You can find out more about our ‘sustaining growth’ strategy where you see this symbol.
Sustaining growth requires sustained investment. Our strong premium growth in 2018 was the result of continuous investment in our people, technology and global office network over many years. This investment continues.
Strategic report IFC Highlights Our key performance indicators 1 Our key differentiators 2 Entrepreneurial spirit 3 Strong partnerships 4 Diversified business 8 Our business model and strategy 10 Sustaining growth 14 Sustainability overview 16 Chairman’s statement 18 Chief executive’s statement 22 Q&A with the chief executive 24 Chief underwriting officer’s report 26 Performance by division 28 Marine 30 Political, accident & contingency 32 Property 34 Reinsurance 36 Specialty lines 38 Sustained profitable growth 40 Financial review 40 Group performance 46 Balance sheet management 48 Capital structure 50 Operational update 53 Risk management 59 Sustainable business 74 Directors’ report
Governance 79 Letter from our chairman 80 Board of directors 84 Investor relations 85 Statement of corporate governance 100 Letter from the chairman of our remuneration committee 101 Directors’ remuneration report 121 Statement of directors’ responsibilities 122 Independent auditor’s report
The interim and second interim dividend for 2018 is in line with our dividend strategy and has grown by 5%.
Average five year return on equity of 14%. Our combined ratio has averaged 92% over five years.
We create value through the implementation of three key differentiators – consistently applied and nurtured across our specialist insurance operations around the world
“ We’ve built a billion dollar business in the US in 14 years, based on our ability to respond quickly and creatively to the challenges brokers and clients bring us. The growth opportunities open to us today are greater than ever.”
For the second year in a row, natural catastrophe activity was relatively intense in 2018, testing the diversification of our underwriting portfolio. As it had in 2017, the portfolio – and the principles on which it was built – stood up well, generating a combined ratio of 98%.
Not all of the areas of diversification within Beazley’s portfolio are obvious. For example, large risks and small risks in a particular line of business tend to perform quite differently as the supply and demand of insurance fluctuates. Large risks tend to be more volatile, with greater swings between the peaks and troughs of the insurance cycle, whereas small risks are generally more stable. A judicious mix of large and small business can thus help optimise an insurer’s risk adjusted return.
Find out more on pages 30 to 31 Find out more on pages 28 to 29
Specialty lines Specialty lines comprises management liability and professional liability risks, including cyber liability, underwritten for clients on both a primary and excess basis worldwide. Our clients are served both by our underwriters at Lloyd’s and by our local underwriters in hubs around the world.
Find out more on pages 34 to 35 Find out more on pages 32 to 33 Find out more on pages 36 to 37
London Market Explore ways of promoting London as a great place to write specialist insurance while improving the efficiency of the London market (Lloyd’s and company market). Also ensure the market continues to obtain the most value for our clients, brokers and shareholders. Enhance ways that the London market can generate access to business and capital more efficiently.
Given the nature of Beazley’s business, the key risks that impact financial performance arise from insurance activities and fall into the following categories: • Market cycle risk: The risk of systematic mispricing of the medium tailed specialty lines business which could arise due to a change in the US tort environment, changes to the supply and demand of capital, and companies using incomplete data to make decisions; • Natural catastrophe risk: The risk of one large event caused by nature affecting a number of policies and therefore giving rise to multiple losses. Given Beazley’s risk profile, this could be a hurricane, major windstorm or earthquake; • Non-natural catastrophe risk: This risk is similar to natural catastrophe risk except that multiple losses arise from one event caused by mankind. Given Beazley’s risk profile, examples include a coordinated cyber attack, an act of terrorism, an act of war or a political event; • Reserve risk: The risk that the reserves put aside for claims to be settled in the future turn out to be insufficient; and
• Market (asset) risk: The risk that the value of investments could be adversely impacted by movements in interest rates, exchange rates, default rates or external market forces.
For shareholders We measure our value creation for shareholders through earnings per share, the growth of net assets per share, and total shareholder returns in dollars as this is the currency of the majority of our transactions. Underpinning our strong results against all of these metrics has been our consistently strong underwriting performance, reflected in our combined ratio. Our combined ratio in 2018, a year of high natural catastrophes, was 98%. In the five years prior to 2018 it averaged 90%.
Our approach to managing these and other risks is described in detail on pages 53 to 58
Obtaining growth Growth for insurance companies rarely proceeds in a straight line and, when it does, it does not usually bode well for investors. Market conditions, particularly for catastrophe exposed risks, can swing wildly and a disciplined insurer will adjust its exposures accordingly. In 2010 and 2011, Beazley’s premiums overall declined by 2% as intense competition in many lines of business and the global recession following the 2008 financial crisis took their toll. However in 2012, the business bounced back with double digit premium growth and record profits. Since 2012, Beazley’s top line has grown by an average of 6% annually.
Most of this growth has been organic, which Beazley generally favours over growth by acquisition. One exception was the business derived through the acquisition of Creechurch Underwriters in February 2017, a managing agency in Canada that Beazley had supported since its establishment in 1996. This acquisition has afforded Beazley a strong platform for growth in the Canadian market that would have been difficult and time-consuming to build from scratch.
“Our acquisition of Creechurch has been very successful,” says Beazley’s CEO Andrew Horton. “But in the main we focus on organic growth because it is more sustainable and poses less of a risk of nasty surprises. We have been fortunate at Beazley in being able to attract some talented individuals from other companies that have become quite internally focused due to large scale mergers and complex corporate reorganisations.”
Although organic growth means the company does not have to invest in the purchase of businesses, it does require continuous investment. Beazley has been investing in technology to enhance the productivity of underwriters and improve the service provided to clients and brokers.
1 Beazley’s underwriters also write on behalf of syndicate 623, a syndicate managed by Beazley but backed by third party capital. As such, $114.5m of locally underwritten US premium does not remain within the Beazley plc group.
Investment in people In the past two years, Beazley has added 99 underwriters to develop business around the world outside the US, against 43 actually within the US. There is no expectation that the pace of growth in the US will slacken, but the overall geographic mix of the portfolio is likely to diversify further as Beazley grows into other markets.
Beazley’s new hires in Europe and elsewhere are often multiline underwriters able to write a range of specialty risks. Their ability to do this (which represents a departure from Beazley’s historic single line underwriter model) is supported by technology that marshals underwriting data more efficiently and shortens response time for brokers’ submissions. Particularly for small risks, speed of response is often the main determinant of winning business.
Gearing up for activity based working: artist’s impression of Twentytwo Bishopsgate, Beazley’s London headquarters from 2020
In the course of this transformation, the skills required of Beazley’s underwriters – and within the company as a whole – will change. Beazley has historically relied upon hiring experienced underwriters who have brought all the capabilities needed to the job, together with strong pre-existing broker relationships.
The company continues to hire such individuals, but is now also beginning to train up underwriters in their first or second role.
Amongst others, Beazley’s Birmingham office houses members of the company’s global IT team who have been focusing on robotics technology that promises significant efficiency gains over time. The goal of the Beazley Digital strategic initiative launched in 2018 is to introduce ‘no touch’ processing for most small business transacted by Beazley, and robotics will be key to this transformation.
Insurance is an essential enabler of human and economic activity. Without insurance, the risks inherent in many endeavours could prohibit development and innovation. The consequences of risk events would be unmitigated. We are there to protect our clients’ physical and financial interests in the event that things go wrong. In this sense insurance is a force for progress.
However, we must also be sensitive to the undesirable side effects – what economists call ‘externalities’ – that may accompany economic growth. At Beazley, our underwriters and our investment professionals are sensitive to these externalities. Before binding any risks, our underwriters consider the risks being presented in the widest possible sense, including the potential social and environmental impact of the insurance in question.
In recognition of the importance of transparency in ESG performance, we will be making this report available as a standalone document for the first time this year.
Maximising and measuring our impact Underwriting strategy Before binding any risks, our underwriters consider the risks being presented in the widest possible sense, including the potential social and environmental impact of the insurance in question.
Investment strategy Through our investment strategy, we seek to have a positive influence on society and the world at large and we accordingly consider environmental, social and governance (ESG) risks in our decision making.
Environmental Beazley has reported its environmental impacts under the insurance sector’s ClimateWise initiative since 2007.
Local communities In 2018, more than 550 Beazley employees around the world participated in a wide range of activities in support of the communities where they work and live, helping young people and vulnerable adults, and restoring local parks and community gardens.
Beazley delivered strong premium growth in 2018 against a backdrop of often challenging market conditions, with premiums rising 12% to $2,615.3m (2017: $2,343.8m). Profitability was impacted by underwriting losses in our property insurance and reinsurance business, which fed into a combined ratio for the group of 98% (2017: 99%), as well as a sharply lower investment return. The company generated a return on average shareholders’ equity of 5% (2017: 9%).
After 2017’s exceptional catastrophe experience, 2018 was only slightly less eventful. There were two hurricanes in the US, Florence and Michael, and two typhoons in Japan, Jebi and Trami, and in November, California experienced massively destructive wildfires for the second year in a row.
We are constantly mindful of the human cost of these traumatic events and the need to act swiftly to help communities and companies rebuild and recover. By year end we had disbursed $110m in funds to clients afflicted by 2018’s natural catastrophes.
I took over as chairman from Dennis Holt in March 2018. In the six years of Dennis’s tenure as chairman, Beazley grew premiums by 37% and generated annual shareholder returns of 31%, a quite remarkable track record. On behalf of the board I would like to thank Dennis for his leadership and wish him well for the future.
I am delighted that Christine LaSala will assume the role of senior independent director upon George’s retirement from the board. Christine has a long and distinguished career in the insurance industry and has already made a significant contribution to the board.
Neil Maidment also retired from the board, and as our chief underwriting officer, at the end of 2018. Neil has made an inestimable contribution over his 28 years at Beazley, for which I am very grateful. We wish him every success and fulfilment in his future ventures.
Beazley has thrived as a specialist insurer for more than three decades by offering brokers products that are well designed to meet their clients’ most pressing needs. These skills will continue to be important in the years ahead. However Beazley will additionally need to show itself as a leader in redesigning insurance business processes in a market that is ripe for structural change. I am confident that Beazley possesses the skills and the vision to make this leap.
Beazley’s claims teams worked tirelessly in 2018 to provide the swift and supportive claims service expected by all of our clients.
Developing a strong foothold in new markets often takes time. Our US accident and health business is a case in point. In recent years, the soaring cost of health benefits to US companies has generated strong demand for ‘supplemental health’ offerings to employees that are either partly funded by employers or wholly funded by employees. This has not historically been a target market for Beazley and it has taken time to develop the relationships needed to win a share of this business. Under the leadership of Brian Thompson, our US team began to gain real traction in this market in 2017 and this continued into 2018, when we wrote $20.6m.
At the beginning of 2019, Adrian Cox succeeded Neil Maidment as Beazley’s chief underwriting officer. Adrian is exceptionally well qualified to assume the role, having run our largest division, specialty lines, since 2008. From the beginning of 2019, we have split this division – which accounted for 56% of our total premiums in 2018 – into two. The new divisions are headed by seasoned Beazley underwriters: one, under the leadership of James Eaton, will continue to be called specialty lines, while the other, under the leadership of Mike Donovan, has been named cyber & executive risk (CyEx).
Jerry Sullivan, who leads our professions group within specialty lines, is one of the four individuals joining the executive committee during 2019 replacing Mark as the chairman of our US management committee.
Investment performance Beazley’s investment returns fell to $41.1m or 0.8% in 2018 (2017: $138.3m, or 2.9%), mainly due to a series of interest rate hikes in the US that only generated a modest return for our fixed income portfolio, which accounted for 81% (2017: 76%) of our total investments at year end. A higher US dollar interest rate does, however, mean that the longer term outlook for these investments is more positive than it has been for a number of years.
Our capital growth investments, accounting for 12% of our portfolio at year end (2017: 15%), suffered from the very adverse market conditions that affected many asset classes, generating a loss of 1% (2017: return of 11%). This performance could have been materially worse had our investment team, led by Stuart Simpson, not prudently reduced our exposure to equities part way through the year.
The latest chief risk officer report to the board confirmed that the control environment has not identified any significant failings or weaknesses in key processes and that Beazley is operating within risk appetite as at 31 December 2018.
It is perhaps fitting that our new Birmingham office houses our robotics team, whose work will free up many of our people’s time from repetitive tasks. Our watchword, reflected in the design of our new offices, is flexibility. Beazley has thrived as a specialist insurer by being quicker than competitors to spot opportunities and more decisive in grasping them. The investments we have been making and the strategic initiatives we launched last year are designed to ensure that we can maintain this competitive edge in the years to come.
A Syndicate 5623 focuses on underwriting entire portfolios of business, or shares of portfolios of business. Its aim is to be a low cost operation attracting third party capital delivering reasonable returns with limited volatility. 2018 was the first year of operation and we are pleased with the access we have had to a range of business and, while it is early, we are comfortable with its profitability at this stage. We are aiming to grow 5623 by two and a half times in 2019 and if the model works we will continue to grow this business going forward. The aim of the syndicate is to offer a low cost mechanism for placing follow business within the Lloyd’s market. If we can all work to reduce the cost of transacting business in London then we will be able to attract more business into the Lloyd’s market.
Q After two years of exceptionally severe wildfires in California, do you see this peril as insurable?
A I think the industry has been surprised at the size of the Californian wildfire losses in 2017 and 2018. If these are going to be regular events in the future then the pricing and structure of insurance covering losses such as these will need to change. There is always a balance between not over-reacting to two years of unusual losses versus ensuring technical pricing properly reflects risk, rather than assuming similar events will not happen in the future.
Q Do you see any adverse effects for Beazley from Brexit?
A Applying hindsight to set an investment strategy for now which would have worked perfectly a year ago is a classic trap to be avoided. We have a consistent approach and a good balance within our investment portfolio of treasuries, corporate fixed income, and capital growth assets. We concentrate on optimising the return we can get over time given our limited risk appetite. Our focus is being an underwriting company and our aim is to deliver best in class underwriting profits across the cycle together with creditable investment returns.
With 2018 being another year of significant natural catastrophes we were pleased that we could record an underwriting profit. Maintaining a diverse portfolio once again showed its value, as the group as a whole was able to compensate for the claims experienced in our catastrophe exposed lines of business.
As is inevitably the case with natural catastrophe claims, our reinsurance and property teams were hardest hit with the former registering claims of $97.7m (2017: $97.5m). The claims were in the reinsurance division’s expectation for such events, with the division recording a combined ratio of 103% (2017: 107%).
We have maintained our philosophy of setting prudent claims reserves initially. In aggregate, the current cost of the 2017 events is within our original estimates albeit there have been some variances at a divisional level.
Our property division saw overall premiums increase 14% to $415.4m for 2018 (2017: $362.9m) driven by the double digit rate increase of 10%. However, the active claims market in 2018, with claims arising from the 2018 natural catastrophes as well as a higher level of attritional claims from prior underwriting years, meant that the property division recorded an overall loss of $80.4m for 2018 (2017: loss of $68.3m). The division also decided to cease underwriting construction and engineering business during the year since it was concluded, following close scrutiny of the plans for this product over a number of years, that it would be unlikely to satisfy our cross-cycle profitability requirements in the foreseeable future. This business accounted for approximately 10% of the division’s premiums in 2017.
Our political, accident & contingency division achieved strong top line growth with an increase of 11% to $238.7m (2017: $214.3m). We were pleased in particular with the development of our US accident and health business which is focused on the growing supplemental health cover market. It was also pleasing to see all of the lines of business performing well in 2018, generating an improved combined ratio for the division of 90% (2017: 101%).
Our marine division started to benefit from an improved rating environment, most prominent in areas such as aviation and cargo, which allowed the division as a whole to achieve premium growth of 6% to $284.8m (2017: $267.6m) and an improved combined ratio for 2018 of 94% (2017: 98%). We expanded our presence in the US during 2018, with the division starting to write marine business out of the Houston office.
