2 Risk management continued An analysis of the overall credit risk exposure indicates that the group has reinsurance assets that are impaired at the reporting date. The total impairment in respect of the reinsurance assets, including reinsurer’s share of outstanding claims, at 31 December 2019 was as follows: Individual impairment $m
2.6 Regulatory and legal risk Regulatory and legal risk is the risk arising from not complying with regulatory and legal requirements. The operations of the group are subject to legal and regulatory requirements within the jurisdictions in which it operates and the group’s compliance function is responsible for ensuring that these requirements are adhered to.
The group’s approach is to manage its liquidity position so that it can reasonably survive a significant individual or market loss event (details of the group’s exposure to realistic disaster scenarios are provided on page 157). This means that the group maintains sufficient liquid assets, or assets that can be converted into liquid assets at short notice and without any significant capital loss, to meet expected cash flow requirements. These liquid funds are regularly monitored using cash flow forecasting to ensure that surplus funds are invested to achieve a higher rate of return. The group also makes use of loan facilities and borrowings, details of which can be found in note 25. Further information on the group’s capital resources is contained on pages 39 to 40.
<1 yr $m 1-2 yrs $m 2-3 yrs $m 3-4 yrs $m $m 5-10 yrs $m >10 yrs $m Total $m
Fixed and floating rate debt securities 1,114.0 909.1 1,050.2 516.6 322.1 188.2 – 4,100.2 Derivative financial instruments 6.9 – – – – – – 6.9 Cash and cash equivalents 336.3 – – – – – – 336.3 Insurance receivables 943.3 – – – – – – 943.3 Other receivables 58.5 – – – – – – 58.5 Other payables (442.6) – – – – – – (442.6)
Illiquid credit assets, hedge funds and equity funds are not included in the maturity profile because the basis of maturity profile cannot be determined with any degree of certainty.
2.9 Capital management † The group follows a risk-based approach to determine the amount of capital required to support its activities. Recognised stochastic modelling techniques are used to measure risk exposures, and capital to support business activities is allocated according to risk profile. Stress and scenario analysis is regularly performed and the results are documented and reconciled to the board’s risk appetite where necessary.
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 2019 we have surplus capital of 22% of ECR (unaudited, on a Solvency II basis). Following payment of the second interim dividend of 8.2p per share, the surplus reduces to 19% (unaudited) compared to our current target range of 15% to 25% of ECR.
Marine This segment underwrites a broad spectrum of marine classes including hull, energy, cargo and specie, piracy, satellite, aviation, kidnap & ransom and war risks.
Additional information Impairment of associate2 – – – – – (7.0) (7.0)
1 From 1 January 2019, the speciality lines division has been split into two. The prior year comparative has been re-presented to allow comparison. 2 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.
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 158.
Wages and salaries 165.2 156.0 Short term incentive payments 56.2 38.0 Social security 17.0 21.0 Share based remuneration 4.9 17.7
Interest expense on financial liabilities 25.8 22.4 Interest expense on lease liabilities 1.9 –
Current tax expense Current year 38.8 32.3 Prior year adjustments (4.0) (5.3)
Effects of: – non-taxable losses on foreign exchange – – 0.3 0.4 – tax relief on share based payments – current and future years (0.7) (0.3) 0.2 0.3 – over provided in prior years (7.0) (2.6) (10.2) (13.4) – change in UK/US tax rates 1 (0.5) (0.1) 0.7 0.9 Tax charge for the period 33.6 12.6 8.2 10.7 1 The Finance Act 2016, which provides for reduction in the UK Corporation tax rate down to 17% effective from 1 April 2020, was substantively enacted on 6 September 2016. This 17% tax rate will reduce the company’s future current tax charge and has been reflected in the calculation of the deferred tax balance as at 31 December 2019.
9 Income tax expense continued As noted on page 36, the group has assessed the potential impact of the diverted profits tax (DPT) following the enactment of new legislation in April 2015 and is of the view that no liability arises. The ultimate outcome may differ and any profits that did fall within the scope of the DPT would potentially be taxed at a rate of 25% rather than 12.5% (the current rate of tax on corporate earnings in Ireland). The earnings that would potentially be taxed at 25% are the relevant earnings from 2015 to 2019. The relevant earnings are determined in relation to 75% of the profits and losses in Beazley’s syndicates potentially starting with a proportion of the profits on the 2013, 2014 and 2015 years of account and 75% of all profits and losses in Beazley’s syndicates on years of account from 2016 onwards.
