You can find out about how we have navigated changes throughout 2019 wherever you see this symbol.
We look for individuals with a strong sense of ownership for the business they handle who are willing – indeed keen – to be accountable for their decisions
We maintain a diverse underwriting portfolio and actively manage the different insurance cycles to target consistent results year on year
Strong partnerships have underpinned Beazley’s success since the company was founded in 1986.
Beazley is also a founding member of the product innovation facility (PIF) at Lloyd’s, launched in June 2019 by a number of syndicates to develop solutions for non-standard risks that might not suit the traditional market, such as risks relating to intangible assets and new technologies. The PIF launched its first product in September 2019.
Specialty lines 28% Property 23% Cyber & executive risk 15% Marine 15% Political, accident & contingency 11% Reinsurance 8%
Specialty lines 24% Cyber & executive risk 20% Property 17% Marine 16% Political, accident & contingency 13% Reinsurance 10%
In 2019, the mix of business underwritten by Beazley was particularly important as a succession of natural catastrophes in the US and Japan rocked the world’s reinsurance markets and some lines of US liability business saw jury awards climb steeply. The latter mainly impacted Beazley’s management liability book, comprising predominantly directors’ & officers’ (D&O) and employment practices liability (EPL) risks, as well as healthcare liability risks, particularly for large hospitals. Other lines of liability business have been less affected.
Each year we review the make up of our portfolio and assess which areas offer profitable growth opportunities and which require us to reduce our underwriting appetite.
Diversified portfolio achieves consistent combined ratio through market cycles 05www.beazley.com Beazley Annual report 2019
Find out more on page 25 Find out more on page 26 Find out more on page 26 06 Beazley Annual report 2019 www.beazley.com
We’ve protected clients ranging from Fortune 1000 companies to homeowners through 25 years of natural and manmade catastrophes. We underwrite this business through five platforms: London, the US, Canada, Latin America and Singapore, with a business focus on commercial property risks, valuable assets and select homeowners’ business.
Specialty lines The specialty lines division writes a diverse book of specialty liability business including professional liability, healthcare, life sciences, environmental liability and international financial lines. Included in the team is our casualty reinsurance business which focuses on reinsuring other specialists in classes such as surety and professional liability and also distributing Beazley products via our reinsured partners.
• Beazley is a specialist insurer. We have a targeted product set, largely in commercial lines of business, and underwrite each risk on its own merit
• We primarily transact business through brokers and work with selected managing general agencies and managing general underwriters to improve distribution in specialist niches
Our platforms These platforms give us global reach, with each platform focused on a different market and offering different opportunities. Our US & European insurance companies complement our Lloyd’s business well and ensure we can offer coverage across a wider distribution network.
Beazley Insurance Company, Inc. Writes business in the US admitted insurance market.
Beazley’s success is based on the talent and commitment of our people, our entrepreneurial culture and the values that enable us to maintain growth.
Underpinning our strong results against all of these metrics has been our consistently strong underwriting performance, reflected in our combined ratio: • 2019, a year of active claims environment: 100%
For customers Nearly all business at Beazley comes through brokers. We monitor broker and client perceptions of our service in a variety of ways, including through a detailed annual broker survey. This is the third year Beazley has conducted a global survey and the number of brokers participating continues to increase, reflecting strong engagement.
Strong long term relationships with brokers, reinsurers and clients have sustained our business over three decades.
• The ability to scale our operations to ensure that client and broker service keeps pace and, wherever possible, improves as the company grows
• Consistent investment in product innovation to provide better products and services to improve our clients’ risk transfer
Beazley Insurance dac Writes business in Europe and provides reinsurance to Beazley Underwriting Limited.
Earnings per share 44.6c Net assets per share 309.6c TSR since 1 January 2010 23.3% pa
Structural changes The second was structural changes as insurers strove to put in place more efficient, innovative and clientfriendly ways of doing business.
Management changes The third set of changes for Beazley was those that inevitably occur when one generation of senior executives passes the baton to another.
Market changes In the US rates for management liability lines such as directors’ & officers’ (D&O), and employment practices liability (EPL) rose steeply in response to an increase in the cost of the most severe claims. “We’ve seen higher frequency of severe losses in common with other parts of the market” says Mike Donovan, Beazley’s head of cyber & executive risk. “We might normally see a couple of big losses in a year and we saw four or five in the first six months of 2019.”
For a specialist insurer such as Beazley with a long track record in its selected lines of liability business, social inflation is a challenge but also an opportunity. It is a challenge to select risks that are adequately priced with appropriate terms and conditions – but a challenge that seasoned underwriters can handle. Also there is an opportunity, particularly for Beazley’s claims professionals, to differentiate the service they provide from that of less experienced insurers.
Some risks remain underpriced In other parts of Beazley’s business, rates have also been rising steeply after a prolonged period of rate erosion that drove prices down to uneconomic levels. In the marine, aviation and commercial property markets, the turnaround began in 2018 and continued through 2019. Nevertheless, some risks remain underpriced. “We’re fixated on risk quality and risk selection,” says Richard Montminy, who took over the leadership of Beazley’s property division in May 2019.
Against the backdrop of an often volatile rating environment, Beazley is also investing in operational change designed to increase the efficiency with which business is transacted and deliver an improved service to clients. Two strategic initiatives designed to drive change in this area align very closely with the approach laid out by Lloyd’s in its Blueprint One plan published in October.
Reducing a high cost base Lloyd’s has divided the task of reducing the market’s currently high cost base between two distinct but related initiatives. One, called the Lloyd’s Risk Exchange, will focus on automating the transaction of relatively simple, high volume, low premium business – currently accounting for around half the risks placed at Lloyd’s. The other, the Complex Risk Platform, will “support the sourcing and efficient placing of complex risks,” according to the Blueprint. The goal is to move to a “data first” digital model, and away from the current document-based model, with large efficiency gains in the process.
More than a year before the Lloyd’s Blueprint was published, Beazley had adopted a similar approach to its business, with the Beazley Digital strategic initiative focusing on the automation of small, simple business and the Faster, Smarter Underwriting initiative focusing on larger and more complex risks.
Structural changes myBeazley roll out With the backing of the Beazley Digital team, the company has been rolling out its broker e-trading platform, myBeazley, across numerous markets. In 2019, myBeazley was launched in Spain and Germany and new products were added to the platform in France and the UK.
Announcing the launch of myBeazley in Spain in November, international financial lines regional manager Lorena Segovia said: “Beazley has applied its expertise in management liability, professional indemnity and cyber insurance to create simple, specialist products that can be sold separately or as a package for brokers looking to work through an online channel to secure quick and efficient quotes.”
Historically Beazley underwriters have focused exclusively on a single line of business, but multiline underwriters are now increasingly common for small business. With myBeazley automating a large part of the placement process, underwriters can focus their attention on the more unusual risks that require human intervention.
Looking ahead “An important test of a company is how it handles executive succession,” says Beazley chief executive Andrew Horton. “This is particularly so when a large number of senior executives retire at around the same time. Change of this kind can be unsettling but I believe the transition at Beazley has been smooth, aided by the fact that six of our eight new executives are internal hires.”
Looking ahead, Andrew Horton predicts more change to come in the markets in which Beazley operates. “In addition to the natural ebb and flow of rates in response to claims and capacity, we can expect to see further significant changes stemming from the broader adoption of technology and the better use of data. We’ve really only just begun on that journey.”
There have been many changes to the management of Beazley at both a board and executive committee level. On the executive committee there have been several changes, two from within Beazley and two external appointments. Here the new committee members discuss their prior experience and how they see Beazley changing over the next few years.
What is your background? I qualified as an actuary in 2004 and joined Beazley in 2006. I initially worked within the specialty lines claims team on analytics, and helped build the reserving process that the business continues to use today. Whilst the role was different compared to a traditional actuarial role, I loved the closeness to the claims managers and really getting a deep understanding of the drivers of reserves. I moved into the actuarial function in 2012 and there had the opportunity to gain a broader view of the entire business. I was group actuary prior to taking on the group finance director role in 2019.
What have you enjoyed in your first year being on the executive committee? Too many to list, but I will name a few here. Spending more time on key decisions which will shape the business in the future. I have appreciated getting to know people in more depth, and being part of the new team who have fresh ideas and lots of energy to get things done. I enjoy the mix of colleagues I have worked with for many years, along with new faces like Lou Ann and Richard bringing in fresh ideas and different perspectives.
“I would like to see us achieve a more diverse leadership team.”
What have you enjoyed in your first year being on the executive committee? My executive role at Beazley has given me insights into aspects of an organisation that I had never been exposed to. I also appreciate having a voice in which I can share my thoughts and experiences about all parts of the company not just those that I have responsibility for.
What is your background? My first job in the financial services industry was at Executive Risk, where I was underwriting directors’ & officers’ (D&O) and employment practices liability insurance (EPL). Soon after, I moved to Lexington Insurance Company as a multiline underwriter.
Being part of the committee means I’m able to learn about other areas of the business, such as capital raising, the evolution of Lloyd’s and growing our European operations, to name a few.
One highlight of the year was hosting the Beazley plc board in Farmington. It was inspiring to hear the passion of our focus group leaders and teams, highlighting the successes and unique challenges to their business lines.
What changes would you like to see at Beazley over the next three years? Technology is already impacting the insurance industry in a big way, and it will only continue year after year. We must position the business to gain a competitive advantage by utilising various technological solutions. Two of our strategic initiatives are focused on just this, which will inevitably transform the business.
We need to embrace this evolution instead of fighting against it. This will take strong, diligent leadership, who are open to change.
“We need to provide our underwriters with accurate real time risk data and insights.”
Beazley has a well-diversified portfolio of risks and we continue to take action to ensure we anticipate and respond to the challenges and opportunities arising from current market conditions.
We withdrew from underwriting construction and engineering business in 2018 because it failed to meet our cross-cycle profitability requirements and took steps to strengthen our catastrophe reserves. In both 2018 and 2019 we opened our underwriting at historically high loss ratios to provide a strong reserve buffer against rising claims. We are now in a market in which rates are often adequate to achieve profitable growth but significant pockets of 16 Beazley Annual report 2019 www.beazley.com
underpriced business remain. This plays to all of Beazley’s traditional strengths as a company, in risk selection, reserving and claims management. Our diversified portfolio of business should also continue to stand us in good stead: only two of the liability classes we transact – management liability and healthcare liability – have been significantly exposed to social inflation, which has driven US jury awards up.
These areas of focus are also priorities for the leadership of Lloyd’s and are reflected in the Lloyd’s Blueprint One published in September 2019. As a major participant in the Lloyd’s market, writing 85% of our business on Lloyd’s paper, Beazley has been actively involved in shaping the market’s future plans. We are a strong supporter of the far-reaching reforms proposed in Lloyd’s Blueprint One: our London Market strategic initiative is designed to ensure that Beazley can benefit to the fullest possible extent from the changes as they are implemented.
Board and management changes To ensure the board remains able to challenge, support and advise Beazley’s management, we constantly evaluate the mix of skills and experience the board possesses. In April 2019, we welcomed two new board members, Nicola Hodson and John Reizenstein, who added to the board’s skillset in important ways.
Nicola has brought deep expertise in the areas of technology, data and operations to the board, developed in the course of a series of senior executive roles at Microsoft, including as chief operating officer of Microsoft UK. John was formerly chief financial officer of Direct Line Insurance Group, and the board has benefited from his extensive financial services experience across insurance, investment banking, and financial markets. He replaced Angela CrawfordIngle as chair of Beazley’s audit and risk committee following her retirement at the end of May 2019.
Part of the board’s role is to consider the interests of all stakeholders in the company. Beazley is a profit-making business that must meet, and if possible exceed, the expectations of investors. Nevertheless we also need to take a broader view of the role that insurance plays in society and in addressing the major challenges of our times.
We believe understanding and reporting the needs and views of our various stakeholders is extremely important and we are always trying to enhance these relationships.
The new code’s reporting requirements reflect this commitment which Beazley maintains with its various stakeholders and provides transparency to our policies and procedures.
Climate change is unquestionably one such challenge, and possibly the most important. Another is the vulnerability of our interconnected world to cyber attacks. At Beazley we are keen to ensure we are able to protect our insureds, and have developed products that address these cyber risks. We are also investigating products that address the effect of climate change. In both cases we can amplify our impact by collaborating with others. The Lloyd’s market offers a tried and tested model for such collaboration and we will continue to work with other syndicates at Lloyd’s to push forward the boundaries of insurable risk.
Natural catastrophes took a smaller toll on our business than in 2018, but nevertheless had a material impact with our estimated costs of Typhoons Faxai and Hagibis and Hurricane Dorian totalling approximately $80m net of reinsurance and reinstatement premiums. A number of our liability lines were also impacted by US jury awards that have been increasing for some time now, particularly affecting our management liability book and our large risk professional liability business for hospitals.
We have been taking action to address underperforming classes of business for several years and we have seen rates rise steadily as the market has responded to elevated claims. The claims that we have seen in these classes, combined with the continuing high incidence of natural catastrophe claims in recent years, reduced the contribution to profits from prior year reserve releases in 2019 to $9.5m (2018: $115.0m).
During 2019 we also split what had previously been by far our largest division – specialty lines – into two. Both of the new divisions, one of which continues to be called specialty lines and the other cyber & executive risk, underwrite classes of business that were negatively affected by increased jury awards and settlements in 2019. However, many lines of business were unaffected and continued to show strong growth and profitability.
Growth opportunities Rising premium rates were by no means solely responsible for the strong premium growth we saw in 2019. We have continued to grow in newer lines of business in our traditional markets and in long established lines in newer markets. As an example of the former, our accident and health team in the US – now renamed Beazley Benefits – saw premiums rise 20% to $24.7m. As an example of the latter, our cyber business grew by 26% outside the US in 2019, outstripping our cyber growth in the US, where demand for this form of insurance originated.
As by far the world’s largest insurance market, the US continues to present many attractive growth opportunities for Beazley, but we are also seeing strong demand for many of our specialist products in Canada, Europe and Asia. In the course of 2019, we saw our European business grow by 17%, while the business we underwrote locally in the US grew by 13%.
At Beazley we have two strategic initiatives focused on these issues. The first, which we call Faster, Smarter Underwriting, addresses the large and complex risks that have been the historic mainstay of our business. Improved technology can make the transaction of this business far more efficient, and we have identified several opportunities for underwriting productivity improvements, complementing – but not supplanting – the underwriter’s skill and judgement.
Faster, Smarter Underwriting Focus on larger more complex risks using new technology and data analytics to improve the efficiency and the quality of our complex risk underwriting and claims settlement.
For smaller, simpler risks, the role of technology is even greater. Our Beazley Digital strategic initiative has identified significant scope for automation in this space, with the underwriter’s day to day role limited to the pricing of unusual risks that fall outside the constraints programmed into our systems. In 2019, we launched our award-winning broker e-trading platform, myBeazley, in Spain and Germany. The platform, already in service for brokers in the UK and France, enables brokers to access Beazley’s specialist insurance products online, including management liability, professional indemnity, and cyber cover.
Change at Lloyd’s The varying approaches that we are taking towards large complex risks on the one hand and smaller and simpler risks on the other are mirrored in Blueprint One, a programme of farreaching reforms published by Lloyd’s in September 2019. We strongly support the plan Lloyd’s has put forward and, in particular, the goal of reducing the market’s stubbornly high expense ratio. Beazley’s expense ratio in 2019 was 38%, in line with the Lloyd’s market average. We would like to see both come down materially.
Climate change As with any insurance company, climate change is going to be an area where we will expect to give greater focus to in the coming years. The perceived risks around climate change are great and should not be underestimated, but the opportunities around providing suitable cover, products and claims service to our insureds is something that aligns to Beazley’s current service model. We have always prided ourselves on delivering on our promises to our insureds and these promises will become even more important as the potential severity of losses increases.
I paid tribute to Martin, Dan and Mark at the half year for their enormous contributions to Beazley’s success over the years. Here I would like to express my gratitude to Anthony, who has guided our claims function skilfully since 2011. In insurance, we offer clients a simple promise to pay. As our business has grown around the world, Anthony and his team have ensured that we fulfil these promises consistently and in a way that increases the loyalty of our clients. I have every confidence that Beth, who was the head of our third party complex claims team prior to succeeding Anthony, will ensure that world class claims service remains a differentiator for Beazley.
Our fixed and floating rate debt securities are the mainstay of our investment portfolio and represented 82.3% of our investment assets as at December 2019 (2018: 81.1%). These investments (including cash and cash equivalents and derivatives) returned 4.3% in 2019, (2018: 1.1%) well above the level of yields at the beginning of the period, as declining yields and narrowing credit spreads generated capital gains on these assets. We were able to take advantage of the conditions by increasing the duration of our portfolio, which was maintained at close to two years for much of the year.
Our capital growth assets also performed strongly, helped by rallying equities; returning 8.6% overall (2018: a loss of 1.0%). We took advantage of the strong market conditions by adding to more volatile asset classes earlier in the year, utilising nearly all of our current appetite for investment risk. However, a more cautious approach later in the year, as risk assets became increasingly expensive, meant that we did not capture all of the available return, as markets continued to rally. Looking ahead, and despite our limited appetite for investment risk, the material difference between outcomes in 2018 and 2019 highlights the dangers of forecasting investment returns in the short term. Notwithstanding, yields and credit spreads are much less attractive than they were and this leads us to expect a lower return in 2020.
