Beazley plc | Annual report and accounts 2018
Sustaining growth
Beazley Annual report 2018
www.beazley.com
Contents
Strategic report
IFC Highlights
1
Our key performance indicators
Our key differentiators
Entrepreneurial spirit
2
3
Strong partnerships
4 Diversified business
Our business model and strategy
8
10 Sustaining growth
14 Sustainability overview
16 Chairman’s statement
18 Chief executive’s statement
22 Q&A with the chief executive
24 Chief underwriting officer’s report
26
Performance by division
28 Marine
30 Political, accident & contingency
32 Property
34 Reinsurance
36 Specialty lines
38 Sustained profitable growth
40 Financial review
40 Group performance
46 Balance sheet management
48 Capital structure
50 Operational update
53 Risk management
59 Sustainable business
74 Directors’ report
Governance
79 Letter from our chairman
80 Board of directors
84
Investor relations
85 Statement of corporate governance
100 Letter from the chairman
of our remuneration committee
101 Directors’ remuneration report
121 Statement of directors’ responsibilities
122 Independent auditor’s report
Financial statements
131 Consolidated statement of profit or loss
132 Statements of comprehensive income
133 Statements of changes in equity
135 Statements of financial position
136 Statements of cash flows
137 Notes to the financial statements
198 Glossary
Sustaining growth
Sustaining growth requires
sustained investment. Our strong
premium growth in 2018 was the
result of continuous investment
in our people, technology and
global office network over many
years. This investment continues.
You can find out more about
our ‘sustaining growth’ strategy
where you see this symbol.
Find out more on pages 10 to 13
Please turn overleaf
for our Key performance
indicators and highlights.
Beazley Annual report 2018
Highlights
Gross premiums written
$2,615.3 m
(2017: $2,343.8 m)
Cash and investments
$5,052.6 m
(2017: $4,890.1 m)
Net premiums written
$2,248.5 m
(2017: $1,978.8 m)
Net earned premiums
$2,084.6m
(2017: $1,869.4m)
Net investment income
$41.1m
(2017: $138.3m)
Investment return
0.8%
(2017: 2.9%)
Renewal rate increase
3%
(2017: decrease 1%)
Profit before tax for the financial year
$76.4m
(2017: $168.0m)
Annual report 2018 Beazley
Key performance indicators
KPIs
Financial highlights
Earnings per share (c)
Net assets per share (c)
Gross premiums written ($m)
60
50
40
30
20
10
0
48.8
48.6
43.1
25.0
13.0
2014
2015
2016
2017
2018
300
250
200
150
100
50
0
18.7
247.0
17.8
18.7
25.5
263.9
268.2
261.6
24.2
256.2
2014
2015
2016
2017
2018
3,000
2,500
2,000
1,500
1,000
500
0
■ Tangible ■ Intangible
.
8
1
2
0
2
,
.
9
0
8
0
2
,
.
6
5
9
1
2
,
.
8
3
4
3
2
,
.
3
5
1
6
2
,
2014
2015
2016
2017
2018
EPS is at 0.8x total dividend cover for 2018.
Net assets per share are consistent despite
a challenging environment.
Growth of 12% in 2018 and 29% since 2014.
Dividends per share (p)
Return on equity (%)
Combined ratio (%)
30
25
20
15
10
5
0
11.8
9.3
18.4
9.9
10.0
10.5
11.1
11.7
2014
2015
2016
2017
2018
■ Interim and second interim ■ Special
The interim and second interim dividend for
2018 is in line with our dividend strategy and
has grown by 5%.
25
20
15
10
5
0
17
19
18
9
5
2014
2015
2016
2017
2018
100
80
60
40
20
89
87
89
99
98
49
40
48
39
48
41
58
41
59
39
0
2014
■ Expense ratio
2015
2016
■ Claims ratio
2017
2018
Average five year return on equity of 14%.
Our combined ratio has averaged 92% over
five years.
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 41 and in the glossary on page 198.
Find out more within our Financial Statements on pages 130 to 197
www.beazley.com
Annual report 2018 Beazley
01
Our key differentiators
We create value through the implementation of three key
differentiators – consistently applied and nurtured across
our specialist insurance operations around the world
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Entrepreneurial
spirit
Strong
partnerships
Diversified
business
We look for individuals
with a strong sense of
ownership for the business
they are engaged in, who
are willing – indeed keen
– to be accountable for
their decisions
Strong long term
relationships have
sustained our business
over more than three
decades
We target a diverse
underwriting portfolio
and actively manage the
different insurance cycles
to achieve consistent
results year on year
02
Beazley Annual report 2018
www.beazley.com
Our key differentiators continued
Entrepreneurial spirit
We look for individuals with a strong sense
of ownership for the business they are engaged
in, who are willing – indeed keen – to be
accountable for their decisions
As the digital transformation of
Beazley’s operations gathers pace,
driving internal efficiencies and
enhancing the experience of brokers
and clients, the capability of all
Beazley employees to think and
act like entrepreneurs will continue
to be critical.
Since Beazley was founded in 1986,
the company has relied on the zeal and
commitment of people who want to build
a business, not just do a job. For the first
two decades, most of the individuals who
embodied this spirit were underwriters
who had deep knowledge of a particular
line of business and a vision of how best
to grow their book.
Highly motivated entrepreneurial
underwriters are still crucial to Beazley’s
success. However in recent years other
functions within the company, such as IT,
operations and marketing, have been
encouraged to take a similar broad view
of the opportunities Beazley offers.
Initiatives such as the launch of the
world’s first fully personalised digital
insurance policy in 2018 owed their
existence to multi-disciplinary teams
of individuals from varied backgrounds
working towards a common goal.
“ We’ve built a billion dollar
business in the US in
14 years, based on our
ability to respond quickly
and creatively to the
challenges brokers and
clients bring us. The
growth opportunities
open to us today are
greater than ever.”
Jennifer Englund
Head of US operations
www.beazley.com
Annual report 2018 Beazley 03
Strong partnerships
Strong long term relationships have
sustained our business over more
than three decades
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Insurance is a highly collaborative
business and much of Beazley’s
success is derived from the strength of
its relationships with other participants
in the market. Strong client
relationships are of course crucial and
Beazley’s relationships with its clients
frequently span many years in some
cases, decades. However relationships
with other insurers are also important,
particularly within the London market.
In London, most business is transacted
on a subscription basis, meaning that
large risks are parcelled out among
numerous Lloyd’s syndicates and
insurance companies. As a widely
recognised lead underwriter for many
of the classes of business in which we
specialise, Beazley sets the price and
terms and conditions for most of the
business it writes.
On occasion a group of Lloyd’s
syndicates will come together to form
a consortium, increasing the capacity
limits they can offer. Such was the
case in July 2018 when Beazley
spearheaded the creation of a ‘wage
& hour’ consortium at Lloyd’s to protect
US companies against claims made
under the Fair Labor Standards Act.
Limits up to $25m are thus available
for the costs of defending and
indemnifying US organisations that
are alleged to have violated their
obligations under this extremely
complex legislation.
The Lloyd’s syndicates
The Lloyd’s syndicates managed
by Beazley compete vigorously
with other syndicates, but they
also collaborate with both Lloyd’s
syndicates and insurance companies
to provide the underwriting capacity
that clients need.
Lloyd’s of London
04
Beazley Annual report 2018
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Our key differentiators continued
Diversified business
We target a diverse underwriting
portfolio and actively manage the
different insurance cycles to achieve
consistent results year on year
For the second year in a row, natural
catastrophe activity was relatively
intense in 2018, testing the
diversification of our underwriting
portfolio. As it had in 2017, the portfolio
– and the principles on which it was
built – stood up well, generating
a combined ratio of 98%.
Not all of the areas of diversification
within Beazley’s portfolio are obvious.
For example, large risks and small risks
in a particular line of business tend to
perform quite differently as the supply
and demand of insurance fluctuates.
Large risks tend to be more volatile, with
greater swings between the peaks and
troughs of the insurance cycle, whereas
small risks are generally more stable.
A judicious mix of large and small
business can thus help optimise an
insurer’s risk adjusted return.
It was with the goal of expanding
Beazley’s small and mid-sized business
that the company established a local
underwriting presence in the US market
in 2005. The goal was to write business
from smaller clients, who would not
normally seek cover in the London
market, but for the same lines of
business for which Beazley was already
well known. The strategy has paid off,
securing access to significant growth
opportunities while balancing the
overall underwriting portfolio. Beazley’s
US underwriters wrote in excess of
$1bn in gross premiums during 2018.
$1bn achievement
On 13 December, our US offices
celebrated achieving our milestone
of $1bn gross premiums written in
the US. Since launching in 2005, our
US business has grown from a single
office to 589 employees across
13 locations. We maintain our A rated
status, write over 27 product lines
and continue to pursue our vision.
In early 2019, we will celebrate this
achievement and thank our brokers
by hosting them at various events
across the US. We are proud of this
accomplishment and have already
set our sights on our next milestone
in the US.
Dallas office
Beazley, Dallas, US
www.beazley.com
Annual report 2018 Beazley 05
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US managed gross premiums $m
1,200
1,000
800
600
400
200
0
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Diversified portfolio
The spread of our overall portfolio by division and the
impact this diversification has had on our combined ratio
over the past nine years can be seen in the chart below.
Diversified portfolio achieves consistent
combined ratio through market cycles
160%
140%
120%
100%
80%
60%
40%
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Lines of business
Diversified portfolio
06
Beazley Annual report 2018
www.beazley.com
Our key differentiators continued
Diversified business
Growth of managed
gross premiums
by division $m
Marine
We help insure in excess of 20% of the world’s
ocean-going tonnage and are the pre-eminent
leader of voyage and tow business in the
London market. The energy team work with
over 500 oil and gas companies, drilling
contractors and service companies globally
offering insurance solutions for these complex
risks. We have extensive experience insuring
a wide variety of cargoes including project
cargo, fine art and specie.
Political, accident
& 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 personal accident product covers
a number of niche classes and we have
a growing account of US supplemental health
business providing tailored benefit solutions
to a wide range of employers.
Find out more on pages 28 to 29
Find out more on pages 30 to 31
3,000
2,500
2,000
1,500
1,000
500
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86
87
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89
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92
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99
00
01
02
03
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www.beazley.com
Annual report 2018 Beazley 07
Property
Reinsurance
Specialty lines
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 five platforms: London, the US,
Canada, Latin America and Singapore, with a
business focus on commercial property risks,
valuable assets and select homeowners’
business.
The reinsurance team specialises in writing
worldwide property catastrophe, per risk,
aggregate excess of loss and pro-rata
business, and casualty clash. Approximately
80% of our top clients have reinsured with
us for 20 years or more.
Specialty lines comprises management
liability and professional liability risks,
including cyber liability, underwritten
for clients on both a primary and excess
basis worldwide. Our clients are served both
by our underwriters at Lloyd’s and by our
local underwriters in hubs around the world.
Find out more on pages 32 to 33
Find out more on pages 34 to 35
Find out more on pages 36 to 37
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2,000
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1,000
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Beazley Annual report 2018
www.beazley.com
Our business model and strategy
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
Our business model
Our strategy
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
• We primarily transact business
through brokers and work with
selected managing general
agencies and managing general
underwriters to improve
distribution in specialist niches.
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.
www.beazley.com
Annual report 2018 Beazley 09
Our current strategic
initiatives
Risks
Beazley Digital
Focus on smaller/less complex risks
by doing business in a way which
maximises the value we get from
technology and provides seamless
and efficient solutions to brokers
and clients.
Faster, Smarter Underwriting
Focus on larger more complex
risks using new technology and data
analytics to improve the efficiency
and the quality of our complex risk
underwriting and claims settlement.
Closer to the Client
By better understanding our clients’
needs, we will be able to enhance our
product design and improve our clients’
experience. Also we look to improve the
client experience and strengthen our
brand as a client-focused insurer by
enhancing our client attraction,
retention and cross-selling.
London Market
Explore ways of promoting London as a
great place to write specialist insurance
while improving the efficiency of the
London market (Lloyd’s and company
market). Also ensure the market
continues to obtain the most value for
our clients, brokers and shareholders.
Enhance ways that the London market
can generate access to business and
capital more efficiently.
Given the nature of Beazley’s
business, the key risks that impact
financial performance arise from
insurance activities and fall into
the following categories:
• Market cycle risk:
The risk of systematic mispricing
of the medium tailed specialty
lines business which could arise
due to a change in the US tort
environment, changes to the
supply and demand of capital,
and companies using incomplete
data to make decisions;
• Natural catastrophe risk:
The risk of one large event caused
by nature affecting a number
of policies and therefore giving
rise to multiple losses. Given
Beazley’s risk profile, this could
be a hurricane, major windstorm
or earthquake;
• 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;
• Reserve risk:
The risk that the reserves put
aside for claims to be settled
in the future turn out to be
insufficient; and
• Market (asset) risk:
The risk that the value of
investments could be adversely
impacted by movements in
interest rates, exchange rates,
default rates or external market
forces.
Our approach to managing
these and other risks
is described in detail
on pages 53 to 58
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How we measure
value creation
For shareholders
We measure our value creation for
shareholders through earnings per
share, the growth of net assets per
share, and total shareholder returns
in dollars as this is the currency
of the majority of our transactions.
Underpinning our strong results
against all of these metrics has
been our consistently strong
underwriting performance, reflected
in our combined ratio. Our combined
ratio in 2018, a year of high natural
catastrophes, was 98%. In the five
years prior to 2018 it averaged 90%.
For staff
Beazley employs talented people
and we invest accordingly in
expanding their skills and helping
them build rewarding careers.
We measure the impact of these
investments on the perceptions
of our people in two main ways:
by monitoring staff retention levels
and through a detailed employee
engagement survey, which we
conduct every two years. On both
counts, the evidence is strongly
positive. Our staff retention levels
are very high and the most recent
employee engagement survey,
conducted in 2017, positioned Beazley
in the top quartile of the 6,000
companies surveyed by Aon Hewitt.
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. This is
the third year Beazley have conducted
a global survey, and the number
of brokers participating continues
to increase, reflecting strong
engagement. Over 5,000 brokers
provided feedback on our underwriting
and claims service. Our high Net
Promoter Scores in both areas
reflect their continued willingness to
recommend Beazley to their clients.
10
Beazley Annual report 2018
www.beazley.com
Sustaining growth
Strong organic growth
has been nurtured by
steady investments in
Beazley’s people
and technology
In 2018, Beazley’s teams across
the US celebrated a landmark
achievement – passing the goal
of underwriting a billion dollars
of US business. From modest
beginnings in 2005, when
Beazley’s underwriters in
Farmington, Connecticut brought
in $15.4m in premium, the US
business has grown to encompass
13 offices, 589 people, and
during 2018 $1,051.2m
in gross premiums written.1
www.beazley.com
Annual report 2018 Beazley
11
Obtaining growth
Growth for insurance companies
rarely proceeds in a straight line and,
when it does, it does not usually bode
well for investors. Market conditions,
particularly for catastrophe exposed
risks, can swing wildly and a disciplined
insurer will adjust its exposures
accordingly. In 2010 and 2011,
Beazley’s premiums overall declined
by 2% as intense competition in many
lines of business and the global
recession following the 2008 financial
crisis took their toll. However in 2012,
the business bounced back with
double digit premium growth and
record profits. Since 2012, Beazley’s
top line has grown by an average of
6% annually.
Most of this growth has been organic,
which Beazley generally favours over
growth by acquisition. One exception
was the business derived through the
acquisition of Creechurch Underwriters
in February 2017, a managing agency
in Canada that Beazley had supported
since its establishment in 1996.
This acquisition has afforded Beazley
a strong platform for growth in the
Canadian market that would have been
difficult and time-consuming to build
from scratch.
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Downtown Toronto: Beazley now has
a strong platform for growth in Canada
“Our acquisition of Creechurch has
been very successful,” says Beazley’s
CEO Andrew Horton. “But in the main
we focus on organic growth because it
is more sustainable and poses less of
a risk of nasty surprises. We have been
fortunate at Beazley in being able to
attract some talented individuals from
other companies that have become
quite internally focused due to large
scale mergers and complex corporate
reorganisations.”
Although organic growth means the
company does not have to invest in the
purchase of businesses, it does require
continuous investment. Beazley has been
investing in technology to enhance the
productivity of underwriters and improve
the service provided to clients and
brokers.
With any investments in technology
come investments in people, to
help them optimise the value of the
technology and build satisfying long
term careers at the company.
The US has proved the main engine
of Beazley’s growth in recent years
but since 2017 Beazley has
increased its investments elsewhere
in the world, notably in continental
Europe. “We see strongly growing
demand in Europe for many of the
lines of business in which we
specialise,” says new chief
underwriting officer Adrian Cox.
“That includes cyber of course,
but also specialist liability products
for healthcare providers, technology
companies and financial
institutions.”
1 Beazley’s underwriters also write on behalf of syndicate 623, a syndicate managed by Beazley but
backed by third party capital. As such, $114.5m of locally underwritten US premium does not remain
within the Beazley plc group.
12
Beazley Annual report 2018
www.beazley.com
Sustaining growth continued
Investment in people
In the past two years, Beazley has
added 99 underwriters to develop
business around the world outside the
US, against 43 actually within the US.
There is no expectation that the pace
of growth in the US will slacken, but
the overall geographic mix of the
portfolio is likely to diversify further
as Beazley grows into other markets.
Beazley’s new hires in Europe
and elsewhere are often multiline
underwriters able to write a range
of specialty risks. Their ability to do
this (which represents a departure
from Beazley’s historic single line
underwriter model) is supported by
technology that marshals underwriting
data more efficiently and shortens
response time for brokers’ submissions.
Particularly for small risks, speed of
response is often the main determinant
of winning business.
Technology that enhances the speed
and agility of Beazley’s workforce also
underpins another major innovation
designed to sustain future growth.
In February 2018 Beazley opened its
first office – in Birmingham, England
– equipped to provide its 40 occupants
with an activity based working
(ABW) environment.
Gearing up for activity based working:
artist’s impression of Twentytwo Bishopsgate,
Beazley’s London headquarters from 2020
“The principle underlying ABW is
flexibility,” says Munira Hirji, Beazley’s
head of commercial management,
who is responsible for the company’s
24 offices worldwide. “Flexibility to work
in the way you need to and with the tools
you need. So we looked closely at the
design of this office to create places that
reflected the different activities we do
each day: for example quiet areas for
calls or focused work, creative areas for
collaboration, and social areas for eating
and catching up.”
In spring 2019 Beazley’s office in
Toronto will move to new premises
equipped for ABW. The 190 person
New York office will follow suit later
in 2019 and in 2020 the company’s
London office will move to Twentytwo
Bishopsgate, a new development in
the City of London, also providing
for ABW.
www.beazley.com
Annual report 2018 Beazley
13
Amongst others, Beazley’s Birmingham
office houses members of the company’s
global IT team who have been focusing
on robotics technology that promises
significant efficiency gains over time.
The goal of the Beazley Digital strategic
initiative launched in 2018 is to introduce
‘no touch’ processing for most small
business transacted by Beazley, and
robotics will be key to this transformation.
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“ We are seeking to
offer our early career
joiners a broad exposure
to the workings of the
company.”
Pippa Vowles
Head of talent management
Beazley’s office in Birmingham
The company continues to hire such
individuals, but is now also beginning
to train up underwriters in their first
or second role.
“We are seeking to offer our early
career intake a broad exposure to
the workings of the company,” says
Pippa Vowles, Beazley’s head of talent
management. “They need to be well
versed in the ways in which technology
and new forms of data are reshaping
our business, as well as in the
traditional but still critical technical
pricing and relationship-building skills.
It’s a new world.”
“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.
‘‘We have also been looking to harness
new sources of data, including social
media feeds, that can help us price risks
more swiftly. The ultimate effect of all this
will be to transform our business, but it’s
not a big bang.”
In the course of this transformation, the
skills required of Beazley’s underwriters
– and within the company as a whole –
will change. Beazley has historically relied
upon hiring experienced underwriters
who have brought all the capabilities
needed to the job, together with strong
pre-existing broker relationships.
14
Beazley Annual report 2018
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Sustainability overview
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
For Beazley, being a
responsible business
means we take our
environmental, social and
governance (ESG) obligations
seriously. As global trends –
including climate change –
threaten our clients’ interests,
it is becoming ever more
clear that good business
must simply be responsible
business.
Global warming may be aggravating flood damage
as warm air can hold far more water than cooler air
Insurance is an essential enabler of
human and economic activity. Without
insurance, the risks inherent in many
endeavours could prohibit development
and innovation. The consequences of risk
events would be unmitigated. We are
there to protect our clients’ physical and
financial interests in the event that things
go wrong. In this sense insurance is a
force for progress.
However, we must also be sensitive
to the undesirable side effects – what
economists call ‘externalities’ – that may
accompany economic growth. At Beazley,
our underwriters and our investment
professionals are sensitive to these
externalities. Before binding any risks,
our underwriters consider the risks being
presented in the widest possible sense,
including the potential social and
environmental impact of the insurance
in question.
www.beazley.com
Annual report 2018 Beazley 15
On the investment side, we believe our
strategy should seek to have a positive
influence on society and the wider world.
For this reason we consider ESG risks
as part of our decision making process.
We view this approach as consistent
with the objective of optimising total
return, as companies demonstrating
a commitment to a sustainable business
strategy and ethical business culture
have been shown to enjoy a competitive
advantage over time, generating stronger
and more stable returns.
“ We know that our
insurance products
perform a vital function
in protecting our clients’
interests and helping
them to recover from
disaster. As a responsible
business, we also recognise
our role in trying to
ensure that the insurance
that we provide, and the
wider impact of our
people, business and
assets, serve a positive
purpose in this planet
on which we all depend.”
