When catastrophes hit, for us and our clients they are moments of truth
Insurance cannot make everything right. However, it can help people begin to rebuild their lives after devastating natural catastrophes. In 2017, one of the worst years on record for such events, Beazley’s claims teams worked tirelessly to fulfil the promises that our underwriters had made.
Financial statements 126 Consolidated statement of profit or loss 127 Statements of comprehensive income 128 Statements of changes in equity 130 Statements of financial position 131 Statements of cash flows 132 Notes to the financial statements 193 Glossary
The group is of the view that some of the above metrics constitute alternative performance measures (APMs). Further information on our APMs can be found in the financial review on page 43 and in the glossary on page 193.
Entrepreneurial spirit We look for individuals with a strong sense of ownership for the business they handle who are willing – indeed keen – to be accountable for their decisions
Entrepreneurial spirit We look for individuals with a strong sense of ownership for the business they handle who are willing – indeed keen – to be accountable for their decisions www.beazley.com02 Beazley Annual report 2017
Beazley’s success over more than three decades has been due, largely, to its ability to attract talented individuals and teams with an entrepreneurial mindset, and give them the resources and tools to build a profitable business.
“ Beazley’s successful track record for organic growth and innovation was something which was attractive to me. It generates an extremely strong and cohesive corporate culture.”
Strong partnerships Strong long term relationships with brokers, reinsurers and clients have sustained our business over three decades
Diversified portfolio The spread of our overall portfolio by division and the impact this diversification has had on our combined ratio over the past eight years can be seen in the chart below.
Property We’ve protected clients ranging from Fortune 1000 companies to homeowners through 25 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 elsewhere. Our clients are served both by our underwriters at Lloyd’s and by our local underwriters in hubs around the world.
Beazley’s vision is to become, and be recognised as, the highest performing specialist insurer. The company’s business model, strategy, and approach to risk management are geared to the achievement of this vision, as well as to creating value for our stakeholders
Reconfirmed annually through the business planning process, our business model is as follows: • Beazley is a specialist insurer. We have a targeted product set, largely in commercial lines of business, and underwrite each risk on its own merits; • We employ highly skilled, experienced and specialist underwriters and claims managers; • We tend to write capped liabilities; • We operate through specific insurance hubs rather than seeking a local presence in every country in which we do business; and
Our strategy is directed towards the achievement of our vision, which is to become, and be recognised as, the highest performing specialist insurer. To this end, our strategy comprises: • Prudent capital allocation to achieve a well diversified portfolio that is resistant to shocks in any individual line of business; • The creation of an environment in which talented individuals with entrepreneurial spirit can build successful businesses; • The ability to scale our operations to ensure that client and broker service keeps pace and, wherever possible, improves as the company grows; and
• Consistent investment in product innovations to provide better products and services to improve our clients’ risk transfer.
For customers Nearly all business at Beazley comes through brokers. We monitor broker and client perceptions of our service – particularly our claims service – in a variety of ways, including through a detailed annual broker survey. The 2017 survey, conducted with more than 4,000 brokers, showed a strong net promoter score (NPS) for our underwriters, reflecting a high willingness to recommend Beazley. Among brokers who had experienced our claims service the NPS was higher still.
Our approach to managing these and other risks is described in detail on page 55
The trio of hurricanes – Harvey, Irma and Maria – that devastated large areas of Texas, Florida and the Caribbean in August and September caused total insured losses now estimated between $90-95bn. For Beazley, advanced technology – and in particular satellite imagery – enabled funds to be sent to policyholders far faster than would have been possible even a few years ago.
“In 2005 when Katrina hit New Orleans, it might have taken us 90 days to get money into the hands of our policyholders,” says Trevor Self, head of property claims at Beazley. “This time around we were able to do it much faster.”
Total estimated insurance market losses for large catastrophes in 2017 $100bn
The remnants of a plane in a ditch on the St. Thomas airport runway after Hurricane Irma*
US Virgin Islands – September 2017 * Credit: Hilary Swift / The New York Times / Redux / Eyevine
“It’s all about a more efficient claims service. For the client that equates to a better claims service,” says Trevor Self. “Now we can send an adjuster out on one trip rather than three or four, and we instruct our adjusters to bring architects or engineers along with them, as needed, so that they can quantify costs up front.”
Technology plays an important part in delivering excellent claims service after a natural catastrophe, but it is by no means the whole story. Good advance planning is also essential. Beazley’s property team has a detailed catastrophe plan embedded in its annual business plan, ensuring that when a storm or earthquake hits, the damage can be ascertained swiftly. In many cases, advance payments are wired to the policyholder, ahead of the final determination of the claim.
Technology plays an important part in delivering excellent claims service, but it is not the whole story.
Since May 2016, Beazley, in common with other Lloyd’s insurers, has been working with McKenzie Intelligence Services, a company founded by British military intelligence veterans seeking to apply military knowhow and technology – particularly high resolution satellite imaging – in the service of the private sector. The technology was first employed after the Fort McMurray wildfires in the summer of 2016 in Alberta, Canada. Since then it has been progressively refined. In conjunction with Beazley’s exposure maps, reliable satellite imagery can enable the right experts to be sent, posthaste, to the scene of expected damage to ascertain the cost.
Total impact to Beazley losses for large natural catastrophes in 2017 $200- 300m
“Within 24 hours of notification of the Mexican earthquakes we had advanced funds to our cedents in Mexico,” says reinsurance claims manager Stephen Black. “Less than a month later, we were doing the same for our cedents in the US after the Californian wildfires. Our business is based on strong, long term relationships – in situations such as these we understand the pressures our clients are under and make every effort to give them our full support.”
While a sequence of massive storms were striking the Caribbean, Mexico was contending with catastrophes of a different kind.
On 7 September a magnitude 8.1 earthquake, the largest to hit Mexico in more than a century, killed at least 90 people and destroyed or damaged more than 40,000 homes in the southern state of Chiapas. Less than a fortnight later, on 19 September, a magnitude 7.1 quake hit a more densely populated region south of Mexico City, causing 370 deaths and extensive damage.
Stuart Simpson, who took on the role of chief investment officer from 2016, observes: “In investment management, conservatism does not mean being slow off the mark and decisiveness need not be rash. Sometimes you need to act quickly and decisively in pursuit of a conservative strategy, to extract additional value or to protect returns.”
An example of the latter occurred on the evening of 8 November 2016, the date of the US general election. As the result began to crystallise, the team foresaw a sharp jump in US bond yields as markets anticipated higher economic growth and inflation.
Beazley’s investment team favours a variety of investment strategies for different elements of the company’s $4.9bn portfolio, some of them passive to limit fees. However, as chief investment officer Stuart Simpson explains, the team’s overall approach to its role is anything but passive
The skills of Beazley’s investment team played an important role in the company’s success in 2017, generating a return of 2.9%. The team was restructured in 2014, with the recruitment of Stuart Simpson, who had headed Lloyd’s investment function, and Linda Zuberi, who was responsible for global credit investments at another insurance company. Since 2015, the team has delivered strong returns through a series of carefully judged portfolio adjustments within the constraints of a conservative investment strategy.
As yields rose in the following days and weeks, this move insulated Beazley’s portfolio from losses of as much as $16m.
Equally effective in 2017 was the decision taken early in the year to increase Beazley’s exposure to equities. Additional investments were made during the year, with a particular focus on emerging market equities which the team regarded as relatively undervalued.
From 3% of total investments at the end of 2016, equities made up as much as 6% during the year. Equity exposure returned 22% for the year as a whole, outperforming the global equity benchmark by more than 3%, largely thanks to overweight exposure to emerging market equities. Although equities only averaged 4% of total investments in the course of the year, they generated a quarter of the total return.
“We see a role for active stock picking in emerging markets and our managers delivered a good return, net of expenses, on these investments in 2017,” says Stuart Simpson. “However in developed markets we prefer essentially passive and systematic strategies with lower fees.”
Looking ahead to 2018, Stuart Simpson notes that bond yields are generally higher than in recent years, which should be supportive of investment returns. However, despite a generally benign global economic background, there are many developing risks for financial markets, including the long awaited tightening of monetary policies and ongoing geo-political tensions. Given these uncertainties, the ability of Beazley’s investment team to respond quickly to market developments is likely to remain key.
The value of insurance was brought home to millions of people in 2017
The diversification of Beazley’s business once again showed its value in 2017, enabling the company to generate a return on average shareholders’ equity of 9% (2016: 18%), despite recognising substantial claims due to policyholders affected by natural catastrophes in the second half of the year.
In a year in which many insurers and reinsurers are expected to post underwriting losses, Beazley recorded a combined ratio of 99% (2016: 89%) and a strong investment return of 2.9% (2016: 2.0%). Earnings per share were 25.0c (2016: 48.6c) and net tangible assets per share were 261.6c (2016: 268.2c).
The board is pleased to announce a second interim dividend of 7.4p per ordinary share. Together with the first interim dividend of 3.7p this takes the total dividends declared for 2017 to 11.1p per ordinary share (2016: first interim dividend of 3.5p, second interim dividend of 7.0p plus a special dividend of 10.0p, totalling 20.5p).
Beazley has demonstrated an impressive ability to weather rapidly shifting market conditions, as the past year has once again demonstrated. David’s experience and acumen give me added confidence that the company will be well equipped to continue to grow profitably in the years ahead.
Innovation is the lifeblood of a specialist insurer, which must stay ahead of the inevitable commoditisation that affects insurance products as much as any other products over time. Beazley has had notable successes in launching products that are entirely new to world markets, but innovation also consists of bringing products developed in one market to others. This approach has informed the thinking behind the geographic expansion of our specialty lines division, which began in earnest in 2017. The team identified an opportunity to offer products that are market-leading in the US – such as our cyber, management liability and medical malpractice policies – to clients in Europe, Asia and Latin America.
Investments in technology have also underpinned Beazley’s growth and these have increased significantly in recent years. 2017 saw the establishment of a data and analytics strategic initiative, the performance of which will be followed closely by the board.
Board changes Clive Washbourn stood down from the Beazley board in July 2017. I am extremely grateful to Clive for his exceptional contribution to the board over the past 10 years. Clive will continue to provide a valuable service to Beazley by remaining head of our marine division.
In a year that tested the mettle of many insurers, Beazley performed strongly, delivering a profit before income tax of $168.0m (2016: $293.2m) on gross premiums written that rose by 7% to $2,343.8m (2016: $2,195.6m). After absorbing the impact of an exceptional series of natural catastrophes, we achieved a modest underwriting profit, with a combined ratio of 99% (2016: 89%).
The losses we paid in 2017 were well within the scenarios for which our underwriting teams routinely plan. As described on page 12, a detailed claims plan is a major part of the annual business plan for divisions exposed to potential catastrophe losses. In 2017 our plans included a larger role for technology than in prior years, with sophisticated satellite imagery enabling claims adjusters to be dispatched rapidly to the Beazley clients located in the areas most severely affected by the storms.
The events of late 2017 have since spurred material price rises in the classes of business directly affected. We saw reinsurance renewal prices climb by 3% for non-US business and 8% for US business in January 2018. Our property division, which derives 71% of its business from the US, saw prices overall rise by 6% with the biggest increases focused on the large risk business that we underwrite predominantly in London. In the marine market, premium rates for cargo business – the class most affected by the Atlantic storms rose by between 2.5% – 5.0% in the last quarter of 2017.
The same may prove true for some of the large risk business underwritten by teams within our largest division, specialty lines. The specialty lines division, which focuses on professional liability, management liability and cyber risks, has accounted for much of Beazley’s growth in recent years as margins on small and mid sized risks – much of it accessed by our underwriters in the US – have remained attractive. However aggressive competition from new entrants in areas such as large risk architects’ and engineers’ professional liability and medical malpractice for large US hospitals have held back our growth in these segments. This too may change as opportunities for cross-subsidisation diminish.
Across our five divisions, the balance of our underwriting portfolio continued to serve Beazley well in 2017. We were able to achieve growth of 11% in specialty lines on gross premiums written and, after a slow start to the year, our underwriters in the US delivered premium growth of 12% to write $778.0m (2016: $695.7m).
Specialty lines also significantly increased their contribution of prior year reserve releases by 77% to $121.4m (2016: $68.5m). Our consistent approach to reserving means that some distribution of prior year reserves for specialty lines business is often possible in excess of three years after the business was underwritten, by which time claims have largely been paid. The scale of these reserve releases was reduced by the elevated claims that we saw – and had expected to see – in the wake of the 2008 financial crisis; but with this period now well behind us, the contribution specialty lines should make to overall reserve releases is on the increase.
Growth initiatives Our approach to growth remains unchanged. We do not sacrifice profitability for growth. Instead we look for growth from three sources: increasing the flow of profitable business to our teams through brokers who know they can rely on Beazley for high quality service; designing new products to cater for our clients’ changing needs; and expanding geographically into new markets.
We pursued all of these growth strategies in 2017. A team within specialty lines under the leadership of Gerard Bloom focused on geographic growth in markets where Beazley has historically had a modest presence, including continental Europe, Canada, Latin America and parts of Asia. To facilitate this growth and that of other teams, we took two important steps.
Our longstanding preference is for organic growth, but our purchase of Creechurch Underwriters was an exception that was not difficult to justify. We had supported the company with underwriting capital since its creation in 1996 and we knew the team extremely well. Now that we have a local presence in Canada, we see significant growth opportunities and have already begun to supplement the existing team with new underwriters focusing on media liability, cyber and environmental liability business.
In Asia and Latin America, we continue to focus on the growth opportunities available through regional hubs. Singapore has been playing such a role in Asia and Miami continues to grow in importance as a hub for Latin American business: we expanded our specialty lines teams in both locations in 2017.
Other divisions also targeted growth in geographies that, while not new to Beazley, were new for the products in question. Our marine division, the last Beazley division to establish a local presence in the US, began underwriting hull and liability cover for the marine and marine construction industries from our New York office in December 2017, targeting business not normally seen by our underwriters in London.
Earlier in 2017 we also began writing large scale property business locally in the US on the same basis – a move that should stand us in good stead in the changed market conditions now prevailing.
Product innovation is another important source of growth in the specialist markets in which Beazley operates. Our track record in this area is strong and we continued to expand our product range in 2017. We have seen particularly strong demand in the US for our Virtual Care product, launched in July 2017, which addresses the wide range of risks affecting both healthcare and technology companies in the fastgrowing telemedicine market.
Given the depth of our experience, the cyber market continues to afford strong growth opportunities for Beazley. This spring the European Union’s General Data Protection Regulation will come into force, continuing a process through which data regulation outside the US has been catching up with – and in some respects exceeding – the stringency of US regulation. Beazley’s product range is adapted to the needs of clients of all sizes and in all industries.
We are also exploring writing a portfolio of facilities business through a newly created syndicate, syndicate 5623. This syndicate will be backed mainly by third party capital and is expected to deliver returns with lower volatility.
We restructured our fixed income investments in 2016, adopting additional credit exposures, and this proved helpful in 2017 as declining credit spreads generated additional value. As a result, our core portfolio returned a respectable 1.6% (2016: 1.5%), despite rising yields in the final months of the year. Our capital growth investments produced a particularly strong return, at 11.0% (2016: 5.6%), driven by equities, to which we added during the year. We kept a focus on emerging markets, which performed particularly well in 2017.
Risk management 2017 was our second year of operating within the new Solvency II regime with our internal model approved by the Central Bank of Ireland. During this period we have seen the work undertaken by the capital modelling team in the pre-application stages pay off. As our chief risk officer Andrew Pryde explains on page 56, we have in place a capital model which reflects the reality of the business and can be 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 and to support the production of a detailed validation report to the board.
Although risk appetite is established with reference to earnings volatility, there are a number of risks that do not necessarily have an immediate financial consequence but which are taken into account by our processes. Reputational risk is one example. The qualitative risk appetite statements first introduced in 2015 have helped business functions prioritise activity within their teams to ensure that all parts of the business operate as the board expects.
