IFC Our business model and strategy Our key performance indicators 1 Our key differentiators 2 Entrepreneurial spirit 3 Strong partnerships 4 Diversified business 8 Strong roots, tall trees 12 Three eventful decades 14 Chairman’s statement 16 Chief executive’s statement 20 Q&A with the chief executive 22 Chief underwriting officer’s report 24 Performance by division 26 Life, accident & health 28 Marine 30 Political risks & contingency 32 Property 34 Reinsurance 36 Specialty lines
Governance 71 Letter from our chairman 72 Board of directors 76 Investor relations 77 Statement of corporate governance 92 Letter from the chairman of our remuneration committee 94 Directors’ remuneration report 94 Directors’ remuneration policy 102 Annual remuneration report 119 Statement of directors’
Financial statements 128 Consolidated statement of profit or loss 129 Statement of comprehensive income 130 Statement of changes in equity 132 Statements of financial position 133 Statements of cash flows 134 Notes to the financial statements 197 Glossary
Artist’s impression of Jeddah Tower. Design architect: Adrian Smith + Gordon Gill Architecture
At Beazley, our commitment is to deliver beautifully designed insurance to our clients around the world.
Beautiful designs require beautifully designed insurance. Our architects’ and engineers’ professional indemnity team is just one of the many teams at Beazley that work closely with brokers to design customised insurance, backed by expert service, to address our clients’ most pressing needs. We are proud to have insured the architects behind the Jeddah Tower and many other pioneering designs, Adrian Smith + Gordon Gill Architecture, since 2008 and the building’s structural engineers, Thornton Tomasetti, since 2006.
• We employ highly skilled, experienced and specialist underwriters and claims managers.
Risks Given the nature of Beazley’s business, the key risks that impact financial performance arise from insurance activities and fall into the following categories: • Market cycle risk: The risk of systematic mispricing of the medium tailed specialty lines business which could arise due to a change in the US tort environment, changes to the supply and demand of capital, and companies using incomplete data to make decisions.
• Natural catastrophe risk: The risk of one large event caused by nature affecting a number of policies and therefore giving rise to multiple losses. Given Beazley’s risk profile, this could be a hurricane, major windstorm or earthquake.
Our key differentiators We create value through the implementation of three key differentiators – consistently applied and nurtured across our specialist insurance operations around the world.
Strong partnerships Strong long term relationships with brokers, reinsurers and clients have sustained our business over three decades.
For us entrepreneurial spirit has a very specific meaning, a meaning that guides us in evaluating new hires to our underwriting teams around the world. We look for individuals who have a strong sense of ownership for the business that they underwrite and are willing – indeed keen – to be accountable for their underwriting decisions. We also look for individuals who have a broad understanding of the ways in which factors such as economic, political and social changes can impact their book.
“ The world of risk is changing fast. I was attracted to Beazley by its track record of innovation – trying new things is part of the company’s DNA. In an industry that can be slow to adapt, Beazley stood out.” Libby Benet Underwriter and manager, Beazley Product Solutions, Farmington
Responsibility for maintaining strong broker relationships falls to each and every Beazley underwriter, supported by our broker relations team led by Dan Jones. A detailed survey among our brokers worldwide conducted in October and November indicated that our commitment to these relationships is appreciated. Eighty four percent of respondents ranked us seven or higher out of ten for responsiveness (with 49% ranking us nine or ten out of ten). For underwriting expertise, 94% ranked us seven or higher out of ten and 59% nine or higher.
We aim to forge strong relationships with brokers, reinsurers and insureds who appreciate the quality of our products and the value of our service and whose decisions are not driven solely by cost.
For our shareholders, Beazley aims to deliver sector leading returns on equity with relatively low volatility. The key to this performance over time is the balance of Beazley’s portfolio across specialist classes driven by different cycles.
Our diversified portfolio allows us to implement efficient cycle management. We assess the merits of writing a new line of business very carefully with an eye on the effect on the diversification of our portfolio.
Hull & miscellaneous 26% Liability 19% Energy 18% Cargo 17% War 9% Aviation 8% Satellite 3%
Hull & miscellaneous 34% Liability 3% Energy 34% Cargo 13% War 16%
“ Over the past decade, we have enhanced the ability of our portfolio to weather rate declines in individual lines of business. We have progressively diversified our account, expanding our marine liability book, entering the satellite market, and significantly developing our aviation business.” Clive Washbourn Head of marine
Diversified portfolio The spread of our overall portfolio by division and the impact this diversification has had on our combined ratio over the past five years can be seen in the chart below.
Life, accident & health With an experienced team of leading underwriters many of whom have been together since the early 1990s, our personal accident and specialty life business is written on both an insurance and a reinsurance basis and covers a number of niche classes, including sports disability. The business was acquired by Beazley in 2008 and has grown since then organically and through further acquisition.
Property We’ve protected clients ranging from Fortune 1000 companies to homeowners through 24 years of natural and man-made catastrophes. We underwrite this business through three platforms; Lloyd’s, the US and Singapore, with a business focus on commercial property, engineering and construction risks and select homeowners’ business.
Specialty lines Specialty lines comprises management liability and professional liability risks, including cyber liability, underwritten for clients on both a primary and excess basis in North America, Europe and around the world. Our US clients are served both by our underwriters at Lloyd’s and, on an admitted basis, by our local US-based underwriters.
Strong roots, tall trees Specialty lines have been part of Beazley since the company’s earliest days. They are a big part of its future too.
“We aim to attract people that enjoy becoming experts – you might even say geeks – on both the underwriting and claims side,” says Adrian Cox. “Then we deploy them in the field where they can best use their expertise to win the loyalty of clients and out-manoeuvre competitors. This model does not suit the writing of lines such as personal auto insurance.”
Specialty lines, led by Adrian Cox since 2008, has benefited from a consistent strategy. This starts with the identification of promising business lines – lines in which highly skilled underwriters and claims specialists can make a major difference to the experience of clients and brokers. This difference may take the form of a willingness to underwrite risks that other insurers will not. Invariably it reflects a commitment to providing excellent service, both in underwriting and claims.
In 2005, Beazley underwrote $7.5m in specialty lines business in the US; by last year, this had grown to $545.8m. The years in between saw the financial crisis of 2008 and the recession that followed it. However, perhaps more significant for Beazley, was the onward march of Moore’s Law (named after the co-founder of Intel, Gordon Moore, who predicted in the 1960s that the processing power of computers would double roughly every two years) and the related explosion in the online exchange of data, including personal data.
“ We were able to achieve significant growth in our environmental book in 2016. We see further growth opportunities in the US and around the world, particularly from property owners and developers looking for well designed, long term protection from environmental lawsuits and regulatory action.” Jayne Cunningham Environmental focus group leader
Beazley’s technology, media and business services (TMB) team within the specialty lines division began underwriting network security and privacy risks in 2005. However, to establish clear leadership in the nascent data breach insurance market required a willingness to rethink the product from the ground up, recognising that clients’ most pressing need was not for third party liability cover following a data breach, but for immediate hands-on help in handling the consequences of the breach.
Thus Beazley Breach Response (BBR) was launched in June 2009. As billed in the press release, the product did indeed bring ‘radical change to the data breach and security insurance market’. It provided an array of tightly coordinated response services to help clients manage data breaches effectively for up to two million affected individuals (later increased to five million). By tying the cap to the number of individuals notified of the breach, BBR alleviated any concerns clients might have about running out of insurance funds before the job was done.
BBR, developed by a team led by Mike Donovan, TMB focus group leader, was the first really credible insurance industry response to the growing legal and reputational challenge to companies posed by data breaches. Several dozen states then had their own data breach notification laws (the number has since risen to 48) and coordinating responses in multiple states was a major challenge. BBR Services, the dedicated business unit established by Beazley in 2012 to help clients manage data breaches effectively, strengthened the service still further. Beazley has now worked with clients on more than 5,000 breaches.
Specialty lines is strongly rooted in the history and culture of Beazley as the company has developed over three decades. And trees with strong roots can grow very tall.
Three eventful decades For three decades, Beazley has helped clients recover from risks that threaten to derail their businesses and destroy their livelihoods.
At Lloyd’s, storm clouds were gathering. The late 1980s saw mounting losses from long tail liabilities for risks such as asbestos deriving from policies underwritten, in many cases, decades before. As a new syndicate Beazley was not directly exposed to these risks, but the combination of long tail liabilities and more recent catastrophe losses from events such as the North Sea Piper Alpha oil platform explosion and Hurricane Hugo posed a threat to the market as a whole.
Change at Lloyd’s The problems at Lloyd’s came to a head in the 1990s. At the beginning of the decade, the market’s capital was derived exclusively from the personal wealth of 34,000 private individuals, known as Names, who backed underwriting at Lloyd’s with unlimited liability. By the end of the decade, corporate capital had replaced much of the Names’ capacity and Equitas, the world’s largest run-off reinsurance company, had been formed to manage 1992 and prior year liabilities. (Equitas was later acquired by Berkshire Hathaway.)
Andrew Beazley, Nick Furlonge and other Beazley underwriters played key roles in helping the Lloyd’s market navigate through this perilous period in its history.
Increased demand for cyber Demand for specialist insurance has also been evolving rapidly. Recent years have also seen an explosion of data as businesses seek new ways to serve customers (and influence them). The Internet of Things, a term first coined in 1999, became immensely popular a decade and more later as the networked world expanded. However the dark side of big data – the potential for massively damaging data breaches and network intrusions – also grew, spurring the rapid emergence of a new insurance market. Beazley, which had launched a highly innovative data breach product, Beazley Breach Response, in 2009, has established itself as a leader in this market.
Growth at Beazley Beazley took two important steps to develop its business in the early years of this century. In 2002, the company floated its shares on the London Stock Exchange, raising £150m to invest in profitable growth opportunities that were, at that time, plentiful. Also from 2005 onwards, the company began underwriting business locally in the United States, then as now, Beazley’s most important market.
Although many of the risks Beazley underwrites today were unheard of in 1986, in other important respects the company has not changed. It has enjoyed a high level of management stability, with two chief executives in the company’s history. A focus on organic growth has enabled the company to avoid the dilution of the founders’ culture that companies which have grown through acquisitions have often experienced. The culture is based on strong, respectful relationships – among colleagues and, externally, with brokers and clients. The evidence of the past three decades suggests that it is a culture that benefits investors as well.
As we move into our fourth decade, the company is larger, better resourced and more diverse than at any point in its history. We can accordingly do more to help our clients while providing exciting career opportunities for our employees and attractive returns for our investors.
Hurricanes Katrina, Rita and Wilma cause massive damage to the southern US. Wilma set a record for the lowest barometric pressure ever recorded in the Atlantic. But it was Katrina that caused by far the greatest loss of life and damage.
On the day that Lehman Brothers files for bankruptcy – 15 September 2008 – the Dow Jones index falls by over 500 points (4.4%). Worse was to come.
environment, we expect our capital requirements to increase. In 2016, our capital requirements grew by 11%, thus reducing the level of excess capital compared to 2014 and 2015.
The board is pleased to announce a second interim dividend of 7.0p per ordinary share (plus a special dividend of 10.0p per ordinary share). Together with the first interim dividend of 3.5p this takes the total dividends declared for 2016 to 20.5p per ordinary share (2015: first interim dividend of 3.3p, second interim dividend of 6.6p plus a special dividend of 18.4p, totalling 28.3p).
Dennis Holt Chairman fallen to reflect this, most sharply in the energy market. However, it is in the nature of large risk, catastrophe exposed business that rates can fall a long way and insurers can still make money if claims are subdued.
Nevertheless, amid the challenges our industry faces, there are many areas of opportunity for Beazley. Specialty lines, the company’s largest division, continues to grow strongly, generating gross premiums of $1,159.8m in 2016 (2015: $1,015.2m), 14% up on the previous year. This business was buoyed by the relatively attractive premium rates for small scale risks that our mature US operations are now well equipped to handle. We have been building a strong platform in the US for more than a decade now and it has served us well.
For a specialist insurer such as Beazley, one important measure of vitality is the flow of new product ideas and a commitment to invest in them – an area in which Beazley continues to excel. Another is a willingness to partner with other insurers or reinsurers to exploit attractive growth opportunities that might not be accessible to a single company. The partnership we forged in 2016 with Munich Re to underwrite large scale cyber risks is an example of the latter.
An important focus for the Beazley board has always been to scrutinise the key diversification elements in the company’s risk portfolio. Beazley’s success over time has depended heavily on being able to flex the portfolio to capitalise on profitable growth opportunities in one geography or line of business while keeping our powder dry in another. In addition, the duration of risks matters: in recent years we have seen short tail catastrophe exposed business shed margin far faster than the medium tail casualty business that is the focus of our specialty lines division. In all these areas – product, geography and duration – the board continuously challenges the company’s strategy and the assumptions that underpin it.
The London market faces a more challenging near term future. The influx of capital into this market in recent years, and the resulting rating pressure, has contributed to tighter margins across many lines of business. If the relatively benign claims environment we have grown used to in recent years were to deteriorate, the consequences of writing risk at these rates would become even clearer.
Our balanced portfolio was a key factor in achieving both growth and a strong combined ratio.
We see London continuing to play a key role in the provision of tailored cover for large and complex risks, including in Europe, notwithstanding uncertainty caused by Britain’s referendum decision to exit the European Union (EU) in June. We strongly support the negotiating position of Lloyd’s, which has been seeking to ensure that passporting rights for UK-based insurers to transact business throughout Europe will survive Britain’s exit from the union. However, we have also been pursuing plans to establish an insurance company within the EU. In November we filed an application with the Central Bank of Ireland to convert Beazley Re dac, our long established Irish reinsurance vehicle, to a direct insurance company for this purpose.
Although we expect London to remain the preeminent wholesale and reinsurance market for large risks, the profitability of this business will remain highly sensitive to the incidence of catastrophe claims, dipping when claims hit the market but rebounding thereafter. Since 2011, we have seen an unusually calm period in this regard. This has been accompanied by a major influx of capital, much of it from US pension funds, that has not historically been heavily deployed to support insurance and reinsurance business. The combined effect of these developments has been to drive rates down very significantly for many of the lines of business in which Beazley’s London underwriters specialise. In 2016, we saw reinsurance rates fall by 4%, while large commercial property rates declined by 6% and energy rates by 13%.
Claims activity As noted, claims continued to be subdued by historic standards in 2016. The insurance market experienced what may be regarded as a near miss in early October when Hurricane Matthew progressed up the eastern seaboard as a category three storm but only made landfall, in South Carolina, as a category one storm with 75 mph winds. Earlier in its course, Matthew had been a highly destructive hurricane, causing massive loss of life in Haiti, the poorest country in the western hemisphere. Estimated insured market losses from Matthew currently stand at between $2.5bn and $8.0bn and we do not expect claims for Beazley to be material.
Investment performance Our investment portfolio as a whole returned $93.1m, or 2.0% in 2016 (2015: $57.6m, 1.3%). This is an excellent result when considered against a background of low and volatile yields, particularly in the final months of the year. Our move to insource more decision taking to our CIO, Stuart Simpson, and his team is working well. Following the outcome of the US Presidential election in November, the team took action to reduce the duration risk of our fixed income investments and this helped protect our return as yields subsequently rose. Earlier in the year we added to our corporate debt investments, improving the yield of our portfolio whilst accepting a modest increase in credit risk. This change has improved our return in 2016. Our capital growth investments have also made a good contribution, with all asset classes recording positive returns: our illiquid credit investments, in particular, performed strongly in this period. More details of our investment strategy are shown on page 42.
Two months later, in May, we announced the acquisition of the Leviathan facility, a London-based managing general agency with two decades of experience underwriting subsea risks, including remotely operated vehicles, seismic streamers for surveying the sea-bed, submarines and diving equipment.
Our preference at Beazley is for organic growth, supplemented by small scale bolt-on acquisitions that are complementary to our existing business. Both the transactions we completed in 2016 fitted this mould.
Underwriting talent is clearly critical to the success of a specialist insurer such as Beazley that aspires to be an innovator and must therefore be able to price risks that often lack a long-established claims history. However, many other skills are also critical to our success and we continued in 2016 to invest heavily in the diverse talent we will need to grow profitably in the years ahead. This included the Beazley board, to which, as the chairman describes in his letter on page 71, we welcomed three new non-executive directors with extensive US and London market experience – John Sauerland, Christine LaSala and Bob Stuchbery – during the course of the year.
Service High quality service to brokers and clients has always been an important differentiator for Beazley and is something we monitor closely. We intensified these efforts in 2016 with a large scale survey, to which nearly 2,800 individual brokers around the world responded.
Outlook I noted in last year’s report that the returns on equity we had seen in previous years would prove unsustainable if market conditions continued to deteriorate. That deterioration has occurred but, thanks to the composition of our risk portfolio and strong investment returns, we have been able to offset declining rates in some areas with continued profitable growth in others.