Emma Whiteacre
Chair of the responsible business
committee
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As the insurance industry continues
to pick up the bill for increasing
extreme weather events, it is starting
to re-evaluate on how to perform its
role as an enabler of economic activity.
At Beazley, we are on a journey to explore
this further. Our internal sustainability
initiative considers how we can use
our expertise to support and incentivise
improved social and environmental
outcomes.
We also aim to support the communities
within which we work by using our
resources and skills. Whether it’s
volunteering with the elderly, feeding the
homeless as part of our global Make a
Difference programme, working directly
with our global charity partner, All Hands
and Hearts or indeed making business
decisions that take their social and
environmental impact into consideration,
our aim isn’t just to provide short-term
solutions for our communities but to
provide sustainable and long-term
support through our programmes.
In recognition of the importance of
transparency in ESG performance,
we will be making this report available
as a standalone document for the first
time this year.
We have contributed over
$300,000
to charitable causes in 2018
Our sustainable business
ESG report is described in detail
on pages 59 to 73
Maximising and
measuring our impact
Underwriting strategy
Before binding any risks, our
underwriters consider the risks
being presented in the widest
possible sense, including the
potential social and environmental
impact of the insurance in question.
Investment strategy
Through our investment strategy,
we seek to have a positive
influence on society and the
world at large and we accordingly
consider environmental, social
and governance (ESG) risks in
our decision making.
Environmental
Beazley has reported its
environmental impacts under the
insurance sector’s ClimateWise
initiative since 2007.
Local communities
In 2018, more than 550 Beazley
employees around the world
participated in a wide range
of activities in support of the
communities where they work
and live, helping young people
and vulnerable adults, and restoring
local parks and community gardens.
Charitable giving
The company and our employees
contributed over $300,000
to charitable causes in 2018.
Equal opportunity
We work with Stonewall to identify
the best support for our colleagues
in the LGBT+ community and with
Disability Forum to help make
our organisation and working
environment more ‘disability-smart’.
We were the first Lloyd’s managing
agent to sign up to the British
Government’s Women in Finance
Charter.
Prevention of bribery and corruption
Prevention, detection and reporting
of bribery and other forms of
corruption is the responsibility of
all employees. Senior management
have overall accountability for
ensuring Beazley’s Anti-Bribery
and Corruption Policy complies
with Beazley’s ethical obligations,
and that all those under its control
comply with it.
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Beazley Annual report 2018
www.beazley.com
Chairman’s statement
Strong premium
growth against
a backdrop of
challenging market
conditions
David Roberts
Chairman
Beazley delivered strong
premium growth in 2018
against a backdrop of often
challenging market conditions,
with premiums rising 12% to
$2,615.3m (2017: $2,343.8m).
Profitability was impacted
by underwriting losses in
our property insurance and
reinsurance business, which
fed into a combined ratio for
the group of 98% (2017: 99%),
as well as a sharply lower
investment return. The company
generated a return on average
shareholders’ equity of 5%
(2017: 9%).
After 2017’s exceptional catastrophe
experience, 2018 was only slightly less
eventful. There were two hurricanes in
the US, Florence and Michael, and two
typhoons in Japan, Jebi and Trami, and
in November, California experienced
massively destructive wildfires for the
second year in a row.
We are constantly mindful of the human
cost of these traumatic events and the
need to act swiftly to help communities
and companies rebuild and recover.
By year end we had disbursed $110m
in funds to clients afflicted by 2018’s
natural catastrophes.
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).
www.beazley.com
Annual report 2018 Beazley
17
I took over as chairman from Dennis Holt
in March 2018. In the six years of
Dennis’s tenure as chairman, Beazley
grew premiums by 37% and generated
annual shareholder returns of 31%, a
quite remarkable track record. On behalf
of the board I would like to thank Dennis
for his leadership and wish him well for
the future.
I see my role and that of the board as
being to challenge, support and advise
Beazley’s management as they embark
on the next phase of profitable growth.
Two prerequisites for this growth are
clearly present. In recent months, I have
been greatly impressed with the talent of
individuals at all levels of the organisation.
Beazley also has significant headroom
to grow in all its major markets and
geographies.
This breadth of opportunity is significant.
Cyber insurance is perhaps too often
cited as a growth opportunity for Beazley
– not because it is unimportant but
because it can eclipse other promising
opportunities. The growth of the US
business has been broad-based and our
plans for growth outside of the US equally
rely on a diverse product range.
Future growth will also increasingly
depend on harnessing new technologies
and data sources. Beazley took a number
of measures to grasp these opportunities
in 2018. In particular, our two new IT
related strategic initiatives – Beazley
Digital and Faster, Smarter Underwriting
– should help capture the benefits of new
technology and the availability of new
data sources across our product range.
Neil Maidment also retired from the
board, and as our chief underwriting
officer, at the end of 2018. Neil has
made an inestimable contribution over
his 28 years at Beazley, for which I am
very grateful. We wish him every success
and fulfilment in his future ventures.
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We announced last March that Adrian Cox
would succeed Neil as chief underwriting
officer, a role for which he is exceptionally
well qualified, having run our largest
division, specialty lines, since 2008.
We also announced during 2018 that
Martin Bride, our finance director, will
retire during 2019 and we are delighted
to announce that Sally Lake, currently our
group actuary, will take over from Martin
during 2019 following a hand over.
Management changes present a twofold
opportunity: to bring people with new
ideas and experiences into the company
and to promote capable and ambitious
individuals internally. It is particularly
pleasing that the strength of Beazley’s
talent – for which the company has long
been known – has enabled many of our
recent senior appointments to be internal.
Beazley has thrived as a specialist insurer
for more than three decades by offering
brokers products that are well designed
to meet their clients’ most pressing
needs. These skills will continue to be
important in the years ahead. However
Beazley will additionally need to show
itself as a leader in redesigning insurance
business processes in a market that is
ripe for structural change. I am confident
that Beazley possesses the skills and
the vision to make this leap.
David Roberts
Chairman
Board changes
The changes that Beazley and other
insurers are grappling with are more
than incremental and they are likely to
accelerate. They will necessitate new
ways of working, new skills and a new
approach to the interaction between
people and technology. Succession
planning is a critical responsibility for
a board, and therefore in the light of
planned retirements we have been
looking closely at the composition of the
Beazley board, taking into account the
skills required to compete successfully
in this new environment, whilst ensuring
we can continue to discharge our
responsibility to challenge, support
and advise management.
In March 2019, George Blunden will be
stepping down from the board, having
served for eight years as Beazley’s senior
independent director, as well as
participating on the audit and risk
committee, remuneration committee
and nomination committee. He has been
an outstanding servant of Beazley,
helping to guide the company through
a period of sustained growth. George
will step down from the board at the
conclusion of the annual general meeting,
but we will continue to benefit from his
counsel as a member of the board of
our Lloyd’s managing agency, Beazley
Furlonge Limited.
I am delighted that Christine LaSala will
assume the role of senior independent
director upon George’s retirement from
the board. Christine has a long and
distinguished career in the insurance
industry and has already made a
significant contribution to the board.
Following the conclusion of two three-year
terms, Angela Crawford-Ingle, non-
executive director and chairman of the
audit and risk committee, will step down
from the board at the conclusion of the
2018 accounting year and when the
handover to her successor is complete.
On behalf of the board I would like to
extend our considerable gratitude to
Angela. She has been an excellent
chairman of the audit and risk committee
and has made a significant contribution
to Beazley.
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Beazley Annual report 2018
www.beazley.com
Chief executive’s statement
Achieving profitable
growth while
supporting our
insureds is key to
Beazley maintaining
its long term value
Andrew Horton
Chief executive officer
Beazley delivered strong
premium growth in 2018, with
gross premiums written rising
12% to $2,615.3m (2017:
$2,343.8m). Profit before
income tax declined by 55%
to $76.4m (2017: $168.0m)
due to a decline in investment
returns. Our combined ratio
stood at 98% (2017: 99%) and
was affected by severe natural
catastrophe claims again
in 2018.
Beazley’s claims teams worked tirelessly
in 2018 to provide the swift and supportive
claims service expected by all of our
clients.
We have now seen two years of above
average claims for short tail property
insurance and reinsurance business,
following on from five years of very
subdued claims activity. The erosion of
premium rates we saw between 2012
and 2016 has, to some extent, been
reversed. We hope to build on last year’s
price increases during 2019. In particular,
numerous competitors have curtailed
their property underwriting following
heavy losses and this withdrawal of
capacity should make recent price
rises more sustainable.
In November, we estimated the combined
cost of two US hurricanes, Florence and
Michael, and two Japanese typhoons,
Jebi and Trami, at $105m net of
reinsurance and reinstatement premiums.
As the year drew to a close, we sustained
an additional $40m of claims net of
reinsurance for the wildfires that blazed
with unprecedented ferocity in northern
California. The previous year’s exceptionally
heavy catastrophe losses had already
depleted our catastrophe reserves with
the outcome that prior year reserve
releases for the group as a whole in 2018
fell to $115.0m (2017: $203.9m).
We are in business to pay claims and the
long term value of the company depends
on the claims service we provide, which
supports strong, enduring relationships
with our clients and brokers. When
insurers talk of catastrophe claims, they
usually mean claims triggered by events
such as storms, earthquakes or wildfires.
However for our clients any loss may
potentially rank as a catastrophe.
www.beazley.com
Annual report 2018 Beazley
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Two of our strategic initiatives are
tackling this challenge in different ways.
Our Beazley Digital initiative focuses on
small, relatively simple business, where
we see significant scope for automation.
Our Faster, Smarter Underwriting initiative
is tackling the larger, more complex risks
that are the historic mainstay of Beazley’s
business. We see some opportunities
for automation here too, but there is
also scope for enlisting new data sources
to help us underwrite risks that were
previously very hard to price or even
deemed uninsurable.
The value we offer to clients depends
of course on our underwriting appetite
and the claims service that we provide.
However it also depends on how easy it
is to do business with us. To improve our
overall service we need to stand in our
clients’ shoes and this is the focus of
a third strategic initiative we are calling
Closer to the Client. In parallel with this,
we have been working hard to simplify
our policies – a drive epitomised in
April 2018 by the launch of a digital
version of our WeatherGuard policy that
dramatically simplifies weather-related
cover for event organisers.
Finally, as a London-based insurer
our success is in many respects bound
up with the broader success – and
particularly the efficiency – of the
London insurance market. Last April
I was delighted to be invited to chair the
London Market Group (LMG), a body that
represents all of the market’s businesses.
At Beazley our London Market strategic
initiative was launched during 2018
to ensure that we benefit to the fullest
possible extent from the work that the
LMG is doing to modernise and promote
the London market.
Growth opportunities
Growth in insurance can be opportunistic
– driven by firming premium rates –
but it can also be strategic, based on
an insurer’s position in growth markets.
Over time, the latter is more important.
Beazley is well positioned in a wide array
of growth markets. The cyber insurance
market, showing double digit annual
growth, is perhaps the most widely
discussed. Nevertheless demand is
also very strong for the specialty liability
products we offer to healthcare providers,
technology companies, and property
developers confronting environmental
liability risks.
Our position in markets such as these
has underpinned the strong growth of
our US operations in recent years,
which continued in 2018. We saw locally
underwritten US premiums grow 20%
during the year to $1,051.2m (2017:
$878.2m), nearly 90% of which is written
on behalf of the group (the balance is
attributable to the external investors
supporting Beazley syndicate 623).
Our US business has grown at an average
rate of 18% for the past five years and
we foresee further double digit growth
during 2019.
Developing a strong foothold in new
markets often takes time. Our US
accident and health business is a case
in point. In recent years, the soaring
cost of health benefits to US companies
has generated strong demand for
‘supplemental health’ offerings to
employees that are either partly funded
by employers or wholly funded by
employees. This has not historically been
a target market for Beazley and it has
taken time to develop the relationships
needed to win a share of this business.
Under the leadership of Brian Thompson,
our US team began to gain real traction
in this market in 2017 and this continued
into 2018, when we wrote $20.6m.
Outside the US, we have also been laying
the foundations for long term growth.
In 2017, our specialty lines division
– Beazley’s largest – began a concerted
effort to capitalise on the growing
demand for specialty liability products
that we saw developing outside the US,
particularly in continental Europe. We saw
opportunities in many of the industries
that have also fuelled our US growth,
such as healthcare and technology, but
we also saw significant growth potential
in financial institutions business, which
we have not historically underwritten
in the US.
As described on page 12 and 13 of this
report, we have invested heavily in both
people and technology to support the
growth of our non-US business, hiring
34 underwriters outside the US in 2018.
Although we are a UK-based business,
Brexit should not present any
insurmountable challenges for Beazley.
In July 2017 we secured approval from
the Central Bank of Ireland for our Dublin
based European insurance company,
Beazley Insurance dac, to write insurance
business. We are accordingly able to
underwrite European business for the
account of Beazley Insurance dac – which
has branches in Germany, France, Spain
and the UK – and for the account of our
Lloyd’s syndicates through the Lloyd’s
Brussels office.
New strategic initiatives
Change is gathering pace in our industry,
fuelled by new technologies and new data
sources. In 2018 we launched a series
of strategic initiatives to help Beazley
adjust to these changes and benefit from
them. Our overarching goal is to make the
company an even better business partner
to our clients and brokers.
A key objective of these initiatives will
be to lower, over time, the expense ratios
that have proved stubbornly high in
our industry. Our value to our clients will
dramatically increase if we can pay out
less in expenses and more in claims. This
in turn will depend on enlisting technology
to enhance the productivity of our
underwriters and other staff, automating
manual processes wherever possible.
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Beazley Annual report 2018
www.beazley.com
Chief executive’s statement continued
Executive changes
Succession planning is something we
take very seriously at Beazley at all levels
in the organisation. Some of our plans
are currently being executed: we
welcomed four new members to the
executive committee in 2018 and
a further four will join during 2019.
I am delighted that more than half
of our recent senior appointments are
internal promotions, including all of
those to senior underwriting roles.
At the beginning of 2019, Adrian Cox
succeeded Neil Maidment as Beazley’s
chief underwriting officer. Adrian is
exceptionally well qualified to assume
the role, having run our largest division,
specialty lines, since 2008. From the
beginning of 2019, we have split this
division – which accounted for 56% of
our total premiums in 2018 – into two.
The new divisions are headed by
seasoned Beazley underwriters: one,
under the leadership of James Eaton,
will continue to be called specialty lines,
while the other, under the leadership of
Mike Donovan, has been named cyber
& executive risk (CyEx).
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.
In November 2018, Tim Turner
succeeded Clive Washbourn as head of
Beazley’s marine division. Tim joined
Beazley in 1998 when the marine division
was established and has for several years
headed the marine, hull and war risk
account within the division. He has
represented the marine division on
Beazley’s underwriting committee since
2016. Clive took the decision to step
down for personal reasons. We are
however delighted that he has expressed
his willingness to continue to offer the
team the benefit of his expertise in
underwriting and business development.
Mark Bernacki, who joined Beazley in
2005 and has led our property division
since 2012, will also be leaving during
2019 and there will be an announcement
about his successor as head of property
in due course.
Jerry Sullivan, who leads our professions
group within specialty lines, is one of
the four individuals joining the executive
committee during 2019 replacing
Mark as the chairman of our US
management committee.
Two other key appointments have
ensued from the planned retirements
of Martin Bride, our finance director,
and Dan Jones, who heads our marketing
and broker relations functions, in 2019.
Martin will be succeeded by Sally Lake
in May 2019. Sally has been with Beazley
since 2006 in various roles and is the
current group actuary. In late 2018,
Lou Ann Layton joined us from Marsh as
Dan’s successor. Prior to joining Beazley
Lou Ann held a series of senior positions
at Marsh in the US, most recently as
head of the south east region.
Investment performance
Beazley’s investment returns fell to
$41.1m or 0.8% in 2018 (2017: $138.3m,
or 2.9%), mainly due to a series of
interest rate hikes in the US that only
generated a modest return for our fixed
income portfolio, which accounted for
81% (2017: 76%) of our total investments
at year end. A higher US dollar interest
rate does, however, mean that the longer
term outlook for these investments
is more positive than it has been for
a number of years.
Our capital growth investments,
accounting for 12% of our portfolio
at year end (2017: 15%), suffered from
the very adverse market conditions that
affected many asset classes, generating
a loss of 1% (2017: return of 11%). This
performance could have been materially
worse had our investment team, led by
Stuart Simpson, not prudently reduced
our exposure to equities part way through
the year.
Beazley maintains a conservative
investment strategy which has served
us well over the years. Nevertheless with
financial assets of more than $5.1bn, it is
clear that sharp gyrations in asset values
can significantly affect the company’s
overall performance. In 2018, the 70%
decline in our investment return was
equivalent in effect to a large catastrophe
loss on our underwriting portfolio.
www.beazley.com
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Risk management
Risk management continued to be an
invaluable part of our business model
and the team, led by Andrew Pryde,
undertook a number of special
assignments in 2018. In light of the
impending Brexit deadline, Beazley
implemented a cross business working
group to discuss and work through the
various possible outcomes ahead of
March 2019. At the time of writing, many
outcomes still remain on the table but
we believe we are well placed to navigate
through the uncertainties.
With changes to corporate taxation
arising within the US, Beazley also
revisited and amended its intragroup
reinsurance contracts to ensure that they
continued to be as efficient as possible
in providing the desired effect on capital
allocation and risk management.
The latest chief risk officer report to
the board confirmed that the control
environment has not identified any
significant failings or weaknesses in
key processes and that Beazley is
operating within risk appetite as at
31 December 2018.
Outlook
Our business confronted some stiff
headwinds in 2018, which impacted both
our underwriting and investment returns.
By contrast, we enter 2019 with some
moderate tailwinds: firmer pricing for
some lines of business and higher
interest rates to underpin our investment
returns. However the world remains
a very uncertain place, with political risk
– the kind that none of us can insure
against – threatening global growth
through trade wars and protectionism.
In this environment our focus will
continue to be on the determinants of
growth that we can control, investing
in our people, our systems, and in our
offices around the world. Emblematic
of these investments is our new
Birmingham office which opened
in February 2018: the first of many new
and remodelled offices around the world
designed to accommodate the varied
workplace needs of our people in the
years to come. In 2020, Beazley’s London
staff will move into similar, futuristic office
space at Twentytwo Bishopsgate in the
City of London and our New York and
Toronto colleagues are already ahead
of us in the queue.
It is perhaps fitting that our new
Birmingham office houses our robotics
team, whose work will free up many of
our people’s time from repetitive tasks.
Our watchword, reflected in the design
of our new offices, is flexibility. Beazley
has thrived as a specialist insurer by
being quicker than competitors to spot
opportunities and more decisive in
grasping them. The investments we have
been making and the strategic initiatives
we launched last year are designed
to ensure that we can maintain this
competitive edge in the years to come.
Andrew Horton
Chief executive
22
Beazley Annual report 2018
www.beazley.com
Q&A with the chief executive
Q How has syndicate 5623
performed? Has it succeeded in
driving the cost of doing business down?
Andrew discusses
key topics around
performance and
outlook
A Syndicate 5623 focuses on
underwriting entire portfolios
of business, or shares of portfolios
of business. Its aim is to be a low cost
operation attracting third party capital
delivering reasonable returns with limited
volatility. 2018 was the first year of
operation and we are pleased with
the access we have had to a range of
business and, while it is early, we are
comfortable with its profitability at this
stage. We are aiming to grow 5623 by
two and a half times in 2019 and if the
model works we will continue to grow
this business going forward. The aim
of the syndicate is to offer a low cost
mechanism for placing follow business
within the Lloyd’s market. If we can all
work to reduce the cost of transacting
business in London then we will be
able to attract more business into the
Lloyd’s market.
Q After two years of exceptionally
severe wildfires in California,
do you see this peril as insurable?
A
I think the industry has been
surprised at the size of the
Californian wildfire losses in 2017 and
2018. If these are going to be regular
events in the future then the pricing and
structure of insurance covering losses
such as these will need to change.
There is always a balance between not
over-reacting to two years of unusual
losses versus ensuring technical pricing
properly reflects risk, rather than
assuming similar events will not happen
in the future.
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 2018 is the second consecutive
year in which the property division
has made a significant loss so, no, we
are not satisfied with the performance.
Rates in property business had been
going down for a number of years and
finally in 2018 we saw rates increase.
The business has been impacted by the
increased cost of attritional claims on
top of worse than average catastrophe
claims. We started re-underwriting the
business in our large risk property book
at the end of 2017 and our aim is to
see the benefit of this in the improved
profitability in 2019 and beyond. We
will be closely monitoring the division
throughout 2019 to ensure this business
returns to acceptable profitability.
A Lloyd’s is the leading market for
specialty insurance. However its
profitability as a market has come under
pressure with falling rates over the past
few years and in 2017 its overall result
was an underwriting loss even with
the impact of the catastrophe events
excluded. On the back of this Lloyd’s
has taken action to ensure businesses
operating at Lloyd’s, including Beazley,
aim to write business profitably. Not
surprisingly these actions have had
more of an impact on the less profitable
operations or lines of business. These
challenges to the market have not had
a major impact on our growth plans for
2019 but have ensured we remain, as
we have always have been, focused
on underwriting profitably. Our aim is
for each product to secure a profit over
the underwriting cycle, which is why
we decided in 2018 to withdraw from
construction business.
www.beazley.com
Annual report 2018 Beazley 23
for Beazley from Brexit?