As explained on pages 44 to 50, our risk management team works closely with others across the business to identify and manage emerging and strategic risks. In 2019, this included preparations to enable Beazley to continue to serve continental European clients and write EU business in the event of a hard Brexit.
Outlook For a company with an exceptional track record of underwriting profitability, 2019 was a difficult year.
However, although history never repeats itself exactly, we have seen market conditions similar to this in our 33 year history and know that early remedial action is critical in lines of business where the market as a whole has failed to make adequate provision for rising claims. We have been taking such action for several years now across a number of areas.
These measures should result in an improved underwriting performance in 2020, with further improvement expected in 2021. We have been reserving conservatively against business underwritten in 2018 and 2019 but it will take some time for claims against this business to crystallise. We therefore expect prior year reserve releases to be below average in 2020.
The market conditions we witnessed in 2019 reaffirmed the importance of skilled underwriters capable of making prudent promises to our clients as well as resourceful claims professionals able to deliver swiftly on our promises. Technology will assist us, but these core skills should continue to underpin the profitable growth of our business in the years ahead.
A We ran combined ratios averaging below 90% from 2012 through 2016, during which time rates fell steadily in response to a generally benign claims environment and we saw a large influx of capital into parts of the market. We warned in 2016 that further declining rates and any rise in claims would make it harder for us to maintain these underwriting margins, and so it has proved.
Our overriding principle of course is to secure the best available person for the job. Where this criterion can clearly be met through an internal hire, it brings a number of advantages. The individuals are very familiar with our culture and their promotion opens opportunities for talented individuals further down the organisation. I am very pleased that Beazley has had the bench strength to make so many internal appointments at all levels within the company.
A They are a source of concern and are one of the reasons we opened our underwriting at a higher reserve position in 2018 and sustained that approach in 2019. It is important to note, however, that there are many parts of our liability book that have not been affected by this phenomenon, including our cyber business, our environmental business and our small risks business.
A Positively I believe. The costs of doing business at Lloyd’s are too high and are denying attractive growth opportunities, for our market. We strongly support Lloyd’s plans to lower expense ratios and this is something I have also championed in my time as chair of the London Market Group.
There is a remarkable degree of alignment between the four strategic initiatives that Beazley announced in 2018 and the six initiatives described in the Lloyd’s Blueprint One last September. Like Lloyd’s we have developed discrete approaches to our large, complex business and to our smaller and more standardised business. Also like Lloyd’s we see more scope for automation – and thus cost reduction – for the smaller standardised business. However, we also see a significant role for technology and new data sources in pricing complex risks and in processing this business more efficiently.
Lloyd’s has an unmatched record of settling valid claims stretching back more than three centuries. Nevertheless there is more that we can do to improve the speed and efficiency of claims settlement across the market. Colin Masson, from our claims team, was involved in the Lloyd’s claims initiative up until October 2019, which also aligns closely with our own Closer to the Client strategic initiative to improve client service.
A Yes I do, but the extent to which climate change has aggravated these losses is difficult to assess given the limited data sets available. We have certainly seen increasing severity of weather-related events and in some cases the impact of climate change is not hard to discern. For example, warm air can hold more moisture than colder air, contributing to the severity of floods accompanying storms.
At Beazley we have begun to explore these connections and their impacts on our business, including the opportunity to underwrite new forms of cover. I believe that, broadly speaking, the insurance market can accommodate climate change, given our ability to reprice policies annually, but the costs to the most vulnerable communities may ultimately become unsustainable.
Q More generally, is climate change something that you are worried about for Beazley?
As described above we have taken action on our underwriting strategy in 2019, but we cannot be complacent as climate change has more far reaching impacts. In 2019, we continued our drive to increase recycling and reduce waste throughout the business. We also continue to look at the environmental impact of our suppliers and actively look to source our office products locally. However, climate change is not a short term problem and investment in long term solutions and policies are required. We are currently recruiting a sustainability officer to join Beazley who will lead our efforts on climate change and sustainability across the group, aligning the work done to date, and constructing our policy going forward.
A We expect to see further growth from rate rises in 2020. In addition, we still have a relatively small footprint in most of our target markets – both by product and geography – and therefore significant further scope to grow. We plan to grow as we always have done, by focusing on risks that we understand and in areas where we can attract high quality people.
I also believe strongly that we need to keep talking to our clients and designing new products to meet their changing needs. Not all products can cross borders unmodified, but where there is an underlying demand we can also look at adapting existing products for new markets. We have been doing this with our flagship cyber product, Beazley Breach Response, over the years and in 2019 we began to globalise our virtual care liability product for telemedicine providers.
The underwriting losses sustained by many insurers in recent years have driven rates up significantly for many lines of business, and the momentum shows no sign of slowing. Rates across our portfolio rose by 6% in 2019, on top of rises averaging 3% in 2018. This masked far steeper rises in lines such as directors’ & officers’ (D&O) (31%); hospital professional liability (15%); aviation (27%); and large risk property (18%).
In some but not all liability lines of business, we have been seeing a surge in US jury awards that has driven increased claims severity. The trend is particularly evident in claims from US hospitals. Between 2015 and 2018, the share of claims in excess of $5m within our total hospital claims rose by 68% compared to the years 2011 to 2014.
Beazley has more than 30 years experience of underwriting large, complex risks and our underwriters are constantly scanning the horizon for opportunities and threats.
Strong premium growth while claims environment remained challenging. Adrian Cox Chief underwriting officer 24 Beazley Annual report 2019 www.beazley.com
Profitability also depends on the efficiency with which we transact business. One of our strategic initiatives – Faster, Smarter Underwriting – has been targeting efficiency gains in the transaction of large, complex risks, with a focus in 2019 on cyber, D&O, commercial property and marine risks. Another strategic initiative – Beazley Digital – has concentrated on the smaller, more standardised risks that can be more fully automated: here our main focus has been on the continuing roll-out of our myBeazley e-trading platform for brokers around the world.
Historically, the slow pace of change in insurance markets has meant that insurers have not funded significant research and development budgets to implement new and promising technologies. This is now changing and at Beazley we have, through our targeted strategic initiatives, been investing more heavily and widely in research and development.
Lines of business long seen as more traditional are now seeing benefits from new technology and data sources: for example, in February we partnered with another Lloyd’s insurer to establish a Lloyd’s marine cargo consortium using technology from the Lloyd’s Lab insurtech Parsyl to track cargo accumulation and collect data to assist in risk management and claims.
Our international cyber team, based in London, has bound risks in 55 countries and we have launched BBR in the UK, France, Italy, Spain and Canada.
In a year in which some political risk underwriters sustained heavy credit losses, Beazley’s business was largely unscathed and we made some recoveries from prior year claims.
In fact, both the political risk and contingency teams continued to successfully grow their portfolios in a controlled manner in competitive market conditions. Risk selection remains key in these markets and the teams have a proven track record.
On terrorism business, the rate declines that we have seen over the years were less steep in 2019. Civil unrest in Hong Kong, Lebanon and Chile contributed to nervousness in the market and – in the case of more than 100 Walmart stores damaged by arson and looting in Chile – to actual losses. Although Beazley was not exposed to these losses, we did have some exposure to the terrorist attack on the Shangri-La hotel in the Sri Lankan city of Colombo in April.
Our main growth has come from group limited medical indemnity business, which provided supplemental medical insurance for company employees with defined and pre-agreed medical limits. These plans have proven particularly attractive in the retail and hospitality industries, which employ large numbers of part time workers.
The pressures on US employers faced with rising employee healthcare costs show no sign of abating. We therefore see significant growth opportunities for companies such as Beazley that can offer well designed supplemental cover at affordable prices.
In London our personal accident team, which underwrites a diverse portfolio of risks, saw growth in US disability business in 2019. Personal accident is one of the classes of business in which the retrenchment of a number of Lloyd’s syndicates has opened up some growth opportunities for Beazley.
The property division under the leadership of Richard Montminy saw a return to underwriting profitability in 2019, generating a combined ratio of 97% (2018: 125%) after two years of heavy losses. Premiums increased by 3% to $428.7m (2018: $415.4m).
Submission flow to our property teams remains very strong but we are being selective in the business we underwrite, as by no means all the risks we see meet our underwriting requirements. 2019 was a quiet year for catastrophe losses affecting our property division (although not our reinsurance division) but we still see scope for improvement in our attritional loss ratios.
Our jewellers’, fine art and specie book performed well in 2019. The business is currently largely concentrated in the UK where we are by some distance the leading insurer of jewellers’ business, but we have also been investing in international growth opportunities. We hired a fine arts underwriter in Paris in May and an underwriter to write jewellers’ and fine arts business via the Lloyd’s China platform in December 2019.
Other sources of risk continue to present concerns. We have reduced our exposures to US wildfires following the very severe losses of 2017 and 2018. Claims were less severe in 2019, but the longer term weather patterns – with rising temperatures in California and other regions exposed to wildfires – are not encouraging.
Specialty lines is one of the two new Beazley divisions created when we split the old specialty lines division at the start of 2019. It underwrites a mix of specialty liability insurance, including professional liability for hospitals, lawyers, and architects & engineers; environmental liability business; and management liability business outside the US. Beazley’s private enterprise team, which offers a range of products including cyber insurance to small businesses, primarily in the US, also forms part of the division.
The strong premium growth that the division saw in 2019 was driven in large part by our non-US business, which has received steady investment in recent years. Since 2017, we have been building a diversified book of financial institutions business outside the US, particularly in continental Europe, as well as offering management liability and cyber cover to a broader clientele. In addition, the healthcare liability expertise that we have built over many years in the US has proved highly relevant to new markets outside the US: in 2019, we launched our virtual care product to meet the needs of telemedicine providers – a fast growing market – in the UK.
Parts of our specialty lines book have been affected by social inflation, most notably healthcare liability risks. In our hospitals professional liability (HPL) book we saw rates rise by 16% in 2019, spurred by a sharp increase in large claims over $5m referenced earlier. Even with these rate rises some hospital risks remain inadequately priced in our view and we have declined to underwrite them.
Gross premiums written 306.4 284.8 Net premiums written 222.1 255.0 Results from operating activities 8.4 20.5 Claims ratio 57% 54% Expense ratio 50% 40% Combined ratio 107% 94% Rate change 11% 3%
Gross premiums written 823.0 713.5 Net premiums written 712.2 615.3 Results from operating activities 126.6 69.7 Claims ratio 61% 56% Expense ratio 32% 34% Combined ratio 93% 90% Rate change 5% (1%)
Cyber and technology 53% Executive risk 43% Fidelity and crime 4%
Gross premiums written 428.7 415.4 Net premiums written 365.6 360.2 Results from operating activities 43.3 (80.4) Claims ratio 57% 84% Expense ratio 40% 41% Combined ratio 97% 125% Rate change 11% 10%
Gross premiums written 206.0 207.4 Net premiums written 123.0 137.3 Results from operating activities (48.2) (1.8) Claims ratio 118% 70% Expense ratio 36% 33% Combined ratio 154% 103% Rate change 5% 6%
Financial review Group performance Beazley delivered increased premium, increased investment return and increased profit before tax. This highlights how Beazley’s financial performance derived from a range of areas across the business in 2019.
Premiums Gross premiums written have increased by 15% in 2019 to $3,003.9m (2018: $2,615.3m). We continue to monitor our underwriting portfolio and look for areas where we see good opportunities to achieve profitable growth. Rates on renewal business on average increased by 6% across the portfolio (2018: increased by 3%) with our property and marine classes seeing the largest movement.
We have seen strong growth in our international platform, especially in Europe, as we continue to expand the variety of our offerings to our insureds. The charts overleaf highlight how we achieve diversification by product mix.
Cyber & executive risk 27% Property 14% Marine 10% Political, accident & contingency 9% Reinsurance 7%
Net earned premiums 2,347.0 2,084.6 13% Net investment income 263.7 41.1 542%
Net insurance claims 1,452.5 1,227.8 18% Acquisition and administrative expenses 889.7 812.6 9% Foreign exchange (gain)/loss (1.1) 13.2 (108%)
The group is of the view that some of the above metrics constitute alternative performance measures (APMs). Further information on our APMs can be found in the key performance indicators section (inside front cover) and in the glossary on page 207.
The amount the group spent on reinsurance in 2019 was $500.4m (2018: $366.8m). As a percentage of gross premiums written it increased to 17% from 14% in 2018. This was due to an increase in market facilities business written (which is 90% reinsured out of the group) as well as us reinsuring our trucking portfolio during 2019. These impact the net earned premiums in the specialty lines and marine divisions respectively.
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 increased in 2019 to 100% (2018: 98%) due to lower reserve releases.
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 6.8% at the end of 2019 (2018: 5.6%). As we indicated in the 2018 annual report, our reserve releases for 2019 have been subdued compared to our long term average. We expect this to remain the case for 2020. Reserve monitoring is performed at a quarterly ‘peer review’, which involves a challenge process contrasting the claims reserves of underwriters and claim managers, who make detailed claim-by-claim assessments, and the actuarial team, who provide statistical analysis. This process allows early identification of areas where claims reserves may need adjustment.
Releases as a percentage of net earned premium 10.4% 10.2% 10.9% 5.5% 0.4% 7.5%
As such, specialty lines releases decreased to $36.9m (2018: $85.5m) while cyber & executive risk releases reduced to $9.4m (2018: $25.7m). Our political, accident & contingency division provided a release of $16.8m, $2.0m higher than the $14.8m released in 2018. These releases were offset by strengthening in our marine, property and reinsurance book. Our reinsurance division saw reserves strengthen by $30.1m (2018: release of $23.8m), driven by loss creep on Typhoon Jebi and the Woolsey Fires. Our marine and property business saw reserves increased, with marine strengthening by $6.4m (2018: release of $12.5m) and property strengthening by $17.1m (2018: $47.3m).
Brokerage costs are the premium commissions paid to insurance intermediaries for providing business. As a percentage of net earned premiums they have increased slightly to 23% in the current year (2018: 22%). Brokerage costs are deferred and expensed over the life of the associated premiums in accordance with the group’s accounting policy. Other acquisition costs comprise costs that have been identified as being directly related to underwriting activity (e.g. underwriters’ salaries and Lloyd’s box rental). These costs are also deferred in line with premium earning patterns.
Investment performance During 2019, the funds managed by the Beazley group increased on the prior year, with financial assets at fair value and cash and cash equivalents of $5,851.3m at the end of the year (2018: $5,052.6m). The chart below shows the increase in our group funds since 2015.
We have seen a much stronger investment performance in 2019, as financial market conditions proved more supportive of returns than many anticipated. Interest rates, particularly in the US, were generally expected to continue their upward path in 2019, but growing concerns about the sustainability of global growth instead resulted in an easing of monetary policy and the US Federal Reserve reduced interest rates three times between July and October.
However, interest rates fell as global growth faltered and yields also declined throughout most of the year, generating capital gains and resulting in a return of 3.5% on two-year sovereign US securities in 2019: the highest return achieved by these assets for more than a decade.
We increased the duration of our fixed income portfolio in 2019, maintaining it at around two years for much of the period. This unusually high asset duration helped us to take good advantage of the falling yield environment.
■ Group funds including funds at Lloyd’s 35www.beazley.com Beazley Annual report 2019
Approximately 65% of our fixed income investments include exposure to corporate credit spreads. The combination of strong contributions from both risk free yields and credit spreads is fairly unusual and resulted in an overall return of 4.3% (2018: 1.1%) for our core portfolio in 2019.
Our cash balance has reduced in recent years, to $278.5m, or 4.8% of our financial assets, at the end of 2019 (2018: $336.3m, or 6.7%).
A new Tax Act (the Tax Cuts and Jobs Act) was signed into law in the US in December 2017. The Tax Act includes a base erosion anti-avoidance tax (the “BEAT”) provisions. We have performed an assessment for a number of our intra-group transactions for BEAT purposes. Although the application of this new BEAT legislation is still not fully certain for some types of transactions we believe that the BEAT impact on the group is not significant. For the year 2019 the amount of $1.9m was provided for in the group financial statements for BEAT liabilities (for 2018 the group paid BEAT tax of $0.9m).
In addition, if BEAT encourages other governments to introduce similar legislation impacting cross-border transactions, Beazley’s tax liability could consequently increase in those countries. We continue to assess the future impact of BEAT and other tax changes (including OECD’s Pillar 1 and Pillar 2 proposals) on our business.
Net assets per share (cents) 309.6c 280.4c 10% Net tangible assets per share (cents) 286.3c 256.2c 12%
Net assets per share (pence) 235.0p 219.6p 7% Net tangible assets per share (pence) 217.3p 200.7p 8% Number of shares 1 524.9m 523.1m – 1 Excludes shares held in the employee share trust and treasury shares.
The group’s exposure to reinsurers is managed through: • minimising risk through selection of reinsurers who meet strict financial criteria (e.g. minimum net assets, minimum ‘A’ rating by S&P). These criteria vary by type of business (short vs medium tail). The chart below shows the profile of these assets (based on their S&P rating) at the end of 2019; • timely calculation and issuance of reinsurance collection notes from our ceded reinsurance team; and
• regular monitoring of the outstanding debtor position by our reinsurance security committee and credit control committee. We continue to provide against impairment of reinsurance recoveries and at the end of 2019 our provision in respect of reinsurance recoveries totalled $13.7m (2018: $12.2m).
