The CyberAcuView LLC board is charged with governance over its affairs. The board is composed of individuals who are selected by the investors. As a result, the group has the ability to appoint a member to the board of CyberAcuView LLC to represent the group’s interest. As a result, the group is deemed to have significant influence over CyberAcuView LLC and therefore this investment is recognised as an associate.
The aggregate financial information for all associates (100%) held at 31 December 2020 is as follows: 2020 $m $m
Derivative financial assets 28.5 25.5 Total financial assets at fair value 6,362.0 5,572.8 www.beazley.com Beazley | Annual report 2020
16 Financial assets and liabilities continued Investment corporate bonds are rated BBB-/Baa3 or higher by at least one major rating agency, while high yield corporate bonds have lower credit ratings. Hedge funds are investment vehicles pursuing alternative investment strategies, structured to have minimal correlation to traditional asset classes. Equity funds are investment vehicles which invest in equity securities and provide diversified exposure to global equity markets. Illiquid credit assets are investment vehicles that predominantly target private lending opportunities, often with longer investment horizons. The fair value of these assets at 31 December 2020 excludes an unfunded commitment of $49.3m (2019: $74.3m).
As noted on page 144 consideration is also given when valuing the hedge funds and illiquid credit funds to the timing of the latest valuations, and the impact of any significant market stress events. The adjustment to the underlying net asset value of the funds as a result of these considerations was $nil at 31 December 2020 (2019: $nil).
A breakdown of the group’s investment portfolio is provided on page 48. A breakdown of derivative financial instruments is disclosed in note 17.
If the inputs used to measure the fair value of an asset or a liability could be categorised in different levels of the fair value hierarchy, then the fair value measurement is categorised in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement.
Level 3 investments The group’s level 3 investments consist of illiquid credit assets and Lloyd’s syndicate loans.
To ensure that values are materially correct at the reporting date, all fund managers are contacted to confirm whether there has been a material impairment to the fund valuations since the most recent valuation date. In the event that a manager confirms a material impairment since the latest valuation date, we would make a downwards revision to the value of our fund holding based on the manager’s assessment. Furthermore, during major stress events in public financial markets (defined as >10% fall in leveraged loan market indices during a calendar quarter), such as the macroeconomic uncertainty caused by COVID-19 in Q1 2020, we would consider adjusting the valuations of all level 3 fund holdings to account for material impairment in the valuation between the latest valuation date and the reporting date. The magnitude and breadth of any broader portfolio impairment would be dependent on the specific situation.
Syndicate loans – – 40.6 40.6 Equity funds 203.2 – – 203.2 Hedge funds – 442.1 – 442.1 Illiquid credit assets – – 227.9 227.9 Derivative financial assets 28.5 – – 28.5 Total financial assets measured at fair value 4,120.8 1,972.7 268.5 6,362.0
Financial liabilities measured at fair value Derivative financial liabilities 11.4 – – 11.4
16 Financial assets and liabilities continued The table above does not include financial assets and liabilities that are, in accordance with the group’s accounting policies, recorded at amortised cost, if the carrying amount of these financial assets and liabilities approximates their fair values at the reporting date. Cash and cash equivalents have not been included in the table above; however, the full amount of cash and cash equivalents would be classified under level 1 in both the current and prior year.
The following transfers between levels 1 & 2 for the period ended 31 December 2020 reflect the level of trading activities including frequency and volume derived from market data obtained from an independent external valuation tool.
31 December 2020 vs 31 December 2019 transfer from level 2 to level 1 Level 1 $m Level 2 $m
– Equity funds 25.0 (25.0) – High yield 69.1 (69.1) – Investment grade 190.0 (190.0) – Government issued 4.1 (4.1)
The following transfers between levels 2 & 3 for the period ended 31 December 2020 is a result of management’s enhanced understanding of the syndicate loans instruments based on additional details provided by Lloyd’s of London.
The $6.2m net gains recognised in the profit or loss on level 3 investments includes realised gains $8.1m (2019: $17.6m) and unrealised losses $1.9m (2019: $8.5m).