A new Tax Act (the Tax Cuts and Jobs Act) was signed into law in the US in December 2017. The Tax Act includes base erosion anti-avoidance tax provisions (the “BEAT”). We have performed an assessment for our intra-group transactions potentially in scope of BEAT. The application of this new BEAT legislation is still uncertain for some types of transaction and we are keeping developments under review. With support from external advisors, we believe that the BEAT impact on the group is not significant. For the year 2019 $1.9m was provided in the group accounts for BEAT liabilities (for 2018 the group paid BEAT tax of $0.9m). The ultimate outcome may differ and if any additional amounts did fall within the scope of the BEAT, incremental tax at 10% might arise on some or all of those amounts.
Amounts recognised directly in equity Aggregate current and deferred tax arising in the reporting period and not recognised in net profits or loss or other comprehensive income but directly debited or credited to equity: $m $m
Together with the interim dividend of 4.1p (2018: 3.9p) this gives a total dividend for the year of 12.3p (2018: 11.7p).
Specialty lines $m Total $m 1 From 1 January 2019, the speciality lines division has been split into two. The prior year comparative has been re-presented to allow comparison.
Depreciation charge for the year – (1.6) (0.8) (2.4) Foreign exchange loss – (0.2) (0.1) (0.3)
Falcon Money Management Holdings Limited (and subsidiaries) Malta1 25% – Capson Corp., Inc. (and subsidiary) USA2 31% – Pegasus Underwriting Limited Hong Kong3 33% 0.1 1 259 St Paul Street, Valletta, Malta.
2 221 West 6th Street, Suite 301, Austin TX 78701, USA. 3 Suite 126, 12/F Somptuex Central, 52-54 Wellington Street, Hong Kong.
In March 2018, the group took the decision to write down its investment in Capson Corp., Inc. to $2.8m. In December 2018 the group took the further decision to fully write down its investment in Capson Corp., Inc. to nil. This was deemed to be an appropriate value for Beazley’s share in Capson.
Profit after tax – 0.9 Share of other comprehensive income – – Share of total comprehensive income – 0.9
All of the investments in associates are unlisted and are equity accounted using available financial information as at 31 December 2019. Falcon Money Management Holdings Limited is an investment management company which also acts in an intermediary capacity.
Amortisation charge (645.4) (561.9) Balance at 31 December 350.7 307.4 178 Beazley Annual report 2019 www.beazley.com
Financial assets at fair value Fixed and floating rate debt securities: – Government issued 1,870.9 1,384.2 – Quasi-government – 25.9 – Corporate bonds – Investment grade 2,706.4 2,525.3 – High yield 235.8 32.7 – Senior secured loans – 132.1 Total fixed and floating rate debt securities 4,813.1 4,100.2
Quasi-government securities include securities which are issued by non-sovereign entities but which have an explicit sovereign guarantee. Supranational securities are issued by institutions sponsored by more than one sovereign issuer. Investment corporate bonds are rated BBB-/Baa3 or higher by at least one major rating agency, while high yield corporate bonds have lower credit ratings. Senior secured loans are tradeable, floating rate debt obligations of corporate issuers, with credit ratings of BB+/Ba1 or below. Hedge funds are investment vehicles pursuing alternative investment strategies, structured to have minimal correlation to traditional asset classes. Equity funds are investment vehicles which invest in equity securities and provide diversified exposure to global equity markets. Illiquid credit assets are investment vehicles that predominantly target private lending opportunities, often with longer investment horizons. The fair value of these assets at 31 December 2019 excludes an unfunded commitment of $74.3m (2018: $81.8m).
The retail bond was issued in 2012 and redeemed in 2019. The tier 2 subordinated debt (2029) was issued in 2019. Tier 2 subordinated debt (2026) was issued in 2016. Please refer to note 25 for further details of our borrowings and associated repayment terms.
The group records the unadjusted price provided and validates the price through various tolerance checks such as comparison with the investment custodians and the investment managers to assess the reasonableness and accuracy of the price to be used to value the security. In the rare case that the price fails the tolerance test, it is escalated and discussed internally. We would not override the price on a retrospective basis, but we would work with the administrator and pricing vendor to investigate the difference. This generally results in the vendor updating their inputs. We also review the valuation policy on a regular basis to ensure it is fit for purpose. No adjustments have been made to the prices obtained from the administrator at the current year end.
16 Financial assets and liabilities continued The following table shows the fair values of financial assets and financial liabilities, including their levels in the fair value hierarchy.
