EPS is at 0.8x total dividend cover for 2018. Net assets per share are consistent despite a challenging environment.
Strong organic growth has been nurtured by steady investments in Beazley’s people and technology
“Digital transformation has become almost a cliché in the insurance industry,” says Beazley’s chief operating officer Ian Fantozzi. “At Beazley our focus has been on delivering steady improvements in the service we can provide to our clients and brokers without adding proportionately to our headcount.
Our record of sustained growth as a company is closely intertwined with our interest in supporting sustainable growth in the world around us. The future of our business depends upon a sustainable future for our clients, our environment and our communities
The board is pleased to announce a second interim dividend of 7.8p per ordinary share, in line with our strategy of delivering 5-10% dividend growth. Together with the first interim dividend of 3.9p this takes the total dividends declared for 2018 to 11.7p per ordinary share (2017: first interim dividend of 3.7p plus a second interim dividend of 7.4p, totalling 11.1p).
It is difficult to do justice to the contribution that Neil has made to Beazley. He has overseen the development of one of the best performing underwriting portfolios in the market. He also helped us to shape our business model and brand, and to maintain an open and inclusive culture as the company has grown. We wish him well in all his future endeavours.
Q Do you agree that, as some have argued, Lloyd’s is unnecessarily constraining the growth of the market’s better performing businesses?
Q Are you satisfied with the performance of Beazley’s property division in 2018?
A Fortunately I have always been a good sleeper. Our business is built on the high quality of the people we employ, retain and develop and attract and the only thing that I worry about from time to time is how we ensure this continues. The culture of the company is of paramount importance to the board and management and we need to ensure that we maintain the entrepreneurial, empowered, transparent culture that we have had for the past 32 years.
Property catastrophe 80% Property risk 16% Miscellaneous 3% Casualty class 1%
Group structure The group operates across Lloyd’s, Europe, Asia, Canada and the US through a variety of legal entities and structures. The main entities within the legal entity structure are as follows: • Beazley plc – group holding company and investment vehicle, quoted on the London Stock Exchange; • Beazley Ireland Holdings plc – intermediate holding company which holds £75m sterling denominated notes; • Beazley Underwriting Limited – corporate member at Lloyd’s writing business through syndicates 2623, 3622 and 3623; • Beazley Furlonge Limited – managing agency for the seven syndicates managed by the group (623, 2623, 3622, 3623, 6107, 6050 and 5623); • Beazley Insurance dac – insurance company based in Ireland that accepts non-life reinsurance premiums ceded by the corporate member, Beazley Underwriting Limited and also writes business directly from Europe; • Syndicate 2623 – corporate body regulated by Lloyd’s through which the group underwrites its general insurance business excluding accident, life and facilities. Business is written in parallel with syndicate 623; • Syndicate 623 – corporate body regulated by Lloyd’s which has its capital supplied by third party names; • Syndicate 6107 – special purpose syndicate writing reinsurance business, and from 2017 cyber, on behalf of third party names; • Syndicate 3622 – corporate body regulated by Lloyd’s through which the group underwrites its life insurance and reinsurance business; • Syndicate 3623 – corporate body regulated by Lloyd’s through which the group underwrites its personal accident,
To support Beazley’s continuing growth we have developed a scalable and efficient operating platform that through focused investment has become an important competitive advantage. A high performing global operations function relies on us maintaining consistency in operational standards throughout the group, while simultaneously being prepared to try new things and leverage our depth of insurance operations expertise to give us a lead over the competition. In order to achieve this, we pursue our group operations strategy. This focuses on the areas below: Supporting growth initiatives In support of our growth plan, we have continued to enhance our infrastructure so that we can bring attractive new products to market as efficiently as possible. Expanded versions of our products such as Information Security for mid-sized and large businesses, and expanded regulatory coverage for nutraceutical firms are examples of products we launched in 2018.