Q Do you see any adverse effects
A
I think we have done everything
possible to mitigate the impact
of Brexit. Over the past couple of years
we have been focusing on growing
our business in Europe, expanding
our underwriting presence in France,
Spain and Germany, and we feel that our
specialist products will sell well in those
countries. Lloyd’s has set up Lloyd’s
Brussels and we are writing business in
those countries via that platform and in
addition we have our Irish incorporated
insurance company with branches in
those three countries. So far we have
not seen a major negative impact of
Brexit on our business although we have
seen one or two clients being unwilling
to commit their business to Lloyd’s whilst
there is uncertainty around the Brexit
position. The challenge at the moment
is uncertainty – hopefully we will know
soon where we are and it will be easier to
ensure that our plans are fit for purpose.
Q Do you believe that the specialty
insurance business will be
materially disrupted by outsiders
or will incumbents find ways to hold
onto the business?
A I think it is up to the incumbents to
ensure that they embrace the use
of data and technology better than they
have done so far. This means insureds
working with their brokers and insurers
to determine how best to make the
placement chain of insurance as efficient
as possible. I feel optimistic that there
is more progress on this topic now than
there has ever been. If the incumbents
do not act quickly and decisively then
I am sure disruptors will come in and
impact us.
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Q What keeps you up at night?
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.
Q Has Beazley’s investment
performance in 2018 prompted
any changes to your investment
strategy?
A Applying hindsight to set an
investment strategy for now which
would have worked perfectly a year ago
is a classic trap to be avoided. We have
a consistent approach and a good balance
within our investment portfolio of
treasuries, corporate fixed income, and
capital growth assets. We concentrate
on optimising the return we can get over
time given our limited risk appetite. Our
focus is being an underwriting company
and our aim is to deliver best in class
underwriting profits across the cycle
together with creditable investment
returns.
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www.beazley.com
Chief underwriting officer’s report
Effective cycle
management through
an active claims
environment
Adrian Cox
Chief underwriting officer
Against the backdrop of an
active claims environment,
2018 saw Beazley deliver
a combined ratio of 98%
(2017: 99%) and gross
premiums written of $2,615.3m
(2017: $2,343.8m). All five
divisions achieved top line
growth year on year with
political, accident &
contingency, property and
specialty lines all achieving
double digit growth.
With 2018 being another year of
significant natural catastrophes we
were pleased that we could record an
underwriting profit. Maintaining a diverse
portfolio once again showed its value,
as the group as a whole was able to
compensate for the claims experienced
in our catastrophe exposed lines
of business.
As is inevitably the case with natural
catastrophe claims, our reinsurance
and property teams were hardest hit with
the former registering claims of $97.7m
(2017: $97.5m). The claims were in the
reinsurance division’s expectation for
such events, with the division recording
a combined ratio of 103% (2017: 107%).
We have maintained our philosophy of
setting prudent claims reserves initially.
In aggregate, the current cost of the
2017 events is within our original
estimates albeit there have been
some variances at a divisional level.
Our property division saw overall
premiums increase 14% to $415.4m
for 2018 (2017: $362.9m) driven by
the double digit rate increase of 10%.
However, the active claims market in
2018, with claims arising from the 2018
natural catastrophes as well as a higher
level of attritional claims from prior
underwriting years, meant that the
property division recorded an overall
loss of $80.4m for 2018 (2017: loss of
$68.3m). The division also decided to
cease underwriting construction and
engineering business during the year
since it was concluded, following close
scrutiny of the plans for this product
over a number of years, that it would
be unlikely to satisfy our cross-cycle
profitability requirements in the
foreseeable future. This business
accounted for approximately 10%
of the division’s premiums in 2017.
Our specialty lines division was the
largest contributor to the group’s result
achieving a combined ratio of 91%
(2017: 89%). The division continued
to see strong growth with premiums
increasing 14% to $1,469.0m (2017:
$1,292.2m) helped by rate increases
of 1% (2017: flat). Our US platform
continues to be the core driver of the
division’s premiums written, contributing
$760.7m in 2018 (2017: $632.9m). Our
specialty lines international business also
began to show promising developments
as we saw steady growth in the first full
year of underwriting. It is expected that
our non-US specialty lines business will
become more prominent as we move
through 2019.
www.beazley.com
Annual report 2018 Beazley 25
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Outlook
Beazley continues to benefit from
the diverse portfolio which the group
maintains across its underwriting
divisions. Our philosophy of effective
cycle management has underpinned
our underwriting strategy for many years.
We actively seek to grow the areas where
we see the best opportunities for future
profitability and shrink areas where
margins are challenged.
As we enter 2019 we continue to see
opportunities for high single digit
premium growth. Further development
of our business written onshore in the
US and of our international specialty lines
platform will support this.
Beazley’s underwriting strategy of
exercising discipline across a diverse
portfolio of specialist products will remain
a constant. It has enabled us to achieve
an underwriting profit in another
catastrophe year in 2018 and will
position Beazley well as the company
goes into 2019.
Adrian Cox
Chief underwriting officer
Cumulative renewal rate changes since 2008 (%)
Rate change
120
110
100
90
80
70
08
09
10
11
12
Underwriting year
13
14
15
16
17
18
■ Marine
■ Property
■ Specialty lines
■ Reinsurance
■ Political, accident & contingency
■ All divisions
Premium retention rates
In 2018, we were able to maintain
a strong retention of business from
existing clients and brokers. We believe
that being able to work with clients
and brokers for a number of years has
enabled Beazley to provide coverage
which was sustainably priced while still
covering the insureds’ needs.
The table below shows our premium
retention rates by division compared
to 2017:
Retention rates1
Marine
Political, accident
& contingency
Property
Reinsurance
Specialty lines
Overall
2018
89%
76%
73%
88%
83%
82%
2017
88%
79%
82%
85%
84%
84%
1 Based on premiums due for renewal in each
calendar year.
Our political, accident & contingency
division achieved strong top line growth
with an increase of 11% to $238.7m
(2017: $214.3m). We were pleased in
particular with the development of our
US accident and health business which
is focused on the growing supplemental
health cover market. It was also pleasing
to see all of the lines of business
performing well in 2018, generating an
improved combined ratio for the division
of 90% (2017: 101%).
Our marine division started to benefit
from an improved rating environment,
most prominent in areas such as aviation
and cargo, which allowed the division
as a whole to achieve premium growth
of 6% to $284.8m (2017: $267.6m) and
an improved combined ratio for 2018
of 94% (2017: 98%). We expanded our
presence in the US during 2018, with the
division starting to write marine business
out of the Houston office.
Rating environment
The catastrophe loss activity during
2017 had a positive effect on the rating
environment with rates increasing
by 3% in 2018 across the portfolio
(2017: decrease of 1%). Most of our
lines of business saw increases in rates
compared to 2017, with marine increasing
by 3%, property increasing by 10%,
reinsurance rates increasing by 6% and
specialty lines increasing 1%. However,
rates on renewals in our political,
accident & contingency division
decreased by 1%.
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www.beazley.com
Performance by division
Increased premium
with double digit top
line growth across
three divisions
Marine
Political, accident
& contingency
Tim Turner
Head of marine
Christian Tolle
Head of political, accident & contingency
Combined ratio %
Combined ratio %
150
100
50
0
54
40
55
43
150
100
50
0
46
44
51
50
2018
2017
2018
2017
■ Expense ratio
■ Claims ratio
■ Expense ratio
■ Claims ratio
2018
$m
2017
$m
Gross premiums written 284.8 267.6
Net premiums written
255.0 233.2
Results from
operating activities
Claims ratio
Expense ratio
Combined ratio
Rate change
20.5
54%
40%
94%
3%
19.3
55%
43%
98%
(3%)
2018
$m
2017
$m
Gross premiums written 238.7 214.3
Net premiums written
212.7 190.8
Results from
operating activities
Claims ratio
Expense ratio
Combined ratio
Rate change
7.9
24.2
51%
46%
44%
50%
90% 101%
(4%)
(1%)
Find out more on pages 28 to 29
Find out more on pages 30 to 31
www.beazley.com
Annual report 2018 Beazley 27
Property
Reinsurance
Specialty lines
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Head of property
Patrick Hartigan
Head of reinsurance
Adrian Cox
Head of specialty lines
Combined ratio %
Combined ratio %
Combined ratio %
150
100
50
0
84
86
41
44
150
100
50
0
70
33
71
36
150
100
50
0
53
38
50
39
2018
2017
2018
2017
2018
2017
■ Expense ratio
■ Claims ratio
■ Expense ratio
■ Claims ratio
■ Expense ratio
■ Claims ratio
2018
$m
2017
$m
Gross premiums written 415.4 362.9
Net premiums written
360.2 300.0
Results from
operating activities
Claims ratio
Expense ratio
Combined ratio
Rate change
(68.3)
86%
44%
125% 130%
–
(80.4)
84%
41%
10%
2018
$m
2017
$m
Gross premiums written 207.4 206.8
Net premiums written
137.3 134.6
Results from
operating activities
Claims ratio
Expense ratio
Combined ratio
Rate change
3.8
71%
36%
103% 107%
(2%)
(1.8)
70%
33%
6%
2018
$m
2017
$m
Gross premiums written 1,469.0 1,292.2
Net premiums written
1,283.3 1,120.2
Results from
operating activities
Claims ratio
Expense ratio
Combined ratio
Rate change
136.3 227.4
50%
39%
89%
–
53%
38%
91%
1%
Find out more on pages 32 to 33
Find out more on pages 34 to 35
Find out more on pages 36 to 37
www.beazley.com
Premium rates for much of
the business underwritten
in Beazley’s marine division
started to rise last year,
enabling the division to
achieve a combined ratio of
94% on premiums of $284.8m
(2017: 98% on premium of
$267.6m), but competition
remained intense.
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Marine
Tim Turner
Head of marine
Portfolio mix
Liability
Hull & miscellaneous
Cargo
Energy
Aviation
War
Satellite
27%
23%
22%
14%
6%
5%
3%
Gross premiums written ($m)
350
300
250
200
150
100
50
0
325.2
269.3
247.4
267.6
284.8
2014
2015
2016
2017
2018
Gross premiums written
Result from operating activities
$284.8m
$20.5m
www.beazley.com
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Political factors, such as tariffs on
trade between the US and China, could
potentially have a material effect on
the volume of goods transported by our
clients and thus on demand for hull and
cargo cover, but we have yet to see any
impact from such trade tensions.
We had also seen our larger energy
account reduce in size under the
pressure of falling rates and a declining
oil price from 2012, but this trend was
reversed in 2018 as the rating environment
began to improve. Rising energy prices
during much of the year also stimulated
an uptick in exploration activity, benefiting
our sub-sea team which insures the
equipment used in offshore oil and gas
exploration. For 2019 we plan to grow
our energy business as well as our hull
and machinery account.
Lloyd’s ‘decile 10’ initiative, through
which Lloyd’s syndicates were asked in
2018 to submit remediation plans for the
worst-performing 10% of business lines
in their portfolios, has had a significant
effect on the marine market. After several
years of competition that drove the
combined ratios of many syndicates
well into triple digits, we saw a number of
syndicates withdrawing from marine hull,
cargo and aviation business. Hull, cargo
and aviation rates have recently
increased materially.
The hull market was significantly
impacted by one major loss after the
superyacht Sassi caught fire while under
construction at the Lürssen shipyard
in Bremen in northern Germany in
September. We expect the loss to
contribute further to rising premium
rates in this market.
Beazley is well positioned in this context,
achieving consistent underwriting
profitability within the marine division
over the past 10 years and accounting on
average for a quarter of the entire Lloyd’s
marine market’s profits between 2013
and 2017.
Two smaller lines of business – marine
and aviation war risks and satellite
business – made good contributions to
our overall profitability in 2018, although
we have seen the war risks account
shrink steadily in recent years. Aviation
business, another relatively small
component of the division’s total portfolio,
has begun at last to see meaningful rate
rises after the withdrawal of capacity
by a number of our competitors.
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Beazley Annual report 2018
www.beazley.com
Political, accident & contingency
All of the lines of business
comprising the political,
accident & contingency (PAC)
division performed well in
2018, generating an improved
combined ratio for the division
of 90% (2017: 101%) on
premiums that grew by 11%
to $238.7m (2017: $214.3m).
Many of the lines of business in which
we specialise, including political risks,
terrorism and contingency, are historic
areas of focus for the London market
and we continue to write the bulk of our
business in London. However we also
have local teams in the US, Europe and
Singapore to access business we would
not normally see in London, including the
fast growing market for supplemental
health insurance solutions for company
employees in the US.
Our political risks team had a good year
with premium growth of 11% and a far
more benign claims environment than
we had witnessed in 2017. Only about
a third of political risk accounts are
renewable so we depend on brokers to
bring our teams a steady flow of new
business. However, as political tensions
rise in many parts of the world, we expect
demand for cover to remain strong. Our
practice is to reserve prudently for claims,
and if the claims do not fully materialise
this enables us to make reserve releases
in later years: in 2018 we were able to
release funds no longer required to meet
political risks and trade credit claims on
the 2016 and prior underwriting years.
Christian Tolle
Head of political, accident & contingency
Portfolio mix
Political
Contingency
PA direct
Stand alone terrorism
PA reinsurance
Life direct
Sports
Life reinsurance
23%
21%
18%
14%
12%
6%
3%
3%
Gross premiums written ($m)
300
250
200
150
100
50
0
255.4
243.4
245.3
214.3
238.7
2014
2015
2016
2017
2018
Gross premiums written
Result from operating activities
$238.7m
$24.2m
www.beazley.com
Annual report 2018 Beazley
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The final major component of our
business – life, accident and health
risks – also performed strongly in 2018.
We continued to reshape our London
book with a focus on improving the
balance in the portfolio. We have
been adding underwriting talent to
our London team, which now numbers
seven, including two underwriters
focused on sports disability insurance.
The focus of our US team is purely
on accident and health business, and
specifically on supplemental health cover
for the employees of companies seeking
additional protection over and above that
provided by high deductible benefit plans.
Under the leadership of Brian Thompson,
we made excellent progress in carving
out a niche for Beazley in this growing
market in 2018.
The terrorism market continued to see
premium rates decline in 2018, but at
a slower rate than in previous years,
due to the relative rarity of attacks that
result in widespread physical damage.
The potential for such attacks of course
continues to exist but in recent years
terrorists have sadly tended to target
people more than property. Attacks of
any kind can have a chilling effect on
local businesses and we have accordingly
been offering loss of attraction cover to
companies that may find their business
affected by a nearby incident.
Terrorism, or the threat thereof, is also
a peril covered by our contingency team,
which offers broad cancellation cover for
events of widely varying sizes, including
some of the world’s largest sports and
entertainment events. The team had a
good year with premium growth of 25%.
Our London team, the largest and most
experienced in the market, focuses
predominantly on large scale events
whereas our US underwriters also
underwrite a large volume of smaller risks.
In April 2018 in the US we launched a
new version of our WeatherGuard policy
for weather-related event cancellation
risks, offering each policyholder a fully
personalised digital policy that can be
consulted on a phone. The easy to use
digital policy, which also offers automatic
claims payment in the event that the
insured weather peril occurs, has been
very well received by brokers and clients.
www.beazley.com
Deteriorating claims experience
made 2018 a challenging year
for property insurers while
ushering in a more favourable
pricing environment. At Beazley
we saw the cost of the previous
year’s catastrophes, notably
Hurricane Irma, rise and
combine with fresh losses
from Hurricanes Michael and
Florence in the US. Attritional
losses also continued at a
higher rate than in recent years.
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Property
Mark Bernacki
Head of property
Portfolio mix
Commercial property
Small property business
Jewellers & homeowners
Engineering
59%
18%
16%
7%
Gross premiums written ($m)
500
400
300
200
100
0
344.7
353.1
329.7
362.9
415.4
2014
2015
2016
2017
2018
Gross premiums written
Result from operating activities
$415.4m
($80.4m)
www.beazley.com
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As a result we experienced a very high
combined ratio of 125% (2017: 130%).
This was the second year in a row where
a combined ratio over 100% was seen,
but after two years of severe claims the
strain is telling on the broader market.
We have seen more than a dozen Lloyd’s
businesses either withdraw from direct
and facultative property business
altogether or sharply curtail their
exposures.
In light of the scale of the market losses
it is not surprising that we saw significant
rate rises on renewal business this year.
Rates for our large risk open market
property team in London rose by 18%
and we saw rates rise across the entirety
of our portfolio by 10%.
These rate rises have made for a
healthier pricing environment after
several years of price erosion. We wrote
14% more business in 2018 than the
previous year.
The large risk property business we
underwrite in London was most affected
by the catastrophe losses of the past two
years and increased attritional activity,
but other segments of our portfolio
were also impacted by increased claims
experience. Our small business team led
by Paul Bromley writes a large volume
of business through binding authorities
granted to Lloyd’s coverholders around
the world. In recent months we have
cancelled some of these binders with
coverholders in North America, as
they failed to meet our profitability
requirements.
Furthermore, in October 2018 we took
the difficult decision to exit the market
for construction and engineering
business around the world, transacted
through teams in London, the US (where
the business is known as builders’ risk),
Singapore and Latin America. This
business accounted for approximately
10%, or $35m, of our property division’s
premiums in 2017. After careful analysis,
we concluded it was unlikely to satisfy
our cross-cycle profitability requirements
in the foreseeable future.
We will of course honour the commitments
we have made to our brokers and clients
as we run off our existing construction
and engineering book in a professional
and orderly manner, but we have ceased
underwriting new business. This decision
affects only property risks and has no
bearing on the construction liability
business that our colleagues in Beazley’s
specialty lines division continue to write.
London remains our largest underwriting
location but we have continued to see
strong top line growth in the business we
write locally in the US. This business –
which comprises mid-market commercial
property risks underwritten on a surplus
lines basis, a portfolio of homeowners’
business in catastrophe-exposed
locations, and some large risk
commercial accounts – grew 2% last
year, contributing to the strong premium
growth of Beazley’s US operations.
I will be leaving Beazley at the end of April
after 13 years with the company and
seven years at the helm of our property
division and I wish the team continuing
success.
www.beazley.com
Two of the major perils that
drove our claims experience
in 2017 – hurricanes and
wildfires – recurred in 2018,
resulting in a combined ratio
for the year of 103%
(2017: 107%) on premiums
of $207.4m (2017: $206.8m).
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Reinsurance
uld be
Patrick Hartigan
Head of reinsurance
Portfolio mix
Property catastrophe
Property risk
Miscellaneous
Casualty class
80%
16%
3%
1%
Gross premiums written ($m)
200.8
199.9
213.4
206.8
207.4
250
200
150
100
50
0
2014
2015
2016
2017
2018
Gross premiums written
Result from operating activities
$207.4m
($1.8m)
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Beazley has provided consistent
reinsurance support to clients in Japan
for more than two decades and we
accordingly incurred a share of the
reinsurance losses from Typhoon Jebi
in September, the most severe storm
to make landfall in Japan since 1993,
and from Typhoon Trami, which hit the
south of the country a few weeks later.
Also in September, Hurricane Florence
came ashore in North Carolina, triggering
massive flood damage over a wide area.
The following month, Hurricane Michael
became the strongest storm ever to hit
the Florida panhandle, with wind speeds
of 155 mph. For our reinsurance book,
Michael was the more expensive storm,
generating reinsurance losses of about
half those of Hurricane Irma in 2017.
In aggregate, we incurred an estimated
$41m in reinsurance losses from the
storms in Japan and the US in 2018.
Total market losses for the Japanese
typhoons are estimated at between
$10bn and $12bn and for the US
hurricanes at between $11bn and $14bn.
For the reinsurance market, the wildfires
that ravaged California for the second
year in a row were far less predictable.
Wildfire has historically been regarded
as an attritional peril by insurers in
California but this approach looks
unsustainable after the experience
of the past two years. Wildfire losses in
2017 are estimated to have cost insurers
$10bn and losses in 2018 look likely to
exceed this figure, with current estimates
running between $9bn and $15bn.
Beazley’s share of this loss is currently
estimated at $40m.
Questions are now being raised about
the insurability of wildfires, but our hope
is that it will prove possible to identify
effective loss control precautions that
can continue to make affordable cover
available.
The net effect of 2017’s catastrophe
losses exerted continued upward
pressure on premium renewal rates
in January 2018. We saw rate rises
averaging 8% for US business, which
accounts for approximately 54% of our
portfolio, and 5% for non-US business.
In light of the current rating environment,
we plan to continue to grow our
reinsurance account in 2019.
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Specialty lines
Adrian Cox
Head of specialty lines
Portfolio mix
Technology, media and business services
Management liability
Small business
Professions
Healthcare
Treaty
International financial lines
Crime
Market facilities
28%
19%
17%
15%
12%
4%
3%
1%
1%
Gross premiums written ($m)
1,600
1,400
1,200
1,000
800
600
400
200
0
1,159.8
1,292.2
1,469.0
895.7
1,015.2
2014
2015
2016
2017
2018
Gross premiums written
Result from operating activities
$1,469.0m
$136.3m
www.beazley.com
Specialty lines, Beazley’s
largest division, was an engine
of premium growth for the
company in 2018, with
premiums rising 14% to
$1,469.0m (2017: $1,292.2m).
Our combined ratio was up to
91% (2017: 89%) following
reserve releases that were
slightly below those of 2017.
Overall we saw rates rise by 1%
(2017: flat).
For more than three decades, the US
has been the largest and most attractive
market for Beazley’s specialty lines
products, ranging from architects’ and
engineers’ professional liability (A&E)
in the early years (and still today) to
healthcare and environmental liability
insurance more recently. The US
continued to account for the bulk of our
premium in 2018 and we saw top line
growth of 20% in our locally underwritten
US business. However our efforts to grow
internationally outside the US are also
gathering pace, especially in Europe,
as demand for our products intensifies.