Insurance receivables Insurance receivables are amounts receivable from brokers in respect of premiums written. The balance at 31 December 2019 was $1,048.0m (2018: $943.3m).
AA+ 1% AA 1% AA- 46% A+ 43% A 4% A- 1% Collateralised 3% Others 1%
In September 2019, Beazley Ireland Holdings plc redeemed its £75m sterling denominated 5.375% notes as per the due date.
The cash element of the facility will expire on 31 July 2021, whilst letters of credit issued under the facility can be used to provide support for the 2019, 2020 and 2021 underwriting years. The facility is currently unutilised.
Other assets Other assets are analysed separately in the notes to the financial statements. The items included comprise: • deferred acquisition costs of $350.7m
(2018: $307.4m); • profit commissions of $nil (2018: $5.9m); and • deferred tax assets available for use against future taxes payable of $41.0m (2018: $28.9m).
Capital structure Capital structure Beazley has a number of requirements for capital at a group and subsidiary level. Capital is primarily required to support underwriting at Lloyd’s and in the US and is subject to prudential regulation by local regulators (Prudential Regulation Authority, Lloyd’s, Central Bank of Ireland, and the US state level supervisors). Beazley is subject to the capital adequacy requirements of the European Union (EU) Solvency II regime (SII). We comply with all relevant SII requirements.
In 2019, Beazley acquired 2.0m of its own shares into the employee benefit trust. These were acquired at an average price of 530.1p and the cost to the group was £10.6m.
Lloyd’s economic capital requirement (ECR) 1,828.4 1,594.5 Capital for US insurance companies 203.9 173.4
The final Lloyd’s economic capital requirement (ECR) at year end 2019, 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 broadly in line with the net written premiums in our business plan, which in the short-term should be low double digit growth.
At 31 December 2019, we have surplus capital of 22% of ECR (on a Solvency II basis). Following payment of the second interim dividend of 8.2p, this surplus reduces to 19% 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 was proposed by the IASB in June 2019. Applying this standard is a major undertaking and so the company has established a multi-disciplinary project group to oversee this activity.
Financial review continued Capital structure continued 40 Beazley Annual report 2019 www.beazley.com
To support Beazley’s growth we have a scalable and efficient operating platform that through focused investment has become an important competitive advantage. A high performing global operations function relies on us maintaining consistency in operational standards throughout the group, while being prepared to try new things and leverage our depth of insurance operations expertise to give us a lead over the competition. In order to achieve this, we pursue our group operations strategy. This focuses on the following areas: Supporting growth initiatives In support of our growth plans, we have built an infrastructure that enables us to quickly trial and launch new products in the market as efficiently as possible. Expanded versions of our products such as virtual care UK, marine cyber and environmental eclipse are examples launched in 2019. We have also expanded our product development team that employs agile delivery techniques to more quickly convert new ideas into market-ready insurance products and services.
We also make use of global outsourcing agreements for business processing support and information technology support. These arrangements have been carefully planned and selected to ensure we can maximise a highly efficient and scalable operating platform to support our business growth. A significant proportion of our IT is outsourced to specialist technology vendors. Not only has this enabled us to deliver far more for our shareholders’ money, but it has also been a source of expertise and ideas that would have been difficult to build in-house.
Another area of focus across the Financial Services industry is operational resilience. As more financial services benefit from technology automation, they also become more dependent on system availability and the supporting technology infrastructure. At Beazley we have responsible individuals and teams committed to ensuring business continuity, IT disaster recovery, information security and critical outsource management. We have brought these together under one operational resilience governance model which works in partnership with our business managers to ensure that, in the event of an incident, we can minimise the impact to our customers, shareholders and employees.
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 cyber and Breach Response products. In 2019, we partnered with a leading software business to provide a range of data attributes that can indicate whether a business is more likely to suffer from a cyber attack or data breach. Not only can this type of solution improve underwriting decision making, it also provides information that we can use to advise our customers and reduce their risk exposure.
2) Building an agile delivery capability One thing is certain in a digital world – business agility is key. Beazley is well regarded for its innovation in specialist insurance. To stay ahead of the competition, we seek to innovate in an increasingly agile way, taking new ideas to the market quickly, gathering feedback, evolving or failing them fast. At Beazley, we have structured our operations and technology teams into what we call a platform delivery model. Instead of delivering change and technology via many individual projects, we have organised our teams into ‘platforms’ that are aligned to both, the markets that Beazley operates in, and to the type of business being written. Each platform has an annual delivery budget within which there is greater flexibility afforded to the relevant business lines on how the budget is applied, and with the discipline of achieving against specific business outcomes aligned to our group strategy – such as increasing cost efficiency and responsiveness in customer service.
Governance In 2019, there were a number of changes to the membership of the executive committee, which resulted in changes to risk owners. Risk owners, a key role within the risk management framework, are senior members of staff responsible for identifying and managing risk in their areas of responsibility. The risk management function has worked with the new risk owners to explain their role and ensure that nothing has been missed or lost during the transition. Having new risk owners has created an opportunity to take a fresh look at the risks inherent within a function and reassess and enhance the control environment.
I have taken over as chair of the risk and regulatory committee, which is the executive level committee with oversight of how the business is managing risk. This evolution enables the committee to operate as an effective second line of defence to monitor and challenge risk owners as they undertake their risk responsibilities. The change has also meant that senior risk managers now attend the committee, which has improved the discussion as a result of their detailed knowledge of the areas of the risk register they focus on.
A further enhancement has been to split the exposure management committee into a committee that focuses on natural catastrophes and a committee that focuses on man-made catastrophes such as cyber. Again, this split means that we have the most appropriate people involved in oversight of these key risks, as both areas require a different skill set, and we ensured that we commit an appropriate amount of time so that one risk area does not monopolise time to the detriment of the other.
Our experience of operating these new governance structures for the majority of 2019 has already demonstrated the value of having made these changes.
Culture Every two years we commission a comprehensive staff engagement survey and this was undertaken in 2019. The results of this survey, coupled with leadership scores, are a useful guide for the risk management function to understand how the risk culture is evolving at Beazley. We have observed that the completion rate remains high at 83% and the level of engagement is 70%, which is on the boundary of top quartile companies and is at a relatively similar level from the survey in 2017. The survey also evidences a strong and open risk culture with consistency across most of our offices. Any deviation by function or office is a valuable risk metric which the risk function use to scope their work in order to provide assurance to the board.
Climate change Our stakeholders (including investors, regulators and staff) are increasingly interested in the financial impact of climate change.
• Scenario B – A long-term orderly transition scenario that is broadly in line with the Paris Agreement. This involves a maximum temperature increase being kept well below 2 degrees celsius (relative to preindustrial levels) with the economy transitioning in the next three decades to achieve carbon neutrality by 2050 and greenhouse-gas neutrality in the decades thereafter.
Insurance portfolio From an insurance portfolio perspective, the increased claims costs of a US Hurricane under the three climatic scenarios are: Insurance portfolio
We are now extending the exercise across other classes of business to understand the liability and transition risk and asses how we should transition our insurance portfolio over time.
Investment portfolio From an investment portfolio perspective, the potential impact on the valuations of our portfolio under the three climatic scenarios are: Investment portfolio
We have started to assess the financial impact of climate change and will continue this ongoing multi-year activity to ensure Beazley responds appropriately to this important risk.
In summary, the board identifies risk, assesses risk and sets risk appetite. The business then implements a control environment which describes how the business should operate to stay within risk appetite. Risk management then reports to the board on how well the business is operating using a risk management report.
For each risk, the risk management report brings together a view of how successfully the business is managing risk and whether there have been any events that we can learn from (risk incidents). Finally, the framework is continually evaluated and where appropriate improved, through the consideration of stress and scenario testing, themed reviews using risk profiles and an assessment of strategic and emerging risks. There were no material changes made during 2019.
The internal audit function considers the risk management framework in the development of its audit universe to determine its annual risk-based audit plan. The plan is based on, among other inputs, the inherent and residual risk scores as captured in the risk register. Finally, a feedback loop operates, with recommendations from the internal audit reviews being assessed by the business and the risk management function for inclusion in the risk register as appropriate.
Viability statement The directors have completed an assessment of the viability of the group over a three year period. A period of three future years has been selected to be short enough to be reasonably assessable but long enough to reflect Beazley’s risk profile of a portfolio of diversified short- tailed and medium-tailed insurance liabilities. This three year period also aligns with the length of time over which business underwritten at Lloyd’s, being the majority of our insurance business, is managed. The board has performed an annual risk assessment and the key risks to the group in the future are summarised on pages 48 to 50.
The risks and associated capital requirements have been brought together into a five year plan, although the uncertainties in year 4 and 5 of the plan mean the board focuses on the first three years for assessing viability. The main assumption is that the current market conditions will prevail, over which the outcomes of the board’s strategic initiatives are overlaid. In addition, the board has reviewed the sensitivity of key assumptions and has performed scenario testing to understand the impact on cash flows of the key risks of a major natural catastrophe and/or a systemic mispricing of the medium-tailed liability classes.
The board has also given specific consideration to the work of the Brexit team and whether or not Brexit in general and, more specifically, hard Brexit materially impacts viability and has concluded it does not.
The risks to financial performance The board monitors and manages risks grouped into eight categories, which cover the universe of risk that could affect Beazley. There have been no new risk areas identified and no major shifts in existing risks. The board considers the first two of the following risk categories to be the most significant.
• 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, losses linked to an economic crisis, 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.
• Reserve risk: Beazley has a consistent reserving philosophy. However, there is a risk that the reserves put aside for expected losses turn out to be insufficient. This could be due to any of the three drivers of risk described above. The group uses a range of techniques to mitigate this risk including a detailed reserving process which compares estimates established by the claims team with a top down statistical view developed by the actuarial team. A suite of metrics is also used to ensure consistency each year.
Strategic risk Alongside these insurance risks, the success of the group depends on the execution of an appropriate strategy. The main strategic risks can be summarised as follows: • Strategic decisions: The group’s performance would be affected in the event of making strategic decisions that do not add value. The group mitigates this risk through the combination of recommendations and challenge from non-executive directors, debate at the executive committee and input from the strategy and performance group (a group of approximately 30+ senior individuals from across different disciplines at Beazley).
• Communication: Having the right strategy and environment is of little value if the strategy is not communicated internally so that the whole group is heading in the same direction, or if key external stakeholders are not aware of Beazley’s progress against its strategy.
• Senior management performance: There is a risk that senior management could be overstretched or could fail to perform, which would have a detrimental impact on the group’s performance. The performance of the senior management team is monitored by the chief executive and talent management team and overseen by the nomination committee.
• Liquidity risk: This is the risk that the group might not have sufficient liquid funds following a catastrophic event. The investment committee monitors this risk which, given the nature of the asset portfolio, is currently small.
Anti-bribery and corruption risk The group also considered antibribery 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.
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 highcalibre 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.
We acknowledge and accept that over time climate change could impact the risks facing our insureds and we aim to manage the resulting risk to Beazley as described below: • Pricing risk: This is the risk that current pricing levels do not adequately consider the prospective impact of climate change resulting in systemic underpricing of climate exposed risks. The group’s business planning process establishes how much exposure in certain classes of business or geographic area we wish to accept. We benefit from a feedback loop between our claims and underwriting teams to ensure that emerging claims trends and themes can be contemplated in the business planning process, the rating tools and the underwriter’s risk by risk transactional level considerations. Our underwriters are empowered to think about climate risk during their underwriting process in order to determine the implication on each risk.
• External event risk: This is the risk that the physical impact of climate related events has a material impact on our own people, processes and systems leading to increased operating costs or the inability to deliver uninterrupted client service. The group has business continuity plans in place to minimise the risk of an interrupted client service in the event of a disaster.
• Regulatory and legal risk: Regulators, investors and other stakeholders are becoming increasingly interested in companies’ responses to climate change. Failure to appropriately engage with these stakeholders and provide transparent information may result in the risk of reputational damage or increased scrutiny. The group regularly monitors the regulatory landscape to ensure that we can adhere to any changes in relevant laws and regulations. This includes making any necessary regulatory or statutory filings with regard to climate risk.
• Strategic risk: This is the risk that our strategy fails to effectively consider climate change resulting in our business planning not adapting fast enough to respond to changes in wider claims trends. This creates a transition risk that our underwriting portfolio might not keep pace with the changes, being heavily exposed to declining industries and failing to capitalise on the opportunities. Our Emerging Risks analysis and business planning process seeks to mitigate this risk through horizon scanning for our longer-tail book, while we are able to be more flexible in responding to events impacting our short tail exposures.
Responsible business committee Our responsible business committee is chaired by Emma Whiteacre and sponsored by executive member Anthony Hobkinson. It reports into the executive committee and the board.
Inclusivity and diversity Our vision is to inspire and develop people with diverse perspectives to thrive at all levels of our business.
Responsible underwriting compliance We are committed to ensure our business is conducted in an ethical and honest manner. It ensures we do the right thing for our stakeholders.
“ All the one on one conversations I had with Beazley people were really good - they recognised the value of what we were doing, loved being a part of it, were always involved in evening activities, and my favourite thing, started thinking about their lives back home.”
Thanks to our partnership with All Hands and Hearts, volunteers from Beazley were able to participate in one of their projects for the third year. Over 50 employees expressed interest, and after a blind application
Beazley volunteers process, eight employees were selected. They visited Nepal to help rebuild a school, which accommodates 140 students.
The volunteers were in Nepal from Saturday 30 November to Sunday 15 December. They spent two weeks working hard to help rebuild Manakamana Basic School.
Alex Hardy ran the Bank of America Chicago Marathon to raise money for Lurie Children’s Hospital. He raised over $4,985 and was match funded $750.
BeLikeJake A group of US employees raised $56,000 for the BeLikeJake foundation who support the Children’s Hospital of Philadelphia, a long term Beazley client.
Highlights Charity week We raised over $7,200 during our charity week in the UK and US, which involved a presentation from All Hands and Hearts, a bake sale, an executive mastermind session and a Wimbledon screening.
Natural disasters We respond to large-scale disasters, especially if they affect the communities where we work. We donate to Disaster Emergency Committee (DEC), a disaster relief charity which brings 14 charities together to help respond quickly and effectively when a crisis hits. We also support All Hands and Hearts if they have an existing project in the community affected. In 2019, we donated over $7,000 to charities, including the relief efforts following Hurricane Dorian in The Bahamas, and Cyclone Idai in Mozambique.
Paris: Strides of Insurance 2019 A sporting event aimed at fighting cardiovascular diseases and raising awareness to the public and insurance employees around this cause.
Our long-term global approach focuses on young people, vulnerable adults and conservation. In 2019, our primary focus has been young people and children from lower socio-economic backgrounds.
The New York office have partnered with Reading Partners NYC to tutor students in small groups throughout the year.
Make a Difference is our global community volunteering programme, with 2019 marking a fifth successful consecutive year. Activities were selected based on local need and ranged from working at a farm to harvesting crops for local food pantries, sorting food at food banks, preparing and serving meals to the homeless, spending time with local pensioners and upgrading community facilities likes crèches and parks.
Toronto office visit St. John’s Park to help keep it clean
Our 2019 focus on Young People Maths in Insurance workshop: Volunteers in our London office worked on supporting 32 aspiring students to learn about maths related roles in the insurance market.
“ There has been a direct correlation between the children making advanced progress in reading and having a reading partner. Our children are more confident when meeting new adults and able to have a conversation, they are learning about the wider world and becoming more inquisitive. The adults who join us from Beazley are kind, inspiring and it is truly wonderful to watch them with our children every week. We thank them for their continued support.”
Global Intern programme In 2019 over 25 interns were given internships in our local communities in New York, Farmington, San Francisco and London.
Toy appeals We ran toy appeals in our London, Birmingham, Dublin, Chicago and New York offices.
Recycling and waste management The EWG has conducted research and an information campaign about the best approaches to waste management and recycling and has promoted the use of the ‘Six Rs’ – Refuse, Reduce, Reuse, Repair, Repurpose, Recycle.
Our focus is on the environmental impact of our people, our places of work and our business processes. Through the EWG we are influencing corporate decision-making, increasing the environmental awareness of our employees and helping them to make more environmentallyconscious choices.
Carbon emissions report Latest greenhouse gas emission figures (tonnes CO2 equivalent)1
Scope 3 tCO2e/employee/year tCO2e/employee/year 6.8 Scope 3 emissions increased due to increased business travel by air
Looking ahead, the biggest contribution to Beazley carbon footprint comes from flights. Ours is a business that requires frequent face to face contact with brokers and clients but we will be exploring opportunities to replace short haul flights with train journeys where possible.
We will also be exploring the carbon footprint of the data centres Beazley uses. There are significant differences in the carbon footprint of data centres primarily driven by the age of the cooling systems used. Some newer centres, such as one recently opened in Wales, are 100% powered by renewable energy.
Climate change impacts on insurers may be three-fold: Physical The disruptive impacts of more frequent or severe extreme weather events.