The goal of Beazley Digital is to take out any unnecessary points of manual interaction in the underwriting process, which is key to writing profitable business and to minimising response times for our higher volume products. The main technologies that we are applying here are: myBeazley.com, for our brokers wanting an end-to-end electronic trading portal; natural language processing, to enable us to quickly extract underwriting data from the high volumes of submission emails we receive; and Application Programming Interfaces (APIs), so that we can interface directly with broker IT systems and provide quotes or policies without any re-keying required by either the broker or Beazley staff. In an increasingly connected world, we see APIs as a critical technology for transacting business. In 2018, for example, in partnership with a large broker, we launched our cyber pricing API in both Spain and Australia.
Instead of delivering change and technology via many individual projects, we have reorganised our teams into ‘platforms’ that are aligned both to the markets that Beazley operates in, and to the type of business being written. Each platform has an annual delivery budget within which there is greater flexibility afforded to the relevant business lines on how the budget is applied, and with the discipline of achieving against specific business outcomes aligned to our group strategy – such as increasing cost efficiency and responsiveness in customer service.
In 2018, Beazley has successfully responded to both external and internal change.
Make a Difference More than 530 employees took part in Make a Difference in 2018
• audit our progress with yearly GHG emissions reports across London, Dublin and our four largest US offices.
Respect of human rights Sustaining growth; Sustainable business 10-13; 59-73 Anti-corruption and anti-bribery matters Sustainability overview; Risk management; Sustainable business 14-15; 53-73
By order of the board, covering the strategic report from pages 1 to 73 and the directors’ report from pages 74 to 77 .
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 the Beazley group) this appointment date refers to their representation on the parent company of the Beazley group.
Mutual Funds 51% Retail 14% Pensions 10% SWF 8% Insurance 6% Investment Trusts 4% Trading 3% ETF 2% Directors 1% Charities 1%
Key responsibilities The executive committee manages all operational activities of the group and acts under the powers delegated by the board. It has responsibility for proposing strategic initiatives and group/syndicate business plans to the board as well as for reviewing the risk management framework and oversight of the group’s sub-committees and business functions.
The board The board has a schedule of matters reserved for its decision. This includes inter alia: strategic matters; statutory matters intended to generate and preserve value over the longer term acquisitions; approval of financial statements and dividends; appointments and terminations of directors, officers and auditors; and appointments of committees and setting of their terms of reference. It is responsible for: reviewing group performance against budgets; approving material contracts; determining authority levels within which management is required to operate; reviewing the group’s annual forecasts; and approving the group’s corporate business plans, including capital adequacy and the Own Risk and Solvency Assessment (ORSA). The board is responsible for determining the nature and extent of the principal risks it is willing to take in pursuing its strategic objectives. To this end, the board is responsible for the capital strategy, including the group’s Solvency II internal model.
Director changes Following Neil Maidment’s retirement, Adrian Cox was promoted from head of specialty lines to chief underwriting officer (CUO). The role of CUO has also been restructured so that, in addition to responsibility for treaty and political, accident and contingency, the CUO will now also have oversight of property, marine and specialty lines. To recognise this increased responsibility, Adrian’s salary was increased by 8.3%.
The second tranche of the 2014 LTIP award vested at 63.4% of maximum following five year NAVps performance of 14.2% p.a.
In 2019, the following grants as a percentage of base salary will be made, subject to the usual NAVps performance condition: • D A Horton: 200% • A P Cox: 150%
■ 2017 performance range ■ 2017 ROE performance 2017 ROE performance (%)
International growth • Growing demand in Europe for many of the lines of business in which we specialise including healthcare and technology. • Integration of Creechurch in Canada with growth of 15% and expanding our capacity to write multi-line financial business. • Significant growth potential internationally in financial institutions business.
Vesting of awards is based on growth in net asset value per share (NAVps), one of Beazley’s key performance indicators. The committee considers the LTIP NAVps growth targets to be very stretching, particularly taking into account that growth must be over a sustained three and five year period.
LTIP awards for 2018 ▪ During 2018 LTIP awards with a face value equal to 200% of salary for the CEO and 150% of salary were granted to executive directors. The awards were as shown in the table below.