We expect that the rapid development
of our non-US business will, over time,
change the geographic mix of our
portfolio, although our focus on the US
market will certainly not diminish in the
process. Our 2019 plan envisages the
non-US portion of our portfolio growing
to 20%, from 17% in 2018.
Specialty lines accounted for 56%
of Beazley’s total premium in 2018,
covering a very wide array of types of
cover and clients ranging in size from the
world’s largest engineering firms, health
systems and technology companies
to thousands of small businesses
requiring specialist liability policies.
www.beazley.com
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Maintaining the right mix of large risk,
mid-market and small business will
continue to be central to our thinking
at Beazley. In 2018, we continued to
observe an active claims environment
for some of our larger risk business,
including D&O risks, and large professional
liability business, including hospitals
and health systems. However, in contrast
to previous years, we have seen prices
beginning to firm in these areas.
In the cyber market, rates have been
softening, but we continue to see
profitable growth opportunities. The
strongest growth we saw last year was
outside the US, where the impact of the
European Union’s General Data Protection
Regulation and similar regulations in
other regions is now beginning to bite.
The business interruption risk presented
by cyber attacks also continues to worry
our clients and is no longer exclusively
the concern of the larger businesses
we insure.
From the beginning of 2019, I assumed
the role of chief underwriting officer at
Beazley. It was very gratifying that we did
not need to look outside the company to
fill the key underwriting and leadership
roles within our two new divisions.
Innovation is equally important to the
team that will continue to trade under the
specialty lines name. These include our
professions group, led by Jerry Sullivan,
with teams focusing on the professional
liability needs of lawyers and architects
and engineers, as well as our fast growing
environmental liability team.
Another major growth area within
specialty lines is in the healthcare space,
where we have been expanding our
offerings to life sciences companies.
This segment currently comprises medical
device manufacturers, contract research
organisations involved in clinical trials,
blood and tissue banks, and a range
of service providers to the life services
sector. It is a field in which companies
collaborate closely, generating complex
exposures. Adaptability and willingness
to innovate need to be second nature:
around two thirds of the risks underwritten
by Marc Amis and his life sciences team
are tailored to meet the unique needs of
the individual clients involved. They are
accordingly able to offer clients bundled
cover for multiple exposures, which is
invaluable when a single claim can span
multiple forms of insurance.
Finally, specialty lines will also continue
to include our small business teams.
Automating the operations of these
teams as much as possible is the focus
of our Beazley Digital strategic initiative,
which should increase the productivity of
our underwriters significantly. Like most
Lloyd’s businesses, Beazley began life as
a large risk insurer but in recent years we
have been writing an ever growing volume
of small business risks. These clients,
and the brokers who serve them,
appreciate the quality of our specialist
cover and the claims service that supports
them, but we do see opportunities to
simplify these products and make the
placement process more efficient.
We concluded that it would be beneficial
to split this diverse portfolio into two
new divisions from 2019 onwards. One
division, which continues to be called
specialty lines, is now led by James
Eaton, who was previously responsible
for our small business portfolio. The other,
called cyber & executive risk (CyEx), is
now led by Mike Donovan, who previously
ran our technology, media and business
services team.
The rationale for this grouping is that
we saw great value in bringing our
management liability and cyber business
together ‘under one roof’. Many of
our brokers already group cyber and
management liability business together
and discuss them in the same breath
with clients. Both directors’ and officers’
insurance (D&O), a major management
liability line, and cyber liability risks rank
as boardroom issues in the eyes of many
of our clients.
The strength of Beazley’s cyber business
is well known. We saw premiums from
this line grow by 9% in 2018 and there is
further scope to grow significantly, given
that more than half the new business we
saw in 2018 was from first time buyers.
However we see excellent growth
opportunities within our management
liability portfolio as well, particularly for
products such as Beazley Safeguard,
which combines risk management advice,
crisis response and liability coverage for
organisations entrusted with the care
of children or vulnerable adults.
Our ambition within the CyEx division
will be to position Beazley as the leading
provider of quality management liability
coverage for both traditional and
emerging exposures – a reputation our
cyber team already enjoys. Our London
market business will continue to serve as
a crucible for innovation in many of these
lines: our London underwriters have deep
expertise in a number of areas that are
not well addressed by many domestic
markets, such as ‘wage & hour’ coverage
in the US, protecting companies against
claims made under the Fair Labor
Standards Act. In July 2018 our
management liability launched in London
a Lloyd’s consortium to offer increased
capacity for wage & hour risks.
38
Beazley Annual report 2018
www.beazley.com
Sustained profitable growth
Beazley’s vision is to become,
and be recognised as, the highest
performing specialist insurer
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.
Trading
began
1986
Flotation
2002
1986
1991
1991
1992
2000
2001
2007
Began trading at the ‘old’ 1958 Lloyd’s
building in 1986 with a capacity of £8.3m
Beazley, Furlonge & Hiscox established and
takes over managing syndicate 623
Specialty lines and treaty accounts started
UK windstorms $3.5bn
European storms $10bn
Management buyout of Hiscox share
Management buyout of minority shareholders
Commercial property account started
EPL and UK PI accounts started
Corporate capital introduced at Lloyd’s
followed by Lloyd’s Reconstruction
and Renewal
APUA, based in Hong Kong, forms a strategic
partnership with Beazley Furlonge
Recall, contingency and political risks
accounts started
Marine account started
US Hurricane Andrew $17bn
UK Bishopsgate explosion $750m
US Northridge earthquake $12.5bn
European storms $12bn
Flotation raised £150m to set up Beazley
Group plc
D&O, healthcare, energy, cargo and specie
accounts started
Local representation established in the US
Beazley MGA started in the US
Beazley acquires Omaha P&C and renames it
Beazley Insurance Company, Inc. (BICI)
US 9/11 terrorist attack $20.3bn
SARS outbreak in Asia $3.5bn
US Hurricanes Katrina, Rita and Wilma $101bn
Managed gross premiums and Group share
$m
Managed gross premiums
Group share
20183,170.92,615.320071,919.61,561.020081,984.91,620.020092,121.71,751.320102,108.51,741.620112,079.21,712.520122,278.01,895.920132,352.31,970.220142,424.72,021.820152,525.62,080.920162,666.42,195.620172,857.12,343.820061,762.02,615.3198613.4199142.5199258.81997128.41998168.82000256.12001431.620031,148.720041,374.92,195.620051,485.12,343.8 www.beazley.com
Annual report 2018 Beazley 39
S
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2008
2009
2010
2011
2012
2013
Beazley opens new
office in Munich
Political risks &
contingency group
formed as new division
Acquisition of
Momentum Underwriting
Management
Accident & life formed
as new division
US Hurricane Ike $20bn
Raised £150m through
rights issue to develop
our business at Lloyd’s
and in the US
Acquisition of First State
Management Group,
Inc., a US underwriting
manager focusing on
surplus lines commercial
property business
Beazley plc becomes the
new holding company for
the group, incorporated
in Jersey and
tax-resident in Ireland
Andrew Beazley,
co-founder of Beazley
Group and chief
executive until
September 2008, dies
at the age of 57
Beazley changes
functional and
presentational
currency to US dollar
Beazley opens new
office in Oslo
Expansion of Australian
accident & health
business through
acquisition of two MGAs
Launch of the Andrew
Beazley Broker Academy
Nick Furlonge,
co-founder, retires as an
executive member but
becomes a non-
executive of Beazley
Furlonge Limited
Special purpose
syndicate 6107 formed
to grow reinsurance
business
Beazley remains
profitable in worst year
ever for insured natural
catastrophe losses
Chile and NZ
earthquakes $14bn
Tohoku earthquake
in Japan $37bn
Deepwater Horizon
explosion triggers
biggest oil spill in history
Floods in Thailand
$16bn
US tornadoes $15bn
NZ earthquake $16bn
Expansion into aviation
and kidnap & ransom
markets
Construction
Consortium launched
at Lloyd’s
Reinsurance division
broadens access to
South East Asia, China
and South Korea
business with local
presence in Singapore
Political risks &
contingency expands
into French market
Superstorm Sandy
$25-30bn
Miami office opened to
access Latin American
reinsurance business
Beazley Flight –
comprehensive
emergency evacuation
cover – launched
Beazley data breach
cover extended in
Europe. 1,000th breach
managed
Local representation
added in Rio to develop
Latin American
insurance business
2014
2015
2016
2017
2018
Construction Consortium
extended to Lloyd’s Asia
Entered into a reinsurance
agreement with Korean Re
Beazley celebrates its 30th
anniversary
US underwritten premium
grows by 21%
10th anniversary of operations
in Singapore and Paris
Middle East office opened to
access local political risk and
violence, terrorism, trade
credit and contingency
business
Cyber Consortium launched
at Lloyd’s
Space and satellite insurance
account started
Beazley welcomes its 1,000th
employee globally
D&O Consortium launched
at Lloyd’s
Locally underwritten US
business grows 19% to $537m
Beazley plc becomes the new
holding company for the
group, incorporated in England
& Wales and tax-resident in
the United Kingdom
Partnership established with
Munich Re to broaden and
enhance the cyber cover
available to the world’s largest
companies
Beazley Insurance dac
acquires licence to write
business within the EU
Beazley opens a new office
in Barcelona and acquires
Creechurch Underwriters
in Canada
Beazley closes Middle East
office and sells Australian
renewal rights
Hurricanes Harvey, Irma and
Maria $90-95bn
Californian wildfires $10bn
Mexican earthquakes $2-5bn
US local written premium
reaches £1bn, overall gross
premiums written grow 12%
during 2018
Neil Maidment retires as
chief underwriting officer
Beazley closes Oslo office
Hurricanes Florence and
Michael $11-14bn
Typhoons Jebi and Trami
$10-12bn
Californian wildfires
$9-15bn
20183,170.92,615.320071,919.61,561.020081,984.91,620.020092,121.71,751.320102,108.51,741.620112,079.21,712.520122,278.01,895.920132,352.31,970.220142,424.72,021.820152,525.62,080.920162,666.42,195.620172,857.12,343.820061,762.02,615.3198613.4199142.5199258.81997128.41998168.82000256.12001431.620031,148.720041,374.92,195.620051,485.12,343.8
40
Beazley Annual report 2018
www.beazley.com
Financial review
Group performance
A robust financial
performance despite
high levels of claims
and a low investment
return
Martin Bride
Finance director
Profit
Profit before tax in 2018 was $76.4m (2017: $168.0m). The group’s combined ratio improved slightly to 98% (2017: 99%) thanks
to an improving expense ratio in what was another year of high claims activity. By recording an underwriting profit we once again
demonstrated the resilience of our portfolio. Our investment team achieved an investment return of 0.8% (2017: 2.9%) or $41.1m
(2017: $138.3m).
Premiums
Gross premiums written have increased by 12% in 2018 to $2,615.3m (2017: $2,343.8m). We are confident of the quality of
this growth, which is the fruit of sustained investment in our underwriting teams and our patience in waiting for the appropriate
conditions, market by market, before growing. Rates on renewal business on average increased by 3% across the portfolio
(2017: decreased by 1%) with our catastrophe exposed lines obtaining the largest increases.
Our portfolio mix is broadly unchanged from 2017. We continue to operate a diversified portfolio by type of business and
geographical location.
The charts overleaf highlight how we achieve diversification by product mix, geography and type of business.
www.beazley.com
Annual report 2018 Beazley
41
Insurance type
Business by division
Insurance
Reinsurance
87%
13%
Specialty lines
Property
Marine
Political, accident & contigency
Reinsurance
Premium written by claim settlement term
Location of insured
Short tail
Medium tail
53%
47%
USA
Worldwide
Europe
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56%
16%
11%
9%
8%
60%
23%
17%
Statement of profit or loss
Gross premiums written
Net premiums written
Net earned premiums
Net investment income
Other income
Revenue
Net insurance claims
Acquisition and administrative expenses
Foreign exchange loss
Expenses
Share of profit of associates
Impairment of investment in associate
Finance costs
Profit before tax
Income tax expense
Profit after tax
Claims ratio
Expense ratio
Combined ratio
Rate increase/(decrease)
Investment return
Movement
%
12%
14%
12%
(70%)
(5%)
6%
14%
5%
326%
11%
2018
$m
2,615.3
2,248.5
2,084.6
41.1
33.7
2,159.4
1,227.8
812.6
13.2
2,053.6
–
(7.0)
(22.4)
76.4
(8.2)
68.2
59%
39%
98%
3%
0.8%
2017
$m
2,343.8
1,978.8
1,869.4
138.3
35.5
2,043.2
1,075.7
774.4
3.1
1,853.2
0.1
–
(22.1)
168.0
(38.0)
130.0
58%
41%
99%
(1%)
2.9%
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 key performance indicators section (inside front cover) and in the glossary on page 198.
42
Beazley Annual report 2018
www.beazley.com
Financial review continued
Group performance continued
Reinsurance purchased
Reinsurance is purchased for a number of reasons:
• to mitigate the impact of natural catastrophes such as hurricanes and non-natural catastrophes such as cyber attacks;
• to enable the group to put down large lead lines on the risks we underwrite; and
• to manage capital to lower levels.
The amount the group spent on reinsurance in 2018 was $366.8m (2017: $365.0m). As a percentage of gross premiums written
it decreased to 14% from 16% in 2017 due to a desire to keep reinsurance spend flat year on year.
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 reduced in 2018 to 98% (2017: 99%) thanks to an improvement in the expense ratio.
Claims
Claims activity in 2018 was very similar to that seen in 2017. Hurricanes Florence and Michael hit the US, while Typhoons Jebi
and Trami affected Japan. Added to this, wildfires broke out in California for the second year in a row causing widespread damage.
Whilst these natural disasters were not quite at the level of the catastrophes experienced in 2017, they combined with higher
attritional claims particularly in our property account and the lower reserve releases compared to 2017 that we had signalled,
to cause the claims ratio to increase slightly to 59% (2017: 58%).
www.beazley.com
Annual report 2018 Beazley 43
Reserve releases
Beazley has a consistent reserving philosophy, with initial reserves being set to include risk margins that may be released over time
as and when any uncertainty reduces. Historically these margins have given rise to held reserves within the range of 5-10% above
our actuarial estimates, which themselves include some margin for uncertainty. The margin held above the actuarial estimate was
5.6% at the end of 2018 (2017: 5.0%). Whilst the margin is higher than year end 2017, it is still towards the low end of the range that
management targets, which is in part a result of the above average natural catastrophe activity again in 2018. As a consequence,
reserve releases in 2019 are likely to be below the long term average level particularly in the short tail classes affected by the natural
catastrophes. However, it is important to recognise that while there is strong correlation between the level of margin and future
reserve releases, current year developments can also affect releases either positively or negatively.
S
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Reserve monitoring is performed at a quarterly ‘peer review’, which involves a challenge process contrasting the claims reserves
of underwriters and claim managers, who make detailed claim-by-claim assessments, and the actuarial team, who provide
statistical analysis. This process allows early identification of areas where claims reserves may need adjustment.
Prior year reserve adjustments across all divisions over the last five years are shown below:
Marine
Political, accident & contingency
Property
Reinsurance
Specialty lines
Total
Releases as a percentage of net earned premium
2014
$m
40.2
24.5
35.9
27.8
29.7
158.1
9.5%
2015
$m
31.2
23.7
37.8
44.9
38.7
176.3
10.4%
2016
$m
15.9
27.2
36.8
32.3
68.5
180.7
10.2%
2017
$m
10.7
3.9
13.2
54.7
121.4
203.9
10.9%
2018
$m
12.5
14.8
(47.3)
23.8
111.2
115.0
5.5%
5 year
average
$m
22.1
18.8
15.3
36.7
73.9
166.8
9.3%
The reserve releases in 2018 decreased to $115.0m (2017: $203.9m). Our property division strengthened its reserves materially.
Approximately half of this was driven by increasing the reserves for the 2017 catastrophes, notably Hurricane Irma, and the balance
was due to higher than expected attritional claims in our property division, particularly in relation to the 2016 and 2017 underwriting
years. Our overall reserves for the 2017 catastrophes proved sufficient and the downward revisions in our reinsurance division that
counter balanced the increases in the property division were the major driver of that division’s release. Our specialty lines division
maintained a strong level of reserve release in 2018 at $111.2m (2017: $121.4m) including meaningful amounts from the
2015/2016 cyber portfolio. This part of the specialty lines portfolio is effectively short tail and will show more year on year
variability than the balance of the division.
Please refer to the financial statements for further information on reserve releases and loss development tables.
Whole account reserve strength within our 5-10%
target range (%)
Surplus in net held assets: reserves
10
5
0
03 04 05 06 07 08 09
11 12 13
14
15
16
17
18
10
Financial year
44
Beazley Annual report 2018
www.beazley.com
Financial review continued
Group performance continued
Acquisition costs and administrative expenses
Business acquisition costs and administrative expenses increased during 2018 to $812.6m from $774.4m in 2017. The breakdown
of these costs is shown below:
Brokerage costs
Other acquisition costs
Total acquisition costs
Administrative expenses
Total acquisition costs and administrative expenses
2018
$m
461.1
100.8
561.9
250.7
812.6
2017
$m
431.1
88.6
519.7
254.7
774.4
Brokerage costs are the premium commissions paid to insurance intermediaries for providing business. As a percentage of net
earned premiums they have decreased slightly to 22% in the current year (2017: 23%). Brokerage costs are deferred and expensed
over the life of the associated premiums in accordance with the group’s accounting policy.
Other acquisition costs comprise costs that have been identified as being directly related to underwriting activity (e.g. underwriters’
salaries and Lloyd’s box rental). These costs are also deferred in line with premium earning patterns.
Beazley’s overall expense ratio was down by two percent from 41% in 2017 to 39%. It is also flat five years on from 2013 when it
was also 39%. The company has always stressed that improving the expense ratio during the phases of stronger growth was a key
objective. It is encouraging that this outcome has been achieved whilst at the same time maintaining investment in future growth
opportunities.
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 a material number of our staff receive their salary
in sterling. Beazley’s foreign exchange loss taken through the statement of profit or loss in 2018 was $13.2m (2017: loss of $3.1m).
Investment performance
2018 proved to be a difficult year for investments and many asset classes have produced negative returns. Whilst our absolute
return was disappointing, most of the portfolio performed well relative to its benchmarks and the management actions of Stuart
Simpson and his team had a positive effect at the margin. US interest rates were increased four times as the Federal Reserve
continued to reverse the easing monetary policies of recent years and officials indicated that interest rates would continue to rise
through 2019. As a result US bond yields rose throughout most of the year, generating capital losses on these securities. These
developments, combined with continuing tensions over international trade and signs that global economic growth may be slowing,
has led to growing pessimism about prospects for global economic activity, culminating in a significant correction in risk asset
values, including equities and credit, in the final quarter of the year.
We reduced our exposure to more volatile capital growth investments from 14.8% to 12.1% of assets during the year, which was
beneficial as these exposures produced a negative return in this period, with equities the worst performing asset class as the global
equity index declined by more than 7%. We halved our equity exposure, from 3.4% to 1.7% of assets, during the period. Our fixed
income investments grew from 76.0% to 81.1% of assets in 2018 and this portfolio returned 1.3%, held back by rising interest rates
and widening credit spreads, but helped by the significant decline in US bond yields during December. Our overall investment return
for the year ending 31 December 2018 was 0.8%, or $41.1m (2017: 2.9%, $138.3m). Rising yields in 2018 have increased the
average yield of our fixed income investments to 3.3% and this should support better investment returns in future periods.
Comparison of returns – major asset classes ($m)
80
60
40
20
0
-20
71.0
67.3
47.8
(6.7)
Capital growth portfolio
Core portfolio
■ 2017 ■ 2018
www.beazley.com
Annual report 2018 Beazley 45
The table below details the breakdown of our portfolio by asset class:
Cash and cash equivalents
Fixed and floating rate debt securities
– Government, quasi-government and supranational
– Corporate bonds
– Investment grade
– High yield
– Senior secured loans
Derivative financial instruments
Core portfolio
Equity funds
Hedge funds
Illiquid credit assets
Total capital growth assets
Total
Comparison of return by major asset class:
Core portfolio
Capital growth assets
Overall return
S
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a
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i
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r
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p
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t
31 Dec 2018
31 Dec 2017
$m
336.3
%
6.7
$m
440.5
%
9.0
1,410.1
27.9
1,390.6
28.4
2,525.3
32.7
132.1
6.9
4,443.4
85.4
337.2
186.6
609.2
5,052.6
50.0
0.6
2.6
0.1
87.9
1.7
6.7
3.7
12.1
100.0
2,179.7
58.8
85.6
8.8
4,164.0
168.3
377.4
180.4
726.1
4,890.1
44.6
1.2
1.8
0.2
85.2
3.4
7.7
3.7
14.8
100.0
31 Dec 2018
31 Dec 2017
$m
47.8
(6.7)
41.1
%
1.1
(1.0)
0.8
$m
67.3
71.0
138.3
%
1.6
11.0
2.9
During 2018, the funds managed by the Beazley group increased on the prior year, with financial assets at fair value and cash
and cash equivalents of $5,052.6m at the end of the year (2017: $4,890.1m). The chart below shows the increase in our group
funds since 2014.
Tax
Beazley is liable to corporation tax in a number of jurisdictions, notably the UK, the US and Ireland. Beazley’s effective tax rate is
thus a composite tax rate mainly driven by the Irish, UK and US tax rates. The weighted average of the statutory tax rates for the
year was 18.6% (2017: 18.7%). The effective tax rate has decreased in 2018 to 10.7% (2017: 22.6%). The decrease has been
possible thanks to the revision of prior years’ US tax returns to incorporate additional tax deductions for staff costs, including share
based payments.