Liability The risk that parties who have suffered loss or damage from climate change seek to recover losses from those they believe are responsible.
Our Marketplace workstream is all about using insurance as a force for good, giving our clients and insureds good reasons to do the right thing and improving their risk and business profiles by helping them to manage risks and adapt to sustainability challenges.
Climate change is a major issue of discussion for us, internally and externally, and we are participating in the debate through various channels such as the hosting of briefings in Lloyd’s on resilience and adaptation for property owners, climate change, and renewable energy; press articles including one by the head of our reinsurance division, Patrick Hartigan, on reinsurance and climate change in Insurance Day; and contributing to a forthcoming Lloyd’s report on Insuring a Low Carbon World.
Our framework consists of systems and controls, including: • risk assessments; • policies to ensure we comply with regulations; • staff training and awareness; • compliance monitoring; and • compliance reporting.
Being Beazley is at the heart of everything we do.Responsible underwriting – compliance
Knowing our customers Knowing our clients and business partners is central to doing business responsibly. It is key to managing risk and ensuring we transact only with reputable intermediaries, agents and suppliers. We maintain various policies, procedures and controls to ensure compliance considerations are embedded in our business processes.
Anti-bribery and corruption A strong belief in ethical business practices underpins our relationships with our customers and business partners. To keep us connected to this core value, we operate within strict guidelines that govern the payment of commissions, the exchange of gifts and entertainment and all circumstances capable of leading to a conflict of interest. In particular, we maintain the following policies and procedures which ensure compliance with anti-bribery laws in the jurisdictions in which we operate: • anti-bribery policy • gifts and hospitality record and approval process
The exchange of gifts and hospitality is closely monitored to ensure that business decisions are free from improper influence. Where there is a risk of potential impropriety staff are able to make use of various avenues for reporting instances of bribery, corruption or conflicts of interest.
Our anti-corruption policies are supplemented by an annual risk assessment which analyses our business for exposure to high risk jurisdictions, our distribution channels and the classes of business we write.
The standards we require of our staff are set out in the Beazley Customer Conduct Protocol. The protocol is supplemented with periodic conduct related training.
Data security We have a robust approach to information security and privacy comprised of organisational, human and technical controls designed to safeguard data and the rights of data subjects.
These policies are well embedded in our business processes and staff are trained annually to apply principles of information security in their day-to-day role. To ensure consistent compliance with data requirements, we undertake frequent security testing and annual data security/privacy audits. Our governance structure enables the information security and privacy function to escalate and report data related matters without restraint, thereby ensuring senior management oversight of data risk management at all times.
We are committed to upholding the rights of data subjects, informing them of the information we collect and process, and ensuring that we only collect what is required to deliver our services. We observe the legal and regulatory requirements of the various jurisdictions within which we operate and have a global privacy policy aligned to European, North American, Canadian and Singaporean privacy requirements.
Such reports are treated with the utmost confidentiality and in accordance with all applicable legal and regulatory requirements. Annual reports are made to relevant Beazley boards on the effectiveness and operation of our whistleblowing procedures.
Social matters Statement of the chair; Chief executive’s statement; Responsible business 16-21; 51-65 Respect of human rights
Our ongoing commitment to gender diversity During 2017 Beazley signed up to participate in the HM Treasury’s Women in Finance Charter. In doing so we made a public commitment to increase the percentage of females in senior management from 28% to at least 35% by the end of 2020. At the beginning of 2019 32% of our senior management were women, however, we are pleased to announce that as of the start of 2020 we have achieved our goal, with 36% of our senior management being women.
To further support our commitment, we continue our Insurance Supper club membership, which provides development training and events for our female staff. In addition, we launched our Beazley SHE employee resource network during 2019. Beazley SHE is a global network with the aim of providing personal and professional development opportunities to women internally as well as externally within the industry.
Inviting diverse perspectives Through our recruitment practices we aim to attract and retain a diverse range of talent. Once hired we seek to develop our people and encourage them to share their individual skills, opinions and experiences to help shape our business. After its successful launch in 2018, the second cohort of NexCo was formed in 2019. NexCo is a group consisting of our younger talent from a broad range of roles, backgrounds and geographical locations, which aims to get different perspectives on the issues focused on at executive level. The group is provided with the monthly executive committee papers and members meet on a monthly basis to discuss, share ideas, challenge the executive and even make recommendations which the business should consider. This allows our future leaders to engage in key projects they may not have otherwise been aware of as well as present their own ideas to executive members. Membership is rotated every 12 months to maintain diversity of thought and ensure a wide pool of leadership development opportunities.
In 2020 we will be setting a new goal for our commitment to gender diversity. Additionally, female representation on our plc board increased from 25% to 36% and executive committee from 13% to 20% from 2018 to 2019 respectively.
In 2019, a small number of passionate individuals were trained as Wellness Champions as part of a Lloyd’s mental wellbeing initiative. Over the course of the year this small group conducted ‘lunch and learns’ and presented on request in team meetings about the importance of good mental health and how we can support one another and ourselves through mental health challenges.
2020 and beyond We have made great strides during 2019, however, we recognise work must be ongoing in order to maintain and build on what we have achieved. Along with finalising a new gender diversity target, our 2020 focus will include initiatives to support our people from a race and ethnicity perspective. This will include the launch of a new employee resource network.
The board receives an annual report from the responsible business committee. Further information on the company’s responsible business strategy and how the company aims to provide support for our communities and the environment are set out in the responsible business report on pages 51 to 65.
How we engage: • Our people: Our people are fundamental to the long-term success of the company. We have various engagement mechanisms many of which have been in place for a number of years. Every other year we conduct a company-wide employee survey which provides an overall employee engagement score. Overall employee engagement in 2019 was 70%.
• Our customers: Through our Closer to the Client core strategic initiative, we are focused on better understanding the needs of our clients. One of the key goals of the initiative is to ensure that Beazley becomes a client-centric organisation. The board receives regular reports on the progress against each of the strategic initiatives.
The directors are fully aware of their responsibilities to promote the success of the company in accordance with s172 of the Companies Act and have acted in accordance with these responsibilities during the year. The board has identified that its key stakeholders are: • our workforce • shareholders • customers • brokers • regulators
Principal activity Beazley plc (registered number 09763575) is the ultimate holding company for the Beazley group, a global specialist risk insurance and reinsurance business operating through: its managed syndicates at Lloyd’s in the UK; Beazley Insurance Company, Inc. and Beazley American Insurance Company, Inc., both of which are admitted insurance carriers in the US; and Beazley Insurance dac, a European insurance company in Ireland.
Going concern and viability statement A review of the financial performance of the group is set out on pages 32 to 40. The financial position of the group, its cash flows and borrowing facilities are included therein.
Directors The directors of the company who served during 2019 and/or to the date of this report were as follows: David Lawton Roberts Non-executive chair David Andrew Horton Chief executive George Patrick Blunden Non-executive director (resigned 21/03/2019) Martin Lindsay Bride Finance director (resigned 23/05/2019) Adrian Peter Cox Director Angela Doreen Crawford-Ingle Non-executive director (resigned 31/05/2019) Nicola Hodson Non-executive director (appointed 10/04/2019) Sally Michelle Lake Finance director (appointed 23/05/2019) Christine LaSala Non-executive director Sir John Andrew Likierman Non-executive director Anthony Jonathan Reizenstein Non-executive director (appointed 10/04/2019) John Peter Sauerland Non-executive director Robert Arthur Stuchbery Non-executive director Catherine Marie Woods Non-executive director 67www.beazley.com Beazley Annual report 2019
The board is complying with the provision on annual re-election of all directors in accordance with the UK Corporate Governance Code. The appointment and replacement of directors is governed by the company’s Articles of Association (the Articles), the UK Corporate Governance Code (the Code), the Companies Act 2006 and related legislation. The Articles may be amended by a special resolution of the shareholders. Subject to the Articles, the Companies Act 2006 and any directions given by special resolution, the business of the company will be managed by the board who may exercise all the powers of the company.
Fidelity Management & Research 51,083,172 9.6 MFS Investment Management 38,243,203 7.2 Invesco Perpetual 36,310,643 6.9 SKAGEN Fondene 21,986,028 4.2 Vanguard Group 21,412,769 4.0
Employee engagement We place great emphasis on open and regular communication which helps to ensure everyone knows what is going on at Beazley. We have a number of channels to share information and gather feedback, including an intranet which is accessible by all employees and is updated at least every other day with company news. We also email all employees a weekly newsletter, and provide the opportunity for colleagues to join face to face presentations every other week to hear about a specific team/project/topic. Each week we host a brief update for all colleagues to hear progress on our strategic initiatives and on a monthly basis our CEO provides a bulletin giving information about general happenings around the business and the financial and economic factors affecting us that month (when relevant).
Every other year all employees are encouraged to take part in a survey which measures the way our people feel about the business, its vision and aspirations. Our executive team host regular face to face sessions with employees in which they have the opportunity to ask questions and share ideas and vice versa. We also ask for volunteers to work on projects outside of their day jobs in order to give different perspectives to decisions the company is making. In addition, a group of selected representatives from across the business gather input and views on set topics and provide those to the board.
Inclusion and diversity Information concerning inclusion and diversity can be found in the responsible business section on pages 64 and 65 and in the statement on corporate governance on page 83.
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 2019 remains unchanged.
The directors have pleasure in presenting their report and the audited financial statements of the group for the year ended 31 December 2018
v) GHG emissions are, where possible, calculated using the BEIS conversion factors for ‘kgCO2e’ the sum of carbon dioxide, methane and nitrous oxide emission factors. The exceptions to this are emissions associated with: • Refrigerants (Scope 1 emissions), which are reported as carbon dioxide equivalent (CO2e) emissions; • Dublin office electricity use which is based on information reported by the Sustainable Energy Authority of Ireland (SEAI) and reported as tCO2 only.
viii) 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.
Greenhouse gas emissions Beazley Group report 2018 UK and European GHG emissions of 5,412.43 tonnes CO2 equivalent (tCO2e) a decrease of 11% relative to 2017, 5% higher than 2016 emissions. 2018 Scope 1 and 2 emissions (611.39 tCO2e) continuing the downwards trend, 15% lower than those reported for 2017.
Total 2016: 5,173.31 2017: 6,103.16 2018: 5,412.43 2016: 1,653.95 2017: 2,191.96 2018: 2,032.23 tCO2e/employee/year 2016: 7.1 2017: 7.7 2018: 6.8
Auditor EY LLP has indicated its willingness to continue in office. Accordingly a resolution to reappoint EY LLP as the auditor of the company will be proposed at the 2020 AGM.
By order of the board, covering the strategic report from pages 1 to 70 and the directors’ report from pages 67 to 70.
Governance 72 Letter from our chair 74 Board of directors 78 Investor relations 79 Statement of corporate governance 94 Letter from the chair of our remuneration committee 96 Directors’ remuneration report 125 Statement of directors’ responsibilities 126 Independent auditor’s report
In accordance with the group’s policy on director independence and rotation, non-executive directors George Blunden (senior independent director) and Angela Crawford-Ingle (chair of the audit and risk committee) stepped down from the board on 21 March 2019 and 31 May 2019 respectively. The board is immensely grateful to both George and Angela for being such tremendous servants to the company during their tenure. The board welcomed John Reizenstein and Nicola Hodson who were appointed as directors on 10 April 2019. John became chair of the audit and risk committee succeeding Angela on 31 May 2019. Nicola became a member of the audit and risk committee and brings to the board expertise in technology, operations and data which we reported last year were additional skills that we were seeking. The board will be commencing a search for an individual with relevant insurance expertise to enhance and complement the board’s skills. Following the recommendations from the Parker Review the board is committed to increasing ethnic diversity and this will be a specific consideration in future appointments.
Christine LaSala succeeded George Blunden in the role of senior independent director from 21 March 2019. Christine also joined the nomination and remuneration committees from the same date. We have increased diversity across all of the board’s committees during the year.
Board evaluation In 2018, we appointed Boardroom Review Limited to undertake the triennial externally facilitated board evaluation. As reported last year, the review concluded that the board, its committees and its individual members continue to operate effectively. The review highlighted the following key areas that the board focused on in the coming year: • reviewing the group’s governance structure; • discussing whether to divide the audit and risk committee into separate committees; • development of the role of internal audit within the organisation; • non-executive director participation in a crisis simulation; and • improving visibility and understanding of the changing competitive landscape.
Governance The company continues to be committed to the highest standards of governance and I am pleased to confirm that the company has complied with the principles and provisions that are set out in the 2018 UK Corporate Governance Code throughout the year ended 31 December 2019. Details of the activities of the board and its committees are also set out on pages 79 to 93. All directors will attend this year’s AGM, either in person or via teleconference, which will again provide an opportunity for all shareholders to hear more about our performance and to ask questions of the board.
The remuneration committee ensures that remuneration arrangements support the strategic aims of the business and enable the recruitment, motivation and retention of senior executives while complying with the requirements of regulatory and governance bodies, satisfying the expectations of shareholders and remaining consistent with the expectations of the wider employee population.
David Roberts Chair Appointed: 1 November 2017 Experience: David joined Beazley on 1 November 2017 and became chair on 22 March 2018. He is chair of Nationwide Building. Society and vice chair of NHS England. He has over 30 years’ experience in financial services and was previously chair 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 chair at Lloyds Banking Group. His previous non-executive directorships include Absa Group SA and BAA plc. Committee: Nomination committee (chair) Skills: governance, strategy, board leadership and regulation.
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 non-executive director. Andrew currently chairs the London Market Group. Committee: Executive committee (chair) Skills: strategy, investment, finance, mergers and acquisitions, leadership and people management.
John Reizenstein Non-executive director Appointed: 10 April 2019 Experience: John joined Beazley in April 2019 as chair of the audit and risk committee. He has more than 30 years experience in financial services, most recently as chief financial officer of Direct Line Insurance Group plc, from which he retired in 2018. Prior to that he held senior positions in insurance and banking at Co-operative Financial Services and in investment banking at Goldman Sachs and UBS. He is a member of the Takeover Panel, chair of Farm Africa and a trustee of Nightingale Hammerson. Committee: Audit and risk committee (chair) Skills: finance, strategy, leadership, investment, and mergers & acquisitions.
Sally Lake Group finance director Appointed: 23 May 2019 Experience: A Fellow of the Institute of Actuaries since 2004. Sally joined Beazley in 2006 initially working with the specialty lines division, the largest underwriting division, for six years. This gave her a breadth of exposure to many aspects of the business at Beazley, especially focusing on claims analytics and reserving. In 2012 Sally became reserving manager and then group actuary in 2014. As group actuary Sally covered both pricing and reserving, as well as capital model validation. She became group finance director in May 2019. Prior to joining Beazley, Sally held financial positions within Lane Clark & Peacock where she qualified as an actuary and PwC where she gained experience in pensions. Committee: Executive committee Skills: reserving and actuarial pricing, capital model validation, leadership and people management, inclusion and diversity.
Nicola Hodson Non-executive director Appointed: 10 April 2019 Experience: Nicola joined the board in April 2019. Nicola is vice president field transformation, for Microsoft Global Sales and Marketing and was previously chief operating officer for Microsoft UK. She is a non-executive director on the board of Drax Group plc and is chair of its remuneration committee. Nicola was formerly a non-executive director at Ofgem, a board member at the UK Council for Child Internet Safety and at the Child Exploitation and Online Protection group. Committee: Audit and risk committee Skills: strategy, leadership and management. digital transformation, sales & marketing. change leadership and IT.
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 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 Limited in 2008 and Beazley plc in 2011. Committee: Executive committee Skills: insurance, management, international business development and governance.
John Sauerland Non-executive director Appointed: 5 May 2016 Experience: John is chief financial officer of the Progressive Corporation, a US based insurance holding company. Prior to his current role, he was Progressive’s personal lines group president for eight years, responsible for the company’s primary business unit with $17bn in revenues. During his tenure as personal lines group president, he led the introduction of many innovations such as Name Your Price® and Snapshot®, the industry-leading pay-as-you-drive offering. He also oversaw significant growth of the company’s direct marketing efforts and consumer-facing web and mobile technology. Committee: Remuneration committee Skills: finance, pricing, marketing and distribution.
Sir Andrew Likierman Non-executive director Appointed: 25 March 2015* Experience: Andrew is professor of management practice at the London Business School having served as Dean from 2009-2017. His career has spanned the public and private sectors as well as academic life, including 10 years as head of the UK Government Accountancy Service. He has had many non-executive director appointments, including at the Bank of England, and is currently also a non-executive director of Times Newspapers Holdings Ltd and Monument Corporation Ltd. Committees: Remuneration committee (chair), nomination committee Skills: accountancy, financial services, and governance.
Catherine Woods Non-executive director Appointed: 1 January 2016* Experience: Catherine has 35 years experience in financial services as well as significant governance experience. Her executive career was with JP Morgan in the City of London, specialising in European financial institutions. She is a former vice president and head of the JP Morgan European Banks equity research team. She currently is a non-executive director of BlackRock Asset Management (Ireland) and joins the Lloyds Banking Group Board on 1 March 2020. She was previously appointed by the Irish Government to the Electronic Communications Appeals Panel and the Adjudication Panel to oversee the rollout of the National Broadband scheme. Catherine is a former deputy chair of AIB Group plc, former chair of EBS DAC and former non-executive director of AIB Mortgage Bank and An Post. Committees: Audit and risk committee, remuneration committee, nomination committee Skills: insurance, strategy, stakeholder management, finance, governance, leadership and management.
