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 33 and in the glossary on page 207.
Strong long term relationships with brokers, reinsurers and clients have sustained our business over three decades 01www.beazley.com Beazley Annual report 2019
The second way in which Beazley encourages entrepreneurial spirit is by offering employees varied career paths. This has become easier as the company has grown around the world. Many Beazley employees have now worked for a duration of two years or more outside their home countries. This too supports the crossfertilisation of ideas that characterises entrepreneurial companies.
Around the world, Beazley’s partnerships with insurance brokers are also critical in securing access to high quality business. For smaller risks these relationships are increasingly dependent on online systems that allow brokers to place business with Beazley with minimal effort. A growing number of brokers have been gaining access to Beazley’s award-winning e-trading platform, myBeazley, through application programming interfaces (APIs) that enable them to link their own trading platforms to ours.
Cyber & executive risk Our cyber & executive risk division comprises cyber and management liability cover for our clients. Our products range from our flagship cyber product, Beazley Breach Response (BBR), through to crime insurance and private and public directors’ & officers’ (D&O) insurance.
The reinsurance team specialises in writing worldwide property catastrophe, per risk, aggregate excess of loss, pro-rata business and casualty clash. Approximately 80% of our top clients have reinsured with us for 20 years or more.
Management changes The final set of changes that confronted Beazley in 2019 was internal. In the course of the year, three members of the executive team retired, while a fourth, Anthony Hobkinson, head of claims, is retiring in early 2020. These moves followed earlier changes in the chief underwriting officer role, with Adrian Cox succeeding Neil Maidment at the end of 2018, and in the head of talent management role, with Pippa Vowles succeeding Penny Malik in July 2018. In 2020, we also announced to employees that Mike Donovan will be retiring in June 2020.
What is your background? My career has spanned some 30 plus years. Having obtained an engineering degree, I had never planned to be in the insurance industry. Then like many I fell into this vast world of insurance. My work experience has included tenures on both the brokerage and carrier side of the business. This experience included loss prevention engineering, claims, account development, portfolio management, brokerage/placement, client executive and various levels of leadership roles for FM Global, Marsh, Zurich and now Beazley.
Beazley’s immediate focus is to deploy its traditional underwriting strengths to navigate what remains a turbulent market. However, we are well aware that market conditions in the not too distant future will present very different challenges and require new strengths. I am confident that Beazley has the means and the will to adapt and navigate these changes.
Beazley achieved a second year of double digit premium growth in 2019, with gross premiums written increasing 15% to $3,003.9m (2018: $2,615.3m). Profit before income tax rose to $267.7m (2018: $76.4m), driven by a very strong investment return. Our combined ratio of 100% (2018: 98%) was impacted by intensifying claims across several lines of business and reduced reserve releases from prior years.
Find out more on pages 41 to 50 19www.beazley.com Beazley Annual report 2019
The team also stress-tested a variety of long term climate change scenarios that could affect Beazley’s business as a whole, as well as conducting a detailed pilot assessment of the impact of climate change on the liability lines offered by our US architects and engineers professional liability team. We are currently expanding upon this pilot exercise to other classes of business and have estimated that around a third of the group’s 2019 premium arises from classes that have material exposure to climate change effects.
Beazley in the past two years. What principles have guided you in the new appointments you have made?
Various reasons have been proposed for social inflation, which bears no relation to inflation levels in the wider economy. These are discussed in our chief underwriting officer’s report on page 24. It is a phenomenon we have seen before – indeed Beazley was founded at a time of sharply increasing jury awards that generated a crisis of capacity for many liability risks in the US. The situation is not currently so extreme and the market has been responding in an orderly manner to the claims inflation we have seen.
A The world is changing and Beazley has to be prepared to move with it.
Most of the lines of business underwritten in our marine division, led by Tim Turner, have seen significant price erosion over a number of years and recent rate rises have not yet proved sufficient to reverse the damage. In 2019, the division recorded a combined ratio of 107% (2018: 94%) on premiums that increased by 8% to $306.4m (2018: $284.8m).
