided by our underwriters. This actuarial review takes place as part of the quarterly peer review process.
The board is responsible for setting the investment strategy, defining the risk appetite and overseeing the internal and outsourced providers via the chief investment officer (CIO). The committee are aware of the new holdings in illiquid credit assets entered into in the latter part of 2014, and remain satisfied that there is no increased level of valuation risk at this time. The committee receives reporting from the CIO via the finance director and it has reported for 2015 that the investment portfolio is in line with the board approved risk appetite and that carrying values of the portfolio as at 31 December 2015 are appropriate. The committee has monitored the change in the investment management arrangements through regular discussion with management, reviews undertaken by internal audit and has ensured that the external audit approach has responded to this change.
The auditor explained the results of their work on financial instruments, including testing of their existence and valuation. On the basis of their audit work, no misstatements that were material in the context of the financial statements as a whole were identified.
d) Recoverability of insurance receivables As detailed in note 18, the value of insurance receivables at 31 December 2015 is $732.7m. Aged debt analysis provided by the company was enhanced during 2015 and is reviewed as part of the audit process at key reporting periods. The analysis reviewed in 2015 did not identify any material instances of default in relation to our insurance debtors.
On this basis, the committee is satisfied that the insurance receivables of $732.7m are materially correct and that no adjustment is required to this balance at 31 December 2015.
Assessing the effectiveness of the external auditor The committee places great emphasis on ensuring there are high standards of quality and effectiveness in the external audit process. Audit quality is assessed throughout the year, with a focus on strong audit governance and the quality of the team. The effectiveness of the audit is assessed through discussion throughout the year, taking into account considerations such as: • reviewing the quality and scope of the audit planning and its responsiveness to changes in the business; • monitoring of the auditor’s independence; • considering the level of challenge evidenced in discussions and reporting; and • discussing the output of the FRC’s Audit Quality Review with our auditors.
These considerations are taken to account by the committee when determining whether to reappoint the external auditor. Appointment of the external auditor is conducted through a tendering process. The current firm’s tenure commenced in 2002.
Non-audit services The audit and risk committee’s responsibility to monitor and review the objectivity and independence of the external auditor is supported by a policy that we have developed in relation to the provision of non-audit services by the auditors. The objective is to ensure that the provision of such services does not impair the external auditor’s objectivity. The policy specifically disallows certain activities from being provided by the auditors, such as bookkeeping and accounting services, internal actuarial services and executive remuneration services. The policy requires pre-approval for all other material services such as due diligence assistance, tax services and advice on accounting and audit matters. The committee reviews the terms of such proposed services to ensure they have been robustly justified.
e) Recoverability of reinsurance assets The committee received confirmation from management that the majority of Beazley’s reinsurance receivables are due from highly rated institutions. Based on previous experience, the committee has not noted any instances where poor quality reinsurers have led to a material financial loss and is comfortable with the monitoring processes management have described and put in place to ensure this continues. The external auditor has reported on the output of their work over assessing the recoverability of the group’s reinsurance assets. The committee is comfortable that the judgements applied by management in making provision for bad debts is appropriate.
Currently the membership of the remuneration committee comprises Padraic O’Connor (chairman), George Blunden and Sir Andrew Likierman.
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 non-executive 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 competence; • 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
In the following pages we set out the directors’ remuneration report for 2015.
There are no significant changes to the operation of our policy this year.
Salary increases The average salary increase for 2016 for executive directors was 1%, which was below the average increase throughout the organisation.
Benefits • Benefits include private medical insurance, travel insurance, and company car or monthly car allowance
Annual bonus Deferral into shares • Discretionary annual bonus from an incentive pool generated by reference to ROE and awarded based on individual performanceDeferral into underwriting
Shareholding requirements Executive directors are expected to build up and maintain a shareholding of 150% of salary (200% for the CEO).
Single total figure of remuneration ▪ The table below sets out the single figure of total remuneration for executive directors for the financial years ending 31 December 2015 and 31 December 2014.
2 Benefits for Adrian Cox included an allowance of £95,335 in respect of his secondment in the US. This included housing allowance of £38,869 and tax gross up of the benefit of £47,471.
4 The LTI figure for Clive Washbourn includes the vesting of the first tranche of the MSIP award granted in 2013 to address a commercial risk to the business. This was an award, approved by shareholders, with performance conditions which required sustained exceptional divisional performance. The marine division achieved average ROE results of 53.1% as compared with a group average of 19% over the period and the first tranche vested in full. For Clive Washbourn, £1,390,260 of the single figure is also as a direct result of the significant share price appreciation, which is directly aligned to shareholders’ experience.
2 Sir Andrew Likierman was appointed to the board on 25 March 2015 and the figure in the table above represents his fees from this date.
Special dividend Interim and second interim dividend Net asset per share
Salary ▪ The committee reviews salaries annually taking into consideration any changes in role and responsibilities, development of the individual in the role and levels in comparable positions in similar financial service companies. It also considers the performance of the group and the individual as well as the average salary increase for employees across the whole group. Salary reviews take place in December of each year, with new salaries effective from 1 January.
For 2016, the average salary increase for executive directors is 1.0%, which was below the average salary increase across the group.
Benefits ▪ Benefits include private medical insurance for the director and his immediate family, income protection insurance, death in service benefit at four times annual salary, travel insurance, health-club membership, season ticket and the provision of either a company car or a monthly car allowance. Adrian Cox was on secondment in the US until 30 June 2015 and his benefits also included relocation and expatriate benefits in the year to that date.
The framework for determining bonuses is as follows: • a percentage of profit is allocated to a bonus pool subject to a minimum group return on equity; and • the percentage of profit increases for higher levels of ROE.
For heads of divisions a bonus may be awarded outside of the incentive pool in circumstances where the performance of a division in relation to the group is very strong.
Performance out-turn for 2015 The process for determining 2015 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 2015 was 19% and the overall enterprise bonus pool (in which executive directors as well as other senior employees participate) was calculated based on this. The risk-free return (RFR) was set at 1% taking into account the yield on US treasuries of two to five year maturities; • the committee then considered the individual bonus award for the executive directors and other senior employees within the committee’s remit. In determining the bonus award for each individual the committee took into account the individual’s contribution including, where relevant, the performance of their division; and
Bonus deferral ▪ A portion of the bonus will generally be deferred into shares for three years. The deferral will range from 0% to 37.5% dependent on the level of bonus. Deferred shares are generally subject to continued employment.
Martin L Bride £240,000 Adrian P Cox £300,000 D Andrew Horton £390,000 Neil P Maidment £300,000 Clive A Washbourn £300,000
Growth in NAVps is calculated taking into account any payment of dividends by the company. In line with our reporting to shareholders, NAVps is denominated in US dollars. The targets are equivalent to those that applied in 2012.
LTIP awards vesting in respect of the year ▪ The LTIP awards shown in the single total figure of remuneration for 2015 include: • the second tranche of awards granted on 14 February 2011. These are due to vest on 14 February 2016, subject to the achievement of a NAVps growth performance condition over the five years ended 31 December 2015; and
• the first tranche of awards granted on 13 February 2013. These are due to vest on 13 February 2016, subject to the achievement of a NAVps growth performance condition over the three years ended 31 December 2015.