Rating environment The catastrophe loss activity during 2017 had a positive effect on the rating environment with rates increasing by 3% in 2018 across the portfolio (2017: decrease of 1%). Most of our lines of business saw increases in rates compared to 2017, with marine increasing by 3%, property increasing by 10%, reinsurance rates increasing by 6% and specialty lines increasing 1%. However, rates on renewals in our political, accident & contingency division decreased by 1%.
Premium retention rates In 2018, we were able to maintain a strong retention of business from existing clients and brokers. We believe that being able to work with clients and brokers for a number of years has enabled Beazley to provide coverage which was sustainably priced while still covering the insureds’ needs.
The table below shows our premium retention rates by division compared to 2017: Retention rates1 2018 2017
Beazley’s underwriting strategy of exercising discipline across a diverse portfolio of specialist products will remain a constant. It has enabled us to achieve an underwriting profit in another catastrophe year in 2018 and will position Beazley well as the company goes into 2019.
Increased premium with double digit top line growth across three divisions
Gross premiums written 284.8 267.6 Net premiums written 255.0 233.2 Results from operating activities 20.5 19.3 Claims ratio 54% 55% Expense ratio 40% 43% Combined ratio 94% 98% Rate change 3% (3%)
Gross premiums written 238.7 214.3 Net premiums written 212.7 190.8 Results from operating activities 24.2 7.9 Claims ratio 46% 51% Expense ratio 44% 50% Combined ratio 90% 101% Rate change (1%) (4%)
Gross premiums written 1,469.0 1,292.2 Net premiums written 1,283.3 1,120.2 Results from operating activities 136.3 227.4 Claims ratio 53% 50% Expense ratio 38% 39% Combined ratio 91% 89% Rate change 1% –
Liability 27% Hull & miscellaneous 23% Cargo 22% Energy 14% Aviation 6% War 5% Satellite 3%
Premium rates for much of the business underwritten in Beazley’s marine division started to rise last year, enabling the division to achieve a combined ratio of 94% on premiums of $284.8m (2017: 98% on premium of $267.6m), but competition remained intense.
Lloyd’s ‘decile 10’ initiative, through which Lloyd’s syndicates were asked in 2018 to submit remediation plans for the worst-performing 10% of business lines in their portfolios, has had a significant effect on the marine market. After several years of competition that drove the combined ratios of many syndicates well into triple digits, we saw a number of syndicates withdrawing from marine hull, cargo and aviation business. Hull, cargo and aviation rates have recently increased materially.
The hull market was significantly impacted by one major loss after the superyacht Sassi caught fire while under construction at the Lürssen shipyard in Bremen in northern Germany in September. We expect the loss to contribute further to rising premium rates in this market.
Two smaller lines of business – marine and aviation war risks and satellite business – made good contributions to our overall profitability in 2018, although we have seen the war risks account shrink steadily in recent years. Aviation business, another relatively small component of the division’s total portfolio, has begun at last to see meaningful rate rises after the withdrawal of capacity by a number of our competitors.
We had also seen our larger energy account reduce in size under the pressure of falling rates and a declining oil price from 2012, but this trend was reversed in 2018 as the rating environment began to improve. Rising energy prices during much of the year also stimulated an uptick in exploration activity, benefiting our sub-sea team which insures the equipment used in offshore oil and gas exploration. For 2019 we plan to grow our energy business as well as our hull and machinery account.
All of the lines of business comprising the political, accident & contingency (PAC) division performed well in 2018, generating an improved combined ratio for the division of 90% (2017: 101%) on premiums that grew by 11% to $238.7m (2017: $214.3m).
Many of the lines of business in which we specialise, including political risks, terrorism and contingency, are historic areas of focus for the London market and we continue to write the bulk of our business in London. However we also have local teams in the US, Europe and Singapore to access business we would not normally see in London, including the fast growing market for supplemental health insurance solutions for company employees in the US.
In April 2018 in the US we launched a new version of our WeatherGuard policy for weather-related event cancellation risks, offering each policyholder a fully personalised digital policy that can be consulted on a phone. The easy to use digital policy, which also offers automatic claims payment in the event that the insured weather peril occurs, has been very well received by brokers and clients.
Commercial property 59% Small property business 18% Jewellers & homeowners 16% Engineering 7%
As a result we experienced a very high combined ratio of 125% (2017: 130%). This was the second year in a row where a combined ratio over 100% was seen, but after two years of severe claims the strain is telling on the broader market. We have seen more than a dozen Lloyd’s businesses either withdraw from direct and facultative property business altogether or sharply curtail their exposures.
The large risk property business we underwrite in London was most affected by the catastrophe losses of the past two years and increased attritional activity, but other segments of our portfolio were also impacted by increased claims experience. Our small business team led by Paul Bromley writes a large volume of business through binding authorities granted to Lloyd’s coverholders around the world. In recent months we have cancelled some of these binders with coverholders in North America, as they failed to meet our profitability requirements.
We will of course honour the commitments we have made to our brokers and clients as we run off our existing construction and engineering book in a professional and orderly manner, but we have ceased underwriting new business. This decision affects only property risks and has no bearing on the construction liability business that our colleagues in Beazley’s specialty lines division continue to write.
London remains our largest underwriting location but we have continued to see strong top line growth in the business we write locally in the US. This business – which comprises mid-market commercial property risks underwritten on a surplus lines basis, a portfolio of homeowners’ business in catastrophe-exposed locations, and some large risk commercial accounts – grew 2% last year, contributing to the strong premium growth of Beazley’s US operations.
Two of the major perils that drove our claims experience in 2017 – hurricanes and wildfires – recurred in 2018, resulting in a combined ratio for the year of 103% (2017: 107%) on premiums of $207.4m (2017: $206.8m).
Beazley has provided consistent reinsurance support to clients in Japan for more than two decades and we accordingly incurred a share of the reinsurance losses from Typhoon Jebi in September, the most severe storm to make landfall in Japan since 1993, and from Typhoon Trami, which hit the south of the country a few weeks later.
In aggregate, we incurred an estimated $41m in reinsurance losses from the storms in Japan and the US in 2018. Total market losses for the Japanese typhoons are estimated at between $10bn and $12bn and for the US hurricanes at between $11bn and $14bn.
For the reinsurance market, the wildfires that ravaged California for the second year in a row were far less predictable. Wildfire has historically been regarded as an attritional peril by insurers in California but this approach looks unsustainable after the experience of the past two years. Wildfire losses in 2017 are estimated to have cost insurers $10bn and losses in 2018 look likely to exceed this figure, with current estimates running between $9bn and $15bn. Beazley’s share of this loss is currently estimated at $40m.
In light of the current rating environment, we plan to continue to grow our reinsurance account in 2019.
Technology, media and business services 28% Management liability 19% Small business 17% Professions 15% Healthcare 12% Treaty 4% International financial lines 3% Crime 1% Market facilities 1%
Specialty lines, Beazley’s largest division, was an engine of premium growth for the company in 2018, with premiums rising 14% to $1,469.0m (2017: $1,292.2m). Our combined ratio was up to 91% (2017: 89%) following reserve releases that were slightly below those of 2017. Overall we saw rates rise by 1% (2017: flat).
For more than three decades, the US has been the largest and most attractive market for Beazley’s specialty lines products, ranging from architects’ and engineers’ professional liability (A&E) in the early years (and still today) to healthcare and environmental liability insurance more recently. The US continued to account for the bulk of our premium in 2018 and we saw top line growth of 20% in our locally underwritten US business. However our efforts to grow internationally outside the US are also gathering pace, especially in Europe, as demand for our products intensifies.
We expect that the rapid development of our non-US business will, over time, change the geographic mix of our portfolio, although our focus on the US market will certainly not diminish in the process. Our 2019 plan envisages the non-US portion of our portfolio growing to 20%, from 17% in 2018.
We concluded that it would be beneficial to split this diverse portfolio into two new divisions from 2019 onwards. One division, which continues to be called specialty lines, is now led by James Eaton, who was previously responsible for our small business portfolio. The other, called cyber & executive risk (CyEx), is now led by Mike Donovan, who previously ran our technology, media and business services team.
Our ambition within the CyEx division will be to position Beazley as the leading provider of quality management liability coverage for both traditional and emerging exposures – a reputation our cyber team already enjoys. Our London market business will continue to serve as a crucible for innovation in many of these lines: our London underwriters have deep expertise in a number of areas that are not well addressed by many domestic markets, such as ‘wage & hour’ coverage in the US, protecting companies against claims made under the Fair Labor Standards Act. In July 2018 our management liability launched in London a Lloyd’s consortium to offer increased capacity for wage & hour risks.
Maintaining the right mix of large risk, mid-market and small business will continue to be central to our thinking at Beazley. In 2018, we continued to observe an active claims environment for some of our larger risk business, including D&O risks, and large professional liability business, including hospitals and health systems. However, in contrast to previous years, we have seen prices beginning to firm in these areas.
From the beginning of 2019, I assumed the role of chief underwriting officer at Beazley. It was very gratifying that we did not need to look outside the company to fill the key underwriting and leadership roles within our two new divisions.
US local written premium reaches £1bn, overall gross premiums written grow 12% during 2018
Premiums Gross premiums written have increased by 12% in 2018 to $2,615.3m (2017: $2,343.8m). We are confident of the quality of this growth, which is the fruit of sustained investment in our underwriting teams and our patience in waiting for the appropriate conditions, market by market, before growing. Rates on renewal business on average increased by 3% across the portfolio (2017: decreased by 1%) with our catastrophe exposed lines obtaining the largest increases.
Our portfolio mix is broadly unchanged from 2017. We continue to operate a diversified portfolio by type of business and geographical location.
A robust financial performance despite high levels of claims and a low investment return
Specialty lines 56% Property 16% Marine 11% Political, accident & contigency 9% Reinsurance 8%
Net earned premiums 2,084.6 1,869.4 12% Net investment income 41.1 138.3 (70%)
Share of profit of associates – 0.1 Impairment of investment in associate (7.0) – Finance costs (22.4) (22.1) Profit before tax 76.4 168.0 Income tax expense (8.2) (38.0) Profit after tax 68.2 130.0
Claims ratio 59% 58% Expense ratio 39% 41% Combined ratio 98% 99% Rate increase/(decrease) 3% (1%) Investment return 0.8% 2.9%
Reinsurance purchased Reinsurance is purchased for a number of reasons: • to mitigate the impact of natural catastrophes such as hurricanes and non-natural catastrophes such as cyber attacks; • to enable the group to put down large lead lines on the risks we underwrite; and • to manage capital to lower levels.
Combined ratio The combined ratio of an insurance company is a measure of its operating performance and represents the ratio of its total costs (including claims and expenses) to total net earned premium. A combined ratio under 100% indicates an underwriting profit. Consistent delivery of operating performance across the market cycle is clearly a key objective for an insurer. Beazley’s combined ratio reduced in 2018 to 98% (2017: 99%) thanks to an improvement in the expense ratio.
Reserve releases Beazley has a consistent reserving philosophy, with initial reserves being set to include risk margins that may be released over time as and when any uncertainty reduces. Historically these margins have given rise to held reserves within the range of 5-10% above our actuarial estimates, which themselves include some margin for uncertainty. The margin held above the actuarial estimate was 5.6% at the end of 2018 (2017: 5.0%). Whilst the margin is higher than year end 2017, it is still towards the low end of the range that management targets, which is in part a result of the above average natural catastrophe activity again in 2018. As a consequence, reserve releases in 2019 are likely to be below the long term average level particularly in the short tail classes affected by the natural catastrophes. However, it is important to recognise that while there is strong correlation between the level of margin and future reserve releases, current year developments can also affect releases either positively or negatively.
Prior year reserve adjustments across all divisions over the last five years are shown below: $m $m $m $m $m 5 year average $m
Releases as a percentage of net earned premium 9.5% 10.4% 10.2% 10.9% 5.5% 9.3%
Foreign exchange The majority of Beazley’s business is transacted in US dollars, which is the currency we have reported in since 2010 and the currency in which we hold the company’s net assets. Changes in the US dollar exchange rate with sterling, the Canadian dollar and the euro do have an impact as we receive premiums in those currencies and a material number of our staff receive their salary in sterling. Beazley’s foreign exchange loss taken through the statement of profit or loss in 2018 was $13.2m (2017: loss of $3.1m).
Comparison of return by major asset class: 31 Dec 2018 31 Dec 2017
Net assets per share (cents) 280.4c 287.1c (2%) Net tangible assets per share (cents) 256.2c 261.6c (2%)
We continue to provide against impairment of reinsurance recoveries, and at the end of 2018 our provision in respect of reinsurance recoveries totalled $12.2m (2017: $13.2m).
Insurance receivables Insurance receivables are amounts receivable from brokers in respect of premiums written. The balance at 31 December 2018 was $943.3m (2017: $918.0m).
Other assets Other assets are analysed separately in the notes to the financial statements. The items included comprise: • deferred acquisition costs of $307.4m (2017: $281.4m); • profit commissions of $5.9m (2017: $10.1m); and • deferred tax assets available for use against future taxes payable of $28.9m (2017: $6.9m).
Judgement is required in determining the policy for deferring acquisition costs. Beazley’s policy assumes that variable reward paid to underwriters relates to prior years’ business and is not an acquisition cost. As a result, the quantum of costs classified as acquisition is towards the lower end of the possible range seen across the insurance market. Costs identified as related to acquisition are then deferred in line with premium earnings.
Insurance liabilities Insurance liabilities of $5,456.2m (2017: $5,167.8m) 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 $1,171.2m (2017: $1,056.3m) and an estimate of claims incurred but not yet reported (IBNR) of $2,869.5m (2017: $2,852.3m). These are estimated as part of the quarterly reserving process involving the underwriters and group actuary. Gross insurance claims reserves have increased 3% from 2017 to $4,040.7m (2017: $3,908.6m).
Financial liabilities Financial liabilities comprise borrowings and derivative financial liabilities. The group utilises two long term debt facilities: • during September 2012 we issued a sterling denominated 5.375% retail bond under a £250m euro medium term note programme which raised £75m for the group and is due in 2019. This diversified the source and maturity profile of the group’s debt financing; and
In October 2018, the group exercised its call option and redeemed the full nominal amount of $18.0m subordinated debt issued in 2004.
AA+ 1% AA 1% AA- 48% A+ 41% A 5% A- 1% Collateralised 2% Others 1%
Capital structure Beazley has a number of requirements for capital at a group and subsidiary level. Capital is primarily required to support underwriting at Lloyd’s and in the US and is subject to prudential regulation by local regulators (PRA, Lloyd’s, Central Bank of Ireland, and the US state level supervisors). Beazley is subject to the capital adequacy requirements of the European Union (EU) Solvency II regime (SII). We comply with all relevant SII requirements.
Our funding comes from a mixture of our own equity alongside $248.7m of tier 2 subordinated debt, a $95.6m retail bond and an undrawn banking facility of $225.0m.
The final Lloyd’s economic capital requirement (ECR) at year end 2018 as confirmed by Lloyd’s is consistent with our projection at the interim results and reflects our plans for growth. Overall we expect our capital requirement to grow in line with the net written premiums in our business plan, which in the short term should be high single digit.
At 31 December 2018, we have surplus capital of 26% of ECR (on a Solvency II basis). Following payment of the second interim dividend of 7.8p, this surplus reduces to 23% compared to our current target range of 15% to 25% of ECR.
IFRS 17 The implementation of IFRS 17: Insurance contracts is currently scheduled for accounting periods commencing on or after 1 January 2021, although a 12 month deferral is widely expected. Applying this standard is a major undertaking and so the company has established a multi-disciplinary project group to oversee this activity. The project has made good progress during 2018 and Beazley’s preparations for IFRS 17 are on schedule.