Also, as in 2017, we will continue to rely heavily on the preparedness of our claims teams to redeem the promises that our underwriters have made.
The breadth of our expertise in all these areas means that we can innovate in ways that benefit our clients and our brokers but without necessarily assuming more underwriting risk. Insurance is, for the most part, a complicated, jargon-laden business and anything we can do to make our clients’ lives simpler and easier is likely to be rewarded with increased loyalty. This is particularly true of small business clients that do not employ professional risk managers. Last year we simplified and streamlined our data breach product, BBR, while expanding the cover offered. We are committed to providing ‘beautifully designed insurance’ across our product range and see considerable scope for further simplification of policies and processes.
A well established design precept is sometimes expressed as ‘what you see is what you get’, meaning that there should be no mismatch between the way in which a product or service is sold and the way in which it performs. It is a precept we have long sought to apply at Beazley in relation to all of our stakeholders. Today’s world offers enough surprises: we have no desire to add to them.
Q – How would you rate the performance of the insurance industry in responding to the massive damage and disruption caused by storms, earthquakes and wildfires in 2017? Generally speaking, we did well. By the end of November Lloyd’s reported that around $2bn had been paid out by the Lloyd’s market, of which we’re proud to be a part, to help people rebuild in the US, the Caribbean and Mexico. Enhanced satellite imagery is speeding the settlement of claims.
One weak area remains the lack of coverage for flood damage in the US. According to data collated by the US Federal Emergency Management Agency (FEMA), only 17% of homeowners in the eight counties most directly affected by Hurricane Harvey had flood insurance policies. That of course is a matter of individual choice, but our industry could do a better job in helping people understand the risk. Houston, as has been frequently said, has been visited by three one-in-500 year storms in three years.
Q – In 2017, 41 cents in every dollar Beazley received in premiums went to pay expenses, of which distribution costs were by far the largest component. How can the insurance industry become more efficient? We launched a new Beazley syndicate in 2017 (which will start underwriting in 2018) with one aspect of this issue in mind. We see broker facilities – in which syndicates agree to write an entire book of business – as a much more efficient way of providing follow capacity than a broker going from syndicate to syndicate to complete the slip. We are keen to encourage efficiency in the Lloyd’s market and win a share of this business, which doesn’t clash with the ability of our existing syndicates to select and lead individual risks.
Andrew Horton reviews Beazley’s performance and describes the risks and opportunities he foresees in 2018
Q – How do you see technology, including new sources and uses of data, changing Beazley’s business in the next five years? Every year our operations get more efficient through the use of technology. In five years’ time we should have significantly expanded the availability of our products available on e-trading platforms. We also plan to harness advances in technologies such as natural language processing and robotics to eliminate much of the low complexity manual intervention in the end-toend underwriting and claims process. Improvements in the way we capture our data, and access to previously untapped data sources – for example from social media or the internet of things – present us with opportunities to make more informed underwriting and claims decisions, more quickly. Finally, as a leading insurer of technology and the technology industry, all of this change should create new opportunities for us to grow.
Q – The economic fundamentals of the European Union look stronger today than at any time in recent years. How important are European markets to Beazley? Today, Europe is not a major market for us. Tomorrow, we hope, it will be much more important. At present about 15% of our total business derives from Europe and 4% from the EU excluding the UK. We have plans to grow this business significantly in the years ahead, particularly for our specialty lines products, and we have been actively hiring talent during 2017. We see strong demand for cyber, management liability and medical malpractice insurance in Europe and we believe that financial institutions in particular will value our products and expertise. We do not expect Brexit to be an impediment to European growth: we will access business after Brexit both through Lloyd’s and through our new Dublin-based insurance company, which was authorised in 2017.
Q – Do you expect the recent reforms of US taxation to affect Beazley? The over-riding objective of these reforms is to stimulate the US economy. If they are successful this should be good for Beazley, as the US is our largest market and it may also cause US interest rates to rise which will boost our investment earnings. There are aspects of the legislation that affect companies that are doing business in the US using structures that involve overseas companies, but we do not expect those to have a significant effect on Beazley.
Q – What keeps you up at night? Generally I sleep very well! I am concerned, however, at the stubbornly high costs of our industry’s products, which are fuelled, I believe, by inefficient ways of doing business. We should be giving more back to our clients in claims and we cannot do that because our costs for writing and placing insurance are too high.
In a year defined by a high incidence of natural catastrophe events, Beazley delivered a creditable underwriting performance achieving a combined ratio of 99% (2016: 89%) on gross premiums written of $2,343.8m (2016: $2,195.6m).
With the claims activity seen in the second half of the year, market rate increases across a number of lines of business are expected in 2018.
The table below shows our premium retention rates by division compared to 2016: Retention rates1 2017 2016
Divisional commentary In 2017, specialty lines once again delivered strong growth, achieving an 11% increase on 2016 with premiums of $1,292.2m (2016: $1,159.8m). Profit increased to $227.4m (2016: $133.9m), partly driven by the prior year reserve releases which increased from $68.5m to $121.4m while the combined ratio improved to 89% (2016: 93%).
In 2017 our specialty lines international strategy, led by Gerard Bloom, laid the foundations for the future with the acquisition of a Canadian managing general agent, Creechurch Underwriters, as well as the conversion of our Irish reinsurance company to an insurance company, Beazley Insurance dac, which has licences to write throughout the EU. On the back of this conversion we have created strategic hubs in the UK, France, Germany and Spain and we expect that in 2018 business written through these offices will begin to complement our well established US operations.
Our reinsurance division achieved a break-even result despite heightened catastrophe activity. Its combined ratio increased to 107% (2016: 65%) on gross premiums written of $206.8m (2016: $213.4m) with net insurance claims increasing to $97.5m (2016: $40.2m). Over the last 10 years we have enhanced our access to business globally with underwriters in Munich, Paris, Singapore, Shanghai and Miami complementing our team in London. The improved balance of the portfolio, alongside active management of our risk appetite, helped mitigate the effect of the losses in 2017.
Our property division experienced its most active year for catastrophe losses since 2011. Hurricanes, earthquakes and wildfires all affected the US and Central America in the second half of the year, contributing to a combined ratio of 130% (2016: 87%) on gross premiums written of $362.9m (2016: $329.7m).
In 2017 we combined our political risk & contingency division and our life, accident & health division to form a new division: political, accident & contingency (PAC). Through the newly created division, headed up by Christian Tolle, we see potential for a number of cross selling opportunities between several of these classes of business.
Our newly created division took the difficult decision to close its Australian operations in 2017 which, alongside an uptick in claims in our political and contingency teams, contributed to a reduction in profits to $7.9m (2016: $27.6m). Our plans for 2018 include growing our accident and health business in the US, under the leadership of Brian Thompson, and exploiting some of the cross selling opportunities between the division’s various product lines.
Our marine division has experienced tough underwriting conditions over the past few years and 2017 was no exception. Overall, our marine division wrote gross premiums of $267.6m (2016: $247.4m) and achieved a combined ratio of 98% (2016: 90%). 2017 saw the launch of our US marine business, led by Stephen Vivian. We see potential to expand our US liability and hull business through local underwriters accessing business which generally would not be seen in London.
Outlook After a sustained period of low catastrophe activity, the insurance industry experienced one of the most costly years for natural disaster losses on record in 2017. Beazley’s 2017 result benefited from our balanced business model and our active risk appetite management, leaving us well placed to benefit from any improvement in market conditions in 2018. We have already seen rate increases in the latter part of 2017 and early 2018 across our property and treaty books as the market recalibrates its pricing of catastrophe exposed risks.
We also see continued opportunities for profitable growth in specialty lines in 2018, with further development of our US platform and the first full year of operation for our international business.
Gross premiums written 214.3 245.3 Net premiums written 190.8 215.6 Results from operating activities 7.9 27.6 Claims ratio 51% 45% Expense ratio 50% 46% Combined ratio 101% 91% Rate change (4%) (4%)
Find out more page 30 Find out more page 32 www.beazley.com28 Beazley Annual report 2017
Gross premiums written 206.8 213.4 Net premiums written 134.6 141.2 Results from operating activities 3.8 60.9 Claims ratio 71% 29% Expense ratio 36% 36% Combined ratio 107% 65% Rate change (2%) (4%)
Gross premiums written 1,292.2 1,159.8 Net premiums written 1,120.2 999.4 Results from operating activities 227.4 133.9 Claims ratio 50% 56% Expense ratio 39% 37% Combined ratio 89% 93% Rate change – 1%
Competition in the lines of business transacted by the marine division intensified further in 2017, leading to a combined ratio of 98% (2016: 90%) on gross premiums written of $267.6m (2016: $247.4m).
A focus on disciplined underwriting is not new to our team. In recent years our strategy has also included diversifying our book into new lines of business and niches. This can continue to offer profitable opportunities when market conditions in our historical lines are severely depressed.
Market conditions for our energy business remained very challenging in 2017. This business is naturally sensitive to the price of oil, which at recent levels has led to many rigs standing idle. However more efficient drilling techniques are changing the economics of the industry and may stimulate stronger demand for insurance. This would also benefit our team focusing on insuring sub-sea equipment, much of which is used for energy exploration and exploitation.
The division writes political risks, terrorism and contingency business (the latter predominately event cancellation risks) from offices in London, New York, Paris and Singapore. London is currently the focus for all of our life business, through a dedicated Lloyd’s life syndicate, and most of our current accident and health business. Nevertheless we see substantial growth opportunities for our accident and health team in the US.
Political 23% Contingency 18% PA direct 16% PA reinsurance 15% Stand alone terrorism 14% Life direct 9% Sports 3% Life reinsurance 2%
Claims for property damage following terrorist attacks have also been subdued in recent years, although the attacks on Brussels airport in March 2016 were an exception, with significant property damage alongside the unfortunate loss of life.
Market conditions for our life, accident & health team in London continued to prove challenging last year, with competition depressing premium rates. We saw rates on this business fall by 2.8% in the course of the year, following rate declines in 2016 and 2015.
In May, we were delighted to welcome Brian Thompson to head our US accident and health team. Our focus in the US remains on the sale of supplemental medical products to help employees enhance the cover their employers provide under high deductible benefit plans. This market continues to grow in line with the growing burden of healthcare costs on American employers.
For Beazley’s property division 2017 proved an eventful year, with hurricanes, earthquakes and wildfires affecting clients in the US, the Caribbean and Mexico, three of our largest territories. The most active year for property catastrophe losses since 2011 saw the division’s combined ratio rise to 130% (2016: 87%) on gross premiums written of $362.9m (2016: $329.7m).
For Beazley, the financial impact of the losses was within expectations. Crucially for our clients, our claims team had meticulously prepared for such scenarios. These preparations, described on pages 11 to 13, ensured we were able to provide the supportive claims service our policyholders have the right to expect, whether they be large or small businesses or homeowners. As at the end of the year the property division had already disbursed $41.2m in advance payments to help our clients begin repairs.
Property catastrophe 70% Property risk 17% Korean Re 8% Miscellaneous 4% Casualty clash 1%
As a result, we saw rate rises of 5% on average on renewal business at the beginning of 2018. We plan to increase our underwriting by 3% for non-US business and 8% for US business in the course of 2018, reflecting the improved margins now available.
As has been the case for several years now, we saw better margins, and the most attractive growth opportunities, in smaller scale business in 2017. Our acquisition in February of Creechurch Underwriters, a Canadian managing general agency focusing on small business, expanded our access to this business in North America.
Demand for cyber insurance, both in the US and around the world, continued to grow in 2017 and Beazley benefited from the depth of our expertise and the quality of our products in this market. In November we relaunched our market-leading Beazley Breach Response (BBR) cyber product in the US to address growing demand for robust first party cyber cover from small and mid sized US businesses. In the years after BBR was first launched in 2009, the main driver of demand for cover was third party liability for data breaches and the onerous regulatory requirements governing how breaches must be handled. These factors still weigh heavily, but the risk of production stoppages from cyber attacks – particularly ransomware attacks – has recently grown. We relaunched BBR to provide 360° protection for the full array of cyber risks that now concern our clients.
For larger clients, we continue to offer robust cyber cover through our Beazley InfoSec product. And, for the world’s largest enterprises, our Vector partnership with Munich Re affords fully customised cover for each organisation. Working closely with Munich Re, we have been instrumental in helping clients build some of the highest ‘towers’ of cyber coverage seen in today’s market. Moving steadily closer to $1bn, these towers reflect the scale of cyber risk as perceived by multinational corporations.
We made good progress in the implementation of our international growth strategy in 2017. In July we obtained authorisation from the Central Bank of Ireland for our new Dublin-based insurance company, Beazley Insurance dac, which will transact business in Europe from branches located in the UK, France, Germany and Spain. We began writing our first risks through the company in October. During the course of the year we also hired underwriters in Spain and Germany and – further afield – in our two hub offices in Singapore (serving Asian markets) and Miami (serving Latin American markets).
Andrew Beazley, co-founder of Beazley Group and chief executive until September 2008, dies at the age of 57
Began trading at the ‘old’ 1958 Lloyd’s building in 1986 with a capacity of £8.3m
Corporate capital introduced at Lloyd’s followed by Lloyd’s Reconstruction and Renewal
Partnership established with Munich Re to broaden and enhance the cyber cover available to the world’s largest companies
Beazley began life in 1986 Since then, we have grown steadily in terms of the risks we cover, the clients we serve and our geographic reach, and today Beazley is a mature insurance business with a well-diversified portfolio. We have weathered some of the toughest times the Lloyd’s market has seen in more than three centuries and our underwriting operations have an unbroken record of profitability.
Our portfolio by business division is broadly unchanged from 2016. We continue to operate a diversified portfolio by type of business and geographical location. However, we took the decision to merge our life, accident & health division and our political risk & contingency division to form political, accident & contingency.
Gross premiums written 2,343.8 2,195.6 7% Net premiums written 1,978.8 1,854.0 7%
Net insurance claims 1,075.7 855.6 26% Acquisition and administrative expenses 774.4 720.3 8% Foreign exchange loss 3.1 9.5 (67%)
Claims ratio 58% 48% Expense ratio 41% 41% Combined ratio 99% 89% Rate decrease (1%) (2%) Investment return 2.9% 2.0%
Specialty lines 56% Property 15% Marine 11% Reinsurance 9% Political, accident & contigency 9%
Combined ratio The combined ratio of an insurance company is a measure of its operating performance and represents the ratio of its total costs (including claims and expenses) to total net earned premium. A combined ratio under 100% indicates an underwriting profit. Consistent delivery of operating performance across the market cycle is clearly a key objective for an insurer. Beazley’s combined ratio increased in 2017 to 99% (2016: 89%) due to a high incidence of claims from natural catastrophes in the second half of 2017, which added circa 10% to the full year ratio.
Claims 2017 experienced a number of natural catastrophes with Hurricanes Harvey, Irma and Maria, the Mexican earthquakes and Californian wildfires, all of which were major contributors to an increase in net insurance claims of $220.1m, which brought the 2017 total net insurance claims to $1,075.7m (2016: $855.6m). These claims, while large, were not outside of our expectation for such types of natural catastrophes. The claims ratio increased to 58% (2016: 48%).
Releases as a percentage of net earned premium 13.7% 9.5% 10.4% 10.2% 10.9% 10.9%
1 During 2017, the life, accident & health division and political risks & contingency division were combined to form the political, accident & contingency division.
Brokerage costs 431.1 390.0 Other acquisition costs 88.6 82.5 Total acquisition costs 519.7 472.5 Administrative expenses 254.7 247.8 Total acquisition costs and administrative expenses 774.4 720.3
The group expense ratio remained unchanged compared to the previous year. Internal administrative expenses have increased less than premium due to a continued conscious drive to challenge costs. This was offset by the aforementioned small increase in acquisition costs versus our earned premium growth.