LTIP Martin L Bride Nil cost option (LTIP) 150% of salary 89,458 495,000 10% 31/12/2020 31/12/2022 Adrian P Cox Nil cost option (LTIP) 150% of salary 95,151 526,500 10% 31/12/2020 31/12/2022 D Andrew Horton Nil cost option (LTIP) 200% of salary 169,338 937,000 10% 31/12/2020 31/12/2022 Neil P Maidment Nil cost option (LTIP) 150% of salary 95,151 526,500 10% 31/12/2020 31/12/2022 Deferred bonus (in respect of 2017 bonus) Martin L Bride Deferred shares n/a 18,072 100,000 – – – Adrian P Cox Deferred shares n/a 27,108 150,000 – – – D Andrew Horton Deferred shares n/a 30,723 170,000 – – – Neil P Maidment Deferred shares n/a 22,590 125,000 – – –
Note: Salary and bonus are compared against all employees of the group. Benefits (including pension) are compared against all UK employees, reflecting the group’s policy that benefits are provided by reference to local market levels.
Angela D Crawford-Ingle 34,207 – – – – – Christine LaSala 35,000 – – – – – Sir J Andrew Likierman 10,000 – – – – –
No changes in the interests of directors have occurred between 31 December 2018 and 7 February 2019.
LTIP 2018 – 3/5 year Awards were made on 13 February 2018 at a mid-market share price of 553.33p. 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.
The committee considers the individual remuneration packages of the chief executive, executive directors and executive committee members. It also has oversight of the salary and bonus awards of individuals outside the executive committee who either directly report to executive committee members or who have basic salaries over £200,000, as well as the overall bonus pool and total incentives paid by the group. The terms of reference of the committee are available on the company’s website. The committee met six times during the year. Further information on the key activities of the committee for 2018 can be found within the statement of corporate governance on page 97.
— Assessing transparency: Considered the adequacy of the Group’s disclosures in respect of the valuation of insurance liabilities.
Refer to page 93 (Audit and Risk Committee Report), page 145 (Statement of accounting policies) and page 177 (financial disclosures).
Earnings per share (cents per share): Earnings per share (pence per share):
Issue of shares 0.1 – – – – – 0.1 Equity settled share based payments 22 – – – – 24.5 – 24.5 Acquisition of own shares in trust 22 – – – – (16.2) – (16.2) Transfer of shares to employees 22 – – – – (4.0) 6.1 2.1
• all resulting exchange differences are recognised in other comprehensive income and as a separate component of equity.
Financial statem ents www.beazley.com Annual report 2018 Beazley 151 2 Risk management continued c) Claims management risk Claims management risk may arise within the group in the event of inaccurate or incomplete case reserves and claims settlements, poor service quality or excessive claims handling costs. These risks may damage the group brand and undermine its ability to win and retain business, or incur punitive damages. These risks can occur at any stage of the claims life cycle. The group’s claims teams are focused on delivering quality, reliability and speed of service to both internal and external clients. Their aim is to adjust and process claims in a fair, efficient and timely manner, in accordance with the policy’s terms and conditions, the regulatory environment, and the business’s broader interests. Case reserves are set for all known claims liabilities, including provisions for expenses, as soon as a reliable estimate can be made of the claims liability.
<1 yr $m 1-2 yrs $m 2-3 yrs $m 3-4 yrs $m 4-5 yrs $m
The group’s core business is to accept significant insurance risk and the appetite for other risks is low. This protects the group’s capital from erosion so that it can meet its insurance liabilities.
Up to 30 days past due $m 30-60 days past due $m 60-90 days past due $m
Financial statem ents www.beazley.com Annual report 2018 Beazley 159 2 Risk management continued
• to support underwriting in Beazley Insurance Company, Inc. in the US; • to support underwriting in Beazley Insurance dac in Europe; and • to make acquisitions of insurance companies or managing general agents (MGAs) whose strategic goals are aligned with our
2.10 Company risk The company is exposed to the same interest rate and liquidity risk exposure experienced on its mutual borrowings with the group. The group’s exposure can be seen in sections 2.3b and 2.7. The company also experiences operational, regulatory and legal risks as defined in section 2.4 and 2.6.