NAVps growth < risk-free rate +10% p.a. 0% NAVps growth = risk-free rate +10% p.a. 25% NAVps growth = risk-free rate +15% p.a. 100% Straight-line vesting between points
Actual NAVps growth achieved in the five years to 31 December 2015 was 16.80% p.a. which resulted in 100% of awards vesting.
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 = risk-free rate +15% p.a. 100% Straight-line vesting between points
Actual NAVps growth achieved in the three years to 31 December 2015 was 20.14% p.a. which resulted in 100% of awards vesting.
The ROE performance condition for this award is as follows: 2013 award – first tranche (three years)
Actual ROE achieved in the three years to 31 December 2015 was 53.0% which resulted in 100% of the award vesting.
Awards for 2016 It is intended that the LTIP awards for 2016 will be in line with those granted in 2015 (see above).
Following the adoption of the 2012 LTIP, the company adheres to a dilution limit of 5% in a ten year period for executive schemes.
Investment in underwriting ▪ Traditionally, Lloyd’s underwriters contributed their personal capital to syndicates in which they worked. With the move to corporate provision of capital, individual membership of Lloyd’s has declined significantly. The committee feels that having personal capital at risk in the syndicate is an important part of the remuneration policy and provides a healthy counterbalance to incentivisation through bonuses and long term incentive awards. The company has operated the Beazley staff underwriting plan for this purpose since 2004 and executive directors and other selected staff are invited to participate through bonus deferral with an element of their cash incentives ‘at risk’ as capital commitments. These capital commitments can be lost in full if underwriting performance is poor.
To date over 200 employees of the group have committed to put at risk £10.1m of bonuses to the underwriting results of syndicate 623. Of the total at risk, £9.3m has already been deferred from the bonuses awarded.
The executive directors are currently fully funded in the plan and no further bonus deferral was made in 2015. Funding of £7,400 is no longer at risk from 31 December 2015 following the close of the 2013 year of account and will be released to participants. The remaining portion of total bonuses deferred is at risk of the underwriting performance of the years of account as listed in the table above.
Annual bonus awards may be subject to clawback for a period of three years following payment of the cash bonus. These clawback provisions will also extend to any deferred shares delivered before the end of the three year period and to the notional investment where the bonus is voluntarily deferred as notional capital into the investment in the underwriting plan (excluding any returns on the investment which will not be subject to clawback).
Malus provisions have applied to the LTIP and deferred share plan for a number of years. The committee has the discretion to reduce or withhold an award in circumstances of: • conduct which justifies summary dismissal; • an exceptional development which has a material adverse impact on the company, including but not limited to reputational damage, material failure of risk management, a material misstatement or any significant sanction from a government agency or regulatory authority; or
• where the committee considers it is necessary to comply with a law or regulatory requirement.
Jonathan Gray was an executive director of Beazley plc until 30 June 2013, when he stepped down from the board. He remained in employment with the group, leading the open market property underwriting team and serving on the board of Beazley’s subsidiary, Beazley Furlonge Limited. On 30 June 2015 he retired from the group. No loss of office payments were made. As a good leaver, the treatment of previous share awards and deferral into the staff underwriting plan was as follows: • deferred shares awards were pro-rated for time. 38,810 shares vested; • LTIP awards were pro-rated for time and performance. For the 2012 and 2013 LTIP awards, the committee determined that performance be measured at the time of retirement, in line with the treatment for the 2011 LTIP awards. Calculations were performed independently by Deloitte LLP. In aggregate 420,575 shares vested; and
Non-executive directors’ service contracts ▪ Details of the non-executive directors’ terms of appointment are set out below: Commencement date of appointment Expires
George P Blunden 1 Jan 2010 AGM 2019 Angela D Crawford-Ingle 27 Mar 2013 AGM 2019 Dennis Holt 21 Jul 2011 AGM 2018 Sir J Andrew Likierman 25 Mar 2015 AGM 2018 Padraic J O’Connor 20 Mar 2009 AGM 2016 Vincent J Sheridan 9 Jun 2009 AGM 2017 Rolf A W Tolle 6 Dec 2010 AGM 2017 Catherine M Woods 1 Jan 2016 AGM 2019
With effect from 2012 the standard approach for non-executive director appointments is that the appointment expires at the AGM following the end of the three year term, notwithstanding the fact that each non-executive director is subject to annual re-election at each AGM.
Profit on the relevant underwriting account as measured at three years and later.
The table below shows the total number of directors’ interests in shares as at 31 December 2015 or date of cessation as a director.
Unvested awards Vested awards Conditional shares not subject to performance conditions
Angela D Crawford-Ingle 20,850 – – – – – Sir J Andrew Likierman 10,000 – – – – –
No changes in the interests of directors have occurred between 31 December 2015 and 3 February 2016.
CEO pay versus performance The following graph sets out Beazley’s seven year total shareholder return performance to 31 December 2015, compared with the FTSE All Share and FTSE 350 Non-Life Insurance indices. These indices were chosen as comparators as they comprise of companies listed on the same exchange and, in the case of the Non-Life Insurance index, the same sector as Beazley.
* Note: An individual overall cap of 400% of salary was introduced from 2013. Prior to this date and in line with industry practice, there was no formal limit on individual bonuses. To enable comparison, the above graphs assume that a maximum annual variable award of 400% of salary also applied for years prior to 2013. £1,093,657 of the single figure for 2015 is a direct result of the significant share price appreciation over the LTI periods, which is directly aligned to shareholders’ experience.
Remuneration committee The committee consists of only non-executive directors and during the year the members comprise of Padraic O’Connor (chairman), George Blunden, Dennis Holt (resigned 7 May 2015), Kenneth Sroka (resigned 4 December 2015) and Sir Andrew Likierman (appointed 7 May 2015). The board views each of these directors as independent. The committee met six times during the year.
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. During the year the committee was advised by remuneration consultants from Deloitte LLP. Total fees in relation to executive remuneration consulting were £103,750. Deloitte LLP also provided advice in relation to tax, assurance support and share schemes.
Statement of shareholder voting The voting outcome of the remuneration related shareholder vote at the 2015 AGM was as follows: Votes for % for Votes against % against Total votes cast Votes discretionary Votes withheld
Martin L Bride Deferred bonus: LTIP (see notes): Conditional share awards: SAYE: Adrian P Cox Deferred bonus: LTIP (see notes):
Neil P Maidment Deferred bonus: LTIP (see notes): SAYE: Clive A Washbourn Deferred bonus: LTIP (see notes): MSIP: SAYE:
5 Shareholding requirements (as part of the LTIP) of 200% of salary for CEO and 150% of salary for other executive directors. To be built up over three years. LTIP awards may be forfeited if shareholding requirements are not met. Executive directors have met the shareholding requirements in respect of all unexercised share options.
6 Conditional awards were made on 27 April 2009 at the time of M L Bride’s recruitment. The 150,000 shares will vest in four equal tranches on each of the third, fourth, fifth and sixth anniversaries of the date of grant.
7 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.
I am keen to encourage an ongoing dialogue with shareholders. Accordingly, please feel free to contact me if you would like to discuss any matter arising from this report or on remuneration issues generally, either by writing to me at the company’s head office or by email through Sian Coope at sian.coope@beazley.ie.
Appendix: Extract from the directors’ remuneration policy approved by shareholders at the 2014 AGM The following table sets out descriptions of each component of executive director remuneration packages comprised in the Beazley directors’ remuneration policy, and, at the bottom of the table, the policy for non-executive directors, for reference. To provide consistency with the remainder of the directors’ remuneration report, salaries shown are 2016 salaries. Since the policy report was approved by shareholders Beazley has introduced additional reclaim provisions and these are detailed in the annual remuneration report.