Foreign exchange The majority of Beazley’s business is transacted in US dollars, which is the currency we have reported in since 2010 and the currency in which we hold the company’s net assets. Changes in the US dollar exchange rate with sterling, the Canadian dollar and the euro do have an impact as we receive premiums in those currencies and the majority of our staff still receive their salary in sterling. Beazley’s foreign exchange loss taken through the statement of profit or loss in 2017 was $3.1m (2016: loss of $9.5m).
The table below details the breakdown of our portfolio by asset class: Cash and cash equivalents 440.5 9.0 507.2 10.8 Fixed and floating rate debt securities – Government, quasi-government and supranational 1,390.6 28.4 1,261.5 26.8 – Corporate bonds
Comparison of return by major asset class: 31 Dec 2017 31 Dec 2016
In 2017, the funds managed by the Beazley group increased on the prior year, with financial assets at fair value and cash and cash equivalents of $4,890.1m at the end of the year (2016: $4,702.6m). The chart below shows the increase in our group funds since 2013.
The application of the diverted profits tax legislation passed by the government early in 2015 still remains uncertain. We have considered the implication of this and retain the view that this tax should not apply to Beazley (see note 9 in the financial statements).
Financial assets at fair value and cash and cash equivalents 4,890.1 4,702.6 4%
Net assets per share (cents) 287.1c 286.9c – Net tangible assets per share (cents) 261.6c 268.2c (2%)
Reinsurance assets Reinsurance assets represent recoveries from reinsurers in respect of incurred claims of $993.2m (2016: $853.9m), and the unearned reinsurance premiums reserve of $237.9m (2016: $228.2m). The reinsurance receivables from reinsurers are split between recoveries on claims paid or notified of $219.4m (2016: $201.8m) and an actuarial estimate of recoveries on claims that have not yet been reported of $773.8m (2016: $652.1m). The group’s exposure to reinsurers is managed through: • minimising risk through selection of reinsurers who meet strict financial criteria (e.g. minimum net assets, minimum ‘A’ rating by S&P). These criteria vary by type of business (short vs medium tail). The chart on page 49 shows the profile of these assets (based on their S&P rating) at the end of 2017; • timely calculation and issuance of reinsurance collection notes from our ceded reinsurance team; and • regular monitoring of the outstanding debtor position by our reinsurance security committee and credit control committee.
Judgement is required in determining the policy for deferring acquisition costs. Beazley’s policy assumes that variable reward paid to underwriters relates to prior years’ business and is not an acquisition cost. As a result, the quantum of costs classified as acquisition is towards the lower end of the possible range. Costs identified as related to acquisition are then deferred in line with premium earnings.
Insurance liabilities Insurance liabilities of $5,167.8m (2016: $4,657.7m) consist of two main elements, being the unearned premium reserve (UPR) and gross insurance claims liabilities.
Our UPR has increased by 10% to $1,259.2m (2016: $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.
Financial liabilities Financial liabilities comprise borrowings and derivative financial liabilities. The group utilises three long term debt facilities: • a US$18m subordinated debt facility was raised in 2004. This loan is also unsecured and interest is payable at the
A syndicated short term banking facility led by Lloyds Banking Group plc provides potential borrowings up to $225m. Under the facility $225m may be drawn as letters of credit to support underwriting at Lloyd’s. Of this, 100% may be advanced as cash under a revolving facility. The cost of the facility is based on a commitment fee of 0.385% per annum and any amounts drawn are charged at a margin of 1.1% per annum. The cash element of the facility will expire on 31 July 2019, whilst letters of credit issued under the facility can be used to provide support for the 2017, 2018 and 2019 underwriting years. The facility is currently unutilised.
AA+ 2% AA 1% AA- 49% A+ 38% A 4% A- 1% Collateralised 4% Others 1%
On issuance of the new tier 2 subordinated debt in 2016, Beazley Insurance dac was assigned an Insurer Financial Strength (IFS) rating of ‘A+’ by Fitch.
Our funding comes from a mixture of our own equity alongside $248.5m of tier 2 subordinated debt, $18.0m of subordinated long term debt, a $99.5m retail bond and an undrawn banking facility of $225.0m.
We signalled at the interim results that we expected the Lloyd’s economic capital requirement (ECR) to increase, reflecting our plans for growth. The final figure at year end 2017 is lower than our projection reflecting the improved profitability of the natural catastrophe underwriting expected in 2018. Our guidance, that we expect underwriting capital to grow in the mid to high single digits, remains.
The following table sets out the group’s capital requirement: $m $m
At 31 December 2017, we have surplus capital of 39% of ECR (on a Solvency II basis). Following payment of the second interim dividend of 7.4p, this surplus reduces to 35% compared to our current target range of 15% to 25% of ECR.
Solvency II The Solvency II regime came into force on 1 January 2016. Beazley continue to provide quarterly Solvency II pillar 3 reporting to both Lloyd’s for the Beazley managed syndicates and the Central Bank of Ireland for Beazley Insurance dac and Beazley plc. In 2017 the first annual solvency financial condition report (SFCR) of Beazley plc was published.
The current SCR has been established using our Solvency II approved internal model which has been run within the regime as prescribed by Lloyd’s. In order to perform the capital assessment, we have made significant investments in both models and process: • we use sophisticated mathematical models that reflect the key risks in the business allowing for probability of occurrence, impact if they do occur, and interaction between risk types. A key focus of these models is to understand the risk posed to individual teams, and to the business as a whole, of a possible deterioration in the underwriting cycle; and
Syndicate 5623** Syndicate 5623 is supported by both Beazley capital and third party capital.
Maintaining operations and preparing our business for high performance in an increasingly digital world
In February, we announced the acquisition of Creechurch Underwriters. The addition of this business to Beazley presents new opportunities to increase distribution of our specialist underwriting products in Canada. The acquisition brought three additional office locations in Toronto, Montreal and Vancouver – all of which have had their technology and processing infrastructure integrated with our wider business. There will be further opportunities for us to share operational capability as this integration develops in 2018, and for us to leverage our existing product delivery capability in this region.
Supporting business growth relies on effective processes and systems, but it is also important that we have a high quality working environment that is conducive to team working and thought leadership. In 2017, we opened a new office in Barcelona that will help to increase our access to continental European business, and expanded our Los Angeles office in support of our growing underwriting portfolio in the south west of the US.
Cost efficiency Beazley is organised to a large degree around global underwriting and claims teams. This model has served us well in ensuring that products that succeed in one market can be swiftly introduced in others. However, it is important that this does not result in back office systems and support resources becoming duplicative or the administration of insurance transactions impeding the business in any way.
In pursuit of greater efficiency and consistency of operational service, we have centralised operations support or outsourced it where this brings further value. We want to make sure that operations and processing are done by appropriately skilled people, at the most cost effective location, whilst providing the best service levels. To help achieve this, we have built operations service centres in the US in Connecticut and in Georgia. We also make use of global outsourcing agreements for business processing support and information technology support. These arrangements have been carefully planned and selected to ensure we can maximise a highly efficient and scalable operating platform to support our business growth.
Managing operational risk effectively Effective risk management requires clear visibility of the level of operational risk we maintain. Critical to supporting an effective control environment is consistency of ownership for operations support and the provision of management information.
As we continue to make our operational support more efficient, we have defined clear ownership for processes, establishing clear accountability for process execution and planning. This simplifies operational control reporting and strengthens our ability to provide a coordinated rapid response to support business growth opportunities.
A widely discussed topic across our industry is preparation for the General Data Protection Regulation (GDPR), which comes into effect during 2018. We see the privacy of our customer data and the associated rights to the use of personal data as very important to preserve. In previous years, Beazley has made significant investment in this area and so our preparation for GDPR has been a continuation of this work. Similarly, we see the threat of cyber attack as an ever evolving threat, and over the years have developed a framework of preventative, detective and response controls to counter this threat. In 2017, we increased the size of our in-house information security and IT security teams in support of this framework.
Managing for performance A market differentiator for Beazley is the considerable experience that we have amassed within our global operations team. Whether providing support services or delivering large projects, we know what works and what does not. The operations team and the underwriting teams have developed strong working relationships over the years, and collectively we have developed considerable expertise in bringing new products and distribution channels to fruition. As with all Beazley talent we recognise the importance of developing attractive career paths. We equip our operations team with the right skills for the job. We routinely review our talent for potential skills gaps and then provide the most relevant training to ensure a high standard of service provision.
Looking ahead to a digital Beazley In our industry, the word digital has become a catch-all term for the application of new technologies, data analytics and disruptive business models. It can be easy to get caught in the hype surrounding these, or worse to get distracted by opportunities that may not align with the future direction of our markets or customer needs. In 2017, our focus has been towards synthesising how best to leverage new technology to further strengthen the value that Beazley already brings to its customers, and to keep differentiating ourselves within the specialist insurance market. We do see this as requiring a digital transformation of our business, but the question has been how best to achieve this. This year, our board approved a new digital strategy for the group which takes a two-pronged approach towards answering this question: 1) Building the data and technology research capability In late 2016, we created a new team called Beazley Labs, and dedicated resource to the research of new technology and data analytics solutions. Since its inception, the Beazley Labs team has run a series of hackathons to prototype new technologies responding to real business problems and opportunities. In 2017, we raised the profile of this work across the whole business –establishing a new group strategic initiative called the Data & Analytics Strategic Initiative (DASI). As well as providing regular board level updates, this strategic initiative has further increased business engagement and awareness of how new data and technology ideas can be applied across our product lines.
Of course, the proof of these technologies goes beyond trials and prototypes. Ideas that were mentioned in last year’s annual report are already in production. Some examples are robotics, for which we now have an in-house delivery team and ‘live’ robots now operating processes in Beazley day-to-day; natural language processing, which is being used to extract and process unstructured data from the thousands of risk submission emails we receive from our brokers; and the rollout of a new suite of data analytics tools to all Beazley users.
2) Organising our business to deliver, and leverage, the technology This year we reorganised our operational capability so that equal attention is applied to both the day-to-day efficient support of the business, and to transforming our business for a digital future. This saw the creation of a new Digital Transformation team that will focus on changing our business in terms of product design, processes, workforce and physical infrastructure in order to maximise the value we get from new data and technology solutions.
Preparing for and responding to catastrophes Beazley is exposed to three key insurance risks where one event can lead to multiple claims. These are, in order of potential impact to Beazley, 1) a specialty lines catastrophe, 2) a natural catastrophe and 3) a cyber catastrophe. The natural catastrophes of hurricanes, earthquakes and wildfires which occurred in the second half of 2017 demonstrate why careful aggregate management is important to avoid undue surprises. This starts with the board setting risk appetite which is managed to throughout the year as risks are underwritten. The monitoring is performed using catastrophe modelling tools which help to manage the aggregation of exposure in different geographical areas. The same catastrophe modelling tools are used to assist the underwriting teams with pricing the risk and to establish the amount of capital that must be held to support the underwriting given the risk being taken. Therefore, when natural catastrophes occur, it is important to test the models, particularly the methods and assumptions used, to ensure that they are still fit for purpose. This validation exercise has been completed and has confirmed that the catastrophe modelling tools remain reasonable in light of the events observed without the need for an immediate off cycle adjustment, and they remain a useful aid to the underwriting process.
The aggregation potential of multiple claims arising from a cyber event is managed using a similar process. However, given that there have been very few cyber events that have led to a notable aggregation of claims, the monitoring is based on a suite of realistic disaster scenarios - which is how the monitoring of natural catastrophes started. We have been undertaking a cyber risk review for the past four years, which has charted the evolution of the modelling approach and has evidenced improvements in sophistication each year. This year, Beazley has added new coverages to the cyber product to meet the needs of our clients. As a result, we have introduced a new realistic disaster scenario to monitor this additional exposure. We have also added a new realistic disaster scenario to monitor the increasing trend of ransomware attacks. We have supplemented the knowledge of Beazley’s internal cyber experts with advice and analysis from external experts working in the cyber field to ensure that we have sight of emerging technical trends. Finally, we continue to monitor and support the development of third party catastrophe modelling tools as more analysis is being performed in this risk area. We expect, over time, that the modelling of cyber risks will be able to mirror the sophistication of the modelling of natural catastrophe risks.
Realistic disaster scenarios are also used to monitor the potential impact of a specialty lines catastrophe - for example the impact that a recession might have on the various professional indemnity risks underwritten. This approach was tested and validated following the 2008 global financial crisis and, whilst there has been less reserve release than usual from the underwriting years immediately following the crisis, they remained profitable.
2017 in review This year has included organisational changes which have impacted the risk and control environment. Firstly, we received approval of Beazley Insurance dac’s licence from the Central Bank of Ireland to underwrite insurance business in Europe in addition to the reinsurance of syndicate 2623 and syndicate 3623. Secondly, Beazley purchased a managing general agent, Creechurch Underwriters, which is now called Beazley Canada Limited, in order to provide more of Beazley’s products to our clients in Canada.
We have been involved throughout these processes which, in each case, started with the production of an Own Risk and Solvency Assessment (ORSA) report which informed the board of the risk and capital considerations and subsequently has involved updating the risk register, controls and governance to reflect the new risk profile. This has included ensuring that the new underwriting and claims processes meet Beazley’s group-wide consistent underwriting and claims standards.
We worked with the board to produce Beazley’s contingency plan for the UK’s exit from the European Union (‘Brexit’), setting out a central plan and testing it against a range of potential outcomes. The main risk is the ability to offer insurance to European clients following Brexit and, for context, around 4% of Beazley’s current European business is within scope. The central plan is to be able to offer policies, at the client’s choice, either through Beazley’s insurance company in Dublin or through the subsidiary that Lloyd’s is in the process of establishing in Brussels. A Brexit working group, led by the chief risk officer, was established to oversee Beazley’s response to Brexit and this working group will remain in place until the conclusion of the Brexit process.
We facilitated a discussion of emerging and strategic risks at the board strategy day in May. The discussions focused on five topics, namely; developments in the US which is our largest market, developments of broker facilities as a method of placement, preparing for the office of the future, insuring uninsured risks, and developments at Lloyd’s. The analysis performed by board members and members of the executive committee provided an opportunity to test how Beazley’s strategy may have to evolve if these risks were to crystallise.
2017 was the second year of operating within the new Solvency II regime, with our internal model approved by the Central Bank of Ireland. There have been no major changes to the model during the year and the output of the model continues to be used extensively to support business decisions. This year we changed the external consulting firm who support the independent validation process. The feedback of this review related mainly to capturing efficiencies rather than any recommendations to change the approach or assumptions. In particular, the feedback was particularly complimentary about the quality of the documentation (a key Solvency II standard) which helped the third party consultancy understand how the model operates and how it reflects the risks within the group. The capital modelling team continue to operate a programme of regular and tailored director briefings to ensure that the internal model is understood and provide an opportunity for directors to suggest enhancements to the internal model.
Risk management Risk oversight – Are risks being identified? – Are controls operating effectively? – Are controls being signed off? – Reports to committees and board
The above diagram illustrates the components of the risk management framework.
In summary, the board identifies risk, assesses risk and sets risk appetite. The business then implements a control environment which describes how the business should operate to stay within risk appetite. Risk management then reports to the board on how well the business is operating using a consolidated assurance report. For each risk, the consolidated assurance report brings together a view of how successfully the business is managing risk, qualitative commentary from the assurance functions and whether there have been any events that we can learn from (risk incidents). Finally, the framework is continually evaluated and where appropriate improved, through the consideration of stress and scenario testing, themed reviews using risk profiles and an assessment of strategic and emerging risks.
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 mediumtailed 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 60 and 61.
• Flight: There is a risk that Beazley could be unable to deliver its strategy due to the loss of key personnel. Beazley has controls in place to identify and monitor this risk, for example, through succession planning.