We place great importance on communication with shareholders. The annual report and accounts and the interim report are available to shareholders on the company’s website (www.beazley.com). A mailed copy of the accounts is also available on request. The company responds to individual letters from shareholders and maintains a separate investor relations centre within the existing www.beazley.com website, as a repository for all investor relations matters.
Financial reporting for insurance companies can seem to be complex. In order to help shareholders and potential investors better understand the key drivers of the business and its prospects, we have endeavoured to provide increasing levels of transparency and explanation in our communications. As a result, in addition to enhancing the information contained in the annual and interim reports, the investor relations centre on the company website contains a substantial amount of relevant information for investors, including key corporate data and news, presentations to analysts, information for the names of syndicates 623 and 5623 and special purpose syndicate 6107, analyst estimates and a financial calendar. The website also gives investors the opportunity to sign up for an alert service as new information becomes available.
There is regular dialogue with institutional shareholders, as well as general presentations after the preliminary and interim results. The board is advised of any specific comments from institutional investors to enable it to develop an understanding of the views of major shareholders. All shareholders have the opportunity to put questions at the company’s annual general meeting.
Compliance with Code provisions The board confirms that the company and the group have complied with the provisions set out in the 2018 version of the Financial Reporting Council’s UK Corporate Governance Code (the Code) throughout the year ended 31 December 2019.
Governance framework The company operates through the main board, the managing agent board, the board of the Irish insurance company (that accepts non-life reinsurance premiums ceded by the corporate member, Beazley Underwriting Limited), the board of the US admitted insurance companies and their board committees. The group has established properly constituted audit and risk, remuneration, nomination and disclosure committees of the board. There are terms of reference for each committee and details of their main responsibilities and activities in 2019 are set out on pages 80 to 93. Andrew Horton as the chief executive officer, has also constituted an executive committee that he chairs and which acts under delegated authority from the board. The executive committee meets on a monthly basis and is responsible for managing all activities of the operational group. The governance framework of the main board and its committees is shown in the diagram on the following page.
The roles of the chair 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.
Key responsibilities The audit and risk committee assists the board of directors in fulfilling its oversight responsibilities for the financial reporting process, the system of internal control, the audit process and the company’s process for monitoring compliance with laws and regulations and the Beazley Code of Conduct. It also ensures that an effective risk management process exists in the major regulated subsidiaries and that the Beazley group has an effective framework and process for managing its risks.
Members Adrian Cox Beth Diamond Mike Donovan James Eaton Ian Fantozzi Patrick Hartigan Sally Lake Lou Ann Layton Richard Montminy Andrew Pryde Jerry Sullivan Christian Tolle Tim Turner Pippa Vowles
The board consists of a non-executive chair, David Roberts, together with seven independent non-executive directors, of whom Christine LaSala is the senior independent non-executive director, and three executive directors, of whom Andrew Horton is chief executive officer. The non-executive directors, who have been appointed for specified terms, are considered by the board to be independent of management and free of any relationship which could materially interfere with the exercise of their independent judgement.
Board meeting attendance The full board meets at least five times each year and more frequently where business needs require. In 2019, in addition to the five regular board meetings, there were further meetings to consider the Q1 and Q3 2019 interim trading statements. All the directors also attend an annual strategy day. The nomination, audit and risk committees had additional ad hoc meetings with full attendance. The chair holds regular meetings with the non-executive directors without the executive directors being present.
D Andrew Horton 5 5 – – – – – – Sally M Lake6 3 3 – – – – – –
Beazley continues its support for 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. Beazley also remains a member of 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 inclusion and diversity steering group provides inclusion and diversity 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. In late 2019, Beazley launched an internal/external network, Beazley SHE, to support Successful, High potential, Empowered women in insurance, providing them opportunities for personal and professional development.
Board performance evaluation Under the UK Corporate Governance Code, the board is required to undertake formal and rigorous evaluation of its own performance and that of its committees and individual directors and this should be externally facilitated every three years. The board and its committees consider their effectiveness regularly. An assessment was externally facilitated in 2018 by Boardroom Review Limited and an internal review was conducted in 2019. The recommendations from the 2018 review were progressed and discussed with the board throughout the year. One of the actions was to conduct a review the group’s governance structure to explore credible options and alternatives for information flows and agendas, and to identify any potential vulnerabilities. A number of recommendations were adopted as a result of the review, including a number of amendments to the matters reserved for the board. A further recommendation from the external assessment was to consider the division of the audit and risk committee into separate committees. After some robust discussions, the board decided to reformat the way the committee operated, placing an increased focus on risk. The board will continue to keep a watching brief during the following year as to how effective the change has been. The board agreed at its last meeting of the year that the other actions from the review had been completed. The board will agree an action plan from the 2019 internally facilitated assessment in early 2020 and report on the action taken in the 2020 annual report. The reviews concluded that the board and its committees continue to operate effectively.
The board therefore confirms that it has, during 2019, reviewed the effectiveness of the group’s risk management and internal controls (including financial, operational and compliance controls), which have been in place throughout the year under review and continue to operate up to the date of approval of the annual report and accounts.
The chair of the audit and risk committee also had regular contact with external and internal auditors during 2019 and members of the audit and risk committee met individually with the Central Bank of Ireland and the Prudential Regulation Authority.
Audit and risk committee The role of the committee is to assist the board of directors in fulfilling its oversight duties for the financial reporting process, the system of internal control, the audit process and the company’s process for monitoring compliance with laws and regulations and the Code of Conduct. This role is unchanged from previous years and in order to perform this role effectively the committee works with management and key stakeholders to ensure that the risk and control framework within Beazley remains robust and appropriate for the group in the current environment. In addition to assessing the risk and control framework, in 2019 the committee also considered a number of specific topics such as monitoring of changes in regulatory and tax environments, and continued to assess the risks associated with Brexit.
The board has delegated oversight of audit and risk matters to the audit and risk committee which currently comprises John Reizenstein (chair), Catherine Woods, Nicola Hodson, Christine LaSala and Robert Stuchbery.
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 2019 there were a total of 6 meetings in the year compared to 7 meetings in 2018.
John Reizenstein 10 April 2019 4/4 Nicola Hodson 10 April 2019 3/4 Christine LaSala 1 July 2016 6/6 Robert Stuchbery 11 August 2016 6/6 Catherine Woods 11 March 2016 6/6 85www.beazley.com Beazley Annual report 2019
b) Internal audit • recommend the appointment or termination of appointment of the head of internal audit; • monitor and review the effectiveness of the company’s internal audit function; • receive a report on the results of the internal auditor’s work, review internal audit reports and make recommendations to the board on a periodic basis; and
c) External audit • recommend to the board, to be put to the shareholders for approval, the appointment, reappointment and removal of the external auditors; • oversee the relationship with the external auditor including planning, reviewing of findings and assessing overall effectiveness; • approve auditor’s remuneration for audit, assurance and non-audit services; • review and approve the annual audit plan to ensure that it is consistent with the scope of the audit engagement, having regard to the seniority, expertise and experience of the audit team; and
d) Actuaries • recommend to the board the appointment and termination of any firm of consulting actuaries used for the provision of Syndicate Actuarial Opinions (SAO) and/or review of insurance reserving. In 2019, the committee appointed EY to provide the SAO report; and
Principal activities The principal activities undertaken by the committee in discharging its responsibilities in 2019 are described below: a) Significant financial statement reporting issues The significant financial statement reporting issues, along with the significant matters and accounting judgements that the committee considered during the year under review, are set out below: 86 Beazley Annual report 2019 www.beazley.com
i) Valuation of insurance liabilities As further explained in note 1 to the financial statements, the group’s policy is to hold sufficient provisions, including those to cover claims which have been incurred but not reported (IBNR) to meet all liabilities as they fall due. The reserving for these claims represents the most critical estimate in the group’s financial statements. In both 2017 and 2018, we observed a significant amount of natural catastrophe activity which impacted many lines of business underwritten by Beazley. The impact of the 2018 catastrophes continued to be seen during 2019 with adjustments required to the valuation of the insurance liabilities held for these events. We have also seen a rise in cyber and liability claims during 2019 in line with the wider market. While there remains uncertainty around the final cost of these events to the company, the committee notes that Beazley continues to adopt a prudent approach where uncertainty exists as to the final cost of settlement.
iii) Valuation of financial assets at fair value The board is responsible for setting the investment strategy, defining the risk appetite and overseeing the internal and outsourced providers via the chief investment officer. As the group’s business model is to predominantly issue insurance contracts, the group has taken the option to defer the effective date of IFRS 9 until January 2021, as per the amendment to IFRS 4. As such the group continues to report its financial assets at fair value.
• reviewed how the internal audit, risk management and compliance functions contributed information and assurance relating to the group’s control effectiveness; • received and reviewed an overall summary assessment of 2019 internal audit activity; • monitored the timely implementation of agreed management actions and reviewed the status of the same; • requested and reviewed a report regarding the group’s control environment as a whole; and
During the course of 2019 a number of internal audit recommendations were made to management in relation to its systems of control which have been subsequently implemented. Overall the internal audit function was able to report that for those areas it reviewed, the design and operation of our risk management framework, controls and processes have supported the group in operating within its risk appetite.
b) External audit i) Appointment of EY As disclosed in the group’s annual report for the year ended 31 December 2018, EY were appointed Beazley’s external auditor for financial periods commencing on or after 1 January 2019 after receiving shareholder approval at the group’s AGM in 2019.
The objective is to ensure that the provision of such services does not impair the external auditor’s objectivity. The policy specifically disallows certain activities from being provided by the auditor, such as bookkeeping and accounting services, internal actuarial services and executive remuneration services. The policy requires consideration and pre-approval for all other material services such as due diligence assistance, tax services and advice on accounting and audit matters.
In the year the audit fees and audit related services for 2019 were $1.9m (2018: $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.
The committee also reviewed the Solvency II technical provisions on an adhoc basis.
Risk management and compliance a) Risk management To assist the board, the committee, supported by the risk committees of the subsidiary boards, receives and reviews reports from the risk management function focusing on the following areas: • risk appetite: the committee has monitored the actual risk profile against risk appetite throughout 2019 and can confirm that Beazley plc has been operating within risk appetite as at 31 December 2019. The committee has also reviewed the proposed 2020 risk appetite; • risk assessment: the committee has performed a review of the group’s risk profile to assess its coverage of the universe of risk and that major underlying risks are visible and are being monitored; • risk profiles: the committee and the risk committees of the subsidiary boards have reviewed Beazley’s risk profiles, which are focused risk assessments of specific topics. In 2019 the committee received a review of insured’s cyber risk aimed at ensuring our suite of realistic disaster scenarios are appropriate. There was also a number of other operational risk profiles presented, including exposure management, life sciences and the IT platforms, which supported the committee’s oversight of the on-going business processes; • emerging risk: the committee supported the identification of strategic and emerging risks which were discussed at the board meeting in May 2019 and have been subsequently monitored and reported in the quarterly Own Risk and Solvency Assessment (ORSA); • oversight of the control environment: the committee has received a quarterly consolidated assurance report which provides commentary on the status of the control environment with perspective from the business, risk management, compliance and internal audit. It also includes entries from the risk incident log; • reverse stress testing: the committee has received the results of the reverse stress testing exercise, which explores what would have to happen for the group to be unviable and has been able to provide assurance to the board that this work has been performed with the appropriate level of depth and expertise; • heightened risk: the committee consider the heightened risk register quarterly. A risk is considered heightened if the likelihood or the impact of occurrence was higher than usual; • oversight of the internal model: the committee and the risk committees of the subsidiary boards have reviewed regular reports associated with the internal model. These have included a standing report on internal model output, and a validation report featuring both internal and independent validation and themed reviews, for example, on the approach used to aggregate risk in individual entities which consolidate up to the group level. These assessments have supported the boards’ use of the internal model; and
b) Compliance The group head of compliance has direct access to the committee members and attends all committee meetings.
During 2019, the committee: • monitored the implementation of the 2019 compliance plan; • reviewed and approved the 2020 annual compliance plan, including the compliance monitoring programme; • reviewed changes in the regulatory environment applicable to Beazley; • received updates on relationships with key group regulators, and oversight of regulatory requests; • provided oversight to regulatory responses to corporate developments; • reviewed updates from the money laundering reporting officer on the adequacy and effectiveness of the company’s anti-money laundering systems and controls; • provided oversight of the progress of the business in addressing identified enhancements to compliance requirements; • approved the group policies and controls in respect of anti-bribery and corruption and anti-fraud; • received updates on the structure and effectiveness of the company’s compliance function; and
• received updates on the framework, training and policy put in place regarding whistleblowing.
Remuneration committee 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 chair of the company; • recommend the remuneration of the chief executive, the other executive directors, the direct reports to the chief executive, the company secretary and such other members of the executive management as it is designated to consider. No director or manager shall be involved in any decisions as to his or her own remuneration; • obtain reliable, up-to-date information about remuneration in other companies; and
Key activities in 2019 During 2019 the committee: • reviewed the key aspects of the remuneration policy, and oversaw its implementation and application; • satisfied itself that the current remuneration structure is appropriate to attract and retain talented people; • considered the chief risk officer’s report which confirmed that the design of remuneration promotes appropriate risk behaviour throughout the organisation. In addition, the analysis considered the performance of the control environment, profit related pay targets, calculation of the bonus pool, share awards, a suite of risk metrics for each Solvency II member of staff and any individual who has created a higher than expected level of risk; • ensured incentives continued to be appropriate to align company and shareholders; • reviewed methodology of reporting of bonus disclosures with the objective of improving transparency; • approved the grant of share awards under the group’s deferred, retention and LTIP plans; • considered the salary and bonus awards for 2019 for executive directors, heads of control functions, material risk takers and other officers; • approved the gender pay gap report; • approved the chair’s fees; • reviewed the executive director employment contracts; • implemented the 2018 UK Corporate
Currently the membership of the remuneration committee comprises Sir Andrew Likierman (chair), Christine LaSala, John Sauerland and Catherine Woods.
Nomination committee The nomination committee meets at least twice annually and at such other times during the year as are necessary to discharge its duties. In 2019, there were five scheduled meetings, reflecting the workload of the committee during the year. Only members of the committee have the right to attend meetings; however, other individuals, such as the chief executive and external advisers, may be invited to attend for all or part of any meeting.
Policy on gender, inclusion and diversity We believe having a diverse and inclusive workplace will support our vision for growth and outperforming the market. We continually review our approach to diversity and our aim is to have nurtured diverse employees across the business who are given the tools and opportunities to progress their career within Beazley. We believe employing individuals with wider perspectives and from a broader skill base will lead to a more dynamic, innovative, responsive organisation in touch with changes and developments in our business environment.
The nomination committee is chaired by David Roberts, and currently also comprises Christine LaSala, Sir Andrew Likierman and Catherine Woods.
The committee has agreed the establishment of goals for gender diversity for both the board and the broader organisation. The board achieved its goals for gender diversity for the Beazley plc board of two female members by AGM 2016, and a third female member by AGM 2017. Female representation on the board went from zero to three in five years and has increased in 2019 with the appointments of Nicola Hodson and Sally Lake to the board. With the resignation of Angela Crawford-Ingle during the year, this brings the representation of females on the board to four or 44%. The committee reviewed progress against the group’s 2020 goals for there being a minimum of 35% female senior managers within the organisation by 2020 and 33% female board members at group level by 2021.
The 2019 board effectiveness review was carried out internally and the board will agree an action plan from this review, early in 2020. A report on the plan and actions taken will be included in the 2020 annual report.
Key activities in 2019 Tasks which the committee carried out in 2019 were to: • carry out the search process for a new group finance director. The appointment of Sally Lake as group 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; • carry out the search for a nonexecutive director with expertise in technology, operations and data. This resulted in the appointment of Nicola Hodson in April 2019. For the recruitment process the committee was 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
• consider and approve proposals for individuals to be included in the new Senior Managers and Certification Regime.
Business performance and incentive out-turns As you will have seen from the results, the commercial background to this year’s remuneration report is double digit premium growth and increased profit before income tax, despite a combined ratio of 100%, driven by a very strong investment return. The increase in average director’s bonus from 49% to 59% of the maximum reflects higher profits.
The committee believes that the remuneration policy operated as intended during 2019 and considers that out-turns are well aligned with company and individual performance. As such we did not find it necessary to apply further discretion.
LTIP targets Since 2012 the vesting of our LTIP has been based on growth in net asset value per share (NAVps). NAVps is Beazley’s central KPI and is a key item supporting increases in share price. As such its use strongly aligns the interest of participants with the interests of our shareholders. Threshold vesting of our LTIP requires sustained growth of 7.5% p.a. in excess of the risk-free rate whilst full vesting requires growth of 15% p.a. in excess of the risk-free rate. In order to receive the entire award this level of performance must be sustained for five years. During the review of our policy the committee considered the use of alternative measures and target ranges and concluded that NAVps was the most appropriate measure and that our target ranges were appropriately stretching.