Impairment of investment in associate – (7.0) Finance costs (27.7) (22.4) Profit before tax 267.7 76.4 Income tax expense (33.6) (8.2) Profit after tax 234.1 68.2
These developments helped to stabilise economic growth later in the year and provided the catalyst for much improved investor sentiment across most asset classes. Geopolitical concerns persisted and generated intermittent market volatility, but the most adverse outcomes were avoided, or at least deferred, so that these considerations had limited ultimate impact on market levels. Many asset classes had seen significant weakness in the final part of 2018, making valuations look more attractive, and this was also a factor in the strong recovery in asset values during 2019. The level and direction of risk free yields is the most significant driver of our investment returns. US sovereign bond yields are most relevant to us, as nearly all of our investments are denominated in US dollars. At the start of 2019, US sovereign bonds of a two-year duration yielded more than they had for some years, at around 2.5%, but many feared that yields would continue to rise as interest rates increased further, generating capital losses and unattractive overall returns.
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. During 2019 the third annual solvency financial condition report (SFCR) of Beazley plc was published.
Under Solvency II requirements, the group is required to produce a Solvency Capital Requirement (SCR) which sets out the amount of capital that is required to reflect the risks contained within the business. Lloyd’s reviews the syndicates’ SCRs to ensure that SCRs are consistent across the market.
In 2017, we commenced a project to develop our larger offices into ABW environments. We have now launched four offices in this format – Birmingham, Barcelona, Toronto and New York. Work is currently underway to fit-out a new ABW London office at 22 Bishopsgate. We expect to open the new office in late 2020.
Emerging and strategic risks The emerging and strategic risk analysis helped identify the need for two of the current strategic initiatives. The Beazley Digital strategic initiative is working out how we underwrite and process our simpler risks better. The Faster, Smarter Underwriting strategic initiative is working out how we provide underwriters with data and analytics to help them better underwrite our complex risks. Both initiatives are creating opportunities for Beazley to work in new ways, develop new skill sets and harness new technology. Whilst they fundamentally improve profitability, they also reduce insurance and operational risk.
All Hands and Hearts works with volunteers and local partners to rebuild the basic hubs of a community – including schools and homes. Participating in these efforts has enabled Beazley employees to support devastated communities on the ground. Many people who are hit by these disasters fall into the insurance gap and are unprotected to some degree.
New York prepares food for Loaves & Fishes Soup Kitchen in the office, with a group visiting the site to deliver, setup and serve lunch.
Wellbeing The installation of sit/stand desks in Paris, Dublin, Barcelona, New York and Toronto encourages a healthier working environment. Water filters introduced in the new Barcelona, New York and Toronto offices remove heavy metals, fluoride etc, and ionises water to ensure optimal pH levels. We have introduced alternative milk options (soy and almond) in all US offices and London and Birmingham offices.
It guides our behaviours, informs our decisions, and enables us to do the right thing.
Corporate, social and environmental responsibility The company’s corporate, social and environmental activities are set out on pages 51 to 65. During 2019 Beazley and employees donated and raised over $400,000 to charities, details of which can be found in the responsible business report on pages 52 to 54.
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 206.
Share capital As at 31 December 2019, the company’s issued shared capital comprised 529,744,068 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 186. 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 Group’s greenhouse gas emission intensity ratio (reported Scope 1-3 emissions/employee/year) fell from 7.7 tCO2e/employee in 2017 to 6.8 tCO2e/employee in 2018.
Board changes I am pleased to report that your board remains highly engaged in fulfilling its principal tasks of leading the company and overseeing the governance of the group. As mentioned on page 81, the board has continued to evolve with a number of changes during the year and further developments planned for the forthcoming year. Martin Bride retired from the board on 23 May 2019 after having served as an executive director since 2009. Martin was succeeded on the board by Sally Lake who was appointed on 23 May 2019. The board would like to express their thanks to Martin for the immense contribution he made to the development of the group.
Non-executive directors * Where the appointment date of a director pre-dates 13 April 2016 (being the date that Beazley plc became the holding company of Beazley Group) this appointment date refers to their representation on the Beazley Ireland Holdings plc board (formerly Beazley plc).
4 Nicola Hodson and John Reizenstein were appointed to the board and audit and risk committee on 10 April 2019. 5 Nicola Hodson was unable to attend her first meeting of the audit and risk committee due to a scheduling clash. 6 Sally Lake was appointed to the board on 23 May 2019. 7 Christine LaSala was appointed to the remuneration and nomination committees with effect from 21 March 2019. 8 Catherine Woods was unable to attend the nomination and remuneration committee meetings in September 2019 due to a longstanding schedule clash.