Financial liabilities measured at fair value Derivative financial liabilities 8.0 – – 8.0
Total financial liabilities not measured at fair value – 347.6 – 347.6 182 Beazley Annual report 2019 www.beazley.com
Fixed and floating rate debt securities – Investment grade 866.5 (866.5)
There were no transfers in either direction between Level 1, 2 and 3 in 2018.
Total net gains recognised in profit or loss 9.1 12.3 As at 31 December 216.6 186.6
High yield bond funds 235.8 32.7 Equity funds 163.6 85.4 Hedge funds 354.0 337.2 Illiquid credit assets 216.6 186.6 Investments through unconsolidated structured entities 970.0 641.9 183www.beazley.com Beazley Annual report 2019
All the investee funds in the investment portfolio are managed by portfolio managers who are compensated by the respective investee funds for their services. Such compensation generally consists of an asset-based fee and a performance-based incentive fee and is reflected in the valuation of the fund’s investment in each of the investee funds. The right to sell or request redemption of investments in high yield bond funds, asset backed securities, equity funds and hedge funds ranges in frequency from daily to semi-annually. The group did not sponsor any of the respective structured entities.
Foreign exchange forward contracts 427.3 25.3 365.1 6.9 Bond futures contract 222.8 0.2 – –
Foreign exchange forward contracts 323.2 8.0 205.6 9.6 Bond futures contract – – 189.2 2.8
These are receivables due within one year and relate to business transacted with brokers and intermediaries. All insurance receivables are classified as loans and receivables and their carrying values approximate fair value at the reporting date.
Cash at bank and in hand 276.9 291.3 Short term deposits and highly liquid investments 1.6 45.0
Total cash and cash equivalents include $9.8m (2018: $10.4m) held in Lloyd’s Singapore trust accounts. These funds are only available for use by the group to meet local claim and expense obligations.
Share based payments 4.7 – 4.7 Acquisition of own shares held in trust – (13.8) (13.8) Tax on share option vestings 1.0 – 1.0 Transfer of shares to employees (16.8) 12.0 (4.8)
The employee share options reserve is held in accordance with IFRS 2: Share-based payment. For more information refer to note 23.2.
23.2 Employee share option plans The group has a long term incentive plan (LTIP), one-off share incentive plan, deferred share plan, retention plan and save-as-youearn (SAYE) plan that entitle employees to purchase shares in the group.
One-off share incentive plan 10/02/2015 0.2 Five years’ service + ROE 10 years LTIP 12/02/2019 1.6 Five years’ service + NAV + 10 years 13/02/2018 1.3 minimum shareholding requirement 17/02/2017 1.6 09/02/2016 1.8 10/02/2015 1.8
LTIP 12/02/2019 1.5 Three years’ service + NAV + 10 years 13/02/2018 1.3 minimum shareholding requirement 17/02/2017 1.7
SAYE (UK) 01/04/2019 0.4 Three years’ service N/A 04/04/2018 0.5 17/02/2017 0.6
Notes to the financial statements continued 188 Beazley Annual report 2019 www.beazley.com
Gross Claims reported and loss adjustment expenses 1,263.7 1,171.2 Claims incurred but not reported 3,196.6 2,869.5 Gross claims liabilities 4,460.3 4,040.7 Unearned premiums 1,598.7 1,415.5 Total insurance liabilities, gross 6,059.0 5,456.2
Increase in claims – Arising from current year claims 1,860.6 (398.6) 1,462.0 1,844.7 (501.9) 1,342.8 – Arising from prior year claims (18.2) 8.7 (9.5) (380.8) 265.8 (115.0)
Chain-ladder techniques are most appropriate for classes of business that have a relatively stable development pattern. Chain-ladder techniques are less suitable in cases in which the insurer does not have a developed claims history for a particular class of business, or for underwriting years that are still at immature stages of development where there is a higher level of assumption volatility.
– Marine – Political, accident & contingency – Property – Reinsurance – Specialty lines – Cyber & executive risk
d) Claims reserve strength analysis The estimation of IBNR reserves for future claim notifications is subject to a greater degree of uncertainty than the estimation of the outstanding claims already notified. This is particularly true for the specialty lines and executive risk business, which will typically display greater variations between initial estimates and final outcomes as a result of the greater degree of difficulty in estimating these reserves. The estimation of IBNR reserves for other business written is generally subject to less variability as claims are generally reported and settled relatively quickly.
As such, our reserving assumptions contain a reasonable margin for prudence given the uncertainties inherent in the insurance business underwritten, particularly on the longer tailed specialty lines and executive risk classes.