It is easy to talk about our business, and in particular the operation of the insurance cycle, in a somewhat mechanistic, impersonal way. However, Beazley’s success derives from the energies of 1,144 dedicated and skilled employees, building on sound principles that have served the company well over three decades, as well as constantly seeking new ways to better address clients’ needs. ‘Beautiful’ and ‘insurance’ are not words that are often used in the same sentence. We believe they can and should be.
Rising interest rates, which the Federal Reserve has signalled for 2017, have a short term negative impact on our investment returns as our bonds are marked to market, but longer term the impact is clearly positive.
We look frequently at the headroom we have to continue growing in our target markets. The good news for our specialty lines underwriters is that they have plenty of headroom to grow further. To take just one example, we wrote $36m more environmental business in 2016 than in the previous year, but the team’s total premium was still only $61m. There’s a great deal more profitable business to play for.
Q What progress has been made this year in enhancing the efficiency of the London market through the Target Operating Model initiative? How optimistic are you about London’s future?
A The idea behind the London Target Operating Model is to have more efficient processing supported by electronic data capture for all stages of the journey taken by a piece of business, from placement, through claims, to renewal. This year saw the launch of a key part of the model, Placing Platform Limited or PPL, which brokers are now using to submit risks to London market insurers electronically and enable risk data to flow through into their systems. Fifteen brokers and 68 insurers, including Beazley, are now using the platform. Since the system went live, more than 1,000 risks have been placed electronically, reflecting the value of the initiative and the strong collaborative relationships that underpin it.
The relationship with Munich Re is of longer duration – they have reinsured Beazley, and supported our growth, over many years. However, we think we have a unique opportunity in the cyber space to combine Munich Re’s emerging risks expertise (particularly in the manufacturing sector) with our data breach experience. We are working with the Corporate Insurance Partner unit of Munich Re, which was established for just this type of venture, and we are writing risks together on a coinsurance, rather than a reinsurance, basis.
We are taking a number of steps to build on our existing attractions for small business clients. Many of these clients like to buy insurance on a package basis, with multiple lines written together, and we will be expanding our ability to offer package policies in Europe and the US. However our goal in doing this is clear – we think our specialist products, such as our data breach cover, can help differentiate our package policies. We are not keen to write more commoditised business for its own sake.
A The margin pressures in our industry have definitely increased and this has contributed to the recent consolidation we have seen among competitors and their withdrawal from lines of business where they no longer feel they can make money. At Beazley we have enjoyed a greater degree of flexibility than some others because of the diversity of our book, which enables us to be quite nimble in focusing on profitable opportunities. This is not an accident – it reflects well on both our strategy and the skills of our underwriters. However if rates continue to erode for large parts of our overall book, we cannot maintain current margins indefinitely. The other part of the equation is of course claims experience, which continued to be relatively benign in most of our lines in 2016: a return to more normal levels would also depress margins. We will, once again, do our utmost in 2017 to maintain underwriting margins but it will, once again, be harder to succeed.
A Not in the near term. The Lloyd’s market is a bellwether for both these lines of business and we have not seen capacity withdrawn by syndicates that, in most cases, have experienced higher loss ratios than we have. There is some evidence that global trade is picking up, which should have positive effects for the marine market, but we are not expecting that to give our marine business a lift in 2017. As we explain on page 4, Clive Washbourn and his team have taken steps in recent years to diversify the marine division’s book: marine hull and energy risks together accounted for approximately 70% of the account in 2009; they now account for less than 45%. This has reduced the margin erosion we have suffered but not eliminated it altogether.
Divisional commentary Specialty lines wrote gross premiums of $1,159.8m in 2016 (2015: $1,015.2m), representing an increase of 14% over the prior year. As in recent years, much of our growth has been achieved through our underwriters located in the US and by focusing on small and mid-sized risks across many of our product lines such as cyber, healthcare, environmental and professional liability.
We continue to see strong demand for our cyber products and in April, we were happy to start to offer large scale cyber risk solutions in partnership with Munich Re.
We also focused on expanding our cyber offerings outside the US and we see good growth potential in other markets, particularly in Europe. Our healthcare team was another which performed well during 2016 and in March, we were delighted to welcome a new team focusing on small and mid-sized medical malpractice business outside the US. Looking forward, we are also excited by our plans for our non-US specialty lines offerings to include financial institution insurance, focusing initially on mainland Europe.
Our life, accident and health division recorded a loss of $3.9m in 2016 (2015: profit of $0.4m) driven by losses in our Australian business and a relatively high cost base in the US as we continue to work towards growing our business across the country. We have taken positive steps in 2016 to continue to re-shape our portfolio, particularly in Australia where one of our larger superannuation policies was not renewed, while increasing our focus on smaller scale personal accident risks. In the US, we are working to optimise our sales and distribution capabilities so that we can take better advantage of the demand for our products and grow across the country.
The market conditions experienced by our underwriters in our reinsurance division were predominantly the same as those faced by our property team. While rates fell by 4% year on year, the team was aided by lower than average catastrophe activity and achieved a combined ratio of 65% (2015: 57%). We have seen indications that the severe rate decreases experienced since 2013 may be levelling out, however the trading environment is likely to remain difficult throughout 2017 due to the high level of capital having entered the market, attracted by the returns generated in the reinsurance sector in recent years.
Our marine division experienced similarly challenging market conditions as rating pressure, particularly in the more traditional marine classes such as energy and war, drove a drop in gross premiums written of 8% to $247.4m (2015: $269.3m). We are seeing some macro-economic drivers of lower demand and rates such as the relatively low price of oil, as well as geopolitical drivers such as reductions in the areas of the world’s seas which are designated as war areas. Despite these challenges, we demonstrated our commitment to profitable underwriting over premium growth by focusing on writing risks which we felt were appropriately priced. Our strong performance in this area is best exemplified by our combined ratio of 90%, which although higher than 2015 represents a strong return in a highly competitive market environment.
In 2016, our political risks and contingency division delivered another pleasing result, delivering a combined ratio of 75% (2015: 76%). The division saw contrasting levels of competition throughout its book both in terms of products and, as we continue to expand our global offerings, location. While our terrorism book experienced significant rating pressure, other parts of the portfolio such as contingency were able to maintain relatively stable pricing. Our underwriting approach in such circumstances includes constantly challenging ourselves that the composition and split of our overall portfolio is appropriate and ensuring that considerable time is spent on risk selection.
Outlook The insurance market continues to be impacted by an oversupply of capital. This oversupply, particularly in short tail lines of business such as marine and reinsurance, has meant that 2016 has been another year where most trading divisions within Beazley have found competitive pressures to be strong.
We anticipate that the trading environment currently encountered will remain broadly unchanged throughout 2017.
Our diverse portfolio gives us the ability to exercise discipline in areas where margins are under the most pressure, while simultaneously pushing forward in areas such as specialty lines where we see the best opportunities for profitable growth. This emphasis on disciplined underwriting across a wide range of products and locations will remain the cornerstone of our underwriting strategy throughout the next 12 months and beyond.
Gross premiums written 126.6 119.8 Net premiums written 118.0 106.6 Results from operating activities (3.9) 0.4 Claims ratio 59% 58% Expense ratio 45% 45% Combined ratio 104% 103% Rate change (2%) (1%)
Find out more on pages 30Find out more on pages 28Find out more on pages 26
Gross premiums written 213.4 199.9 Net premiums written 141.2 132.0 Results from operating activities 60.9 66.3 Claims ratio 29% 22% Expense ratio 36% 35% Combined ratio 65% 57% Rate change (4%) (7%)
Life, accident & health Progress made in 2016 by re-balancing our portfolio.
Christian Tolle Head of life, accident & health $126.6m Gross premiums written
The life, accident & health division made good progress in strengthening key distribution channels in 2016 despite recording a combined ratio of 104% (2015: 103%) on premiums of $126.6m (2015: $119.8m). The operating loss of $3.9m was driven by losses in our Australian business in the current year, and a high cost base in the US as we continue our efforts to grow our business stateside.
More than 60 Lloyd’s syndicates have the capability to underwrite personal accident business. This is positive in that it makes the Lloyd’s market a significant player in this market, particularly for niche forms of cover that other insurers lack the experience to underwrite. However, it can be challenging when, as now, there is a significant amount of competition for high quality business. We saw rates on our London market business fall by an average of 2% in the course of 2016 (2015: fell by 1%).
In Australia our business has undergone material changes in the past two years, moving away from a heavy dependence on major superannuation fund accounts. (Australian superannuation funds are government supported retirement funds that also offer disability insurance). With the loss of one such major account and a strong push into smaller scale group personal accident business, we now have a far more diverse and balanced book.
In the United States, the drivers of demand for the gap protection products that we offer remain strong. These products help employees supplement the cover they obtain under high deductible healthcare benefit plans. With medical inflation continuing to run at high levels, the costs to employers of providing more comprehensive benefit plans will continue to climb, increasing the attractiveness of our products.
Further steep declines in rates, particularly for marine and energy business, took a toll on the marine division’s results in 2016, with reserve releases from previous years also down. We were nevertheless pleased to achieve a combined ratio of 90% (2015: 77%) on premiums of $247.4m (2015: $269.3m).
The division underwrites a mix of marine, energy, aviation and satellite business, benefiting from Lloyd’s position as the leading global market for all these classes of business. We also underwrite a war risks account, which in recent years has primarily focused on piracy risks off the Horn of Africa. In recent years, we have significantly outperformed the average results for the marine market at Lloyd’s.
Underwriting conditions in 2016 continued to be exceptionally challenging, with rates falling by 7% for the marine division and notably 13% for energy and 9% for aviation business.
Our focus in this environment is on underwriting discipline, as is well illustrated by the 53% reduction in our energy premiums since 2014, a market in which competitive pressures have been particularly strong. Brokers are well aware that we will walk away from risks that do not meet our profitability requirements: they also know that Beazley is an adaptable insurer that can commit swiftly to new and unusual risks that fall within our appetite. Speed is also of the essence in claims service and we strive to deliver the most responsive service in the market.
Competition for terrorism business was particularly strong in London during the course of 2016, while the market environment was slightly less competitive in other locations, such as Singapore and Dubai, where we have begun locating underwriters in recent years. We relocated one terrorism underwriter, Andrew Page, to Singapore in 2016 to access business we would not normally see in London and continue the growth of our terrorism business there.
At 39% of our portfolio, political risks insurance for perils such as confiscation, nationalisation and expropriation, and trade-related credit insurance continues to be our largest line of business. This team, under the leadership of Roddy Barnett, performed well during 2016, despite rates that fell by 4% on average.
Our differentiators in markets that are awash with capacity are high service standards, strong broker relationships forged over a long period, and a willingness to innovate to offer new solutions to our clients and, thereby, incremental revenue streams to our brokers. All three of these differentiators stood us in good stead in 2016.
In addition to political risks and terrorism cover, the division includes one of the largest and most experienced contingency teams in the world, with a strong track record in insuring many of the largest international sports and entertainment events. We have leveraged this experience in recent years to write a steadily increasing volume of smaller event cancellation risks for trade shows and conference organisers among others.
Commercial property 60% Small property business 17% Jewellers & homeowners 13% Engineering 10%
In addition to large scale commercial property business, the property division, Beazley’s second largest, underwrites small and mid sized commercial property risks; construction and engineering risks; and homeowners risks in both the UK and US. Our London underwriters also specialise in jewellers’ block, fine art and specie business. The property account as a whole has become steadily more diversified in recent years, enhancing the consistency of our underwriting returns.
Hurricane Matthew, which grazed the eastern seaboard of the US in October, did not rank as a market changing event in terms of the rating environment for any of our teams. It did however affect a number of our clients, both businesses and homeowners, in the south eastern US and we were pleased to be able to support them through the storm’s aftermath.
A key single segment of our portfolio continues to be our small business unit, led by Paul Bromley, which underwrote $99.3m in 2016 (2015: $123.7m). We see greater residual profitability in this business – much of it sourced from Lloyd’s coverholders with whom we have strong long term relationships – than in our large risk business. Beazley has a strategic initiative to enhance our attractiveness to small commercial clients and their brokers and we expect the small business unit to be a major beneficiary of this.
Reinsurance Good profitability driven by lower than expected natural catastrophe losses.
Property catastrophe 70% Property risk 17% Korean RE 8% Miscellaneous 4% Casualty clash 1%
Claims continued to be broadly subdued in 2016, despite the most active US hurricane season that we have seen since 2012. Hurricane Matthew, the largest of these storms, is now expected to cost the insurance industry between $2.5bn and $8bn, but that will not in itself have a material impact on premium rates. The impact of Hurricane Matthew on Beazley was modest.
In terms of the supply of risk bearing capital, we have recently seen traditional reinsurers competing very effectively with the insurance linked securities (ILS) alternatives that, a few years ago, were widely expected to encroach far more deeply into our markets. Part of the reason for this is that the set-up costs for many of these vehicles have remained stubbornly high, exceeding the transaction costs of reinsurance. At Beazley we have continued to look for ways to improve the design of our products, including reinstatement terms, to address the challenge posed by both traditional and non traditional competitors.
Specialty lines Profitable growth across numerous product lines and geographies drives improved combined ratio.
In common with other lines of business underwritten at Beazley, we saw less competition for small and mid sized business in 2016 than for large risk business. Overall, we saw premium rates rise 1% for the division as a whole during the year.
In much of the business we underwrite, claims take some time to crystallise – in many professional lines, for example, this can occur six years or more after the policies were underwritten. We reserve prudently in the meantime and, after claims are paid, are frequently able to make reserve releases. In 2016, these prior year reserve releases made an increased contribution to the division’s profits of $68.5m (2015: $38.7m). This higher level of reserve release was possible as we distanced ourselves from the credit crunch which affected the years 2008 through to 2011, where claims frequency appears to be higher than in the years immediately before and after this period.
The fastest growing cyber insurance market in the world has hitherto been the US, driven largely by complex state and federal regulations governing how data breaches must be reported to the affected individuals. In coming years, we expect other developed economies to begin to catch up as regulations in those regions also tighten. In Europe, the EU General Data Protection Regulation, due to come into force in 2018, will make the challenge of managing data breaches more complex and more costly. We also launched BBR in Canada during 2016 to tap growing demand in that country.
In all of the industries we serve, clients look to Beazley for well designed products that address their most pressing risks and perform as required in the event of a claim. Many of these products are highly innovative – for example the regulatory liability cover we offer to US hospitals to protect them from billing errors, a major concern in the highly complex and regulated US healthcare market. Other products afford specialist services in the event of a claim – services that can be far more valuable than monetary compensation.
London will also be a key focus for the continuing development of our broader international business outside the US. In December we welcomed Gerard Bloom to lead a new team focusing on the development of this business, including non-US financial institutions risks. We will be writing this business both from the Beazley box at Lloyd’s and from local offices around the world.
Net earned premiums 1,768.2 1,698.7 4% Net investment income 93.1 57.6 62%
Net insurance claims 855.6 813.9 5% Acquisition and administrative expenses 720.3 663.8 9% Foreign exchange loss 9.5 9.7 (2%)
Our portfolio by business division has remained broadly unchanged from 2015. We continue to operate a diversified portfolio by type of business and geographical location, and have grown our business across three of the six divisions during 2016.
The amount the group spent on reinsurance in 2016 was $341.6m (2015: $367.8m). The reduced purchases in 2016 were driven by a reduction in our life, accident and health division’s reinsurance purchase as a result of the non renewal of one large inward risk and a reduction in our specialty lines division due to business mix and amendments to some of our larger quota shares.
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 has increased in 2016 to 89% (2015: 87%), but it still maintains our five year historic average below 90%.
Claims Claims have developed favourably during 2016, with overall claim notifications once again below normalised levels. In particular, there has been only moderate exposure to natural catastrophes throughout the year.
Reserve releases Beazley has a consistent reserving philosophy, with initial reserves being set to include risk margins that may be released over time as and when any uncertainty reduces. Historically these margins have given rise to held reserves within the range 5-10% above our actuarial estimates, which themselves include some margin for uncertainty. The margin held above the actuarial estimate was 6.6% at the end of 2016 (2015: 8.2%). This margin has remained stable over time and is a lead indicator for the sustainability of reserve releases. However, it is important to recognise that claims reserve uncertainty is significant for Beazley and a positive lead indicator will not always equate to future releases.
The reserve releases in 2016 totalled $180.7m and were broadly flat when compared to 2015. Our specialty lines division increased their reserve releases as the post recession portfolio from 2012 onwards matures; a trend which we expect to see continuing. This counter-balanced lower releases on short tail classes where the mechanical effect that reduced margins have on reserve releases is now visible.
Foreign exchange The majority of Beazley’s business is transacted in US dollar, which is the currency we have reported in since 2010 and the currency in which we hold the company’s net assets. Changes in the US dollar exchange rate with sterling, the Canadian dollar and the euro do have an impact as we receive premiums in those currencies and the majority of our staff still receive their salary in sterling. Beazley’s FX loss taken through the statement of profit or loss in 2016 was $9.5m (2015: loss of $9.7m). The main component of this loss, generated by IFRS’s treatment of the unearned premium reserve as a non-monetary item, is purely timing with FX profits and losses which unwind in the subsequent period.