The application of the diverted profits tax legislation passed by the UK government early in 2015 still remains uncertain. We have
considered the implication of this and retain the view that this tax should not apply to Beazley (see note 9 to the financial statements).
Whilst the uncertainty around the legislation remains, the quantum of our earnings that could theoretically fall within its scope
grows as the period since the legislation started to apply lengthens.
Beazley group funds ($m)
4,442
4,519
4,703
4,890
5,053
6,000
5,000
4,000
3,000
2,000
1,000
0
2014
2015
■ Group funds including funds at Lloyd’s
■ Syndicates 2623, 3623 and 3622
2016
2017
2018
46
Beazley Annual report 2018
www.beazley.com
Financial review continued
Balance sheet management
Summary statement of financial position
Intangible assets
Reinsurance assets
Insurance receivables
Other assets
Financial assets at fair value and cash and cash equivalents
Total assets
Insurance liabilities
Financial liabilities
Other liabilities
Total liabilities
Net assets
Net assets per share (cents)
Net tangible assets per share (cents)
Net assets per share (pence)
Net tangible assets per share (pence)
Number of shares 1
2018
$m
126.5
1,192.8
943.3
418.7
5,052.6
7,733.9
5,456.2
356.7
454.1
6,267.0
1,466.9
280.4c
256.2c
219.6p
200.7p
523.1m
2017
$m
133.5
1,231.1
918.0
386.0
4,890.1
7,558.7
5,167.8
367.3
524.7
6,059.8
1,498.9
287.1c
261.6c
215.3p
196.2p
522.0m
Movement
%
(5%)
(3%)
3%
8%
3%
2%
6%
(3%)
(13%)
3%
(2%)
(2%)
(2%)
2%
2%
–
1 Excludes shares held in the employee share trust and treasury shares.
Intangible assets
Intangible assets consist of goodwill on acquisitions of $62.0m (2017: $62.0m), purchased syndicate capacity of $10.7m (2017:
$10.7m), US admitted licences of $9.3m (2017: $9.3m), renewal rights of $25.2m (2017: $35.2m) and capitalised expenditure
on IT projects of $19.3m (2017: $16.3m).
Reinsurance assets
Reinsurance assets represent recoveries from reinsurers in respect of incurred claims of $951.7m (2017: $993.2m), and the
unearned reinsurance premiums reserve of $241.1m (2017: $237.9m). The reinsurance receivables from reinsurers are split
between recoveries on claims paid or notified of $231.9m (2017: $219.4m) and an actuarial estimate of recoveries on claims
that have not yet been reported of $719.8m (2017: $773.8m). 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 47 shows the profile of these assets
(based on their S&P rating) at the end of 2018;
• 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.
We continue to provide against impairment of reinsurance recoveries, and at the end of 2018 our provision in respect of
reinsurance recoveries totalled $12.2m (2017: $13.2m).
Insurance receivables
Insurance receivables are amounts receivable from brokers in respect of premiums written. The balance at 31 December 2018 was
$943.3m (2017: $918.0m).
www.beazley.com
Annual report 2018 Beazley
47
Other assets
Other assets are analysed separately in the notes to the financial statements. The items included comprise:
• deferred acquisition costs of $307.4m (2017: $281.4m);
• profit commissions of $5.9m (2017: $10.1m); and
• deferred tax assets available for use against future taxes payable of $28.9m (2017: $6.9m).
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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 seen across the insurance market. Costs identified as related to
acquisition are then deferred in line with premium earnings.
Insurance liabilities
Insurance liabilities of $5,456.2m (2017: $5,167.8m) consist of two main elements, being the unearned premium reserve (UPR)
and gross insurance claims liabilities.
Our UPR has increased by 12% to $1,415.5m (2017: $1,259.2m). 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.
Gross insurance claims reserves are made up of claims which have been notified to us but not yet paid of $1,171.2m (2017:
$1,056.3m) and an estimate of claims incurred but not yet reported (IBNR) of $2,869.5m (2017: $2,852.3m). These are estimated
as part of the quarterly reserving process involving the underwriters and group actuary. Gross insurance claims reserves have
increased 3% from 2017 to $4,040.7m (2017: $3,908.6m).
Financial liabilities
Financial liabilities comprise borrowings and derivative financial liabilities. The group utilises two long term debt facilities:
• during September 2012 we issued a sterling denominated 5.375% retail bond under a £250m euro medium term note
programme which raised £75m for the group and is due in 2019. This diversified the source and maturity profile of the
group’s debt financing; and
• in November 2016, Beazley Insurance dac issued $250m of 5.875% subordinated tier 2 notes due in 2026.
In October 2018, the group exercised its call option and redeemed the full nominal amount of $18.0m subordinated debt issued
in 2004.
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.
Reinsurance debtor credit quality
AA+
AA
AA-
A+
A
A-
Collateralised
Others
1%
1%
48%
41%
5%
1%
2%
1%
48
Beazley Annual report 2018
Financial review continued
Capital structure
www.beazley.com
Capital structure
Beazley has a number of requirements for capital at a group and subsidiary level. Capital is primarily required to support underwriting
at Lloyd’s and in the US and is subject to prudential regulation by local regulators (PRA, Lloyd’s, Central Bank of Ireland, and the
US state level supervisors). Beazley is subject to the capital adequacy requirements of the European Union (EU) Solvency II regime
(‘SII’). We comply with all relevant SII requirements.
Further capital requirements come from rating agencies who provide ratings for Beazley Insurance Company, Inc and Beazley
Insurance dac. We aim to manage our capital levels to obtain the ratings necessary to trade with our preferred client base.
Beazley holds a level of capital over and above its regulatory requirements. The amount of surplus capital held is considered on an
ongoing basis in light of the current regulatory framework, opportunities for organic or acquisitive growth and a desire to maximise
returns for investors.
The group actively seeks to manage its capital structure. Our preferred use of capital is to deploy it on opportunities to underwrite
profitably. However, there may be times in the cycle when the group will generate excess capital and not have the opportunity to
deploy it. At such points in time the board will consider returning capital to shareholders.
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.
In 2018, Beazley acquired 6.0m of its own shares into the employee benefit trust. These were acquired at an average price of 547p
and the cost to the group was £32.8m.
The following table sets out the group’s sources of funds:
Shareholders’ funds
Tier 2 subordinated debt (2026)
Retail bond (2019)
Long term subordinated debt (2034)
2018
$m
1,466.9
248.7
95.6
–
1,811.2
2017
$m
1,498.9
248.5
99.5
18.0
1,864.9
Our funding comes from a mixture of our own equity alongside $248.7m of tier 2 subordinated debt, a $95.6m retail bond and an
undrawn banking facility of $225.0m.
The changes in the US tax legislation announced towards the end of 2017 have led us to reconsider how risk is distributed across
the group and following changes to Beazley’s internal reinsurance programs, more premium and more risk is retained within the US in
our admitted insurance company, BICI. As a result of this, BICI has required a c.$80m increase in its capital, which was partially offset
by a decrease in the Lloyd’s ECR. The net impact on the group’s capital requirement was not material. These changes do not impact
how Beazley manages its operations. We expect that Beazley’s revised internal reinsurance arrangements may still result in some
exposure to the new US BEAT tax, but that it will not have any significant impact on the group’s effective tax rate.
The final Lloyd’s economic capital requirement (ECR) at year end 2018 as confirmed by Lloyd’s is consistent with our projection at
the interim results and reflects our plans for growth. Overall we expect our capital requirement to grow in line with the net written
premiums in our business plan, which in the short term should be high single digit.
The following table sets out the group’s capital requirement:
Lloyd’s economic capital requirement (ECR)
Capital for US insurance company
2018
$m
1,594.5
173.4
1,767.9
2017
$m
1,517.2
96.5
1,613.7
At 31 December 2018, we have surplus capital of 26% of ECR (on a Solvency II basis). Following payment of the second interim
dividend of 7.8p, this surplus reduces to 23% 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. During 2018
the second 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.
www.beazley.com
Annual report 2018 Beazley 49
The current SCR has been established using our Solvency II approved internal model approved by Central Bank of Ireland (CBI)
which has been run within the regime as prescribed by Lloyd’s. In order to perform the capital assessment:
• 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
• the internal model process is embedded so that teams can see the direct and objective link between underwriting decisions
and the capital allocated to that team. This gives a consistent and comprehensive picture of the risk/reward profile of the
business and allows teams to focus on strategies that improve return on capital.
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IFRS 17
The implementation of IFRS 17: Insurance contracts is currently scheduled for accounting periods commencing on or after
1 January 2021, although a 12 month deferral is widely expected. Applying this standard is a major undertaking and so the
company has established a multi-disciplinary project group to oversee this activity. The project has made good progress during
2018 and Beazley’s preparations for IFRS 17 are on schedule.
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,
BICI reinsurance business and, from 2018, facilities business;
• Syndicate 6050 – special purpose syndicate which has its capital provided by third party names and provided reinsurance
to syndicates 623 and 2623 on the 2015, 2016 and 2017 years of account;
• Syndicate 5623 – special purpose syndicate writing facilities ceded from syndicate 3623;
• Beazley Insurance Company, Inc. (BICI) – insurance company regulated in the US. Licensed to write insurance business
in all 50 states; and
• Beazley USA Services, Inc. (‘BUSA’) – managing general agent based in Farmington, Connecticut. Underwrites business
on behalf of Beazley syndicates and BICI.
Beazley plc
Beazley Ireland Holdings plc
Beazley Insurance dac
Capital
Beazley Group Ltd
Reinsurance
contract
Beazley Underwriting Ltd
(Corporate member)
Beazley Furlonge Ltd
(Managing agency)
Management
Beazley USA
Capital
Third party capital providers
* Syndicate 5623 is supported by both
Beazley capital and third party capital.
Quota share
Syndicate 623
Syndicate 2623
Syndicate 3622
Syndicate 3623
Syndicate 6107
Syndicate 6050
Syndicate 5623*
Beazley
USA
Services,
Inc.
(service
company)
Beazley
Insurance
Company,
Inc.
(admitted
insurance
company;
A rated)
Excess of loss contract
Quota share
50
Beazley Annual report 2018
www.beazley.com
Operational update
Maintaining operations and preparing
our business for high performance
in an increasingly digital world
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.
We have also supported the launch of
several financial lines products in Europe
via our Europe based insurance company.
Key to growing the distribution of smaller
risk business has been the ongoing
expansion of our myBeazley.com
e-trading platform. The latest e-trading
product launches have been for our
financial lines market offering, with
a new management liability package
product delivered in October 2018, with
subsequent go-lives planned in early
2019 for France and Spain. Meanwhile in
the US, another myBeazley.com product
launch was the small enterprise MediaTech
package, which provides a quick and
simple way for small businesses to
access specialist insurance coverage.
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 2018, we opened a new larger Munich
office that will help to increase our access
to continental European business. We
also opened a new Birmingham office
which has the capacity to take over
150 Beazley staff. This office now
provides both an operations hub to
support our UK and European growth,
and also a facility to make it easier for UK
regional brokers to access our business.
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 Connecticut and Georgia, both
in the US, and the new Birmingham office
provides a cost-effective alternative to
London. It also benefits from excellent
access to skills relevant to Beazley’s
future growth plans, for example in
technology, data analytics and financial
services support generally.
Ian FantozziChief operating officer www.beazley.com
Annual report 2018 Beazley
51
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We can see many applications of data
and technology across our business,
and there continues to be a flow of
technology innovations that we could
pursue. However, as we move further
into the digital age, we recognise that
it’s not just about the technology. To truly
transform our business and make it fit
for a digital environment, there are other
areas we must focus on:
1) Applying technology and data to our
business model
Our specialist insurance business
provides cover for a broad range of client
risks – both smaller risks such as those
covered by our SME business products,
and larger complex risks such as those
covered by our marine energy products.
Different technology solutions are best
applicable to different points on this
spectrum of risk size and complexity.
So that we best leverage technology, we
have created two new strategic initiatives:
Beazley Digital to focus on our smaller
and higher volume underwriting; and
Faster, Smarter Underwriting to focus
on our larger and more complex risk
underwriting.
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. A significant
proportion of our IT is now outsourced
to specialist technology vendors. Not
only has this enabled us to deliver far
more for our shareholders’ money, but it
has also been a source of expertise and
ideas that would have been difficult to
build in-house.
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.
A widely discussed topic across our
industry is the preparation for the UK
departure from the EU. We have worked
closely with the Lloyd’s Brussels
subsidiary and our regulators to make
sure that we are operationally ready
for a post Brexit world.
Over the last two years, another area
of focus across our industry was the
preparation for the General Data
Protection Regulation (GDPR) which
came into effect in May 2018. We see
the privacy of our customer data, and the
rights associated 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 had been a
continuation of this work. We completed
our GDPR readiness project prior to the
May deadline and believe that we have
put the necessary measures in place
to be GDPR compliant.
Beazley’s digital transformation
We have had some notable successes in
the two years since establishing the
Beazley Labs team, which provides
dedicated resource for researching new
technology and data analytics solutions.
One has been the implementation of
a permanent robotics development team
that is steadily eliminating manual or
repetitive tasks within our back office.
We have run several data analysis trials
which have generated new insights to
support our specialist underwriting and
claims handling. A recent example was
the use of natural language processing
software to identify patterns within high
volumes of US hospital claims data.
The analysis has been used to identify
correlations between key terms in
submission data and claims activity,
and these are now used to support our
medical malpractice underwriting and
to provide risk management advice back
to our clients.
52
Beazley Annual report 2018
www.beazley.com
4) Creating the optimum physical
environment
Although Beazley receives plenty of
interest when attracting new operations
and technology talent, we recognise that
our working environment needs to keep
evolving to maintain this attraction and
to then retain and further motivate this
talent. In 2017 we commenced a project
to develop our larger offices into activity
based working (ABW) environments.
Although one benefit of ABW is more
efficient use of office space, it also
creates a physical and technology
environment that maximises the potential
for our staff to carry out their daily
activities. In 2018 we opened our first
ABW environment in the Birmingham
office and we are in the process of
building ABW offices in Toronto and New
York, both opening in 2019. We have also
signed a lease for a London office move
in 2020. The new London office will also
be an ABW environment.
As we proceed into 2019 we are well
placed not only as a high performing
specialist insurer, but also because we
have developed great strength in our
operational capability. The changes we
have made in 2018 will allow us to build
on this operational strength and ensure
we remain a high performing specialist
insurer in an increasingly digital world.
Operational update continued
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.
Faster, Smarter Underwriting aims to
use technology and data to support the
expert judgement of our underwriters.
The types of technology most applicable
here are data science tools which identify
correlations in external data sets that
could enhance our underwriting
decisions. A practical example of this
is with our Reputational Risk product,
which uses a technology to provide the
underwriters with public sentiment trends
on emerging risks being discussed on
social media.
2) Building an agile delivery capability
One thing is certain in a digital world –
business agility is key. Beazley is well
regarded for its innovation in specialist
insurance. To stay ahead of the
competition, we seek to innovate in an
increasingly agile way, taking new ideas
to the market quickly, gathering feedback,
evolving or failing them fast. This is why
during 2018 we restructured our
operations and technology teams to
what we call a platform delivery model.
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.
The move to the platform delivery model
has enabled us to increase the speed of
process and technology delivery by using
an agile approach. This is instead of
a more conventional ‘waterfall’ delivery
approach which could in the past impede
our ability to deliver new ideas quickly.
Today, we often start the process of
solving a business problem or addressing
an opportunity by running a ‘hackathon’,
where we put underwriting, operations
and technology talent together for a short
and intensive period of delivery. An early
notable success has been our US
operations platform, which has managed
to cut its product delivery time by half.
3) Developing our talent to best leverage
technology
We are investing in our workforce to
ensure we have the right blend of skills
for the future. This means that our talent
development programmes are placing
emphasis on cross-skilled staff so they
can operate in a more digital insurance
market. In practice this means
underwriters with increased
understanding of technology, and
similarly technology teams with greater
knowledge of how specialist underwriting
works. The outcome we strive for is to put
technology and data at the centre of our
specialist underwriting proposition. It also
means we are increasingly equipped for
changes driven by our business partners
– ranging from brokers wanting to trial
new digital distribution methods to better
understanding new insurance risks such
as the growth in crypto currencies.
www.beazley.com
Annual report 2018 Beazley 53
Risk management
Creating the environment
for sustainable growth
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2018 in review
A key design principle of the risk
management framework is that all
members of staff are responsible for
identifying, managing and communicating
risk. Whilst this activity is supported by
the risk management function, all Beazley
staff understand that with the benefits
of an empowered culture comes the
responsibility for identifying and managing
risk. This is particularly important when
an organisation is navigating above
average levels of change.
In 2018, Beazley has successfully
responded to both external and
internal change.
External change
The main political change that Beazley
continued to navigate in 2018 was Brexit,
although this is not a significant risk as
only around 4% of Beazley’s premium
originates from the EU. Despite the
uncertainty throughout the year, a cross
functional working group has prepared
Beazley for the worst case scenario of
a hard Brexit, which is where the UK
leaves the EU without agreements and a
transitional period. From an underwriting
perspective, the EU risks expiring from
1 January 2019 have been successfully
renewed. Generally the renewals have
been onto the newly established Lloyd’s
Brussels platform. However EU renewals
within the specialty lines and reinsurance
divisions have been written on the
Beazley Insurance dac platform where
clients have requested it. From a staff
perspective, we continue to work with the
40 EU nationals (3% of employees) who
are working in our UK offices to minimise
the impact of Brexit on them. As such,
Beazley has successfully navigated the
key risks of a potential hard Brexit. Since
such a hard Brexit is not certain, our
preparations have also considered two
other potential outcomes in order to
ensure that the group is able to operate
in every eventuality; namely 1) some form
of transitional arrangement or 2) the UK
decides not to leave the EU prior to Brexit.
In light of political decisions in the US, the
group reviewed its intragroup reinsurance
arrangements, which resulted in more
premium being retained in the US in
Beazley Insurance Company Inc. with
a corresponding reduction in premium
in syndicate 3623 at Lloyd’s of London.
Two key consequences of this change
are that the group is slightly less capital
efficient, as the change has required a
c.$80m increase in the US capital which
was partially offset by a specific reduction
in our Lloyd’s ECR, and the risk profile of
syndicate 3623 is more diversified with
a relatively equal mix of specialty lines
risks and personal accident risks. This
was an example of an important use of
our internal model to balance risk and
capital resources. These changes
however did not impact how Beazley
manages its operations.
The approach taken to business planning
at Lloyd’s of London during the year
attracted extensive press coverage and
resulted in a number of changes to the
marketplace. From a Beazley perspective,
the approach taken was closely aligned
to our own process of cycle management
which has been followed for many years.
As a result, we were able to present
syndicate business plans and associated
capital requirements that were approved
by Lloyd’s as being consistent with their
objective of improved risk selection and
market profitability.
The introduction of IFRS 17 will change
the way that Beazley measures and
reports the profitability of our insurance
contracts to the market in the future.
A multi-year programme of work has been
progressing as planned during 2018
to ensure that our data and systems
are able to meet the new accounting
requirements when they come into force,
while continuing to support our internal
management practices.
We have included a new section within
this risk management report (see page 57)
covering the impact of climate change on
Beazley. A key aspect of Beazley’s
business model is to support clients
who have been affected by natural
catastrophes, helping them return to
pre-catastrophe conditions as soon as
possible. In addition, we explain how
climate change could affect Beazley’s
own risk profile, highlighting how we
respond to these risks. These include the
performance of our insurance contracts,
the investments we make, the office
spaces we occupy, the companies we
partner with and our travel footprint.
Internal change
The Beazley plc board undertook regular
reviews of its strategy which culminated
in wide ranging discussions at its strategy
day in May. As a result, four new strategic
initiatives were identified to support our
vision. The first, Beazley Digital, looks at
how we can use technology to transact
and process smaller, simpler business.
Andrew PrydeChief risk officer
54
Beazley Annual report 2018
www.beazley.com
Risk management continued
The second, Faster, Smarter Underwriting,
aims to equip underwriters with data and
analytics to better support the underwriting
of larger, more complex business. The
third is about getting closer to our clients
to better understand how we can support
their risk management either with
existing insurance products or by
designing innovative new products to
tackle a risk that our clients are worrying
about. Finally, the fourth initiative is how
we can do more in the London market,
particularly because this is the core part
of our risk profile.
There has been a high level of change at
board and executive level during 2018
and this will continue into 2019. The risk
management function has been working
with the individuals in new roles to ensure
that they understand their responsibilities
within the risk management framework
and to minimise the risk associated
with such transition periods. The risk
management function is also providing
assurance to the board that the group
continues to operate within risk appetite
and is supported in this by internal
audit who have completed an audit
of risk culture.
The group’s risk profile has altered
with the exit from the construction and
engineering class of business within
the property division and the closing the
office in Norway, which underwrote part
of our energy class of business within
the marine division. Growth continues
in the US with the $1bn annual managed
premiums milestone being reached during
2018. The chief risk officer completed
his secondment to the Atlanta office
and provided a report to the Beazley plc
board. This report provided assurance
that the US operations have coped well
with the recent growth and that processes
and practices have evolved to adapt
to the risks and challenges associated
with operating a larger company. As such,
the US operations are well placed to
achieve the planned growth over the
next five years.
Finally, we have introduced a number of
new working practices across the group
to provide our staff with the best
environment and to continue to attract
new talent to the group. This included
starting to introduce activity based
working environments in our larger
offices, which provide staff with the space
most conducive to the task in hand. We
have also provided staff with technology
to be able to work remotely and to work
more flexibly around our core hours,
so that Beazley employees can better
balance the demands of work and
personal life. We now also provide staff
with flexibility to dress for the day. These
various changes help ensure that our staff
can perform to the best of their ability,
which helps to lower the operational
risk inherent in the company.