High yield bond funds 251.1 235.8 Equity funds 203.2 163.6 Hedge funds 442.1 354.0 Illiquid credit assets 227.9 216.6 Investments through unconsolidated structured entities 1,124.3 970.0
Currency exposures The currency exposures of our financial assets held at fair value are detailed below: UK £
Financial assets at fair value Fixed and floating rate debt securities 15.1 248.6 – 263.7 5,156.0 5,419.7
Equity funds – – – – 203.2 203.2 Hedge funds – – – – 442.1 442.1
Financial assets at fair value Fixed and floating rate debt securities 13.7 198.8 – 212.5 4,592.6 4,805.1
Foreign exchange forward contracts 623.7 28.5 427.3 25.3 Bond futures contract – – 222.8 0.2
Foreign exchange forward contracts 287.0 11.0 323.2 8.0 Bond futures contract 288.8 0.4 – –
The timing and level of impact of business failures as a result of COVID-19 remains uncertain. Current and expected collection of insurance receivables since the start of the COVID-19 pandemic have been modelled on a region-specific basis, taking into account macroeconomic factors, such as revised GDP outlooks, government support available, and other regional specific microeconomic factors. Compared to historical receivable collection rates, management have recognised a $1.8m provision against insurance receivables. This provision is in light of an increase in balances over 90 days as a proportion of total insurance receivables over the past year.
Insurance receivables in respect of coverholder business are credit controlled by third-party managers. We monitor third-party coverholders’ performance and their financial processes through the group’s coverholder management team. These assets are individually impaired after considering information such as the occurrence of significant changes in the counterparties’ financial position, patterns of historical payment information and disputes with counterparties.
$m $m Reinsurers’ share of claims 1,320.4 1,082.5 Impairment provision (14.8) (13.7)
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 was $3.0m (2019: $3.1m). This $3.0m provision in respect of overdue reinsurance recoverables is included within the total provision of $14.8m.
The group have assessed whether a specific provision for COVID-19 should be required for reinsurance recoverables, equivalent to the provision recognised in insurance receivables in note 18. The group have determined a provision is not required. This is largely due to the fact that the group’s Security Committee have a requirement that the minimum credit rating of any reinsurer is at least an A for short tail business and at least AA or A+ for longer tail business, as well as that the group is not aware of any specific examples of reinsurers defaulting. The group believes that the unimpaired amounts that are past due more than 30 days are still collectable in full, based on historic payment behaviour and analyses of credit risk.
Ordinary shares of 5p each Issued and fully paid 608.9 38.1 529.7 38.0
On 19 May 2020, the group successfully completed the placing of new ordinary shares in the capital of the company. A total of 78,501,420 new ordinary shares of five pence each in the capital of the group were placed at a price of 315 pence per Placing Share. A total of 13,085 Subscription Shares were subscribed through the Subscription. The placing raised total net proceeds of $292.6m.
The Placing Price of 315 pence represented a discount of 4.95 per cent to the closing share price of 331.4 pence on 18 May 2020. The Placing Shares and the Subscription Shares being issued together represented approximately 15 per cent of the existing issued ordinary share capital of Beazley prior to the Placing and Subscription.
This equity was raised through a cash box structure. Pre-emptive rights were not considered with the placing, however prior to issuance, senior management consulted with approximately 85% of existing shareholders (calculated by voting rights) who were given the option to participate. The shares issued are classified as ordinary shares and carry the same voting rights as previously issued ordinary shares. The group considered it an appropriate time to raise equity in order to position the business for future growth opportunities. It also provides further strength to the balance sheet in light of the continued uncertainty from COVID-19.
Share based payments 2.8 – 2.8 Acquisition of own shares held in trust – (13.6) (13.6) Transfer of shares to employees (17.0) 20.2 3.2
The deferred share plan is recognised in the statement of profit or loss on a straight-line basis over a period of three years, while the retention share plan is recognised in the statement of profit or loss on a straight-line basis over a period of six years.
LTIP 11/02/2020 1.5 Five years’ service + NAV + 10 years 12/02/2019 1.6 minimum shareholding requirement 13/02/2018 1.3 17/02/2017 1.6 09/02/2016 1.8
LTIP 11/02/2020 1.6 Three years’ service + NAV + 10 years 11/02/2019 1.5 minimum shareholding requirement 13/02/2018 1.3
SAYE (UK) 30/03/2020 0.4 Three years’ service n/a 01/04/2019 0.4 04/04/2018 0.5
23 Equity compensation plans continued Further details of equity compensation plans can be found in the directors’ remuneration report on pages 94 to 114. The total gain on directors’ exercises of share-option plans during the period was £0.5m (2019: £2.7m).