• Group risk: The structure of the Beazley group is not complex and so the main group risk is that one group entity might operate to the detriment of another group entity or entities. This includes, for example, changes in tax legislation such as the US Tax Cuts and Jobs Act enacted in late 2017 which affects which types of intra-group reinsurance it is efficient for Beazley to use. The Beazley plc board monitors this risk through the reports it receives from each entity.
Anti-bribery and corruption risk The group also considered anti-bribery and corruption risk across all risk categories. We are committed to ensuring that all business is conducted in an ethical and honest manner, and that we are not involved in any illicit activity defined under the UK Bribery Act and US Foreign Corrupt Practices Act. This risk includes the risk of bribery and corruption we are exposed to and manifests itself in the susceptibility to unethical or dishonest influences whereby illicit payments and/or inducements are either made or received. Such activity has severe reputational, regulatory and legal consequences, including fines and penalties. Considerations relevant to this risk include the nature, size and type of transactions, the jurisdiction in which transactions occur, and the degree to which agents or third parties are used during such transactions. Every employee and individual acting on Beazley’s behalf is responsible for maintaining our reputation. We have a zero-tolerance approach to bribery and corruption and are committed to acting professionally, fairly and with integrity in all aspects of our business. In doing so, we aim to recruit and retain high-calibre employees who carry out their responsibilities honestly, professionally and with integrity. We maintain a number of policies designed to prevent any risk of bribery and corruption, which are communicated to all employees and supplemented with appropriate training.
Responsible business Keeping our momentum in 2017 Our vision is to use our expertise, influence and passion as a force for good in our local communities and the wider world
The energy and passion of our people contributed to making a difference, within our communities and in the wider world, in 2017. Four years ago we launched our global Make a Difference month with 75 employees taking action in our communities. This year almost 500 employees took part. We raised over $115,000 for our global charity partner, All Hands and Hearts, and by supporting the fundraising efforts of our people we donated a further $33,000 to charities around the world. We also launched our first ever global volunteering with All Hands and Hearts, which saw eight Beazley employees spend two weeks in Nepal building a much-needed community school.
Products with a purpose Beazley’s Marketplace workstream focuses on the impact that we have on the world through our business, insurance. We strongly believe that insurance in itself is a force for good – facilitating economic activity and development, helping to protect people, property and businesses from the worst effects of adverse events, and enabling them to recover more swiftly when risks materialise.
“ At Beazley, we pride ourselves on our ability to think creatively and provide innovative solutions to challenges. We are now bringing this innovative force to bear on some of the challenges the world faces. The insurance industry is well positioned to do this – our business is managing risks. Beyond helping to meet the financial costs of insured events, we can use our expertise to promote sustainability efforts through managing and mitigating risks, and promoting resilience.”
Finding products with a purpose Our new Marketplace strategy prioritises the pursuit of positive externalities. With the support of the executive committee, underwriters from across the business are embarking on a process to explore how, through our insurance products, we can improve environmental and social outcomes, not just for our clients but for the uninsured people and places affected by an insured event occurring.
This year we have formalised our participation in the Lloyd’s Disaster Risk Facility (DRF) with a consortium agreement with six other syndicates, although this was not utilised in 2017. With a headline capacity of $425m for any risk, the facility can support governments or organisations in emerging markets to improve resilience and deal with the economic consequences of natural disasters. Through the DRF, we are represented on the Insurance Development Forum, an industry body focused on increasing the use of insurance and its associated risk management capabilities to increase resilience and protection for vulnerable countries and communities.
“ I am very proud of the way we at Beazley contribute to our communities, our charities and the environment. It is a key part of Being Beazley and something that matters enormously to our people.”
All Hands and Hearts have offices in both the UK and US and respond to the needs of communities impacted by devastation from natural disasters, which encompasses the following steps: > Respond – engaging and leveraging volunteers, partner organisations and local communities to take part in activities like ‘mucking and gutting’ after a flood, clearing after an earthquake or safe demolition for buildings that are dangerous > Recover – working together with communities to meet their longer term needs by rebuilding the basic ‘hubs’ of a community, including homes, schools, daycare facilities and community centres > Renew – becoming part of the fabric of the communities they serve. Projects have included weekly movie nights for kids in Malawi to offset the devastation with smiles and laughter, holding weekly English tutoring sessions in the Philippines or hosting a Thanksgiving dinner for hundreds of flood victims in Detroit.
The charity committees help support employees who would like to organise internal fundraising activities or activities for groups of people to get involved in.
> Also, in September, the ‘All Hands No Legs’ team of seven Beazley employees took part in the 75km Thames Kayak Challenge over two days, raising over £4,000 for All Hands and Hearts to support their work in Nepal, Peru and Houston.
Atlanta volunteers > Singapore’s first fundraising event of a broker quiz night; > Members of the New York office teamed up with Marsh and volunteered to serve a catered lunch for families with sick children, including donating toys to children; > Farmington’s chilli cook-off; > Members of the Dallas office partnered with Lockton to help feed children in need for the Children’s Hunger Fund in Dallas; they supported Arthur J. Gallagher at a charity sand volleyball game to support children in need and have been working with our charity partner, All Hands and Hearts, to support those recovering from Hurricane Harvey; and > Over 80 employees took part in the JP Morgan Run, raising money for the Macmillan Trust in London. Colleagues in Farmington and Paris also took part in similar 5K runs to raise money to support local cancer charities.
These events not only raise donations and awareness for All Hands and Hearts and other charities, but also help strengthen employee engagement.
Beazley was awarded the ‘Employer of the Year’ award for the second time by the Brokerage CityLink to recognise our work on their internship programme.
We hosted a stall at the Lloyd’s Careers Fair event for school leavers and undergraduates in our community, with six volunteers taking part.
We are tenants in all our buildings globally and, working closely with our landlords, we lead and support on environmental initiatives in our offices.
Diversity & Inclusion Diversity in our workforce Having a talented workforce that reflects the customers we serve and the communities we work in is a key enabler of our vision. Our diversity and inclusion vision is to inspire and develop people with diverse perspectives to thrive at all levels of our business.
During 2017, we continued with our focus on enhancing gender diversity, in particular at more senior levels of the organisation. As part of that, we became the first Lloyd’s managing agent to sign up to HMT’s Women in Finance Charter. Through the charter we have committed to increase the women in our senior leadership team to at least 35% by the end of 2020. You can see more information about the charter at www.beazley.com including the other commitments we have made, such as a link to the chief executive and finance director’s variable pay. We are also members of the 30% Club, which is further demonstration of our commitment to gender diversity.
“ We are proud of the progress we’re making on our journey to an inclusive culture that capitalises on the diversity of our people. We know there is still a fair distance to travel but we are confident that the steps we’re taking will lead us to our vision.”
Statement on the Modern Slavery Act 2015 We abide by and are committed to the requirements of the Modern Slavery Act. We continue to work to ensure there is no slavery, human trafficking or forced labour in our supply chains.
We have also expanded our activity to cover other areas of diversity. The 2017 highlights are set out below.
Stonewall We have become proud members of Stonewall who will work with us to identify the best support for our colleagues in the LGBT+ community.
Management report The directors’ report, together with the strategic report on pages 1 to 73, serves as the management report for the purpose of Disclosure and Transparency Rule 4.1.8R.
Results and dividends The consolidated profit before taxation for the year ended 31 December 2017 amounted to $168.0m (2016: $293.2m).
The aforementioned second interim dividend will be paid on 28 March 2018 to shareholders on the register on 2 March 2018.
Going concern and viability statement A review of the financial performance of the group is set out on pages 42 to 51. The financial position of the group, its cash flows and borrowing facilities are included therein.
After reviewing the group’s budgets and medium term plans, the directors have a reasonable expectation that the group has adequate resources to continue in operational existence for the foreseeable future. For this reason they continue to adopt the going concern basis in preparing the accounts.
In accordance with provision C.2.2 of the UK Corporate Governance Code, the directors have assessed the viability of the group. The viability statement, which supports the going concern basis mentioned above, is included in the risk management section at page 59.
The board is complying with the provision on annual re-election of all directors in accordance with the UK Corporate Governance Code. The appointment and replacement of directors is governed by the Company’s Articles of Association (the ‘Articles’), the UK Corporate Governance Code (the ‘Code’), the Companies Act 2006 and related legislation. The Articles may be amended by a special resolution of the shareholders. Subject to the Articles, the Companies Act 2006 and any directions given by special resolution, the business of the company will be managed by the board who may exercise all the powers of the company.
Directors’ interests The directors’ interests in shares of the company, for those directors in office at the end of the year, including any interests of a connected person (as defined in the Disclosure and Transparency Rules of the UK’s Financial Conduct Authority), can be found in the directors’ remuneration report on page 97.
Risk management The group’s approach to risk management is set out on pages 55 to 61 and further detail is contained in note 2 to the financial statements on pages 142 to 154.
Recent developments and post balance sheet events Recent developments and post balance sheet events are given in note 34 to the financial statements on page 192.
Share capital As at 31 December 2017, the company’s issued shared capital comprised 525,778,033 ordinary shares, each with a nominal value of 5p and representing 100% of the total issued share capital. Details of the movement in ordinary share capital during the year can be found in note 21 on page 172. There are no restrictions on the transfer of shares in the company other than as set out in the articles of association and certain restrictions which may from time to time be imposed by law and regulations.
Beazley’s GHG emission intensity ratio (emissions/employee/year) fell from 8.8 tCO2e/employee in 2015 to 7.1 tCO2e/employee in 2016.
Beazley’s corporate GHG emissions are summarised in the table below: European Offices North American Offices
Scope 1 Emissions 2015: 171.69 2016: 51.48 2015: data not available 2016: data not available
Total 2015: 6,415.47 2016: 5,173.31 2015: 1,665.12 2016: 1,653.95 tCO2e/employee/year 2015: 8.8 2016: 7.1
Auditor KPMG LLP has indicated their willingness to continue in office. Accordingly, a resolution to reappoint KPMG LLP as the auditor of the company will be proposed at the annual general meeting.
The board and its committees met regularly during the year to set direction and risk appetite and provided oversight and control of management in the day-to-day running of the business. We promote a culture of openness and debate at each meeting and seek to receive constructive challenge from the non-executive directors to help develop proposals on strategy and other matters. As chairman, I seek to ensure this is achieved, that appropriate decisions are then reached, and that we empower management to then execute those decisions, with our ongoing oversight and support. Each of the strategic initiatives has been assigned a non-executive sponsor. In May, we held our annual board strategy day and topics included were the long term plan, emerging risks and opportunities, deep dives into our specialty lines division and the Data and Analytics strategic initiative and a competitor analysis.
Clive Washbourn resigned from the board on 20 July 2017 and we would like to thank him for his valuable contributions during his time on the board.
Our committees and committee chairmen The audit and risk committee assists the board of directors in fulfilling its oversight responsibilities for the financial reporting process, the system of internal control, the audit process, and the company’s process for monitoring compliance with laws and regulations and the Beazley code of conduct. It also ensures that an effective risk management process exists in the major regulated subsidiaries and that the Beazley group has an effective framework and process for managing its risks.
Appointed: 15 March 2001* Experience: Neil joined Beazley in 1990 and was appointed to the board in 1993. He has 33 years of Lloyd’s experience and, in 2011, joined the board of the Lloyd’s Market Association, becoming chairman on 1 January 2016. Neil was elected to the Council of Lloyd’s with effect from 1 February 2016. Committee: Executive committee
Appointed: 12 June 2003* Experience: Andrew joined Beazley in June 2003 as finance director. Prior to that he held various financial positions within ING, NatWest and Lloyds Bank and was the chief financial officer for the UK wholesale banking division of ING immediately prior to joining Beazley. He qualified as a chartered accountant with Coopers and Lybrand in 1987. He joined the board of Man Group plc in 2013 as a non-executive director. Committee: Executive committee (chairman)
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 deputy chairman of the board at AIB Plc, senior independent director and chair of the audit committee. 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
Robert Stuchbery Non-executive director Appointed: 11 August 2016 Experience: Bob had previously been appointed as a nonexecutive director to the board of Beazley Furlonge Ltd, the group’s Lloyd’s managing agency, where he chairs the risk committee. He brings extensive Lloyd’s experience, having been CEO of Chaucer until 2015 and a deep knowledge of the Lloyd’s market and distribution and operational strategies. Committee: Audit and risk committee
Financial reporting for insurance companies can seem to be complex. In order to help shareholders and potential investors better understand the key drivers of the business and its prospects, we have endeavoured to provide increasing levels of transparency and explanation in our communications. As a result, in addition to enhancing the information contained in the annual and interim reports, the investor relations centre on the company website contains a substantial amount of relevant information for investors, including key corporate data and news, presentations to analysts, information for the names’ of syndicate 623 and special purpose syndicate 6107, analyst estimates and a financial calendar. The website also gives investors the opportunity to sign up for an alert service as new information becomes available.
There is regular dialogue with institutional shareholders, as well as general presentations after the preliminary and interim results. The board is advised of any specific comments from institutional investors, to enable it to develop an understanding of the views of major shareholders. All shareholders have the opportunity to put questions at the company’s annual general meeting.
Financial calendar 2 March 2018 Second interim dividend record date 22 March 2018 Annual general meeting 28 March 2018 Second interim dividend payment date for the six months ended 31 December 2017 20 July 2018 First interim dividend announcement for the six months ended 30 June 2018
The board Key responsibilities Leadership, strategic aims, risks, values and standards.
Shareholders 1 Clive Washbourn resigned from the Beazley plc board with effect from 20 July 2017.
2 David Roberts was appointed to the Beazley plc board with effect from 1 November 2017.
David Roberts was appointed to the board as a non-executive director on 1 November 2017 and will replace Dennis Holt as non-executive chairman at the AGM in March 2018. Dennis Holt will be stepping down from the board at that time, having served two full three-year terms as chairman. Clive Washbourn resigned from the board on 20 July 2017.
1 Robert Stuchbery was unable to attend the audit and risk committee meeting on 27 January 2017 due to a scheduling conflict.
During the year, the board has spent time particularly on: • review of strategic initiatives; • review of the competitive landscape; • discussions over prioritisation of investment expenditure; • Solvency II reporting; • review of risk management framework, including risk appetite; • continued monitoring of market conditions prior to and following the UK referendum and consideration of the implications of its result; • understanding the General Data Protection Regulation and review of the project due for implementation in May 2018; • review of the ORSA; • discussion on capital position and dividends; • cyber product development and cyber security; • new acquisitions and the Beazley Insurance dac expansion plans for the UK, Spain, France and Germany; • review of developments in corporate governance and receipt of key legal and regulatory updates including revisions to modern slavery legislation and the PRA/FCA Senior Insurance Managers’ Regime; and • discussion of the outcome of the board evaluation and effectiveness review and agreement of improvement opportunities.
In November 2017, Beazley signed up to HM Treasury’s Women in Finance Charter. The aim of the Charter is to help build a more balanced and fair financial services industry, by working together with other signatories to see gender balance at all levels across the sector.
Beazley also joined Stonewall and the Business Disability Forum in 2017. Both organisations will work closely with Beazley to provide the best possible support for our colleagues in the LGBT+ community, and for those living with disabilities, to help Beazley become a more inclusive and supportive place to work.
There is an agreed principle that directors may take independent professional advice if necessary at the company’s expense, assuming that the expense is reasonable. This is in addition to the access which every director has to the company secretary. The company secretary is charged by the board with ensuring that board procedures are followed.
Board performance evaluation Under the UK Corporate Governance Code, the board is required to undertake formal and rigorous evaluation of its own performance and that of its committees and individual directors, and this should be externally facilitated every three years. An externally facilitated assessment of the board and its committees will be conducted in 2018. A self-assessment of the board and its committees was carried out in 2017, the results of which are described in the nomination committee report on page 94. No significant issues were raised.