In pursuit of greater efficiency and consistency of operational service, we have centralised operations support or outsourced it where this brings further value. We want to make sure that operations and processing are done by appropriately skilled people, at the most cost effective location, whilst providing the best service levels. To help achieve this we have built operations service centres in Connecticut and Georgia, both in the US, and the new Birmingham office provides a cost-effective alternative to London. It also benefits from excellent access to skills relevant to Beazley’s future growth plans, for example in technology, data analytics and financial services support generally.
Supporting business growth relies on effective processes and systems, but it is also important that we have a high quality working environment that is conducive to team working and thought leadership. In 2018, we opened a new larger Munich office that will help to increase our access to continental European business. We also opened a new Birmingham office which has the capacity to take over 150 Beazley staff. This office now provides both an operations hub to support our UK and European growth, and also a facility to make it easier for UK regional brokers to access our business.
Beazley’s digital transformation We have had some notable successes in the two years since establishing the Beazley Labs team, which provides dedicated resource for researching new technology and data analytics solutions. One has been the implementation of a permanent robotics development team that is steadily eliminating manual or repetitive tasks within our back office. We have run several data analysis trials which have generated new insights to support our specialist underwriting and claims handling. A recent example was the use of natural language processing software to identify patterns within high volumes of US hospital claims data. The analysis has been used to identify correlations between key terms in submission data and claims activity, and these are now used to support our medical malpractice underwriting and to provide risk management advice back to our clients.
Faster, Smarter Underwriting aims to use technology and data to support the expert judgement of our underwriters. The types of technology most applicable here are data science tools which identify correlations in external data sets that could enhance our underwriting decisions. A practical example of this is with our Reputational Risk product, which uses a technology to provide the underwriters with public sentiment trends on emerging risks being discussed on social media.
4) Creating the optimum physical environment Although Beazley receives plenty of interest when attracting new operations and technology talent, we recognise that our working environment needs to keep evolving to maintain this attraction and to then retain and further motivate this talent. In 2017 we commenced a project to develop our larger offices into activity based working (ABW) environments. Although one benefit of ABW is more efficient use of office space, it also creates a physical and technology environment that maximises the potential for our staff to carry out their daily activities. In 2018 we opened our first ABW environment in the Birmingham office and we are in the process of building ABW offices in Toronto and New York, both opening in 2019. We have also signed a lease for a London office move in 2020. The new London office will also be an ABW environment.
As we proceed into 2019 we are well placed not only as a high performing specialist insurer, but also because we have developed great strength in our operational capability. The changes we have made in 2018 will allow us to build on this operational strength and ensure we remain a high performing specialist insurer in an increasingly digital world.
The introduction of IFRS 17 will change the way that Beazley measures and reports the profitability of our insurance contracts to the market in the future. A multi-year programme of work has been progressing as planned during 2018 to ensure that our data and systems are able to meet the new accounting requirements when they come into force, while continuing to support our internal management practices.
There has been a high level of change at board and executive level during 2018 and this will continue into 2019. The risk management function has been working with the individuals in new roles to ensure that they understand their responsibilities within the risk management framework and to minimise the risk associated with such transition periods. The risk management function is also providing assurance to the board that the group continues to operate within risk appetite and is supported in this by internal audit who have completed an audit of risk culture.
Finally, we have introduced a number of new working practices across the group to provide our staff with the best environment and to continue to attract new talent to the group. This included starting to introduce activity based working environments in our larger offices, which provide staff with the space most conducive to the task in hand. We have also provided staff with technology to be able to work remotely and to work more flexibly around our core hours, so that Beazley employees can better balance the demands of work and personal life. We now also provide staff with flexibility to dress for the day. These various changes help ensure that our staff can perform to the best of their ability, which helps to lower the operational risk inherent in the company.
Beazley’s approach of empowering all our employees, coupled with thoughtful ‘management of risk’ means that we can nimbly respond to and manage change, which creates the right environment for delivering sustainable growth.
The latest chief risk officer report to the board has confirmed that the control environment has not identified any significant failings or weaknesses in key processes and that Beazley is operating within risk appetite as at 31 December 2018.
Risk management strategy The Beazley plc board has delegated executive oversight of the risk management department to the executive committee, which in turn has delegated immediate oversight to the risk and regulatory committee. The Beazley plc board has also delegated oversight of the risk management framework to the audit and risk committee, and the primary regulated subsidiary boards have each established a risk committee.
Risk management framework Beazley takes an enterprise-wide approach to managing risk following the group’s risk management framework. The framework establishes our approach to identifying, measuring, mitigating and monitoring the group’s key risks. Beazley has adopted the ‘three lines of defence’ framework: namely business risk management, the risk management function and the internal audit function. Within business risk management, there
www.beazley.com Annual report 2018 Beazley 55 are two defined roles: risk owner and control reporter. Each risk event is owned by the risk owner, who is a senior member of staff. Risk owners, supported by the risk management team, perform a risk assessment twice a year, including an assessment of heightened and emerging risks.
Internal audit Risk assurance – Independently tests control design – Independently tests control operation – Reports to committees and board
Insurance risk Given the nature of Beazley’s business, the key risks that impact financial performance arise from insurance activities. The main insurance risks can be summarised in the following categories: • Market cycle risk: The risk of systematic mispricing of the medium tailed specialty lines business which could arise due to a change in the US tort environment, changes to the supply and demand of capital, and companies using incomplete data to make decisions. This risk would affect multiple classes within the specialty lines division across a number of underwriting years. The group uses a range of techniques to mitigate this risk including sophisticated pricing tools, analysis of macro trends, analysis of claim frequency and the expertise of our experienced underwriters and claims managers.
• Non-natural catastrophe risk: This risk is similar to natural catastrophe risk except that multiple losses arise from one event caused by mankind. Given Beazley’s risk profile, examples include a coordinated cyber attack, an act of terrorism, an act of war or a political event. 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.
Under the environmental risk heading, the board identifies and analyses emerging and strategic risk on an annual basis for discussion at the board strategy day in May.
• Operational risk: This risk is the failure of people, processes and systems or the impact of an external event on Beazley’s operations, and is monitored by the operations committee. An example would be a cyber attack having a detrimental impact on our operations.
• Credit risk: Beazley has credit risk to its reinsurers, brokers and coverholders of which the reinsurance asset is the largest. The underwriting committee monitors this risk.
• Group risk: The structure of the Beazley group is not complex and so the main group risk is that one group entity might operate to the detriment of another group entity or entities. This includes, for example, changes in tax legislation such as the US Tax Cuts and Jobs Act enacted in late 2017 which affects which types of intragroup reinsurance it is efficient for Beazley to use. The Beazley plc board monitors this risk through the reports it receives from each entity.
Anti-bribery and corruption risk The group also considered anti-bribery and corruption risk across all risk categories. We are committed to ensuring that all business is conducted in an ethical and honest manner, and that we are not involved in any illicit activity as defined under the UK Bribery Act and US Foreign Corrupt Practices Act. This risk includes the risk of bribery and corruption we are exposed to and manifests itself in the susceptibility to unethical or dishonest influences whereby illicit payments and/or inducements are either made or received.
Such activity has severe reputational, regulatory and legal consequences, including fines and penalties. Considerations relevant to this risk include the nature, size and type of transactions, the jurisdiction in which transactions occur, and the degree to which agents or third parties are used during such transactions.
Every employee and individual acting on Beazley’s behalf is responsible for maintaining our reputation. We have a zero-tolerance approach to bribery and corruption and are committed to acting professionally, fairly and with integrity in all aspects of our business. In doing so, we aim to recruit and retain high-calibre employees who carry out their responsibilities honestly, professionally and with integrity. We maintain a number of policies designed to prevent any risk of bribery and corruption, which are communicated to all employees and supplemented with appropriate training.
Climate change risk The warming of the global climate is recognised as an important emerging risk due to its widespread potential impact on the global population, environment and economy. A key aspect of Beazley’s business model is to support our clients who have been affected by natural catastrophes, helping them return to pre-catastrophe conditions as soon as possible. As a specialist insurer, various classes of business we underwrite are subject to the effect climate change presents to the risk environment.
As part of the underwriting process, we work with our insureds to understand the risks facing their organisation, including applicable climate related risks, to tailor insurance coverages to mitigate the associated financial risks.
• Catastrophe risk: This is the risk that current models do not adequately capture the impact of climate change on the frequency, severity or nature of natural catastrophes or other extreme weather events that could drive higher-than-expected insured losses. The group utilises commercial catastrophe models to facilitate the estimation of aggregate exposures based on the group’s underwriting portfolio. These catastrophe models are updated to reflect the latest scientific perspectives. Catastrophe models are evolving to include new or secondary perils which may be related to climate change. In addition, the group runs a series of Natural Catastrophe Realistic Disaster Scenarios (RDS’s) on a monthly basis which monitors the group’s exposure to certain scenarios that could occur. These RDS’s include hurricanes in the US, typhoons in Japan, European windstorms and floods in the UK.
• Asset risk: This is the risk that climate change has a significant impact across a number of industries which may negatively impact the value of investments in those companies. The group considers the impact of climate change on its asset portfolio by seeking to incorporate an assessment of environmental risks in the investment process. We subscribe to the research services of a specialist company in the field of environmental, social and governance research and have integrated their proprietary ratings into the internal credit process applied to investments in corporate debt securities. A minimum standard for the economic scenario generator performance is defined and companies not meeting the required standard will be excluded from the approved list of issuers. The analysis also includes a consideration of the sustainability of each company with regard to the potential decline in demand in specific sectors.
Community How we interact with the people and places in our local area
Environment Taking responsibility for our own use of resources as we conduct our business, to minimise our environmental footprint
For Beazley, being a Responsible Business is core to our values and actions.
All Hands and Hearts works with volunteers and local partners to rebuild the basic hubs of a community – including schools and homes. Participating in these relief efforts has enabled Beazley employees to help to support devastated communities on the ground. Many people who are hit by these disasters fall into the ‘insurance gap’ and are unprotected to some degree.
“ Thank you so much for being a great group to work with. You all carry such positive attitudes and displayed amazing work ethic. It was an absolute pleasure being able to oversee your arrival to the Yabucoa base. You’ve set the bar very high!”
The volunteers were in Puerto Rico from Saturday 1 December to Saturday 15 December. There they spent two long weeks working hard to restore homes damaged by the hurricane.
Match funding As important as supporting our charity partner is, we also aim to empower our people to take charge of their own fundraising and volunteering. We offer match funding of $750 (or local currency equivalent) per employee, and up to $5,000 per team of three employees or more. Some examples of colleagues who used this are: Conquering Everest Base Camp To support the communities still recovering from the devastating Nepal earthquake, Jon Labram from London took the challenge to trek to Everest Base Camp. His challenge took almost two weeks, and he raised over £2,300 for our charity partner All Hands and Hearts.
Five-time marathon runner To raise money for the charity Healing Venezuela, Rafael Guia Vera took on the challenge of running five marathons in 2018 – in Cambridge, Madrid, Budapest, Valencia and Hartlebury (Worcestershire). So far he has raised almost £900, plus match funding from Beazley.
Cycle for Survival: employees in our New York City and Chicago offices took part to raise funds for the Memorial Sloan Kettering Cancer Center, for research into rare cancers.
Clock-to-clock challenge To help raise money for his local hospice, Hospice on the Weald, Richard took on the challenge to run, kayak and cycle over 360km in 26.5 hours. On 24 June, Richard and three of his friends started a 65km overnight run from a clock tower in Kent, UK before kayaking 40km across the English Channel. They concluded the race by cycling a final 260km to the clock tower by Notre Dame in Paris.
Feedback... “ I thoroughly enjoyed the opportunity to ask mentors questions as I learned a lot about being an actuary.” Year 11 student
“ Pupils with special educational needs can enjoy iPads support for learning. More pupils can use Siri, instead of a dictionary or teaching assistant. They can develop graphic skills and so much more to illustrate work.” School feedback on iPad donations
Conservation – We adopt an honourable approach to how we should protect and conserve our environment. By restoring local parks and community gardens, our communities will be better able to enjoy these areas.
Global intern programme This year over 35 individuals were given internships from our local communities in our Chicago, London, New York, Farmington, San Francisco and Singapore offices.
For her efforts, our responsible business assistant, Shakeela Khanom, was awarded ‘Best Project Champion’ award by the Lord Mayor of London.
Looking forward in London – Twentytwo Bishopsgate As we plan to move into our new London offices at Twentytwo Bishopsgate, we are making sure that sustainability is a top consideration. Twentytwo is pursuing WELL certification, demonstrating its commitment to improving and encouraging the health and wellness of its community.
The construction company are aware of the impact on local residents and are engaged in community liaison to address any concerns and communicate with local businesses and neighbours.
As a new building, all of its functions will be more energy efficient than our current site and in keeping with our other new offices, we are making sustainable choices (wood, vegan leather alternatives) for our furniture and fittings.
Where appropriate our internal and external stakeholders are required to acknowledge and adhere to our Environmental Policy and relevant operating procedures.
Procurement and outsourcing Where we can, we ensure good working conditions and employee rights throughout our supply chains. Our external contracts are governed by our Outsourcing Policy and our Procurement Policy. Our due diligence in both cases includes assessment of risk management, internal controls, compliance with laws including the UK Bribery Act 2010 and Modern Slavery Act 2015, and information on staff turnover, industrial relations, staff training and recruitment. We take our obligations to our suppliers seriously and ensure that when we enter into significant outsourcing contracts with new service providers we conduct due diligence on their operations, and carry out site visits to ensure that conditions are suitable. We maintain ongoing communication and close relations with such suppliers.
Scope 1 and 2 emissions increased due to expanded scope of reporting
• We are conducting an ongoing review of decarbonisation-related business implications, as well as convening a working group to produce our 2019 ClimateWise report, which will be aligned with the recommendations of the Taskforce on Climate-related Financial Disclosures.
• We remain committed to the Lloyd’s Disaster Risk Facility (DRF), as a founding member. The consortium was set up to increase economic resilience by developing innovative solutions for populations which suffer some of the most serious losses from natural disasters, yet currently have little or no access to insurance. While this is a long-term development opportunity, with such exposures often being considered at the sovereign government level and having very long lead-in times, the DRF has been very active in building relations with multilateral financing institutions and relevant government agencies worldwide.
We are signatory to the Paris Pledge for Action, the formal initiative for non-state organisations supporting the Paris Climate Change Agreement.
The majority of our assets (approximately 75%) are held in a portfolio of investment grade fixed income securities managed in-house by the Beazley investment team. Our internal investment process applied to these assets incorporates an analysis of ESG factors to ensure that we favour those companies who actively seek to identify and control ESG risks. To support this process we subscribe to the services of a specialist provider of ESG and governance research and ratings.
Responsible investing At Beazley, we believe our investment strategy should seek to have a positive influence on society and the world at large and for this reason we incorporate a consideration of environmental, social and governance (ESG) risks into our decision-making process. Our view is that this approach is consistent with the objective of optimising total return as companies demonstrating a commitment to a sustainable business strategy and ethical business culture have been shown to enjoy a competitive advantage over time, generating stronger and more stable returns.
Networks Colleagues have formed three networks that focus on the interests of the LGBT+ community (PROUD@Beazley), colleagues from a minority race/ethnicity (Empowered@Beazley) and our young talent (Beazley Young Professionals).
• help younger members of the organisation learn about Beazley governance and direction setting.
External group membership We are proud members or sponsors of external bodies including: HMT Women in Finance Charter, Stonewall, Women in Banking and Finance, myGwork, Business Insurance D&I Institute, 30% Club, Insurance Supper Club, and DiveIn. They are a helpful source of ideas and best practice for us to learn from.