Recoverable from reinsurers Claims reported and loss adjustment expenses 262.2 223.7 Unexpired risk reserve 9.0 – Claims incurred but not reported 1,034.4 845.1 Reinsurers’ share of claims liabilities 1,305.6 1,068.8 Unearned premiums 379.1 269.4 Total reinsurers’ share of insurance liabilities 1,684.7 1,338.2 $m $m
Net Claims reported and loss adjustment expenses 1,245.1 1,040.0 Unexpired risk reserve 82.5 – Claims incurred but not reported 2,820.9 2,351.5 Net claims liabilities 4,148.5 3,391.5 Unearned premiums 1,545.2 1,329.3 Total insurance liabilities, net 5,693.7 4,720.8
Claims reported and loss adjustment expenses 1,507.3 (262.2) 1,245.1 1,263.7 (223.7) 1,040.0 Unexpired risk reserve 91.5 (9.0) 82.5 – – – Claims incurred but not reported 3,855.3 (1,034.4) 2,820.9 3,196.6 (845.1) 2,351.5 www.beazley.com Beazley | Annual report 2020
A formal internal peer review process is then undertaken to determine the reserves held for accounting purposes which, in totality, are not lower than the actuarially established figure.
24 Insurance liabilities and reinsurance assets continued We also review triangulations of the paid/outstanding claim ratios as a way of monitoring any changes in the strength of the outstanding claim estimates between underwriting years so that adjustments can be made to mitigate any subsequent over/(under) reserving. To date, this analysis indicates no systematic change to the outstanding claim strength across underwriting years.
Another assumption used within insurance liabilities is the estimation of an unexpired risk reserve (URR) for the expected value of net claims and expenses attributable to the unexpired periods of policies in force at the balance sheet date which exceeds the unearned premium reserve. The provision has been determined by reviewing various policies/events which are expected to trigger a COVID-19 related claims loss in the first half of 2021. This estimate is based on the assumption that various government restrictions are predicted to ease from July 2021.
– Claims inflation – Judicial decisions – Mix of business – Premium rate change – Professional judgement – Reporting patterns – Settlement patterns
To illustrate the robustness of our reserves, the loss development tables below provide information about historical claims development by the seven segments – Cyber & Executive Risk, Marine, Market Facilities, Political, Accident & Contingency, Property, Reinsurance and Specialty Lines. The tables are by underwriting year which in our view provides the most transparent reserving basis. We have supplied tables for both ultimate gross claims and ultimate net claims.
The top part of the table illustrates how the group’s estimate of the claims ratio for each underwriting year has changed at successive year ends. The bottom half of the table reconciles the gross and net claims to the amount appearing in the statement of financial position.
For the assessment of first-party COVID-19 losses, underlying policies’ exposure to event cancellation and business interruption losses resulting from the pandemic were considered. Expected losses were then assumed by considering the individual contract wordings for each policy. A key uncertainty is the future event cancellation exposure in 2021 within the contingency book. Event cancellation losses are assumed to occur during the first half of 2021 in line with that experienced during 2020, with an assumption of a return to some form of normality in the second half of 2021. Were this not to be the case, we estimate that there is potential for a further $50m of claims net of reinsurance to the end of 2021.
While the information in the table provides a historical perspective on the adequacy of the claims liabilities established in previous years, users of these financial statements are cautioned against extrapolating past redundancies or deficiencies on current claims liabilities. The group believes that the estimate of total claims liabilities as at 31 December 2020 is adequate. However, due to inherent uncertainties in the reserving process, it cannot be assured that such balances will ultimately prove to be adequate.
Estimated total ultimate losses ($m) 7,108.3 851.2 869.1 933.6 996.9 1,125.3 1,275.2 1,711.8 1,917.2 2,276.0 2,443.9 21,508.5 Less paid claims ($m) (6,962.0) (776.3) (779.8) (818.4) (910.4) (879.4) (960.9) (1,116.4) (933.9) (530.2) (157.8) (14,825.5) Less unearned portion of ultimate losses ($m) – – – – – – – – (38.6) (227.7) (962.6) (1,228.9) Gross claims liabilities ($m) 146.3 74.9 89.3 115.2 86.5 245.9 314.3 595.4 944.7 1,518.1 1,323.5 5,454.1
Market Facilities 48 months – – – – – – – 60 months – – – – – – 72 months – – – – – 84 months – – – – 96 months – – – 108 months – – 120 months – Political, Accident & Contingency
Cyber & Executive Risk The 2019 and 2020 underwriting years have strengthened in response to cyber ransomware activity. However, these years are now recovering under aggregate excess of loss reinsurance programmes, so the impact is reduced net of reinsurance.