Beazley’s approach of empowering all
our employees, coupled with thoughtful
‘management of risk’ means that we can
nimbly respond to and manage change,
which creates the right environment for
delivering sustainable growth.
The latest chief risk officer report to the
board has confirmed that the control
environment has not identified any
significant failings or weaknesses in key
processes and that Beazley is operating
within risk appetite as at 31 December
2018.
Risk management philosophy
Beazley’s risk management philosophy
is to balance the risks the business takes
on with the associated cost of controlling
these risks, whilst also operating within
the risk appetite agreed by the board. In
addition, our risk management processes
are designed to continuously monitor our
risk profile against risk appetite and to
exploit opportunities as they arise.
Risk management strategy
The Beazley plc board has delegated
executive oversight of the risk
management department to the
executive committee, which in turn has
delegated immediate oversight to the risk
and regulatory committee. The Beazley
plc board has also delegated oversight
of the risk management framework to
the audit and risk committee, and the
primary regulated subsidiary boards
have each established a risk committee.
Clear roles, responsibilities and
accountabilities are in place for the
management of risks and controls, and
all employees are aware of the role they
play in all aspects of the risk management
process, from identifying sources of risk
to playing their part in the control
environment. The impact of each risk is
recorded in the risk register on a 1:10
likelihood of that risk manifesting in the
next 12 months. A risk owner has been
assigned responsibility for each risk, and
it is the responsibility of that individual to
periodically assess the impact of the risk
and to ensure appropriate risk mitigation
procedures are in place. External factors
facing the business and the internal
controls in place are routinely reassessed
and changes made when necessary.
On an annual basis, the board agrees the
risk appetite for each risk event and this
is documented in the risk management
framework document. The residual
financial impact is managed in a number
of ways, including:
• mitigating the impact of the risk
through the application of controls;
• transferring or sharing risk through
outsourcing and purchasing insurance
and reinsurance; and
• tolerating risk in line with the risk
appetite.
In addition, the following risk management
principles have been adopted:
• risk management is a part of the wider
governance environment;
• techniques employed are fit for
purpose and proportionate to the
business;
• risk management is a core capability
for all employees;
• risk management is embedded in
day-to-day activities;
• there is a culture of risk awareness,
in which risks are identified, assessed
and managed;
• risk management processes are
robust and supported by verifiable
management information; and
• risk management information and
reporting are timely, clear, accurate
and appropriately escalated.
Risk management framework
Beazley takes an enterprise-wide
approach to managing risk following the
group’s risk management framework.
The framework establishes our approach
to identifying, measuring, mitigating and
monitoring the group’s key risks. Beazley
has adopted the ‘three lines of defence’
framework: namely business risk
management, the risk management
function and the internal audit function.
Within business risk management, there
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Annual report 2018 Beazley 55
Internal audit
Risk assurance
– Independently tests control design
– Independently tests control operation
– Reports to committees and board
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Risk management
Risk oversight
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– Are risks being identified?
p
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– Are controls operating effectively?
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– Are controls being signed off?
– Reports to committees and board
Internal audit
Risk assurance
– Independently tests control design
– Independently tests control operation
– Reports to committees and board
Business risk management
Risk ownership
– Identifies risk
– Assesses risk
– Mitigates risk
– Monitors risk
– Records status
– Remediates when required
Risk management
Risk oversight
– Are risks being identified?
– Are controls operating effectively?
– Are controls being signed off?
– Reports to committees and board
Internal audit
Risk assurance
– Independently tests control design
– Independently tests control operation
– Reports to committees and board
are two defined roles: risk owner and
control reporter. Each risk event is
owned by the risk owner, who is a senior
member of staff. Risk owners, supported
by the risk management team, perform
a risk assessment twice a year, including
an assessment of heightened and
emerging risks.
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
(53 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.
Business risk management
Risk ownership
In summary, the board identifies risk,
assesses risk and sets risk appetite.
– Identifies risk
The business then implements a control
– Assesses risk
– Mitigates risk
environment which describes how the
– Monitors risk
business should operate to stay within
– Records status
risk appetite. Risk management then
– Remediates when required
reports to the board on how well the
business is operating using a risk
management report.
For each risk, the risk management
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. There were no material
changes made during 2018.
Business risk management
Risk ownership
– Identifies risk
– Assesses risk
– Mitigates risk
– Monitors risk
– Records status
– Remediates when required
A suite of risk management reports are
provided to the boards and committees
to assist senior management and board
members to discharge their oversight
and decision making responsibilities.
The risk reports include the risk appetite
statement, the risk management report,
risk profiles, stress and scenario testing,
reverse stress testing, an emerging
and strategic report, a report to the
remuneration committee and the
Own Risk and Solvency Assessment
(ORSA)report.
Risk management
Risk oversight
– Are risks being identified?
– Are controls operating effectively?
– Are controls being signed off?
The internal audit function considers
– Reports to committees and board
the risk management framework in the
development of its audit universe to
determine its annual risk-based audit
plan. The plan is based on, among other
inputs, the inherent and residual risk
scores as captured in the risk register.
Finally, a feedback loop operates, with
recommendations from the internal audit
reviews being assessed by the business
and the risk management function for
inclusion in the risk register as appropriate.
Risk appetite
(annual)
Risk assessment
(biannual)
Stress and scenario
framework (annual)
Risk profiles
(ad hoc)
Strategic and emerging
risk (annual)
Risk register
Control assessment
(monthly)
Internal model
Key risk indicators
(quarterly)
Control performance
aggregation (monthly)
Risk incidents
reporting
Consolidated assurance
report
Committees
1st line: Underwriting, Investment,
Operations, Executive committees
2nd line: Risk and regulatory, Risk committees
3rd line: Audit committees
Boards
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Risk management continued
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 medium-tailed 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 56 to 58.
The risks and associated capital
requirements have been brought together
into a five year plan. The main assumption
is that the current market conditions will
prevail, over which the outcomes of the
board’s strategic initiatives are overlaid.
In addition, the board has reviewed the
sensitivity of key assumptions and has
performed scenario testing to understand
the impact on cash flows of the key risks
of a major natural catastrophe and/or a
systemic mispricing of the medium-tailed
liability classes.
The chief risk officer provides a quarterly
ORSA to the board summarising the short
term and longer term risks to the group
and the capital implications.
The directors have concluded, based
on this review, that there is a reasonable
expectation that the group will be able
to continue in operation and meet its
liabilities as they fall due over the three
year period of assessment.
The board has also given specific
consideration to the work of the Brexit
team and whether or not Brexit in general
and, more specifically, hard Brexit
materially impacts viability and has
concluded it does not.
The risks to financial performance
The board monitors and manages risks
grouped into eight categories, which
cover the universe of risk that could
affect Beazley. There have been no new
risk areas identified and no major shifts
in existing risks. The board considers the
first two of the following risk categories
to be the most significant.
Insurance risk
Given the nature of Beazley’s business,
the key risks that impact financial
performance arise from insurance
activities. The main insurance risks can
be summarised in the following categories:
• Market cycle risk: The risk of
systematic mispricing of the medium
tailed specialty lines business which
could arise due to a change in the
US tort environment, changes to the
supply and demand of capital, and
companies using incomplete data to
make decisions. This risk would affect
multiple classes within the specialty
lines division across a number of
underwriting years. The group uses
a range of techniques to mitigate this
risk including sophisticated pricing
tools, analysis of macro trends,
analysis of claim frequency and the
expertise of our experienced
underwriters and claims managers.
• Natural catastrophe risk: The risk of
one or more large events caused by
nature affecting a number of policies
and therefore giving rise to multiple
losses. Given Beazley’s risk profile,
such an event could be a hurricane,
major windstorm or earthquake.
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.
• 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.
• 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, claim by claim,
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.
• Single risk losses: Given the size of
policy limits offered on each risk, it is
unlikely that the poor performance of
one policy will have a material impact
on the group’s financial performance.
Strategic risk
Alongside these insurance risks, the
success of the group depends on the
execution of an appropriate strategy.
The main strategic risks can be
summarised as follows:
• Strategic decisions: The group’s
performance would be affected in the
event of making strategic decisions
that do not add value. The group
mitigates this risk through the
combination of recommendations
and challenge from non-executive
directors, debate at the executive
committee and input from the strategy
and performance group (a group of
approximately 30+ senior individuals
from across different disciplines
at Beazley).
• Environment: There is a risk that the
chosen strategy cannot be executed
because of the environmental
conditions within which Beazley
operates, thereby delaying the timing
of the strategy.
• Communication: Having the right
strategy and environment is of
little value if the strategy is not
communicated internally so that
the whole group is heading in the
same direction, or if key external
stakeholders are not aware of
Beazley’s progress against its strategy.
• Senior management performance:
There is a risk that senior management
could be overstretched or could fail
to perform, which would have a
detrimental impact on the group’s
performance. The performance of the
senior management team is monitored
by the chief executive and talent
management team and overseen
by the nomination committee.
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Annual report 2018 Beazley
57
• Reputation: Although reputational risk
is a consequential risk, i.e. it emerges
upon the occurrence of another risk
manifesting, it has the potential to have
a significant impact on an organisation.
Beazley expects its staff to act
honourably by doing the right thing.
• 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.
• Crisis management: This is the risk
caused by the destabilising effect of
the group having to deal with a crisis
and is mitigated by having a detailed
crisis management plan.
• Corporate transaction: There is a risk
that Beazley could undertake a
corporate transaction which did not
return the expected value to
shareholders. This risk is mitigated
through the due diligence performed,
the financial structure of transactions
and the implementation activity.
Under the environmental risk heading,
the board identifies and analyses
emerging and strategic risk on an annual
basis for discussion at the board strategy
day in May.
Other risks
The remaining six risk categories
monitored by the board are:
• Market (asset) risk: This is the risk
that the value of investments could
be adversely impacted by movements in
interest rates, exchange rates, default
rates or external market forces. This
risk is monitored by the investment
committee.
• Operational risk: This risk is the failure
of people, processes and systems or
the impact of an external event on
Beazley’s operations, and is monitored
by the operations committee. An
example would be a cyber attack
having a detrimental impact on our
operations.
• Credit risk: Beazley has credit
risk to its reinsurers, brokers and
coverholders of which the reinsurance
asset is the largest. The underwriting
committee monitors this risk.
• Regulatory and legal risk: This is
the risk that Beazley might fail to
operate in line with the relevant
regulatory framework in the territories
where it does business. Of the eight
risk categories, the board has the
lowest tolerance for this risk. This risk
is monitored by the risk and regulatory
committee.
• Liquidity risk: This is the risk that the
group might not have sufficient liquid
funds following a catastrophic event.
The investment committee monitors
this risk which, given the nature of the
asset portfolio, is currently small.
• 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 intragroup
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
as 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.
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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.
Climate change risk
The warming of the global climate is
recognised as an important emerging risk
due to its widespread potential impact on
the global population, environment and
economy. A key aspect of Beazley’s
business model is to support our clients
who have been affected by natural
catastrophes, helping them return to
pre-catastrophe conditions as soon as
possible. As a specialist insurer, various
classes of business we underwrite are
subject to the effect climate change
presents to the risk environment.
As part of the underwriting process, we
work with our insureds to understand the
risks facing their organisation, including
applicable climate related risks, to tailor
insurance coverages to mitigate the
associated financial risks.
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Risk management continued
We acknowledge and accept that over
time climate change could impact the
risks facing our insureds and we aim to
manage the resulting risk to Beazley as
described below:
• Pricing risk: This is the risk that current
pricing levels do not adequately
consider the prospective impact of
climate change resulting in systemic
underpricing of climate exposed risks.
The group’s business planning process
establishes how much exposure in
certain classes of business or
geographic area we wish to accept.
We benefit from a feedback loop
between our claims and underwriting
teams to ensure that emerging
claims trends and themes can be
contemplated in the business planning
process, the rating tools and the
underwriter’s risk by risk transactional
level considerations. Our underwriters
are empowered to think about climate
risk during their underwriting process
in order to determine the implication
on each risk.
• Catastrophe risk: This is the risk that
current models do not adequately
capture the impact of climate change
on the frequency, severity or nature of
natural catastrophes or other extreme
weather events that could drive
higher-than-expected insured losses.
The group utilises commercial
catastrophe models to facilitate the
estimation of aggregate exposures
based on the group’s underwriting
portfolio. These catastrophe models
are updated to reflect the latest
scientific perspectives. Catastrophe
models are evolving to include new or
secondary perils which may be related
to climate change. In addition, the
group runs a series of Natural
Catastrophe Realistic Disaster
Scenarios (RDS’s) on a monthly basis
which monitors the group’s exposure
to certain scenarios that could occur.
These RDS’s include hurricanes in the
US, typhoons in Japan, European
windstorms and floods in the UK.
• Reserve risk: This is the risk that
established reserves are not sufficient
to reflect the ultimate impact climate
change may have on paid losses. This
includes liability risk unanticipated
losses arising from our clients
facing litigation if they are held to be
responsible for contributing to climate
change, or for failing to act properly
to respond to the various impacts of
climate change. With support from
our group actuarial team, claims teams
and other members of management
the group establishes financial
provisions for our ultimate claims
liabilities. The group maintains a
consistent approach to reserving to
help mitigate the uncertainty within
the reserves estimation process.
• Asset risk: This is the risk that climate
change has a significant impact across
a number of industries which may
negatively impact the value of
investments in those companies.
The group considers the impact of
climate change on its asset portfolio
by seeking to incorporate an
assessment of environmental risks in
the investment process. We subscribe
to the research services of a specialist
company in the field of environmental,
social and governance research and
have integrated their proprietary
ratings into the internal credit process
applied to investments in corporate
debt securities. A minimum standard
for the economic scenario generator
performance is defined and companies
not meeting the required standard will
be excluded from the approved list
of issuers. The analysis also includes
a consideration of the sustainability
of each company with regard to the
potential decline in demand in
specific sectors.
• External event risk: This is the risk that
the physical impact of climate related
events has a material impact on our
own people, processes and systems
leading to increased operating costs
or the inability to deliver uninterrupted
client service. The group has business
continuity plans in place to minimise
the risk of an interrupted client service
in the event of a disaster.
• Commercial management risk: The
group aims to minimise where possible
the environmental impact of our
business activities and those that
arise from the occupation of our office
spaces. As we operate in leased office
spaces our ability to direct environmental
impacts is limited. However, we do
choose office space and engage with
our employees, vendors and customers
in an effort to reduce overall waste and
our environmental footprint.
• Credit risk: As a result of material
natural catastrophe events, there
is a risk that our reinsurance
counterparties are unable to pay
reinsurance balances due to Beazley.
If the frequency or severity of these
events is increased due to climate
change this could have a corresponding
increase on credit risk. An important
consideration when placing our
reinsurance programme is evaluation
of our counterparty risk. Every
potential reinsurer is evaluated
through a detailed benchmarking
which considers: financial strength
ratings, capital metrics, performance
metrics as well as other considerations.
• Regulatory and legal risk: Regulators,
investors and other stakeholders
are becoming increasingly interested
in companies’ response to climate
change. Failure to appropriately
engage with these stakeholders
and provide transparent information
may result in the risk of reputational
damage or increased scrutiny. The
group regularly monitors the regulatory
landscape to ensure that we can
adhere to any changes in relevant laws
and regulations. This includes making
any necessary regulatory or statutory
filings with regard to climate risk.
• Liquidity risk: Linked to the
underwriting and credit risks noted
above, there is a risk that losses
resulting from unprecedented natural
disasters or extreme weather could
erode our ability to pay claims and
remain solvent. The group establishes
capital at a 1:200 level based on the
prevailing business plan.
• Strategic risk: This is the risk that our
strategy fails to effectively consider
climate change resulting in our
business planning not adapting fast
enough to respond to changes in wider
claims trends. This creates a transition
risk that our underwriting portfolio
might not keep pace with the changes,
being heavily exposed to declining
industries and failing to capitalise on
the opportunities. Our Emerging Risks
analysis and business planning process
seeks to mitigate this risk through
horizon scanning for our longer-tail
book, while we are able to be more
flexible in responding to events
impacting our short tail exposures.
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Annual report 2018 Beazley 59
Sustainable business
In 2017 the cost to the insurance industry
from natural disasters hit a record $144bn,
and 2018 looks set to be similarly catastrophe-
dominated. While our business entails dealing
with the financial burden of these losses, we
recognise that their impact on lives and
livelihoods is far greater. For this reason,
we try to align our responsible business
efforts with our natural interest and expertise
in risk management and mitigation.
For Beazley, being a Responsible Business
is core to our values and actions.
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Responsible
business committee
Our responsible business
committee is chaired by Emma
Whiteacre and sponsored by
executive member Anthony
Hobkinson. It reports into the
executive committee and the
board.
Emma Whiteacre
We aim to support our
local and international
communities and clients
by using our resources and
skills – whether it’s through
volunteering with the lonely
elderly and helping to feed
the homeless as part of our
global Make a Difference
programme, creating
bespoke activities such
as ‘Maths in insurance’
workshops or finding ways
to make existing and new
products that have a
beneficial impact on our
wider society and the
environment too.
Our aim isn’t just to provide
short-term solutions for our
communities but to provide
sustainable and long-term
support through our
programmes. For our
Responsible Business strategy,
we have six areas of focus:
Charity
Our global partnership, fundraising
and match funding
Community
How we interact with the people and
places in our local area
Environment
Taking responsibility for our own use of
resources as we conduct our business,
to minimise our environmental footprint
Marketplace
Our awareness of the social and
environmental impact of the business
that we conduct, and how we can
support global sustainability efforts
through the provision of insurance
Inclusivity and diversity
Our vision is to inspire and develop
people with diverse perspectives
to thrive at all levels of our business
Responsible underwriting
compliance
We are committed to ensure our
business is conducted in an ethical
and honest manner. It ensures we
do the right thing for our stakeholders
60
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Sustainable business continued
Charity
Our charity efforts go beyond simply
making a donation – we focus on making
a difference, both in our local communities
and around the globe
All Hands and Hearts
Our global charity partner, All Hands
and Hearts, is often there to help
communities pick up the pieces when
disaster strikes. We chose to work with
them because of their innovative
approach, focused on deploying
volunteers to areas in need, and their
relatively small size, which means that
our involvement can be more impactful.
We have donated over
$190,000
to All Hands and Hearts
Our global partnership with All Hands and
Hearts provides different opportunities
to use our skills and support international
communities impacted by natural
disaster. For Beazley, our charity efforts
go beyond simply making a donation. We
focus on making a difference, both in our
local communities and around the globe.
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 relief efforts has enabled Beazley
employees to help 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.
“ Thank you so much for
being a great group to work
with. You all carry such
positive attitudes and
displayed amazing work
ethic. It was an absolute
pleasure being able to
oversee your arrival to the
Yabucoa base. You’ve set
the bar very high!”
Cia
All Hands and Hearts
Puerto Rico volunteering
“ At Beazley being a
responsible business is a
core part of our culture.
So many employees
give up their time to
lend their expertise,
influence and passion as
a force for good, both in
our local communities
and the wider world.
We encourage and
support that behaviour,
both because it is the
right thing to do and
it makes business
sense too.”
Anthony Hobkinson
Executive committee sponsor
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Annual report 2018 Beazley
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Volunteering in Puerto Rico
Hurricane Maria devastated Puerto Rico
in 2017. The hurricane was the worst
natural disaster ever to hit the island and
caused the longest blackout in US history.
Thousands died and many more were left
homeless or forced to live in damaged
homes.
Beazley offered employees the chance to
work alongside All Hands and Hearts on a
project to help rebuild damaged homes.
Over 80 employees expressed interest,
and, after a blind application process,
eight employees were selected.
Beazley colleagues around the world
fundraised over $37,000 through
international bake sales and quiz nights
to support their colleagues during the two
week project.
The volunteers were in Puerto Rico from
Saturday 1 December to Saturday 15
December. There they spent two long
weeks working hard to restore homes
damaged by the hurricane.
Match funding
As important as supporting our charity
partner is, we also aim to empower our
people to take charge of their own
fundraising and volunteering. We offer
match funding of $750 (or local currency
equivalent) per employee, and up to
$5,000 per team of three employees or
more. Some examples of colleagues who
used this are:
Conquering Everest Base Camp
To support the communities still
recovering from the devastating Nepal
earthquake, Jon Labram from London
took the challenge to trek to Everest Base
Camp. His challenge took almost two
weeks, and he raised over £2,300 for
our charity partner All Hands and Hearts.
Jon at Everest Base Camp
Team Puerto Rico
SOS image from Puerto Rico
Five-time marathon runner
To raise money for the charity Healing
Venezuela, Rafael Guia Vera took on the
challenge of running five marathons in
2018 – in Cambridge, Madrid, Budapest,
Valencia and Hartlebury (Worcestershire).
So far he has raised almost £900, plus
match funding from Beazley.
Five marathons in 2018
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Sustainable business continued
Charity continued
Charity quiz fundraiser
Highlights
Volunteering in Houston: following the
aftermath of Hurricane Harvey, our
colleagues from Houston and Dallas
fundraised and collected toiletries and
clothes, and five employees worked with
All Hands and Hearts to help restore
a damaged family home.
Charity runs: over 80 colleagues took part
in the JP Morgan Run in London, raising
money for Macmillan Trust in London.
Colleagues in the US took part in similar
5k runs for local charities, including
The Connection Inc, a Connecticut-based
human service and community
development agency.
Cycle for Survival: employees in our
New York City and Chicago offices took
part to raise funds for the Memorial Sloan
Kettering Cancer Center, for research
into rare cancers.