Returns on sovereign debt exposures have traced a very different path, with significant declines in yields in the first half amid pessimism about global growth, assisted by the result of the UK’s EU referendum in June, leading to strong returns in the first part of the year. Subsequently, yields began to rise as the US approached full employment and US interest rates were expected to increase. This trend was quickly extended following the US election, as investors discounted higher growth and inflation in anticipation of President Trump’s policies, causing the five-year US Treasury note yield to rise by more than 50 basis points in one week. As a result, US sovereign yields ended the year higher than they began, generating low, but positive, returns at most maturities.
Our fixed income portfolios, which constitute the majority of our investments, returned 1.5% overall in 2016, with returns on sovereign debt exposures augmented by the higher yields from our corporate credit investments and, in particular, strong returns from our high yield fixed income exposures. Our decision to reduce the duration of our fixed income investments immediately following the US election result has also helped performance. Our capital growth portfolios incorporate around 12% of our investments and utilise more volatile asset classes, aiming to generate additional returns in the longer term. In 2016 the capital growth portfolio returned 5.6%. Our overall investment return for the year ended 31 December 2016 was 2.0%, or $93.1m (2015: $57.6m; 1.3%). We believe this to be a good outcome in a volatile period for investments.
At 31 December 2016, the weighted average duration of our fixed income investments was unusually low, at 1.2 years (2015: 1.8 years). Looking ahead to 2017, the investment outlook is once again uncertain. Recent increases in bond yields provide some hope that available returns may improve, but further market volatility is likely and we are prepared to take action to reduce the volatility of our investment returns, if appropriate.
The table below details the breakdown of our portfolio by asset class: Cash and cash equivalents 507.2 10.8 676.9 15.0 Fixed and floating rate debt securities – Government, quasi-government and supranational 1,261.5 26.8 1,857.1 41.1 – Corporate bonds
Comparison of return by major asset class: 31 Dec 2016 31 Dec 2015
Financial assets at fair value and cash and cash equivalents 4,702.6 4,519.1 4%
Net assets per share (pence) 225.9p 186.5p 21% Net tangible assets per share (pence) 211.2p 174.8p 21%
We continue to provide against impairment of reinsurance recoveries, and at the end of 2016 our provision in respect of reinsurance recoveries totalled $12.6m (2015: $13.7m).
Other assets Other assets are analysed separately in the notes to the financial statements. The largest items included comprise: • deferred acquisition costs of $242.8m; • profit commissions of $15.2m; and • deferred tax assets available for use against future taxes payable of $11.0m.
Insurance liabilities Insurance liabilities of $4,657.7m consist of two main elements, being the unearned premium reserve (UPR) and gross insurance claims liabilities.
Our UPR has increased by 8% to $1,140.8m. The majority of the UPR balance relates to current year premiums that have been deferred and will be earned in future periods. Current indicators are that this business is profitable.
In 2012, we bought back a total of £47.3m in two tranches. In 2013 we bought back £26.2m of this debt. In October 2016, the group exercised its first call option and redeemed the remaining outstanding nominal amount of debt of £76.5m.
• in November 2016, Beazley Re dac issued $250m of 5.875% subordinated tier 2 notes due in 2026.
Beazley holds a level of capital over and above its regulatory requirements. The amount of surplus capital held is considered on an ongoing basis in light of the current regulatory framework and opportunities for organic or acquisitive growth and a desire to maximise returns for investors.
In 2016, Beazley acquired 2.0m of its own shares into the employee benefit trust. These were acquired at an average price of 335p and the cost to the group was £6.7m.
Shareholders’ funds 1,483.7 1,441.4 Tier 2 subordinated debt (2026) – recalled in 2016 – 116.9 Tier 2 subordinated debt (2026) – issued in 2016 248.3 –
Our funding comes from a mixture of our own equity alongside $248.3m of tier 2 subordinated debt, $18.0m subordinated long term debt, a $94.7m retail bond and an undrawn banking facility of $225.0m.
At 31 December 2016, we have surplus capital of 44% of ECR (on a Solvency II basis). Following payment of the second interim dividend of 7.0p and special dividend of 10.0p, this surplus reduces to 36% compared to our current target range of 15% to 25% of ECR.
Group structure The group operates across both Lloyd’s and the US through a variety of legal entities and structures. The main entities within the legal entity structure are as follows: • Beazley plc – group holding company and investment vehicle, quoted on the London Stock Exchange; • Beazley Ireland Holdings plc – Intermediate holding company which holds £75m sterling denominated notes; • Beazley Underwriting Limited – corporate member at Lloyd’s writing business through syndicates 2623, 3622 and 3623; • Beazley Furlonge Limited – managing agency for the six syndicates managed by the group (623, 2623, 3622, 3623, 6107 and 6050); • Beazley Re dac – reinsurance company that accepts reinsurance premiums ceded by the corporate member,
BICI reinsurance business; • Syndicate 6050 – special purpose syndicate which has its capital provided by third-party names and provides reinsurance to syndicates 623 and 2623; • Beazley Insurance Company, Inc. (BICI) – insurance company regulated in the US. Licensed to write insurance business in all 50 states; and • Beazley USA Services, Inc. (BUSA) – managing general agent based in Farmington, Connecticut. Underwrites business on behalf of Beazley syndicates and BICI.
Beazley continues to demonstrate profitable growth, and we have developed a diversified portfolio of products that are distributed globally, through 27 locations. To support this growth we have developed a scalable and efficient operating platform that through focused investment has become an important competitive advantage.
Supporting business growth relies on effective processes and systems, but it is also important that we have a high quality working environment that is conducive to team working and thought leadership. Our offices are open plan, bright and airy with a style and consistency that supports our global brand. We strive to get the best quality working space at the best lease and facility cost. In 2016, we opened a new office in Miami that will help us to access both Latin American reinsurance business and US insurance business. We also opened a new office in Houston, Texas where our specialty lines underwriters are already growing market share. We further opened a larger office in Atlanta, Georgia – to accommodate underwriting team growth and to provide space for a second US shared service support centre. This support centre will enable us to better load balance operational support alongside our primary support centre in Farmington, Connecticut. In Europe, we have moved to a new office in Paris to accommodate our broadening portfolio of products and new underwriting hires.
In pursuit of greater efficiency and consistency of operational service, we have centralised operations support or outsourced it where this brings further value. We want to make sure that operations and processing are done by appropriately skilled people, at the most cost effective location, whilst providing the best service levels. In 2016, we progressed two new 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.
In order to encourage more idea development from all Beazley employees, we launched a new ‘BHive’ collaboration app. This tool enables employees to upload new innovation ideas or contribute to other people’s ideas whilst on the move, using their mobile devices. For this app we won the Lloyd’s Innovation Award for the second year running, and it reaffirms our commitment to driving innovation across Beazley.
A good technology idea is only of value if we can apply it to a business problem or opportunity. With this in mind, in 2016, we launched a new programme of work called Beazley Labs. This focuses specifically on applying emerging technologies to our business products and services, with a view to converting technology ideas into specialist insurance revenue opportunities. Beazley Labs has begun with a series of organised sessions that bring together technology specialists both from within Beazley and from external partners, along with specialist underwriters, in order to quickly prototype technology ideas for business application. Initial areas of focus have been on supporting underwriting and claims decisions with artificial intelligence, processing using robotics, and mapping insurance exposures using marine cargo tracking data.
Growing across different markets entails greater operational complexity and a requirement for additional skills in our staff. We do not want to be limited to specific geographic pools of skilled individuals, such as project managers, IT specialists and business analysts. Some locations such as London also have higher unit costs both to hire and to accommodate employees. With this in mind, we continue to improve our sourcing channels to tap into different skilled resource pools. Where possible, if we can deliver a service competently from a remote location, we will aim to do so – better leveraging our more operationally oriented locations, notably Farmington and now from Atlanta.
• Decision making: The risk management framework and its associated reports support informed decision making and help steer the business. At Beazley, in addition to the consolidated assurance report, the suite of risk management reports range from thematic risk reviews to the regular and transactional Own Risk and Solvency Assessment (ORSA) reports.
More recently in November, another key change was the outcome of the US election which delivered a Republican Presidency, Senate and House of Representatives. Given the importance of the US to Beazley’s business, we are actively monitoring the risk environment and any emerging opportunities and risks to Beazley’s US business as policies are implemented by the newly elected government.
Risk management completed a transactional ORSA which considered the associated risks, including related to regulatory, legal and tax, arising from the transfer of management of the Beazley group from Dublin to London which was completed on 13 April 2016. Another transactional ORSA was also written for the debt issuance that completed on 4 November 2016 which can be used to support underwriting opportunities from both the US and the specialty lines international initiative.
The challenging market conditions have remained a key risk for Beazley in 2016 and careful cycle management was required to navigate the classes of business experiencing the most rating pressure and to optimise the areas of opportunity. The ability of Beazley underwriters to segment their classes and understand the relative risk and reward dynamics is a key way this risk is mitigated and members of the risk and capital teams have supported underwriting teams in this activity during 2016.
In 2016 we had a number of employees take advantage of our sabbatical programme. Risk management have supported the business to test that, where necessary, adjustments to roles and responsibilities are considered. In addition to recognising a ten year career at Beazley, the sabbatical programme has also benefited teams and individuals supporting those on sabbatical with opportunities to expand their roles, challenge existing processes, and in some cases, reduce exposure to key personnel risk.
The risk management report to the remunerations committee is now in its sixth year. The analysis reported confirmed that the design of remuneration at Beazley is driving appropriate behaviour. The main enhancement made this year has been to review a suite of risk metrics in order to provide assurance that senior members of staff were managing risk in an appropriate manner.
This year represents the first year of operating within the new Solvency II regime with our internal model approved by the Central Bank of Ireland. The extensive work undertaken by the capital modelling team in the pre-application stages to design how processes should operate has resulted in a robust yet efficient framework that delivers a valued capital model which is parametrised to reflect the reality of the business, is updated to reflect the evolution of the business, is validated to provide assurance that its design and parametrisation is appropriate and so is used across the group to support business processes and inform the board on how risk is changing. We have continued to use an external consultancy to provide independent challenge which has supported the production of a detailed validation report to the board. This report, coupled with a programme of regular and tailored director briefings ensure that the internal model is understood. During 2016 we have welcomed new directors and have benefited from their fresh perspective on managing risk and capital to ensure that our approach remains fit for purpose in identifying, managing and mitigating risk we may face in the future.
– Identifies risk – Assesses risk – Mitigates risk – Monitors risk – Records status – Remediates when required
Viability statement The directors have completed a robust 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 56 and 57.
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 following two risk categories to be the most significant.
• Natural catastrophe risk: The risk of one or more large events caused by nature affecting a number of policies and therefore giving rise to multiple losses. Given Beazley’s risk profile, this could be a hurricane, major windstorm or earthquake. This risk is monitored using exposure management techniques to ensure that the risk and reward are appropriate and that the exposure is not overly concentrated in one area.
• Reserve risk: Beazley has a consistent and conservative 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, claim by claim, 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 35 senior individuals from across different disciplines at Beazley).
• Corporate transaction: There is a risk that Beazley undertakes a corporate transaction which does not return the expected value to shareholders. This risk is mitigated through the due diligence performed, the financial structure of transactions and the implementation activity.
QuIRP and Baby Beazley “Hospitals that improve get money back on the basis they are becoming a better risk. And that means patients are safer,” says Nat Cross, Head of global healthcare.
We refreshed our environmental policy in July 2016, renewing our commitment to managing our environmental impacts. Our strategy focuses on three key areas: Our offices We make every effort to ensure that any adverse environmental impact from our offices is minimal and we find ways to enhance them so they have a more positive impact.
Our people and communications We engage our people to help achieve our goals, consider their environmental approach outside work and keep them informed of what we are doing. Every day we strive to reduce our carbon footprint – from using public transport as a preferred means of transportation to booking taxi’s with car companies that provide electric and hybrid vehicles when car transportation is required in the UK.
“ Our vision is to attract and develop people with different experiences, backgrounds and lifestyles, with different skills and perspectives – a workforce that shares the diversity of our customers and communities where we work around the world.” Penny Malik Head of talent management
Environment continued Workplace The building also received an Energy Star score from the US Environmental Protection Agency (EPA) of 84 – three points up from last year. Buildings that earn the Energy Star use on average up to 35% less energy and generate 35% fewer greenhouse gas emissions than similar buildings across the US.
Diversity in our workforce Furthering our diversity goals In 2015 the nomination committee agreed our goal should be to have two women on the board by the 2016 AGM and three by the 2017 AGM – we achieved that with Catherine Woods and Christine LaSala joining the board this year.
Recruitment We have increased our activities to support diversity recruitment across the group and we are looking to partner with organisations that promote diverse recruitment in both the US and the UK.
Training We have recently launched a new learning management system (LMS) across the group. This includes a section focusing on diversity and inclusion outlining programmes focusing on: • Learning and development for women at Beazley. This includes a bespoke modular programme ‘Women at Work’. In the US we have linked with the Women in Insurance and Financial Services network.
• Young professionals. We have connected with programmes in the US, UK and Asia Pac that help support young professionals starting their careers in insurance.
Health and wellbeing 2016 saw the second year of our Health and Wellbeing initiative, which raises awareness about the Beazley benefits available to employees, and promotes healthy lifestyles. During the year we held events on nutrition, which covered educational talks and healthy eating and also musculoskeletal, which included yoga and massage sessions.
The rewards of volunteering “I love September – it’s global volunteering month and all over the world colleagues are going out and making a difference,” says Pippa Vowles, chair, Beazley Responsible Business Committee. “Everyone agrees that Make a Difference is valuable, for those we help and for ourselves.”
This year teams from Australia, Ireland, France, Singapore, the US and the UK took part in Make a Difference projects, distributing food for the homeless, maintaining local parks, restoring community centres and teaching young people career and public speaking skills.
Pedalling hard for Haiti “What’s the link between 23,000ft, the Pacific Ocean and pink lycra? It can only be the Beazley Pacific Cycle! On 15 September, eight of us took to our bikes for a gruelling 470 miles from San Francisco to LA in aid of our global charity partner of the year, ShelterBox,” says James Wright, Head of US IT.
“Our target was to raise $10,000 for the charity and we almost doubled that by reaching $18,264.”
The amount raised was used for 18 ShelterBoxes in Haiti following Hurricane Matthew.
► $18,264 raised for ShelterBox through Beazley Pacific Cycle 30 grants and 30 meals As part of our 30th anniversary efforts to continue making an impact in our communities, we offered employees the chance to apply for a total of 30 grants of 250 in local currency to be donated to a charity of their choice. We have also donated 30 meals in every location where we are based for those in need, via a local charity or homeless shelter.
Supporting the Cancer Research Institute In the US, one in four people’s lives are cut short by cancer. The Cancer Research Institute awards research grants and fellowships to support scientists at leading research universities and clinics around the world. It supports scientists at any stage of their career at all levels of scientific inquiry from basic research to coordinated clinical trials. It is the world’s only not-for-profit organisation dedicated exclusively to harnessing the immune system’s power to conquer cancer.
There has been much to celebrate with regards to carrying out our business responsibly in the year of our 30th anniversary. However we’re on a journey and it’s ever a case of ‘onwards and upwards’.
Marketplace includes finding ways to underwrite profitable business that can also have a positive impact on the wider community, for example, better patient care through our healthcare products or encouraging our insureds to invest in their local communities with our terrorism products. Also, we link our community and charity activities to our business, choosing charities that are relevant to us like ShelterBox and All Hands (for more on All Hands please see page 65).
Our objective is to create a robust responsible business strategy that creatively uses our expertise as a force for good in the sectors we serve and recognises its centrality to our business.
Aspiring to keep doing our bit We will look for opportunities to do even more next year to minimise our environment impact. We will ensure we deliver against our environmental policy and continue to work with our landlords and our new people to make an even bigger difference.
“ 2016 has seen some great projects delivered and some great results achieved in our community and charity work. Our focus next year will be on strategic direction while keeping our momentum.” Adam Rich Actuary and lead for our US community efforts
New charity partnership Establishing our new global charity partnership with All Hands will be a key focus for us in 2017. All Hands are a disaster-relief organisation addressing the needs of communities worldwide affected by such catastrophes. We need to look beyond the funds we donate and create a sustainable partnership where we use our skills and expertise as well.
“ Wherever you find Beazley, we want you to find people doing the right thing by our clients, by the communities we’re part of, and by each other. I look forward to working with my colleagues across the business in 2017 to develop a strategic approach that embeds our desire to do the right thing throughout our company.” Andrew Horton Chief executive officer
Management report The directors’ report, together with the strategic report on pages 1 to 65, serves as the management report for the purpose of Disclosure and Transparency Rule 4.1.8R.
Directors’ responsibilities The statement of directors’ responsibilities in respect of the annual report and financial statements is set out on page 119.
Results and dividends The consolidated profit before taxation for the year ended 31 December 2016 amounted to $293.2m (2015: $284.0m).
