Beth Diamond Head of Claims Executive Sponsor of the Closer to the Client Strategic Initiative
This ongoing curiosity around the potential for digital technology has stepped up in recent years, and particularly in 2020. These activities are managed and coordinated through Beazley’s digital business management committee (DBMC) and Faster, Smarter Underwriting strategic initiative (SI). In recognition of the fact that different technology solutions are required for risks of different size or complexity, these groups oversee our approach to tackling smaller, higher volume underwriting, and larger, complex risk underwriting, respectively.
We have a targeted product set, largely in commercial lines of business, and underwrite each risk on its own merit
On behalf of the board, I express our heartfelt thanks to our shareholders, clients and employees for their support over the past year. The resilience of colleagues throughout 2020 has been a tower of strength, helping Beazley to overcome many challenges and operate seamlessly and without interruption.
Following controlled growth in recent years, Beazley writes a sizeable contingency book that has absorbed a sharp increase in claims due to the severe impact of the pandemic on the events and hospitality industries. COVID-19-related contingency loss estimates of $70m net of reinsurance were reported in the first half of the year. In September, Beazley’s overall loss estimate for first-party claims increased by a further $170m net of reinsurance, which was largely attributable to the ongoing cancellation of events into 2021.
Overall rates increased in the year by 15% on average with the sharpest premium growth across international financial lines and management liability, and particularly in those territories with traditionally higher litigation costs, including Australia, and risks exposed in the US. International D&O increased by more than 120% on top of rate hardening in 2018 and 2019.
Cyber & Executive Risk Marine Political, Accident & Contingency Property Reinsurance Speciality LinesMarket Facilities
Our claims service remains a key differentiator for Beazley and, as a team, we strive to ensure clients and brokers know we will go above and beyond to deliver fast, efficient outcomes and work in partnership to support clients when they need us most. To continue to innovate and deliver exceptional service we continue to invest in our processes and to seek innovative ways to keep pace with the evolving trading environment and expectations of our partners.
The events of 2020 will come to define how our market and individual organisations perform over the next few years. We will continue to be judged on our performance, not least on how we handled claims and treated customers in this toughest of years, and how responsibly we have played our part in the economic recovery.
Global Charity and Community Week In our first virtual charity week we ran a number of events including: • Global Baking Challenge – colleagues were asked to submit photos of their best bakes.
These events help to increase employee engagement as well as raising funds and awareness for our partners.
New York In New York, we partnered with Reading Partners NYC, and our colleagues have spent the past year tutoring students in small groups, making a big impact. Due to the pandemic, Reading Partners pivoted to remote tutoring and developed an online curriculum, in which our New York tutors have now been trained and are awaiting pairing with students to pilot this programme. We will also be making a small donation to Reading Partners, as they have lost significant funding this year due to being forced to cancel all of their in-person fundraisers.
Scope 2 870.16 tCO2e Scope 1 & 2 emissions decreased in 2020 due to our offices being closed as a result of COVID-19 restrictions.
Our planning process is key to embedding this in our business. Sustainability initiatives will be incorporated in the development of some our products and services in 2021. As a foundation, we started a project in autumn 2020 to map potential climaterelated risks and their potential impact on our business. The outputs of both a combination of data analysis and scenario analysis will further inform business strategy, as well as develop our risk management approach as outlined later in this report. The workstream is expected to be completed by autumn 2021, with our first dedicated TCFD report published by the end of the year. The project also provides an opportunity for our underwriters to develop their knowledge and understanding of climatechange -related risks so they can be best placed to support our clients.
Despite the uncertainty of the early months of the pandemic, we have continued to maintain momentum in our inclusion and diversity efforts.
Non-financial information statement Beazley presents its non-financial information (NFI) statement in compliance with sections 414CA & 414CB of the Companies Act 2006. The content required for this statement can be found throughout the report as per the table below: Chapter Page reference
At our core; Our business model; Statement from the Chair; Chief Executive’s statement; Q&A with the Chief Executive; Responsible business; Section 172 statement; Operational update; Risk management; Directors’ report; Letter from our Chair; Board of directors; Statement of corporate governance; Letter from the Chair of our remuneration committee; Directors’ remuneration report 01-15; 30-43; 53-75; 72-114
Social matters Statement from the Chair; Chief Executive’s statement; Responsible business 08-13; 30-39 Respect for human rights Responsible business 30-39 Anti-corruption and anti-bribery matters
The board has identified that its key stakeholders are: our workforce, shareholders, customers, brokers and regulators. The information below summarises how the directors have engaged with the company’s key stakeholder groups.