During the year, the board has spent time particularly on: • review of strategic initiatives; • review of the competitive landscape; • discussing the actions arising from the board effectiveness review, and in particular the subsequent governance review and whether the audit and risk committee should be divided into two separate committees; • climate change and the risks and opportunities associated with it; • engagement with the workforce and key stakeholders; • reviewing the letter of credit facility and debt issuance by subsidiary Beazley Insurance dac; • discussing the prioritisation of investment expenditure; • Solvency II reporting; • review of risk management framework, including risk appetite; • continued monitoring of developments and responding to requirements for Brexit; • review of the Own Risk and Solvency Assessment (ORSA); • cyber product development and cyber security; and • review of developments in corporate governance and receipt of key legal and regulatory updates.
Further information on the role of the audit and risk committee is set out on page 85 and further information on risk management at Beazley is set out in the risk management report.
In 2019 the audit and risk committee discussed a wide range of topics against the changing landscape
The specific responsibilities and duties of the committee are set out in its terms of reference, which were updated in September 2019, and reflect the requirements set out in the UK Corporate Governance Code 2018. These requirements 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.
A portion is generally deferred into shares for three years dependent on level of bonus.
• D A Horton: 200% • A P Cox: 150% • S Lake: 150%
None, although performance in role is taken into account in determining any salary increase.
Legacy commitments The committee reserves the right to make any remuneration payments and payments for loss of office (including exercising any discretions available to it in connection with such payments) notwithstanding that they are not in line with the policy set out in this report where the terms of the payment were agreed (i) before 26 March 2014 AGM (the date Beazley’s first shareholderapproved directors’ remuneration policy came into effect); (ii) before the policy set out in this report comes into effect, provided that the terms of the payment were consistent with the shareholderapproved directors’ remuneration policy in force at the time they were agreed or were otherwise approved by shareholders; or (iii) at a time when the relevant individual was not a director of Beazley (or other person to whom this policy applies) and, in the opinion of the committee, the payment was not in consideration for the individual becoming a director of Beazley or such other person. For these purposes ‘payments’ includes the committee satisfying awards of variable remuneration and, in relation to an award over shares, the terms of the payment are ‘agreed’ at the time the award is granted. This policy applies equally to any individual who is required to be treated as a director under the applicable regulations.
0% of salary 150% of salary 400% of salary1 400% of salary1
6 John P Sauerland received fees of $10,500 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.
Annual bonus pool calculation At the beginning of the financial year, the risk-free return (RFR) was set at 2.5% taking into account the yield on US treasuries of two to five year maturities. This resulted in the following ROE hurdles and guideline bonus awards: 2019 ROE hurdles and guideline bonus awards
These percentages are indicative only and based on broad corporate results. Within the pool framework bonus out-turns may be higher or lower taking into account corporate achievements and individual performance (see next page).
Annual bonus award outcomes for 2019 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. The resultant bonuses were as follows: Bonus (delivered as a mix of cash and deferred shares) % of maximum % of salary 1 Martin L Bride stepped down from the board on 23 May 2019. He remained eligible for a bonus in respect of the period of the year worked. 2 Sally M Lake was appointed to the board on 23 May 2019.
Actual NAVps growth achieved in the three years to 31 December 2019 was 9.5% p.a. which resulted in 0% of the first tranche of the 2017 awards vesting.
Service contracts and payments for loss of office No loss of office payments have been made in the year.
Non-executive directors’ fees The fees of non-executive directors are determined by the board and are reviewed annually. When setting fee levels consideration is given to levels in comparable companies for comparable services and also to the time commitment and responsibilities of the individual non-executive director. No non-executive director is involved in the determination of their fees.
Underwriter bonus plan – profit related pay plan Underwriters participate in a profit related pay plan based upon the profitability of their underwriting account. Executive directors do not participate in this plan.
Under applicable law and regulations, the directors are also responsible for preparing a strategic report, directors’ report, directors’ remuneration report and corporate governance statement that complies with that law and those regulations.
Full scope component: Syndicate 2623 61% Specific scope components: BICI, BIDAC, Syndicate 3623 and Group Function
We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you if, in our opinion: • adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or • the parent company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the accounting records and returns; or • certain disclosures of directors’ remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit
Other matters we are required to address • We were appointed by the Company Directors on 23 May 2019 to audit the financial statements for the year ending 31 December 2019 and subsequent financial periods. Our appointment as auditor was approved by shareholders at the Annual General Meeting on 21 March 2019.