A full copy of the Beazley directors’ remuneration policy is contained within the company’s 2015 annual report, which can be found on the company’s website at www.beazley.com.
Executive directors Element Purpose and link to strategy Operation Maximum Performance conditions
Discretionary annual bonus to individuals. An incentive pool is generated by reference to group return on equity and awards are based upon individual performance.
An incentive pool is calculated as a percentage of profit subject to a minimum return on equity.
For heads of divisions, a bonus may be awarded outside the incentive pool in circumstances where the performance of a division in relation to the group is very strong.
Normally LTIP awards are subject to shareholding requirements to be built up over three years. LTIP awards may be forfeited if shareholding requirements are not met.
Benefits include, but are not limited to, a company car or car allowance, season ticket, private medical insurance, death in service benefit and income protection insurance. Further benefits may be provided if the committee considers it appropriate.
There is no overall maximum as the cost of insurance benefits will vary depending on the individual’s circumstances and the cost of relocation will vary depending upon the jurisdiction.
Benefits in the event of relocation may include, but are not limited to, relocation allowance, housing allowance and school fees.
For defined contribution plans, maximum company contribution of 15% of salary.
HMRC-approved monthly savings scheme facilitating the purchase of shares at a discount.
US SAYE To create staff alignment with the group and promote a sense of ownership.
Legacy matters Payments can also be made to executive directors under the following legacy remuneration arrangements. It is not intended that these components of remuneration policy will be used to grant any future awards. Marine share incentive plan (MSIP)
A share award in 2013 for the head of marine made in two tranches: • 500,000 shares to vest after three years • 500,000 shares to vest after five years.
Awards are subject to a malus provision. The committee may determine that unvested shares will be forfeited in certain circumstances, such as a material misstatement of accounts or a significant adverse group development.
The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the parent company’s transactions and disclose with reasonable accuracy at any time the financial position of the parent company and enable them to ensure that its financial statements comply with the Companies (Jersey) Law 1991. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the group and to prevent and detect fraud and other irregularities.
Independent auditor’s report to the members of Beazley plc Opinions and conclusions arising from our audit
In our opinion: • the financial statements give a true and fair view of the state of the group’s and of the parent company’s affairs as at 31 December 2015 and of the group’s profit for the year then ended; • the group and company financial statements have been properly prepared in accordance with International Financial Reporting
Standards as adopted by the European Union; • the group and company financial statements have been prepared in accordance with the Companies (Jersey) Law 1991.
Our assessment of risks of material misstatement The risks of material misstatement detailed in this section are those risks that we have deemed, in our professional judgment, to have had the greatest effect on: the overall audit strategy; the allocation of resources in our audit; and directing the efforts of the engagement team. Our audit procedures relating to these risks were designed in the context of our audit of the financial statements as a whole. Our opinion on the financial statements is not modified with respect to any of these risks, and we do not express an opinion on these individual risks.
In arriving at our audit opinion above on the financial statements the risks of material misstatement that had the greatest effect on our audit were as follows : Valuation of insurance liabilities ($4,586.7m gross, $3,487.0m net; 2014: $4,547.4m gross, $3,494.2m net) Refer to page 77 (audit committee report), pages 118 to 127 (accounting policy) and pages 112 to 176 (financial disclosures).
The risk Our procedures to address this risk 86% of the group’s liabilities relate to insurance liabilities (2014: 89%). The valuation of insurance liabilities remains the most significant inherent risk in our audit. Management apply judgement to determine reserves which include a prudential margin above the actuarial best estimate to account for estimation uncertainty. The most critical estimate included in insurance liabilities is the estimate for insurance losses incurred but not reported, for which the estimate gross of reinsurance is $2,588.4m (31 December 2014: $2,540.2m) and the estimate net of reinsurance is $1,930.3m (31 December 2014: $1,874.5m) at 31 December 2015. The level of subjectivity in the estimated impact of uncertain or unknown future events; the diversity of risks written by Beazley, and therefore the granular level of reserving that occurs at class of business level; the nature of the specialist classes of business that Beazley underwrites; and particular uncertainty as regards the exposure to extreme losses in the catastrophe book, reserving for new products and continued growth within US specialty lines all serve to increase the level of judgement required and subjectivity inherent in the estimation of insurance liabilities. These judgements and uncertainties are significant to the earnings of the group.
• Evaluation and testing of key controls around the actuarial reserving process and the data used to determine the quantum of both gross and net insurance liabilities. This included controls over the extraction of data from the underlying systems and considerations of matters raised in reserving and underwriting committee meetings; • use of our own actuarial specialists to support us in our evaluation of insurance liabilities and in particular the estimate for insurance losses incurred but not reported, as well as the evaluation of management’s methodology against market practice based on our market knowledge and industry data, where available, and our conclusions over whether the amount calculated by the group lies within an acceptable range; • in 2015, we increased our focus on US specialty lines in consideration of the continued growth and relative immaturity of parts of this line of business; • use of our own actuarial specialists to help us with re-projections on a gross and net basis (based on quarter 3 data then rolled forward for quarter 4) using our own models for selected significant classes of business, including marine, property and specialty (including a disaggregated analysis on US specialty lines). We also considered the consistency of the basis for the margin applied to the actuarial estimate year-on-year; • discussion and consideration of the reserving assumptions and methodology applied for prudence and consistency, and benchmarking to identify any outliers against our experience of similar accounts in the market place. Any outliers were then followed up through discussions with the Chief Actuary, the Finance Director and the Audit and Risk Committee; • consideration of the quality of historic reserving exercises by tracking the outcome of prior years’ liabilities provisions by reference to subsequent out-turn; and
• in light of our work above we also considered the adequacy of the judgements and uncertainties being made by the directors in the insurance risk note 2.
• Understood, assessed and tested the group’s controls for the investment valuation process, monitoring performance of investments and the data integrity of the investment records; • assessment of the identification and subsequent resolution of differences in custodian reconciliations; • receipt of external confirmations from custodians of the investment portfolio and agreement to company records; • performance and evaluation of independent pricing and credit rating checks by our valuation specialists; • assessment of the valuation methodology for the portfolio of assets with a higher credit risk and testing of the year end valuations; • inspection of the hedge fund managers’ valuation reports and consideration of the historical accuracy of these pricing estimates by reference to realized amounts. We discussed any potential valuation issues with management; • assessment of the management monitoring of the outsourced service providers; and
Valuation of other assets (reinsurance assets ($1,099.7m, 2014: $1,053.2m), insurance receivables ($732.7m, 2014: $587.0m), and premium estimates ($2,080.9m, 2014: $2,021.8m)) Refer to page 77 (audit committee report), pages 118 to 127 (accounting policy) and pages 112 to 176 (financial disclosures). The risk Our procedures to address this risk
For all of the risk areas set out above, we have assessed whether the group’s disclosures about the sensitivities of the relevant financial statement items to changes in the respective key assumptions appropriately reflect the associated risks and comply with the requirements of the relevant accounting standards.