How we engage with other stakeholders: Suppliers We recognise the role that our suppliers play in helping us run our business. The company complies with the Prompt Payment Code reporting requirements and publishes its average payment times for supplier invoices. Where a supplier proposes payment terms that differ from our standard terms, the company uses its best endeavours to accommodate the supplier’s terms. The board annually reviews and approves the company’s Modern Slavery and Human Trafficking Statement which sets out the company’s efforts to eliminate modern slavery in its supply chain.
Employee morale To keep employee morale high, our internal communications, culture and employee engagement team stepped up and introduced innovative ways to keep our employees connected. Some of these included a ‘We’re all in this together’ scrap book, which featured employees sharing their families, pets, staycations, talents and more with their colleagues; a ‘summer camp’ programme; a celebrating Beazley day; and a virtual 24 hour global ‘How are we doing?’ live event which provided insights and information about different aspects of our business and the broader context in which Beazley operates.
Result Loss before tax in 2020 was $50.4m (2019: $267.7m profit). The group’s combined ratio deteriorated to 109% (2019: 100%) primarily due to high volumes of claims arising on COVID-19 impacted lines of business. Our investment team achieved an investment return of 3.0% (2019: 4.8%).
Prior year reserve adjustments across all divisions over the last five years are shown on the previous page.
A Tax Act (the Tax Cuts and Jobs Act) was signed into law in the US in December 2017. The Tax Act includes base erosion anti-avoidance tax (the ‘BEAT’) provisions. We have performed an assessment for a number of our intra-group transactions for BEAT purposes. Although the application of this BEAT legislation is still not fully certain for some types of transactions we believe that the BEAT impact on the group is not significant. For the year 2020 the amount of $1.1m was provided for in the group financial statements for BEAT liabilities (for 2019 the group paid BEAT tax of $3.2m).
Faced with this global crisis, and an increasingly volatile and unpredictable environment, we experienced first-hand how the targeted investment in our operating platform paid dividends by ensuring we were equipped and able to continue delivering for our staff, customers and shareholders. We made a strategic decision five years ago to embrace and even experiment with the possibilities that data and digital technology have presented to us. As a result, the rich combination of our people’s expertise, and the insight and analytics we derive from digital sources, has put us in the advantageous position of being able to operate seamlessly during lockdown and continue progressing our agenda of becoming a more data-led organisation.
Colleagues understood their roles and responsibilities and, importantly, knew how their roles dovetailed together. This enabled us to take full advantage of our suite of collaboration tools to deliver tangible value for our customers and broker partners through clear communication and a commercial mindset.
The risk management framework comprises a number of risk management components, which when added together describe how risk is managed on a day-to-day basis. The framework includes a risk register that captures the risk universe (approximately 50 risk events grouped into eight risk categories: insurance, market, credit, liquidity, operational, regulatory and legal, group and strategic), the risk appetite set by the Beazley plc board, and the control environment that is operated by the business to remain within the risk appetite and which is monitored and signed off by control reporters.
• Reserve risk: Beazley has a consistent reserving philosophy. However, there is a risk that the reserves put aside for expected losses turn out to be insufficient. This could be due to any of the three drivers of risk described above. The group uses a range of techniques to mitigate this risk including a detailed reserving process which compares estimates established by the claims team with a top-down statistical view developed by the actuarial team. A suite of metrics is also used to ensure consistency each year.
Electricity for utilities Beazley delivers business from two locations in the UK – Birmingham and London. Additional offices are located across the globe, many of which are considered shared space and serviced office suites. Beazley pays a service charge for their use, however, has no control over the operation or use of utility provisions. Responsibility for energy consumption and carbon emissions, therefore, falls to the landlord, and is considered out of scope for the purpose of these calculations. The Global Emissions reported do not include data for the following office locations: Houston, Los Angeles, Minneapolis, Philadelphia, Scottsdale, Rio de Janeiro, Sydney, Miami and Singapore, Shanghai, Montreal, Vancouver and Seattle. These offices make up 11% of Global FTE in 2020.
Exclusions Energy consumption from business travel with the exception of hire cars and company cars has not been included, as Beazley does not operate the transport in question.
The internal and external auditors attend committee meetings and regularly meet in private with the committee. In addition the chair of the audit and risk committee has regular contact with the external and internal auditors throughout the year and members of the committee met individually with the Central Bank of Ireland and the Prudential Regulation Authority during 2020.
During the course of 2020 a number of internal audit recommendations were made to management in relation to its systems of controls and agreed upon action plans were subsequently or are in process of being implemented. Overall the internal audit function was able to report that in the context of the agreed audit universe and plans the design and operation of our risk management framework, controls and processes have supported the group in operating within its risk appetite.
ii) 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 2020, our non-audit services policy was reviewed by the committee.