Natural disasters: We respond to
large-scale disasters, especially if they
affect the communities where we work.
We have donated over $15,000 to
charities, including the relief efforts
following three earthquakes and a
tsunami in Indonesia, Hurricane Florence
in the US, Storm Mangkhut in the
Philippines, the Greek wildfires and
Hurricane Lane in Hawaii.
These events not only raise donations
and awareness for charities, but also help
to strengthen employee engagement.
Clock-to-clock
Clock-to-clock challenge
To help raise money for his local
hospice, Hospice on the Weald,
Richard took on the challenge to run,
kayak and cycle over 360km in
26.5 hours. On 24 June, Richard and
three of his friends started a 65km
overnight run from a clock tower
in Kent, UK before kayaking 40km
across the English Channel. They
concluded the race by cycling a
final 260km to the clock tower by
Notre Dame in Paris.
During their challenge, they burned
approximately 14,000 calories, drank
45 litres of water, ate 35 bananas and
did over 18,000 kayak paddle strokes.
They raised over £10,000 as a result.
JP Morgan run
Houston
Bake sale
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Annual report 2018 Beazley 63
Community
We know our communities have many needs. Our long-term global
approach focuses on young people, vulnerable adults and conservation
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Highlights
Young people – We partner with a
number of educational charities to help
support local young individuals from
lower socio-economic backgrounds
through their education and into the
world of work.
Vulnerable adults – It’s important to us
and our people to support the elderly and
homeless in our communities. We do this
through volunteering in programmes to
tackle root causes of these issues.
Conservation – We adopt an honourable
approach to how we should protect and
conserve our environment. By restoring
local parks and community gardens, our
communities will be better able to enjoy
these areas.
Maths workshop
Hague Primary School students
Feedback...
“ I thoroughly enjoyed the
opportunity to ask mentors
questions as I learned a lot about
being an actuary.”
Year 11 student
“ Thank you so much for your
support, I have been working at
Hague for 12 years now and we have
never had so many supportive
reading partners; in addition we
have never had so many children
asking for reading partners! I have
children currently on a ‘wait list’ who
I am reading with as they are all
desperate to have a reading partner.
This is amazing and incredibly
motivating for the children who do
have one as they feel they have
something incredibly special.”
Teacher
Hague Primary School
“ Access to learning using a class
set of professional devices, rather
than one per class, is a game
changer! Pupils will have more
hands on access and teachers
will be able to plan better
opportunities for children to
use ICT across the curriculum.
From experience iPads are more
instantly accessible meaning
more time is spent actually
learning than on computers
loading up and setting them up.”
“ Pupils with special educational
needs can enjoy iPads support
for learning. More pupils can
use Siri, instead of a dictionary
or teaching assistant. They can
develop graphic skills and so
much more to illustrate work.”
School feedback on iPad donations
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Sustainable business continued
Community continued
Make a Difference
More than 530 employees took part
in Make a Difference in 2018
Make a Difference is our
global community volunteering
programme. This year marked a
successful fifth consecutive year.
Over 530 employees took part.
Activities were selected based on
local need and ranged from working
at a farm to harvesting crops for
local food pantries, sorting food at
food banks, preparing and serving
meals to the homeless, spending
time with local pensioners and
upgrading community facilities likes
crèches and parks.
Make a Difference
Farmington workshop
(sustaining talent)
Our colleagues in Farmington
hosted a Career Day
workshop for students from
local high schools.
They spent the day learning about
the business along with potential
career opportunities within the
insurance industry.
Make a Difference
Career day workshop
“ I love how open Beazley is
and how willing the people
here are to get to know you,
or to just sit and have
a conversation.’’
Camryn
Talent Management intern, US
Make a Difference
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Annual report 2018 Beazley 65
Global intern programme
This year over 35 individuals were given internships from
our local communities in our Chicago, London, New York,
Farmington, San Francisco and Singapore offices.
Our interns worked for teams across
the business. As well as having
valuable work experience, they spent
time volunteering in local food banks
and worked in a global project to
search for Beazley’s next charity
partner.
For her efforts, our responsible
business assistant, Shakeela
Khanom, was awarded ‘Best Project
Champion’ award by the Lord Mayor
of London.
Interns
Shakeela Khanom
Interns
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More highlights in 2018:
• We launched our bespoke
‘Maths in Insurance’ workshop, with
volunteers supporting 32 aspiring
students to learn about maths-
related roles;
• 45 Beazley volunteers mentored
15-16 year old students throughout
the year;
• 35+ local young people were hired
as summer interns in our UK and
US offices, and three former interns
have been employed in permanent
roles;
• 25 Beazley volunteers supported
reading and numeracy skills for 50
children from our local community
partner, Hague School;
• we facilitated and hosted four
workshops for over 100 young
people to increase their knowledge
of the insurance sector and career
development; and
• we donated over 40 iPads to our
local schools.
“ Internships such as these are
essential for the business as
they introduce a whole new
demographic to the industry.
Internships are also very
important to young people
for a variety of reasons, the
first being that they are given
an opportunity to work in
a professional environment
and see whether the
corporate world is something
they may enjoy as a future
career. Also for many, they
may not have any previous
connections or opportunity
to access these types of highly
skilled and highly paid jobs.”
Celine
Property intern, UK
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Sustainable business continued
Environment
We are committed to minimising our own environmental footprint,
and reducing the adverse impacts arising from office-based activities
and business travel as laid out in our Environmental Policy
Taking the environmental
initiative in Singapore
As part of Make a Difference month, our
Singapore colleagues spent a day in the
blistering heat to clean up a local beach.
This inspired another Beazley campaign
where colleagues were encouraged to
pick up litter during their summer holidays
at their own local beach.
Looking forward in London –
Twentytwo Bishopsgate
As we plan to move into our new London
offices at Twentytwo Bishopsgate, we are
making sure that sustainability is a top
consideration. Twentytwo is pursuing
WELL certification, demonstrating its
commitment to improving and encouraging
the health and wellness of its community.
The construction company are aware
of the impact on local residents and are
engaged in community liaison to address
any concerns and communicate with local
businesses and neighbours.
As a new building, all of its functions will
be more energy efficient than our current
site and in keeping with our other new
offices, we are making sustainable
choices (wood, vegan leather alternatives)
for our furniture and fittings.
Make a Difference Singapore
Make a Difference Singapore
As well as ensuring compliance with
all applicable environmental
legislation, we:
• monitor our energy consumption,
greenhouse gas emissions and
other environmental criteria, and
are using this data to help identify
opportunities to improve our
performance;
• source office space that is LEED
or BREEAM certified, where
environmental considerations
have been factored in;
• ensure that environmental impacts
are considered and managed
during the procurement process.
Our focus is on recyclable, recycled,
renewable, and low-VOC (volatile
organic compound) materials,
including, but not limited to, office
supplies and lunch providers;
• regularly review waste management
practices to identify opportunities
to improve;
• engage our people to help achieve
our goals, encourage them to
consider their environmental
approach outside of work and keep
them informed of what we are
doing; and
• audit our progress with yearly GHG
emissions reports across London,
Dublin and our four largest US
offices.
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Carbon emissions report
Latest Greenhouse Gas Emission figures
(tonnes CO2 equivalent)1
Scope 1
39.47
Scope 2
898.54
Scope 3
7,357.11
tCO2e/employee/year
7.7
Scope 1 and 2 emissions increased
due to expanded scope of reporting
Scope 3 emissions increased due
to increased business travel by air
1 For further information, please refer to pages 76 to 77.
Environmental
governance
Environmental and sustainability issues
are primarily the responsibility of the
Commercial Management team, who
set objectives and targets and manage
deadlines. Beazley communicates our
Environmental Policy to all employees
through the company intranet, as well as
through employee induction and training.
Where appropriate our internal and
external stakeholders are required to
acknowledge and adhere to our
Environmental Policy and relevant
operating procedures.
Procurement and outsourcing
Where we can, we ensure good working
conditions and employee rights
throughout our supply chains. Our
external contracts are governed by our
Outsourcing Policy and our Procurement
Policy. Our due diligence in both cases
includes assessment of risk management,
internal controls, compliance with laws
including the UK Bribery Act 2010
and Modern Slavery Act 2015, and
information on staff turnover, industrial
relations, staff training and recruitment.
We take our obligations to our suppliers
seriously and ensure that when we enter
into significant outsourcing contracts with
new service providers we conduct due
diligence on their operations, and carry
out site visits to ensure that conditions
are suitable. We maintain ongoing
communication and close relations with
such suppliers.
We comply with all Lloyd’s Minimum
Standards on outsourcing, and oversee
our outsourcing arrangements with
annual reviews and updates to our
operations committee. An executive
committee member retains full
responsibility for each outsourced
relationship.
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Sustainable business continued
Marketplace
Using our influence as a force for good
In 2018 we have been taking a more
strategic approach to ESG matters, and
overtly linking them to our business:
• We have been running a cross-
business sustainability initiative,
exploring how we can embed social
and environmental considerations
into our products and business
practices. With the help of external
experts, we held workshops to
focus on the insurance angle
of the global issues we face,
and are consequently pursuing a
number of business development
opportunities and partnerships
across business lines, including
clean energy generation and
storage, clean technology, climate
change adaptation, measures to
address marine pollution, support
for environmental pollinators, and
employment practices liability.
• We are conducting an ongoing
review of decarbonisation-related
business implications, as well
as convening a working group to
produce our 2019 ClimateWise
report, which will be aligned with
the recommendations of the
Taskforce on Climate-related
Financial Disclosures.
• We remain committed to the Lloyd’s
Disaster Risk Facility (DRF), as a
founding member. The consortium was
set up to increase economic resilience
by developing innovative solutions
for populations which suffer some of
the most serious losses from natural
disasters, yet currently have little or
no access to insurance. While this is
a long-term development opportunity,
with such exposures often being
considered at the sovereign government
level and having very long lead-in
times, the DRF has been very active
in building relations with multilateral
financing institutions and relevant
government agencies worldwide.
• 2018 was a pivotal year in marine
sustainability. The headline item is
the shipping industry defining how
the low sulphur fuel regulations will be
implemented and analysis of how this
will affect the shipping industry as
a whole. More renewable farms have
being completed, with offshore wind
leading from the front. The subsea
team have underwritten a number of
accounts which have shown increased
activity in the preparation and
completion of renewable infrastructure.
Also the hull, liability, cargo and
subsea teams will be working with
a key oceanographic organisation,
supporting their scientific research
efforts to better understand the ocean.
We are signatory to the
Paris Pledge for Action,
the formal initiative for
non-state organisations
supporting the Paris Climate
Change Agreement.
As climate change risks rise up the
public agenda, the insurance
industry is taking steps to ensure
that we are sufficiently prepared for
both the potential physical impacts
of more frequent and severe
extreme weather events, and the
transition risks arising from the shift
to a low-carbon economy.
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We have reported into
ClimateWise, the insurance
industry’s initiative to monitor
and disclose the risks and
opportunities associated with
the climate risk protection gap,
since 2007.
As ClimateWise shifts to incorporate
anticipated greater regulatory
disclosure requirements and the
recommendations of the Taskforce
on Climate-related Financial
Disclosures (TCFD), we are
preparing to significantly increase
our reporting efforts in 2019, with
assigned board and executive
committee level oversight.
The majority of our assets
(approximately 75%) are held in a
portfolio of investment grade fixed
income securities managed in-house
by the Beazley investment team.
Our internal investment process
applied to these assets incorporates
an analysis of ESG factors to ensure
that we favour those companies who
actively seek to identify and control
ESG risks. To support this process
we subscribe to the services of
a specialist provider of ESG and
governance research and ratings.
The remaining assets are outsourced
to external investment managers
and invested across a range of asset
classes. We have undertaken an audit
of the ESG policy of each manager
to understand how they incorporate
an assessment of sustainability into
their investment process and over
time we may realign our mandates
to ensure a consistent approach
is applied.
Our risk management team assesses
and monitors the broad array of risks
presented by climate change, including:
• Pricing risk;
• Catastrophe risk;
• Reserve risk;
• Asset risk;
• External event risk;
• Commercial management risk;
• Credit risk;
• Regulatory and legal risk;
• Liquidity risk; and
• Strategic risk.
Our risk management of climate
change risks is described in
detail on pages 57 to 58
Responsible investing
At Beazley, we believe our investment
strategy should seek to have a positive
influence on society and the world at
large and for this reason we incorporate
a consideration of environmental, social
and governance (ESG) risks into our
decision-making process. Our view is
that this approach is consistent with the
objective of optimising total return as
companies demonstrating a commitment
to a sustainable business strategy and
ethical business culture have been
shown to enjoy a competitive advantage
over time, generating stronger and more
stable returns.
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Sustainable business continued
Inclusivity and diversity
Our vision of inspiring and developing people with diverse perspectives
During 2018, we continued our journey
towards our vision of inspiring and
developing people with diverse
perspectives to thrive at all levels of
our business, in an environment that
supports and celebrates differences.
On gender diversity, the executive
committee agreed a range of initiatives
including diverse recruitment slates and
increased senior leadership accountability
for creating and maintaining gender-
diverse teams. We made good progress
with our Her Majesty’s treasury (HMT)
Women in Finance Charter target, which
is to increase the women in our senior
leadership team to at least 35% by the
end of 2020. At the beginning of 2019,
32% of our senior leadership team will
be women, compared to 29% at the
beginning of 2018.
Other actions we have taken to enhance
gender diversity at all levels of our
organisation include development,
networking and mentoring opportunities
for our female talent facilitated by Women
in Banking and Finance, which we joined
in 2018. Our chief executive officer and
chairman are members of the 30% Club,
demonstrating our most senior leaders’
commitment to gender diversity.
Networks
Colleagues have formed three networks
that focus on the interests of the LGBT+
community (PROUD@Beazley), colleagues
from a minority race/ethnicity
(Empowered@Beazley) and our young
talent (Beazley Young Professionals).
During 2018:
PROUD@Beazley supported our talent
management team’s review of our
employee handbooks to be more
inclusive from an LGBT+ perspective
and facilitated Beazley joining a leading
online LGBT+ recruitment and networking
hub called myGwork.
Beazley Young Professionals continued
its expansion into our offices across the
group. The network arranged lunch and
learn sessions, networking events, panel
discussions, and screened relevant TED
talks, all targeted at the development
needs and interests of our younger talent.
Empowered@Beazley launched and
welcomed its first members. The network
is focused on helping to create an
environment where colleagues from
different races and ethnicities feel
empowered to showcase their skills and
reach for opportunities across the group.
Employee diversity
by gender
Beazley plc board
Male
9
Female
3
Total 2018 – 12
Senior management
Male
78
Female
32
Total 2018 – 110
All employees
Male
728
Female
656
Total 2018 – 1,384
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Celebrating our differences
An important part of our vision is
creating an environment that
recognises and celebrates our
differences. That helps our people to
feel comfortable with being
themselves in the workplace and
creates the opportunity for Beazley to
benefit from those collective
differences. As part of that, we
celebrated across the group,
International Men’s and International
Women’s Days, Black History Month,
Pride, and World Aids Day.
NexCo
NexCo is a group drawn from our younger
talent who each represent one of the
executive committee members. The
group works through the monthly
executive committee papers, reviewing
them and challenging them in a similar
way to the executive committee. The main
aims of the idea are to:
• garner more diverse perspectives
on important Beazley matters;
• provide a wider understanding of
Beazley strategies and key issues/
opportunities for this group; and
• help younger members of the
organisation learn about Beazley
governance and direction setting.
External group membership
We are proud members or sponsors of
external bodies including: HMT Women
in Finance Charter, Stonewall, Women
in Banking and Finance, myGwork,
Business Insurance D&I Institute, 30%
Club, Insurance Supper Club, and DiveIn.
They are a helpful source of ideas and
best practice for us to learn from.
“ 2018 has been a year of
continued focus on our
diversity and inclusion
journey. We are proud
of our inclusive culture
and of our progress on
gender diversity, which
we will maintain.
Looking ahead, we will
apply what we have
learned from our focus
on gender diversity to
other forms of diversity.
This includes
acknowledgement of
the pivotal role that
all our leaders and
managers play in this
journey and the
support they require
in doing so.”
Rob Anarfi
Chair, diversity steering group
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Sustainable business continued
Responsible underwriting – compliance
Being Beazley is at the heart of everything we do
It guides our behaviours, embeds a
culture of good conduct, and ensures
we do the right thing for all our
stakeholders.
We are committed to ensuring that our
business is conducted in an ethical
and honest manner, and to ensuring
our continued compliance with all
applicable bribery and corruption
legislation, including the UK Bribery
Act and US Foreign Corrupt Practices
Act. Our Code of Conduct policy details
our core values and the behaviours
to which we require all employees
to adhere, with reference to:
• Customer conduct protocol
• Complaints handling policy
• Anti-bribery and corruption policy
• Conflicts of interest policy
• Whistleblowing policy
• Acquisition cost protocol
• Financial crime policy
• Anti-fraud policy.
These are communicated to all
employees and are available on our
intranet. Executive responsibility for
our Code of Conduct policy is with
the head of talent management.
Prevention, detection and reporting
of bribery and other forms of corruption
is the responsibility of all employees.
Senior management have overall
accountability for ensuring Beazley’s
Anti-Bribery and Corruption Policy
complies with Beazley’s ethical
obligations, and that all those under
its control comply with it. We undertake
a bribery and corruption risk assessment
on an annual basis, analysing our
worldwide business for exposure to
higher risk jurisdictions, the distribution
channels used and the nature and size
of business we conduct.
Our Gifts and Hospitality Policy and
Anti-Bribery and Corruption Policy
both outline the appropriate behaviour
required of all staff and associated
persons, and identify record-keeping
requirements and approval procedures.
Employees complete annual mandatory
training and assessment on financial
crime, bribery and corruption.
Our Whistleblowing Policy allows for
anonymous reporting; all reports are
treated with the utmost confidentiality.
A record of concerns raised and their
resolution is maintained and considered
annually by the relevant audit and risk
committee. An annual report is made
to the Beazley Insurance dac, Beazley
Furlonge Ltd and Beazley plc boards
on the operation and effectiveness of
our systems and controls in relation
to whistleblowing.
Further information regarding our
approach to anti-bribery and corruption
can be found on our website.
Financial Crime Policy
Beazley’s executive management is
ultimately responsible for preventing,
detecting and investigating alleged
financial crime activity. However, all
employees share the responsibility
to watch out for possible financial crime
and are empowered to take appropriate
action.
Beazley has operating guidelines for
reporting suspicious transactions.
Staff complete annual training on
anti-money laundering (AML) and terrorist
financing. The Financial Crime e-learning
module currently being updated to
include tax evasion. Staff complete
annual training on internal sanctions.
The Financial Crime Policy outlines the
reporting requirements that the company
must adhere to depending on the nature
of the irregularity.
Underwriting and
claims due diligence
procedure
The Beazley due diligence procedure,
aimed at underwriting and claims staff,
outlines the customer due diligence
requirements before writing a risk or
paying a claim, and the enhanced due
diligence requirements for those in
high-risk scenarios.
www.beazley.com
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Governance
We have a number of internal
procedures that govern our approach
to data and data subjects:
• information security strategy;
• information security master policy;
• information security risk
assessment and management
policy; and
• global privacy policy and privacy
notice.
Compliance
monitoring policy
Beazley’s compliance monitoring team
monitor existing business relationships
for AML and sanctions purposes.
Data security
We have a mandatory annual training
and assessment programme on data
security and privacy, enriched by regular
awareness campaigns.
An information security and privacy
assessment process is embedded into
our business and technology change
projects.
The group’s internal audit department
undertakes IT related audits as part of it’s
risk-based schedule of audit work. This
includes annual audits of IT security and
information security. Internal audit also
undertakes annual reviews of the group’s
risk management framework.
Beazley has a governance structure
which enable the information security and
privacy function to report on data privacy
and security issues without restraint.
We are committed to the rights of a
data subject and follow our legal and
regulatory obligations within the various
jurisdictions in which we operate. We
have a global privacy policy aligned to
European, North American, Canadian
and Singaporean privacy and breach
notification requirements.
We are committed to informing data
subjects about what data on them we
collect and process, ensuring we only
collect what is required to deliver the
services back to them. We are committed
to protecting customer and personnel
data by having appropriate
organisational, people and technical
controls and delivering an information
security programme built around a
framework of prepare, protect, detect,
respond and recover.
Managerial responsibilities for privacy
and data security are defined within
Beazley policies.
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 below:
Environmental matters
The company’s employees
Social matters
Chapter
Sustainability overview; Risk management; Sustainable business;
Directors’ report
Our key differentiators; Our business model and strategy;
Sustaining growth; Sustainability overview; Chairman’s statement;
Chief executive’s statement; Q&A with the chief executive;
Operational update; Risk management; Sustainable business;
Directors’ report; Letter from our chairman; Board of directors;
Statement
of corporate governance; Letter from our chairman of our
remuneration committee; Directors’ remuneration report
Sustainability overview; Chairman’s statement; Chief executive’s
statement; Sustainable business
Sustaining growth; Sustainable business
Page
reference
14-15; 53-77
1-23; 50-83;
85-120
14-21; 59-73
10-13; 59-73
14-15; 53-73
Respect of human rights
Anti-corruption and anti-bribery matters Sustainability overview; Risk management; Sustainable business
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Directors’ report
www.beazley.com
Principal activity
Beazley plc is the ultimate holding company for the Beazley group, a global specialist risk insurance and reinsurance business
operating through: its managed syndicates at Lloyd’s in the UK; Beazley Insurance Company, Inc., an admitted insurance carrier
in the US; and Beazley Insurance dac, a European insurance company in Ireland.