Directors The directors of the company who served during 2016 and/or to the date of this report were as follows: Dennis Holt Non-executive chairman David Andrew Horton Chief executive George Patrick Blunden Non-executive director Martin Lindsay Bride Finance director Adrian Peter Cox Director Angela Doreen Crawford-Ingle Non-executive director Christine LaSala Non-executive director (appointed 01/07/2016) Sir John Andrew Likierman Non-executive director Neil Patrick Maidment Director Padraic Joseph O’Connor Non-executive director (resigned 24/03/2016) John Peter Sauerland Non-executive director (appointed 05/05/2016) Vincent Joseph Sheridan Non-executive director (resigned 31/12/2016) Robert Arthur Stuchbery Non-executive director (appointed 11/08/2016) Rolf Albert Wilhelm Tolle Non-executive director (resigned 11/03/2016) Clive Andrew Washbourn Director Catherine Marie Woods Non-executive director (appointed 01/01/2016)
Directors’ interests The directors’ interests in shares of the company, in office at the end of the year, including any interests of a connected person (as defined in the Disclosure and Transparency Rules of the UK’s Financial Conduct Authority), can be found in the directors’ remuneration report on page 94.
Corporate, social and environmental responsibility The company’s corporate, social and environmental policy is disclosed on pages 58 to 65.
Invesco Perpetual 88,445,467 16.9 MFS Investment Management 64,866,670 12.4 Woodford Investment Management 26,396,106 5.0 Dimensional Fund Advisors 23,897,373 4.6
Note: All interests disclosed to the company in accordance with DTRs that have occurred, can be found on the News and Alerts section of our corporate website: www.beazley.com
Recent developments and post balance sheet events Recent developments and post balance sheet events are given in note 34 in the financial statements on page 196.
Greenhouse gas emissions Our latest greenhouse gas (GHG) emissions report from 2015, showed 2015 UK and European GHG emissions for 2015 (6,415.47 tonnes CO2 equivalent (tCO2e)) increased by 4%, although Scope 1 and 2 emissions (1,324.26 tCO2e) fell 4% relative to 2014 (to 1,380.69 tCO2e). The increase in total reported emissions is primarily emissions associated with air travel (Scope 3 emissions). 2015 GHG emissions for Beazley Group’s three principal North American offices are reported as 1,665.12 tonnes CO2 equivalent (tCO2e). This is 13% lower than 2014 reported emissions and is primarily due to reduced emissions from business travel by air.
Authority to purchase own shares On 24 March 2016 shareholders approved an authority, which will expire on 24 June 2017 or, if earlier, at the conclusion of the 2017 AGM for the company to repurchase up to a maximum of 52,335,334 ordinary shares (representing approximately 10 per cent of the company’s issued ordinary share capital). During the year, Beazley acquired 2.0m of its own shares into the employee benefit trust. The board continues to regard the ability to repurchase issued shares in suitable circumstances an important part of the financial management of the company. A resolution will be proposed at the 2017 annual general meeting to renew the authority for the company to purchase its own share capital up to the specified limits for a further year. More detail of this proposal is given in the notice of AGM.
Share capital The company has ordinary shares in issue. Ordinary shares therefore represent 100% of the total issued share capital as at 31 December 2016 and 2 February 2017. Details of the movement in ordinary share capital during the year can be found in note 21 on page 176.
Disclosure of information to auditors The directors who held office at the date of approval of this directors’ report confirm that, so far as they are each aware, there is no relevant audit information of which the company’s auditors are unaware; and each director has taken all the steps that he or she ought to have taken as a director to make himself or herself aware of any relevant audit information and to establish that the company’s auditors are aware of that information.
The board’s role is to set the company’s strategic aim, scrutinise management’s performance and ensure that the necessary financial and human resources are in place for the company to meet its objectives.
On 13 April 2016 the management of the group was re-located to the United Kingdom by means of a scheme of arrangement in order to simplify the management and decision making of the group. This put in place a new parent company for the Beazley group, which is incorporated in England and Wales and resident for tax purposes in the UK. Under the scheme of arrangement Beazley shareholders received one New Beazley share for every ordinary share held by them at the scheme record date. These New Beazley shares were admitted to the premium segment of the Official List and began trading on the London Stock Exchange’s main market on 13 April 2016. The reorganisation has had no material effect on the strategy of the group.
Appointed: 4 December 2006* Experience: Clive has over 30 years’ experience in the marine insurance industry and actively underwrites marine hull, marine liability and marine war risks. Committee: Executive committee
Appointed: 1 January 2016* Experience: Catherine Woods is a non-executive director of AIB Plc, AIB Mortgage Bank, and EBS Dac. She is also the senior independent director and chair of the audit committee at AIB Plc. She was previously the finance expert on the adjudication panel established by the Irish government to oversee the rollout of the national broadband scheme. Her executive career was with JP Morgan where she was a vice president and head of the European banks equity research team. Catherine is a former non-executive director of An Post, and a former member of the Electronic Communications Appeals Panel. Committee: Audit and risk committee
Appointed: 11 August 2016 Experience: Bob had previously been appointed as a non-executive director to the board of Beazley Furlonge Ltd, the group’s Lloyd’s managing agency, where he chairs the risk committee. He brings extensive Lloyd’s experience, having been CEO of Chaucer until 2015 and a deep knowledge of the Lloyd’s market and distribution and operational strategies. Committee: Audit and risk committee
Mutual funds 55% Pensions 13% Retail 11% Insurance 6% Investment trusts 5%
Compliance with code provisions The board confirms that the company and the group have complied with the provisions set out in the 2014 version of the Financial Reporting Council’s UK Corporate Governance Code (the Code) throughout the year ended 31 December 2016. The Company has not, however, tendered for audit services in the past 10 years as explained on page 87.
The Code can be viewed on the www.frc.org.uk website. The governance section, together with the remuneration report, describes how we have applied the main principles of the Code and complied with its detailed provisions.
The board is accountable to the company’s shareholders for good governance and the statements set out below describe how the main principles identified in the UK Corporate Governance Code have been applied by the group.
Governance framework The company operates through the main board, the managing agent board, the board of the reinsurance company (that accepts reinsurance premiums ceded by the corporate member, Beazley Underwriting Limited) and their board committees. The group has established properly constituted audit and risk, remuneration and nomination committees of the board. There are terms of reference for each committee and details of their main responsibilities and activities in 2016 are set out on pages 83 to 91. The board has also appointed an executive committee that is chaired by Andrew Horton and acts under delegated authority from the board. The executive committee meets on a monthly basis and are 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 chairman and chief executive are separate with each having clearly defined responsibilities. They maintain a close working relationship to ensure the integrity of the board’s decision making process and the successful delivery of the group’s strategy. The board evaluates the membership of its individual board committees on an annual basis and the board committees are governed by terms of reference which detail the matters delegated to each committee and for which they have authority to make decisions. The terms of reference for the board committees can be found on www.beazley.com.
Nomination committee Chairman Dennis Holt Members Sir Andrew Likierman George Blunden Key responsibilities The nomination committee is focused on evaluating the board of directors, ensuring an appropriate balance of skills, considering and recommending board and committee candidates and considering board succession.
Chairman Dennis Holt Key responsibilities The chairman leads the board, managing constructive dialogue between executive and non-executive directors. He is responsible for ensuring that the board discharges its duties effectively.
The board consists of a non-executive chairman, Dennis Holt, together with seven independent non-executive directors, of whom George Blunden is the senior independent non-executive director, and five executive directors, of whom Andrew Horton is chief executive. 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.
George Blunden, who has served a term in excess of six years, continues to bring strong challenge and insight to the board and its committees and his appointment was extended for a further three years at the 2016 AGM, subject to annual reappointment at the AGM. The nomination committee carried out a rigorous assessment of George Blunden’s continuing independence, taking into account the length of his tenure on the boards of both Beazley plc and Beazley Furlonge Ltd, and concluded that he remained independent. As senior independent director George will, if required, deputise for the chairman. He is available to talk to shareholders if they have any issues or concerns or if there are any unresolved matters that shareholders believe should be brought to his attention.
In accordance with the code, the board has recommended that all directors should submit themselves for election or re-election on an annual basis and as such all directors will stand for election or re-election at the forthcoming AGM.
2 Clive Washbourn was unable to attend the board meeting on 4 May 2016 as he was on sabbatical and the meeting on 29 September due to illness.
To enable the board to function effectively and directors to discharge their responsibilities, full and timely access is given to all relevant information. In the case of board meetings, this consists of a comprehensive set of papers, including regular business progress reports and discussion documents regarding specific matters. Directors have access to an electronic information repository to support their activities. During 2016 the board continued to support the maintenance and development of Beazley’s information security programme to address changing and emerging cyber security threats. All directors allocate sufficient time to the company to enable them to discharge their responsibilities effectively. The terms and conditions of appointment for all the non-executive directors set out the expected time commitment and they agree that they have sufficient time to meet what is expected of them.
Further information on the role of the audit and risk committee is set out on page 83 and further information on risk management at Beazley is set out in the risk management report.
We were able to bring on board Catherine Woods, Christine LaSala and Bob Stuchbery who bring a diverse range of experience and insight to the committee. Throughout the year we maintained continuity within the committee and this enabled us to carry out our full range of responsibilities.
The board has delegated oversight of audit and risk matters to the audit and risk committee which currently comprises Angela CrawfordIngle (committee chairman), George Blunden, Catherine Woods, Christine LaSala and Bob Stuchbery.
At the same time we have considered a number of significant issues including the increasingly complex regulatory reporting environment, potential impact of the UK referendum, business growth in the US primarily in our cyber book and our proposed tender strategy to rotate our current auditors.
The committee has seen a number of changes during the year. Vincent Sheridan and Rolf Tolle resigned and I would like to take this opportunity to thank them for their contribution.
As part of the appointments process the nomination committee reviewed the membership of the committee during the year. Taken as a whole, the committee has an appropriate balance of skills, including recent and relevant financial experience as required by the UK Corporate Governance Code. All committee members are independent non-executives.
There is representation from the plc audit and risk committee on the group’s regulated entity audit and/or risk committees which further demonstrates our proactive approach to understanding our control and risk environment at all levels of the organisation.
d) 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; and
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. Similar to 2015, the past year has seen a relatively benign claims environment in terms of large risk, catastrophe exposed classes of business. In this regard, our consideration of catastrophe losses has therefore been focused on developments in relation to the more significant catastrophes of previous years.
ii) Financial close process The audit and risk committee continues to focus on the group’s close and estimation processes generally, and the related control carried out by the business and specifically the finance team. The close process is particularly important in the current environment where insurers are being required to adhere to increasingly tight regulatory reporting timelines and the audit and risk committee is committed to ensuring that the robust nature of our control environment is not compromised during this period of change.
On this basis, the committee is satisfied that insurance receivables are materially correct and that no adjustment is required at 31 December 2016.
Considering management updates and supported by the external auditor’s report on the output of their work over assessing the recoverability of the group’s reinsurance assets, the committee is satisfied that the judgements applied by management in making provision for bad debts are appropriate.
vii) Tax The audit and risk committee discussed management’s updates on the continually developing tax environment and in particular reviewed management’s approach to Diverted Profits Tax in the UK and developments in this area generally. The committee is satisfied that the approach taken by management (see note 9) at the balance sheet date is reasonable.
b) Other updates During 2016, in addition to the financial reporting matters mentioned above the following items were key topics of discussion for the committee: • oversight of the reporting and control processes and procedures relating to the increased Solvency II reporting requirements; • overview of key reporting and regulatory updates, including updates on accounting standards, changes in tax legislation and changes in regulatory requirements; • management’s accounting approach in relation to the scheme of arrangement executed by the group during the year; • enhancements to key process and reconciliation procedures, in particular in relation to technical balances due to/from internal coverholders; • compliance, financial crime and assurance reporting including risk incident information; • quarterly reserving and actuarial data; and
The work undertaken and key matters considered during the year in these areas are set out below: 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 2016 and can confirm that Beazley plc has been operating within risk appetite as at 31 December 2016. The committee has also reviewed the proposed 2017 risk appetite and commended it to the Beazley plc board for approval; • risk assessment: The committee has performed a review of the group’s risk profile to ensure it covers the complete universe of risk and that all 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 2016, the committee received a review of cyber risk aimed at ensuring our suite of realistic disaster scenarios are appropriate. There was also a number of other operational risk profiles presented 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 2016 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; and
• 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. These assessments have supported the boards’ use of the internal model; and
• quarterly ORSA: The committee has received a quarterly ORSA report and has reviewed it as part of the quality assurance process before commending it to the board.
During 2016, the committee: • considered the results of all internal audit reports and monitored the progress of the business in addressing the findings of internal audit; • monitored the implementation of the 2016 internal audit plan; • reviewed and approved the basis for audit planning and approved the 2017 internal audit plan; • reviewed and approved the internal audit charter; • reviewed and approved the internal audit budget for 2017; • received and reviewed an overall summary assessment of 2016 internal audit activity; and
d) External audit i) Audit tendering Following in depth consideration during 2016, the board have committed to changing group auditor no later than for the 2019 financial year. Given KPMG’s length of service (group auditor since 2002) and because the board have not sought to formally tender KPMG’s services the committee requested KPMG to submit a non-competitive tender outlining their approach, value proposition and areas of focus over the next two years up until their rotation. Following careful consideration of KPMG’s proposal, the assessment of the auditors effectiveness through the 2016 cycle as part of the committee’s routine activities and taking into account the operational challenges the business faces which are in progress (such as Solvency II reporting and major finance system developments), the committee decided that it would be beneficial to retain KPMG for the time being. It is therefore proposed to put the audit out to tender no later than 2018 to allow new auditors to take over for the 2019 reporting period.
• discussing the output of the FRC’s Audit Quality Review with our auditors.
Audit and risk committee continued iii) Non-audit services The audit and risk committee’s responsibility to monitor and review the objectivity and independence of the external auditor is supported by a policy that we have developed in relation to the provision of non-audit services by the auditor.
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. The committee reviews the terms of such proposed services to ensure they have been robustly justified.
The committee receives a report from the external auditors twice a year setting out all non-audit services undertaken, so that it can monitor the types of services being provided, and the fees incurred for that work. The aim is to limit the total spend on non-audit services to a maximum of the annual audit fee, unless it is deemed that not doing so is in shareholders’ interest from an efficiency and effectiveness point of view.
The split between audit and non-audit fees for the year under review is disclosed in note 6 to the financial statements. In the year the audit fees for the statutory audit of the consolidated financial statements were $1.0m (2015: $1.1m) while fees paid for non audit and assurance services were $1.2m (2015: $0.8m). Fees for non audit and assurance services include work related to the accounts and regulatory reporting of the syndicates managed by Beazley. Also included, as a one-off in 2016, is reporting accountant work in relation to the change of domicile and comfort letters to support the debt issuance. Both of these are assignments normally performed by the incumbent auditors.
KPMG is a panel member eligible to provide services under our cyber breach response service. To date KPMG has not been called upon to provide any services under this arrangement and the committee receives regular updates to monitor the level of activity and to ensure conflicts of interest do not occur.
CMA Order 2014 statement of compliance The committee confirms that during 2016 the group complied with the mandatory audit processes and audit committee responsibilities provisions of the Competition and Markets Authority Statutory Audit Services Order 2014 as presented in this report.
We have a defined policy and strategy that will enable us to: • nurture diverse individuals across all areas of the business and encourage them to grow into senior positions with our organisation; • develop plans on how to best support diversity in a way that is both locally relevant and globally impactful; • support, mentor and encourage individuals from diverse backgrounds to grow and develop within Beazley; • have leadership and sponsorship of our vision at the most senior level of our organisation; • regularly review our employment policies and practices. We expect our people to work with us to further enhance our diversity objectives; and
The committee has agreed the establishment of goals for gender diversity for both the board and the broader organisation. The board approved goals for gender diversity for the Beazley plc board of two female members by AGM 2016, and a third female member by AGM 2017. This goal has been achieved through the appointments of Catherine Woods and Christine LaSala. Female representation on the board has gone from zero to three within the last five years. The committee has established 2020 goals for increasing diversity across the wider organisation through a series of initiatives looking at recruitment, development and succession. Having achieved our goal of having three female directors by the 2017 AGM, the committee has established new goals of a minimum of 35% female senior managers within the organisation by 2020 and of 33% female board members at group level by 2021.
The 2016 board review was overseen by the committee and was facilitated in November 2016 using a survey completed by board and committee members. No material matters were identified and the committee will oversee the implementation of an action plan to further strengthen the board’s overall effectiveness in 2017.
Key activities in 2016 Tasks which the committee carried out in 2016 were to: • recommend the appointment of three additional non-executive directors. The appointments to the board were made on merit and against objective criteria. For the recruitment process, the committee was assisted by Korn Ferry for Bob Stuchbery and Spencer Stuart for John Sauerland. Both of these search firms are wholly independent of the company and of the group. No consultant was used in the recruitment of Christine LaSala; • review of the performance of management by inviting all nonexecutive 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; and
The quality of our people is at the heart of Beazley’s success and we want those who are among the best insurance professionals in the world. We want to keep them through a shared culture and values as well as competitive remuneration which rewards sustained performance.