• review annually the time required from non-executive directors; • review the results of the board performance evaluation process that relate to the composition and skills and competencies of the board and ensure an appropriate response to development needs; • recommend to the board appointments to the role of senior independent director and chair as well as membership of board committees; and
Part of the Beazley culture is creating an open and inclusive environment for our employees, celebrating differences and creating internal networks. During 2020 we progressed our overarching inclusion and diversity strategy, including signing the Race at Work Charter, which endeavours to improve outcomes for black, Asian and minority ethnic employees in the workplace.
The following table summarises how the committee addressed the factors set out in the UK Corporate Governance Code when determining the remuneration policy. The full policy can be found on our website at www.beazley.com: Factor Details
Salaries for 2020 were as follows: • D A Horton: £495,000 • A P Cox: £390,000 • S M Lake: £350,000
NAVps performance % of award vesting < average risk-free rate +7.5% p.a. 0% = average risk-free rate +7.5% p.a. 10% = average risk-free rate +10% p.a. 25% = average risk-free rate +15% p.a. 100% Straight-line vesting between points Since 2019 the first tranche of the LTIP is subject to a further two year holding period taking the total time frame for the entire award to five years.
4 John P Sauerland received fees of $10,800 for his role on the BICI board which are represented in the table above. The fees for this role have been converted at an exchange rate of 1.27.
• Leadership survey score has been the highest it has been to date. Since last year, the leadership score improved by 0.13 to 5.35, out of possible 6.
• Protect and enhance Beazley’s reputation amongst core external stakeholders, including clients, shareholders, market participants, rating agencies and regulators.
The group funds the capital for the plan. The individual capital commitment is then funded through individual’s bonus deferral. The aim is for individuals to fund their capital within three years.
The table below shows the total number of directors’ interests in shares as at 31 December 2020 or date of cessation as a director.
LTIP 2020 – 3/5 year Awards were made on 11 February 2020 at a mid-market share price of 595.5p Performance conditions: all of the award is subject to NAVps performance, with 50% measured over a three year period and 50% measured over a five year period. NAVps < RFR+7.5% p.a. equates to 0% vesting, NAVps = RFR+7.5% p.a. equates to 10% vesting, NAVps = RFR+10% p.a. equates to 25% vesting, NAVps = or > RFR+15% p.a. equates to 100% vesting, with straight-line pro-rated vesting between these points. Awards expire in February 2030.
Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have elected to prepare the group and parent company financial statements in accordance with International Financial Reporting Standards (IFRSs) in conformity with the Companies Act 2006.
In preparing these financial statements the directors are required to: • select suitable accounting policies in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors and then apply them consistently; • make judgements and accounting estimates that are reasonable and prudent; • present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; • provide additional disclosures when compliance with the specific requirements in IFRSs is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the group’s financial position and financial performance; • in respect of the group financial statements, state whether IFRSs in conformity with the Companies Act 2006 and IFRSs adopted pursuant to Regulation(EC) No 1606/2002 as it applies in the European Union have been followed, subject to any material departures disclosed and explained in the financial statements; • in respect of the parent company financial statements, state whether IFRSs in conformity with the Companies Act have been followed, subject to any material departures disclosed and explained in the financial statements; and
Due to travel restrictions in place as a result of the COVID-19 global health pandemic, although no site visits were performed, the primary audit team followed a programme of planned virtual meetings, and had regular team interactions with the component teams where appropriate during various stages of the audit, reviewed key working papers and participated in the component team’s planning event, and attended the closing meetings with the management of BICI and Beazley Services USA Inc at the component virtually.
Explanation as to what extent the audit was considered capable of detecting irregularities, including fraud Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities, outlined below, to detect irregularities, including fraud. The risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment by, for example, forgery or intentional misrepresentations, or through collusion. The extent to which our procedures are capable of detecting irregularities, including fraud is detailed below.
Stuart Wilson (Senior Statutory Auditor) for and on behalf of Ernst & Young LLP, Statutory Auditor London
Change in gross provision for unearned premiums (331.7) (184.5) Reinsurers’ share of change in the provision for unearned premiums 108.1 28.0 Change in net provision for unearned premiums (223.6) (156.5)
Equity settled share based payments 22 – – – 4.7 – 4.7 Acquisition of own shares in trust 22 – – – (13.8) – (13.8) Tax on share option vestings 9 – – – 1.0 2.6 3.6 Transfer of shares to employees 22 – – – (4.8) 4.1 (0.7)
2 A merger reserve was created through a scheme of arrangement on 13 April 2016, in which Beazley plc became the parent company of the group.