While the information in the table provides a historical perspective on the adequacy of the claims liabilities established in previous years, users of these financial statements are cautioned against extrapolating past redundancies or deficiencies on current claims liabilities. The group believes that the estimate of total claims liabilities as at 31 December 2019 is adequate. However, due to inherent uncertainties in the reserving process, it cannot be assured that such balances will ultimately prove to be adequate.
Notes to the financial statements continued 192 Beazley Annual report 2019 www.beazley.com
Notes to the financial statements continued 194 Beazley Annual report 2019 www.beazley.com
Notes to the financial statements continued 24 Insurance liabilities and reinsurance assets continued 196 Beazley Annual report 2019 www.beazley.com
Political, accident & contingency Releases on the 2015 to 2018 underwriting years in terrorism, contingency and personal accident accounts were partially offset by deterioration on the 2014 underwriting year following a claim on the political book and poor experience on the life book.
Property The reserves on the recent underwriting years have been strengthened, with increases to the 2018 catastrophe estimates and adverse claims development on the US coverholders book. Older underwriting years have seen strengthening following adverse experience on the construction and engineering book. The impact of catastrophes on the 2019 underwriting year was less than the two preceding years.
Reserve releases during the year totalled $9.5m (2018: $115.0m). The net of reinsurance estimates of ultimate claims costs on the 2016 and prior underwriting years have improved by $41.9m during 2019, while 2017 and 2018 underwriting year strengthened by $30.3m driven by the deterioration of catastrophe losses in our reinsurance division and poor performance of US trucking and engineering within our marine and property divisions.
Notes to the financial statements continued 198 Beazley Annual report 2019 www.beazley.com
Debt redemption (18.0) – – (18.0) Change in fair value – (17.2) (5.9) (23.1)
In November 2016, the group issued $250m of subordinated tier 2 notes due in 2026. Annual interest, at a fixed rate of 5.875%, is payable in May and November each year.
In September 2019, the group issued $300m of subordinated tier 2 notes due in 2029. Annual interest, at a fixed rate of 5.5% is payable in March and September each year.
Principal actuarial assumptions Discount rate 2.0% 2.8% Inflation rate 3.4% 3.5% Expected return on plan assets 2.0% 2.8% Future salary increases 3.4% 3.5% Future pensions increases 2.9% 3.0% Life expectancy for members aged 60 at 31 December 89 years 90 years Life expectancy for members aged 40 at 31 December 91 years 93 years
Discount rate (0.5% decrease) 6.0 – Inflation rate (0.3% decrease) – (2.2) Future salary changes (0.5% decrease) – (0.5) Life expectancy (1 year increase) 1.6 –
Information about leases for which the group is a lessee is presented below.
Depreciation charge for the year (9.1) (0.9) (0.1) (10.1) Additions of right of use assets 15.8 – 0.1 15.9 Disposals of right of use assets (1.3) – (0.1) (1.4) Foreign exchange gain 0.3 – – 0.3
Interest on lease liabilities 1.8 – – 1.8 Additions to lease portfolio 15.3 – 0.1 15.4 Disposals from lease portfolio (0.5) – – (0.5) Foreign exchange gain 0.3 – – 0.3 203www.beazley.com Beazley Annual report 2019
Operating leases under IAS 17 Lease expense 32.9 Sub-lease income – Total lease commitments under IAS 17 32.9
Should the group exercise all its extension options, the potential lease payments would result in an increase in lease liability of $1.9m.
30 Related party transactions The group and company have related party relationships with syndicates 623, 6107, 6050, 5623, its subsidiaries, associates and its directors.
Balances due: Due to syndicate 623 (21.0) (5.0) Due to syndicate 6107 (65.5) (65.1) Due from/(to) syndicate 6050 0.4 (0.4) Due to syndicate 5623 (15.3) (1.6)
30.3 Other related party transactions At 31 December 2019, the group had purchased services from Falcon Money Management Holdings Limited of $2.3m (2018: $2.3m) throughout the year. All transactions with the associate and subsidiaries are priced on an arm’s length basis.
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 2019, the expense ratio was 38% (2018: 39%). This represents the sum of expenses for acquisition of insurance contracts of $645.4m (2018: $561.9m) and administrative expenses of $244.3m (2018: $250.7m) to earned premiums of $2,347.0m (2018: $2,084.6m).
Reinsurance to close (RITC) A reinsurance which closes a year of account at Lloyd’s by transferring the responsibility for discharging all the liabilities that attach to that year of account (and any year of account closed into that year), plus the right to buy any income due to the closing year of account, into an open year of account in return for a premium.