Charting the right course in today’s insurance market is becoming increasingly challenging. In 2015, the course charted by Beazley enabled the company to grow while continuing to generate strong profits for shareholders.
Beazley plc 2 Northwood Avenue Northwood Park Santry Demesne Santry Dublin 9 | Ireland
Corporate culture matters. Our open, collegial and collaborative culture means our clients and brokers interact with entrepreneurial underwriters who give straight answers and make decisions quickly.
Entrepreneurial spirit is clearly an important part of the psychology of the successful Beazley underwriter. However, a combination of specialist skills and an ability to see the bigger picture also distinguishes Beazley employees in other areas, including claims management and operations.
Beazley has offered me career opportunities I would never have envisaged when I joined the company fresh from college. I love the culture here – people are encouraged to ask questions, take risks, and think unconventionally.
Our business is not conducted through anonymous transactions – we rely on strong relationships with both brokers and insureds. The reciprocity of these relationships matters. Strong partnerships with insureds are based on the expectation that Beazley will be prepared to provide continuity of coverage over the years.
Political risks & contingency In addition to traditional lines such as contract frustration, expropriation and credit, we insure a growing number of businesses against terrorism and political violence. Our contingency team is one of the strongest in the London market. We also specialise in event cancellation – writing everything from weddings to World Cups.
Maintaining our competitive edge While our claims volume has continued to grow broadly in line with premium growth, the nature of the claims we handle continues to evolve, due to a number of factors. First, we have expanded our existing product suites in certain territories, such as France and Singapore. Secondly, our onshore US business has grown rapidly. Finally, the nature of the claims themselves is changing because our small and mid sized risk business has grown faster than our large risk books.
Middle East office opened to access local political risk and violence, terrorism, trade credit and contingency business
A talent for innovation – and the skills and resources to commercialise promising innovations – are key to our value proposition in the eyes of brokers. New forms of cover offer brokers the opportunity to address the emerging risks that concern their clients, as well as making incremental sales in a market where many brokers, like many carriers, have found growth hard to achieve.
Divisional commentary Specialty lines, our largest division, wrote gross premiums of $1,015.2m in 2015 (2014: $895.7m), representing growth of 13% over the prior year. A key contributor to this growth was the continued development of our US platform, where growth was particularly evident in our cyber, management liability and miscellaneous medical product lines. In recent years, we have strengthened our distribution channels for small and mid-sized businesses and, during 2015, we found that these clients often provided us with the best opportunities for growth.
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The marine division made a further significant contribution to Beazley’s profits in 2015, achieving a combined ratio of 77% (2014: 78%) on premiums of $269.3m (2014: $325.2m). However, reserve releases from prior years played a role in this result and we adopted a cautious approach to new business in the light of steep rate declines across many classes.
The steepest rate declines we saw in 2015 related to our energy account, where rates fell by 17%. This was the division’s largest single book in 2014, but last year it contracted by 28% to $68.1m. However, we have had a long run of highly profitable years for energy business and it was inevitable that in the absence of major catastrophe losses competition would grow.
While the rating environment for all these lines of business was favourable for modest growth, with rates broadly stable, the same cannot be said of the large risk open market property risks we saw at the Beazley box at Lloyd’s. Renewal rates on this business were on average down by 8%. We were still able to grow the book slightly however, to $98.1m (2014: $96.8m), due to new relationships that Simon Jackson and John Brown, two senior underwriters who joined us in January, brought to Beazley. Simon succeeded Jonathan Gray as head of the open market property team in June.
Foreign exchange The majority of Beazley’s business is transacted in US dollar 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. Part of this impact, generated by IFRS’s treatment of the unearned premium reserve as a non-monetary item, is purely timing with FX profits and losses which unwind in the subsequent period. Beazley’s FX loss taken through the profit and loss in 2015 was $9.7m (2014: $12.3m).
This year we continued to increase the amount of process automation in our back-office for our higher volume products in the US and Europe. Our investment in process automation is key to supporting increased transaction volumes and revenue, without having to scale up our expense base.
Risk appetite sets the navigational parameters and so supports board discussion. For example, because asset risk appetite is based on how much earnings volatility the board is prepared to tolerate, it is set with consideration of the insurance conditions in mind rather than the asset environment alone. This tempers the amount of asset risk taken in soft insurance market conditions when the initial reaction may be to take on more asset risk to make up for an expectation of reduced insurance profits.