Remuneration policy and link to strategy Our remuneration policy is due for renewal at the forthcoming Annual General Meeting (AGM). After reviewing it carefully in 2016 we concluded that it continues to support our business and is aligned to shareholder interests. So we have not made significant changes since the overall package is appropriate and responsible.
Five year performance. For a number of years we have operated an LTIP where performance is measured over five years as well as three. This longer period aligns reward with the long term performance of the business.
Risk. The features which align remuneration with risk include a long time horizon, deferral of bonus into shares and personal shareholding requirements. The committee gets an annual report from the chief risk officer on remuneration policy to ensure it is consistent with, and promotes, effective risk management.
Long term time horizons As part of the 2016 policy review, the committee looked at whether to introduce holding periods on the LTIPs and in particular whether to move from a five year to a three year performance period with a two year holding period. We concluded that the five years was a strength of the existing arrangements and, with an additional clawback period taking reclaim provisions to seven years, there was alignment with longer term decision-taking.
Directors’ Remuneration Report reporting and operation of our policy The remuneration policy from 2017 and the 2016 annual remuneration report follow this letter. Recognising UK regulations, the policy report will be subject to a binding vote at the AGM.
As noted above, there are no significant changes proposed to the policy approved by shareholders at the 2014 AGM. The key change is that clawback provisions – introduced in 2016 – will now be part of the policy.
Annual bonus framework and reporting Beazley’s approach to the annual bonus reflects an emphasis on teamwork. The bonus pool is based on profit before tax and return on equity (ROE) and is therefore aligned to shareholders’ interests. A broad senior management group receives awards from the pool, reinforcing our collegiate culture.
As previous years show, bonuses are strongly aligned with ROE performance. Allocations for the senior team are based on their individual performance during the year and not through a formula.
Over the years the company has disclosed more about the annual bonus performance framework and targets. There is full disclosure of the group financial targets that have determined the annual bonus. This year more is disclosed about individual objectives and achievements.
Salary increases The average executive director salary increase for 2017 was 2% – below the average salary increase of the organisation as a whole.
Performance out-turns Beazley has reported a pre-tax profit of $293.2m and ROE of 18% for 2016. Remuneration reported in the single total figure, reflects that performance and bonuses reflect performance year on year. The second tranche of our 2012 five year LTIP is due to vest during 2017, reflecting an NAVps growth of 19.85% p.a.
Our LTIP policy maximum continues to be 200% of salary. As last year, our approach is to award shares subject to performance conditions of 200% of salary for the CEO and 150% for other executive directors. This year, however, we are proposing to award 175% to the head of speciality lines in recognition of his contribution to the group. Our expectation is that his award level will revert to 150% next year.
Shareholders The committee is determined to follow best practice developments and considers – indeed welcomes – the views of shareholders. It was encouraged by, and grateful for, a favourable vote of 97% on last year’s annual remuneration report, and 98% on our remuneration policy when it was approved in 2014.
This part of the report sets out Beazley’s directors’ remuneration policy which will be subject to a binding vote at the 2017 AGM.
Remuneration policy table The following table sets out descriptions of each component of executive director remuneration packages comprised in the Beazley directors’ remuneration policy, and, at the bottom of the table, the policy for non-executive directors.
There is no maximum salary opportunity. Any salary increases will generally reflect our standard approach to all-employee salary increases across the group. Higher increases may be made in a range of circumstances where the committee considers that a larger increase is appropriate, including (but not limited to): • a new appointment; • a change in role or adoption of additional responsibilities; • development of the individual in the role; and
Portion generally deferred into shares for three years (between 0% and 37.5% of bonus) dependent on level of bonus.
An individual overall cap of 400% of salary will apply. Cash bonuses will normally be capped at 250% of salary with any amount above this deferred into shares.
For 2017, 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.
The committee may make year-on-year adjustments to the performance framework, in particular to take into account developments in Solvency II requirements.
In certain circumstances LTIP awards may be subject to malus and clawback provisions.
Executive directors may participate in Beazley’s all-employee share plans on the same basis as other employees.
To align the head of the marine division with the sustained outstanding performance of the marine division.
A share award in 2013 for the head of marine made in two tranches. The first tranche has now vested. The second tranche of 500,000 shares vests after five years.
Non-executive directors may receive additional fees in the future if in the view of the board this was considered appropriate, including in circumstances of additional committees, other non-executive director positions, or to reflect additional time commitments in certain circumstances.
Expenses incurred in the performance of non-executive duties for the company may be reimbursed or paid for directly by the company, including any tax due on the expenses. Non-executive directors do not normally receive any benefits however these may be provided in the future if in the view of the board this was considered appropriate.
Total fees paid to non-executive directors will remain within the limit stated in the Articles of Association.
Notes to the remuneration policy table Recovery provisions (clawback and malus) may apply where stated in the above table. Other elements of remuneration are not subject to recovery provisions. Clawback provisions apply only for incentives made in respect of 2015 and thereafter. Further detail on the recovery provisions, including the circumstances and timeframe for which they can be applied are set out in the annual remuneration report.
The committee may increase the proportion of bonus deferred into shares at any time.
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 performances measures were chosen and target is set
• Creates alignment to one of Beazley’s key performance indicators. • The committee reviews the NAVps targets periodically to ensure they remain appropriate with reference to the internal business plan, the external environment and market practice.
• In the event that NAVps were to become unsuitable as a performance measure in the opinion of the committee (for example due to a change in accounting standards) the committee would substitute a measure which followed broadly similar principles.
Investment in underwriting The plan mirrors investment in an underwriting syndicate.
Illustrations of application of remuneration policy The charts below set out an illustration of the operation of the remuneration policy for 2017 and include base salary, pension, benefits and incentives.
Subject to notice requirements, there is no provision in the service agreements for compensation to be payable on early termination of the contract. The committee has discretion to structure any compensation payments in such a way as it deems appropriate taking into account the circumstances of departure. Any payments of compensation will be subject to negotiation, and the group policy is to consider whether mitigation and phasing of payments is appropriate.
Deferred shares If a director ceases office or employment with the group any unvested awards will lapse unless the individual is a good leaver.
Good leaver circumstances are cessation by reason of injury, ill-health, permanent disability or retirement (with the agreement of the employing company) and, if the committee so determines, redundancy, the sale of the individual’s employing company or business out of the group, or such other circumstances as the committee may determine. In these good leaver circumstances awards may vest in full or be time pro-rated, and be delivered on cessation or at the normal time.
For leavers, profit results are payable in respect of years of account commencing before cessation. A participant receives repayment of notional capital invested reduced by any loss result for the relevant year of account.
2012 LTIP and MSIP If a director ceases office or employment with the group any unvested awards will lapse unless the individual is a good leaver.
Pension The director will be eligible to receive the standard 15% of salary contribution to the defined contribution pension plan during the notice period, or cash equivalent.
Recruitment awards Were a buyout award to be made under LR 9.4.2 (or in other circumstances outside of the existing share plan rules) then the leaver provisions would be determined at the time of award.
In the event of a change of control or winding up of the company, treatment of share awards will be in accordance with the relevant plan rules. In these circumstances LTIP awards, MSIP awards and deferred shares may vest early. The extent to which LTIP and MSIP awards vest would be determined by the committee taking into account the satisfaction of any performance conditions, the period of time that has elapsed since the award was granted until the date of the event and any other factors the committee considers relevant. Deferred shares will vest to the extent determined by the committee taking into account any factors it considers relevant. Alternatively, the committee may determine that LTIP awards, MSIP awards or deferred shares may be exchanged for equivalent awards on such terms as agreed with the acquiring company. If there is a demerger, delisting or other event which may materially affect the company’s share price, LTIP awards and MSIP awards may vest on the same basis as for a takeover.
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 non-executive directors in the future.
The committee has consulted with shareholders regarding remuneration policy and shareholder views were taken into account during the formulation of the policy.
For deferred share awards and LTIP awards (from 2012) malus provisions were introduced. For LTIP awards from 2015 and annual bonus in respect of 2015 and onwards, clawback provisions also apply.
Share price at grant Share price appreciation 2012 award 2014 award
Neil P Maidment 1 A significant portion of the single figure values shown arises due to the substantial share price appreciation over the period. For 2016 the share price at the time LTI awards were made was 143.4p for the 2012 award and 273.1p for the 2014 award, while the average share price in the last three months of 2016 was 379.9p. This represents share price growth of 165% and 39% over the five and three year periods respectively.
The figures in the preceding table reflect the following: • salaries for 2016 increased by an average of 1.0%, which was below the average increase for all-employees; • annual bonus out-turns were similar to last year, with Beazley delivering another strong performance in 2016; and • LTI out-turns reflect that the LTI performance targets were met in full. Beazley achieved sustained NAV growth of 18.19%
2 Christine LaSala was appointed to the board on 1 July 2016 and the figure in the table above represents her fees from this date.
5 John Sauerland was appointed to the board on 5 May 2016 and the figure in the table above represents his fees from this date.
7 Robert Stuchbery was appointed to the board on 11 August 2016 and the figure in the table above represents his fees from this date including fees for membership of the subsidiary boards of BFL and the chairmanship of the BFL risk committee.
8 Rolf Tolle resigned as a non-executive director on 10 March 2016 and the figure in the table above represents his fees to this date.
The figures in the preceding table reflect the following: • chairman fees were increased from £164,730 to £200,000 for 2016 following a review of sector and general market practice and taking into account the scope of the role; • senior independent director additional fees were increased from £7,000 to £10,000; and • other non-executive director fees were increased by 2%.
Performance out-turn for 2016 The process for determining 2016 bonuses is described below, including full details of the ROE targets underpinning our bonus approach along with the guideline levels which are used by the committee in its determination for each executive director. • ROE for 2016 was 18% and the overall enterprise bonus pool (in which executive directors as well as other senior employees participate) was calculated based on this. At the beginning of the financial year, the risk-free return (RFR) was set at 1% taking into account the yield on US treasuries of two to five year maturities; • the committee then considered the individual bonus award for the executive directors and other senior employees within the committee’s remit. In determining the bonus award for each individual the committee took into account the individual’s contribution including, where relevant, the performance of their division; and
• in considering individual awards in respect of executive directors for 2016, the committee had regard to the following broad framework: ROE performance hurdles Guideline/illustrative bonus award as a % of maximum
RFR 0% These percentages are indicative only and based on broad group results. Within the pool framework bonus out-turns may be higher or lower taking into account divisional, strategic and personal performance.
RFR +3% 12.5% RFR +10% 37.5% RFR +17.5% 75% RFR +25% 100%
Neil P Maidment • Achievement of strong underwriting result with a combined ratio of 89%, despite strong competitive markets continuing in 2016
Martin L Bride £800,000 256% Adrian P Cox £1,100,000 327% D Andrew Horton £1,250,000 279% Neil P Maidment £980,000 291% Clive A Washbourn £700,000 208%
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 2016 (see investment in underwriting on page 111 for further details).
Long term incentive plan (LTIP) ▪ Under the LTIP, executive directors, senior management and selected underwriters receive awards of shares subject to the achievement of stretching performance conditions measured over three and five years.
Actual NAVps growth achieved in the three years to 31 December 2016 was 18.19% p.a. which resulted in 100% of the first tranche of the 2014 awards vesting.
The graphs below illustrate Beazley’s NAVps and TSR performance over the performance periods, where the shaded areas represent the LTIP NAVps growth target range for awards to vest.
LTIP performance 2011-2016 NAV and TSR growth 31 Dec 31 Dec 31 Dec 31 Dec
Awards for 2016 ▪ During 2016 LTIP awards with a face value equal to 150% of salary were granted to executive directors (200% for CEO), as shown in the table below.
LTIP Martin L Bride Nil cost option (LTIP) 150% of salary 131,249 469,650 10% 31/12/2018 31/12/2020 Adrian P Cox Nil cost option (LTIP) 150% of salary 140,932 504,300 10% 31/12/2018 31/12/2020 D Andrew Horton Nil cost option (LTIP) 200% of salary 250,398 896,000 10% 31/12/2018 31/12/2020 Neil P Maidment Nil cost option (LTIP) 150% of salary 140,932 504,300 10% 31/12/2018 31/12/2020 Clive A Washbourn Nil cost option (LTIP) 150% of salary 140,932 504,300 10% 31/12/2018 31/12/2020 Deferred bonus (in respect of 2015 bonus) Martin L Bride Deferred shares
Adrian P Cox Deferred shares 83,838 300,000 – – – D Andrew Horton Deferred shares 108,990 390,000 – – – Neil P Maidment Deferred shares 83,838 300,000 – – – Clive A Washbourn Deferred shares 83,838 300,000 – – –
The company adheres to a dilution limit of 5% in a ten year period for executive schemes.
To date over 240 employees of the group have committed to put at risk £11.8m of bonuses to the underwriting results of syndicate 623. Of the total at risk, £11.1m has already been deferred from the bonuses awarded.
Service contract and payments for loss of office No loss of office payments have been made in the year.
Martin L Bride 2 Nov 2015 Adrian P Cox 2 Nov 2015 D Andrew Horton 2 Nov 2015 Neil P Maidment 22 Feb 2016 Clive A Washbourn 2 Nov 2015
George P Blunden 1 Jan 2010 AGM 2019 Angela D Crawford-Ingle 27 Mar 2013 AGM 2019 Dennis Holt 21 Jul 2011 AGM 2018 Christine LaSala 1 Jul 2016 AGM 2020 Sir J Andrew Likierman 25 Mar 2015 AGM 2018 John P Sauerland 5 May 2016 AGM 2020 Robert A Stuchbery 11 Aug 2016 AGM 2020 Catherine M Woods 1 Jan 2016 AGM 2019
Approach to remuneration for employees other than directors The committee also has oversight of remuneration arrangements elsewhere in the group. The following tables set out the additional incentive arrangements for other staff within the organisation.
US SAYE The Beazley plc savings-related share option plan for US employees permits all eligible US-based employees to purchase shares of Beazley plc at a discount of up to 15% to the shares’ fair market value. Participants may exercise options after a two-year period. The plan is compliant with the terms of Section 423 of the US Internal Revenue Code and is similar to the SAYE scheme operated for UK-based Beazley employees.
Percentage change in base salary % Percentage change in benefits % Percentage change in annual bonus %
Note: Salary and bonus is compared against all employees of the group. Benefits (including pension) are compared against all UK employees, reflecting the group’s policy that benefits are provided by reference to local market levels.
Angela D Crawford-Ingle 34,207 – – – – – Christine LaSala – – – – – – Sir J Andrew Likierman 10,000 – – – – –
Padraic J O'Connor 30,000 – – – – – John P Sauerland 30,000 – – – – – Vincent J Sheridan 20,000 – – – – – Robert A Stuchbery 53,000 – – – – – Rolf A W Tolle 60,000 – – – – –
No changes in the interests of directors have occurred between 31 December 2016 and 2 February 2017.
CEO pay versus performance The following graph sets out Beazley’s eight year total shareholder return performance to 31 December 2016, 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.
Remuneration committee The committee consists of only non-executive directors and during the year the members were Padraic O’Connor (chairman, resigned 24 March 2016), Sir Andrew Likierman (chairman, appointed 24 March 2016), George Blunden and John Sauerland (appointed 5 May 2016). The board views each of these directors as independent. The committee met five times during the year.
During the year the committee was advised by remuneration consultants from Deloitte LLP. Total fees in relation to executive remuneration consulting were £111,000. Deloitte LLP also provided advice in relation to tax, assurance support and share schemes.
Deloitte LLP was appointed by the committee. Deloitte LLP is a member of the Remuneration Consultants’ Group and as such voluntarily operates under a code of conduct in relation to executive remuneration consulting in the UK. The committee agrees each year the protocols under which Deloitte LLP provides advice to support independence. The committee is satisfied that the advice received from Deloitte LLP has been objective and independent.
Statement of shareholder voting The voting outcomes of the 2015 annual remuneration report and 2013 remuneration policy were as follows: Votes for % for Votes against % against Total votes cast Votes discretionary Votes withheld
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+10% p.a. equates to 0% 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 2021.
LTIP 2012 – 3/5 year Awards were made on 30 March 2012 at a mid-market share price of 143.43p. 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 March 2022.
MSIP 3/5 year MSIP awards were made on 5 April 2013 to C A Washbourn. Details of the plan are set out in the Policy Report, under legacy matters in the remuneration policy table.
Share prices The market price of Beazley ordinary shares at 31 December 2016 was 385.8p and the range during the year was 320.0p to 405.1p.
The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the parent company’s transactions and disclose with reasonable accuracy at any time the financial position of the parent company and enable them to ensure that its financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the group and to prevent and detect fraud and other irregularities.