Our application of materiality and an overview of the scope of our audit The materiality for the group financial statements as a whole was set at $20m (31 December 2014: $20m). This has been calculated with reference to a benchmark of group gross written premiums (of which it represents 1%) which we have determined, in our professional judgment, to be one of the principal considerations for members of the company in assessing the financial performance of the group. In addition, we applied materiality of $10m (31 December 2014: $10m) for balances other than the insurance and reinsurance technical balances, for which we believe misstatements of lesser amounts than materiality for the financial statements as a whole could be reasonably expected to influence the company’s members’ assessment of the financial performance of the group.
Where the work was performed by component auditors, we determined the level of involvement we need to have in the audit work in order to conclude whether sufficient audit evidence has been obtained as a basis for our opinion on the group financial statements as a whole. This involvement included the group team visiting the component audit team in London in order to assess the audit risk and strategy and work undertaken. Telephone conferences and on site meetings were also held with the component auditors.
At these meetings, the findings reported to the group audit team were discussed in more detail and any further work required by the Group audit team was then performed by the component auditors.
In our opinion the directors’ remuneration report which we were engaged to audit has been properly prepared in accordance with Schedule 8 to the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008, as if those requirements were to apply to the company.
An audit undertaken in accordance with ISAs (UK & Ireland) involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the group’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements.
In addition, we read all the financial and non-financial information in the annual report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.
Whilst an audit conducted in accordance with ISAs (UK & Ireland) is designed to provide reasonable assurance of identifying material misstatements or omissions it is not guaranteed to do so. Rather the auditor plans the audit to determine the extent of testing needed to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements does not exceed materiality for the financial statements as a whole. This testing requires us to conduct significant audit work on a broad range of assets, liabilities, income and expense as well as devoting significant time of the most experienced members of the audit team, in particular the engagement partner responsible for the audit, to subjective areas of the accounting and reporting.
Hubert Crehan for and on behalf of KPMG Chartered Accountants and Recognised Auditors 1 Harbourmaster Place International Financial Services Centre Dublin 1 Ireland
Change in gross provision for unearned premiums (57.4) (67.9) Reinsurer’s share of change in the provision for unearned premiums 43.0 (5.9) Change in net provision for unearned premiums (14.4) (73.8)
Income tax expense 9 (35.0) (44.1) Profit for the year attributable to equity shareholders 249.0 217.8
Statement of comprehensive income for the year ended 31 December 2015 $m $m
Group Profit for the year attributable to equity shareholders 249.0 217.8 Other comprehensive income Items that will never be reclassified to profit or loss: Gain/(loss) on remeasurement of retirement benefit obligations 0.3 (1.6)
Items that may be reclassified subsequently to profit or loss: Foreign exchange translation differences (1.6) (2.6) Total other comprehensive income (1.3) (4.2) Total comprehensive income recognised 247.7 213.6
Equity settled share based payments 22 – – – 17.5 – 17.5 Acquisition of own shares in trust 22 – – – (3.9) – (3.9) Transfer of shares to employees 22 – – – 9.8 (8.2) 1.6
Equity settled share based payments 22 – – – 15.3 0.6 15.9 Acquisition of own shares in trust 22 – – – (12.5) – (12.5) Transfer of shares to employees 22 – – – 2.9 (3.3) (0.4)
Statements of cash flows for the year ended 31 December 2015
Cash flow from operating activities Profit before income tax 284.0 379.7 261.9 207.8 Adjustments for: Amortisation of intangibles 12 5.0 – 4.6 – Equity settled share based compensation 22 17.5 17.5 15.3 15.3 Net fair value loss on financial assets 3.0 – 25.6 – Share of loss in associates 14 0.5 – 1.1 – Depreciation of plant and equipment 13 2.1 0.2 2.4 0.2 Impairment of reinsurance assets recognised/(written back) 6 – – (0.4) – Increase/(decrease) in insurance and other liabilities 235.7 (4.2) (103.3) (7.0) (Increase)/decease in insurance, reinsurance and other receivables (203.5) (209.5) 177.6 8.8 Increase in deferred acquisition costs (3.5) – (16.7) –
Income tax paid (89.8) – (89.7) – Net cash from operating activities 195.5 190.5 227.1 231.8
Net increase/(decrease) in cash and cash equivalents 307.9 15.6 (13.4) – Cash and cash equivalents at beginning of year 364.2 1.2 382.7 1.2 Effect of exchange rate changes on cash and cash equivalents 4.8 1.6 (5.1) – Cash and cash equivalents at end of year 20 676.9 18.4 364.2 1.2
The financial statements of the parent company, Beazley plc and the group financial statements have been prepared and approved by the directors in accordance with IFRSs as adopted by the EU (‘Adopted IFRSs’). On publishing the parent company financial statements together with the group financial statements, the company is taking advantage of the exemption in s408 of the Companies Act 2006 not to present its individual income statement and related notes that form a part of these approved financial statements.
The group has applied the amendments to IFRSs included in the annual improvements to IFRS: 2011-2013 cycle for the first time in the current year. The amendments include minor changes to the following standards: • IFRS 1: ‘First time adoption’; • IFRS 3: ‘Business combinations’ on clarification regarding joint arrangements; • IFRS 13: ‘Fair value measurement’ on clarification of the portfolio exemption in IFRS 13; and • IAS 40: ‘Investment property’ on clarification that IAS 40 and IFRS 3 are not mutually exclusive.
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 9: Financial instruments (IASB effective date: 1 January 2018); • IFRS 11: Amendment: Accounting for acquisitions on interests in joint operations (EU effective date: 1 January 2016)*; • IFRS 14: Regulatory deferral accounts (IASB effective date: 1 January 2016); • IFRS 15: Revenue from contracts with customers (IASB effective date: 1 January 2018); • IAS 1: Amendment: Disclosure Initiative (EU effective date: 1 January 2016)*; • IAS 16: Amendment: Clarification of acceptable methods of depreciation and amortisation (EU effective date: 1 January 2016)*; • IAS 19: Amendments: Defined benefits plans (EU effective date: 1 February 2015)*; • IAS 27: Amendment: Equity method in separate financial statements (EU effective date: 1 January 2016)*; • IAS 38: Amendment: Clarification of acceptable methods of depreciation and amortisation (EU effective date: 1 January 2016)*; • annual improvement to IFRSs – 2010-2012 cycle (EU effective date: 1 February 2015)*; • annual improvement to IFRSs – 2012-2014 cycle (EU effective date: 1 January 2016)*.
Financial statem ents 1 Statement of accounting policies continued • IFRS 15 establishes a single comprehensive model for entities to use in accounting for revenue from contracts with customers.
Basis of presentation The group financial statements are prepared using the historical cost convention, with the exception of financial assets and derivative financial instruments which are stated at their fair value. All amounts presented are stated in US dollars and millions, unless stated otherwise.
The financial statements of Beazley plc have been prepared on a going concern basis. The directors of the company have a reasonable expectation that the group and the company have adequate resources to continue in operational existence for the foreseeable future.
The most critical estimate included within the group’s financial position is the estimate for insurance losses incurred but not reported. The total estimate net of reinsurers’ share as at 31 December 2015 is $1,930.3m (2014: $1,874.5m) and is included within total insurance liabilities and reinsurance assets in the statement of financial position.