The board agreed the 2017 risk appetite for the group at the end of 2016 and, throughout 2017, the board has considered and acted upon the information presented to it in order to make risk based decisions against the 2017 risk appetite. Key components of the risk management framework include monthly control self assessments and six monthly risk assessments, with ad hoc risk assessments being conducted when required. These matters have been considered by the executive risk and regulatory committee each month and the audit and risk committee and board quarterly. In addition, the board has considered the quarterly Own Risk and Solvency Assessment report in the past year. This risk management framework has provided the board with an ongoing process for identifying, assessing, monitoring and managing the risks to the company, and accords with the UK Financial Reporting Council’s ‘Guidance on Risk Management, Internal Control and Related Financial Business Reporting’ document.
The board has delegated oversight of audit and risk matters to the audit and risk committee which currently comprises Angela CrawfordIngle (chairman), George Blunden, Catherine Woods, Christine LaSala and Robert Stuchbery. The members of the committee are unchanged from 2016 which has aided us in carrying out the full range of our responsibilities in a consistent manner.
There is regular attendance by plc audit and risk committee members at the group’s regulated entity audit and/or risk committees, further demonstrating our proactive approach to understanding our control and risk environment at all levels of the organisation.
Only members of the committee have the right to attend meetings; however standing invitations are extended to the chief executive officer, the group finance director, the chief underwriting officer, the chief risk officer, the head of internal audit and the head of compliance. Other non-members may be invited to attend all or part of any meeting as and when appropriate. The company secretary acts as secretary to the committee.
The primary role of the audit and risk committee in relation to financial reporting is to monitor the integrity of the financial statements of the group and any formal announcements relating to the group’s financial performance, and to review significant financial reporting judgements. The committee has continued to approach its review of the annual report as a whole with focus on behalf of the board on considering the concept of ‘fair, balanced and understandable’. We have challenged ourselves to ensure the key messages about the performance of the business are delivered in a manner consistent with our own understanding and interpretation of the information we receive.
Specific committee responsibilities are set out below: a) Financial and narrative reporting • monitor the integrity of the company’s financial statements and any other formal announcements relating to the company’s financial performance; • review the annual report before submission to, and approval by, the board, and before clearance by the external auditors. This covers critical accounting policies, significant financial reporting judgements, the going concern assumption, compliance with accounting standards and other requirements under applicable law and regulations and governance codes applicable to the financial statements; and
b) Internal control and risk management systems • review the company’s internal financial controls and the company’s internal control and risk management systems; advise the board on the company’s risk management framework, which includes the risk management objectives, risk appetite, risk culture and assignment of risk management responsibilities; • review risk reports and management information to enable a clear understanding of the key risks and controls in the business; • review any breaches of risk appetite and the adequacy of proposed action; • review the identification of future risks, including considering emerging trends and future risk strategy; and
• review and approve the annual audit plan to ensure that it is consistent with the scope of the audit engagement, having regard to the seniority, expertise and experience of the audit team; and
f) Actuaries • recommend to the board the appointment and termination of any firm of consulting actuaries used for the provision of Syndicate Actuarial Opinions and/or review of insurance reserving; and
Principal activities The principal activities undertaken by the committee in discharging its responsibilities in 2017 are described below: a) Significant financial statement reporting issues The significant financial statement reporting issues, along with the significant matters and accounting judgements that the committee considered during the year under review, are set out below.
i) Valuation of insurance liabilities As further explained in note 1 to the financial statements, the group’s policy is to hold sufficient provisions, including those to cover claims which have been incurred but not reported (IBNR) to meet all liabilities as they fall due. The reserving for these claims represents the most critical estimate in the group’s financial statements. During 2017, we observed a significant amount of natural catastrophe activity which impacted many lines of business underwritten by Beazley. While there remains uncertainty around the final cost of these events to the company, the committee notes that Beazley continues to adopt a prudent approach where uncertainty exists as to the final cost of settlement.
G overnance www.beazley.com Annual report 2017 Beazley 89 projected ultimate claims costs to allow for the risks and uncertainties within the portfolio, and the committee was satisfied that there were no errors or inconsistencies that were material in the context of the financial statements as a whole.
During the year and at year end, we received updates from management on the level of estimations used in our close process and the controls carried out to review these estimates retrospectively. The main areas of estimation and judgement remain materially consistent with prior years, with IBNR representing the most crucial estimate within the group’s financial statements. The committee also reviews the process and controls related to actuarial and underwriting estimates of written premium. The committee continued to receive periodic reporting from both the finance and actuarial functions on our estimation process, and the related controls, in respect of claims reserves, premium income estimates and other key financial statement captions. The committee was satisfied that, based on the information provided to them, the estimates used in the financial close process are appropriate.
The committee also discussed the likely impact of IFRS 17 and in particular the impact that this new standard would have on the current financial close process, including data flows and controls. The committee expects that this new standard will remain a key focus over the next 3-4 years. The committee notes management’s intention to undertake more detailed impact analysis throughout 2018 and will monitor the progress of this analysis throughout the year.
iii) Valuation of financial assets at fair value The group reports its financial assets at fair value. The board is responsible for setting the investment strategy, defining the risk appetite and overseeing the internal and outsourced providers via the chief investment officer. The committee notes that the overall investment strategy is broadly unchanged from prior periods. The committee receives updates from the group finance director and/or the chief investment officer and it has reported for 2017 that the investment portfolio is in line with the board approved risk appetite, that carrying values of the portfolio as at 31 December 2017 are appropriate and that the valuation methodologies applied to each hierarchy level are consistent with the accounting policies. Committee members are invited to and regularly attend the investment committee.
No misstatements that were material in the context of the financial statements as a whole were identified and the committee was satisfied with the approach employed by management in valuing the financial assets at fair value on the balance sheet at 31 December 2017.
Following a review of the group’s year end debtor position, the committee is comfortable that the level of insurance receivables on the group’s balance sheet do not require adjustment.
viii) Intangible asset valuation The audit and risk committee received an overview of management’s valuation of intangibles. The committee reviewed and noted the approach in relation to the creation of an intangible asset on the acquisition of Creechurch Underwriters, a managing general agency in Canada, and the amortisation period of 5 years. The committee was satisfied that management’s approach in respect of this acquisition, and the carrying value of all of the group’s intangible assets, is reasonable.
b) Other updates During 2017, 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, changes in regulatory requirements and the upcoming General Data Protection Regulation in particular; • compliance, financial crime and assurance reporting including risk incident information; • the group’s proposed audit tender strategy (discussed further below); • 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 2017 and can confirm that Beazley plc has been operating within risk appetite as at 31 December 2017. The committee has also reviewed the proposed 2018 risk appetite; • risk assessment: The committee has performed a review of the group’s risk profile to assess its coverage of the universe of risk and that major underlying risks are visible and are being monitored; • risk profiles: The committee and the risk committees of the subsidiary boards have reviewed Beazley’s risk profiles, which are focused risk assessments of specific topics. In 2017, 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.
G overnance www.beazley.com Annual report 2017 Beazley 91 b) Compliance The group head of compliance has direct access to the committee members and attends all committee meetings.
During 2017, the committee: • monitored the implementation of the 2017 compliance plan; • reviewed and approved the 2018 annual compliance plan, including the compliance monitoring programme; • reviewed changes in the regulatory environment applicable to Beazley; • received updates on relationships with key group regulators, and oversight of regulatory requests; • provided oversight to regulatory responses to corporate developments; • reviewed updates from the money laundering reporting officer on the adequacy and effectiveness of the company’s anti-money laundering systems and controls; • provided oversight of the progress of the business in addressing identified enhancements to compliance requirements; • approved the group policies and controls in respect of whistleblowing, anti-bribery and corruption, and anti-fraud; and
As disclosed in the group’s annual report for the year ended 31 December 2016, the board have committed to changing group auditor no later than for the 2019 financial year. In this regard, a comprehensive audit tender process will take place during 2018 and is expected to be a priority of the audit committee throughout the year.
During 2017, the FRC’s AQR team reviewed our external auditor’s audit of our 2016 financial statements. The committee has discussed this review with the AQR team and the external auditor. The review noted a small number of observations, the implementation of which have not had a significant impact on the audit approach of the external auditor.
These considerations are taken in to account by the committee when determining whether to reappoint the external auditor. Noting the intention to run a comprehensive audit tender process during 2018 with a view to appointing a new external auditor for 2019 reporting year, the committee recommends that the board re-appoint KPMG to perform the 2018 external audit.
iii) Non-audit services The audit and risk committee’s responsibility to monitor and review the objectivity and independence of the external auditor is supported by a policy that we have developed in relation to the provision of non-audit services by the auditor. During 2017, our non-audit services policy was updated, enhanced and reviewed by the committee.
The split between audit and non-audit fees for the year under review is disclosed in note 6 to the financial statements. In the year the audit fees for the statutory audit of the consolidated financial statements were $0.9m (2016: $1.0m) while fees paid for non audit and assurance services were $1.4m (2016: $1.2m). Fees for non audit and assurance services include work related to the accounts and regulatory reporting of the syndicates managed by Beazley, work which would commonly be carried out by the external auditor.
Committee effectiveness The committee considers its effectiveness regularly. An assessment was externally facilitated in 2017 using an online survey completed by members of the committee. The review concluded that the committee was operating effectively and efficiently and there were no major issues highlighted for attention.
The nomination committee meets at least twice annually and at such other times during the year as is necessary to discharge its duties. In 2017 there were five scheduled meetings, reflecting the workload of the committee during the year. Only members of the committee have the right to attend meetings; however other individuals, such as the chief executive and external advisers, may be invited to attend for all or part of any meeting.
The specific responsibilities and duties of the committee are set out in its terms of reference which were updated in July 2017 to include specific responsibility to keep under review the leadership needs of the organisation, both executive and non-executive, with a view to ensuring the continued ability of the organisation to compete effectively in the marketplace. The terms of reference are available to download from the company’s website.
• ensure all employees receive equality of opportunity in recruitment, training, development, promotion and remuneration.
Key activities in 2017 Tasks which the committee carried out in 2017 were to: • recommend the appointment of an additional non-executive director with a view to him or her taking on the chairmanship of the board following the 2018 AGM, when the current chairman retires. This appointment was made on merit and against objective criteria. For the recruitment process the committee was assisted by JCA Group, recruitment consultants; • review 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; • ensure board members were able to allocate sufficient time to the company to discharge their responsibilities effectively; and
The 2017 Annual General Meeting approved the latest version of Beazley’s remuneration policy. This can be found on our website at www.beazley.com. The basis of the policy is to attract and keep those who are among the best in the world in specialist insurance, rewarding sustained performance as well as keeping the company competitive. There are no significant changes to the implementation of the policy this year.
Annual bonus framework and reporting As in previous years, bonuses are linked to return on equity (ROE). The senior team are rewarded on their individual performance, not through a formula. Later in the report you can find how targets were set and the link to the bonuses through individual achievements. This year we have expanded on our disclosure to provide shareholders with additional clarity on the way in which we determine individual bonuses.
Remuneration principles The main aim of Beazley’s policy is to ensure that management and staff are remunerated fairly and in such a manner as to facilitate the recruitment, retention and motivation of suitably qualified personnel. In particular we believe that: • performance-related remuneration is an essential motivation to management and staff and should be structured to ensure that executives’ interests are aligned with those of shareholders; • individual rewards should reflect the group objectives but be dependent on the profitability of the group and be appropriately
Performance in 2017 Beazley performed strongly in a challenging year with an exceptional series of natural catastrophes and the incentive outcomes reflect this.
■ Share price at grant ■ Share price appreciation 2013 award 2015 award
Element Overview of policy Implementation and outcomes during 2017 Implementation for 2018
Salary increases of c.2.6% were awarded to executive directors, below the average for the wider employee workforce. Salaries for 2018 will be as follows: • D A Horton: £468,500 • M L Bride: £330,000 • A P Cox: £351,000 • N P Maidment: £351,000
Executive directors receive a pension contribution or cash payment in lieu of pension of 15% of base salary.
ROE in the year was 9%. Profit for the year was $168m.
Bonus outcomes range from 31% to 44% of maximum. A portion of each director’s bonus was deferred into shares as shown on page 105.
The first tranche of the 2015 LTIP award vested at 96.3% of maximum following three year NAVps performance of 16.1% p.a.
The second tranche of the 2013 LTIP award vested at 100% of maximum following five year NAVps performance of 18.1% p.a.
In 2018, the following grants as a percentage of base salary will be made, subject to the usual NAVps performance condition: • D A Horton: 200% • M L Bride: 150% • A P Cox: 150%
Annual remuneration report The symbol ▪ by a heading indicates that the information in that section has been audited.
This part of the report, the annual remuneration report, sets out the remuneration out-turns for 2017 (and how these relate to our performance in the year) and details of the operation of our policy for 2018.
3 Clive Washbourn stepped down from the board effective 20 July 2017. He remains employed by the group. Figures in the table above have been pro-rated to reflect the period of time during which he was an executive director. The LTI figure for 2017 includes the vesting of the second and final tranche of the legacy MSIP award granted in 2013 to address a commercial risk to the business. This was an award, approved by shareholders, with performance conditions which required sustained exceptional divisional performance. The marine division achieved average ROE results over the five years to 31 December 2017 of 39.8% p.a resulting in 100% of the award vesting. For Clive Washbourn £2,258,690 of the single figure is a direct result of the MSIP award.
The figures in the preceding table reflect the following: • salaries for 2017 increased by an average of 2.0%, which was below the average increase for all employees; • annual bonus out-turns were lower than last year, commensurate with group performance; and • LTI out-turns reflect that the second tranche of the 2013 LTI award vested in full and that the first tranche of the 2015 LTI award vested at 96.3% of maximum. Beazley achieved sustained NAV growth of 16.1% per annum and 18.1% per annum over the three and five year periods respectively. Beazley also achieved significant share price appreciation as detailed in the notes to the table.
2 Sir Andrew Likierman was appointed the chairman of the remuneration committee on 24 March 2016 and the figure in the table above includes fees paid for the chairmanship of the remuneration committee from this date.
For 2018, the average salary increase for executive directors was 2.6%, below the average salary increase across the group.
Annual bonus plans ▪ The enterprise bonus plan is a discretionary plan in which all employees are eligible to participate. The operation of a pool approach reflects Beazley’s commitment to encourage teamwork at every level, which, culturally, is one of its key strengths.
Bonus framework The framework for determining bonuses is as follows: • a percentage of profit is allocated to a bonus pool subject to a minimum group ROE; and • the percentage of profit increases for higher levels of ROE.
In determining awards, the committee will not necessarily award the enterprise bonus pool in aggregate (i.e. the sum of the bonus awards may be less than the enterprise bonus pool).
participate) was calculated based on this. • 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
Corporate achievements Corporate achievements that the committee took into account for the year included the following: • the delivery of a profit after tax of $130.0m, and the return of $76.5m to shareholders by way of dividend despite paying out
to clients in Europe, Asia and Latin America; • acquisition and integration of Creechurch Underwriters in the Canada; • creation of a Dublin based insurance company permitted to transact business throughout the European Union; • strong investment performance with a portfolio return of 2.9%; and • continued growth of the US business, with gross premiums written growing 12% in 2017.
• Strong investment return of 2.9% Adrian P Cox • Delivery of strong results across the book with a combined ratio below 90%
• Strong growth of the book with an increase of 11% this year • Execution of the specialty lines international plan, building out the team and opening a new office in Spain and acquisition of Creechurch Underwriters in Canada
• Growth of 7% in overall portfolio in environment of falling rates in many classes • Oversaw the successful merger of the life, accident & health and political risk & contingency divisions and disposal of the Australian A&H business Clive A Washbourn • Achievement of sustained cumulative ROE of 39.8% over the past five years.
Bonus awards for 2017 Within the framework of the annual bonus, in respect of individual performance and achievements, awards are dependent on a profit pool and minimum level of ROE performance.
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 2017 (see investment in underwriting section on pages 108 and 109 for further details).