S M Lake Group Finance Director www.beazley.com Beazley | Annual report 2020
Statements of cash flows for the year ended 31 December 2020
Following the sanction of the scheme by the High Court on 25 November 2020, the scheme took effect on 30 December 2020 and the group transferred the impacted EEA policies and related liabilities to Lloyd’s Brussels, together with cash of $229.2m. On the same date, under the Reinsurance Agreement, Lloyd’s Brussels reinsured the same risks back, together with an equal amount of cash of $229.2m. The combined effect of the two transactions had no economic impact for the group, and accordingly there is no impact on the group’s financial statements.
Estimation techniques are necessary to quantify the future premium on all syndicate business written and are commonly used within the Lloyd’s insurance market. The majority of the estimation arises within the binder and lineslip estimates where the premium amounts are dependent on the volume of policies that are insured under the binder/lineslip over the coverage period. In these cases underwriters estimate an initial premium volume and then adjust throughout the life of the binder/lineslip as and when new information becomes available. The process of determining the EPI is based on a number of factors, which can include: • Coverholder business plan documents supplied prior to binding; • Historical trends of business written; • Current and expected market conditions for this line of business; and • Life to date bordereaux submissions versus expectation.
1 Statement of accounting policies continued d) Fair value measurement Fair value is the price at which an orderly transaction to sell an asset or to transfer a liability would take place between market participants at the measurement date.
2 Risk management continued 2.3 Market risk Market risk arises where the value of assets and liabilities or future cash flows changes as a result of movements in foreign exchange rates, interest rates and market prices. Efficient management of market risk is key to the investment of group assets. Appropriate levels of investment risk are determined by limiting the proportion of forecast group earnings which could be at risk from lower than expected investment returns, using a 1 in 10 confidence level as a practical measure of such risk. In 2020, this permitted variance from the forecast investment return was set at † $150m, but ultimately increased to † $180m in the second half of the year. For 2021, the permitted variance is likely to be at the same level. Investment strategy is developed to be consistent with this limit and investment risk is monitored on an ongoing basis, using outputs from our internal model.
2 Risk management continued An analysis of the overall credit risk exposure indicates that the group has reinsurance assets that are impaired at the reporting date.
The operating segments are based upon the different types of insurance risk underwritten by the group, as described below: Cyber & Executive Risk This segment underwrites management liabilities such as employment practices risks and directors and officers, alongside cyber and technology, media and business services.
Depreciation charge for the year – (1.9) (1.3) (3.2) Foreign exchange gain/(loss) – 0.1 (0.2) (0.1)
2 Suite 126, 12/F Somptuex Central, 52-54 Wellington Street, Hong Kong. 3 106 W 32nd Street, New York.
Profit after tax 0.2 – Share of other comprehensive income – – Share of total comprehensive income – –
Financial assets at fair value Fixed and floating rate debt securities: – Government issued 2,723.7 1,870.9 Corporate bonds – Investment grade 2,444.9 2,698.4 – High yield 251.1 235.8 Syndicate loans 40.6 8.0 Total fixed and floating rate debt securities and syndicate loans 5,460.3 4,813.1
The values shown in the transfer tables above are translated at foreign exchange rate as at 31 December 2020.
Share based payments 4.7 – 4.7 Acquisition of own shares held in trust – (13.8) (13.8) Transfer of shares to employees (16.8) 12.0 (4.8)
Specialty Lines The 2015 year continues to see claims development in excess of expectations. However, this year is now recovering under aggregate excess of loss reinsurance programmes so the impact is lower net of reinsurance. Other underwriting years continue to release as the risk expires.
Beazley Furlonge Limited operates a defined benefit pension scheme (‘the Beazley Furlonge Limited Pension Scheme’). The scheme provides the following benefits: • an annual pension payable to the member from his or her normal pension age (60th birthday) of generally 1/60th of final pensionable salary for each year of pensionable service up to 31 March 2006; • a spouse’s pension of 2/3rds of the member’s pension payable on the member’s death after retirement; • a lump sum of four times current pensionable salary for death in service at the date of death; and • a pension of 2/3rds of the member’s prospective pension at the date of death, payable to the spouse until their death.
The total number of Beazley plc ordinary shares held by key management was 4.7m. Apart from the transactions listed in the table above, there were no further related party transactions involving key management or a close member of their family. Further details of directors’ shareholdings and remuneration can be found in the directors’ remuneration report on pages 96 to 124.