Deferred tax expense Origination and reversal of temporary differences (14.6) (3.6) Impact of change in UK/US tax rates 0.7 5.3 Prior year adjustments (4.9) 1.5
Our capital growth assets have no defined maturity dates and have thus been excluded from the above maturity table. However, all $85.4m (2017: $153.1m) of equity funds could be liquidated within two weeks, $256.5m (2017: $299.5m) of hedge fund assets within six months and the remaining $80.7m (2017: $77.9m) of hedge fund assets within 18 months, in normal market conditions. Illiquid credit assets are not readily realisable and principal will be returned over the life of these assets, which may be up to 12 years.
Additional information is obtained from fund managers relating to the underlying assets within individual hedge funds. We identified that 83% (2017: 67%) of these underlying assets were level 1 and the remainder level 2. This enables us to categorise hedge funds as level 2.
The table above does not include financial assets and liabilities that are, in accordance with the group’s accounting policies, recorded at amortised cost, if the carrying amount of these financial assets and liabilities approximates their fair values at the reporting date. Cash and cash equivalents have not been included in the table above; however, the full amount of cash and cash equivalents would be classified under level 1 in both the current and prior year.
Forfeited during the year 122.0 (0.5) 68.6 (0.6) Exercised during the year 28.5 (5.0) 35.7 (5.7) Granted during the year 80.0 4.0 71.1 4.7
Increase in claims – Arising from current year claims 1,844.7 (501.9) 1,342.8 1,737.4 (457.8) 1,279.6 – Arising from prior year claims (380.8) 265.8 (115.0) (349.4) 145.5 (203.9)
Gross claims liabilities, group share ($m) 202.7 86.8 64.3 89.6 97.8 171.3 281.5 394.2 720.7 1,116.7 815.1 4,040.7
Reinsurance premiums payable 183.8 182.8 Accrued expenses including staff bonuses 138.3 165.7 Other payables 48.4 100.1 Deferred consideration payable on acquisition of MGAs – 0.3 Due to syndicate 623 5.0 – Due to syndicate 6107 65.1 52.2 Due to syndicate 6050 0.4 11.4 Due to syndicate 5623 1.6 –
Trustees obligations Under section 222 of the Pension Act 2004, every scheme is subject to the Statutory Funding Objective (SFO), which is to have sufficient and appropriate assets to cover its technical provisions, which represent the present value of benefits to which members are entitled based on pensionable service to the valuation date. This is assessed at least every three years using assumptions agreed between the Trustees and the employer as set out in the Statement of Funding Principles produced in accordance with the Occupational Pensions (Scheme Funding) Regulations 2005 (OP(SF)R 2005) Regulation 6. The Trustees written Statement of Funding Principles is dated 27 December 2017 and it sets out their policy for securing that the SFO is met (that the scheme will have sufficient assets to cover its technical provisions). In accordance with the OP(SF)R 2005 Regulation 5(2) trustees have chosen the Defined Accrued Benefit Method, a variant of the projected unit credit method where accrual has ceased.
Financial statem ents www.beazley.com Annual report 2018 Beazley 195 30 Related party transactions The group and company have related party relationships with syndicates 623, 6107, 6050, 5623, its subsidiaries, associates and its directors.
A.M. Best A.M. Best is a worldwide insurance-rating and information agency whose ratings are recognised as an ideal benchmark for assessing the financial strength of insurance related organisations, following a rigorous quantitative and qualitative analysis of a company’s statement of financial position strength, operating performance and business profile.
Investment return Ratio, in percentage terms, calculated by dividing the net investment income by the average financial assets at fair value, including cash. In 2018, this was calculated as net investment income of $41.1m (2017: $138.3m) divided by average financial assets at fair value, including cash, of $4,971.4m (2017: $4,796.4m).