2. Overview In arriving at our audit opinion above on the financial statements, the risks of material misstatement that had the greatest effect on our audit, in decreasing order of audit significance, were as follows (unchanged from 2015): Overview Materiality: group financial statements as a whole $20m (2015: $20m) 1% (2015: 1%) of gross premiums written
The risk Our procedures to address this risk The valuation of insurance liabilities remains the most significant inherent risk in our audit.
• Soft market conditions within the insurance industry increase the importance of controls over pricing and underwriting discipline, both of which require consideration in assessing the adequacy of insurance liabilities for risks written at the balance sheet date.
• The diversity of risks written by Beazley and therefore the granular level of reserving that occurs at a class/line of business level.
• The high level of regulatory focus on insurance liabilities (especially the margin above the best estimate).
Controls: • Evaluated and tested the design and operating effectiveness of key controls around the reserving process, including IT controls over the reserving process.
• Inspected papers and minutes to evidence appropriate challenge from the Reserving Committee
• Inspected papers from peer review meetings and met with key divisional underwriters to discuss the performance and changes to their portfolios, rating strength and claims experience and outwards reinsurance cover.
Substantive: • Performed benchmarking of Beazley’s ultimate loss ratios, initial expected loss ratio, premium rate change, the rate at which IBNR has been utilised in the year and reserve releases in comparison to the rest of the market, in order to identify specific trends and outliers.
• Inspected the earning assumptions used to allocate the underwriting year projections to earned and unearned positions.
• Inspected the process used to monitor movements in rates and deviations to pricing assumptions and forecasts.
• Tested the assumptions used to allow for reinsurance recoveries. • Checked the completeness, existence, and accuracy of the data used within the reserving process by reconciling the actuarial source data to the financial systems.
Independent auditor’s report continued 3.2 Recoverability of insurance and reinsurance debtors (reinsurance assets – $1,082.1m; 2015: $1,099.7m, insurance receivables – $794.7m; 2015: $732.7m)
The risk Our procedures to address this risk Insurance debtors and reinsurance debtors comprise a significant amount of the assets held by Beazley.
• Settlements flow through the system directly as well as via Lloyd’s and Xchanging.
Reinsurance – key issues: • Reinsurers’ exposure to underpriced casualty business may lead to uncertainty in the financial strength of certain reinsurers in the market and could point to an increasing risk of counterparty default.
• Reinsurance contracts are often complex and tailored. Profit commissions and risk transfer need consideration. The calculations of recoveries need to be undertaken by experienced staff and be subjected to robust review.
• In recent years, Beazley has adopted a consistent approach in determining the bad debt provisions to be booked in the financial statements. However, judgement is required in ensuring this approach remains relevant and that any aged balances are being given appropriate attention.
• Considered potential indications of non-recovery of reinsurance assets, in light of the credit standing of the counterparty and age of the debt.
• Considered the adequacy of the provisioning policy in place for Beazley by assessing and investigating any material movements in policy and the overall percentage of bad debt.
Refer to page 83 (audit committee report), pages 134 to 145 (accounting policy) and pages 127 to 196 (financial disclosures).
• Beazley holds investments in hedge funds which are valued using underlying fund net asset values (NAVs) one month in arrears, making the valuation susceptible to material movements during the one month lag.
• Classification within the fair value hierarchy for the fair value of investments continues to require careful consideration in terms of the inherent judgement involved.
Our approach comprised both controls and substantive testing. There was greater emphasis given to substantive testing.
• Tested the design and operating effectiveness of the controls associated with the existence and valuation of the hedge funds and illiquid credit assets.
• Inspected the hedge fund managers’ valuation reports and considered the historical accuracy of these pricing estimates and discussed any potential valuation issues with Beazley.
• Assessed the extent of any movements in the value of hedge funds during the lag between the valuation and period end dates to assess whether there were any material movements that required adjustment.
Independent auditor’s report continued 3.4 Valuation of premium estimates $2,195.6m (2015: $2,080.9m) Refer to page 83 (audit committee report), pages 134 to 145 (accounting policy) and pages 127 to 196 (financial disclosures).
There are adjustments made to gross premiums written to reflect adjustments to ultimate premium estimates, binding authority contract adjustments, reinstatement premiums and other ad hoc adjustments to premium income.
Key issues which increase the level of judgement required and subjectivity inherent in the valuation of premium estimates include: • There is judgement involved in the estimation of ultimate premiums which forms part of the reserving process.
Controls: • We have tested design and operating effectiveness of the controls in place around the setting and challenging of premium estimates booked, with a specific focus on the peer review process within the underwriting department.
Substantive: • Evaluated the individually material adjustments by leveraging our actuarial testing over the reserving process.
• Recalculated, on a sample basis, the earning of premium and investigated any changes to earnings patterns.
• Assessed the extent of any movements in the value of premium estimates post cut-off versus the projections recorded at the early close date to consider whether there were any material movements that required adjustment.
Financial statem ents 4. Our application of materiality and an overview of the scope of our audit Materiality for the group financial statements as a whole was set at $20m (31 December 2015: $20m), determined with reference to a benchmark of 2015 group gross premiums written (of which it represents 1%; 31 December 2015: 1%). In addition, we applied materiality of $10m (31 December 2015: $10m) for balances other than the insurance and reinsurance technical balances and investments, for which we believe misstatements of lesser amounts than materiality for the financial statements as a whole could be reasonably expected to influence the company’s members’ assessment of the financial performance of the group.
Materiality for the group financial statements Component materiality Threshold for misstatements reported to the Audit Committee
The audit work performed by the group and component auditor covered 99% of group revenue (2015: 100%), 99% of group profit before tax (2015: 99%), 97% of group total assets (2015: 97%) and 99% of group total liabilities (2015: 100%).
Full scope for group audit purposes 2016 87% Specified risk-focused audit procedures 2016 12% Full scope for group audit purposes 2015 88% Specified risk-focused audit procedures 2015 11% Residual components
Full scope for group audit purposes 2016 89% Specified risk-focused audit procedures 2016 8% Full scope for group audit purposes 2015 89% Specified risk-focused audit procedures 2015 8% Residual components
Full scope for group audit purposes 2016 97% Specified risk-focused audit procedures 2016 2% Full scope for group audit purposes 2015 97% Specified risk-focused audit procedures 2015 3% Residual components
Full scope for group audit purposes 2016 86% Specified risk-focused audit procedures 2016 13% Full scope for group audit purposes 2015 90% Specified risk-focused audit procedures 2015 10% Residual components
Based solely on the work required to be undertaken in the course of the audit of the financial statements and from reading the Strategic report and the Directors’ report: • we have not identified material misstatements in those reports; and • in our opinion, those reports have been prepared in accordance with the Companies Act 2006.
7. We have nothing to report in respect of matters on which we are required to report by exception Under ISAs (UK and Ireland) we are required report to you if, based on the knowledge we acquired during our audit, we have identified other information in the annual report that contains a material inconsistency with either that knowledge or the financial statements, a material misstatement of fact, or that is otherwise misleading.
Under the Companies Act 2006 we are required to report to you if, in our opinion: • adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; • the parent company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the accounting records and returns; or • certain disclosures of directors’ remuneration specified by law are not made, or • we have not received all the information and explanations we require for our audit.
8. Scope and responsibilities As explained more fully in the Directors’ Responsibilities Statement set out on page 119, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. A description of the scope of an audit of financial statements is provided on the Financial Reporting Council’s website at www.frc.org.uk/auditscopeukprivate. This report is made solely to the company’s members as a body and is subject to important explanations and disclaimers regarding our responsibilities, published on our website at www.kpmg.com/uk/auditscopeukco2014a, which are incorporated into this report as if set out in full and should be read to provide an understanding of the purpose of this report, the work we have undertaken and the basis of our opinions.
Insurance claims 1,027.3 974.1 Insurance claims recoverable from reinsurers (171.7) (160.2) Net insurance claims 3 855.6 813.9
Income tax expense 9 (42.2) (35.0) Profit for the year attributable to equity shareholders 251.0 249.0
Earnings per share (cents per share): Earnings per share (pence per share): Consolidated statement of profit or loss for the year ended 31 December 2016
Group Profit for the year attributable to equity shareholders 251.0 249.0 Other comprehensive income Items that will never be reclassified to profit or loss: (Loss)/gain on remeasurement of retirement benefit obligations (6.1) 0.3
Items that may be reclassified subsequently to profit or loss: Foreign exchange translation differences (10.1) (1.6) Total other comprehensive income (16.2) (1.3) Total comprehensive income recognised 234.8 247.7
Equity settled share based payments 22 – – – 26.0 – 26.0 Acquisition of own shares in trust 22 – – – (9.7) – (9.7) Tax on share option vestings 9 – – – – 2.1 2.1 Transfer of shares to employees 22 – – – 0.4 0.7 1.1 1 The share capital and merger reserve balances as at 1 January 2015 have been re-presented to reflect, on a continuation basis, the capital position of the new parent company after the scheme of arrangement, as explained in note 1.
2 During the first half of 2016, 1.9m new ordinary shares were issued, as well as 0.1m of preference shares prior to the scheme of arrangement. The preference shares were redeemed by the company during the year.
3 Following the issuing of the shares, a capital reduction reduced the nominal value of the shares from 90 pence per share to 5 pence per share. Please refer to note 1.
Plant and equipment 13 5.4 – 4.5 – Deferred tax asset 28 11.0 – 7.1 – Investment in subsidiaries 31 – 724.6 – – Investment in associates 14 9.9 – 10.0 – Deferred acquisition costs 15 242.8 – 226.2 –
Current income tax asset 17.0 – 23.6 – Cash and cash equivalents 20 507.2 – 676.9 –
Merger reserve – 55.4 (628.5) – Foreign currency translation reserve (96.7) 0.7 (87.3) –
Net (decrease)/increase in cash and cash equivalents (165.2) (0.2) 307.9 – Cash and cash equivalents at beginning of year 676.9 – 364.2 – Effect of exchange rate changes on cash and cash equivalents (4.5) 0.2 4.8 – Cash and cash equivalents at end of year 20 507.2 – 676.9 –
Notes to the financial statements 1 Statement of accounting policies Beazley plc (registered number 09763575) is a company incorporated in England and Wales and is resident for tax purposes in the United Kingdom. The company’s registered address is Plantation Place South, 60 Great Tower Street, London EC3R 5AD, United Kingdom. The group financial statements for the year ended 31 December 2016 comprise the parent company, its subsidiaries and the group’s interest in associates. The principal activity of the company and its subsidiaries (‘the group’) is to participate as a specialist insurer which transacts primarily in commercial lines of business through its subsidiaries and through Lloyd’s syndicates.
The group has also applied the amendments to IFRSs included in the annual improvements to IFRS: 2012-2014 cycle for the first time in the current year. The amendments include minor changes to the following standards: • IFRS 5: Changes in methods of disposal; • IFRS 7: Servicing contracts; • IFRS 19: Regional market issue; and • IAS 34: Disclosure of information ‘elsewhere in the interim financial report’.
These amendments did not result in a material impact on the financial statements of the group.
New holding company Swift No. 3 Limited was incorporated in the United Kingdom on 4 September 2015 under the Companies Act 2006 as a private company limited by shares and with registered number 09763575. The company reregistered from a private company to a public company on 12 February 2016 and changed its name to Beazley plc. With effect from 13 April 2016, under a scheme of arrangement involving a share exchange with the members of Beazley Ireland Holdings plc (formerly Beazley plc), the company became the new holding company for the Beazley group.
A reduction in capital was approved by the shareholders of Beazley plc at the scheme general meeting on 24 March 2016. As Beazley plc is incorporated in the UK the reduction of capital also received confirmation from the Companies Court on 20 April 2016. Subsequent to these events, on 21 April 2016, the share capital of Beazley plc was reduced to create distributable reserves broadly similar to those in Beazley Ireland Holdings plc.
The group’s consolidated financial statements are issued in the name of the legal parent company, Beazley plc. The comparative figures for the financial year ended 31 December 2015 are the group financial statements of Beazley Ireland Holdings plc (formerly Beazley plc) for that financial year. Those financial statements have been reported on by the company’s auditor and delivered to the Jersey Financial Services Commission. The report of the auditor was unqualified. The company comparative figures for 31 December 2015 are of Beazley plc (formerly Swift No.3 Limited).
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected.
The group has used the acquisition method of accounting for business combinations arising on the purchase of subsidiaries. Under this method, the cost of acquisition is measured as the fair value of assets given, shares issued or liabilities undertaken at the date of acquisition directly attributable to the acquisition. The excess of the cost of an acquisition over the net fair value of the identifiable assets, liabilities and contingent liabilities of the subsidiary acquired is recorded as goodwill. The accounting treatment of acquisition expenses per IFRS 3 (2008) has changed; however, as the group applied the revised standard prospectively to all business combinations from 1 January 2010 there is no impact on accounting for the acquisition of subsidiaries made in previous periods.
For all business combinations from 1 January 2010: (i) Transaction costs, other than those associated with the issue of debt or equity securities, that the group incurs in connection with a business combination, are expensed as incurred. (ii) In addition, any consideration transferred does not include amounts related to the settlement of pre-existing relationships.
Equity financial investments made by the parent company in subsidiary undertakings and associates are stated at cost in its separate financial statements and are reviewed for impairment when events or changes in circumstances indicate the carrying value may be impaired.
Financial statem ents 1 Statement of accounting policies continued Claims These include the cost of claims and claims handling expenses paid during the period, together with the movements in provisions for outstanding claims, claims incurred but not reported (IBNR) and claims handling provisions. The provision for claims comprises amounts set aside for claims advised and IBNR, including claims handling expenses.
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’).
Revenue Revenue consists of net earned premiums, net investment income and other income (made up of commissions received from Beazley service companies, profit commissions and managing agent’s fees). Profit commissions are recognised as profit is earned. Managing agent’s fees are recognised as the services are provided.
www.beazley.com140 Beazley Annual report 2016 1 Statement of accounting policies continued Plant and equipment All plant and equipment is recorded at cost less accumulated depreciation and any impairment losses. Depreciation is calculated using the straight-line method to allocate the cost of the assets to their residual values over their estimated useful lives as follows: Fixtures and fittings Three to ten years Computer equipment Three years
These assets’ residual values and useful lives are reviewed at each reporting date and adjusted if appropriate.
Goodwill has an indefinite life and is annually tested for impairment. Goodwill is allocated to each cash-generating unit (being the group’s operating segments) for the purpose of impairment testing. Goodwill is impaired when the net carrying amount of the relevant cash-generating unit (CGU) exceeds its recoverable amount, being the higher of its value in use or fair value less costs to sell. Value in use is defined as the present value of the future cash flows expected to be derived from the CGU. On transition to IFRS at 1 January 2004, any goodwill previously amortised or written off was not reinstated.
c) Licences Licences have an indefinite useful life and are initially recorded at fair value. Licences are annually tested for impairment and provision is made for any impairment when the recoverable amount, being the higher of its value in use and fair value, is less than the carrying value.
d) IT development costs Costs that are directly associated with the development of identifiable and unique software products and that are anticipated to generate economic benefits exceeding costs beyond one year, are recognised as intangible assets. Costs include external consultants’ fees, certain qualifying internal staff costs and other costs incurred to develop software programs. These costs are amortised over their estimated useful life (three years) on a straight-line basis and subject to impairment testing annually. Other non-qualifying costs are expensed as incurred.
Financial statem ents 1 Statement of accounting policies continued 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.
a) Financial assets On acquisition of a financial asset, the group is required to classify the asset into one of the following categories: financial assets at fair value through the statement of profit or loss, loans and receivables, assets held to maturity and assets available for sale. The group does not make use of the held to maturity and available for sale categories.
www.beazley.com142 Beazley Annual report 2016 1 Statement of accounting policies continued Assets and long positions are measured at a bid price; liabilities and short positions are measured at an asking price. These prices are monitored and deemed to approximate exit price. Where the group has positions with offsetting risks, mid-market prices are used to measure the offsetting risk positions and a bid or asking price adjustment is applied only to the net open position as appropriate. Fair values reflect the credit risk of the instrument and include adjustments to take account of the credit risk of the group entity and counterparty where appropriate. Fair value estimates obtained from models are adjusted for any other factors, such as liquidity risk or model uncertainties, to the extent that the group believes a third-party market participant would take them into account in pricing a transaction.
Upon initial recognition, attributable transaction costs relating to financial instruments at fair value through profit or loss are recognised in the statement of profit or loss when incurred. Financial assets at fair value through profit or loss are continually measured at fair value, and changes therein are recognised in the statement of profit or loss. Net changes in the fair value of financial assets at fair value through profit or loss exclude interest and dividend income, as these items are accounted for separately as set out on the next page.
l) Impairment of financial assets The group considers evidence of impairment for financial assets measured at amortised cost at both a specific asset and a collective level. The group assesses at each reporting date whether there is objective evidence that a specific financial asset measured at amortised cost is impaired. A financial asset is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that have occurred after the initial recognition of the assets and that event has an impact on the estimated cash flows of the financial asset that can be reliably estimated. Assets that are not individually significant are collectively assessed for impairment by grouping together assets with similar risk characteristics.