– Are risks being identified? – Are controls operating effectively? – Are controls being signed off? – Reports to committees and board
• Non natural catastrophe risk: This risk is similar to natural catastrophe risk except that multiple losses arise from one event caused by mankind. Given Beazley’s risk profile, examples include a coordinated cyber attack, an act of terrorism, an act of war or a political event. This risk is monitored using exposure management techniques to ensure that the risk and reward are appropriate and that the exposure is not overly concentrated in one area.
We donated over $360,000 to charities this year and we continued our partnerships with World Child Cancer, Shelterbox, Feeding America, The Conservation Fund and the Cancer Research Institute in the US. Our focus has been to build strong partnerships that go beyond donating funds and where we can offer our skills and expertise.
Employee fundraising Throughout the year our employees have given their time to fundraise for charities raising cash which Beazley has match funded to recognise their efforts.
Beazley are tenants in all our buildings globally and we work closely with our landlords to lead and support on environmental initiatives in our offices.
We are part of the Lloyd’s Disaster Relief Finance working group, providing $400m of new insurance capacity to help developing economies tackle underinsurance and increase their resilience against the economic impact of natural catastrophes.
The directors announce both a second interim dividend of 6.6p per ordinary share (2014 second interim dividend: 6.2p) and a special dividend of 18.4p per ordinary share (2014 special dividend: 11.8p per ordinary share). These dividends, together with the first interim dividend of 3.3p per ordinary share (2014 first interim dividend: 3.1p), give a total of 28.3p (2014: 21.1p).
Research and development In the ordinary course of business the group develops new products and services in each of its business divisions.
The board agreed the 2015 risk appetite for the group at the end of 2014 and, throughout 2015, the board has considered and acted upon the information presented to it in order to make risk based decisions against the 2015 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’.
c) Valuation of financial assets at fair value As more fully explained in note 16, the total carrying amount of financial assets at fair value (investments) at 31 December 2015 is $3,842.2m.
Key activities in 2015 During 2015 the committee: • reviewed the key aspects of the remuneration policy, and oversaw its implementation and application; • satisfied itself that the current remuneration structure is appropriate to attract and retain talented people; • considered the chief risk officer’s report on the remuneration policy, which confirmed that the remuneration arrangements are consistent with, and promote, effective risk management throughout the organisation through the consideration of remuneration design, performance of the control environment, profit related pay targets, calculation of the bonus pool, and share plan awards; • ensured incentives continued to be appropriate and to align company and shareholders; • approved the grant of share awards under the group’s deferred, retention and LTIP plans; • considered the salary and bonus awards for 2015 for executive directors, heads of control functions, material risk takers and other officers; • reviewed remuneration policies in light of emerging requirements for Solvency II; • approved the chairman’s fees; and • reviewed the executive director employment contracts.
The committee considers the overall package to be appropriate, responsible and balanced.
Annual remuneration report The annual remuneration report sets out the remuneration out-turns for 2015 (and how these relate to our performance in the year) and details of the operation of our policy for 2016.
While the specific individual objectives of the executive directors are considered commercially sensitive, the following provides details of some of the executive director achievements which the committee took into account: • the continued growth of our onshore US platform where premiums grew by 21% year on year; • approval of our Solvency II model by the Central Bank of Ireland (CBI); • growth in both our Paris and Singapore offices in terms of premiums and people; • the continued recruitment and retention of high calibre staff despite challenging market conditions, including mergers and acquisitions taking place in our sector; • the return of our life, accident & health division to a small profit; • the establishment of our partnership with Korean Re; and • continued focus on our employee engagement, being positioned as a top quartile employer in our employee survey.
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.
Statement of directors’ shareholding and share interests ▪ LTIP participants are expected to build a shareholding in Beazley equal to their annual award level. The CEO has a shareholding requirement of 200% of salary and other executive directors have a shareholding requirement of 150% of salary. LTIP awards may be forfeited if shareholding requirements are not met. All executive directors have met their shareholding requirements.
Current policy is to contribute to a defined contribution pension plan. An equivalent cash alternative may be offered.
The directors are responsible for preparing the annual report and the group and parent company financial statements in accordance with applicable law and regulations.
• testing of the manual adjustments on a sample basis by tracing back to supporting documentation.