For 2017, the portion of each director’s annual bonus deferred into shares was as follows: Deferred into shares
Martin L Bride £100,000 Adrian P Cox £150,000 D Andrew Horton £170,000 Neil P Maidment £125,000 Clive A Washbourn –
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.
LTIP awards vesting in respect of the year ▪ The LTIP awards shown in the single total figure of remuneration for 2017 include: • the second tranche of awards granted on 13 February 2013. These are due to vest on 13 February 2018, subject to the achievement of a NAVps growth performance condition over the five years ended 31 December 2017; and
• the first tranche of awards granted on 10 February 2015. These are due to vest on 12 February 2018, subject to the achievement of a NAVps growth performance condition over the three years ended 31 December 2017.
Actual NAVps growth achieved in the five years to 31 December 2017 was 18.1% p.a. which resulted in 100% of the second tranche of the 2013 awards vesting.
Actual NAVps growth achieved in the three years to 31 December 2017 was 16.1% p.a. which resulted in 96.3% of the first tranche of the 2015 awards vesting.
MSIP award vesting in respect of the year ▪ The MSIP award shown in the single total figure of remuneration for 2017 includes: • the second tranche of the award granted on 5 April 2013. This is due to vest on 5 April 2018, subject to pre-tax divisional ROE performance over the five years ended 31 December 2017.
Actual ROE achieved in the five years to 31 December 2017 was 39.8% p.a. resulting in 100% of the award vesting.
LTIP awards for 2017 ▪ During 2017 LTIP awards with a face value equal to 200% of salary for the CEO and 150% of salary were granted to executive directors, other than for the head of specialty lines. For the head of specialty lines an LTIP award of 175% of salary was granted in recognition of his contribution to the group. The awards were as shown in the table below.
1 The face value of shares awarded was calculated using the three day average share price prior to grant, which was 434.33p.
LTIP awards for 2018 It is intended that the performance conditions for the LTIP awards for 2018 will be in line with those granted in 2017 (see table above). LTIP awards will be 200% of salary for the CEO and 150% for other executive directors.
To date over 270 employees of the group have committed to put at risk £13.3m of bonuses to the underwriting results of syndicate 623. Of the total at risk, £11.8m has already been deferred from the bonuses awarded.
The executive directors are currently fully funded in the plan and no further bonus deferral was made in 2017.
Annual bonus and LTIP awards may be subject to clawback in the event of: • material misstatement of results; • gross misconduct; or • factual error in calculating vesting or award.
Under the profit related bonus plan payments are aligned with the timing of profits achieved on the account. For long tail accounts this may be in excess of six years.
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 for executive directors.
Having served as an executive director since 2006 Clive Washbourn stepped down from the board for personal reasons effective 20 July 2017. Clive remains a member of the executive committee and continues to serve on the board of Beazley Furlonge Ltd. His outstanding share awards subsist to their normal release/vesting date subject to performance where applicable.
The current contracts in place for executive directors are as follows: Date of contract
The notice period for each of the above contracts is 12 months. There is no unexpired term as each of the executive directors’ contracts is on a rolling basis.
External appointments Andrew Horton has been a non-executive director of Man Group plc since 3 August 2013, and he retains the fees in respect of this appointment. Fees for the year 2017 were £80,000.
Neil Maidment was appointed to the Council of Lloyd’s on 1 February 2016, and he retains the fees in respect of this appointment. Fees for the year 2017 were £47,500.
Beazley operates across Lloyd’s, Europe and the US markets through a variety of legal entities and structures. Non-executive directors, in addition to the plc board, typically sit on either one of our key subsidiary boards, namely Beazley Furlonge Ltd, our managing agency at Lloyd’s, or Beazley Insurance dac, our Irish insurance company. As a result of developments in regulation, the degree of autonomy in the operation of each board has increased in recent years, with a consequent increase in time commitment and scope of the role.
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 2021 David L Roberts 1 Nov 2017 AGM 2021 John P Sauerland 5 May 2016 AGM 2020 Robert A Stuchbery 11 Aug 2016 AGM 2020 Catherine M Woods 1 Jan 2016 AGM 2019
To align staff bonuses with individual performance and achievement of objectives.
If the account deteriorates as it develops any payouts are ‘clawed back’ through reductions in future profit related pay bonuses. From 2012 onwards any new profit related pay plans may be at risk of forfeiture or reduction if, in the opinion of the remuneration committee, there has been a serious regulatory breach by the underwriter concerned, including in relation to the group’s policy on conduct risk.
UK SAYE The company operates an HMRC-approved SAYE scheme for the benefit of UK-based employees. The scheme offers a three-year savings contract period with options being offered at a 20% discount to the share price on grant. Monthly contributions are made through a payroll deduction on behalf of participating employees. The UK SAYE scheme has been extended to eligible employees in Singapore and Ireland. The Irish SAYE scheme has been approved by the Irish Revenue.
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.
Retention shares The retention plan may be used for recruitment or retention purposes. Any awards vest at 25% per annum over years three to six. Policy going forward is that existing executive directors do not participate in this plan and no executive directors have subsisting legacy awards outstanding.
■ Actual holding as % of salary ■ Holding requirement as % of salary
CEO pay versus performance The following graph sets out Beazley’s nine year total shareholder return performance to 31 December 2017, 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.
■ Beazley ■ FTSE All Share ■ FTSE 350 Non-Life Insurance
LTIP 2013 – 3/5 year Awards were made on 13 February 2013 at a mid-market share price of 204.2p. 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.
LTIP 2014 – 3/5 year Awards were made on 11 February 2014 at a mid-market share price of 273.13p. Performance conditions: all of the award is subject to NAVps performance, with 50% measured over a three year period and 50% measured over a five year period. NAVps < RFR+7.5% p.a. equates to 0% vesting, NAVps = RFR+7.5% p.a. equates to 10% vesting, NAVps = RFR+10% p.a. equates to 25% vesting, NAVps = or > RFR+15% p.a. equates to 100% vesting, with straight-line pro-rated vesting between these points.
LTIP 2017 – 3/5 year Awards were made on 8 February 2017 at a mid-market share price of 434.33p. 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.
During the year the committee was advised by remuneration consultants from Deloitte LLP. Total fees in relation to executive remuneration consulting were £96,800. Deloitte LLP also provided advice in relation to share schemes, tax, internal audit and compliance support.
Company law requires the directors to prepare group and parent company financial statements for each financial year. Under that law they are required to prepare the group financial statements in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs as adopted by the EU) and applicable law and have elected to prepare the parent company financial statements on the same basis.
Responsibility statement of the directors in respect of the annual financial report We confirm that to the best of our knowledge: • the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the company and the undertakings included in the consolidation taken as a whole; and
We consider the annual report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the group’s position and performance, business model and strategy.
We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities are described below. We believe that the audit evidence we have obtained is a sufficient and appropriate basis for our opinion. Our audit opinion is consistent with our report to the audit committee.
We were appointed as auditor by the shareholders on 6 November 2002. The period of total uninterrupted engagement is for the 15 financial years ended 31 December 2017. We have fulfilled our ethical responsibilities under, and we remain independent of the Group in accordance with, UK ethical requirements including the FRC Ethical Standard as applied to listed public interest entities. No non-audit services prohibited by that standard were provided.
Key audit matters are those matters that, in our professional judgment, were of most significance in the audit of the financial statements and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by us, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. We summarise below the key audit matters (unchanged from 2016), in decreasing order of audit significance, in arriving at our audit opinion above, together with our key audit procedures to address those matters and, as required for public interest entities, our results from those procedures. These matters were addressed, and our results are based on procedures undertaken, in the context of, and solely for the purpose of, our audit of the financial statements as a whole, and in forming our opinion thereon, and consequently are incidental to that opinion, and we do not provide a separate opinion on these matters.
($5,167.8m, gross, $3,936.7m, net, of which incurred but not reported (‘IBNR’) represented $2,852.3m, gross, $2,078.5m, net; 2016: $4,657.7m, gross, $3,575.6m, net, of which IBNR represented $2,564.7m, gross, $1,915.3m, net)
Subjective valuation: Insurance liabilities represent the single largest liability for the Group. Valuation of these liabilities is highly judgemental because it requires a number of assumptions to be made with high estimation uncertainty such as expected loss ratios, estimates of ultimate premium and of the frequency and severity of claims and, where appropriate, the discount rate for longer tail classes of business by territory and line of business. The determination and application of the methodology and performance of the calculations are also complex.
A margin is added to the actuarial best estimate of insurance liabilities to make allowance for specific risks identified in assessment of the best estimate. The appropriate margin to recognise is a subjective judgement and estimate taken by the directors, based on the perceived uncertainty and potential for volatility in the underlying claims.
In addition to the above, the audit team performed procedures to assess the completeness and accuracy of data: — Data reconciliations: Checked the completeness and accuracy of the data used within the reserving process by reconciling the actuarial source data to the financial systems. We have also checked the completeness and accuracy of the data flow from the claims and policy systems into the financial systems primarily through the testing of automated controls.
— Reinsurance assets: Major catastrophes could impair the group’s ability to recover incurred losses from its reinsurers, depending on the financial strength of the counterparties, which would then impact the recoverability of reinsurance assets.
Our procedures included: — Data reconciliations: Reperformed the Group’s prepared reconciliations between Xchanging and the Group’s financial systems.
($4,449.6m, of which hedge funds and illiquid credit assets comprised $557.8m; 2016: $4,195.4m, of which hedge funds and illiquid credit assets comprised $449.5m)
Refer to page 89 (Audit and Risk Committee Report), page 138 (Statement of accounting policies) and page 165 (financial disclosures).
Subjective valuation: A proportion of the Group’s investment assets are comprised of either illiquid credit assets or investments in hedge funds. These assets are inherently harder to value due to the inability to obtain a market price of these assets as at the balance sheet date. As such there is judgement involved in the valuation of these assets.
The valuation of the investments are based on third party valuation reports which are received at dates other than the year end date. The investments are subject to variations in value between the date of the valuation report and the period end date. These variations where applicable require judgement to assess whether adjustments are required to the valuation of the investments at the period end date.
Our procedures included: — Reconciliation controls: Tested the design and operating effectiveness of the controls associated with the existence of the hedge funds and illiquid credit assets.
Subjective valuation: In determining gross premiums written, adjustments are made to gross premiums written to reflect adjustments to ultimate premium estimates, binding authority contract (‘binders’) adjustments, reinstatement premiums and other ad hoc adjustments to premium income.
Our procedures included: — Retrospective analysis: Critically assessed the group’s past expertise in making premium estimates through comparison of estimates and actuals for prior years for a sample of binders. We also compared the group’s estimate of gross premiums written between the early close date and reporting date to actuals.
— We found the resulting estimate of the recoverability of the parent company’s investment in subsidiaries to be acceptable (2016 result: acceptable).
Materiality for the parent financial statements as a whole was set at $7m (31 December 2016: $7m), determined with reference to a benchmark of total assets (of which it represents 1%, 31 December 2016 1%). We have used total assets as the benchmark rather than profit before tax because the purpose of the entity is to act as the ultimate parent company of the group and hold investments in other group companies and not to generate profits.
Of the group’s 33 (2016: 33) reporting components, we subjected 17 (2016: 18) to full scope audits for group purposes and 3 (2016: 3) to specified risk-focused audit procedures. These entities were not individually financially significant enough to require a full scope audit for group purposes, but did present specific individual risks that needed to be addressed.
The components within the scope of our work accounted for the percentages illustrated opposite. For the residual components, we performed analysis at an aggregated group level to re-examine our assessment that there were no significant risks of material misstatement within these.
$16m Component materiality ($16 m) Range of materiality at 17 components ($0.1m-$16m) (2016 : $0.1m-$18m)
— the related statement under the Listing Rules set out on page 70 is materially inconsistent with our audit knowledge.
In our opinion the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006.
We are required to report to you if: — we have identified material inconsistencies between the knowledge we acquired during our financial statements audit and the directors’ statement that they consider that the annual report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s position and performance, business model and strategy; or
We are required to report to you if the Statement of corporate governance does not properly disclose a departure from the eleven provisions of the UK Corporate Governance Code specified by the Listing Rules for our review.
Our audit aimed to detect non-compliance with relevant laws and regulations (irregularities) that could have a material effect on the financial statements.
In planning and performing our audit, we considered the impact of laws and regulations in the specific areas of the UK listing rules, Companies Act and Prudential Regulatory Authority and Lloyd’s of London prudential regulation. We identified these areas through discussion with the directors and other management (as required by auditing standards), from our sector experience, and from inspection of the group’s regulatory and legal correspondence. In addition we had regard to laws and regulations in other areas including financial reporting, and company and taxation legislation.
As with any audit, there remained a higher risk of nondetection of irregularities, as these may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal controls.
Financial statements 126 Consolidated statement of profit or loss 127 Statement of comprehensive income 128 Statement of changes in equity 130 Statements of financial position 131 Statements of cash flows 132 Notes to the financial statements 193 Glossary
Consolidated statement of profit or loss for the year ended 31 December 2017
Income tax expense 9 (38.0) (42.2) Profit for the year attributable to equity shareholders 130.0 251.0
Group Profit for the year attributable to equity shareholders 130.0 251.0 Other comprehensive income Items that will never be reclassified to profit or loss: Loss on remeasurement of retirement benefit obligations (0.6) (6.1)
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
Company Balance at 1 January 2016 – – – – – –
Equity settled share based payments 22 – – – 22.5 – 22.5 Acquisition of own shares in trust 22 – – – (4.6) – (4.6) Transfer of shares to employees 22 – – – 2.0 (1.8) 0.2
2 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.
Financial assets at fair value 16, 17 4,449.6 – 4,195.4 –
Current income tax asset 17.7 0.5 17.0 – Cash and cash equivalents 20 440.5 0.7 507.2 –
Cash flow from investing activities Purchase of plant and equipment 13 (1.7) – (2.9) – Expenditure on software development 12 (9.3) – (4.7) – Purchase of investments (3,299.3) – (5,985.4) – Proceeds from sale of investments 3,093.7 – 5,666.0 – Investment in associate 14 – – (0.1) – Sale of associate 14 3.0 – – – Sale of LAH renewal rights 0.8 – – – Acquisition of subsidiaries (net of cash) 35 (31.8) – (8.0) –
Cash flow from financing activities Acquisition of own shares in trust 22 (16.2) (16.2) (9.7) (4.6) Repayment of borrowings 25 – – (107.1) – Proceeds from debt issue 25 – – 248.7 –
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 2017 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.