Celebrating our differences An important part of our vision is creating an environment that recognises and celebrates our differences. That helps our people to feel comfortable with being themselves in the workplace and creates the opportunity for Beazley to benefit from those collective differences. As part of that, we celebrated across the group, International Men’s and International Women’s Days, Black History Month, Pride, and World Aids Day.“ 2018 has been a year of continued focus on our diversity and inclusion journey. We are proud of our inclusive culture and of our progress on gender diversity, which we will maintain. Looking ahead, we will apply what we have learned from our focus on gender diversity to other forms of diversity. This includes acknowledgement of the pivotal role that all our leaders and managers play in this journey and the support they require in doing so.”
It guides our behaviours, embeds a culture of good conduct, and ensures we do the right thing for all our stakeholders.
Our Gifts and Hospitality Policy and Anti-Bribery and Corruption Policy both outline the appropriate behaviour required of all staff and associated persons, and identify record-keeping requirements and approval procedures. Employees complete annual mandatory training and assessment on financial crime, bribery and corruption.
Financial Crime Policy Beazley’s executive management is ultimately responsible for preventing, detecting and investigating alleged financial crime activity. However, all employees share the responsibility to watch out for possible financial crime and are empowered to take appropriate action.
Staff complete annual training on anti-money laundering (AML) and terrorist financing. The Financial Crime e-learning module currently being updated to include tax evasion. Staff complete annual training on internal sanctions.
Underwriting and claims due diligence procedure The Beazley due diligence procedure, aimed at underwriting and claims staff, outlines the customer due diligence requirements before writing a risk or paying a claim, and the enhanced due diligence requirements for those in high-risk scenarios.
Responsible underwriting – compliance Being Beazley is at the heart of everything we do
The company’s employees Our key differentiators; Our business model and strategy; Sustaining growth; Sustainability overview; Chairman’s statement; Chief executive’s statement; Q&A with the chief executive; Operational update; Risk management; Sustainable business; Directors’ report; Letter from our chairman; Board of directors; Statement of corporate governance; Letter from our chairman of our remuneration committee; Directors’ remuneration report 1-23; 50-83; 85-120
Social matters Sustainability overview; Chairman’s statement; Chief executive’s statement; Sustainable business 14-21; 59-73
Managerial responsibilities for privacy and data security are defined within Beazley policies.
Governance We have a number of internal procedures that govern our approach to data and data subjects: • information security strategy; • information security master policy; • information security risk assessment and management policy; and
Directors’ responsibilities The statement of directors’ responsibilities in respect of the annual report and financial statements is set out on page 121.
Results and dividends The consolidated profit before taxation for the year ended 31 December 2018 amounted to $76.4m (2017: $168.0m).
The aforementioned second interim dividend will be paid on 27 March 2019 to shareholders on the register on 1 March 2019.
Going concern and viability statement A review of the financial performance of the group is set out on pages 40 to 49. The financial position of the group, its cash flows and borrowing facilities are included therein.
Directors’ interests The directors’ interests in shares of the company, for those directors in office at the end of the year, including any interests of a connected person (as defined in the Disclosure and Transparency Rules of the UK’s Financial Conduct Authority), can be found in the directors’ remuneration report on pages 100 to 120.
Substantial shareholdings As at 6 February 2019, 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 %
Authority to purchase own shares On 22 March 2018 shareholders approved an authority, which will expire on 22 June 2019 or, if earlier, at the conclusion of the 2019 Annual General Meeting (AGM) for the company to repurchase up to a maximum of 52,578,239 ordinary shares (representing approximately 10% of the company’s issued ordinary share capital). During the year, Beazley acquired 6,039,136 of its own shares into its employee benefit trust. The board continues to regard the ability to repurchase issued shares in suitable circumstances as an important part of the financial management of the company. A resolution will be proposed at the 2019 AGM to renew the authority for the company to purchase its own share capital up to the specified limits for a further year. More detail of this proposal is given in the notice of AGM.
Significant agreements – change of control Details of an agreement to which the company is party that alters on change of control of the company following a takeover bid are as follows: The amended and restated $225m multi-currency standby letter of credit and revolving credit facility agreement dated 25 July 2017 remains unchanged. The agreement is between the company, other members of the group and various banks provides that if any person or groups of persons acting in concert gains control of the company or another group obligor, then: (a) the banks are thereafter not obliged to participate in any new revolving advances or issue any letter of credit and (b) the facility agent may: (i) require the group obligors to repay outstanding revolving advances made to them together with accrued interest and (ii) ensure that the liabilities under letters of credit are reduced to zero or otherwise secured by providing cash collateral in an amount equal the maximum actual and contingent liabilities under such letters of credit.
Annual general meeting The AGM of the company will be held at 14.30 on Thursday 21 March 2019 at Plantation Place South, 60 Great Tower Street, London EC3R 5AD. The notice of the AGM details the business to be put to shareholders.
Beazley’s GHG emission intensity ratio (emissions/employee/year) rose from 7.1 tCO2e/employee in 2016 to 7.7 tCO2e/employee in 2017.
Beazley’s corporate GHG emissions are summarised in the table below: European offices North American offices
Scope 1 emissions 2016: 51.48 2017: 39.47 2016: data not available 2017: data not available 2016: 170.21 2017: 214.91
Notes: i) Greenhouse gas emissions are calculated and presented in accordance with DEFRA Environmental Reporting Guidelines, using the UK Government’s GHG Conversion Factors for Company Reporting where possible.
ii) Beazley Group’s 2017 GHG emissions are, where possible, calculated using emission factors for carbon dioxide, methane and nitrous oxide, reported in units of tonnes of carbon dioxide equivalent (tCO2e). The principal exceptions to this are reporting of emissions associated with electricity use in our Dublin and US offices, which are limited to just carbon dioxide (CO2). iii) Reporting is based on operational control. Beazley Group does not have operational control over the building infrastructure and plant at its offices due to the presence of facility management companies and shared tenancy; as a result, emissions primarily fall within Scope 2 and 3 of the Greenhouse Gas Protocol. iv) Reported Scope 1 sources are: company cars, fuel use in back-up generators and fugitive refrigerant losses from AC systems. Emissions associated with electricity used in Beazley’s offices and data centres are reported as Scope 2 emissions. Scope 3 sources include business travel by air, rail, taxi and leased cars. v) UK and European office reporting covers activity associated with our principal UK office, Plantation Place South and our Dublin office. These sites collectively accounted for 90% of Beazley’s UK/European permanent and contracted staff in 2017. vi) Beazley’s US office reporting covers activity associated with our three principal US offices, Farmington, New York and Chicago in 2015 and 2016. The scope of reporting was expanded in 2017 to also include our Atlanta office. These sites collectively accounted for 63% of Beazley’s US employees in 2016 and 73% in 2017.
In line with the board’s commitment to ensuring it has the skills necessary to support and challenge management on the areas central to the group’s strategy, a search is underway for a non-executive director with expertise in technology, operations and data and it is anticipated that an appointment will be made during the first half of 2019.
An effective board of directors made up of diverse and experienced members
Andrew Horton Chief executive officer Appointed: 12 June 2003* Experience: Andrew joined Beazley in June 2003 as finance director and became chief executive officer in September 2008. Prior to that he held various financial positions within ING, NatWest and Lloyds Bank and was the chief financial officer for the UK wholesale banking division of ING immediately prior to joining Beazley. He qualified as a chartered accountant with Coopers and Lybrand in 1987. He joined the board of Man Group plc in 2013 as a nonexecutive director.
Committee: Executive committee (chairman) Skills: strategy, investment, finance, mergers and acquisitions, leadership and people management.
George Blunden Non-executive director Appointed: 1 January 2010* Experience: George is the senior independent director. He retired as senior vice president and director from AllianceBernstein Ltd in December 2009. He had previously been chief executive of Union plc, and a director of SG Warburg Securities, Seccombe, Marshall and Campion plc and Meridian Investment Performance Services. He is the chairman of the Charity Bank Ltd and chairman of Stonewater Ltd. Committees: Audit and risk committee, remuneration committee, nomination committee Skills: investments, treasury, credit, capital and governance.
David Roberts Chairman Appointed: 1 November 2017 Experience: David joined Beazley on 1 November 2017 and became chairman on 22 March 2018. He is chairman of Nationwide Building Society and vice chairman of NHS England. He has over 30 years experience in financial services and was previously chairman and CEO of Bawag PSK AG, Austria’s second largest retail bank, and an executive director and member of the group executive committee at Barclays plc, where he was responsible for the international retail and commercial banking business. Prior to joining Nationwide he was group deputy chairman at Lloyds Banking Group. His previous non-executive directorships include Absa Group SA and BAA plc. Committee: Nomination committee (chairman) Skills: governance, strategy, board leadership and regulation.
Adrian Cox Chief underwriting officer Appointed: 6 December 2010* Experience: Adrian began his career at Gen Re in 1993 writing short tail facultative reinsurance before moving to the treaty department in 1997, where he wrote both short and long tail business specialising in financial lines. He joined specialty lines at Beazley in 2001 where he has performed a variety of roles, including underwriting manager, building the long tail treaty account, managing the private enterprise teams, and the large risk teams before taking responsibility for specialty lines in 2008. He took on the role of chief underwriting officer in January 2019. Adrian was appointed to the boards of Beazley Furlonge Ltd in 2008 and Beazley plc in 2011. Committee: Executive committee Skills: insurance, management, international business development and governance.
Robert Stuchbery Non-executive director Appointed: 11 August 2016 Experience: Bob had previously been appointed as a nonexecutive director to the board of Beazley Furlonge Ltd, the group’s Lloyd’s managing agency, where he chairs the risk committee. He brings extensive Lloyd’s experience, having been chief executive officer of Chaucer until 2015, and a deep knowledge of the Lloyd’s market and distribution and operational strategies. Committee: Audit and risk committee Skills: insurance, risk management and strategy.
The roles of the chairman and chief executive are separate, with each having clearly defined responsibilities. They maintain a close working relationship to ensure the integrity of the board’s decision making process and the successful delivery of the group’s strategy. The board evaluates the membership of its individual board committees on an annual basis and the board committees are governed by terms of reference which detail the matters delegated to each committee and for which they have authority to make decisions. The terms of reference for the board committees can be found on www.beazley.com.
Members Mark Bernacki Martin Bride Adrian Cox Mike Donovan James Eaton Ian Fantozzi Patrick Hartigan Anthony Hobkinson Dan Jones Lou Ann Layton Andrew Pryde Jerry Sullivan Christian Tolle Tim Turner Pippa Vowles
Company secretary Christine Oldridge Key responsibilities The company secretary’s responsibilities include ensuring good information flows within the board and its committees and between senior management and non-executive directors, as well as advising the board through the chairman on all governance matters.
Chairman David Roberts Key responsibilities The chairman leads the board, managing constructive dialogue between executive and non-executive directors. He is responsible for ensuring that the board discharges its duties effectively.
Members Chief executive officer (or their nominee) Chief risk officer Company secretary
George Blunden has served a term in excess of six years and continues to bring strong challenge and insight to the board and its committees. His appointment was extended for a further three years at the 2016 AGM, subject to annual reappointment at the AGM. The nomination committee carried out a rigorous assessment of George Blunden’s continuing independence, taking into account the length of his tenure on the boards of both Beazley plc and Beazley Furlonge Ltd, and concluded that he remained independent. As senior independent director George will, if required, deputise for the chairman. He is available to talk to shareholders if they have any issues or concerns or if there are any unresolved matters that shareholders believe should be brought to his attention. As George Blunden has served a further three year term, he will stand down at the 2019 AGM.
Christine LaSala has been appointed as the senior independent non-executive director with effect from 21 March 2019. She will take over the role from George Blunden, who will step down from the board at the conclusion of the AGM. Christine LaSala had a long and distinguished career in the insurance industry and has already made a significant contribution to the Beazley board. Neil Maidment retired from the board on 31 December 2018 and Adrian Cox has assumed his executive management responsibilities.
Attendance at the regular board and committee meetings is set out in the table below: Director
1 Dennis Holt resigned at a director on 22 March 2018.
Managers and Certification Regime, gender pay gap, and the new UK Corporate Governance Code 2018; and • discussion of the outcome of the board evaluation and effectiveness review and agreement of improvement opportunities.
In July 2018 Beazley backed the Inclusion Behaviours Pledge. This is a public commitment made by members of the insurance sector, which reinforces Beazley’s promise to challenge inappropriate behaviour and create increasingly welcoming and inclusive workplaces in our sector. In the UK, Beazley has joined the Women in Banking & Finance forum to share best practice and offer networking and development opportunities to our female talent through their programme.
The Beazley diversity and inclusion steering group provides diversity and inclusion support for all employees and aims to foster open dialogue about gender, social, ethnicity, LGBT+, disability and parental/carer inclusion. Beazley currently has an LGBT+ network and young professionals network in place.
Beazley continue to work with Stonewall and the Business Disability Forum. Both organisations work closely with Beazley to identify the best support for our colleagues in the LGBT+ community, and for those living with disabilities, to help Beazley become a more inclusive and supportive place to work.
The respective responsibilities of the directors and the auditors in connection with the accounts are explained in the statement of directors’ responsibilities and the independent auditor’s report, together with the statement of the directors on going concern in the directors’ report.
The board agreed the 2018 risk appetite for the group at the end of 2017 and, throughout 2018, the board has considered and acted upon the information presented to it in order to make risk based decisions against the 2018 risk appetite. Key components of the risk management framework include monthly control self assessments and six monthly risk assessments, with ad hoc risk assessments being conducted when required. These matters have been considered by the executive risk and regulatory committee each month and the audit and risk committee and board quarterly. In addition, the board has considered the quarterly Own Risk and Solvency Assessment report in the past year. This risk management framework has provided the board with an ongoing process for identifying, assessing, monitoring and managing the risks to the company, and accords with the UK Financial Reporting Council’s ‘Guidance on Risk Management, Internal Control and Related Financial Business Reporting’ document.
The chairman of the audit and risk committee also had regular contact with external and internal auditors during 2018 and members of the audit and risk committee met individually with the Central Bank of Ireland and the Prudential Regulation Authority.
Further information on the role of the audit and risk committee is set out on page 91 and further information on risk management at Beazley is set out in the risk management report.
The key procedures that the board has established to ensure that internal controls are effective and commensurate with a group of Beazley’s size include: • day-to-day supervision of the business by the executive directors; • review and analysis by the various group committees of standard monthly, quarterly and periodic reporting, as prescribed by the board; • review of financial, operational and assurance reports from management; and • review of any significant issues arising from internal and external audits.
Only members of the committee have the right to attend meetings; however standing invitations are extended to the chairman, chief executive officer, the group finance director, the chief underwriting officer, the chief risk officer, the head of internal audit and the head of compliance. Other non-members may be invited to attend all or part of any meeting as and when appropriate. The company secretary acts as secretary to the committee.
The audit and risk committee is required to meet at least quarterly, with meetings scheduled at appropriate intervals in the reporting and audit cycle. Additional meetings are held as required. In 2018 there were a total of 7 meetings in the year compared to 6 meetings in 2017, with an additional meeting required for approval of Solvency II returns.
The internal and external auditors attend committee meetings and regularly meet in private with the committee. In addition the chairman of the audit and risk committee has regular contact with the external and internal auditors throughout the year and members of the committee met individually with the Central Bank of Ireland and the Prudential Regulation Authority during 2018.
Angela Crawford-Ingle 27 March 2013 7/7 George Blunden 1 October 2010 7/7 Christine LaSala 1 July 2016 7/7 Robert Stuchbery 11 August 2016 7/7 Catherine Woods 11 March 2016 7/7
Specific committee responsibilities are set out below: Audit and financial reporting a) Financial and narrative reporting • 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 and regulations and governance codes applicable to the financial statements; and
Risk management and compliance a) Internal control and risk management systems • review the company’s internal financial controls and the company’s internal control and risk management systems; 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; and
• review the regular reports from the compliance officer and keep under review the adequacy and effectiveness of the group’s compliance function.