Certain group subsidiaries underwrite as corporate members of Lloyd’s on syndicates managed by Beazley Furlonge Limited. In view of the several and direct liability of underwriting members at Lloyd’s for the transactions of syndicates in which they participate, only attributable shares of transactions, assets and liabilities of those syndicates are included in the group financial statements. The group continues to conclude that it remains appropriate to consolidate its share of the result of these syndicates and accordingly, as the group is the sole provider of capacity on syndicates 2623, 3622 and 3623, these financial statements include 100% of the economic interest in these syndicates. For the other syndicates to which Beazley is appointed managing agent, being syndicates 623, 6107 and 6050, for which the capacity is provided entirely by third parties to the group, these financial statements reflect Beazley’s economic interest in the form of agency fees and profit commission to which they are entitled. This judgement will be kept under review at each reporting date.
When the group’s share of losses equals or exceeds the carrying amount of the associate, the carrying amount is reduced to nil and recognition for the losses is discontinued except to the extent that the group has incurred obligations in respect of the associate.
Financial statem ents 1 Statement of accounting policies continued • income and expenses for each statement of profit or loss are translated at average exchange rates for the reporting period where this is determined to be a reasonable approximation of the actual transaction rates; and • all resulting exchange differences are recognised in other comprehensive income and as a separate component of equity.
On disposal of foreign operations cumulative exchange differences previously recognised in other comprehensive income are recognised in the statement of profit or loss as part of the gain or loss on disposal.
Insurance contracts Insurance contracts (including inwards reinsurance contracts) are defined as those containing significant insurance risk. Insurance risk is considered significant if, and only if, an insured event could cause Beazley to pay significant additional benefits in any scenario, excluding scenarios that lack commercial substance. Such contracts remain insurance contracts until all rights and obligations are extinguished or expire.
Deferred acquisition costs (DAC) Acquisition costs comprise brokerage, premium levy and staff-related costs of the underwriters acquiring new business and renewing existing contracts. The proportion of acquisition costs in respect of unearned premiums is deferred at the reporting date and recognised in later periods when the related premiums are earned.
The IBNR amount is based on estimates calculated using widely accepted actuarial techniques which are reviewed quarterly by the group actuary and annually by Beazley’s independent syndicate reporting actuary. The techniques generally use projections, based on past experience of the development of claims over time, to form a view on the likely ultimate claims to be experienced. 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.
Notes to the financial statements continued 1 Statement of accounting policies continued 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.
Dividends paid Dividend distributions to the shareholders of the group are recognised in the period in which the dividends are paid, as a first interim dividend, second interim dividend or special dividend, and approved by the group’s shareholders at the group’s annual general meeting.
d) IT development costs Costs that are directly associated with the development of identifiable and unique software products and that are anticipated to generate economic benefits exceeding costs beyond one year, are recognised as intangible assets. Costs include external consultants’ fees, certain qualifying internal staff costs and other costs incurred to develop software programs. These costs are amortised over their estimated useful life (three years) on a straight-line basis subject to impairment. Other non-qualifying costs are expensed as incurred.
The best evidence of the fair value of a financial instrument at initial recognition is the transaction price, i.e. the fair value of the consideration given or received, unless the fair value of that instrument is evidenced by comparison with other observable current market transactions in the same instrument (i.e. without modification or repackaging) or based on a valuation technique whose variables include only data from observable markets. When the transaction price provides the best evidence of fair value at initial recognition, the financial instrument is initially measured at the transaction price and any difference between this price and the value initially obtained from a valuation model is subsequently recognised in profit or loss depending on the individual facts and circumstances of the transaction but before the valuation is supported wholly by observable market data or the transaction is closed out.
Upon initial recognition, attributable transaction costs relating to financial instruments at fair value through profit or loss are recognised in the statement of profit or loss when incurred. Financial assets at fair value through profit or loss are continually measured at fair value, and changes therein are recognised in the statement of profit or loss. Net changes in the fair value of financial assets at fair value through profit or loss exclude interest and dividend income, as these items are accounted for separately as set out below.
g) Other receivables Other receivables categorised as loans and receivables and are carried at amortised cost less any impairment losses.
h) Investment income Investment income consists of dividends, interest, realised and unrealised gains and losses and foreign exchange gains and losses on financial assets at fair value through the statement of profit or loss. Dividends on equity securities are recorded as revenue on the ex-dividend date. Interest is recognised on an accrued basis for financial assets at fair value through the statement of profit or loss. The realised gains or losses on disposal of an investment are the difference between the proceeds and the original cost of the investment. Unrealised investment gains and losses represent the difference between the carrying value at the reporting date, and the carrying value at the previous period end or purchase value during the period.
i) Borrowings Borrowings are initially recorded at fair value less transaction costs incurred. Subsequently borrowings are stated at amortised cost and interest is recognised in the statement of profit or loss over the period of the borrowings using the effective interest method.
Financial statem ents 1 Statement of accounting policies continued k) Hedge accounting and derivative financial instruments Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at their fair value. The best evidence of fair value of a derivative at initial recognition is the transaction price. The method of recognising the resulting fair value gains or losses depends on whether the derivative is designated as a hedging instrument and, if so, the nature of the item being hedged. Fair values are obtained from quoted market prices in active markets, recent market transactions, and valuation techniques which include discounted cash flow models. All derivatives are carried as assets when fair value is positive and as liabilities when fair value is negative.
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.
Employee benefits a) Pension obligations The group operates a defined benefit pension plan that is now closed to future service accruals. The scheme is generally funded by payments from the group taking account of the recommendations of an independent qualified actuary. All employees now participate in defined contribution pension arrangements to which the group contributes.
The group also determines the net interest expense/(income) for the period on the net defined benefit liability/(asset) by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual period to the net defined benefit liability/(asset) at the beginning of the annual period, taking into account any changes in the net defined benefit liability/(asset) during the period as a result of contributions and benefit payments. Consequently, the net interest on the defined liability/(asset) comprises: • interest cost on the defined benefit obligation; • interest income on plan assets; and • interest on the effect of the asset ceiling.
b) Share-based compensation The group offers option plans over Beazley plc’s ordinary shares to certain employees, including the SAYE scheme.
Financial statem ents 1 Statement of accounting policies continued Earnings per share Basic earnings per share are calculated by dividing profit after tax available to shareholders by the weighted average number of ordinary shares in issue during the period.
The shares held in the employee share options plan (ESOP) and treasury shares are excluded from both the calculations, until such time as they vest unconditionally with the employees.
One of the largest types of event exposure relates to natural catastrophe events such as windstorm or earthquake. Where possible the group measures geographic accumulations and uses its knowledge of the business, historical loss behaviour and commercial catastrophe modelling software to assess the expected range of losses at different return periods. Upon application of the reinsurance coverage purchased, the key gross and net exposures are calculated on the basis of extreme events at a range of return periods.
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 2014 and 2015 are: Unaudited 2015
Los Angeles quake (2015: $78.0bn) 630.0 224.8 Gulf of Mexico windstorm (2015: $112.0bn) 563.7 222.7 US Northeast windstorm (2015: $78.0bn) 488.2 220.5
The net of reinsurance exposures to the above Lloyd’s RDS events have reduced during 2015 mainly due to additional reinsurance being purchased in the reinsurance division. In the property division, there has been growth in exposure in some regions which has led to an increase in the gross losses for the Los Angeles quake and Gulf of Mexico windstorm 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 2015, 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.
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.
All underwriters also have a right to refuse renewal or change the terms and conditions of insurance contracts upon renewal. Rate monitoring details, including limits, deductibles, exposures, terms and conditions and risk characteristics are also captured and the results are combined to monitor the rating environment for each class of business.