In the current year, the group has applied amendments to IFRSs issued by the IASB that are mandatorily effective for an accounting period that begins on or after 1 January 2019. The new effective requirements are: • IFRS 16: Leases (EU effective date: 1 January 2019); • IFRIC 23: Uncertainty over Income Tax Treatments (EU effective date: 1 January 2019); • IAS 28: Amendment: Long-term Interests in Associates and Joint Ventures (EU effective date: 1 January 2019); • IAS 19: Amendment: Plan Amendment, Curtailment or Settlement (EU effective date: 1 January 2019); and • Annual Improvements to IFRS Standards 2015-2017 Cycle (EU effective date: 1 January 2019).
Upon adoption of IFRS 16, the group applied a single recognition and measurement approach for all leases, except for leases of low-value assets. The standard provides specific transition requirements and practical expedients, which have been applied by the group.
Use of estimates and judgements The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.
The following table is an analysis of the net contractual cash flows based on all the liabilities held at 31 December: 31 December 2019 Within 1 year 1-3 years 3-5 years Greater than 5 years Total
Specialty lines This segment underwrites a wide portfolio of business, including architects and engineers, healthcare, lawyers and environmental liability, market facilities business and international financial institutions.
During 2019, Beazley redeemed debt with a nominal value of £75m and a market value of £75m in the form of sterling denominated notes. No profit or loss was realised at redemption as there was no difference between the carrying value and market value of the debt. Please refer to note 25 for further detail on subordinated debt.
Current tax: share based payments (2.6) (6.1) Deferred tax: share based payments (1.0) (4.1)
12 Intangible assets continued Impairment tests Goodwill, syndicate capacity and US insurance authorisation licences are deemed to have indefinite life as they are expected to have value in use that does not erode or become obsolete over the course of time. Consequently, they are not amortised but annually tested for impairment. For the purpose of impairment testing, they are allocated to the group’s cash-generating units (CGUs) as follows: Cyber & executive risk $m Marine $m
Equity funds 163.6 85.4 Hedge funds 354.0 337.2 Illiquid credit assets 216.6 186.6 Total capital growth assets 734.2 609.2 Total financial investments at fair value through statement of profit or loss 5,547.3 4,709.4
These inputs can be subjective and may include a discount rate applied to the investment based on market factors and expectations of future cash flows, the nature of the investment, local market conditions, trading values on public exchanges for comparable securities, current and projected operating performance relative to benchmarks, financial condition, and financing transactions subsequent to the acquisition of the investment.
Transfers The group determines whether transfers have occurred between levels in the fair value hierarchy by assessing categorisation at the end of the reporting period.
Vesting conditions In summary the vesting conditions are defined as: • two years’ service – an employee has to remain in employment until the second anniversary from the grant date; • three years’ service – an employee has to remain in employment until the third anniversary from the grant date; • ROE – return on equity, based on the average marine divisional pre-tax return on equity (ROE) over the performance period; and • NAV – the NAV growth, after adjusting for the effect of dividends, is greater than the risk-free rate of return plus a premium per year.
Net Claims reported and loss adjustment expenses 1,040.0 939.3 Claims incurred but not reported 2,351.5 2,149.7 Net claims liabilities 3,391.5 3,089.0 Unearned premiums 1,329.3 1,174.4 Total insurance liabilities, net 4,720.8 4,263.4
The movements shown on 2015 and earlier are absolute claim movements and are not impacted by any current year movements in premium on those underwriting years.
Movement in present value of funded obligations recognised in the statement of financial position Balance at 1 January 47.0 55.9 Interest cost 1.3 1.3 Actuarial loss/(gain) 5.3 (6.8) Benefits paid (0.5) (1.1) Foreign exchange loss/(gain) 1.6 (2.3) Balance at 31 December 54.7 47.0 $m $m
The movement in the net deferred income tax is as follows: Balance at 1 January 19.8 (3.0) Income tax charge 1.2 18.8 Amounts recorded through equity 0.9 4.2 Foreign exchange translation differences (0.4) (0.2) Balance at 31 December 21.5 19.8
Coverholder A firm either in the United Kingdom or overseas authorised by a managing agent under the terms of a binding authority to enter into contracts of insurance in the name of the members of the syndicate concerned, subject to certain written terms and conditions. A Lloyd’s broker can act as a coverholder.