Director changes As announced last year, Martin Bride stepped down from the board at the conclusion of its meeting on 23 May 2019 and retired on 31 August 2019. Martin remained eligible for a pro-rated bonus for the year and his outstanding share awards subsist to their normal release/vesting date subject to performance where applicable. Following Martin’s departure from the board we were pleased to announce Sally Lake’s promotion from group actuary to be the new group finance director, effective from 23 May 2019. Sally’s compensation was set in line with our remuneration policy. In recognition of the UK Corporate Governance Code Sally’s pension was set at the level available to the majority of the UK workforce.
Consideration of the wider workforce This year we have disclosed information on our CEO to employee pay ratio. The committee takes our pay ratios into account when considering remuneration policies and frameworks for the group and will continue to monitor them as they develop over time. In addition, the committee reviews the firm-wide remuneration policy and is presented with updates on arrangements for the wider workforce.
In August 2019, Beazley published its third gender pay gap analysis. We were encouraged to see that both our gender pay and bonus gaps have decreased year-on-year. We remain focused on improving our position through various initiatives and targets, for example we have a goal of having at least 35% female senior managers within the organisation. Our report, which can be found on our website, provides additional analyses we have undertaken to better understand the causes of our pay gap as well as more information on our initiatives.
Sir Andrew Likierman Remuneration committee chair 95www.beazley.com Beazley Annual report 2019
Remuneration policy During the review of our directors’ remuneration policy the remuneration committee took into account a wide range of factors including guidance from institutional shareholders, the requirements of Solvency II and the provisions of the UK Corporate Governance Code. The main aim of Beazley’s remuneration policy is to ensure that management and staff are remunerated fairly and in such a manner as to facilitate the recruitment, retention and motivation of suitably qualified personnel. The committee considers that the policy supports our strategy and promotes the long-term success of Beazley.
We believe reward at Beazley is appropriately balanced in light of risk considerations. The committee receives an annual report from the chief risk officer on remuneration policy to ensure that it is consistent with, and promotes, effective risk management. Our framework has a number of features which align remuneration out-turns with risk, including a five year time horizon on the LTIP, deferral of bonus into shares and personal shareholding requirements which, from 2020, extend post departure. Further details of the link between risk and remuneration are set out on page 116.
Page 104 provides four illustrations of the application of our remuneration policy including the key elements of remuneration: base salary, pension, benefits and incentives. Payments at Beazley are directly aligned to the group’s performance and the graph set out on page 110 demonstrates how historic annual bonus out-turns have reflected profit and ROE performance.
Individual remuneration reflects group objectives but is dependent on the profitability of the group and is appropriately balanced against risk considerations. Potential rewards are market-competitive and the committee is comfortable that the range of potential out-turns are appropriate and reasonable. In addition the remuneration committee has discretion to adjust incentive outturns where they are not considered to appropriately reflect the underlying financial or non-financial performance of the individual or the company.
Performance in 2019 Beazley delivered double digit premium growth and increased profit before income tax, despite a combined ratio of 100%, driven by a very strong investment return.
LTIP performance 2014-2019 NAV and TSR growth 31 Dec 31 Dec 31 Dec 31 Dec
Salaries for 2019 were as follows: • D A Horton: £482,500 • M L Bride: £340,000 • A P Cox: £380,000 • S M Lake: £340,000
The executive directors received salary increases of 2.6% to 2.9%, below the average for the wider workforce.
Executive directors appointed prior to 2019 (D A Horton and A P Cox) receive a cash payment in lieu of pension of 13.2% of base salary.
Directors appointed from 2019 (S M Lake) receive a pension contribution or cash payment in lieu of pension of 12.5% of base salary, aligned with the rate available for the majority of the UK workforce.
Contribution rates for Executive Directors will be reduced from 13.2% to 12.5% of salary, in line with the rate available to the wider UK workforce.
Since 2019 the first tranche of the LTIP is subject to a further two year holding period taking the total time frame for the entire award to five years.
The first tranche of the 2017 LTIP award vested at 0% of maximum following three year NAVps performance of 9.5% p.a.
The second tranche of the 2015 LTIP award vested at 55.0% of maximum following five year NAVps performance of 13.7%p.a.
Executive directors are expected to build up and maintain a shareholding of 150% of salary (200% for the CEO).
• The minimum and maximum proportion of annual bonus that can be deferred into shares will be increased from 0%-37.5% of bonus to 20%-40% of the bonus. The deferral level will continue to depend on the level of bonus.
• Pension contribution rates for executive directors will be reduced from 13.2% to 12.5% of salary in line with the level available to the majority of the UK workforce.
Base salary Salaries are set at a level to appropriately recognise responsibilities and to be broadly market competitive.
Discretionary annual bonus to individuals. Bonuses are determined by reference to financial, corporate/strategic and individual performance. A portion of the bonus is deferred into shares for three years (between 20% and 40% of bonus) dependent on the level of bonus. Deferred shares may have dividend equivalents as described below this table. In certain circumstances deferred share awards may be subject to malus provisions and annual bonus payments may be subject to clawback, as described below. Additional amounts may be voluntarily deferred into the investment in underwriting arrangements described below
An incentive pool will be calculated as a percentage of profit and by reference to group return on equity, subject to a minimum return on equity and risk adjustment. While bonus awards are determined by reference to the profit pool, the bonus plan is discretionary and the committee may take into account any other factors it considers appropriate. Individual payouts to executive directors are discretionary and take into account broader corporate objectives, the individual’s contribution and, where relevant, the performance of their division. Solvency II requires that performance measures for incentives are based on a combination of group, business unit and individual performance. The committee may make year-on-year adjustments to the performance framework, in particular to take into account developments in Solvency II requirements.
Awards of shares with performance conditions. Awards are normally in the form of nil-cost options with a tenyear term, but may also be in the form of a conditional award. LTIP awards made after 1 January 2019 which have a three year performance period will be subject to an additional two year holding period following the date on which the award vests. LTIP shares may have dividend equivalents, as described below this table. In certain circumstances LTIP awards may be subject to malus and clawback provisions, as described below.
Awards of up to 200% of salary in respect of any financial year.
Vesting of LTIP awards is dependent on performance measures selected by the committee. Awards made in 2020 vesting will be dependent on net asset value per share (NAVps) performance against the riskfree rate of return. No more than 25% of the award may vest for threshold performance. A portion of the award is subject to performance over three years and a portion over five years.
Benefits include, but are not limited to, a company car or car allowance, season ticket, private medical insurance, death in service benefit and income protection insurance. Further benefits may be provided, if the committee considers it appropriate. Executive directors may participate in Beazley’s allemployee share plans on the same basis as other employees. Tax equalisation policies may apply.
For defined contribution plans, maximum company contribution of 12.5% of salary. The maximum pension contribution for any executive director may be increased to reflect any increase in the pension available to the UK workforce. Legacy defined benefit pension arrangements will be honoured.
Shareholding requirements The committee has adopted shareholding requirements which apply during employment and, with effect from 25 March 2020, post-employment. During employment, executive directors are expected to build up and maintain a shareholding of 200% of salary and LTIP awards may be forfeited if the requirement is not met. Post-employment, executive directors will ordinarily be expected to maintain a shareholding post-departure: the shareholding requirement 200% of salary will apply for the first year post-departure and 50% of the requirement (100% of salary) will apply for the second year post departure, or in either case, the number of shares owned at departure if lower.
As a result of developments in regulation, the degree of autonomy in the operation of each board has increased in recent years, with a consequent increase in time commitment and scope of the role we have introduced a membership fee for representation on audit and risk committee, remuneration committee and employee voice.
Malus Annual bonuses are discretionary and may be reduced or cancelled before payment. LTIP awards and deferred bonus awards may be reduced or cancelled in the event of conduct which justifies summary dismissal, an exceptional development which has a material adverse impact on the company (including extreme financial loss which has a significant impact on the company’s share price, reputational damage, material failure of risk management, material restatement of group accounts, significant sanction from any regulatory authority, material corporate failure, and other similar events) or to comply with a law or regulatory requirement.
Clawback Annual bonuses paid in cash may be clawed back for up to three years following payment and LTIP awards may be clawed back for two years following vesting. Clawback may be applied in the event of material misstatement of results in respect of the bonus year or a year in the performance period for the LTIP award (as the case may be), gross misconduct, factual error in calculating vesting or award, reputational damage, material corporate failure, and other similar events.
For future incentive awards the committee may adjust the performance measures to take into account developments in Solvency II remuneration requirements, or, in the event of a significant event or changing business circumstance. Major shareholders would be consulted prior to any significant changes.
Performance measures and targets The following table provides further detail on why performance measures are chosen and how targets are set. Incentive plan Performance measures Why performance measures were chosen and target setting
• The committee believes the approach to the determination of bonuses creates alignment to shareholders’ interests and ensures that bonuses are affordable, while the ROE targets increase the performance gearing and the risk adjustment is consistent with and promotes effective risk management.
• The committee reviews the bonus pool framework each year to ensure that it remains appropriate and targets are set taking into account the prevailing environment, interest rates and expected investment returns, headcount and any other relevant factors.
• Vesting of a portion of the award requires sustained growth in NAVps over a five year time period.
Differences in policy from broader employee population The policy for executive directors follows the same broad principles in place for all employees in Beazley. Differences in policy for executive directors and senior management as compared to the broader employee population reflect different market levels for seniority, as well as their group responsibilities. For example, incentive performance conditions for executive directors and senior management are more closely aligned to group performance, whereas underwriters participate in incentive plans linked to the performance of their business area.
Illustrations of application of remuneration policy The charts below set out an illustration of the operation of the remuneration policy for the current executive directors in respect of 2020 and includes base salary, pension, benefits, and incentives. Other than as regards the fourth scenario (“Maximum + share price appreciation”), the illustrations do not reflect potential share price increases. Dividends and, dividend equivalents and any deferral of bonus into the Investment in underwriting arrangements are disregarded for the purposes of these charts.
Fixed remuneration Base salary Annual base salary for 2020 Pension 12.5% of base salary Benefits Taxable value of annual benefits provided in 2019
Long term remuneration (LTIP) 0% vesting 25% vesting 100% vesting 100% vesting + assumed 50% share price appreciation 1 An individual overall cap of 400% of salary applies to the annual bonus depending on financial, corporate/strategic and individual performance.
• where an executive is appointed from within the organisation, the normal policy of the company is that any legacy arrangements would be honoured in line with the original terms and conditions (except that any pension arrangements will be provided in line with the remuneration policy table). Similarly, if an executive director is appointed following Beazley’s acquisition of or merger with another company, legacy terms and conditions would be honoured.
Leavers will be treated in accordance with the approved plan rules.
Non-executive directors’ fee policy and service contracts With effect from 2012 the standard approach for non-executive director appointment is that the appointment expires at the AGM following the end of the three year term, notwithstanding the fact that each director is subject to annual re-election at each AGM. Although there is currently no intention to do so, the board reserves the right to introduce notice periods for nonexecutive directors in the future. Details of the non-executive directors’ current contracts are set out on page 118.
Consideration of conditions elsewhere in the company As part of the regular cycle, the committee is informed of pay and employment conditions of wider employees in the group and takes these into account when determining the remuneration for executive directors. While the review includes various statistics on the outcome of the wider employee pay review, the review does not currently include any direct comparison measures between executive directors and wider employee pay. The company does not consult with employees on executive director remuneration.
Annual remuneration report The symbol ▪ by a heading indicates that the information in that section has been audited. This part of the report, the annual remuneration report, sets out the remuneration out-turns for 2019 (and how these relate to our performance in the year) and details of the operation of our policy for 2020.
3 Martin L Bride stepped down from the board on 23 May 2019. 4 Sally M Lake was appointed to the board on 23 May 2019. Further details of her remuneration arrangements are set out on page 117.
The figures in the preceding table reflect the following: • salaries for 2019 increased by an average of 4.6%; • annual bonus out-turns were higher than last year, commensurate with group performance; and • LTI out-turns reflect that the second tranche of the 2015 LTI award vested at 55.0% of maximum and that the first tranche of the 2017 LTI award vested at 0% of maximum. Beazley achieved sustained NAV growth of 13.7% per annum and 9.5% per annum over the three and five year periods respectively. Beazley also achieved significant share price appreciation as detailed in the notes to the table.
7 John Reizenstein joined the plc board on 10 April 2019 and became chair of the audit committee on 31 May 2019. The figure in the table above represents his fees from these dates.
For 2020, the average salary increase was 2.7%, which was below the average salary increase across the group.
The base salaries for the executive directors in 2019 and 2020 are as set out below: base salary £
Martin L Bride1 340,000 n/a n/a 1 Martin L Bride stepped down from the board on 23 May 2019. 2 Sally M Lake was appointed to the board on 23 May 2019.
Benefits ▪ Benefits include private medical insurance for the director and their immediate family, income protection insurance, death in service benefit at four times annual salary, travel insurance, health-club membership, season ticket and the provision of either a company car or a monthly car allowance.
Pension ▪ Beazley operates a defined contribution scheme arranged through Fidelity. The legacy contribution for executive directors was 15% of salary.
Prior to 31 March 2006 the company provided pension entitlements to directors that are defined benefit in nature, based on its legacy policy under the Beazley Furlonge Limited Final Salary Pension Scheme. Future service accruals ceased on 31 March 2006. Only base salary is pensionable, subject to an earnings cap. The normal retirement age for pension calculation purposes is 60 years. A spouse’s pension is the equivalent of two-thirds of the member’s pension (before any commutation) payable on the member’s death after retirement.
Under the Beazley Furlonge Limited Final Salary Pension Scheme, on early retirement the director receives a pension which is reduced to reflect early payment in accordance with the rules of the scheme.
Annual bonus ▪ The annual bonus plan is a discretionary plan in which all employees are eligible to participate. The annual bonus is funded by a bonus pool. The pool is calculated as a percentage of profit subject to a minimum group ROE. The size of the pool as a percentage of profit increases for higher levels of ROE. This ensures that outcomes are strongly aligned with shareholders’ interests.
The approach to the calculation of bonuses is aligned to shareholders’ interests and ensures that bonuses are affordable, while the ROE targets increase the performance gearing.
The committee reviews the bonus pool framework each year to ensure it remains appropriate, taking into account the prevailing environment, interest rates and expected investment returns, headcount and any other relevant factors.
ROE for 2019 was 15% and the overall bonus pool (in which executive directors as well as other senior employees participate) was calculated based on this.
The annual bonus pool outcome is considered by the committee taking into account the outcome of the group’s ROE/profit. The framework is used by the committee as a broad guideline rather than being formulaic and applies to a broader group of executives than board directors. A key principle of the process is that the committee exercises its judgement in determining individual awards taking into account the corporate/strategic objectives, individual’s contribution and performance. In particular, there may be a diverse spread of returns earned across the various divisions within the business which will be reflected in bonus out-turns achieved. The table therefore provides full retrospective disclosure of all the group financial targets and corporate/strategic performance which the committee considers when determining the annual bonuses.
• Delivery of growth in our gross premiums written of 15%. • Reducing the expense ratio in line with our long term plan.
US performance • Locally underwritten US premiums grew 13% during the year. • Beazley Benefits, our renamed accident and health team in the US, leveraged growth in the market with premiums rising by 20%.
• Launched new admitted insurance company, Beazley America Insurance Company, Inc. • Extended the growth of our market leading products in the US, such as cyber, healthcare liability, accident and health, and environmental liability.
International growth • Continued demand for many of our specialist products in Canada, Europe and Asia, and significant growth potential in financial institutions business.
• 17% European growth, with all platforms future-proofed post Brexit. • Growing demand for newer lines of business internationally, for example our cyber business grew by 26%
outside the US in 2019. • Expanded our specialty treaty, property and mergers and acquisitions offering in Singapore. • Launched new products including marine cyber, reputational risk, virtual care and a myBeazley management liability cyber package across the UK and Europe.
Strategic Initiatives • Strong progress made against all four strategic initiatives, which were identified as areas having the potential to make a considerable difference to the business.
• Build effective relationships with key stakeholders, focusing on US and UK initially. • Continue to oversee growth of Syndicate 5623 • Ensure action is taken on underperforming classes of business.
• Exceeded business KPI’s including in rate change (6.3% v 0.9%), premiums (£2.8b to £2.7b 2019 YOA) and, increased reserve surplus over actuarial (from 5.1% to 6.8%).
• Capabilities strengthened including capital raising for 5623, 6107 and cyber reinsurance.
• Syndicate 5623 plan for 2019 delivered with 330% growth in premium from $8m to $36m.
• Determine five year plan for syndicate 5623. • Rebuild succession plans given recent management changes.
• All strategic initiatives are now gaining momentum, resulting in productivity improvements and improved outputs.
• Strong relationship built with Lloyd’s and chairs the London Market Group.
• Deliver strong investment return. • Pursue expense improvement and containment of expense ratio.
• Handover to new group finance director executed professionally, with 90 day plan implemented. • Achieved the 2020 Women in Finance Charter target.
Beazley were the first Lloyd’s managing agent and specialist insurer to sign up to increasing female representation in the group’s leadership to at least 35% by 2020. We moved from 29% in 2018 to 37% at the start of 2020 and a new target is now being set.