Operating divisions In 2015, the group’s business consisted of six operating divisions. The following table provides a breakdown of gross premiums written by division, and also provides a geographical split based on placement of risk.
The group also has subsidiaries 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 subsidiaries. It also gives rise to a currency translation exposure for the group to sterling, Singapore dollars and Australian dollars on translation to the group’s presentational currency, although these exposures are minimal.
Impact on profit after tax for the year ended Impact on net assets
Dollar weakens 30% against other currencies (12.3) 11.9 (25.7) 22.8 Dollar weakens 20% against other currencies (8.2) 7.9 (17.1) 15.2 Dollar weakens 10% against other currencies (4.1) 4.0 (8.6) 7.6 Dollar strengthens 10% against other currencies 4.1 (4.0) 8.6 (7.6) Dollar strengthens 20% against other currencies 8.2 (7.9) 17.1 (15.2) Dollar strengthens 30% against other currencies 12.3 (11.9) 25.7 (22.8)
Notes to the financial statements continued 2 Risk management continued b) Interest rate risk Some of the group’s financial instruments, including cash and cash equivalents, certain financial assets at fair value and borrowings, are exposed to movements in market interest rates.
Change in fair value of hedge funds, equity linked funds and illiquid credit assets d) Investment risk Managing investment risk is central to the operation and development of our investment strategy. Our internal model includes an asset risk module, which uses an Economic Scenario Generator (ESG) to simulate multiple simulations of financial conditions, to support stochastic analysis of investment risk. We use internal model outputs to assess the Value at Risk (VAR) of our investments, at different confidence levels, including ‘1 in 200’, which reflects Solvency II modelling requirements, and ‘1 in 10’, identifying a level of investment losses which are more likely to occur in practice. Risk is typically considered to a 12 month horizon. It is assessed for investments in isolation and also in conjunction with net present value of our insurance liabilities, to help us monitor and manage market risk across both sides of the balance sheet.
There are a number of business activities for which the group uses the services of a third-party company, such as investment management, 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.
Tier 1 A++ to A- Aaa to A3 AAA to ATier 2 B++ to B- Baa1 to Ba3 BBB+ to BBTier 3 C++ to C- B1 to Caa B+ to CCC Tier 4 D, E, F, S Ca to C R, (U,S) 3
Financial statem ents 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
Financial assets at fair value – fixed and floating rate debt securities 3,008.5 251.2 9.1 – – 3,268.8 – equity linked funds – – – – 147.5 147.5 – hedge funds – – – – 329.0 329.0 – illiquid credit assets – – – – 92.3 92.3 – derivative financial instruments – – – – 4.6 4.6 Insurance receivables – – – – 732.7 732.7 Reinsurance assets 1,099.7 – – – – 1,099.7 Other receivables 31.5 – – – – 31.5 Cash and cash equivalents 676.9 – – – – 676.9
Tier 1 $m Tier 2 $m Tier 3 $m Tier 4 $m Unrated $m Total $m
The largest counterparty exposure within tier 1 is $568.6m of US Treasuries (2014: $426.6m).
An analysis of the overall credit risk exposure indicates that the group has reinsurance assets that are impaired at the reporting date. The total impairment in respect of the reinsurance assets at 31 December 2015 was as follows: Individual impairment $m
Notes to the financial statements continued 2 Risk management continued The group has insurance receivables and reinsurance assets that are past due at the reporting date. An aged analysis of these is presented below: Up to 30 days past due $m 30-60 days past due $m 60-90 days past due $m
The total impairment provision in the statement of financial position in respect of reinsurance assets past due by more than 30 days at 31 December 2015 was $3.3m (2014: $3.5m).
* For a breakdown of net claims liabilities refer to note 24.
2.8 Group risk † Group risk occurs where business units fail to consider the impact of their activities on other parts of the group, as well as the risks arising from these activities. There are two main components of group risk which are explained below.
Political risks & contingency This segment underwrites terrorism, political violence, expropriation and credit risks as well as contingency and risks associated with contract frustration.
Net earned premiums 103.0 282.6 96.9 287.9 160.1 728.4 1,658.9 Net investment income 1.0 8.9 3.8 10.2 7.8 51.3 83.0 Other income 1.0 3.4 1.8 6.6 3.8 10.0 26.6 Revenue 105.0 294.9 102.5 304.7 171.7 789.7 1,768.5
Net insurance claims 62.2 106.6 25.7 121.3 60.0 442.1 817.9 Expenses for the acquisition of insurance contracts 33.9 78.3 29.2 87.1 35.6 177.1 441.2 Administrative expenses 13.9 36.8 20.4 39.9 14.9 91.8 217.7 Foreign exchange loss 0.8 2.1 0.7 2.1 1.2 5.4 12.3 Expenses 110.8 223.8 76.0 250.4 111.7 716.4 1,489.1
Additional information Investment in associates – – 2.8 – – 7.7 10.5 Impairment of non-financial assets – – – – – – –
Amortisation and depreciation (0.4) (1.3) (0.6) (1.1) (1.1) (2.5) (7.0) Net cash flow (0.5) (5.4) (2.4) (2.3) (1.6) (6.3) (18.5)
Notes to the financial statements continued 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 and US earned premium represents all risks placed at the group’s US insurance company, Beazley Insurance Company, Inc. An analysis of gross premiums written split geographically by placement of risk and by reportable segment is provided in note 2 on page 129.
Other than the fees disclosed above, no other fees were paid to the company’s auditor.
Current tax expense Current year 44.6 95.6 Prior year adjustments (8.8) 5.5
Deferred tax expense Origination and reversal of temporary differences (2.9) (55.2) Impact of change in UK tax rates (0.2) 0.4 Prior year adjustments 2.3 (2.2)
Profit before tax 284.0 261.9 Tax calculated at Irish rate 35.5 32.7 Rates applied 12.5% 12.5%
Diluted Diluted earnings per share are calculated by dividing profit after tax of $249.0m (2014: $217.8m) by the adjusted weighted average number of shares of 527.3m (2014: 521.2m). The adjusted weighted average number of shares assumes conversion of dilutive potential ordinary shares, being shares from the SAYE, retention and deferred share schemes. The shares held in the ESOP of 9.7m (2014: 16.0m) have been excluded from the calculation, until such time as they vest unconditionally with the employees.
11 Dividends per share A second interim dividend of 6.6p per ordinary share (2014: 6.2p) and a special dividend of 18.4p (2014: 11.8p) will be payable on 31 March 2016 to Beazley plc shareholders registered at 5.00pm on 26 February 2016 in respect of the six months ended 31 December 2015. The company expects the total amount to be paid in respect of the second interim and special dividend to be approximately £127.9m. These financial statements do not provide for the second interim dividend and the special dividend as a liability.
Together with the interim dividend of 3.3p (2014: 3.1p) this gives a total dividend for the year of 28.3p (2014: 21.1p).
The aforementioned interim and special dividends will be payable on 31 March 2016 to shareholders registered at 5.00pm on 26 February 2016 (save to the extent that shareholders on the register of members on 26 February 2016 are to be paid a dividend by a subsidiary of the company (being Beazley DAS Limited) resident for tax purposes in the United Kingdom pursuant to elections made or deemed to have been made and such shareholders shall have no right to this second interim dividend).