Marine Releases continue on mature underwriting years as the risks expire. The 2018 underwriting year saw an overall strengthening net of reinsurance driven by the marine hull account.
Reinsurance The 2020 underwriting year has been impacted by COVID-19 experience and the recent US hurricanes. Favourable developments on established catastrophes have led to positive experience on the 2018 and 2019 underwriting years. The increase in 2017 is due to a reduction in expectation for further reinsurance premiums relating to the catastrophes within that year.
Reserve releases during the year totalled $93.1m (2019: $9.5m). The net of reinsurance estimates of ultimate claims costs have improved primarily on the 2017 and prior underwriting years by $74.7m during 2020 as medium tail reserves in Specialty Lines mature, while 2018 and 2019 underwriting years’ improvements of $2.3m and $16.1m respectively were partially offset by adverse development particularly in Cyber & Executive Risk as a result of an uptick in ransomware activity.
24 Insurance liabilities and reinsurance assets continued The movements shown on 2017 and earlier are absolute claim movements and are not impacted by any current year movements in premium on those underwriting years.
25 Borrowings The carrying amount and fair values of the non-current borrowings are as follows: Carrying value
A syndicated short term banking facility led by Lloyds Banking Group plc provides potential borrowings up to $450m, up from $225m at the start of the year. Under the facility $393.8m may be drawn as letters of credit to support underwriting at Lloyd’s, and up to $225m may be advanced as cash under a revolving facility. The cost of the facility is based on a commitment fee of 0.4725% per annum and any amounts drawn are charged at a margin of 1.35% per annum. The cash element of the facility will expire on 23 July 2022, whilst letters of credit issued under the facility can be used to provide support for the 2019, 2020 and 2021 underwriting years. In 2020 $225m has been drawn down under the facility and placed as a letter of credit as Funds at Lloyd’s (FAL).
All other payables are payable within one year of the reporting date. The carrying value approximates fair values.
Present value of funded obligations 64.8 54.7 Fair value of plan assets (69.6) (60.1) Retirement benefit (asset) in the statement of financial position (4.8) (5.4)
Amounts recognised in the statement of profit or loss Interest cost 1.2 1.3 Expected return on plan assets (1.2) (1.3)
Plan assets are comprised as follows: www.beazley.com Beazley | Annual report 2020
27 Retirement benefit obligations continued The actual gain on plan assets was $7.5m (2019: gain of $13.2m).
Principal actuarial assumptions Discount rate 1.3% 2.0% Inflation rate 3.3% 3.4% Expected return on plan assets 2.9% 2.0% Future salary increases 3.3% 3.4% Future pensions increases 1.3% 2.9% Life expectancy for members aged 60 at 31 December 89 years 89 years Life expectancy for members aged 40 at 31 December 91 years 91 years
At 31 December 2020, the weighted-average duration of the defined benefit obligation was 22.5 years (2019: 22.2 years).
Discount rate (0.5% decrease) 8.0 – Inflation rate (0.3% decrease) – (3.2) Future salary changes (0.5% decrease) – (0.5) Life expectancy (1 year increase) 2.7 –
The sensitivity analyses above have been determined based on a method that extrapolates the impact on the defined benefit obligation as a result of reasonable changes in key assumptions occurring at the end of the reporting period. The sensitivity analyses are based on a change in a significant assumption, keeping all other assumptions constant. The sensitivity analyses may not be representative of an actual change in the defined benefit obligation as it is unlikely that changes in assumptions would occur in isolation from one another.
Deferred acquisition costs (2.5) (5.1) – – (7.6) Tax losses carried forward 10.0 (10.0) – – –
Deferred tax assets of $6.3m (2019: $nil), relating to tax losses, which depend on the availability of future taxable profits, have been recognised. The group has concluded that, notwithstanding the impact of the COVID-19 pandemic, it is probable that the deferred tax assets will be recovered using the estimated future taxable profits based on the approved business plans. The losses can be carried forward indefinitely and have no expiry date.
The group has no unrecognised tax losses as at 31 December 2020 (2019: deferred tax asset $0.7m).