The following graph and table set out the out-turn for 2019 against performance and illustrate the way in which bonuses over time reflect profit and ROE performance.
Pre-tax profit $63m $251m $313m $262m $284m $293m $168m $76m $268m
Bonus deferral ▪ A portion of the bonus will generally be deferred into shares for three years. For 2019 the deferral will range from 0% to 37.5% dependent on the level of bonus. Deferred shares are generally subject to continued employment.
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 2019 (see investment in underwriting section on page 115 for further details).
The NAVps performance conditions for both these awards are as follows: NAVps performance % of award vesting
LTIP awards for 2020 It is intended that the performance conditions for the LTIP awards for 2020 will be in line with those granted in 2019 (see table above). The remuneration committee may adjust the vesting level of the LTIP awards if it considers that they do not reflect the underlying financial or non-financial performance of the individual or the Company. LTIP awards will be 200% of salary for the CEO and 150% for other executive directors.
Dilution The share plans permit 10% of the company’s issued share capital to be issued pursuant to awards under the LTIP, SAYE and option plan in a 10-year period.
The company adheres to a dilution limit of 5% in a 10 year period for executive schemes.
To date over 300 employees of the group have committed to put at risk £16.0m of bonuses to the underwriting results of syndicate 623. Of the total at risk, £11.9m has already been deferred from the bonuses awarded.
Sally M Lake1 – n/a n/a 100,000 1 Sally M Lake was appointed to the board on 23 May 2019.
LTIP holding period For awards made from 2019 the first tranche of the LTIP is subject to a further two-year holding period.
Shareholding requirements Executive directors are expected to build up and maintain a shareholding of 200% of salary. LTIP awards may be forfeited if shareholding requirements are not met.
Remuneration arrangements for Sally Lake As announced last year, Sally Lake was promoted from group actuary to group finance director, effective from 23 May 2019. Sally’s remuneration arrangements are in-line with our remuneration policy: • Sally was appointed on a salary of £340,000, in-line with the level received by her predecessor. • Her pension level was set at 12.5% of salary, which is aligned with the rate available to the wider workforce. • Sally is eligible for a maximum bonus opportunity of 400% of salary and was awarded an LTIP award with a maximum value of 100% of salary during 2019.
External appointments Andrew Horton has been a non-executive director of Man Group plc since 3 August 2013, and he retains the fees in respect of this appointment. Fees for the year 2019 were £100,000.
A review of non-executive director time commitments was undertaken during the year and in recognition of a significant increase in workload and time commitment over the past few years, an additional fee for committee membership has been introduced for 2020. This includes further fees for the designated non-executive director representing employee voice and those non-executive directors who are members of the audit and risk and remuneration committees. Details of the non-executive directors’ fees payable for plc board responsibilities are set out below: 2019 fee 2020 fee
Chair of board fee £206,000 £211,150 Basic fee £61,500 £63,100 Senior independent director fee (additional) £11,000 £11,300 Chair of audit and risk committee fee (additional) £18,500 £19,000 Chair of remuneration committee fee (additional) £17,000 £17,500 Membership fee for non-executive directors on the audit and risk committee (additional) – £7,500 Membership fee for non-executive directors on the remuneration committee (additional) – £5,000 Fee for designated non-executive director representing employee voice (additional) – £5,000
CEO pay increase in relation to all employees Percentage change in remuneration from 31 Dec 2018 to 31 Dec 2019
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. The CEO and CUO met their shareholding guidelines. The group finance director was appointed during the year and has made progress towards meeting her guideline (see chart below).
No changes in the interests of directors have occurred between 31 December 2019 and 5 February 2020.
CEO pay versus performance The following graph sets out Beazley’s 10 year total shareholder return performance to 31 December 2019, 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.
Pay ratio data The following table provides pay ratio data in respect of the CEO’s total remuneration compared to the 25th, median and 75th percentile UK employees. Financial year Method 25th percentile pay ratio Median pay ratio 75th percentile pay ratio 2019 Option A 42:1 25:1 15:1
Notes to share plan interests table Deferred bonus Deferred bonus awards are made in the form of conditional shares that normally vest three years after the date of award. LTIP 2014 – 3/5 year Awards were made on 11 February 2014 at a mid-market share price of 273.13p.
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 2024.
Share prices The market price of Beazley ordinary shares at 31 December 2019 (the last trading day of the year) was 556p and the range during the year was 494p to 628p.
Remuneration committee The committee consists of only non-executive directors and during the year the members were Sir Andrew Likierman (chair), John Sauerland, Catherine Woods and Christine LaSala. George Blunden also served on the committee until he stepped down in March 2019. The board views each of the committee members as independent.
Input was also received by the committee during the year from the chief executive, head of talent management, company secretary and chief risk officer. However, no individual plays a part in the determination of their own remuneration.
Statement of shareholder voting The voting outcomes of the 2018 annual remuneration report and 2016 remuneration policy were as follows: Votes for % for Votes against % against Total votes cast Votes withheld
S M Lake Group finance director 125www.beazley.com Beazley Annual report 2019
Independent Auditors report to the members of Beazley plc Opinion In our opinion; • Beazley plc’s consolidated financial statements and parent company financial statements (the ‘Financial Statements’) give a true and fair view of the state of the Group’s and of the parent company’s affairs as at 31 December 2019 and of the Group’s profit for the year then ended; • the consolidated financial statements have been properly prepared in accordance with International Financial Report Standards (‘IFRSs’) as adopted by the European Union (‘EU’); • the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the EU as applied in accordance with the provisions of the Companies Act 2006; and
We have audited the financial statements of Beazley plc and its subsidiaries (collectively ‘the group’) and the parent company financial statements which comprises: Group Parent company
Consolidated statement of profit and loss for the year then ended Statement of comprehensive income for the year then ended Statement of comprehensive income for the year then ended Statement of changes in equity for the year then ended Statement of changes in equity for the year then ended Statement of financial position as at 31 December 2019 Statement of financial position as at 31 December 2019 Statement of cash flows for the year then ended Statement of cash flows for the year then ended Related notes 1 to 34 to the financial statements, including a summary of significant accounting policies (except for note 2 where it is marked as unaudited)
• the Directors’ explanation on page 48 in the annual report as to how they have assessed the prospects of the entity, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the entity will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.
Key audit matters • Valuation of insurance liabilities • Valuation of estimated premium income • Valuation of level 3 financial investments
• The components where we performed full or specific audit procedures accounted for 97% of Profit before income tax, 98% Gross Written Premium and 99% Total assets.
Materiality • Overall group materiality of $10.8m which represents 5% of pre-tax profits on a 5 year average.
First year audit considerations In the preparation for our first year audit of the 31 December 2019 financial statements, we performed a number of transitional procedures. Following our selection, we undertook procedures to establish our independence of the Group, including ensuring that all staff who work on the audit worldwide are independent of the Group. We used time prior to commencing any audit work to gain an understanding of the business issues and meet with key management.
We were appointed by the audit committee in May 2019, and were independent from 1 January 2019.
Our transition activities included shadowing the former auditor KPMG LLP (‘KPMG’) at key meetings with management, such as meetings of the Audit and Risk Committee. We reviewed KPMG’s 2018 audit work papers and gained an understanding of their risk assessment and key judgements. We held a number of meetings with management to understand the key judgements being made for the 31 December 2018 year end.
We used the understanding the audit team had formed to establish our audit base and assist in the formalisation of our audit strategy for the 2019 Group audit. This involved gaining an understanding of the Group’s key processes and controls over financial reporting through walkthroughs of the processes.
Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in our opinion thereon, and we do not provide a separate opinion on these matters.
Valuation of claims liabilities (Gross: $4,460.3m, Net of reinsurance : $3,391.5m, PY comparative Gross:$4,040.7m, Net of reinsurance: $3,089.0m) Refer to the Audit and Risk Committee Report (pages 85 to 90); Accounting policies (pages 146 and 149); and Note 24 of the Consolidated Financial Statements (pages 189 to 198). One of the most significant financial statement risk areas from both a business and an audit perspective is the valuation and adequacy of the claims liabilities held by the Group. Gross and net of reinsurance claims liabilities are inherently uncertain and subjective by nature and therefore are more susceptible to fraud or error than other financial statement balances. A small manipulation of an assumption could have a significant impact on the result for the year. This could lead to claims liabilities not falling within a reasonable range of estimates, resulting in a misstatement in the financial statements. Additionally, the valuation process is conditional upon the accuracy and completeness of the data. We have split the risk relating to the valuation of claims liabilities into the following component parts: • Actuarial assumptions; and • data
Actuarial assumptions The assumptions used to develop the incurred but not yet reported (‘IBNR’) loss reserves, which make up a significant component of the claims liabilities (gross and net of reinsurance), involve a significant degree of judgement. As a result we focused on this area as the valuation can be materially impacted by various factors including: • The risk of inappropriate assumptions used in determining current year gross and net of reinsurance loss reserves. Given that limited data is available, especially on newer or growing classes of business such as CyEx, as there is a greater reliance on expert judgement in management’s estimates due to the significant areas of uncertainty.
• Benchmarking catastrophe and large losses, and assumptions used in inherent uncertain classes and new growing classes, against other comparable industry participants to challenge and assess the reserving assumptions.
We determined that the actuarial assumptions as a whole, which are used by management, are reasonable based on our analysis of the experience to date, industry practice and the financial and regulatory requirements. We therefore conclude that reserves lie within our reasonable range of possible outcomes.
Data The valuation of claims liabilities depends on complete and accurate data used since they are used to form expectations about future claims. The valuation of claims liabilities is therefore conditional upon the accuracy and completeness of the data used.
• For a sample of paid and outstanding claims we corroborated to underlying supporting evidence. For paid claims this included authorisation requests and bank statements. For a sample of outstanding claims we held discussions with claims handlers to further understand the background of the claims. We also obtained supporting evidence including claims handler reports performed by third parties handlers to corroborate the year end balances.
Valuation of estimated premium within Gross Written Premiums income (Gross Written Premium $3,003.9m , PY comparative $2,615.3m) Refer to Accounting policies (pages 147 and 148). For certain contracts, premium is initially recognised based on estimates of ultimate premium. This occurs where pricing is based on variables which are not known with certainty at the point of binding the policy. Subsequent adjustments to those estimates arise as updated information relating to those pricing variables becomes available, and are recorded in the period in which they are determined. These estimates are judgemental and therefore could result in misstatements of revenue recognised in the financial statements.
• For a sample of policy estimates in respect of the 2019 underwriting year, we corroborated the estimated premium to third party supporting evidence such as signed slips. Additionally to corroborate estimates where similar policies have been written previously, we performed back testing against historic experience of estimated premium income compared to actual premium signed.
• Reviewing and testing the completeness and accuracy of premium data to underlying policy and finance systems. This was performed through substantively testing key reconciliations to external sources such as external service organisations reports.
Valuation of level 3 investments ($216.6m , PY comparative $186.6m) Refer to the Audit and Risk Committee Report (pages 85 to 90); Accounting policies (pages 150 to 151); and Note 16 of the Consolidated Financial Statements (pages 179 to 184). Investments in level 3 assets predominantly comprise illiquid credit asset funds managed by third party managers (generally closed end limited partnerships or open ended funds). The investments themselves are in many cases private and unquoted. These assets are inherently harder to value due to the inability to obtain a market price of these assets as at the balance sheet date. Therefore, there is judgement in both deriving the price and the timeliness of receiving the information from the third party managers, either of which could result in misstatements of the asset value recognised in the financial statements.
• Obtained net assets valuation (‘NAV’) statements provided by third party administrators in respect of investments and compared these to management’s valuations. We assessed management’s valuations by performing independent back testing of recent realisations, to confirm that NAV is an appropriate proxy for fair value.
Based on our procedures performed we are satisfied that the valuation of level 3 investments was reasonable.
Prior year comparison In the prior year, KPMG identified ‘recoverability of insurance and reinsurance debtors’ and ‘recoverability of parent company’s investment in subsidiaries’ as key audit matters. Based on our risk assessment procedures, we did not consider either to be key audit matters due to the amount of insurance and reinsurance debtors greater than one year outstanding as at 31 December 2019, and we deem that there is limited risk of impairment in respect of the parent company’s investment in subsidiaries as we deem there are no impairment indicators present.
In assessing the risk of material misstatement to the Group financial statements, and to ensure we had adequate quantitative coverage of significant accounts in the financial statements, we identified 33 legal entities within the group. Of the 33 legal entities within the group we selected four entities covering entities within UK, Ireland and US which represent the material business units within the Group. One full scope entity (Syndicate 2623) and three specific scope components (Syndicate 3623, Beazley Insurance Company Inc (‘BICI’) and Beazley Insurance DAC (‘BIDAC’)). Our work on specific scope components covers area such as cash, investments, financial liabilities and reinsurance on outstanding claims. Furthermore, we performed specific scope procedures over a further 11 legal entities over group wide processes and functions and denoted this as one reporting unit (‘Group Function’). The Group Function and process consists of entities primarily which hold the pension scheme, intangibles, leases, expenses, cash and investments for the group.
Independent Auditors report to the members of Beazley plc continued 130 Beazley Annual report 2019 www.beazley.com
Syndicate 2623 Full EY Primary Team Syndicate 3623 Specific EY Primary Team BICI Specific EY New York BIDAC Specific EY Primary Team Group function Specific EY Primary Team
Of the 5 components selected, we performed an audit of the complete financial information of one component (“full scope components”) which was selected based on its size or risk characteristics. For the remaining 4 components (“specific scope components”), we performed audit procedures on specific accounts within that component that we considered had the potential for the greatest impact on the significant accounts in the financial statements either because of the size of these accounts or their risk profile.
Of the remaining 18 legal entities that together represent 3% of the Group’s Profit before Income Tax, none are individually greater than 3% of the Group’s Profit before Income Tax. For these components, we performed other procedures, including analytical review, testing of significant balances, review of consolidation journals and intercompany eliminations to respond to any potential risks of material misstatement to the Group financial statements.
The primary audit team provided detailed audit instructions to the component teams which included guidance on areas of focus, including the relevant risks of material misstatement detailed above, and set out the information required to be reported to the primary audit team.
The work performed on the components, together with the additional procedures performed at Group level, gave us appropriate evidence for our opinion on the consolidated financial statement as a whole.
We determined materiality for the Parent Company to be $7 million, which is 1% of net assets. The Parent company primarily holds the investment in Group entities and, therefore, net assets is considered to be the key focus for users of the financial statements.
On the basis of our risk assessments, together with our assessment of the Group’s overall control environment, our judgement was that performance materiality was 50% of our planning materiality, namely $5.5m, this is our normal practice for a first year audit.
Independent Auditors report to the members of Beazley plc continued 132 Beazley Annual report 2019 www.beazley.com
Reporting threshold An amount below which identified misstatements are considered as being clearly trivial.
Report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s performance, business model and strategy, is materially inconsistent with our knowledge obtained in the audit; or
• Audit and Risk Committee reporting set out on pages 85 to 90– the section describing the work of the Audit and Risk committee does not appropriately address matters communicated by us to the Audit and Risk committee or is materially inconsistent with our knowledge obtained in the audit; or
Responsibilities of directors As explained more fully in the Directors’ responsibilities statement set out on page 125, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
Explanation as to what extent the audit was considered capable of detecting irregularities, including fraud The objectives of our audit, in respect to fraud, are; to identify and assess the risks of material misstatement of the financial statements due to fraud; to obtain sufficient appropriate audit evidence regarding the assessed risks of material misstatement due to fraud, through designing and implementing appropriate responses; and to respond appropriately to fraud or suspected fraud identified during the audit. However, the primary responsibility for the prevention and detection of fraud rests with both those charged with governance of the Group and management.
• For both direct and other laws and regulations, our procedures involved: making enquiry of those charged with governance and senior management for their awareness of any non-compliance of laws or regulations; inquiring about the policies that have been established to prevent non-compliance with laws and regulations by officers and employees; inquiring about the Group’s methods of enforcing and monitoring compliance with such policies; and inspecting significant correspondence with the FCA and PRA.
• The period of total uninterrupted engagement including previous renewals and reappointments is one year. • The non-audit services prohibited by the FRC’s Ethical Standard were not provided to the Group or the parent company and we remain independent of the Group and the parent company in conducting the audit. • The audit opinion is consistent with the additional report to the Audit and Risk committee.