Financial statem ents 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. They are allocated to the group’s cash-generating units (CGUs) as follows: Life, accident & health $m Marine $m
Notes to the financial statements continued 13 Plant and equipment Company Group
Financial statem ents 14 Investment in associates continued The aggregate financial information for all associates (100%) is as follows: $m $m
Loss after tax (1.1) (2.3) Share of other comprehensive income – – Share of total comprehensive income (1.1) (2.3)
All of the investments in associates are unlisted and are equity accounted using available financial information as at 31 December 2015. Equinox Global Limited and Capson Corp Inc are both insurance intermediaries. Falcon Management Holdings Limited is an investment management company which also acts in an intermediary capacity.
The company’s investment in associates consists of: Company Country of incorporation % interest held Carrying value $m
Profit after tax – – Share of other comprehensive income – – Share of total comprehensive income – –
Financial assets at fair value Fixed and floating rate debt securities: – Government issued 1,101.0 820.1 – Quasi-government 362.8 585.7
– Corporate bonds – Investment grade 1,215.8 1,111.5 – High yield 68.3 80.1 – Senior secured loans 114.9 101.5 – Asset backed securities 12.7 378.6 Total fixed and floating rate debt securities 3,268.8 3,517.3
Equity linked funds 147.5 145.9 Hedge funds 329.0 367.0 Illiquid credit assets 92.3 45.9 Total capital growth assets 568.8 558.8 Total financial investments at fair value through statement of profit or loss 3,837.6 4,076.1
Quasi-government securities include securities which are issued by government agencies or entities supported by government guarantees. Supranational securities are issued by institutions sponsored by more than one sovereign issuer. Investment grade credit assets are any corporate bonds rated as BBB-/Baa3 or higher by one or more major rating agency, while the remainder of our corporate bonds are rated as high yield. Asset-backed securities are backed by financial assets, including mortgage, credit card and auto loan receivables Equity linked funds are investment vehicles which are predominantly exposed to equity securities. Broadly speaking, we would expect the returns in our equity linked funds to track returns seen on worldwide, and particularly the US, stock markets. Our illiquid credit assets are described in further detail below. The fair value of these assets at 31 December 2015 excludes an unfunded commitment of $95.3m (2014: $89.8).
Retail bond 112.3 115.8 Subordinated debt 18.0 18.0 Tier 2 subordinated debt 116.9 122.5 Derivative financial liabilities 0.1 0.5 Total financial liabilities 247.3 256.8
The amounts expected to mature before and after one year are: Within one year 117.0 0.5 After one year 130.3 256.3
Notes to the financial statements continued 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 (WM), Discount Margins (DM), Default rates, and recovery and prepayment assumptions for mortgage securities. While such valuations are sensitive to estimates, it is believed that changing one or more of the assumptions to reasonably possible alternative assumptions would not change the fair value significantly.
For our hedge funds and equity linked funds, the pricing and valuation of each fund is undertaken by administrators in accordance with each underlying fund’s valuation policy. For the equity linked funds, the individual fund prices are published on a daily or weekly basis via Bloomberg and other market data providers such as Reuters. For the hedge funds, the individual fund prices are communicated by the administrators to all investors via the monthly investor statements. The fair value of the hedge fund and equity linked fund portfolios are calculated by reference to the underlying net asset values of each of the individual funds.
Additional information is obtained from fund managers relating to the underlying assets within individual hedge funds and equity linked funds. We identified that 68% (2014: 59%) of these underlying assets were level 1 and the remainder level 2. This enables us to categorise hedge funds as level 2.
Notes to the financial statements continued 16 Financial assets and liabilities continued
Financial liabilities measured at fair value Derivative financial liabilities 0.5 – – 0.5
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 at 31 December 2015 the investments comprising the group’s unconsolidated structured entities are as follows: $m $m
Financial statem ents 16 Financial assets and liabilities continued Transfers and level 3 investment reconciliations There were no transfers in either direction between level 1, level 2 and level 3 in either 2014 or 2015.
The currency exposures of our financial assets held at fair value are detailed below: UK £
The above qualitative and quantitative disclosure along with the risk management discussions in note 2 enables more comprehensive evaluation of Beazley’s exposure to risks arising from financial instruments.
Foreign exchange forward contracts The group entered into over-the-counter foreign exchange forward agreements in order to hedge the foreign currency exposure resulting from transactions and balances held in currencies that are different to the functional currency of the group.
Total cash and cash equivalents include $56.2m (2014: $42.2m) held in Lloyd’s Singapore trust accounts. These funds are only available for use by the group to meet local claim and expense obligations.
Ordinary shares of 5p each Authorised 700.0 55.8 700.0 55.8 Issued and fully paid 521.4 41.6 521.4 41.6
The employee share option reserve is held in accordance with IFRS 2 share-based payment. For more information refer to note 23.2.
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 to the sixth anniversary, and each year after that, 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), approved share option plan and SAYE plan that entitle employees to purchase shares in the group.
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; • ROE – return on equity, based on the average marine divisional pre-tax return on equity (ROE) over the performance period; • 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; and • TSR comparator – the group’s TSR growth is compared with that of members of the comparator group over a three-year period starting with the year in which the award is made.
Forfeited during the year 61.3 (0.4) 143.0 (0.1) Exercised during the year 14.1 (6.6) 13.2 (2.9) Granted during the year 29.8 5.5 54.9 4.4
The share option programme allows group employees to acquire shares of the company. The fair value of options granted is recognised as an employee expense with a corresponding increase in the employee share options reserve. The fair value of the options granted is measured at grant date and spread over the period in which the employees become unconditionally entitled to the options. The fair value of the options granted is measured using the Black Scholes model, taking into account the terms and conditions upon which the options were granted. The amount recognised as an expense is adjusted to reflect the actual number of share options that vest.
Weighted average share price (pence per option) 230.7 182.8 Weighted average exercise price (pence per option) 22.1 17.9 Average expected life of options 4.6yrs 4.7yrs Expected volatility 25.0% 25.0% Expected dividend yield 3.4% 3.8% Average risk-free interest rate 2.1% 2.1%
Recoverable from reinsurers Claims reported and loss adjustment expenses 210.3 195.0 Claims incurred but not reported 658.1 665.7 Reinsurers’ share of claims liabilities 868.4 860.7 Unearned premiums 231.3 192.5 Total reinsurers’ share of insurance liabilities 1,099.7 1,053.2
Net Claims reported and loss adjustment expenses 727.2 789.7 Claims incurred but not reported 1,930.3 1,874.5 Net claims liabilities 2,657.5 2,664.2 Unearned premiums 829.5 830.0 Total insurance liabilities, net 3,487.0 3,494.2
Claims reported and loss adjustment expenses 984.7 (195.0) 789.7 1,023.0 (253.7) 769.3 Claims incurred but not reported 2,540.2 (665.7) 1,874.5 2,597.5 (724.7) 1,872.8
Increase in claims – Arising from current year claims 1,218.4 (228.3) 990.1 1,156.5 (180.5) 976.0 – Arising from prior year claims (244.6) 68.3 (176.3) (257.0) 98.9 (158.1)
Notes to the financial statements continued 24 Insurance liabilities and reinsurance assets continued 24.2 Assumptions, changes in assumptions and sensitivity 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.
The expected loss ratio method uses a benchmark/market-based estimate applied to the expected premium and is used for classes with little or no relevant historical data.
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.