G overnance www.beazley.com Annual report 2018 Beazley 93 margin over projected ultimate claims costs to allow for the risks and uncertainties within the portfolio, and the committee was satisfied that there were no errors or inconsistencies 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 of Beazley’s reserving philosophy, and the review work carried out by our external auditor, the committee was satisfied that the reserves held on the group statement of financial position at 31 December 2018 are reasonable.
The committee reviews detailed projections of future cash flows, profit forecasts and capital requirements under various scenarios, including scenarios stressed in terms of claims frequency and liquidity. In the current year, we considered in particular the impact of the natural catastrophe activity during the second half of 2018, which compounded the impact of the catastrophes seen in 2017. We also consider the appropriateness of management’s viability statement and the period over which this analysis is performed. The committee was satisfied by the level of analysis presented during the year, and the related approach taken and statements made in the group’s key external reporting.
vii) Tax The committee continues to monitor the evolving tax environment and in particular considered management’s approach to Diverted Profits Tax in the UK. The committee is of the view that the approach taken by management, as outlined in note 9 to the financial statements, is reasonable.
• the impact of Brexit was discussed and monitored during the year. Potential outcomes were considered and actions taken to mitigate the impact where possible. The impact on the estimates and judgements contained within this report were considered and deemed immaterial.
Committee meetings are scheduled to ensure that they support the financial and regulatory reporting timetables and the internal audit and risk cycle.
The work undertaken and key matters considered during the year in these areas are set out below: Audit and financial reporting a) Internal audit The group’s internal audit function reports directly, and is accountable to the committee, and the head of internal audit has direct access to the committee chairman. The committee has reviewed the effectiveness of the function and remains satisfied that the internal audit function had sufficient resources during the year to undertake its duties.
This selection panel included a director of each of the Public Interest Entities (PIEs) and regulated entities in the group alongside the group actuary and chief risk officer.
The tender process can be summarised as follows: • six firms were invited to participate in the tender; this was split evenly between the three ‘Big 4’ firms not currently providing audit services to the group and three mid-tier insurance audit firms; • three firms confirmed their interest and independence and moved into the first round which included both a written application outlining the strength and depth of the firm and a technical case study; • the selection panel identified two firms to move into the second round which required a written response to a request for proposal (RFP), two case studies, partner interviews and a presentation to the selection panel; • each firm was assessed by the selection panel based on the following transparent and non-discriminatory decision-making criteria: overall audit quality and service proposition; coordination and communication; additional value; and capability and competence of the lead partner, team and the firm; and
• the audit committee received a recommendation from the selection panel and arrived at a recommendation for the board.
The recommendation, which has been accepted by the board, is that EY be proposed for appointment at this year’s annual general meeting as Beazley’s external auditor for financial periods commencing on or after 1 January 2019. A period of knowledge transfer will occur during the first half of 2019.
ii) 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.
• discussing the output of the FRC’s Audit Quality Review (AQR) with our auditor.
These considerations are taken in to account by the committee when determining whether to reappoint the external auditor. Due to the appointment of EY as the group’s external auditor for financial periods on or after 1 January 2019, KPMG is deemed to not be reappointed by the committee.
iii) Non-audit services The audit and risk committee’s responsibility to monitor and review the objectivity and independence of the external auditor is supported by a policy that we have developed in relation to the provision of non-audit services by the auditor. During 2018, our non-audit services policy was updated, enhanced and reviewed by the committee.
The split between audit and non-audit fees for the year under review is disclosed in note 6 to the financial statements. In the year the audit fees and audit related services for 2018 were $1.6m (2017: $1.6m). Fees for non-audit and assurance services include work related to the accounts and regulatory reporting of the syndicates managed by Beazley, work which would commonly be carried out by the external auditor.
KPMG is a panel member eligible to provide services under our cyber breach response service to policy holders. The committee receives regular updates to monitor the level of activity and to ensure conflicts of interest do not occur.
Currently the membership of the remuneration committee comprises Sir Andrew Likierman (chairman), George Blunden, John Sauerland and Catherine Woods.
Responsibilities of the committee The committee’s main responsibilities are to, inter alia: • set the remuneration policy for the group for approval at the annual general meeting. The objective of such policy shall be to ensure that members of the executive management of the company are provided with appropriate incentives to encourage enhanced performance and are, in a fair and responsible manner, rewarded for their individual contributions to the success of the company; • recommend and where appropriate approve targets for performance related pay schemes and seek shareholder approval for any long term incentive arrangements; • recommend and approve the remuneration of the chairman of the company; Membership and attendance
The specific responsibilities and duties of the committee are set out in its terms of reference, which were updated in September 2018 and reflect the new requirements set out in the UK Corporate Governance Code 2018. These requirements include specific responsibility to keep under review the leadership needs of the organisation, both executive and non-executive, with a view to ensuring the continued ability of the organisation to compete effectively in the marketplace. The terms of reference are available to download from the company’s website.
Responsibilities of the committee The committee’s main responsibilities are to, inter alia: • regularly review the structure, size and composition (including the skills, knowledge, experience and diversity) required by the board compared to its current and projected position; • give full consideration to succession planning for executive and nonexecutive directors and in particular for the key roles of chairman and chief executive, senior executives and any other member of the senior management that it is relevant to consider whilst considering a diverse pipeline of talent; • ensure the directors have the required skills and competencies; • review annually the time required from non-executive directors; • review the results of the board performance evaluation process that relate to the composition and skills and competencies of the board and ensure an appropriate response to development needs; • recommend to the board appointments to the role of senior independent director and chairman as well as membership of board committees; and
The 2018 board effectiveness review was overseen by the committee and was externally facilitated in October/ November 2018 by Boardroom Review Limited. As part of the review, Boardroom Review Limited interviewed directors in one to one meetings; observed board and committee meetings; and reviewed meeting packs together with corporate information. Boardroom Review Limited provided feedback to each director and to the chair of each committee. The review resulted in a robust board discussion on the areas in which action should be taken to strengthen the board’s overall effectiveness. The key areas of focus will be: • reviewing the governance structure and information flows between our regulated subsidiary boards in light of the changing business and political landscape; • considering whether a risk committee should be established, separating out the risk and audit agendas and continued development of the role of internal audit; and
• continuing monitoring of corporate culture, and board engagement with executive development, diversity and talent.
In addition to the formal board evaluation, the board chairman met with each individual director during the year to discuss their contribution to the board. The senior independent director met with the chairman to discuss his performance.
Key activities in 2018 Tasks which the committee carried out in 2018 were to: • The committee commenced the search for a successor of Angela Crawford-Ingle (chair of the audit and risk committee) in accordance with the group’s policy on director independence and rotation. Angela will be stepping down from the board during 2019 following the conclusion of 2018 accounting year and a full handover to her successor. The committee has been assisted by JCA Group, recruitment consultants, for this search; • commence the search process for a new group finance director with a view to appointing in Q1 2019. The appointment of Sally Lake as finance director following the conclusion of 2018 accounting year was announced in January 2019. For the recruitment process the committee was assisted by Russell Reynolds Associates, recruitment consultants; • commence the search for a non-executive director with expertise in technology, operations and data. It is anticipated an appointment will be made in 2019. For the recruitment process the committee has been assisted by Audeliss Executive Search; • review the performance of management by inviting all non- executive directors to attend a nomination committee meeting to review the performance of the executive management team; • consider the board and committee succession plans; • assess the collective skills and competency of the board and consider the proposed reappointment of directors; • ensure that director development plans were implemented and that the board collectively received relevant training; • ensure board members were able to allocate sufficient time to the company to discharge their responsibilities effectively; • consider the wider executive management succession; and
Directors will receive the second tranche (instalment) of the 2014 LTIP and the first tranche of the LTIP for 2016. The tranches are due to vest (pay out) at 63.4% and 17.8% of the maximum respectively. These percentages reflect sustained growth in net asset value per annum of 14.2% and 10.6% respectively for the five and three year performance periods.
As announced after the year end, Sally Lake has been promoted from group actuary to be the new group finance director, effective from May 2019. Sally’s compensation will be in line with our remuneration policy and will be announced when she takes up her appointment.
There have been no special remuneration arrangements for the retirements of Neil Maidment and Martin Bride.
Corporate Governance Developments Following the publication of the new UK Corporate Governance Code, the committee is reviewing the remuneration policy to ensure that Beazley is aligned with best practice.
A number of changes have already been made and taking into account the new Code, the 2019 LTIP awards will be awarded with a post-vesting holding period. The first tranche of the LTIP, which vests after three years, will now have an additional two-year holding period. Executive directors will therefore be required to wait until five years from grant to receive any shares under the LTIP. In addition, the recovery provisions have been strengthened and an additional clause has been introduced to the LTIP to enable the committee to apply independent judgement and discretion to out-turns taking into account wider company and individual performance. The committee is also mindful of evolving market practice in relation to post-employment shareholding guidelines. Currently on cessation, in the case of a “good leaver”, all outstanding share awards subsist to their normal release/vesting dates providing considerable alignment with shareholders post-employment.
balanced against risk considerations; • the structure of packages should support meritocracy, an important part of Beazley’s culture; • reward potentials should be market-competitive; and • executives’ pay should include an element of downside risk.
Remuneration policy Our policy, which remains unchanged for 2019, has two guiding principles: alignment to shareholders’ interests and performance of the group. The key features and basis of alignment are: • Key performance indicators used in incentives. Two important factors in the determination of the annual bonus pool are profit
before tax and return on equity, both of which are key performance indicators for the company. In addition the long term incentive plan (LTIP) uses another key performance indicator, net asset value per share (NAVps) growth, since it is aligned to shareholders’ interest. For the maximum awards to vest, NAVps growth of 15% above the risk-free return has to be sustained for five years; • Five year performance. For a number of years we have operated an LTIP where performance is measured over five years as well as three. This aligns reward with the long term performance of the business including malus and clawback provisions taking reclaim provisions to seven years. In addition, for executive directors, a further two year holding period on the three year award applies from 2019 and ensures alignment with longer term decision-taking. Further strengthening alignment with longer term decision making is the company’s policy to defer a portion of annual bonuses into shares and our shareholding guidelines; and
• Risk. The features which align remuneration with risk include a long time horizon, deferral of bonus into shares and personal shareholding requirements. The committee receives an annual report from the chief risk officer on remuneration policy to ensure it is consistent with, and promotes, effective risk management.
A full copy of the remuneration policy can be found on our website at www.beazley.com.
Performance in 2018 Beazley had strong premium growth in a challenging year with an exceptional series of natural catastrophes and the incentive outcomes reflect this.
The group’s performance over the longer term was strong in terms of NAVps growth and total shareholder return, as illustrated in the charts below.
Element Overview of policy Implementation and outcomes during 2018 Implementation for 2019
Any salary increases will generally reflect our standard approach to all-employee salary increases across the group.
Existing executive directors receive a pension contribution or cash payment in lieu of pension of 15% of base salary.
Discretionary annual bonus determined by reference to both financial and individual performance.
Vesting of LTIP awards is dependent on net asset value per share (NAVps) performance against the risk-free rate of return.
< average risk-free rate +7.5% p.a. 0% = average risk-free rate +7.5% p.a. 10% = average risk-free rate +10% p.a. 25% = average risk-free rate +15% p.a. 100% Straight-line vesting between points
The first tranche of the 2016 LTIP award vested at 17.8% of maximum following three year NAVps performance of 10.6% p.a.
Single total figure of remuneration ▪ The tables below set out the single figure of total remuneration for executive directors and non-executive directors for the financial years ending 31 December 2018 and 31 December 2017.
3 Neil Maidment stepped down from the board on 31 December 2018.
3 Dennis Holt stepped down as chairman on 22 March 2018 and the figure in the table above represents his fees until this date.
7 Catherine Woods joined the remuneration committee and nomination committee effective 1 October 2018. Her non-executive director fee was based on €87,000 (2017: €84,750) and has been converted into sterling for this table at the average exchange rate of 1.13 (2017: the fee was converted into £73,696 at the average exchange rate of 1.15).
For 2019, the average salary increase for Martin Bride and Andrew Horton was 3%, below the average salary increase across the group. Adrian Cox, transitioned from his role as head of specialty lines to chief underwriting officer. As part of this transition, the role of the chief underwriting officer has been restructured to include additional responsibilities. The role already included responsibility for treaty and political, accident and contingency and will now include oversight of property, marine and specialty lines. To recognise the increased responsibility and scope of the role, Adrian’s salary was increased by c.8.3%.
Bonus calculation Recommended awards to individuals from the available pool are determined by taking into account performance based on each individual’s contribution to the group, including a review of performance against individual objectives. For heads of the business divisions, divisional performance is also taken into account. The bonus is discretionary and, rather than adopting a prescriptive formulaic framework, the committee considers wider factors in its deliberations at the end of the year: for example quality of profit and risk considerations.
Annual bonus out-turn for 2018 The process for determining 2018 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.
Guideline/illustrative bonus award as a % of maximum 0% 12.5% 37.5% 75% 100%
ROE for 2018 was 5% and the overall enterprise bonus pool (in which executive directors as well as other senior employees participate) was calculated based on this.
■ 2018 performance range ■ 2018 ROE performance 2018 ROE performance (%)
out substantial claims due to the natural catastrophes in the second half of the year and low investment income. • Delivery of growth in our gross premiums written of 12% in a market where premium rates continued to be under pressure. US performance • Achieved the goal of underwriting a billion dollars of US business. Locally underwritten US premiums grew 20% during the year. • Extending the reach of our market leading products in the US, such as cyber, healthcare liability, accident and health, and
environmental liability. Investment performance • Achieved a portfolio return of 0.8%.
Individual contributions While a number of the specific individual objectives of the executive directors are considered commercially sensitive, the following provides details of executive director achievements which the committee took into account.
structure and capital • Ensure focus on agreed elements of Women in
Finance Charter • Define five year vision for Beazley operations with
• Achieved premium growth of 3.1% in the European business for 2018 and governance in place for future growth
• Plans in place for IFRS 17 and one year deliverables achieved • RI structure and capital delivered in line with US legislative
Women in Finance Charter commitments – increase in number of women in senior management from 32 to 37
• Execute on year one of life sciences plan • Promote and raise capital for syndicate 5623 • Deliver smooth processes within specialty lines and support delivery of target operating model in Beazley. • Co-lead the business plan with Neil Maidment ahead of assuming CUO role at the end of 2018
• Delivered specialty lines 2018 plan in all areas other than opening loss ratios due to pressure on reserve surplus. Grew international line of business and delivered excellent growth in the US. Overall premiums up 12.9%
• Grow the business outside the US • Manage strategy refresh and determine actions as a result • Manage executive succession • Continue to build culture with a focus on digital and agile working
• Smooth transition of CUO role from Neil Maidment to Adrian Cox, successful recruitment of Lou-Ann Layton to succeed Dan Jones as head of broker relations. New group finance director appointed effective from May 2019
• Support development and launch of new products • Ensure claims offering continues to be the best, including people, processes and systems • Support Lloyd’s PPL initiative to drive modernisation across London market • Create 2019 business plan • Transition of CUO role to Adrian Cox
• Premiums are in line with plan however increased claims have impacted the GAAP plan
• Strong leadership of claims team and support of initiatives underway to improve operational aspects including improved feedback for the claims team in annual broker survey
• Beazley is in top quartile for adoption rates of Lloyd’s PPL initiative
• Strong business plan in place for 2019 with Lloyd’s approval • Successful transition of CUO role during the year
Bonus awards for 2018 Within the framework of the annual bonus, in respect of individual performance and achievements, awards are dependent on a profit pool and minimum level of ROE performance.