Past service costs are recognised immediately in the statement of profit or loss, unless the changes to the pension plan are conditional on the employees remaining in service for a specified period of time (the ‘vesting period’). In this case, the past service costs are amortised on a straight-line basis over the vesting period.
The grant date fair value of share-based payment awards granted to employees is recognised as an employee expense, with a corresponding increase in equity, over the period that the employees become unconditionally entitled to the awards. The amount recognised as an expense is adjusted to reflect the number of awards for which the related service and non-market performance conditions are expected to be met, such that the amount ultimately recognised as an expense is based on the number of awards that meet the related service and non-market performance conditions at the vesting date. For share-based payment awards with non-vesting conditions, the grant date fair value of the share-based payment is measured to reflect such conditions and there is no true-up for differences between expected and actual outcomes.
Deferred tax assets are recognised in the statement of financial position to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.
2 Risk management The group has identified the risks arising from its activities and has established policies and procedures to manage these items in accordance with its risk appetite. The group categorises its risks into eight areas: insurance, strategic, market, operational, credit, regulatory and legal, liquidity and group risk. The sections below outline the group’s risk appetite and explain how it defines and manages each category of risk.
The eight categories of risk have been considered in context of the company (Beazley plc). The following areas are applicable to the company: market, operational, regulatory and legal, and liquidity. The following disclosures cover the company to the extent that these areas are applicable.
www.beazley.com146 Beazley Annual report 2016 2 Risk management continued 2.1 Insurance risk The group’s insurance business assumes the risk of loss from persons or organisations that are directly exposed to an underlying loss. Insurance risk arises from this risk transfer due to inherent uncertainties about the occurrence, amount and timing of insurance liabilities. The four key components of insurance risk are underwriting, reinsurance, claims management and reserving. Each element is considered below.
The group’s underwriting strategy is to seek a diverse and balanced portfolio of risks in order to limit the variability of outcomes. This is achieved by accepting a spread of business over time, segmented between different products, geographies and sizes.
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 the financial exposure, loss history, risk characteristics, limits, deductibles, terms and conditions and acquisition expenses.
The net of reinsurance exposures to the above Lloyd’s RDS events have reduced during 2016, mainly due to additional reinsurance being purchased in the reinsurance division. In the property division, there has been growth in exposure in some regions which has led to an increase in the gross losses for the Los Angeles quake and Gulf of Mexico windstorm scenarios.
To manage underwriting exposures, the group has developed limits of authority and business plans which are binding upon all staff authorised to underwrite and are specific to underwriters, classes of business and industry. In 2016, 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.
www.beazley.com148 Beazley Annual report 2016 2 Risk management continued These authority limits are enforced through a comprehensive sign-off process for underwriting transactions including dual sign-off for all line underwriters and peer review for all risks exceeding individual underwriters’ authority limits. Exception reports are also run regularly to monitor compliance.
Binding authority contracts A proportion of the group’s insurance risks are transacted by third parties under delegated underwriting authorities. Each third party is thoroughly vetted by our coverholder approval group before it can bind risks, and is subject to rigorous monitoring to maintain underwriting quality and confirm ongoing compliance with contractual guidelines.
Operating divisions In 2016, the group’s business consisted of six operating divisions. The following table provides a breakdown of gross premiums written by division, and also provides a geographical split based on placement of risk.
The reinsurance security committee (RSC) examines and approves all reinsurers to ensure that they possess suitable security. The group’s ceded reinsurance team ensures that these guidelines are followed, undertakes the administration of reinsurance contracts and monitors and instigates our responses to any erosion of the reinsurance programmes.
Financial statem ents 2 Risk management continued c) Claims management risk Claims management risk may arise within the group in the event of inaccurate or incomplete case reserves and claims settlements, poor service quality or excessive claims handling costs. These risks may damage the group brand and undermine its ability to win and retain business, or incur punitive damages. These risks can occur at any stage of the claims life cycle. The group’s claims teams are focused on delivering quality, reliability and speed of service to both internal and external clients. Their aim is to adjust and process claims in a fair, efficient and timely manner, in accordance with the policy’s terms and conditions, the regulatory environment, and the business’s broader interests. Case reserves are set for all known claims liabilities, including provisions for expenses, as soon as a reliable estimate can be made of the claims liability.
www.beazley.com150 Beazley Annual report 2016 2 Risk management continued a) Foreign exchange risk The functional currency of Beazley plc and its main trading entities is the US dollar and the presentational currency in which the group reports its consolidated results is the US dollars. The effect of this on foreign exchange risk is that the group is mainly exposed to fluctuations in exchange rates for non-dollar denominated transactions and to net asset translation risk on non-dollar functional currency entities.
The group operates in four main currencies: US dollars, sterling, Canadian dollars and euros. Transactions in all currencies are converted to US dollars on initial recognition with any resulting monetary items being translated to the US dollar spot rate at the reporting date. Remaining foreign exchange risk is still actively managed as described below.
The group also has foreign operations with functional currencies that are different from the group’s presentational currency. The effect of this on foreign exchange risk is that the group is exposed to fluctuations in exchange rates for US dollar denominated transactions and net assets arising in those foreign currency operations. It also gives rise to a currency translation exposure for the group to sterling, Singapore dollars and Australian dollars on translation to the group’s presentational currency, although these exposures are minimal.
Dollar weakens 30% against other currencies (1.2) (12.3) (9.5) (25.7) Dollar weakens 20% against other currencies (0.8) (8.2) (6.3) (17.1) Dollar weakens 10% against other currencies (0.4) (4.1) (3.2) (8.6) Dollar strengthens 10% against other currencies 0.4 4.1 3.2 8.6 Dollar strengthens 20% against other currencies 0.8 8.2 6.3 17.1 Dollar strengthens 30% against other currencies 1.2 12.3 9.5 25.7
Financial statem ents 2 Risk management continued b) Interest rate risk Some of the group’s financial instruments, including cash and cash equivalents, certain financial assets at fair value and borrowings, are exposed to movements in market interest rates.
Fixed and floating rate debt securities 1,505.2 562.5 688.0 467.5 286.2 108.0 – 3,617.4 Cash and cash equivalents 507.2 – – – – – – 507.2 Derivative financial instruments 12.2 – – – – – – 12.2
Sensitivity analysis Changes in interest yields, with all other variables constant, would result in changes in the capital value of debt securities and borrowings as well as subsequent interest receipts and payments. This would affect reported profits and net assets as indicated in the table below: Impact on profit after income tax for the year Impact on net assets $m $m $m $m
www.beazley.com152 Beazley Annual report 2016 2 Risk management continued c) Price risk Financial assets and derivatives that are recognised in the statement of financial position at their fair value are susceptible to losses due to adverse changes in prices. This is referred to as price risk.
Financial assets include fixed and floating rate debt securities, hedge funds, illiquid credit assets, equity linked funds and derivative financial assets depending on the group’s appetite for risk. The fixed income securities are well diversified across high quality, liquid securities. The price risk associated with these securities is predominantly interest, foreign exchange and credit risk related. The sensitivity to price risk that relates to the group’s hedge fund investments, illiquid credit assets and equity linked funds is presented below. The group’s hedge funds and equity linked funds are limited to a small and manageable part of the total investment portfolio. The investment committee has established comprehensive guidelines in relation to this, with investment managers setting out maximum investment limits, requirements for diversification across industries and limits to concentrations in any one industry or company.
Our investment strategy is developed by reference to an investment risk budget, set annually by the board as part of the overall risk budgeting framework of the business. The internal model is used to monitor compliance with the budget. In 2016, the investment risk budget was set at a level such that investment losses should not cause the group financial result to deviate from the planned level by more than $126.0m at the 1 in 10 confidence level. This compares to a planned investment result in the current low interest rate environment of 1.3% or $61.1m. The investment risk budget will be at a similar level in 2017. It is important to note that stochastic risk modelling is not a precise discipline. Our ESG outputs are regularly validated against actual market conditions, but we also use a number of other, qualitative, measures to support the monitoring and management of investment risk. These include stress testing, as well as selective historic and prospective scenario analysis.
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 and derivative financial instrument; and • cash and cash equivalents.
The group has developed processes to formally examine all reinsurers before entering into new business arrangements. New reinsurers are approved by the reinsurance security committee (RSC), which also reviews arrangements with all existing reinsurers at least annually. Vulnerable or slow-paying reinsurers are examined more frequently.
Financial assets at fair value – fixed and floating rate debt securities 2,687.3 928.2 1.9 – – 3,617.4 – equity linked funds – – – – 116.3 116.3 – hedge funds – – – – 317.1 317.1 – illiquid credit assets – – – – 132.4 132.4 – derivative financial instruments – – – – 12.2 12.2 Insurance receivables – – – – 794.7 794.7 Reinsurance assets 1,082.1 – – – – 1,082.1 Other receivables 46.4 – – – – 46.4 Cash and cash equivalents 507.2 – – – – 507.2
Financial investments falling within the unrated category comprise hedge funds, equity linked funds and illiquid credit assets for which there is no readily available market data to allow classification within the respective tiers. Additionally, insurance receivables are classified as unrated, due to premium debtors not being credit rated.
The total impairment provision in the statement of financial position in respect of reinsurance assets past due by more than 30 days at 31 December 2016 was $3.2m (2015: $3.3m).
www.beazley.com156 Beazley Annual report 2016 2 Risk management continued The following is an analysis by business segment of the estimated timing of the net cash flows based on the net claims liabilities1 balance held at 31 December: Within 1 year $m 1-3 years $m 3-5 years $m
The operating segments are based upon the different types of insurance risk underwritten by the group, as described below: Life, accident & health This segment underwrites life, health, personal accident, sports and income protection risks.
Expenses for the acquisition of insurance contracts 35.0 68.9 32.1 91.0 32.8 188.8 448.6
Financial statem ents 3 Segmental analysis continued c) Information about geographical areas The group’s operating segments are also managed geographically by placement of risk. UK earned premium in the analysis below represents all risks placed at Lloyd’s and US earned premium represents all risks placed at the group’s US insurance company, Beazley Insurance Company, Inc. An analysis of gross premiums written split geographically by placement of risk and by reportable segment is provided in note 2 on page 148.
Capital expenditure Non-US 5.1 2.7 4 Net investment income $m $m
Interest and dividends on financial investments at fair value through profit or loss 70.9 70.3 Interest on cash and cash equivalents 0.6 0.5 Net realised losses on financial investments at fair value through profit or loss (4.9) (18.5) Net unrealised fair value gains on financial investments at fair value through profit or loss 33.8 15.5 Investment income from financial investments 100.4 67.8 Investment management expenses (7.3) (10.2)
Commissions received from Beazley service companies 15.5 16.4 Profit commissions from syndicates 623/6107 14.9 12.4 Agency fees from 623 2.0 1.9 Other income 0.3 0.2 6 Operating expenses $m $m
Current tax expense Current year 37.1 44.6 Prior year adjustments 2.1 (8.8)
Reconciliation of tax expense The weighted average of statutory tax rates applied to the profits earned in each country in which the group operates is 14.9% (2015: 15.2%), whereas the tax charged for the year 31 December 2016 as a percentage of profit before tax is 14.4% (2015: 12.3%). The reasons for the difference are explained below: $m
Effects of: – non-taxable gains on foreign exchange (5.6) (1.9) – – – tax relief on share based payments – current and future years (0.6) (0.2) (2.3) (0.8) – under/(over) provided in prior years 3.8 1.3 (6.5) (2.3) – change in UK tax rates 1 (0.8) (0.3) (0.2) (0.1) Tax charge for the period 42.2 14.4 35.0 12.3 1 The Finance Act 2015, which provided for a reduction in the UK corporation tax rate to 19% effective from 1 April 2017 was substantively enacted on 26 October 2015. The Finance Act 2016, which provides for a reduction in the UK corporation tax rate to 17% effective from 1 April 2020 was substantively enacted on 6 September 2016. These rate reductions to 19% and 17% will reduce the group’s future current tax charge and have been reflected in the calculation of the deferred tax balance as at 31 December 2016.
As a result of the scheme of arrangement, the basic and diluted earnings per share metrics are calculated with reference to the share structure of the new parent company, as if it has been the parent for all periods presented. The number of shares in issue did not change as a result of the scheme of arrangement, as explained in note 1.
11 Dividends per share A second interim dividend of 7.0p per ordinary share (2015: 6.6p) and a special dividend of 10.0p (2015: 18.4p) will be payable on 29 March 2017 to Beazley plc shareholders registered at 5.00pm on 3 March 2017 in respect of the six months ended 31 December 2016. The company expects the total amount to be paid in respect of the second interim and special dividend to be approximately £87.9m. These financial statements do not provide for the second interim dividend and the special dividend as a liability.
Together with the interim dividend of 3.5p (2015: 3.3p) this gives a total dividend for the year of 20.5p (2015: 28.3p).
Write off – – – – – – Foreign exchange loss – – – (10.9) (0.4) (11.3)
www.beazley.com166 Beazley Annual report 2016 12 Intangible assets continued Impairment tests Goodwill, syndicate capacity and US insurance authorisation licences are deemed to have indefinite life as they are expected to have value in use that does not erode or become obsolete over the course of time. Consequently, they are not amortised but annually tested for impairment. They are allocated to the group’s cash-generating units (CGUs) as follows: Life, accident & health $m Marine $m
As at 1 January 10.0 10.5 Investment in Equinox Global Limited 0.1 – Share of loss after tax (0.2) (0.5) As at 31 December 9.9 10.0
www.beazley.com168 Beazley Annual report 2016 14 Investment in associates continued The group’s investment in associates consists of: Country of incorporation
The aggregate financial information for all associates (100%) is as follows: $m $m
Loss after tax (0.7) (1.1) Share of other comprehensive income – – Share of total comprehensive income (0.7) (1.1)
All of the investments in associates are unlisted and are equity accounted using available financial information as at 31 December 2016. Equinox Global Limited and Capson Corp Inc. are both insurance intermediaries. Falcon Management Holdings Limited is an investment management company which also acts in an intermediary capacity.
Financial assets at fair value Fixed and floating rate debt securities: – Government issued 1,180.0 1,101.0 – Quasi-government 62.0 362.8
Quasi-government securities include securities which are issued by government agencies or entities supported by government guarantees. Supranational securities are issued by institutions sponsored by more than one sovereign issuer. Investment grade credit assets are any corporate bonds rated as BBB-/Baa3 or higher by one or more major rating agency, while the remainder of our corporate bonds are rated as high yield. Asset-backed securities are backed by financial assets, including mortgage, credit card and auto loan receivables. Equity linked funds are investment vehicles which are predominantly exposed to equity securities and are intended to give diversified exposure to global equity markets. Our illiquid credit assets are described in further detail below. The fair value of these assets at 31 December 2016 excludes an unfunded commitment of $85.5m (2015: $95.3m).
Our capital growth assets have no defined maturity dates and have thus been excluded from the above maturity table. However, $105.0m (2015: $122.0m) of equity linked funds could be liquidated within two weeks and the balance within six months, $303.8m (2015: $314.5m) of hedge fund assets within six months and the remaining $13.3m (2015: $14.5m) of hedge fund assets within 18 months. Illiquid credit assets are not readily realisable and principal will be returned over the life of these assets, which may be up to ten years.
As noted on page 141 consideration is also given when valuing the hedge funds to any restriction applied to distributions, the existence of side pocket provisions and the timing of the latest valuations. The adjustment to the underlying net asset value of the funds as a result of these considerations was $nil at 31 December 2016 (2015: $nil).
www.beazley.com170 Beazley Annual report 2016 16 Financial assets and liabilities continued
The amounts expected to mature before and after one year are: Within one year 2.8 117.0 After one year 361.0 130.3
Level 2 – Valuations based on quoted prices in markets that are not active, or based on pricing models for which significant inputs can be corroborated by observable market data (e.g. interest rates, exchange rates). Included within level 2 are government bonds and treasury bills which are not actively traded, corporate bonds, asset backed securities and mortgage-backed securities.
Financial statem ents 16 Financial assets and liabilities continued Level 2 investments For the group’s level 2 debt securities our fund administrator obtains the prices used in the valuation from independent pricing vendors such as Bloomberg, Standard and Poor’s, Reuters, Markit and International Data Corporation. The independent pricing vendors derive an evaluated price from observable market inputs. The market inputs include trade data, two-sided markets, institutional bids, comparable trades, dealer quotes, and other relevant market data. These inputs are verified in their pricing engines and calibrated with the pricing models to calculate spread to benchmarks, as well as other pricing assumptions such as Weighted Average life (WM), Discount Margins (DM), default rates, and recovery and prepayment assumptions for mortgage securities. While such valuations are sensitive to estimates, it is believed that changing one or more of the assumptions to reasonably possible alternative assumptions would not change the fair value significantly.