Gross premiums written 3 3,003.9 2,615.3 Written premiums ceded to reinsurers (500.4) (366.8) Net premiums written 3 2,503.5 2,248.5
Insurance claims 1,842.5 1,463.9 Insurance claims recoverable from reinsurers (390.0) (236.1) Net insurance claims 3 1,452.5 1,227.8
Impairment of investment in associate 14 – (7.0) Results of operating activities 295.4 98.8
Income tax expense 9 (33.6) (8.2) Profit for the year attributable to equity shareholders 234.1 68.2
Group Profit for the year attributable to equity shareholders 234.1 68.2 Other comprehensive income Items that will never be reclassified to profit or loss: Gain/(loss) on remeasurement of retirement benefit obligations 6.6 (1.5) Income tax on defined benefit obligation (0.4) –
Items that may be reclassified subsequently to profit or loss: Foreign exchange translation differences 1.8 (2.1) Total other comprehensive income 8.0 (3.6) Total comprehensive income recognised 242.1 64.6
Statement of comprehensive income for the year ended 31 December 2019 $m $m
Company Profit for the year attributable to equity shareholders 75.7 81.7
Statement of changes in equity for the year ended 31 December 2019 139www.beazley.com Beazley Annual report 2019
Plant and equipment 13 8.9 – 4.9 – Right of use assets 29 35.9 – – – Deferred tax asset 28 41.0 – 28.9 – Investment in subsidiaries 31 – 724.6 – 724.6 Investment in associates 14 0.1 – – – Deferred acquisition costs 15 350.7 – 307.4 – Retirement benefit asset 27 5.4 – – –
Financial assets at fair value 16, 17 5,572.8 – 4,716.3 –
Other receivables 72.0 – 58.5 – Current income tax asset – 1.1 19.0 0.3 Cash and cash equivalents 20 278.5 – 336.3 2.4
Lease liabilities 29 39.4 – – – Deferred tax liability 28 19.5 – 9.1 – Current income tax liability 9.3 – – – Retirement benefit liability 27 – – 2.4 –
S M Lake Group finance director 141www.beazley.com Beazley Annual report 2019
Statements of cash flows for the year ended 31 December 2019
Cash flow from operating activities Profit before income tax 267.7 74.7 76.4 81.2 Adjustments for: Amortisation of intangibles 12 14.1 – 12.6 – Equity settled share based compensation 22 4.7 4.7 18.7 18.7 Net fair value (gain)/loss on financial assets 4 (151.6) – 53.7 – Impairment of investment in associate 14 – – 7.0 – Depreciation of plant and equipment 13 2.4 – 2.1 – Depreciation of right of use assets 10.1 – – – Impairment of reinsurance assets recognised/(written back) 6 1.5 – (1.0) – Increase in insurance and other payables1 722.8 0.1 216.7 5.6 (Increase)/decrease in insurance, reinsurance and other receivables (265.0) 10.3 23.9 19.8 Increase in deferred acquisition costs (43.3) – (26.0) –
Cash flow from financing activities Acquisition of own shares in trust 22 (13.8) (13.8) (44.9) (44.9) Payment of lease liabilities (10.8) – – – Repayment of borrowings 25 (92.6) – (18.0) – Issuance of debt 25 297.8 – – –
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’) and the Companies Act 2006. 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.
A number of new standards and interpretations adopted by the EU which are not mandatorily effective, as well as standards and interpretations issued by the IASB but not yet adopted by the EU, have not been applied in preparing these financial statements. The group does not plan to adopt these standards early; instead it expects to apply them from their effective dates as determined by their dates of EU endorsement. The group is still reviewing the upcoming standards to determine their impact: • IFRS 9: Financial Instruments (EU effective date: 1 January 2018, deferred in line with implementation of IFRS 17); • IFRS 3: Amendment: Definition of a business (IASB effective date: 1 January 2020);1
• IFRS 9, IFRS 7 and IAS 39: Amendment: Interest Rate Benchmark Reform (IASB effective date: 1 January 2020); • IFRS 9: Amendment: Prepayment Features with Negative Compensation (EU effective date: 1 January 2019, deferred in line with implementation of IFRS 17); • IFRS 17: Insurance Contracts (IASB effective date: 1 January 2022);1 • IFRS 10 and IAS 28: Amendment: Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (IASB
• As was stated in the 2017 annual report, the group chose to apply the temporary exemption permitted by IFRS 4 from applying IFRS 9: Financial Instruments. The group qualifies for this exemption because, as at 31 December 2015, $5,040.7m or 95% of its total liabilities were connected with insurance. There has been no material change in the group’s activities since 31 December 2015, therefore the exemption still remains. The group has also disclosed information in relation to specific types of financial instruments to ensure the comparability with the entities applying IFRS 9. As such, fair values are disclosed separately for the group’s financial assets which are managed and evaluated on a fair value basis and those which meet the solely payments of principal and interest (SPPI) test under IFRS 9. Beazley plc as a standalone company adopted IFRS 9 from 1 January 2018. However, as the standalone company has no financial investments the adoption had an immaterial impact on its financial statements. Below is a table outlining the fair value of assets which are managed and evaluated on a fair value basis and those which meet the SPPI test under IFRS 9. The information on credit exposures can be found in note 2 to the financial statements on page 164.
Financial assets managed and evaluated on a fair value basis 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 Equity funds 163.6 85.4 Hedge funds 354.0 337.2 Illiquid credit assets 216.6 186.6 Derivative financial assets 25.5 6.9 Total financial assets managed and evaluated on a fair value basis 5,572.8 4,716.3
Financial assets meeting the SPPI test Cash and cash equivalent 278.5 336.3 Insurance receivables 1,048.0 943.3 Other receivables 72.0 58.5 Total financial assets meeting the SPPI test 1,398.5 1,338.1 144 Beazley Annual report 2019 www.beazley.com
The effect of adopting IFRS 16 as at 1 January 2019 is as follows: $m
Liabilities Other payables (2.4) Lease liabilities 33.2 Deferred tax liabilities 0.1 Total liabilities 30.9
Leases previously accounted for as operating leases The group recognised right of use assets and lease liabilities for all leases, except for leases of low-value assets. Lease liabilities were recognised based on the present value of the remaining lease payments, discounted using the weighted average incremental borrowing rate at initial application. The right of use assets were recognised based on the amount equal to the lease liabilities, adjusted for any related prepaid and accrued lease payments previously recognised.
1 Statement of accounting policies continued Based on the above, as at 1 January 2019: • right of use assets of $31.2m were recognised and presented separately in the statement of financial position; • lease liabilities of $33.2m were recognised and presented separately in the statement of financial position. This includes an adjustment of $6.3m for right of use assets, which were previously not included in property operating leases; • other payables of $2.4m related to previous operating leases were derecognised; • deferred tax liabilities increased by $0.1m due to the impact of changes in assets and liabilities; and • the net effect of these adjustments was adjusted in retained earnings.
Basis of presentation The group financial statements are prepared using the historical cost convention, with the exception of financial assets and derivative financial instruments which are stated at their fair value. All amounts presented are in US dollars and millions, unless stated otherwise.
The most critical estimate included within the group’s financial position is the estimate for insurance losses incurred but not reported, which is included within total insurance liabilities and reinsurance assets in the statement of financial position and in note 24. This estimate is critical as it outlines the current liability for future expenses expected to be incurred in relation to claims. If this estimation was to prove inadequate then an exposure would arise in future years where a liability has not been provided for. The total estimate for insurance losses incurred but not reported gross of reinsurers’ share as at 31 December 2019 is $3,196.6m (2018: $2,869.5m). The total estimate for insurance losses incurred but not reported net of reinsurers’ share as at 31 December 2019 is $2,351.5m (2018: $2,149.7m) and is included within total insurance liabilities and reinsurance assets in the statement of financial position and in note 24.
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 • note 1: Leases: determination of a lease term.
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 following 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 and 2019, Beazley also consolidated 33.85% of the business written through syndicate 5623 on the 2018 year of account, which is aligned with Beazley Corporate Member No.3 Limited’s participation in the syndicate. There is no participation on the 2019 year of account.
1 Statement of accounting policies continued b) Associates Associates are those entities over which the group has power to exert significant influence but which it does not control. Significant influence is generally presumed if the group has between 20% and 50% of voting rights.
Liability adequacy testing At each reporting date, liability adequacy tests are performed by segment to ensure the adequacy of the claims liabilities net of DAC and unearned premium reserves. In performing these tests, current best estimates of future contractual cash flows, claims handling and administration expenses, and investment income from the assets backing such liabilities are used. Any deficiency is immediately charged to the statement of profit or loss, initially by writing off DAC and subsequently by establishing a provision for losses arising from liability adequacy tests (‘unexpired risk provision’). There is currently no unexpired risk provision.
Ceded reinsurance These are contracts entered into by the group with reinsurers under which the group is compensated for losses on contracts issued by the group that meet the definition of an insurance contract. Insurance contracts entered into by the group under which the contract holder is another insurer (inwards reinsurance) are included within insurance contracts.
1 Statement of accounting policies continued The carrying values of plant and equipment are reviewed for impairment when events or changes in circumstances indicate that the carrying value may be impaired. If any such condition exists, the recoverable amount of the asset is estimated in order to determine the extent of impairment and the difference is charged to the statement of profit or loss.
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.
Financial instruments Financial instruments are recognised in the statement of financial position at such time as the group becomes a party to the contractual provisions of the financial instrument. Purchases and sales of financial assets are recognised on the trade date, which is the date the group commits to purchase or sell the asset. A financial asset is derecognised when the contractual rights to receive cash flows from the financial assets expire, or where the financial assets have been transferred, together with substantially all the risks and rewards of ownership. Financial liabilities are derecognised if the group’s obligations specified in the contract expire, are discharged or are cancelled.
b) Financial assets at fair value through profit or loss Except for derivative financial instruments and other financial assets listed in policies (f) and (g) below, all financial assets are designated as fair value through the statement of profit or loss upon initial recognition because they are managed and their performance is evaluated on a fair value basis. Information about these financial assets is provided internally on a fair value basis 150 Beazley Annual report 2019 www.beazley.com
c) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and receivables are carried at amortised cost less any impairment losses.
1 Statement of accounting policies continued In assessing collective impairment, the group uses historical trends of the probability of default, the timing of recoveries and the amount of loss incurred, adjusted for management’s judgement as to whether current economic and credit conditions are such that the actual losses are likely to be greater or lesser than those suggested by historical trends.
Leases Summary of new accounting policies Set out below are the new accounting policies of the group upon adoption of IFRS 16, which have been applied from the date of initial application: • Right of use assets The group recognises right of use assets at the commencement date of the lease (i.e., the date the underlying asset is available for use). Right of use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of lease liabilities. The cost of right of use assets includes the amount of lease liabilities recognised, initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentives received. Unless the group is reasonably certain to obtain ownership of the leased asset at the end of the lease term, recognised right of use assets are depreciated on a straight-line basis over the shorter of its estimated useful life and the lease term. Right of use assets are subject to impairment.
In calculating the present value of lease payments, the group uses the weighted average incremental borrowing rate at the lease commencement date. After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. In addition, the carrying amount of lease liabilities is remeasured if there is a modification, a change in the lease term, a change in the in-substance fixed lease payments or a change in the assessment to purchase the underlying asset.
• Significant judgement in determining the lease term of contracts with renewal options The group determines the lease term as the non-cancellable term of the lease, together with any periods covered by an option to extend the lease if it is reasonably certain to be exercised, or any periods covered by an option to terminate the lease, if it is reasonably certain not to be exercised.
The group also determines the net interest income/expense for the period on the net defined benefit asset/liability by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual period to the net defined benefit asset/liability at the beginning of the annual period, taking into account any changes in the net defined benefit asset/liability during the period as a result of contributions and benefit payments. Consequently, the net interest on the defined benefit asset/ liability comprises: • interest cost on the defined benefit obligation; • interest income on plan assets; and • interest on the effect of the asset ceiling.
1 Statement of accounting policies continued 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.
2 Risk management continued We manage and model these four elements in the following three categories: attritional claims, large claims and catastrophe events.
The annual business plans for each underwriting team reflect the group’s underwriting strategy, and set out the classes of business, the territories and the industry sectors in which business is to be written. These plans are approved by the board of each underwriting entity and the group and monitored by the underwriting committee.
Our underwriters calculate premiums for risks written based on a range of criteria tailored specifically to each individual risk. These factors include but are not limited to financial exposure, loss history, risk characteristics, limits, deductibles, terms and conditions and acquisition expenses.
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 2019 the group operated to a catastrophe risk appetite for a probabilistic 1-in-250 years US event of $416.0m (2018: $416.0m) net of reinsurance. This remains unchanged since 2018.
Lloyd’s has also defined its own specific set of RDS events for which all syndicates with relevant exposures must report. Of these the three largest, net of reinsurance, events which could have impacted Beazley in 2018 and 2019 are: Unaudited † 2019
San Francisco quake (2019: $78.0bn) 727.9 222.8 Los Angeles quake (2019: $78.0bn) 748.2 218.8 US Northeast windstorm (2019: $78.0bn) 554.6 205.3
San Francisco quake (2018: $78.0bn) 704.4 236.9 Gulf of Mexico windstorm (2018: $112.0bn) 595.1 199.0 Los Angeles quake (2018: $78.0bn) 697.2 235.9 1 Probable market loss.
The group also has exposure to man-made claim aggregations, such as those arising from terrorism and data breach events. Beazley chooses to underwrite data breach insurance within the cyber and executive risk and specialty lines division using our team of specialist underwriters, claims managers and data breach services managers. Other than for data breach, Beazley’s preference is to exclude cyber exposure where possible.
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 ten realistic disaster scenarios that have been developed internally. These scenarios include the failure of a data aggregator, the failure of a shared hardware or software platform and the failure of a cloud provider. 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 net realistic disaster scenario is currently similar to the US Northeast windstorm event shown above for the group as at 31 December 2019. The reinsurance programmes that protect the cyber and executive risk and specialty lines divisions 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 2019, 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.
2 Risk management continued Operating divisions In 2019, the group’s business consisted of six operating divisions. The following table provides a breakdown of gross premiums written by division, and also provides a geographical split based on placement of risk.
1 From 1 January 2019, the specialty lines division has been split into two. The prior year comparative has been re-presented to allow comparison.
b) Reinsurance risk Reinsurance risk to the group arises where reinsurance contracts put in place to reduce gross insurance risk do not perform as anticipated, result in coverage disputes or prove inadequate in terms of the vertical or horizontal limits purchased. Failure of a reinsurer to pay a valid claim is considered a credit risk which is detailed in the credit risk section on page 163.
2 Risk management continued 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.
2.2 Strategic risk This is the risk that the group’s strategy is inappropriate or that the group is unable to implement its strategy. Where events supersede the group’s strategic plan this is escalated at the earliest opportunity through the group’s monitoring tools and governance structure.
2.3 Market risk † Market risk arises where the value of assets and liabilities or future cash flows changes as a result of movements in foreign exchange rates, interest rates and market prices. Efficient management of market risk is key to the investment of group assets. Appropriate levels of investment risk are determined by limiting the proportion of forecast group earnings which could be at risk from lower than expected investment returns, using a 1 in 10 confidence level as a practical measure of such risk. In 2019, this permitted variance from the forecast investment return was set at $150.0m (unaudited). For 2020, the permitted variance is likely to be at the same level. Investment strategy is developed to be consistent with this limit and investment risk is monitored on an ongoing basis, using outputs from our internal model.
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.
Dollar weakens 30% against other currencies 3.4 (7.5) (1.0) (11.5) Dollar weakens 20% against other currencies 2.3 (5.0) (0.6) (7.7) Dollar weakens 10% against other currencies 1.1 (2.5) (0.3) (3.8) Dollar strengthens 10% against other currencies (1.1) 2.5 0.3 3.8 Dollar strengthens 20% against other currencies (2.3) 5.0 0.6 7.7 Dollar strengthens 30% against other currencies (3.4) 7.5 1.0 11.5 160 Beazley Annual report 2019 www.beazley.com
Borrowings consist of two items as at 31 December 2019. The first is $250m 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 $300m of subordinate tier 2 debt raised in September 2019. This debt is due in 2029 and has annual interest of 5.5% payable in March and September each year.
As at 31 December 2018, borrowings included £75m of sterling denominated 5.375% notes which were redeemed in September 2019. Due to this redemption, it is not included in any of the categories in the 31 December 2019 table (2018: <1 yr category).
Financial assets include fixed and floating rate debt securities, hedge funds, illiquid credit assets, equity investments and derivative financial assets. The price of debt securities is affected by interest rate risk, as described above, and also by issuer’s credit risk. The sensitivity to price risk that relates to the group’s hedge fund, illiquid credit and equity investments is presented below.
2.4 Operational risk Operational risk arises from the risk of losses due to inadequate or failed internal processes, people, systems, service providers or external events.
2 Risk management continued The group also recognises that it is necessary for people, systems and infrastructure to be available to support our operations. Therefore we have taken significant steps to mitigate the impact of business interruption which could follow a variety of events, including the loss of key individuals and facilities. We operate a formal disaster recovery plan which, in the event of an incident, allows the group to move critical operations to an alternative location within 24 hours.
Key components of the group’s operational control environment include: • modelling of operational risk exposure and scenario testing; • management review of activities; • documentation of policies and procedures; • preventative and detective controls within key processes; • contingency planning; and • other systems controls.
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 • cash and cash equivalents.
Tier 1 A++ to A- Aaa to A3 AAA to ATier 2 B++ to B- Baa1 to Ba3 BBB+ to BBTier 3 C++ to C- B1 to Caa B+ to CCC Tier 4 D, E, F, S Ca to C R, (U,S) 3 163www.beazley.com Beazley Annual report 2019
Insurance receivables and other receivables balances held by the group have not been impaired, based on all evidence available, and no impairment provision has been recognised in respect of these assets. Insurance receivables in respect of coverholder business are credit controlled by third-party managers. We monitor third party coverholders’ performance and their financial processes through the group’s coverholder management team. These assets are individually impaired after considering information such as the occurrence of significant changes in the counterparties’ financial position, patterns of historical payment information and disputes with counterparties.