The resultant bonuses were as follows: Bonus (delivered as a mix of cash and deferred shares) % of maximum % of salary
The following graph and table set out the out-turn for 2018 against performance and illustrate the way in which bonuses over time reflect profit and ROE performance.
A portion of bonus may also be deferred under the investment in underwriting plan, and this capital can be lost if underwriting performance is poor. No such deferral was made in 2018 (see investment in underwriting section on pages 110 for further details).
For 2018, the portion of each director’s annual bonus deferred into shares was as follows: Deferred into shares
Martin L Bride £0 Adrian P Cox £45,000 D Andrew Horton £52,500 Neil P Maidment £0
Bonus awards for 2019 The annual bonus for 2019 will operate within the same framework as set out above with reference to both corporate and individual performance.
In accordance with the updated UK Corporate Governance Code, from 2019, the first tranche of LTIP awards will be subject to a further two year holding period taking the total time frame for all awards to five years.
Actual NAVps growth achieved in the five years to 31 December 2018 was 14.2% p.a. which resulted in 63.4% of the second tranche of the 2014 awards vesting.
Actual NAVps growth achieved in the three years to 31 December 2018 was 10.6% p.a. which resulted in 17.8% of the first tranche of the 2016 awards vesting.
1 The face value of shares awarded was calculated using the three day average share price prior to grant, which was 553.33p.
LTIP awards for 2019 It is intended that the performance conditions for the LTIP awards for 2019 will be in line with those granted in 2018 (see table above). LTIP awards will be 200% of salary for the CEO and 150% for other executive directors. In response to the updated UK Corporate Governance Code, for awards in 2019 an additional clause has been introduced that would enable the committee to adjust the vesting outcome if it is not considered to be a fair representation of the underlying financial or non-financial performance.
The group funds the capital for the plan. The individual capital commitment is then funded through individual bonus deferral. The aim is for individuals to fund their capital within three years.
1 Neil Maidment and Martin Bride have not been invited to participate on the 2019 plan due to their respective retirements.
Malus and clawback Clawback provisions have operated for incentives in respect of 2015 and onwards. Under these provisions the committee has the discretion to require clawback in certain circumstances for a defined period following payment or vesting.
Annual bonus and LTIP awards may be subject to clawback in the event of: • material misstatement of results; • gross misconduct; • factual error in calculating vesting or award; • any reputational damage or; • a material corporate failure in any group member or a relevant business unit.
Details of the defined benefit entitlements of those who served as directors during the year are as follows: Accrued benefit at 31 Dec £
If the account deteriorates then payouts are ‘clawed back’ through adjustments to future payments. Since 2012 profit related pay plans may be at risk of forfeiture or reduction if, in the opinion of the remuneration committee, there has been a serious regulatory breach by the underwriter concerned, including in relation to the group’s policy on conduct risk.
During the year Martin Bride also announced his intention to retire from the group. Martin will step down in Q2 2019 and treatment of his cessation will be disclosed in next year’s remuneration report.
During the year the chairman and non-executive director fees were reviewed and increased reflecting the responsibilities and time commitment of the roles. Details of the non-executive directors’ fees payable for plc board responsibilities are set out below: 2018 fee 2019 fee
George P Blunden 1 Jan 2010 AGM 2019 Angela D Crawford-Ingle 27 Mar 2013 AGM 2019 Christine LaSala 1 Jul 2016 AGM 2020 Sir J Andrew Likierman 25 Mar 2015 AGM 2021 David L Roberts 1 Nov 2017 AGM 2021 John P Sauerland 5 May 2016 AGM 2020 Robert A Stuchbery 11 Aug 2016 AGM 2020 Catherine M Woods 1 Jan 2016 AGM 2019
The standard approach for non-executive director appointments is that the appointment expires at the AGM following the end of a three year term, notwithstanding the fact that each non-executive director is subject to annual re-election at each AGM.
Other incentive arrangements at Beazley (not applicable to executive directors): Element Objective Summary Profit related pay plan
Support bonus plan Employees who are not members of the executive and who do not participate in the underwriters’ profit related pay plan participate in a discretionary bonus pool. This pool provides employees with a discretionary award of an annual performance bonus that reflects overall individual performance including meeting annual objectives.
CEO pay increase in relation to all employees Percentage change in remuneration from 31 Dec 2017 to 31 Dec 2018
Statement of directors’ shareholdings and share interests ▪ LTIP participants are expected to build a shareholding in Beazley equal to their annual award level. The CEO has a shareholding requirement of 200% of salary and other executive directors have a shareholding requirement of 150% of salary. LTIP awards may be forfeited if shareholding requirements are not met. All executive directors have met their shareholding requirements (see chart below).
The table below shows the total number of directors’ interests in shares as at 31 December 2018 or date of cessation as a director.
CEO pay versus performance The following graph sets out Beazley’s 10 year total shareholder return performance to 31 December 2018, compared with the FTSE All Share and FTSE 350 Non-Life Insurance indices. These indices were chosen as comparators as they comprise companies listed on the same exchange and, in the case of the Non-Life Insurance index, the same sector as Beazley.
Relative importance of spend on pay The following table shows the relative spend on pay compared to distributions to shareholders: Overall expenditure on pay
Performance conditions: all of the award is subject to NAVps performance, with 50% measured over a three year period and 50% measured over a five year period. NAVps < RFR+7.5% p.a. equates to 0% vesting, NAVps = RFR+7.5% p.a. equates to 10% vesting, NAVps = RFR+10% p.a. equates to 25% vesting, NAVps = or > RFR+15% p.a. equates to 100% vesting, with straight-line pro-rated vesting between these points. Awards expire in February 2023.
During the year the committee was advised by remuneration consultants from Deloitte LLP. Total fees in relation to executive remuneration consulting were £103,100. Deloitte LLP also provided advice in relation to share schemes, tax, internal audit and compliance support.
Deloitte LLP was appointed by the committee. Deloitte LLP is a member of the Remuneration Consultants’ Group and as such voluntarily operates under a code of conduct in relation to executive remuneration consulting in the UK. The committee agrees each year the protocols under which Deloitte LLP provides advice, to support independence. The committee is satisfied that the advice received from Deloitte LLP has been objective and independent.
Annual general meeting At the forthcoming annual general meeting to be held on 21 March 2019, an advisory resolution will be proposed to approve this annual remuneration report.
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 remuneration issues generally, either by writing to me at the company’s head office or by email through Christine Oldridge at christine.oldridge@beazley.com.
Statement of directors’ responsibilities in respect of the annual report and financial statements The directors are responsible for preparing the annual report and the group and parent company financial statements in accordance with applicable law and regulations.
Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the group and parent company and of their profit or loss for that period. In preparing each of the group and parent company financial statements, the directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and estimates that are reasonable, relevant and reliable; • state whether they have been prepared in accordance with IFRSs as adopted by the EU; • assess the group and parent company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and • use the going concern basis of accounting unless they either intend to liquidate the group or the parent company or to cease operations, or have no realistic alternative but to do so.
The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the parent company’s transactions and disclose with reasonable accuracy at any time the financial position of the parent company and enable them to ensure that its financial statements comply with the Companies Act 2006. They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.
• the strategic report/directors’ report includes a fair review of the development and performance of the business and the position of the issuer and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.
We have audited the financial statements of Beazley plc (“the Company”) for the year ended 31 December 2018 which comprise the consolidated statement of profit or loss, statement of comprehensive income, statement of changes in equity, statements of financial position, statements of cash flows, and the related notes, including the accounting policies.
We were first appointed as auditor by the shareholders on 6 November 2002. The period of total uninterrupted engagement is for the 16 financial years ended 31 December 2018. We have fulfilled our ethical responsibilities under, and we remain independent of the Group in accordance with, UK ethical requirements including the FRC Ethical Standard as applied to listed public interest entities. No non-audit services prohibited by that standard were provided.
Refer to page 92 (Audit and Risk Committee Report), page 142 (Statement of accounting policies) and page 181 (financial disclosures).
The effect of these matters is that, as part of our risk assessment, we determined that the valuation of insurance liabilities has a high degree of estimation uncertainty, with a potential range of reasonable outcomes greater than our materiality for the financial statements as a whole, and possibly many times that amount.
Completeness and accuracy of data: The valuation of insurance liabilities depends on complete and accurate data about the volume, amount and pattern of current and historical claims since they are often used to form expectations about future claims. If the data used in calculating the insurance liabilities, or for forming judgements over key assumptions, is not complete and accurate then material impacts on the valuation of insurance liabilities may arise.
In addition to the procedures above, the audit team performed procedures to assess the completeness and accuracy of data: — Data reconciliations: Checked the completeness and accuracy of the data used within the reserving process by reconciling the actuarial source data to the financial systems. We have also checked the completeness and accuracy of the data flow from the claims and policy systems into the financial systems primarily by performing substantive testing over data reconciliations.
— We found the resulting estimate of insurance liabilities to be acceptable. (2017 result: acceptable).
— Reinsurance assets: Major catastrophes could impair the Group’s ability to recover incurred losses from its reinsurers, depending on the financial strength of the counterparties, which would then impact the recoverability of reinsurance assets.
In recent years, Beazley has adopted a consistent approach in determining the bad debt provisions to be booked in the financial statements. However, judgement is required in ensuring this approach remains relevant and that any aged balances are being given appropriate attention.
— Provisioning analysis: Critically assessed, based on our sector expertise, the adequacy of the provisioning policy in place for Beazley by assessing and investigating any material movements in policy and the overall percentage of bad debt during the reporting period.
Refer to page 93 (Audit and Risk Committee Report), page 145 (Statement of accounting policies) and page 171 (financial disclosures).
— Comparing valuations: For investments in hedge funds we inspected the financial statements of the underlying funds to assess that the valuation approach was acceptable.
124 2. Key audit matters: our assessment of risks of material misstatement (cont.)
Our procedures included: — Reconciliation controls: Tested the design and operating effectiveness of the controls associated with the existence and valuation of the hedge funds and illiquid credit assets.
— Historical accuracy: For illiquid credit assets and investments in hedge funds the historical accuracy of the valuations was assessed by comparing interim valuation reports to the final year-end reports for prior periods.
The effect of these matters is that, as part of our risk assessment, we determined that valuation of gross premium written estimates has a high degree of estimation uncertainty, with a potential range of reasonable outcomes greater than our materiality for the financial statements as a whole, and possibly many times that amount.
Our procedures included: — Retrospective analysis: Critically assessed the Group’s past expertise in making premium estimates by comparing the estimates and actuals for prior years for a sample of binders. We also compared the Group’s estimate of gross premiums written between the early close date and reporting date to actuals.
— Assessing transparency: Considered the adequacy of the Group’s disclosures in respect of the valuation of gross premium written estimates.
The Group audit team approved the component materialities, which ranged from $0.1m to $16m (31 December 2017: $0.1m to $16m), having regard to the mix of size and risk profile of the Group across the components. All other work, including the audit of the parent company, was performed by the Group audit team.
As these were risks that could potentially cast significant doubt on the Group’s and the Company's ability to continue as a going concern, we considered sensitivities over the level of available financial resources indicated by the Group’s financial forecasts taking account of reasonably possible (but not unrealistic) adverse effects that could arise from these risks individually and collectively and evaluated the achievability of the actions the Directors consider they would take to improve the position should the risks materialise. We also considered less predictable but realistic second order impacts, such as the impact of Brexit and the impact on the economic environment, which could result in a rapid reduction of available financial resources.
Based on this work, we are required to report to you if: — we have anything material to add or draw attention to in relation to the directors’ statement in Note 1 to the financial statements on the use of the going concern basis of accounting with no material uncertainties that may cast significant doubt over the Group and Company’s use of that basis for a period of at least twelve months from the date of approval of the financial statements; or
— the related statement under the Listing Rules set out on page 74 is materially inconsistent with our audit knowledge.
The directors are responsible for the other information presented in the Annual Report together with the financial statements. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except as explicitly stated below, any form of assurance conclusion thereon.
Based solely on our work on the other information: — we have not identified material misstatements in the strategic report and the directors’ report; — in our opinion the information given in those reports for the financial year is consistent with the financial statements; and
— in our opinion those reports have been prepared in accordance with the Companies Act 2006.
Based on the knowledge we acquired during our financial statements audit, we have nothing material to add or draw attention to in relation to: — the directors’ confirmation within the viability statement page 56 that they have carried out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency and liquidity; — the Principal Risks disclosures describing these risks and explaining how they are being managed and mitigated; and
Under the Companies Act 2006, we are required to report to you if, in our opinion: — adequate accounting records have not been kept by the parent Company, or returns adequate for our audit have not been received from branches not visited by us; or
— the parent Company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the accounting records and returns; or
— certain disclosures of directors’ remuneration specified by law are not made; or
Firstly, the Group is subject to laws and regulations that directly affect the financial statements including financial reporting legislation (including related companies legislation), distributable profits legislation and taxation legislation and we assessed the extent of compliance with these laws and regulations as part of our procedures on the related financial statement items.
Financial statements 131 Consolidated statement of profit or loss 132 Statements of comprehensive income 133 Statements of changes in equity 135 Statements of financial position 136 Statements of cash flows 137 Notes to the financial statements 198 Glossary www.beazley.com130 Beazley Annual report 2018
Consolidated statement of profit or loss for the year ended 31 December 2018
Gross premiums written 3 2,615.3 2,343.8 Written premiums ceded to reinsurers (366.8) (365.0) Net premiums written 3 2,248.5 1,978.8
Change in gross provision for unearned premiums (167.6) (118.4) Reinsurer’s share of change in the provision for unearned premiums 3.7 9.0 Change in net provision for unearned premiums (163.9) (109.4)
Insurance claims 1,463.9 1,388.0 Insurance claims recoverable from reinsurers (236.1) (312.3) Net insurance claims 3 1,227.8 1,075.7
Share of profit in associates 14 – 0.1 Impairment of investment in associate 14 (7.0) – Results of operating activities 98.8 190.1
Items that may be reclassified subsequently to profit or loss: Foreign exchange translation differences (2.1) 2.9 Total other comprehensive income (3.6) 2.3 Total comprehensive income recognised 64.6 132.3
Statement of comprehensive income for the year ended 31 December 2018 $m $m
Statement of changes in equity for the year ended 31 December 2018
Total comprehensive income recognised – – – – – 134.8 134.8
Plant and equipment 13 4.9 – 4.4 – Deferred tax asset 28 28.9 – 6.9 – Investment in subsidiaries 31 – 724.6 – 724.6 Investment in associates 14 – – 7.0 – Deferred acquisition costs 15 307.4 – 281.4 –
Share premium 1.6 1.6 – – Merger reserve – 55.4 – 55.4 Foreign currency translation reserve (95.9) 0.7 (93.8) 0.7
Cash flow from operating activities Profit before income tax 76.4 81.2 168.0 133.3 Adjustments for: Amortisation of intangibles 12 12.6 – 11.6 – Equity settled share based compensation 22 18.7 18.7 23.6 24.5 Net fair value loss/(gain) on financial assets 53.7 – (69.6) – Share of profit in associates 14 – – (0.1) – Impairment of investment in associate 14 7.0 – – – Depreciation of plant and equipment 13 2.1 – 2.7 – Impairment of reinsurance assets (written back)/recognised 6 (1.0) – 0.6 – Increase/(decrease) in insurance and other payables1 216.7 5.6 534.4 (0.2) Decrease/(increase) in insurance, reinsurance and other receivables 23.9 19.8 (295.9) (7.0) Increase in deferred acquisition costs (26.0) – (38.6) –
Foreign exchange on financial liabilities (4.1) – 4.6 – Income tax paid (21.1) – (27.9) – Net cash generated from operating activities 278.7 43.3 258.9 14.7
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 statement of profit or loss and related notes that form a part of these approved financial statements.
These amendments did not result in a material impact on the financial statements of the company.