Where significant large losses impact an underwriting year (e.g. the events of 11 September 2001, the hurricanes in 2004, 2005, 2008 and 2012, or the earthquakes in 2010 and 2011), 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.
Financial statem ents 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.
c) Changes in assumptions As already discussed, general insurance business requires many different assumptions. The diagram below illustrates the main categories of assumptions used for each underwriting year and class combinations.
While the information in the table provides a historical perspective on the adequacy of the claims liabilities established in previous years, users of these financial statements are cautioned against extrapolating past redundancies or deficiencies on current claims liabilities. The group believes that the estimate of total claims liabilities as at 31 December 2015 is adequate. However, due to inherent uncertainties in the reserving process, it cannot be assured that such balances will ultimately prove to be adequate.
Less unearned portion of ultimate losses ($m) – – – – – – – – – (18.3) (628.0) (646.3)
Net claims liabilities, group share ($m) 84.9 45.2 83.9 109.2 121.9 155.6 199.6 286.6 489.4 643.3 437.9 2,657.5 24 Insurance liabilities and reinsurance assets continued
Notes to the financial statements continued 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 2015 for each underwriting year.
Political risks & contingency The 2014 underwriting year saw a significant improvement as the experience on the terrorism book continues to be positive compared to the opening position. All other underwriting years remained stable or had slight improvements.
Property There has been positive developments across all underwriting years, driven by better than expected claims experience, including relatively benign natural catastrophe experience on the 2014 underwriting year.
Specialty lines 2006 and prior underwriting years continued to improve as certainty on the remaining claims increased. The recession exposures underwriting years of 2007 to 2011 have remained stable, with small increases on the 2008 and 2009 underwriting years. 2012 has continued to release as this year matures, and 2013 onwards have remained stable.
Financial statem ents 24 Insurance liabilities and reinsurance assets continued Claim releases The table below analyses our net claims between current year claims and adjustments to prior year net claims reserves. These have been broken down by department 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 2015.
The net of reinsurance estimates of ultimate claims costs on the 2014 and prior underwriting years have improved by $176.3m during 2015 (2014: $158.1m). 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 and anticipating any changes as a result of the new business written.
Notes to the financial statements continued 25 Borrowings The carrying amount and fair values of the non-current borrowings are as follows: Group $m $m
Carrying value Subordinated debt 18.0 18.0 Tier 2 subordinated debt 116.9 122.5 Retail bond 112.3 115.8
Fair value Subordinated debt 18.0 18.0 Tier 2 subordinated debt 119.7 127.1 Retail bond 114.4 124.7
In October 2006, the group issued £150m of unsecured fixed/floating rate subordinated notes that are due in October 2026 with a first call at the group’s option in October 2016. Interest of 7.25% per annum is paid annually in arrears for the period up to October 2016. From October 2016, the notes will bear annual interest at the rate of 3.28% above LIBOR.
Reinsurance premiums payable 159.1 115.2 Accrued expenses including staff bonuses 142.3 111.9 Other payables 118.5 2.0 Deferred consideration payable on acquisition of MGAs 1.8 5.3 Due to syndicate 6107 34.8 21.1 Due to syndicate 623 2.9 – Due to syndicate 6050 3.9 –
All other payables are payable within one year of the reporting date other than $0.7m of the deferred consideration which is payable after one year. The carrying value approximates fair values. The balance at 31 December 2015 was $463.3m (2014: $255.5m). In order to meet with the accelerated regulatory reporting deadlines under Solvency II, Beazley now makes an earlier determination of how much of reinsurance premium and claims creditors are payable rather than paid. While reinsurance purchased has increased materially in 2015, our Solvency II reporting changes have been a key contributor to the overall increase in other payables.
Present value of funded obligations 43.1 43.6 Fair value of plan assets (42.4) (41.0) Retirement benefit liability in the statement of financial position 0.7 2.6
Notes to the financial statements continued 27 Retirement benefit obligations continued $m $m
At 31 December 2015, the weighted-average duration of the defined benefit obligation was 11.4 years (2014: 12.4 years).
The group received management fees and profit commissions for providing a range of management services to syndicates 623, 6107 and 6050, which are all managed by the group. In addition, the group ceded portions or all of a group of insurance policies to both syndicates 6107 and 6050. The participants on syndicates 623, 6107 and 6050 are solely third party capital.
Written premium ceded to syndicates 53.2 23.7 Other income received from syndicates 28.2 25.6 Services provided 39.2 41.0
Salaries and other short term benefits 21.0 21.0 Post-employment benefits 0.7 0.9 Share-based remuneration 12.7 13.5
Further details of directors’ shareholdings and remuneration can be found in the directors’ remuneration report on pages 85 to 106.
Financial statem ents 30 Related party transactions continued 30.3 Other related party transactions At 31 December 2015, the group had a balance payable to an associate (Falcon Money Management Limited) of $0.1m (2014: payable $0.9m) and purchased services from the associate of $2.6m (2014: $9.4m) throughout the year. All transactions with the associate and subsidiaries are priced on an arm’s length basis. During the year Beazley loaned $1.5m at an interest rate of 5.25% p.a to our associate Equinox Global Limited. The outstanding balance on this loan at 31 December 2015 is $1.5m and will be repayable by 2018. During 2014, Beazley invested $1.6m in Capson Corp inc and $1.6m in Equinox Global Limited (to support this associate’s ongoing operations following a significant loss which occurred in late 2014).
** Swift No.1 Limited and Swift No.2 Limited were dissolved effective 5 January 2016.
Notes to the financial statements continued 32 Contingencies 32.1 Funds at Lloyd’s The following amounts are controlled by Lloyd’s to secure underwriting commitments.
Claims ratio Ratio, in percentage terms, of net insurance claims to net earned premiums. The calculation is performed excluding the impact of foreign exchange.
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.
Coverholder/managing general agent A firm either in the United Kingdom or overseas authorised by a managing agent under the terms of a binding authority to enter into contracts of insurance in the name of the members of the syndicate concerned, subject to certain written terms and conditions. A Lloyd’s broker can act as a coverholder.
Earnings per share (EPS) – basic/diluted Ratio, in pence and cents, calculated by dividing the consolidated profit after tax by the weighted average number of ordinary shares issued, excluding shares owned by the group. For calculating diluted earnings per share the number of shares and profit or loss for the year is adjusted for certain dilutive potential ordinary shares such as share options granted to employees.
Line The proportion of an insurance or reinsurance risk that is accepted by an underwriter or which an underwriter is willing to accept.
Net assets per share Ratio, in pence and cents, calculated by dividing the net assets (total equity) by the number of shares issued.
Solvency Capital Requirement on an ultimate basis (uSCR) The capital requirement under Solvency II calculated by Beazley’s internal model which captures the risk in respect of the planned underwriting for the prospective year of account in full covering ultimate adverse development and all exposures.
• The ability to scale our operations to ensure that client and broker service keep pace and, wherever possible, improve as the company grows
• Reserve risk: The risk that the reserves put aside for claims to be settled in the future turn out to be insufficient
Our approach to managing these and other risks is described in detail on page 52
The second interim dividend in 2015 is in line with our dividend strategy and has grown by 6%. In addition we are paying a special dividend of 18.4p.
Designed and produced by: Instinctif Partners www.instinctif.com 6749 Beazley AR Cover 2015.indd 3-6 04/02/2016 11:25