For our hedge funds and equity linked funds, the pricing and valuation of each fund is undertaken by administrators in accordance with each underlying fund’s valuation policy. For the equity linked funds, the individual fund prices are published on a daily, weekly or monthly basis via Bloomberg and other market data providers such as Reuters. For the hedge funds, the individual fund prices are communicated by the administrators to all investors via the monthly investor statements. The fair value of the hedge fund and equity linked fund portfolios are calculated by reference to the underlying net asset values of each of the individual funds.
Additional information is obtained from fund managers relating to the underlying assets within individual hedge funds. We identified that 77% (2015: 68%) of these underlying assets were level 1 and the remainder level 2. This enables us to categorise hedge funds as level 2.
Level 3 investments During 2016, the group’s investment committee approved additional allocations to an illiquid asset portfolio comprising investments in funds managed by third party managers (generally closed end limited partnerships or open ended funds). While the funds provide full transparency on their underlying investments, the investments themselves are in many cases private and unquoted, and are therefore classified as level 3 investments.
www.beazley.com172 Beazley Annual report 2016 16 Financial assets and liabilities continued The following table shows the fair values of financial assets and financial liabilities, including their levels in the fair value hierarchy.
Financial liabilities not measured at fair value Retail bond – 100.8 – 100.8 Tier 2 subordinated debt (2026) – issued in 2016 – 253.3 – 253.3 Total financial liabilities not measured at fair value – 354.1 – 354.1
– Corporate bonds – Investment grade – 1,215.8 – 1,215.8 – High yield – 68.3 – 68.3 – Senior secured loans – 114.9 – 114.9 – Asset backed securities – 12.7 – 12.7 Equity linked funds – 147.5 – 147.5 Hedge funds – 329.0 – 329.0 Illiquid credit assets – 2.6 89.7 92.3 Derivative financial assets 4.6 – – 4.6 Total financial assets measured at fair value 1,693.9 2,058.6 89.7 3,842.2
Financial liabilities not measured at fair value Retail bond – 114.4 – 114.4 Tier 2 subordinated debt (2026) – recalled in 2016 – 119.7 – 119.7 Total financial liabilities not measured at fair value – 234.1 – 234.1
Apart from a small exposure to asset backed securities, our unconsolidated structured entity exposures fall within our capital growth assets. The capital growth assets are held in investee funds managed by asset managers who apply various investment strategies to accomplish their respective investment objectives. The group’s investments in investee funds are subject to the terms and conditions of the respective investee fund’s offering documentation and are susceptible to market price risk arising from uncertainties about future values of those investee funds. Investment decisions are made after extensive due diligence on the underlying fund, its strategy and the overall quality of the underlying fund’s manager and assets. All the investee funds in the investment portfolio are managed by portfolio managers who are compensated by the respective investee funds for their services. Such compensation generally consists of an asset-based fee and a performance-based incentive fee and is reflected in the valuation of the fund’s investment in each of the investee funds. The right to sell or request redemption of investments in asset backed securities, equity linked funds and hedge funds ranges in frequency from daily to semi-annually. The group did not sponsor any of the respective structured entities.
www.beazley.com174 Beazley Annual report 2016 16 Financial assets and liabilities continued Transfers and level 3 investment reconciliations There were no transfers in either direction between level 1, level 2 and level 3 in either 2015 or 2016.
Total net gains recognised in profit or loss 10.1 3.4 As at 31 December 126.1 89.7
Financial assets at fair value Fixed and floating rate debt securities 140.1 169.2 – 309.3 3,308.1 3,617.4
Financial statem ents 17 Derivative financial instruments In 2016 and 2015 the group entered into over-the-counter and exchange traded derivative contracts. The group had the right and the intention to settle each contract on a net basis.
These are receivable within one year and relate to business transacted with brokers and intermediaries. All insurance receivables are classified as loans and receivables and their carrying values approximate fair value at the reporting date.
Issue of shares 1.9 2.5 – – Capital reduction – (631.5) – –
2 After 13 April 2016, following a scheme of arrangement which resulted in Beazley plc (formerly Swift No.3 Limited) becoming the ultimate parent of the Beazley group, the group does not have an authorised share capital.
Financial statem ents 22 Other reserves Employee share options reserve $m
Share based payments 17.5 – 17.5 Acquisition of own shares held in trust – (3.9) (3.9) Transfer of shares to employees (11.2) 21.0 9.8
Company Balance at 4 September 2015 1 – – – Share based payments – – – Acquisition of own shares held in trust – – – Transfer of shares to employees – – – Balance at 31 December 2015 – – –
Share based payments 22.5 – 22.5 Acquisition of own shares held in trust – (4.6) (4.6) Transfer of shares to employees (2.7) 4.7 2.0 1 Date of incorporation of Beazley plc (formerly Swift No.3 Limited).
The employee share option reserve is held in accordance with IFRS 2: Share-based payment. For more information refer to note 23.2.
www.beazley.com178 Beazley Annual report 2016 23 Equity compensation plans 23.1 Employee share trust
MSIP 04/04/2013 0.5 Five years’ service + ROE 10 years LTIP 09/02/2016 10/02/2015 11/02/2014 13/02/2013 30/03/2012
Financial statem ents 23 Equity compensation plans continued Further details of equity compensation plans can be found in the directors’ remuneration report on pages 94 to 118. The number and weighted average exercise prices of share options are as follows: Weighted average exercise price (pence per share)
Forfeited during the year 74.8 (0.4) 61.3 (0.4) Exercised during the year 12.9 (4.5) 14.1 (6.6) Granted during the year 34.2 5.0 29.8 5.5
The following is a summary of the assumptions used to calculate the fair value: $m $m
Weighted average share price (pence per option) 274.9 230.7 Weighted average exercise price (pence per option) 27.8 22.1 Average expected life of options 4.6yrs 4.6yrs Expected volatility 25.0% 25.0% Expected dividend yield 3.2% 3.4% Average risk-free interest rate 1.7% 2.1%
Gross Claims reported and loss adjustment expenses 949.5 937.5 Claims incurred but not reported 2,567.4 2,588.4 Gross claims liabilities 3,516.9 3,525.9 Unearned premiums 1,140.8 1,060.8 Total insurance liabilities, gross 4,657.7 4,586.7
www.beazley.com180 Beazley Annual report 2016 24 Insurance liabilities and reinsurance assets continued $m $m
Net Claims reported and loss adjustment expenses 747.7 727.2 Claims incurred but not reported 1,915.3 1,930.3 Net claims liabilities 2,663.0 2,657.5 Unearned premiums 912.6 829.5 Total insurance liabilities, net 3,575.6 3,487.0
Claims reported and loss adjustment expenses 949.5 (201.8) 747.7 937.5 (210.3) 727.2 Claims incurred but not reported 2,567.4 (652.1) 1,915.3 2,588.4 (658.1) 1,930.3 b) Unearned premiums reserve
Financial statem ents 24 Insurance liabilities and reinsurance assets continued 24.2 Assumptions, changes in assumptions and sensitivity analysis a) Process used to decide on assumptions The peer review reserving process Beazley uses a quarterly dual track process to set its reserves: • the actuarial team uses several actuarial and statistical methods to estimate the ultimate premium and claims costs, with the most appropriate methods selected depending on the nature of each class of business; and • the underwriting teams concurrently review the development of the incurred loss ratio over time, work with our claims managers to set reserve estimates for identified claims and utilise their detailed understanding of both risks underwritten and the nature of the claims to establish an alternative estimate of ultimate claims cost, which is compared to the actuarially established figures.
www.beazley.com182 Beazley Annual report 2016 24 Insurance liabilities and reinsurance assets continued b) Major assumptions The main assumption underlying these techniques is that the group’s past claims development experience (with appropriate adjustments for known changes) can be used to project future claims development and hence ultimate claims costs. As such these methods extrapolate the development of premiums, paid and incurred losses, average costs per claim and claim numbers for each underwriting year based on the observed development of earlier years.
While the information in the table provides a historical perspective on the adequacy of the claims liabilities established in previous years, users of these financial statements are cautioned against extrapolating past redundancies or deficiencies on current claims liabilities. The group believes that the estimate of total claims liabilities as at 31 December 2016 is adequate. However, due to inherent uncertainties in the reserving process, it cannot be assured that such balances will ultimately prove to be adequate.
Less unearned portion of ultimate losses ($m) – – – – – – – – – (17.5) (804.5) (822.0)
Property Reductions have been observed across a number of years within property, driven by favourable settlements on underlying claims and the release of catastrophe margins. The 2016 underwriting year has opened higher than previous years to reflect the continuing challenging market conditions.
For the 2016 underwriting year, the opening position of the traditional specialty lines business is now in line with pre-recession years, recognising the improved experience that is emerging within the more recent underwriting years.
The net of reinsurance estimates of ultimate claims costs on the 2015 and prior underwriting years have improved by $180.7m during 2016 (2015: $176.3m). This movement arose from a combination of better than expected claims experience coupled with small changes to the many assumptions resulting from the observed experience.
Fair value Subordinated debt 18.0 18.0 Tier 2 subordinated debt (2026) – recalled in 2016 – 119.7 Tier 2 subordinated debt (2026) – issued in 2016 253.3 – Retail bond 100.8 114.4
In November 2004, the group issued subordinated debt of $18m to JPMorgan Chase Bank, N.A., JPMorgan. The loan is unsecured and interest is payable at the USD London interbank offered rate (LIBOR) plus a margin of 3.65% per annum. The subordinated notes are due in November 2034 and have been callable at the group’s option since 2009.
In October 2006, the group issued £150m of unsecured fixed/floating rate subordinated notes that were due in October 2026 with a first call at the group’s option in October 2016. Interest of 7.25% per annum was paid annually in arrears for the period up to October 2016. In October 2016, the group exercised its first call option and bought back the remaining outstanding nominal amount of debt of £76.5m. Please refer to note 8 for further detail on debt buyback.
In September 2012, the group issued £75m of sterling denominated 5.375% notes due 2019. Interest at a fixed rate of 5.375% is payable in March and September each year. The carrying value of the note has reduced in 2016 due to a decrease in GBP FX rate against USD.
Reinsurance premiums payable 177.8 159.1 Accrued expenses including staff bonuses 148.0 142.3 Other payables 100.4 118.5 Deferred consideration payable on acquisition of MGAs 1.4 1.8 Due to syndicate 6107 47.0 34.8 Due to syndicate 623 – 2.9 Due to syndicate 6050 9.7 3.9
All other payables are payable within one year of the reporting date other than $1.4m of the deferred consideration, which is payable after one year. The carrying value approximates fair values.
Contributions to the scheme are determined by a qualified actuary using the projected unit credit method as set out in the scheme rules and the most recent valuation was at 31 December 2016. The group expects to pay $1.3m in contributions to the scheme in 2017.
Movement in fair value of plan assets recognised in the statement of financial position Balance at 1 January 42.4 41.0 Expected return on plan assets 1.4 1.5 Actuarial gains 3.7 0.2 Employer contributions 1.6 1.5 Benefits paid (0.3) (0.4) Foreign exchange loss (6.8) (1.4) Balance at 31 December 42.0 42.4
At 31 December 2016, the weighted-average duration of the defined benefit obligation was 10.7 years (2015: 11.4 years).
Discount rate (0.5% decrease) 5.9 – Inflation rate (0.3% decrease) – (3.0) Future salary changes (0.5% decrease) – (0.2) Life expectancy (1 year increase) 1.1 –
www.beazley.com194 Beazley Annual report 2016 30 Related party transactions continued 30.3 Other related party transactions At 31 December 2016, the group purchased services from the associate of $2.5m (2015: $2.6m) throughout the year. All transactions with the associate and subsidiaries are priced on an arm’s length basis. Beazley loaned $2m at an interest rate of 5.25% p.a to our associate Equinox Global Limited. The outstanding balance on this loan at 31 December 2016 is $2m and will be repayable by 2018.
The following is a list of all the subsidiaries in the group as at 31 December 2016: Country of incorporation
Beazley Ireland Holdings plc 1 Jersey 100% Intermediate holding company USD 724.6 Beazley Group Limited England 100% Intermediate holding company USD Beazley Furlonge Holdings Limited England 100% Intermediate holding company USD Beazley Furlonge Limited England 100% Lloyd’s underwriting agents GBP Beazley Investments Limited England 100% Investment company USD Beazley Underwriting Limited England 100% Underwriting at Lloyd’s USD Beazley Management Limited England 100% Intermediate management company GBP Beazley Staff Underwriting Limited England 100% Underwriting at Lloyd’s USD Beazley Solutions Limited England 100% Insurance services GBP Beazley Underwriting Services Limited England 100% Insurance services GBP Beazley DAS Limited England 100% Dividend access scheme GBP Beazley Corporate Member (No.2) Limited England 100% Underwriting at Lloyd’s USD Beazley Corporate Member (No.3) Limited England 100% Underwriting at Lloyd’s USD Beazley Corporate Member (No.4) Limited England 100% Underwriting at Lloyd’s USD Beazley Corporate Member (No.5) Limited England 100% Underwriting at Lloyd’s USD Beazley Corporate Member (No.6) Limited England 100% Underwriting at Lloyd’s USD Beazley Leviathan Limited England 100% Underwriting at Lloyd’s GBP Beazley Re dac Ireland 100% Reinsurance of Lloyd’s business USD Beazley Underwriting Pty Ltd Australia 100% Insurance services AUD Australian Income Protection Pty Ltd Australia 100% Insurance services AUD Beazley USA Services, Inc.* USA 100% Insurance services USD Beazley Holdings, Inc.* USA 100% Holding company USD Beazley Group (USA) General Partnership** USA 100% General partnership USD Beazley Insurance Company, Inc.*** USA 100% Underwriting admitted lines USD Lodestone Securities LLC**** USA 100% Consultancy services USD Beazley Limited Hong Kong 100% Insurance services HKD Beazley Middle East Limited UAE 100% Insurance services USD Beazley Pte. Limited Singapore 100% Underwriting at Lloyd’s SGD
1 Up until 13 April 2016, Beazley Ireland Holdings plc (formerly Beazley plc) was the parent company of the Beazley group. As part of a scheme of arrangement, the shareholders of Beazley Ireland Holdings plc (formerly Beazley plc) acquired 100% of the share capital of Beazley plc on completion of the transaction.
These balances are included within financial assets at fair value on the statement of financial position.
35 Business combinations Acquisition of business portfolio On 27 July 2016, the group acquired all the shares in S.R.P. Edwards & Co. Limited, SRPE, for initial consideration of $8.0m in cash. Further consideration up to a maximum of $2.3m is payable in the future subject to certain performance criteria being achieved.
The acquisition had the following effect on the group’s assets and liabilities: Fair value of the net assets on acquisition $m
Intangible assets – renewal rights 8.0 Intangible assets – goodwill – Consideration paid 1 8.0 1 The consideration paid of $8.0m represents amounts paid at the time of the transaction and an estimate of the most probable amount that is expected to be paid in respect of contingent consideration. Contingent consideration arises subject to the acquired business meeting specific performance criteria over a three-year period from the transaction date. Eighteen percent of the consideration paid will be recharged to members of our third party capital backed syndicate 623, as this syndicate is expected to receive commercial benefits from Beazley’s acquisition of Leviathan.
Capacity This is the maximum amount of premiums that can be accepted by a syndicate. Capacity also refers to the amount of insurance coverage allocated to a particular policyholder or in the marketplace in general.
Claims ratio Ratio, in percentage terms, of net insurance claims to net earned premiums. The calculation is performed excluding the impact of foreign exchange. In 2016, this ratio was 48% (2015: 48%). This represented total claims of $855.6m (2015: $813.9m) divided by net earned premiums of $1,768.2m (2015: $1,698.7m).
Excess per risk reinsurance A form of excess of loss reinsurance which, subject to a specified limit, indemnifies the reinsured company against the amount of loss in excess of a specified retention with respect to each risk involved in each loss.
Expense ratio Ratio, in percentage terms, of the sum of expenses for acquisition of insurance contracts and administrative expenses to net earned premiums. The calculation is performed excluding the impact of foreign exchange on non-monetary items. In 2016, the expense ratio was 41% (2015: 39%). This represents the sum of expenses for acquisition of insurance contracts of $472.5m (2015: $448.6m) and administrative expenses of $247.8m (2015: $215.2m) to earned premiums of $1,768.2m (2015: $1,698.7m).
Facultative reinsurance A reinsurance risk that is placed by means of a separately negotiated contract as opposed to one that is ceded under a reinsurance treaty.
Incurred but not reported (IBNR) These are anticipated or likely claims that may result from an insured event although no claims have been reported so far.
Managing general agent (MGA) An insurance intermediary acting as an agent on behalf of an insurer.
Provision for outstanding claims Provision for claims that have already been incurred at the reporting date but have either not yet been reported or not yet been fully settled.
Reinsurance special purpose syndicate A special purpose syndicate (SPS) created to operate as a reinsurance ‘sidecar’ to Beazley’s treaty account, capitalising on Beazley’s position in the treaty reinsurance market.
Risk This term may refer to: a) the possibility of some event occurring which causes injury or loss; b) the subject matter of an insurance or reinsurance contract; or c) an insured peril.