– Senior secured loans 132.1 85.6 Equity funds 85.4 168.3 Hedge funds 337.2 377.4 Illiquid credit assets 186.6 180.4 Derivative financial assets 6.9 8.8 Total financial assets managed and evaluated on a fair value basis 5,052.6 4,890.1
Financial assets meeting the SPPI test Insurance receivables 943.3 918.0 Other receivables 58.5 68.6 Total financial assets meeting the SPPI test 1,001.8 986.6
Financial statem ents www.beazley.com Annual report 2018 Beazley 139 1 Statement of accounting policies continued • IFRS 16, effective from 1 January 2019, replaces the existing leases standard IAS 17: Leases, and introduces a single, on-balance-sheet accounting model for leases, where distinction between operating and finance leases is eliminated. The standard will have a material impact on the group’s statement of financial position, as large assets and liabilities related to the recognition of a right-of-use asset and lease liability will now be included. As at 31 December 2018 the group’s future minimum estimated payments under non-cancellable lease contracts amounted to $35.6m. This represents the value of the opening lease liability on the statement of financial position as at 1 January 2019. The group has three portfolios of leases: IT equipment, vehicles and property. The group does not have any instances where it is a lessor or is involved in a sublease arrangement. The group has taken the approach of recognising a right-of-use asset of the same amount as the lease liability on initial recognition as at 1 January 2019. With regard to profit and loss impact, this new approach will have no long term impact. However, the group will have a different profit recognition pattern to the current process with interest expense now being contained within finance costs, but the depreciation of the right-of-use asset going through administrative expenses. This is expected to have the overall impact of reducing administrative expenses and increasing finance costs. The net impact is a reduction to profit before tax. On transition to the new standard the group will opt to retain prior period figures as reported under the previous standards as per the modified retrospective approach of transition. The cumulative effect of applying IFRS 16 will have an immaterial impact on the opening balance in equity as at the date of initial application.
The best estimate of the most likely ultimate outcome is used when calculating notified claim. This estimate is based upon the facts available at the time, in conjunction with the claims manager’s view of likely future developments.
Another significant area of estimation is the group’s financial assets and liabilities. Information about estimation uncertainty related to the group’s financial assets and liabilities is described in this statement of accounting policies and note 16: financial assets and liabilities (valuations based on models and unobservable inputs).
www.beazley.com140 Beazley Annual report 2018 1 Statement of accounting policies continued Other key estimates contained within our close process are premium estimates and the earning pattern of recognising premium over the life of the contract. In the syndicates the premium written is initially based on the estimated premium income (EPI) of each contract. Where premium is sourced through binders, the binder EPI is pro-rated across the binder period. This is done on a straight-line basis unless the underlying writing pattern from the prior period indicates the actual underlying writing pattern is materially different. The underwriters adjust their EPI estimates as the year of account matures. As the year of account closes premiums are adjusted to match the actual signed premium. An accrual for estimated future reinstatement premiums is retained. Premiums are earned on a straight-line basis over the life of each contract. At a portfolio level this is considered to provide a reasonable estimate for the full year of the pattern of risk over the coverage period.
b) Judgements Information about significant areas of critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the financial statements are described in this statement of accounting policies and also specifically in the following notes: • note 1a: accounting treatment for the group’s interest in managed syndicates; and • note 12: intangible assets including goodwill (assumptions underlying recoverable amounts).
For all business combinations from 1 January 2010: (i) transaction costs, other than those associated with the issue of debt or equity securities, that the group incurs in connection
with a business combination, are expensed as incurred; (ii) in addition, any consideration transferred does not include amounts related to the settlement of pre-existing relationships.
Such amounts are recognised in profit or loss; and (iii) any contingent consideration is measured at fair value at the acquisition date.
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 it is entitled. In 2018, Beazley also consolidated a 33.85% of the business written through syndicate 5623, which is aligned with Beazley Corporate Member No.3 Limited’s participation in the syndicate.
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. Equity accounting is discontinued when the group no longer has significant influence over the investment.
c) Intercompany balances and transactions All intercompany transactions, balances and unrealised gains or losses on transactions between group companies are eliminated in the group financial statements. Transactions and balances between the group and associates are not eliminated.
c) Foreign operations The results and financial position of the group companies that have a functional currency different from the group presentational currency are translated into the presentational currency as follows: • assets and liabilities are translated at the closing rate ruling at the statement of financial position date; • income and expenses for each statement of profit or loss are translated at average exchange rates for the reporting period where this is determined to be a reasonable approximation of the actual transaction rates; and
For more recent underwriting years, attention is paid 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.
Revenue Revenue consists of net earned premiums, net investment income and other income (made up of commissions received from Beazley service companies, profit commissions, managing agent’s fees and service fees). Profit commissions are recognised as profit is earned. Managing agent’s fees are recognised as the services are provided.
Financial statem ents www.beazley.com Annual report 2018 Beazley 143 1 Statement of accounting policies continued Plant and equipment All plant and equipment is recorded at cost less accumulated depreciation and any impairment losses. Depreciation is calculated using the straight-line method to allocate the cost of the assets to their residual values over their estimated useful lives as follows: Fixtures and fittings Three to ten years Computer equipment Three years
Goodwill has an indefinite life and is annually tested for impairment. Goodwill is allocated to each cash-generating unit (CGU, being the group’s operating segments) for the purpose of impairment testing. Goodwill is impaired when the net carrying amount of the relevant CGU exceeds its recoverable amount, being the higher of its value in use or fair value less costs to sell. Value in use is defined as the present value of the future cash flows expected to be derived from the CGU. On transition to IFRS at 1 January 2004, any goodwill previously amortised or written off was not reinstated.
www.beazley.com144 Beazley Annual report 2018 1 Statement of accounting policies continued a) Financial assets On acquisition of a financial asset, the group is required to classify the asset into one of the following categories: financial assets at fair value through the statement of profit or loss, loans and receivables, assets held to maturity and assets available for sale. The group does not make use of the held to maturity and available for sale categories.
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 continuously 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 on the next page.
www.beazley.com146 Beazley Annual report 2018 1 Statement of accounting policies continued l) Impairment of financial assets The group considers evidence of impairment for financial assets measured at amortised cost at both a specific asset and a collective level. The group assesses at each reporting date whether there is objective evidence that a specific financial asset measured at amortised cost is impaired. A financial asset is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that have occurred after the initial recognition of the assets and that event has an impact on the estimated cash flows of the financial asset that can be reliably estimated. Assets that are not individually significant are collectively assessed for impairment by grouping together assets with similar risk characteristics.
m) Cash and cash equivalents Cash and cash equivalents consist of cash held at bank, cash in hand, deposits held at call with banks, cash held in Lloyd’s trust accounts and other short term highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. These investments have less than three months maturity from the date of acquisition. Cash and cash equivalents are measured at fair value through the profit and loss account.
Financial statem ents www.beazley.com Annual report 2018 Beazley 147 1 Statement of accounting policies continued Past service costs are recognised as an expense at the earlier of the date when a plan amendment or curtailment occurs and the date when an entity recognises any termination benefits.
b) Share based compensation The group offers option plans over Beazley plc’s ordinary shares to certain employees, including the save-as-you-earn (SAYE) scheme.
When the options are exercised and new shares are issued to cover SAYE vestings, the proceeds received, net of any transaction costs, are credited to share capital (nominal value) with the excess amount going to share premium. For other plans, when no proceeds are received, the nominal value of shares issued is to share capital and debited to retained earnings. When the options are exercised and the shares are granted from the employee share trust, the proceeds received, net of any transaction costs, and the value of shares held within the trust, are credited to retained earnings.
Current tax is the expected tax payable on the taxable income for the year using tax rates enacted or substantively enacted at the year end reporting date and any adjustments to tax payable in respect of prior periods.
www.beazley.com148 Beazley Annual report 2018 2 Risk management The group has identified the risks arising from its activities and has established policies and procedures to manage these items in accordance with its risk appetite. The group categorises its risks into eight areas: insurance, strategic, market, operational, credit, regulatory and legal, liquidity and group risk. The sections below outline the group’s risk appetite and explain how it defines and manages each category of risk.
The group’s high level catastrophe risk appetite is set by the board and the business plans of each team are determined within these parameters. The board may adjust these limits over time as conditions change. In 2018 the group operated to a catastrophe risk appetite for a probabilistic 1-in-250 years US event of $416.0m (2017: $370.0m) net of reinsurance. This represented an increase in our catastrophe risk appetite of 12% compared to 2017.
To manage the potential exposure, the board has established a risk budget for the aggregation of data breach related claims which is monitored by reference to the largest of 15 realistic disaster scenarios that have been developed internally. These scenarios have been peer reviewed by an external technical expert and include the failure of a data aggregator, the failure of a shared hardware or software platform, the failure of a cloud provider, the failure of a financial transaction system and four property damage related scenarios. These scenarios include all aspects of coverage, including dependent business interruption. Whilst it is not possible to be precise, as there is sparse data on actual aggregated events, these severe scenarios are expected to be very infrequent. The largest realistic disaster scenario is currently lower than the exposure to the Lloyd’s prescribed natural catastrophe events listed above for the group as at 31 December 2018. However, the cost of these scenarios will increase as Beazley continues to grow its data breach product. The clash reinsurance programme that protects the specialty lines account would partially mitigate the cost of most, but not all, data breach catastrophes.
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 2018, 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.
d) Reserving and ultimate reserves risk Reserving and ultimate reserves risk occurs within the group where established insurance liabilities are insufficient through inaccurate forecasting, or where there is inadequate allowance for expenses and reinsurance bad debts in provisions.
On a day-to-day basis, the group’s management structure encourages organisational flexibility and adaptability, while ensuring that activities are appropriately coordinated and controlled. By focusing on the needs of their customers and demonstrating both progressive and responsive abilities, staff, management and outsourced service providers are expected to excel in service and quality. Individuals and teams are also expected to transact their activities in an open and transparent way. These behavioural expectations reaffirm low group risk tolerance by aligning interests to ensure that routine activities, projects and other initiatives are implemented to benefit and protect resources of both local business segments and the group as a whole.
www.beazley.com152 Beazley Annual report 2018 2 Risk management continued a) Foreign exchange risk The functional currency of Beazley plc and its main trading entities is US dollars and the presentational currency in which the group reports its consolidated results is US dollars. The effect of this on foreign exchange risk is that the group is mainly exposed to fluctuations in exchange rates for non-dollar denominated transactions and to net asset translation risk on non-dollar functional currency entities.
The following table summarises the carrying value of total assets and total liabilities categorised by the group’s main currencies: UK £ $m
Financial statem ents www.beazley.com Annual report 2018 Beazley 153 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.
The group also entered into bond futures contracts to manage the interest rate risk on bond portfolios.
Fixed and floating rate debt securities 1,447.4 851.7 571.1 366.3 382.0 96.2 – 3,714.7 Cash and cash equivalents 440.5 – – – – – – 440.5 Derivative financial instruments 8.8 – – – – – – 8.8
Borrowings consist of two items as at 31 December 2018. The first is $250.0m of subordinated tier 2 debt raised in November 2016. This debt is due in 2026 and has annual interest of 5.875% payable in May and November of each year. The second comprises £75m of sterling denominated 5.375% notes due in 2019 with interest payable in March and September each year.
www.beazley.com154 Beazley Annual report 2018 2 Risk management continued c) Price risk Financial assets and derivatives that are recognised in the statement of financial position at their fair value are susceptible to losses due to adverse changes in prices. This is referred to as price risk.
2.5 Credit risk Credit risk arises where counterparties fail to meet their financial obligations in full as they fall due. The primary sources of credit risk for the group are: • reinsurers – reinsurers may fail to pay valid claims against a reinsurance contract held by the group; • brokers and coverholders – counterparties fail to pass on premiums or claims collected or paid on behalf of the group; • investments – issuer default results in the group losing all or part of the value of a financial instrument or a derivative financial instrument; and
The investment committee has established comprehensive guidelines for the group’s investment managers regarding the type, duration and quality of investments acceptable to the group. The performance of investment managers is regularly reviewed to confirm adherence to these guidelines.
Financial assets at fair value – fixed and floating rate debt securities 3,041.2 1,059.0 – – – 4,100.2 – equity funds – – – – 85.4 85.4 – hedge funds – – – – 337.2 337.2 – illiquid credit assets – – – – 186.6 186.6 – derivative financial instruments – – – – 6.9 6.9 Insurance receivables – – – – 943.3 943.3 Reinsurance assets 1,192.8 – – – – 1,192.8 Other receivables 58.5 – – – – 58.5 Cash and cash equivalents 336.3 – – – – 336.3
The largest counterparty exposure within tier 1 is $1,106.5m of US treasuries (2017: $936.7m).
The total impairment provision in the statement of financial position in respect of reinsurance assets past due (being reinsurance recoverables due on paid claims) by more than 30 days at 31 December 2018 was $3.1m (2017: $3.1m). This $3.1m provision in respect of overdue reinsurance recoverables is included within the total provision of $12.2m shown in the table at the top of the page.
www.beazley.com158 Beazley Annual report 2018 2 Risk management continued The following is an analysis by business segment of the estimated timing of the net cash flows based on the net claims liabilities1 balance held at 31 December: Within 1 year $m 1-3 years $m 3-5 years $m
<1 yr $m 1-2 yrs $m 2-3 yrs $m 3-4 yrs $m $m 5-10 yrs $m >10 yrs $m
Fixed and floating rate debt securities 926.5 967.1 653.0 511.9 454.3 201.9 – 3,714.7 Derivative financial instruments 8.8 – – – – – – 8.8 Cash and cash equivalents 440.5 – – – – – – 440.5 Insurance receivables 918.0 – – – – – – 918.0 Other receivables 68.6 – – – – – – 68.6 Other payables (512.5) – – – – – – (512.5)
As at 31 December 2017, borrowings included $18.0m subordinated debt that was due in October 2034 and callable at the group’s option since 2009. The group exercised its call option in October 2018. As the debt was recalled in November 2018 it is not included within any of the categories in the 31 December 2018 table (2017: >10 yrs category).
The group has several requirements for capital, including: • to support underwriting at Lloyd’s through the syndicates in which it participates, being 2623, 3623, 3622 and 5623. This
www.beazley.com160 Beazley Annual report 2018 2 Risk management continued The board’s strategy is to grow the dividend (excluding special dividend) by between 5% and 10% per year. Our capital management strategy is to carry some surplus capital to enable us to take advantage of growth opportunities which may arise. At 31 December 2018 we have surplus capital of 26% of ECR (unaudited, on a Solvency II basis). Following payment of the second interim dividend of 7.8p per share, the surplus reduces to 23% (unaudited) compared to our current target range of 15% to 25% of ECR.
Specialty lines This segment underwrites professional liability, management liability and environmental liability, including architects and engineers, healthcare, cyber, lawyers, technology, media and business services, directors and officers and employment practices risks.
Expenses for the acquisition of insurance contracts 74.5 63.3 103.5 33.2 287.4 561.9
1 In 2018, management received information which led them to conclude that the recoverable amount of the group’s investment in Capson was lower than its carrying value. In March 2018 the group took the decision to write down its investment in Capson Corp., Inc to $2.8m. In December the group took the further decision to fully write down its investment in Capson Corp., Inc to nil. This is deemed to be an appropriate value for Beazley’s share in Capson.
Segment results Gross premiums written 267.6 214.3 362.9 206.8 1,292.2 2,343.8
Expenses for the acquisition of insurance contracts 68.9 67.2 95.3 32.9 255.4 519.7
Increase in intangibles – – – – 34.4 34.4 1 In July 2017 the group sold its share in associate, Equinox Global Limited, to Nexus Underwriting Management Limited.