Measurement. The standard contains the requirements for a) the classification and measurement of financial assets and liabilities; b) a new impairment methodology, and c) general hedge accounting. During 2016, the IASB stated that the effective date of IFRS 17 ‘Insurance Contracts’ will be 1 January 2021. The IASB also amended IFRS 4 to permit certain entities/groups that issue insurance contracts within the scope of IFRS 4 to defer application of IFRS 9 (Financial instruments) until accounting periods beginning on or after 1 January 2021 (the deferral approach), in order to align with IFRS 17 implementation. The activities of the group are predominately related to insurance, and there are no further significant activities not related to that of insurance. Therefore the group will opt to apply the deferral approach for the implementation of IFRS 9 and will assess the impact of this standard closer to the implementation date. Beazley plc as a standalone company will adopt IFRS 9 from 1 January 2018. However, as the standalone company has no financial investments we do not expect the adoption to have an effect on the financial statements; • IFRS 15, effective from 1 January 2018, establishes a single comprehensive model for entities to use in accounting for revenue from contracts with customers. Revenue from contracts accounted for under IFRS 4 ‘Insurance contracts’ is outside the scope of IFRS 15, but the group will have to apply the new revenue recognition standard to non-insurance contracts, such as profit and service commission agreements with third party syndicates. In 2017 the revenue from such contracts was $32.9m (2016: $32.4m). The new standard’s requirement for accounting for variable consideration could change the timing of revenue recognition for these contracts issued by the group. The group has assessed the impact of this new standard on its financial statements, and our conclusion is that new revenue standard does not have a material impact on the group’s earned income and does not change the timing of recognition of revenue from the contracts outlined above, as our current recognition approach is consistent with the new requirements under IFRS 15. On transition to the new standard, the group opts to retain prior period figures as reported under the previous standards. No cumulative effect on the group’s equity from applying IFRS 15 is expected in the period of initial application; and
• IFRS 16, effective from 1 January 2019, replaces existing leases standard, including IAS 17: Leases, and introduces a single, on-balance sheet accounting model for leases, where distinction between operating and finance leases is eliminated. The group is currently assessing the impact of the new standard on financial statements in the period of initial application and actual impact will depend on unknown factors such as lease portfolio at the date of application, borrowing rates and renewal plans for leases. The standard is expected to have a material impact on the group’s statement of financial position as large assets and liabilities related to the recognition of a right-of-use asset and lease liability will now be included. As at 31 December 2017 the group’s future minimum estimated payments under non-cancellable lease contracts amounted to $45.7m on an undiscounted basis. This represents the estimated value of the gross up of assets and liabilities on the statement of financial position. With regards to profit and loss impact, this new approach will have no long term impact. However, the group will have a different profit recognition pattern to the current process. On transition to the new standard the group will opt to retain prior period figures as reported under the previous standards. The cumulative effect of applying IFRS 16 will be shown as an adjustment to the opening balance of equity as at the date of initial application.
The most critical estimate included within the group’s financial position is the estimate for insurance losses incurred but not reported, which is included within total insurance liabilities and reinsurance assets in the statement of financial position and note 24. This estimate is critical as it outlines the current liability for future expenses expected to be incurred in relation to claims. If this estimation was to prove inadequate then an exposure would arise in future years where a liability has not been provided for. The total estimate for insurance losses incurred but not reported gross of reinsurers’ share as at 31 December 2017 is $2,852.3m (2016: $2,567.4m). The total estimate for insurance losses incurred but not reported net of reinsurers’ share as at 31 December 2017 is $2,078.5m (2016: $1,915.3m) and is included within total insurance liabilities and reinsurance assets in the statement of financial position and note 24.
Another key estimate contained within our close process is premium estimates.
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.
Financial statem ents www.beazley.com Annual report 2017 Beazley 135 1 Statement of accounting policies continued Certain group subsidiaries underwrite as corporate members of Lloyd’s on syndicates managed by Beazley Furlonge Limited. In view of the several and direct liability of underwriting members at Lloyd’s for the transactions of syndicates in which they participate, only attributable shares of transactions, assets and liabilities of those syndicates are included in the group financial statements. The group continues to conclude that it remains appropriate to consolidate its share of the result of these syndicates and accordingly, as the group is the sole provider of capacity on syndicates 2623, 3622 and 3623, these financial statements include 100% of the economic interest in these syndicates. For the other syndicates to which Beazley is appointed managing agent, being syndicates 623, 6107, and 6050, for which the capacity is provided entirely by third parties to the group, these financial statements reflect Beazley’s economic interest in the form of agency fees and profit commission to which they are entitled. Syndicate 5623 commenced underwriting on 1 January 2018 and therefore has no balances consolidated in these financial statements.
b) Associates Associates are those entities over which the group has power to exert significant influence but which it does not control. Significant influence is generally presumed if the group has between 20% and 50% of voting rights.
Foreign currency translation a) Functional and presentational currency Items included in the financial statements of the parent and the subsidiaries are measured using the currency of the primary economic environment in which the relevant entity operates (the ‘functional currency’). The group financial statements are presented in US dollars, being the functional and presentational currency of the parent and its main trading subsidiaries, as the majority of trading assets and insurance premiums are denominated in US dollars.
c) Foreign operations The results and financial position of the group companies that have a functional currency different from the group presentational currency are translated into the presentational currency as follows: • assets and liabilities are translated at the closing rate ruling at the statement of financial position date; • income and expenses for each statement of profit or loss are translated at average exchange rates for the reporting period where this is determined to be a reasonable approximation of the actual transaction rates; and • all resulting exchange differences are recognised in other comprehensive income and as a separate component of equity.
Notes to the financial statements continued 1 Statement of accounting policies continued Net earned premiums a) Premiums Gross premiums written represent premiums on business commencing in the financial year together with adjustments to premiums written in previous accounting periods and estimates for premiums from contracts entered into during the course of the year. Gross premiums written are stated before deduction of brokerage, taxes, duties levied on premiums and other deductions.
e) Renewal rights Renewal rights comprise future profits relating to insurance contracts acquired and the expected renewal of those contracts. The costs directly attributable to acquire the renewal rights are recognised as intangible assets where they can be measured reliably and it is probable that they will be recovered by directly related future profits. These costs are subject to impairment testing annually and are amortised on a straight-line basis, based on the estimated useful life of the assets, which is estimated to be between five and ten years.
g) Other receivables Other receivables categorised as loans and receivables are carried at amortised cost less any impairment losses.
h) Investment income Investment income consists of dividends, interest, realised and unrealised gains and losses and foreign exchange gains and losses on financial assets at fair value through the statement of profit or loss. Dividends on equity securities are recorded as revenue on the ex-dividend date. Interest is recognised on an effective rate basis for financial assets at fair value through the statement of profit or loss. The realised gains or losses on disposal of an investment are the difference between the proceeds and the original cost of the investment. Unrealised investment gains and losses represent the difference between the carrying value at the reporting date, and the carrying value at the previous period end or purchase value during the period.
Employee benefits a) Pension obligations The group operates a defined benefit pension plan that is now closed to future service accruals. The scheme is generally funded by payments from the group, taking account of the recommendations of an independent qualified actuary. All employees now participate in defined contribution pension arrangements, to which the group contributes.
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.
When the options are exercised and new shares are issued, the proceeds received, net of any transaction costs, are credited to share capital (nominal value) and retained earnings. When the options are exercised and the shares are granted from the employee share trust, the proceeds received, net of any transaction costs, are credited to retained earnings.
Deferred tax is provided, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of the assets and liabilities, using tax rates enacted or substantively enacted at the reporting date.
For diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all dilutive potential ordinary shares such as share options granted to employees. Share options with performance conditions attaching to them have been excluded from the weighted average number of shares to the extent that these conditions have not been met at the reporting date.
We manage and model these four elements in the following three categories: attritional claims, large claims and catastrophe events.
San Francisco quake (2017: $78.0bn) 676.9 228.2 Gulf of Mexico windstorm (2017: $112.0bn) 609.0 163.3 Los Angeles quake (2017: $78.0bn) 637.3 218.5
San Francisco quake (2016: $78.0bn) 647.1 219.0 Gulf of Mexico windstorm (2016: $112.0bn) 622.8 215.3 Los Angeles quake (2016: $78.0bn) 674.6 213.9 1 Probable market loss.
The net of reinsurance exposures for the San Francisco and Los Angeles quake scenarios have increased less than 5% during 2017. The Gulf of Mexico windstorm scenario net of reinsurance exposure has reduced by 24% due to less business being written in the Gulf of Mexico off-shore energy portfolio and additional reinsurance being purchased in the reinsurance division.
The group also has exposure to man-made claim aggregations, such as those arising from terrorism and data breach events. Beazley chooses to underwrite data breach insurance within the specialty lines division using our team of specialist underwriters, claims managers and data breach services managers. Other than for data breach, Beazley’s preference is to exclude cyber exposure where possible.
To manage the potential exposure, the board has established a risk budget for the aggregation of data breach related claims which is monitored by reference to the largest of nine realistic disaster scenarios that have been developed internally. These scenarios have been peer reviewed by an external technical expert and include the failure of a data aggregator, the failure of a shared hardware or software platform and the failure of a cloud provider. Whilst it is not possible to be precise, as there is sparse data on actual aggregated events, these severe scenarios are expected to be very infrequent. The largest realistic disaster scenario is currently lower than the exposure to the Lloyd’s prescribed natural catastrophe events listed above for the group as at 31 December 2017. However, the cost of these scenarios will increase as Beazley continues to grow its data breach product. The clash reinsurance programme that protects the specialty lines account would partially mitigate the cost of most, but not all, data breach catastrophes.
Operating divisions In 2017, the group’s business consisted of five operating divisions. The following table provides a breakdown of gross premiums written by division, and also provides a geographical split based on placement of risk.
1 During 2017, the life, accident & health division and political risks & contingency division were combined to form the political, accident & contingency division. Comparative figures for 31 December 2016 have been re-presented to reflect this change in structure and allow comparability.
b) Reinsurance risk Reinsurance risk to the group arises where reinsurance contracts put in place to reduce gross insurance risk do not perform as anticipated, result in coverage disputes or prove inadequate in terms of the vertical or horizontal limits purchased. Failure of a reinsurer to pay a valid claim is considered a credit risk which is detailed in the credit risk section on page 149.
To manage reserving and ultimate reserves risk, our actuarial team uses a range of recognised techniques to project gross premiums written, monitor claims development patterns and stress-test ultimate insurance liability balances. An external independent actuary also performs an annual review to produce a statement of actuarial opinion for reporting entities within the group.
Notes to the financial statements continued 2 Risk management continued a) Foreign exchange risk The functional currency of Beazley plc and its main trading entities is US dollars and the presentational currency in which the group reports its consolidated results is US dollars. The effect of this on foreign exchange risk is that the group is mainly exposed to fluctuations in exchange rates for non-dollar denominated transactions and to net asset translation risk on non-dollar functional currency entities.
In 2017, the group managed its foreign exchange risk by periodically assessing its non-dollar exposures and hedging these to a tolerable level while targeting to have net assets that are predominantly denominated in US dollar. As part of this hedging strategy, exchange rate derivatives were used to rebalance currency exposure across the group. Details of foreign currency derivative contracts entered into with external parties are disclosed in note 17. On a forward looking basis an assessment is made of expected future exposure development and appropriate currency trades put in place to reduce risk.
Financial statem ents www.beazley.com Annual report 2017 Beazley 147 2 Risk management continued b) Interest rate risk Some of the group’s financial instruments, including cash and cash equivalents, certain financial assets at fair value and borrowings, are exposed to movements in market interest rates.
The following table shows the modified duration at the reporting date of the financial instruments that are exposed to movements in market interest rates. Duration is a commonly used measure of volatility and we believe gives a better indication than maturity of the likely sensitivity of our portfolio to changes in interest rates.
Notes to the financial statements continued 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.
Change in fair value of hedge funds, equity funds and illiquid credit assets d) Investment risk The value of our investment portfolio is impacted by interest rate and market price risks, as described above. Managing the group’s exposures to these risks is an intrinsic part of our investment strategy.
Beazley’s 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 Solvency II internal model is used to monitor compliance with the budget, which limits the amount by which our reported annual investment return may deviate from a predetermined target, at the 1 in 10 confidence level. In 2017, the permitted deviation was $126m. Additionally, a limit is specified for the net interest rate sensitivity of assets and liabilities combined and investments are managed to ensure that this limit is not exceeded.
Financial statem ents www.beazley.com Annual report 2017 Beazley 149 2 Risk management continued The group also recognises that it is necessary for people, systems and infrastructure to be available to support our operations. Therefore we have taken significant steps to mitigate the impact of business interruption which could follow a variety of events, including the loss of key individuals and facilities. We operate a formal disaster recovery plan which, in the event of an incident, allows the group to move critical operations to an alternative location within 24 hours.
2.5 Credit risk Credit risk arises where counterparties fail to meet their financial obligations in full as they fall due. The primary sources of credit risk for the group are: • reinsurers – reinsurers may fail to pay valid claims against a reinsurance contract held by the group; • brokers and coverholders – counterparties fail to pass on premiums or claims collected or paid on behalf of the group; • investments – issuer default results in the group losing all or part of the value of a financial instrument or a derivative financial instrument; or • cash and cash equivalents.
Financial assets at fair value – fixed and floating rate debt securities 2,687.3 928.2 1.9 – – 3,617.4 – equity 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 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.
2.6 Regulatory and legal risk † Regulatory and legal risk is the risk arising from not complying with regulatory and legal requirements. The operations of the group are subject to legal and regulatory requirements within the jurisdictions in which it operates and the group’s compliance function is responsible for ensuring that these requirements are adhered to.
Notes to the financial statements continued 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
Illiquid credit assets, hedge funds and equity funds are not included in the maturity profile because the basis of maturity profile can not be determined with any degree of certainty.
b) Reputation Reputation risk is the risk of negative publicity as a result of the group’s contractual arrangements, customers, products, services and other activities. Key sources of reputation risk include operation of a Lloyd’s franchise, interaction with capital markets since the group’s IPO during 2002, and reliance upon the Beazley brand in North America, Europe, Asia, South America and Asia. The group’s preference is to minimise reputation risks but where it is not possible or beneficial to avoid them, we seek to minimise their frequency and severity by management through public relations and communication channels.
The group has several requirements for capital, including: • to support underwriting at Lloyd’s through the syndicates in which it participates, being 2623, 3623, 3622 and 5623. This is based on the group’s own individual capital assessment. It may be provided in the form of either the group’s cash and investments or debt facilities; • to support underwriting in Beazley Insurance Company, Inc. in the US; • to support underwriting inBeazley Insurance dac in Europe; and • to make acquisitions of insurance companies or MGAs whose strategic goals are aligned with our own.
Notes to the financial statements continued 2 Risk management continued The board’s strategy is to grow the dividend (excluding special dividend) by between 5% and 10% per year. Our capital management strategy is to carry some surplus capital to enable us to take advantage of growth opportunities which may arise. At 31 December 2017 we have surplus capital of 39% of ECR (unaudited, on a Solvency II basis). Following payment of the second interim dividend of 7.4p per share, the surplus reduces to 35% (unaudited) compared to our current target range of 15% to 25% of ECR.
Financial statem ents www.beazley.com Annual report 2017 Beazley 155 3 Segmental analysis continued b) Segment information
Share of profit/(loss) of associates – 0.4 – – (0.3) 0.1
Additional information Investment in associates2 – – – – 7.0 7.0 Impairment of non-financial assets – – – – – –
Increase in intangibles – – – – 34.4 34.4 1 During 2017, the life, accident & health division and political risks & contingency division were combined to form the political, accident & contingency division. Comparative figures for 31 December 2016 have been re-presented to reflect this change in structure and allow comparability.
Segment results Gross premiums written 247.4 245.3 329.7 213.4 1,159.8 2,195.6
Additional information Investment in associates – 2.6 – – 7.3 9.9 Impairment of non-financial assets – – – – – –
Financial statem ents www.beazley.com Annual report 2017 Beazley 157 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 144.
Net earned premiums UK (Lloyd’s) 1,807.8 1,697.5 US (Non-Lloyd’s) 61.6 70.7 $m $m
Commissions received by Beazley service companies 22.7 15.5 Profit commissions from syndicates 623/6107 8.0 14.9 Agency fees from 623 2.2 2.0 Other income1 2.6 0.3 1 In May 2017 the group sold its Australian accident and health business, previously included in PAC segment, to Blend Insurance Solutions PTY Limited, a Sydney-based Lloyd’s service company. The current gain on the disposal of $0.4m is included in other income line of the consolidated statement of profit or loss. This figure represents the net of the amounts received from the transaction and an estimate of the most probable amount that is expected to be received in respect of contingent consideration.
Current tax expense Current year 35.4 37.1 Prior year adjustments (0.6) 2.1
Deferred tax expense Origination and reversal of temporary differences (3.6) 2.1 Impact of change in UK/US tax rates 5.3 (0.8) Prior year adjustments 1.5 1.7
Basic Basic earnings per share are calculated by dividing profit after tax of $130.0m (2016: $251.0m) by the weighted average number of shares in issue during the year of 520.5m (2016: 516.3m). The shares held in the Employee Share Options Plan (ESOP) of 3.8m (2016: 6.1m) have been excluded from the calculation, until such time as they vest unconditionally with the employees.