29 Leases Leases as lessee (IFRS 16) The group leases offices, IT equipment and motor vehicles. The leased offices are in several locations and the leases of large offices such as London and New York typically run for a period of 10 years with an option to renew the lease after that date or continue on a rolling month by month basis. Lease payments are renegotiated as agreed in the lease contracts.
During 2020, the group entered into a new office entered into a new lease agreement with 22 Bishopsgate, London which resulted in the recognition of a right of use asset of $35.8m and lease liability $35.8m, Additionally the group utilised extending the office at Plantation Place South, London up to 31 May 2021 resulting in recognising a right of use asset of $0.6m and $0.6m liability. This was due to delays in completion of the new London office.
In the USA the group entered into a new lease in Philadelphia resulting in a right of use asset of $2.0m and lease liability of $1.7m. In Singapore the group entered into a new lease resulting in a right of use asset of $1.9m and lease liability $1.5m.
Lease liabilities Offices $m IT equipment $m Motor vehicles $m Total $m
Interest on lease liabilities 2.0 0.4 – 2.4 Additions to lease portfolio 41.1 18.7 0.1 59.9 Foreign exchange gain 2.8 0.9 – 3.7
Right of use assets Offices $m IT equipment $m Motor vehicles $m Total $m
Interest on lease liabilities 1.8 – – 1.8 Additions to lease portfolio 15.3 – 0.1 15.4 Disposals from lease portfolio (0.5) – – (0.5) Foreign exchange gain 0.3 – – 0.3
Balances due: Due from/(to) to syndicate 623 18.2 (21.0) Due to syndicate 6107 (51.9) (65.5) Due from syndicate 6050 – 0.4 Due to syndicate 5623 (58.7) (15.3)
Salaries and other short term benefits 10.6 16.4 Post-employment benefits 0.6 0.6 Share based remuneration 0.5 1.1
30.3 Other related party transactions At 31 December 2020, the group had purchased services from Falcon Money Management Holdings Limited of $2.3m (2019: $2.3m) throughout the year. All transactions with the associate and subsidiaries are priced on an arm’s length basis.
The following is a list of all the subsidiaries in the group as at 31 December 2020: Country/region of incorporation
Beazley Ireland Holdings plc 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’ managing agents GBP Beazley Investments Limited England 100% Investment company USD Beazley Newco Captive Company, Inc. USA 100% Special Purpose Financial Captive USD Beazley Underwriting Limited England 100% Underwriting at Lloyd’s USD Beazley Management Limited England 100% 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 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.6) Limited England 100% Underwriting at Lloyd’s USD Beazley Leviathan Limited England 100% Underwriting at Lloyd’s GBP Beazley Canada Limited Canada 100% Insurance services CAD Beazley Insurance dac Ireland 100% Insurance and reinsurance company USD Beazley Solutions International Limited Ireland 100% Insurance services EUR Beazley Underwriting 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 Holdings, Inc. Digital LLC USA 100% Insurance services USD Beazley Group (USA) General Partnership** USA 100% General partnership USD Beazley Insurance Company, Inc.*** USA 100% Underwriting admitted lines USD Beazley America Insurance Company, Inc.*** USA 100% Underwriting admitted lines USD Lodestone Securities LLC**** USA 100% Consultancy services USD Beazley Pte. Limited Singapore 100% Underwriting at Lloyd’s SGD Beazley Labuan Limited Malaysia 100% Insurance services USD
The funds can be only used to meet claim liabilities of the relevant member.
In 2020 $225m under the group’s syndicated short term banking facility has been utilised as letters of credit placed as Funds at Lloyd’s (FAL) to provide capital support for the group’s underwriting at Lloyd’s. Letters of credit issued under the facility are uncollateralised. See Note 25 Borrowings for further details on banking facility.
Other than the letters of credit these balances are included within financial assets at fair value and cash and cash equivalents on the statement of financial position.
Binding authority A contracted agreement between a managing agent and a coverholder under which the coverholder is authorised to enter into contracts of insurance for the account of the members of the syndicate concerned, subject to specified terms and conditions.
Deferred acquisition costs (DAC) Costs incurred for the acquisition or the renewal of insurance policies (e.g. brokerage, premium levy and staff related costs) which are capitalised and amortised over the term of the contracts.
Group Surplus Capital Ratio The group surplus capital ratio is the surplus of funds available to meet the group’s ECR expressed as a percentage of the ECR. The funds available are calculated on an economic basis, consistent with how the ECR is calculated.