Audit work to support this opinion is directed by the engagement partner, who signs this report on behalf of the firm, and in the light of the extent of the group’s activities in London, is undertaken primarily by an audit team in London. Of the group’s two reporting components, we subjected Beazley Furlonge Limited and the syndicates to an audit for group reporting purposes and Beazley Insurance Company Incorporated to specified risk-focused audit procedures. The latter was not individually financially significant enough to require an audit for group reporting purposes, but did present specific individual risks that needed to be addressed and reported to the group and component auditor. The group audit team instructed the audit team in London as to the significant areas to be covered, including the relevant risks detailed above and the information to be reported back. The group audit team also determined the component’s materiality.
• the statement of corporate governance does not appropriately address matters communicated by us to the audit and risk committee.
Retirement benefit liability 27 0.7 – 2.6 – Deferred tax liabilities 28 6.0 – 8.5 – Current income tax liability – – 29.2 –
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 2015.
Financial instruments Financial instruments are recognised in the statement of financial position at such time as the group becomes a party to the contractual provisions of the financial instrument. Purchases and sales of financial assets are recognised on the trade date, which is the date the group commits to purchase or sell the asset. A financial asset is derecognised when the contractual rights to receive cash flows from the financial assets expire, or where the financial assets have been transferred, together with substantially all the risks and rewards of ownership. Financial liabilities are derecognised if the group’s obligations specified in the contract expire, are discharged or cancelled.
Income taxes Income tax on the profit or loss for the period comprises current and deferred tax. Income tax is recognised in the statement of profit or loss except to the extent that it relates to items recognised in other comprehensive income or directly in equity, in which case it is recognised respectively in other comprehensive income or directly in equity.
Share of loss of associates – – (0.4) – – (0.1) (0.5)
Segment results Gross premiums written 132.2 325.2 123.2 344.7 200.8 895.7 2,021.8 Net premiums written 113.7 289.9 101.2 297.6 153.8 776.5 1,732.7
The aggregate financial information for the associate (100%) is as follows: $m $m
Our capital growth assets have no defined maturity dates and have thus been excluded from the above maturity table. However, $122m (2014: $126m) of equity linked funds could be liquidated within two weeks and the balance within six months, $314.5m (2014: $317m) of hedge fund assets within six months and the remaining $14.5m (2014: $50m) 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.
A breakdown of the group’s investment portfolio is provided on page 42. A breakdown of derivative financial instruments is disclosed in note 17.
Bond future contract The group entered in bond futures trades to manage the investment portfolio duration. The vast majority of the trades were executed in order to partially hedge the duration of fixed income securities held at the same time. Occasionally, bond future contracts were traded in order to gain interest rate duration exposure to certain areas of the yield curve.
These are receivable 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. The balance at 31 December 2015 was $732.7m (2014: $587m). In order to meet with the accelerated regulatory reporting deadlines under Solvency II, Beazley now makes an earlier determination of how much of written premiums are received versus receivable. As a result, our premium receivables have grown by 25% year on year whilst gross premiums written have only grown 3% relative to the prior year.
MSIP 04/04/2013 0.5 Three years’ service + ROE 10 years MSIP 04/04/2013 0.5 Five years’ service + ROE 10 years LTIP 10/02/2015 11/02/2014 13/02/2013 30/03/2012 14/02/2011
Claims reported and loss adjustment expenses 937.5 (210.3) 727.2 984.7 (195.0) 789.7 Claims incurred but not reported 2,588.4 (658.1) 1,930.3 2,540.2 (665.7) 1,874.5 b) Unearned premiums reserve
Amounts recognised in the statement of profit or loss Interest cost 1.4 1.7 Expected return on plan assets (1.5) (1.7)
Notes to the financial statements continued 28 Deferred tax continued The group has tax adjusted losses carried forward giving rise to a deferred tax asset of $1.5m, measured at the UK corporation tax rate from 1 April 2015 of 20%. 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.
No later than one year 8.3 8.5 Later than one year and no later than five years 31.1 32.6 Later than five years 3.2 14.5 30 Related party transactions The group and company have related party relationships with syndicates 623, 6107, 6050, its subsidiaries, associates and its directors.
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 34 Subsequent events As noted on pages 14 and 19, the board has agreed to present a proposal to the shareholders of the company at the AGM held in March 2016 to complete a return of management of the group to the UK. This would result in no change to the operating structure, expected profits or tax rates of the group.