Together with the interim dividend of 3.7p (2016: 3.5p) this gives a total dividend for the year of 11.1p (2016: 20.5p). The aforementioned interim dividend will be payable on 28 March 2018 to shareholders registered at 5.00pm on 2 March 2018.
Amortisation for the year – – – (4.6) (0.7) (5.3) Foreign exchange gain – – – 9.4 0.1 9.5
Amortisation for the year – – – (3.5) (8.1) (11.6) Foreign exchange loss – – – (1.9) (0.1) (2.0)
A discount rate, based on weighted average cost of capital (WACC) of 6% (2016: 7%) has been applied to projected future cash flows. This has been calculated using independent measures of the risk-free rate of return and is indicative of the group’s risk profile relative to the market. The impairment test for Goodwill confirms that no impairment is required.
The group’s intangible asset relating to syndicate capacity is allocated across all CGUs. The fair value of syndicate capacity can be determined from the latest Lloyd’s of London capacity auctions. Based upon the latest market prices, management concludes that the fair value exceeds the carrying amount and as such no impairment is necessary.
Financial statem ents www.beazley.com Annual report 2017 Beazley 163 13 Plant and equipment Company Group
Carrying amounts 14 Investment in associates Associates are those entities over which the group has power to exert significant influence but which it does not control. Significant influence is generally presumed if the group has between 20% and 50% of voting rights.
Falcon Money Management Holdings Limited (and subsidiaries) Malta 1 25% – Capson Corp., Inc. (and subsidiary) USA 2 31% 7.0 1 259 St. Paul Street, Valletta, Malta.
The aggregate financial information for all associates (100%) held as at 31 December 2017 is as follows: 2017 $m $m
Financial statem ents www.beazley.com Annual report 2017 Beazley 165 16 Financial assets and liabilities 2017 $m $m
– Corporate bonds – Investment grade 2,179.7 2,158.0 – High yield 58.8 97.1 – Senior secured loans 85.6 96.2 – Asset backed securities – 4.6 Total fixed and floating rate debt securities 3,714.7 3,617.4
Derivative financial assets 8.8 12.2 Total financial assets at fair value 4,449.6 4,195.4
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 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 2017 excludes an unfunded commitment of $63.0m (2016: $85.5m).
Our capital growth assets have no defined maturity dates and have thus been excluded from the above maturity table. However, $153.1m (2016: $105.0m) of equity funds could be liquidated within two weeks and the balance within six months, $299.5m (2016: $303.8m) of hedge fund assets within six months and the remaining $77.9m (2016: $13.3m) 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 138 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 2017 (2016: $nil).
The retail bond was issued in 2012. The subordinated debt was issued in 2004. Tier 2 subordinated debt was issued in 2016. Please refer to note 25 for further details of our borrowings and associated repayment terms.
Prior to any new hedge fund investment, extensive due diligence is undertaken on each fund to ensure that pricing and valuation are undertaken by the administrators and that each fund’s valuation policy is appropriate for the financial instruments the manager will be employing to execute the investment strategy. Fund liquidity terms are reviewed prior to the execution of any investment to ensure that there is no mismatch between the liquidity of the underlying fund assets and the liquidity terms offered to fund investors. As part of the monitoring process, underlying fund subscriptions and redemptions are assessed by reconciling the increase or decrease in fund assets with the investment performance in any given period.
We take the following steps to ensure accurate valuation of these level 3 assets. A substantial part of the preinvestment due diligence process is dedicated to a comprehensive review of each fund’s valuation policy and the internal controls of the manager. In addition to this, confirmation that the investment reaches a minimum set of standards relating to the independence of service providers, corporate governance, and transparency is sought prior to approval. Post investment, unaudited capital statements confirming the fair value of the limited partner interests are received and reviewed on a quarterly (or more frequent) basis. Audited financial statements are received on an annual basis, with the valuation of each transaction being confirmed.
Notes to the financial statements continued 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.
Total financial liabilities not measured at fair value – 370.7 – 370.7
Financial assets measured at fair value Fixed and floating rate debt securities – Government issued 1,180.0 – – 1,180.0 – Quasi-government 62.0 – – 62.0
– High yield – 97.1 – 97.1 – Senior secured loans – 96.2 – 96.2 – Asset backed securities – 4.6 – 4.6 Equity funds – 116.3 – 116.3 Hedge funds – 317.1 – 317.1 Illiquid credit assets – 6.3 126.1 132.4 Derivative financial assets 12.2 – – 12.2 Total financial assets measured at fair value 1,318.7 2,750.6 126.1 4,195.4
Transfers and level 3 investment reconciliations There were no transfers in either direction between level 1, level 2 and level 3 in either 2016 or 2017.
Total net gains recognised in profit or loss 20.0 10.1 As at 31 December 180.4 126.1
High yield bond funds 58.8 97.1 Asset backed securities – 4.6 Equity funds 168.3 116.3 Hedge funds 377.4 317.1 Illiquid credit assets 180.4 132.4 Investments through unconsolidated structured entities 784.9 667.5
These investments are included in financial assets at fair value through profit or loss in the statement of financial position. The group’s maximum exposure to loss from its interests in investee funds is equal to the total fair value of its investments in investee funds and unfunded commitments. Once the group has disposed of its shares in an investee fund, it ceases to be exposed to any risk from that investee fund.
These are receivables 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.
Total cash and cash equivalents include $9.0m (2016: $44.5m) held in Lloyd’s Singapore trust accounts. These funds are only available for use by the group to meet local claim and expense obligations.
Company Balance at 1 January 2016 – – – 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
The merger reserve is now shown within the statement of changes in equity as a separate category and as such has been excluded from the other reserves note.
Notes to the financial statements continued 23 Equity compensation plans 23.1 Employee share trust
MSIP 04/04/2013 0.5 Five years’ service + ROE 10 years LTIP 17/02/2017 09/02/2016 10/02/2015 11/02/2014 13/02/2013
Net Claims reported and loss adjustment expenses 836.9 747.7 Claims incurred but not reported 2,078.5 1,915.3 Net claims liabilities 2,915.4 2,663.0 Unearned premiums 1,021.3 912.6 Total insurance liabilities, net 3,936.7 3,575.6
The gross claims reported, the loss adjustment liabilities and the liabilities for claims incurred but not reported are net of recoveries from salvage and subrogation.
24.1 Movements in insurance liabilities and reinsurance assets a) Claims and loss adjustment expenses
Claims reported and loss adjustment expenses 1,056.3 (219.4) 836.9 949.5 (201.8) 747.7 Claims incurred but not reported 2,852.3 (773.8) 2,078.5 2,567.4 (652.1) 1,915.3 b) Unearned premiums reserve
Financial statem ents www.beazley.com Annual report 2017 Beazley 177 24 Insurance liabilities and reinsurance assets continued 24.2 Assumptions, changes in assumptions and claims reserve strength analysis a) Process used to decide on assumptions The peer review reserving process Beazley uses a quarterly dual track process to set its reserves: • the actuarial team uses several actuarial and statistical methods to estimate the ultimate premium and claims costs, with the most appropriate methods selected depending on the nature of each class of business; and • the underwriting teams concurrently review the development of the incurred loss ratio over time, work with our claims managers to set reserve estimates for identified claims and utilise their detailed understanding of both risks underwritten and the nature of the claims to establish an alternative estimate of ultimate claims cost, which is compared to the actuarially established figures.
The group has a consistent reserving philosophy, with initial reserves being set to include risk margins which may be released over time as uncertainty reduces.
Actuarial assumptions Chain-ladder techniques are applied to premiums, paid claims and incurred claims (i.e. paid claims plus case estimates). The basic technique involves the analysis of historical claims development factors and the selection of estimated development factors based on historical patterns. The selected development factors are then applied to cumulative claims data for each underwriting year that is not yet fully developed to produce an estimated ultimate claims cost for each underwriting year.
The choice of selected results for each underwriting year of each class of business depends on an assessment of the technique that has been most appropriate to observed historical developments. In certain instances, this has meant that different techniques or combinations of techniques have been selected for individual underwriting years or groups of underwriting years within the same class of business. As such, there are many assumptions used to estimate general insurance liabilities.
Where significant large losses impact an underwriting year (e.g. the events of 11 September 2001, the hurricanes in 2004, 2005, 2008, 2012 and 2017 or the earthquakes in 2010, 2011 and 2017), the development is usually very different from the attritional losses. In these situations, the large loss total is extracted from the remainder of the data and analysed separately by the respective claims managers using exposure analysis of the policies in force in the areas affected.
Further assumptions are required to convert gross of reinsurance estimates of ultimate claims cost to a net of reinsurance level and to establish reserves for unallocated claims handling expenses and reinsurance bad debt.
– Marine – Political, accident & contingency – Property – Reinsurance – Specialty lines
Given the range of assumptions used, the group’s profit or loss is relatively insensitive to changes to a particular assumption used for an underwriting year/class combination. However, the group’s profit or loss is potentially more sensitive to a systematic change in assumptions that affect many classes, such as judicial changes or when catastrophes produce more claims than expected. The group uses a range of risk mitigation strategies to reduce the volatility including the purchase of reinsurance. In addition, the group holds capital to absorb volatility.
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 2017 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) – – – – – – – – – (24.1) (758.9) (783.0)
Financial statem ents www.beazley.com Annual report 2017 Beazley 183 24 Insurance liabilities and reinsurance assets continued Analysis of movements in loss development tables We have updated our loss development tables to show the ultimate loss ratios as at 31 December 2017 for each underwriting year.
Property The 2015 and prior years have delivered releases, but at lower levels than in recent years due to an increase in claim activity. There was deterioration in the property book in 2016, where claims experience was worse than anticipated. The 2017 underwriting year has opened higher than previous years reflecting the impact of the recent catastrophe events.
Notes to the financial statements continued 24 Insurance liabilities and reinsurance assets continued Claim releases The table below analyses our net claims between current year claims and adjustments to prior year net claims reserves. These have been broken down by segment and underwriting year. Beazley’s reserving policy is to maintain catastrophe reserve margins either until the end of the exposure period or until catastrophe events occur. Therefore margins have been released from prior year reserves where risks have expired during 2017.
Financial statem ents www.beazley.com Annual report 2017 Beazley 185 25 Borrowings The carrying amount and fair values of the non-current borrowings are as follows: Carrying value
Present value of funded obligations 55.9 48.2 Fair value of plan assets (53.6) (42.0) Retirement benefit liability in the statement of financial position 2.3 6.2
The scheme is administered by a trust that is legally separated from the group. The trustees consist of both employee and employer representatives and an independent chairman, all of whom are governed by the scheme rules.
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 2017. According to the Schedule of Contributions, the group expects to contribute approximately $1.3m in each of the next two years.
Discount rate (0.5% decrease) 6.9 – Inflation rate (0.3% decrease) – (3.9) Future salary changes (0.5% decrease) – (0.3) Life expectancy (1 year increase) 1.4 –
The movement in the net deferred income tax is as follows: Balance at 1 January (1.8) 1.1 Income tax (charge)/credit (3.2) (3.0) Amounts recorded through equity 2.2 1.5 Foreign exchange translation differences (0.2) (1.4) Balance at 31 December (3.0) (1.8)
A change in the effective corporation tax in the US from 35% to 21% was substantively enacted in December 2017. This resulted in a $5m reduction to the carrying value of the group’s US deferred tax asset at 31 December 2017.
The group has tax adjusted losses carried forward giving rise to a deferred tax asset of $1.2m, measured at the UK corporation tax rate of 17%. The deferred tax asset has not been recognised on the group statement of financial position in the current year as losses are not expected to be utilised in the foreseeable future based on the current taxable profit estimates and forecasts of the underlying entity in question.
Financial statem ents www.beazley.com Annual report 2017 Beazley 189 30 Related party transactions The group and company have related party relationships with syndicates 623, 6107, 6050, its subsidiaries, associates and its directors.
Written premium ceded to syndicates 66.1 57.3 Other income received from syndicates 35.7 33.1 Services provided 38.6 38.6
Salaries and other short term benefits 16.4 21.0 Post-employment benefits 0.6 0.6 Share based remuneration 9.8 12.7
Notes to the financial statements continued 31 Parent company and subsidiary undertakings Beazley plc, a company incorporated in England and Wales and resident for tax purposes in the United Kingdom, is the ultimate parent and the ultimate controlling party within the group.
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’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 Limited1 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) Limited2 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 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 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 Limited3 UAE 100% Insurance services USD Beazley Pte. Limited Singapore 100% Underwriting at Lloyd’s SGD
1 Beazley DAS Limited is in the process of liquidation. 2 Beazley Corporate Member (No.4) Limited was sold in January 2018. 3 Beazley Middle East Limited was formally liquidated on 3 January 2018.
33 Foreign exchange rates The group used the following exchange rates to translate foreign currency assets, liabilities, income and expenses into US dollars, being the group’s presentational currency: Average Year end spot Average Year end spot
Notes to the financial statements continued 34 Subsequent events There are no other events that are material to the operations of the group that have occurred since the reporting date.
35 Business combinations Acquisition of business portfolio In January 2017 Beazley Furlonge Holdings Limited, an intermediate holding company within the group, set up a direct 100% subsidiary, 1104980 BC Limited, in Canada. The principal activity of 1104980 BC Limited was to act as an intermediate holding company within the group. This subsidiary acquired 100% of the share capital of a Canadian coverholder, Creechurch International Underwriters Limited (now Beazley Canada Limited), on 3 February 2017. In June 2017 1104980 BC Limited and Beazley Canada Limited amalgamated under the name of Beazley Canada Limited.
The acquisition secured a strategic platform for specialty lines and Beazley’s expansion in Canada. It also allowed us to write more business through increased line size and launching new specialist products through the acquiree’s distribution channels. The acquisition was achieved in one stage. The total amount of consideration paid was $33.8m. Total amount of consideration represents cash and no contingent consideration was offered. No material costs related to the acquisition were incurred by the group.
The effect of the acquisition on the group’s revenue was $3.0m ($3.4m if the acquisition happened on 1 January 2017) and the effect on the group’s consolidated statement of profit or loss in the current period was a profit of $2.4m ($2.6m if the acquisition happened on 1 January 2017).
Alternative performance measures (APMs) The group uses APMs to help explain its financial performance and position. These measures, such as combined ratio, expense ratio, claims ratio and investment return, are not defined under IFRS. The group is of the view that the use of these measures enhances the usefulness of the financial statements. Definitions of key APMs are included within the glossary.
Combined ratio Ratio, in percentage terms, of the sum of net insurance claims, expenses for acquisition of insurance contracts and administrative expenses to net earned premiums. This is also the sum of the expense ratio and the claims ratio. The calculation is performed excluding the impact of foreign exchange. In 2017, this ratio was 99% (2016: 89%). This represents the sum of net insurance claims of $1,075.7m (2016: $855.6m), expenses for acquisition of insurance contracts of $519.7m (2016: $472.5m) and administrative expenses of $254.7m (2016: $247.8m) to net earned premiums of $1,869.4m (2016: $1,768.2m). This is also the sum of the expense ratio 41% (2016: 41%) and the claims ratio 58% (2016: 48%).
Hard market An insurance market where prevalent prices are high, with restrictive terms and conditions offered by insurers.
Investment return Ratio, in percentage terms, calculated by dividing the net investment income by the average financial assets at fair value, including cash. In 2017, this was calculated as net investment income of $138.3m (2016: $93.1m) divided by average financial assets at fair value, including cash, of $4,796.4m (2016: $4,610.9m).
Rate change The percentage change in premium income we are charging relative to the level of risk on renewals.
Unearned premiums reserve The portion of premium income in the business year that is attributable to periods after the reporting date in the underwriting provisions.