Financial statem ents www.beazley.com Annual report 2018 Beazley 163 3 Segmental analysis continued c) Information about geographical areas The group’s operating segments are also managed geographically by placement of risk. UK earned premium in the analysis below represents all risks placed at Lloyd’s; US earned premium represents all risks placed at the group’s US insurance company, Beazley Insurance Company, Inc; and Europe earned premium represents all risks placed at the group’s European insurance company, Beazley Insurance dac. An analysis of gross premiums written split geographically by placement of risk and by reportable segment is provided in note 2 on page 150.
Net earned premiums UK (Lloyd’s) 1,821.8 1,807.8 US (Non-Lloyd’s)1 260.2 61.6 Europe (Non-Lloyd’s) 2.6 –
1 Increase in US net earned premiums and assets is driven by a change of internal reinsurance contract. As a result of this, more premiums are retained in the US.
Capital expenditure Non-US 9.5 10.2 4 Net investment income $m $m
Commissions received by Beazley service companies 20.7 22.7 Profit commissions from syndicates 623/6107 7.5 8.0 Agency fees from 623 2.5 2.2 Other income 3.0 2.6
As at 31 December 2018 there was no accrued profit commission at risk of being reversed if there were to be an adverse impact on syndicate 623’s profit (31 December 2017: $0.7m). We have not experienced any deterioration to profits on this contract recognised previously.
Operating expenses include: Amounts receivable by the auditor and associates in respect of: – audit services for the group and subsidiaries 1.0 0.9 – audit-related assurance services 0.6 0.7 – taxation compliance services 0.1 0.1 – other non-audit services 0.8 0.6
Wages and salaries 156.0 142.4 Short term incentive payments 38.0 70.2 Social security 21.0 18.2 Share based remuneration 17.7 21.1
Reconciliation of tax expense The weighted average of statutory tax rates applied to the profits earned in each country in which the group operates is 18.6% (2017: 18.7%), whereas the tax charged for the year 31 December 2018 as a percentage of profit before tax is 10.7% (2017: 22.6%). The reasons for the difference are explained below: $m
A change in the effective corporation tax in the US from 35% to 21% was substantively enacted in December 2017 and has been reflected in the calculation of the deferred tax balance as at 31 December 2018.
Basic Basic earnings per share are calculated by dividing profit after tax of $68.2m (2017: $130.0m) by the weighted average number of shares in issue during the year of 523.2m (2017: 520.5m). The shares held in the Employee Share Options Plan (ESOP) of 4.7m (2017: 3.8m) have been excluded from the calculation, until such time as they vest unconditionally with the employees.
Together with the interim dividend of 3.9p (2017: 3.7p) this gives a total dividend for the year of 11.7p (2017: 11.1p).
Financial statem ents www.beazley.com Annual report 2018 Beazley 167 12 Intangible assets
Other additions – – – 7.2 – 7.2 Foreign exchange loss – – – (3.3) (2.0) (5.3)
Significant changes in the economic and regulatory environment, such as US legislation and Brexit, could impact the amount of premiums written and investment income for each CGU. This could potentially have an impact on the carrying value of the CGU, however this remains remote.
US insurance authorisation licences represent the privilege to write insurance business in particular states in the US. Licences are allocated to the relevant CGU. There is no active market for licences, therefore value in use is deemed to be fair value. As described above, a WACC rate is applied to projected future cash flows sourced from management approved budgets. Keybudgets. Key assumptions are the same as those outlined above. Based upon all available evidence the results of the testing indicate that no impairment is required.
Financial statem ents www.beazley.com Annual report 2018 Beazley 169 13 Plant and equipment Company Group
As at 1 January 7.0 9.9 Sale of share in Equinox Global Limited – (3.0) Impairment of Capson Corp., Inc. (7.0) – Share of profit after tax – 0.1 As at 31 December – 7.0
The group’s investment in associates consists of: Country of incorporation % interest held Carrying value $m
The aggregate financial information for all associates (100%) held at 31 December 2018 is as follows: 2018 $m $m
All of the investments in associates are unlisted and are equity accounted using available financial information as at 31 December 2018. Falcon Money Management Holdings Limited is an investment management company which also acts in an intermediary capacity.
As noted on page 145 consideration is also given when valuing the hedge funds to the timing of the latest valuations, and the impact of any significant market stress events. The adjustment to the underlying net asset value of the funds as a result of these considerations was $nil at 31 December 2018 (2017: $nil).
The amounts expected to mature before and after one year are: Within one year 108.0 1.3 After one year 248.7 366.0
A breakdown of the group’s investment portfolio is provided on page 45. A breakdown of derivative financial instruments is disclosed in note 17.
Valuation hierarchy The table below summarises financial assets carried at fair value using a valuation hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy has the following levels: Level 1 – Valuations based on quoted prices in active markets for identical instruments. An active market is a market in which transactions for the instrument occur with sufficient frequency and volume on an ongoing basis such that quoted prices reflect prices at which an orderly transaction would take place between market participants at the measurement date. Included within level 1 are bonds, treasury bills of government and government agencies, corporate bonds and equity funds which are measured based on quoted prices in active markets.
Financial statem ents www.beazley.com Annual report 2018 Beazley 173 16 Financial assets and liabilities continued Level 2 investments For the group’s level 2 debt securities our fund administrator obtains the prices used in the valuation from independent pricing vendors such as Bloomberg, Standard and Poor’s, Reuters, Markit and International Data Corporation. The independent pricing vendors derive an evaluated price from observable market inputs. The market inputs include trade data, two-sided markets, institutional bids, comparable trades, dealer quotes, and other relevant market data. These inputs are verified in their pricing engines and calibrated with the pricing models to calculate spread to benchmarks, as well as other pricing assumptions such as weighted average life (WAL), discount margins (DM), default rates, and recovery and prepayment assumptions for mortgage securities. While such valuations are sensitive to estimates, it is believed that changing one or more of the assumptions to reasonably possible alternative assumptions would not change the fair value significantly.
Level 1 $m Level 2 $m Level 3 $m Total $m
Financial liabilities measured at fair value Derivative financial liabilities 1.3 – – 1.3
Transfers and level 3 investment reconciliations There were no transfers in either direction between Level 1, 2 and 3 in either 2017 or 2018.
The table below shows a reconciliation from the opening balances to the closing balances of level 3 fair values.
Total net gains recognised in profit or loss 12.3 20.0 As at 31 December 186.6 180.4
Total unrealised loss on level 3 investments included into net gains above was $0.7m (2017: gain of $16.4m).
High yield bond funds 32.7 58.8 Equity funds 85.4 168.3 Hedge funds 337.2 377.4 Illiquid credit assets 186.6 180.4 Investments through unconsolidated structured entities 641.9 784.9
As described in note 2 to the financial statements, the group monitors and manages its currency exposures to net assets and financial assets held at fair value.
Financial assets at fair value Fixed and floating rate debt securities 6.6 184.5 – 191.1 3,909.1 4,100.2
The above qualitative and quantitative disclosure along with the risk management discussions in note 2 enable more comprehensive evaluation of Beazley’s exposure to risks arising from financial instruments.
Financial statem ents www.beazley.com Annual report 2018 Beazley 177 17 Derivative financial instruments In 2018 and 2017 the group entered into over-the-counter and exchange traded derivative contracts. The group had the right and the intention to settle each contract on a net basis.
Foreign exchange forward contracts The group entered into over-the-counter foreign exchange forward agreements in order to economically hedge the foreign currency exposure resulting from transactions and balances held in currencies that are different to the functional currency of the group.
Further analysis of the reinsurance assets is provided in note 24.
Cash at bank and in hand 291.3 376.2 Short term deposits and highly liquid investments 45.0 64.3
Cash at bank and in hand 2.4 0.7 21 Share capital
Financial statem ents www.beazley.com Annual report 2018 Beazley 179 22 Other reserves Employee share options reserve $m
The merger reserve is shown within the statement of changes in equity as a separate category and as such has been excluded from the other reserves note.
Five years’ service + NAV + minimum shareholding requirement 10 years
SAYE (Others) 09/05/2016 0.1 Three years’ service N/A Total share options outstanding 16.5
Financial statem ents www.beazley.com Annual report 2018 Beazley 181 23 Equity compensation plans continued Further details of equity compensation plans can be found in the directors’ remuneration report on pages 101 to 120. The total gain on directors’ exercises of share-option plans during the period was £6.3m.
The share option programmes allow 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) 404.0 333.4 Weighted average exercise price (pence per option) 44.7 34.6 Average expected life of options 4.4 yrs 4.3 yrs Expected volatility 23.5% 24.4% Expected dividend yield 1.3% 1.9% Average risk-free interest rate 0.9% 1.1%
Net Claims reported and loss adjustment expenses 939.3 836.9 Claims incurred but not reported 2,149.7 2,078.5 Net claims liabilities 3,089.0 2,915.4 Unearned premiums 1,174.4 1,021.3 Total insurance liabilities, net 4,263.4 3,936.7
Financial statem ents www.beazley.com Annual report 2018 Beazley 183 24 Insurance liabilities and reinsurance assets continued 24.2 Assumptions, changes in assumptions and claims reserve strength analysis a) Process used to decide on assumptions The peer review reserving process Beazley uses a quarterly dual track process to set its reserves: • the actuarial team uses several actuarial and statistical methods to estimate the ultimate premium and claims costs, with the most appropriate methods selected depending on the nature of each class of business; and • the underwriting teams concurrently review the development of the incurred loss ratio over time, work with our claims managers to set reserve estimates for identified claims and utilise their detailed understanding of both risks underwritten and the nature of the claims to establish an alternative estimate of ultimate claims cost, which is compared to the actuarially established figures.
The Bornhuetter-Ferguson method uses a combination of a benchmark/market-based estimate and an estimate based on claims experience. The former is based on a measure of exposure such as premiums; the latter is based on the paid or incurred claims observed to date. The two estimates are combined using a formula that gives more weight to the experience-based estimate as time passes. This technique has been used in situations where developed claims experience was not available for the projection (e.g. recent underwriting years or new classes of business).
www.beazley.com184 Beazley Annual report 2018 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 combination.
To illustrate the robustness of our reserves, the loss development tables below provide information about historical claims development by the five segments – marine, political, accident & contingency, property, reinsurance and specialty lines. The tables are by underwriting year which in our view provides the most transparent reserving basis. We have supplied tables for both ultimate gross claims and ultimate net claims.
Less unearned portion of ultimate losses ($m) – – – – – – – – – (35.3) (738.8) (774.1)
Less unearned portion of ultimate losses ($m) – – – – – – – – – (33.0) (644.2) (677.2)
Marine There have been reserve releases in the energy book in the 2009 underwriting year following the improvement of a specific claim. The 2010 and 2014 underwriting years have been impacted by specific claims in energy and hull respectively. The 2018 underwriting year has been opened higher than previous years to allow for the recent increased claims activity.
Property Minor releases have been seen on a number of underwriting years, with one claim on the commercial property book leading to a small strengthening in 2013. The recent years have been significantly impacted by higher attritional claims, as well as some strengthening on the 2017 catastrophe estimates during the year.
Reserve releases during the year totalled $115.0m (2017: $203.9m). The net of reinsurance estimates of ultimate claims costs on the 2016 and prior underwriting years have improved by $133.5m during 2018, while 2017 underwriting year strengthened by $18.5m driven by the deterioration of catastrophe and attritional claims in our property division.
Financial statem ents www.beazley.com Annual report 2018 Beazley 191 25 Borrowings The carrying amount and fair values of the non-current borrowings are as follows: Carrying value
The fair values of the subordinated debt, the tier 2 subordinated debt and the retail bond are based on quoted market prices.
Present value of funded obligations 47.0 55.9 Fair value of plan assets (44.6) (53.6) Retirement benefit liability in the statement of financial position 2.4 2.3
Amounts recognised in the statement of profit or loss Interest cost 1.3 1.4 Expected return on plan assets (1.3) (1.3)
This pension is related to salary at the date of death.
Contributions to the scheme are determined by a qualified actuary using the projected unit credit method as set out in the scheme rules and the most recent valuation was at 31 December 2018. According to the Schedule of Contributions, the group expects to contribute approximately $1.3m in each of the next two years.
The most recently completed Actuarial Valuation of the Scheme was carried out at 1 January 2017 including a valuation carried out in accordance with the Pensions Protection Fund (Valuation) Regulations 2005 and with appropriate section 179 guidance and assumptions issued by the Board of the Pension Protection Fund.
Movement in present value of funded obligations recognised in the statement of financial position Balance at 1 January 55.9 48.2 Interest cost 1.3 1.4 Actuarial (gain)/loss (6.8) 4.2 Benefits paid (1.1) (0.4) Foreign exchange (gain)/loss (2.3) 2.5 Balance at 31 December 47.0 55.9
Movement in fair value of plan assets recognised in the statement of financial position Balance at 1 January 53.6 42.0 Expected return on plan assets 1.3 1.3 Actuarial (loss)/gain (8.0) 4.2 Employer contributions 1.0 4.4 Benefits paid (1.1) (0.4) Foreign exchange (loss)/gain (2.2) 2.1 Balance at 31 December 44.6 53.6
At 31 December 2018, the weighted-average duration of the defined benefit obligation was 8.8 years (2017: 9.7 years).
Notes to the financial statements continued 28 Deferred tax $m $m
The movement in the net deferred income tax is as follows: Balance at 1 January (3.0) (1.8) Income tax charge 18.8 (3.2) Amounts recorded through equity 4.2 2.2 Foreign exchange translation differences (0.2) (0.2) Balance at 31 December 19.8 (3.0)
Deferred acquisition costs 6.8 (9.3) – – (2.5) Tax losses carried forward – 10.0 – – 10.0
The future minimum lease payments under the non-cancellable operating leases are as follows: $m $m
Written premium ceded to syndicates 65.0 66.1 Other income received from syndicates 29.0 35.7 Services provided 36.3 38.6
Balances due: Due (to)/from syndicate 623 (5.0) 30.6 Due to syndicate 6107 (65.1) (52.2) Due to syndicate 6050 (0.4) (11.4) Due to syndicate 5623 (1.6) –
The total number of Beazley plc ordinary shares held by key management was 8.4m. Apart from the transactions listed in the table above, there were no further related party transactions involving key management or a close member of their family. Further details of directors’ shareholdings and remuneration can be found in the directors’ remuneration report on pages 101 to 120.
30.3 Other related party transactions At 31 December 2018, the group had purchased services from the associate of $2.3m (2017: $2.5m) throughout the year. All transactions with the associate and subsidiaries are priced on an arm’s length basis.
Claims Demand by an insured for indemnity under an insurance contract.
Claims ratio Ratio, in percentage terms, of net insurance claims to net earned premiums. The calculation is performed excluding the impact of foreign exchange. In 2018, this ratio was 59% (2017: 58%). This represented total claims of $1,227.8m (2017: $1,075.7m) divided by net earned premiums of $2,084.6m (2017: $1,869.4m).
Expense ratio Ratio, in percentage terms, of the sum of expenses for acquisition of insurance contracts and administrative expenses to net earned premiums. The calculation is performed excluding the impact of foreign exchange on non-monetary items. In 2018, the expense ratio was 39% (2017: 41%). This represents the sum of expenses for acquisition of insurance contracts of $561.9m (2017: $519.7m) and administrative expenses of $250.7m (2017: $254.7m) to earned premiums of $2,084.6m (2017: $1,869.4m).
Rate The premium expressed as a percentage of the sum insured or limit of indemnity.
Rate change The percentage change in premium income charged relative to the level of risk on renewals.
Retention limits Limits imposed upon underwriters for retention of exposures by the group after the application of reinsurance programmes.
Return on equity (ROE) Ratio, in percentage terms, calculated by dividing the consolidated profit after tax by the average daily total equity. In 2018, this was calculated as profit after tax of $68.2m (2017: $130.0m) divided by average equity of $1,444.8m (2017: $1,429.5m).