Management report
The directors’ report, together with the strategic report on pages 1 to 77, serves as the management report for the purpose
of Disclosure and Transparency Rule 4.1.8R.
Directors’ responsibilities
The statement of directors’ responsibilities in respect of the annual report and financial statements is set out on page 121.
Review of business
A more detailed review of the business for the year and a summary of future developments are included in the chairman’s
statement, the chief executive’s statement and the financial review.
Results and dividends
The consolidated profit before taxation for the year ended 31 December 2018 amounted to $76.4m (2017: $168.0m).
The directors announce a second interim dividend of 7.8p per ordinary share (2017 second interim dividend: 7.4p). The dividend,
together with the first interim dividend of 3.9p per ordinary share (2017 first interim dividend: 3.7p), gives a total of 11.7p
(2017: 11.1p).
The aforementioned second interim dividend will be paid on 27 March 2019 to shareholders on the register on 1 March 2019.
Going concern and viability statement
A review of the financial performance of the group is set out on pages 40 to 49. 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
on page 56.
Directors
The directors of the company who served during 2018 and/or to the date of this report were as follows:
Dennis Holt
David Lawton Roberts
David Andrew Horton
George Patrick Blunden
Martin Lindsay Bride
Adrian Peter Cox
Angela Doreen Crawford-Ingle
Christine LaSala
Sir John Andrew Likierman
Neil Patrick Maidment
John Peter Sauerland
Robert Arthur Stuchbery
Catherine Marie Woods
Non-executive chairman (resigned 22/03/2018)
Non-executive chairman (appointed 22/03/2018)
Chief executive
Non-executive director
Finance director
Director
Non-executive director
Non-executive director
Non-executive director
Director (resigned 31/12/2018)
Non-executive director
Non-executive director
Non-executive director
www.beazley.com
Annual report 2018 Beazley 75
The directors have pleasure in presenting their report and the audited
financial statements of the group for the year ended 31 December 2018
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.
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Further information can be found in the statement of corporate governance on page 85.
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 pages 100 to 120.
Details of directors’ service contracts are given in the directors’ remuneration report. The directors’ biographies are set out in the
board of directors section of this report.
Corporate governance
The company was compliant with corporate governance during 2018. More information on compliance is disclosed in the statement
of corporate governance on pages 85 to 99.
Corporate, social and environmental responsibility
The company’s corporate, social and environmental policy is disclosed on pages 59 to 73. During 2018 Beazley donated over
$300,000 to charities, details of which can be found in the sustainable overview report on pages 14 and 15.
No political donations were made by the group in either the current or prior reporting period.
Risk management
The group’s approach to risk management is set out on pages 53 to 58 and further detail is contained in note 2 to the financial
statements on pages 148 to 160.
Substantial shareholdings
As at 6 February 2019, the board had been notified of, or was otherwise aware of, the following shareholdings of 3% or more
of the company’s issued ordinary share capital:
MFS Investment Management
Invesco Perpetual
Fidelity Management & Research
BlackRock
SKAGEN Fondene
NBIM
Vanguard Group
Number of
ordinary shares
46,080,688
44,909,637
36,899,614
25,654,836
21,868,203
21,549,042
17,861,118
%
8.7
8.5
7.0
4.9
4.1
4.1
3.4
Note: All interests disclosed to the company in accordance with DTRs that have occurred can be found on the news and alerts section of our corporate website:
www.beazley.com
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 197.
Likely future developments
Information relating to likely future developments can be found in the strategic report.
Research and development
In the ordinary course of business the group develops new products and services in each of its business divisions and develops
IT solutions to support the business requirements.
76
Beazley Annual report 2018
Directors’ report continued
www.beazley.com
Diversity and inclusion
Information concerning diversity and inclusion can be found in the sustainable business section on pages 70 and 71 and in the
statement on corporate governance on page 85.
Share capital
As at 31 December 2018, the company’s issued shared capital comprised 527,761,271 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 178. 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.
Authority to purchase own shares
On 22 March 2018 shareholders approved an authority, which will expire on 22 June 2019 or, if earlier, at the conclusion of the
2019 Annual General Meeting (AGM) for the company to repurchase up to a maximum of 52,578,239 ordinary shares (representing
approximately 10% of the company’s issued ordinary share capital). During the year, Beazley acquired 6,039,136 of its own shares
into its employee benefit trust. The board continues to regard the ability to repurchase issued shares in suitable circumstances as
an important part of the financial management of the company. A resolution will be proposed at the 2019 AGM to renew the
authority for the company to purchase its own share capital up to the specified limits for a further year. More detail of this proposal
is given in the notice of AGM.
Significant agreements – change of control
Details of an agreement to which the company is party that alters on change of control of the company following a takeover bid
are as follows:
The amended and restated $225m multi-currency standby letter of credit and revolving credit facility agreement dated 25 July 2017
remains unchanged. The agreement is between the company, other members of the group and various banks provides that if
any person or groups of persons acting in concert gains control of the company or another group obligor, then: (a) the banks
are thereafter not obliged to participate in any new revolving advances or issue any letter of credit and (b) the facility agent may:
(i) require the group obligors to repay outstanding revolving advances made to them together with accrued interest and (ii) ensure
that the liabilities under letters of credit are reduced to zero or otherwise secured by providing cash collateral in an amount equal
the maximum actual and contingent liabilities under such letters of credit.
Furthermore, the facility agreement includes a covenant that no group obligor will amalgamate, merge, consolidate or combine
by scheme of arrangement or otherwise with any other corporation or person. If this covenant was breached without prior consent,
then the facility agent may: (a) require the group obligors to repay outstanding revolving advances made to them together with
accrued interest, (b) ensure that the liabilities under letters of credit are reduced to zero or otherwise secured by providing cash
collateral in an amount equal the maximum actual and contingent liabilities under such letters of credit, (c) declare that any
unutilised portion of the facility is cancelled and (d) give a notice of non-extension to Lloyd’s in respect of any letter of credit.
Annual general meeting
The AGM of the company will be held at 14.30 on Thursday 21 March 2019 at Plantation Place South, 60 Great Tower Street,
London EC3R 5AD. The notice of the AGM details the business to be put to shareholders.
Greenhouse gas emissions
Our latest greenhouse gas (GHG) emissions report showed 2017 UK and European GHG emissions of 6,103.16 tonnes CO2
equivalent (tCO2e) an increase of 18% relative to 2016. This increase is primarily due to increased business travel by air (Scope 3).
2017 GHG emissions for Beazley’s four principal North American offices are reported as 2,191.96 tCO2e. This is 33% higher
than 2016 reported emissions and is due to the expansion of the scope of reporting for 2017. 2017 Scope 1 and 2 emissions
(214.91 tCO2e) are 26% higher than those reported for 2016 – also due to the expanded scope of reporting.
Beazley’s GHG emission intensity ratio (emissions/employee/year) rose from 7.1 tCO2e/employee in 2016 to 7.7 tCO2e/employee
in 2017.
www.beazley.com
Annual report 2018 Beazley 77
Beazley’s corporate GHG emissions are summarised in the table below:
Scope 1 emissions
Scope 2 emissions
Scope 3 emissions
Total
tCO2e/employee/year
European offices
2016: 51.48
2017: 39.47
2016: 886.83
2017: 683.63
2016: 4,235.00
2017: 5,380.06
2016: 5,173.31
2017: 6,103.16
North American offices
2016: data not available
2017: data not available
2016: 170.21
2017: 214.91
2016: 1,483.74
2017: 1,977.05
2016: 1,653.95
2017: 2,191.96
2016: 7.1
2017: 7.7
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Notes:
i) Greenhouse gas emissions are calculated and presented in accordance with DEFRA Environmental Reporting Guidelines, using
the UK Government’s GHG Conversion Factors for Company Reporting where possible.
ii) Beazley Group’s 2017 GHG emissions are, where possible, calculated using emission factors for carbon dioxide, methane and
nitrous oxide, reported in units of tonnes of carbon dioxide equivalent (tCO2e). The principal exceptions to this are reporting of
emissions associated with electricity use in our Dublin and US offices, which are limited to just carbon dioxide (CO2).
iii) Reporting is based on operational control. Beazley Group does not have operational control over the building infrastructure and
plant at its offices due to the presence of facility management companies and shared tenancy; as a result, emissions primarily fall
within Scope 2 and 3 of the Greenhouse Gas Protocol.
iv) Reported Scope 1 sources are: company cars, fuel use in back-up generators and fugitive refrigerant losses from AC systems.
Emissions associated with electricity used in Beazley’s offices and data centres are reported as Scope 2 emissions. Scope 3
sources include business travel by air, rail, taxi and leased cars.
v) UK and European office reporting covers activity associated with our principal UK office, Plantation Place South and our Dublin
office. These sites collectively accounted for 90% of Beazley’s UK/European permanent and contracted staff in 2017.
vi) Beazley’s US office reporting covers activity associated with our three principal US offices, Farmington, New York and Chicago in
2015 and 2016. The scope of reporting was expanded in 2017 to also include our Atlanta office. These sites collectively accounted
for 63% of Beazley’s US employees in 2016 and 73% in 2017.
The scope of 2017 reporting is consistent with that for 2016. Our 2017 scope of reporting has been expanded to include our
Atlanta office; this takes US office coverage to 80% of employees (based on 2016 occupancy).
Auditor
The group undertook an audit tender process during 2018 in respect of external audit services. EY will be proposed for
appointment, for financial periods on or after 1 January 2019, to shareholders at the 2019 AGM. KPMG will resign as auditor
following completion of the 31 December 2018 audit.
Disclosure of information to auditor
The directors who held office at the date of approval of this directors’ report confirm that, so far as they are each aware, there is
no relevant audit information of which the company’s auditors are unaware; and each director has taken all the steps that he or
she ought to have taken as a director to make himself or herself aware of any relevant audit information and to establish that the
company’s auditors are aware of that information.
By order of the board, covering the strategic report from pages 1 to 73 and the directors’ report from pages 74 to 77 .
C P Oldridge
Company secretary
Plantation Place South
60 Great Tower Street
London
EC3R 5AD
6 February 2019
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Beazley Annual report 2018
www.beazley.com
Governance
Letter from our chairman
Board of directors
Investor relations
Statement of corporate governance
79
80
84
85
100 Letter from the chairman of our remuneration committee
101 Directors’ remuneration report
121 Statement of directors’ responsibilities
122
Independent auditor’s report
www.beazley.com
Annual report 2018 Beazley 79
Letter from
our chairman
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On behalf of the board of directors, I am pleased to present the governance report in which we describe our governance arrangements,
the operation of the board and its committees and how the board discharged its responsibilities throughout the year.
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 87, the board has continued to evolve with a number of changes during the year
and further developments planned for the forthcoming year. Neil Maidment retired from the board on 31 December 2018 after having
served as an executive director since 2001. We also announced that Martin Bride, the group finance director, will retire from the
board in May 2019 following the finalisation of the 2018 accounting year. We were delighted to announce that Martin will be succeeded
on the board by Sally Lake. The board would like to express their thanks to Neil and Martin for the immense contribution they have
made to the development of the group. The board is looking forward to welcoming Sally to her new role.
In accordance with the group’s policy on Director independence and rotation, non-executive directors George Blunden (senior
independent director) and Angela Crawford-Ingle (chair of the audit and risk committee) will be stepping down from the board during
2019. George will stand down at the conclusion of the AGM in March 2019 and Angela will stand down following the conclusion of
the 2018 accounting year and following a handover to her successor. The board is immensely grateful to both George and Angela for
being such tremendous servants to the company during their tenure. A search for a successor to chair the audit and risk committee
is well progressed and the board expects to make an appointment in due course. As previously reported, Dennis Holt, our previous
chairman stepped down following the conclusion of the 2018 AGM and I took up the role of board chairman.
Christine LaSala will succeed George Blunden and will assume the role of senior independent director following the AGM. Christine
will also join the nomination and remuneration committees from the same date. Catherine Woods joined both the nomination and
remuneration committees with effect from 1 October 2018. We have increased diversity across all of the board’s subcommittees
during the year.
In line with the board’s commitment to ensuring it has the skills necessary to support and challenge management on the areas
central to the group’s strategy, a search is underway for a non-executive director with expertise in technology, operations and data
and it is anticipated that an appointment will be made during the first half of 2019.
The board is well supported through continuous group development and training as well as individual development programs. The
board continues to devote significant attention to developing robust succession plans for both the board and senior management.
This will be increasingly important to ensure the optimum balance of expertise, skills and experience is available across the group
in a fast changing marketplace.
Board evaluation
This year, we appointed Boardroom Review Limited to undertake the triennial externally facilitated board evaluation. I am pleased
to report that the review concluded that the board, its committees and its individual members continue to operate effectively. The
review highlighted the following key areas that the board will focus on in the coming year:
• reviewing the governance structure and information flows between our regulated subsidiary boards in light of the changing
business and political landscape;
• considering whether a risk committee should be established, separating out the risk and audit agendas and continued
development of the role of internal audit; and
• continuing monitoring of corporate culture, and board engagement with executive development, diversity and talent.
We will report on the progress in implementing the recommendations made in the 2020 annual report.
Governance
The company continues to be committed to the highest standards of governance and I am pleased to confirm that the company has
complied with the principles and provisions that are set out in the 2016 UK Corporate Governance Code throughout the year ended
31 December 2018. The board has also considered the changes introduced in the 2018 UK Governance Code (the “Code”) and
it is pleasing to note that the company had a number of processes already in place to assist compliance with the principles and
provisions of the Code and we will report fully on our compliance in the 2019 annual report. Details of the activities of the board
and its committees are also set out on pages 86 to 99. All directors will attend this year’s AGM, either in person or via teleconference,
which will again provide an opportunity for all shareholders to hear more about our performance and to ask questions of the board.
I would like to thank all of my colleagues on the board for their contribution during the year.
David Roberts
Chairman
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Beazley Annual report 2018
Board of directors
www.beazley.com
www.beazley.com
Annual report 2018 Beazley
81
An effective board of directors made
up of diverse and experienced members
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 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.
The remuneration committee ensures that remuneration
arrangements support the strategic aims of the business
and enable the recruitment, motivation and retention of senior
executives while complying with the requirements of regulatory
and governance bodies, satisfying the expectations of
shareholders and remaining consistent with the expectations
of the wider employee population.
The nomination committee is focused on evaluating the
board of directors, ensuring an appropriate balance of skills,
considering and recommending board and committee
candidates and considering board succession.
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Governance framework
Board of directors
Audit and risk committee
The audit and risk committee is chaired
by Angela Crawford-Ingle.
Nomination committee
The nomination committee is chaired
by David Roberts.
Remuneration committee
The remuneration committee is chaired
by Sir Andrew Likierman.
Executive committee
The executive committee is chaired
by Andrew Horton and acts under
delegated authority from the board.
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Beazley Annual report 2018
www.beazley.com
Board of directors continued
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David Roberts
Chairman
Appointed: 1 November 2017
Experience: David joined Beazley
on 1 November 2017 and became
chairman on 22 March 2018. He is
chairman of Nationwide Building
Society and vice chairman of NHS
England. He has over 30 years
experience in financial services
and was previously chairman and
CEO of Bawag PSK AG, Austria’s
second largest retail bank,
and an executive director and
member of the group executive
committee at Barclays plc,
where he was responsible for
the international retail and
commercial banking business.
Prior to joining Nationwide he
was group deputy chairman
at Lloyds Banking Group.
His previous non-executive
directorships include Absa
Group SA and BAA plc.
Committee: Nomination
committee (chairman)
Skills: governance, strategy,
board leadership and regulation.
Andrew Horton
Chief executive officer
Appointed: 12 June 2003*
Experience: Andrew joined
Beazley in June 2003 as finance
director and became chief
executive officer in September
2008. 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)
Skills: strategy, investment,
finance, mergers and
acquisitions, leadership and
people management.
N
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Adrian Cox
Chief underwriting officer
Appointed: 6 December 2010*
Experience: Adrian began his
career at Gen Re in 1993 writing
short tail facultative reinsurance
before moving to the treaty
department in 1997, where he
wrote both short and long tail
business specialising in financial
lines. He joined specialty lines
at Beazley in 2001 where he
has performed a variety of roles,
including underwriting manager,
building the long tail treaty
account, managing the private
enterprise teams, and the large
risk teams before taking
responsibility for specialty lines
in 2008. He took on the role
of chief underwriting officer
in January 2019. Adrian was
appointed to the boards of
Beazley Furlonge Ltd in 2008
and Beazley plc in 2011.
Committee: Executive committee
Skills: insurance, management,
international business
development and governance.
Martin Bride
Group finance director
Appointed: 5 May 2009*
Experience: Martin joined Beazley
in April 2009 as finance director.
He began his career in insurance
in 1985 and took up his first role
as a finance director in 1996. He
trained as a general insurance
actuary, and his experience
spans personal and commercial
lines general insurance, the
London market, life insurance
and asset management in both
the UK and France. Martin has
34 years’ experience in insurance
and his career includes a number
of senior level finance and
general management roles in the
sector. He has also held
directorships at Société Foncière
Lyonnaise and Union Financière
de France Banque. Martin has
been group finance director at
Beazley for 10 years joining from
Zurich Financial Services where
he was Chief Financial Officer
for the UK Life Business. Prior to
that, he spent 17 years at Aviva
both in France and the UK.
Committee: Executive committee
Skills: finance, insurance,
mergers and acquisitions
and leadership.
George Blunden
Non-executive director
Appointed: 1 January 2010*
Experience: George is the senior
independent director. He retired
as senior vice president and
director from AllianceBernstein
Ltd in December 2009. He had
previously been chief executive
of Union plc, and a director
of SG Warburg Securities,
Seccombe, Marshall and
Campion plc and Meridian
Investment Performance
Services. He is the chairman
of the Charity Bank Ltd and
chairman of Stonewater Ltd.
Committees: Audit and risk
committee, remuneration
committee, nomination
committee
Skills: investments, treasury,
credit, capital and governance.
Angela Crawford-Ingle
Non-executive director
Appointed: 27 March 2013*
Experience: Angela is a chartered
accountant with extensive audit
experience of multinational and
listed companies. She was a
partner in PricewaterhouseCoopers
specialising in financial services
for 20 years during which time she
led the insurance and investment
management division and retired
in 2008. She is currently a partner
in Ambre Partners, a firm providing
strategic, financial and operational
advice. Angela is also currently a
non-executive director and audit
chair of Swinton Group Ltd and
River and Mercantile Group plc.
Committee: Audit and risk
committee (chairman)
Skills: finance, governance,
audit and strategy.
www.beazley.com
Annual report 2018 Beazley 83
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Executive directors
Non-executive directors
N
* 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.
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Catherine Woods
Non-executive director
Appointed: 1 January 2016*
Experience: Catherine has over
30 years’ experience in financial
services as well as significant
governance experience. Her
executive career was with
JP Morgan in the City of London,
specialising in European financial
institutions. She is a former
vice president and head of the
JP Morgan European Banks
equity research team. She
currently holds a number of
non-executive directorships
including deputy chairman of
AIB Group plc and is a director
of AIB Mortgage Bank EBS DAC,
Black Rock Asset Management
(Ireland) and EBS DAC. She
was previously appointed by
the Irish Government to the
Electronic Communications
Appeals Panel and the
Adjudication Panel to oversee the
rollout of the National Broadband
scheme. Catherine is a former
Chairman of EBS DAC and former
director of An Post.
Committees: Audit and risk
committee, remuneration
committee, nomination
committee
Skills: insurance, strategy,
stakeholder management,
finance, governance, leadership
and management.
Christine LaSala
Non-executive director
Appointed: 1 July 2016
Experience: Based in New York,
Christine retired as chair of
Willis Towers Watson North
America. She has 40 years of
management, client leadership
and financial experience in the
insurance industry including work
as an underwriter and 27 years
as an insurance broker working
with large corporate and public
institution clients. Christine’s
experience includes board and
leadership roles at Johnson &
Higgins and Marsh and 10 years
as CEO of the WTC Captive.
Committee: Audit and risk
committee
Skills: insurance, strategy, risk
management, client leadership,
regulatory and governance.
Sir Andrew Likierman
Non-executive director
Appointed: 25 March 2015*
Experience: Andrew is Professor
of Management Practice at the
London Business School having
served as Dean 2009-2017. His
career has spanned the public
and private sectors as well as
academic life, including 10 years
as head of the UK Government
Accountancy Service. He has
had many non-executive director
appointments, including at the
Bank of England, and is currently
also a non-executive director
of Times Newspapers Ltd.
Committees: Remuneration
committee (chairman),
nomination committee
Skills: accountancy, financial
services, parliamentary advice
and governance.
N
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Robert Stuchbery
Non-executive director
Appointed: 11 August 2016
Experience: Bob had previously
been appointed as a non-
executive 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 chief
executive officer of Chaucer until
2015, and a deep knowledge of
the Lloyd’s market and
distribution and operational
strategies.
Committee: Audit and risk
committee
Skills: insurance, risk
management and strategy.
John Sauerland
Non-executive director
Appointed: 5 May 2016
Experience: John is chief financial
officer of the Progressive
Corporation, a US based
insurance holding company. Prior
to his current role, he was
Progressive’s personal lines
group president for eight years,
responsible for the company’s
primary business unit with $17bn
in revenues. During his tenure as
personal lines group president,
he led the introduction of many
innovations such as Name Your
Price® and Snapshot®,the
industry-leading pay-as-you-drive
offering. He also oversaw
significant growth of
the company’s direct marketing
efforts and consumer-facing
web and mobile technology.
Committee: Remuneration
committee
Skills: finance, pricing, marketing
and distribution.
84
Beazley Annual report 2018
Investor relations
www.beazley.com
We place great importance on communication with shareholders. The annual report and accounts and the interim report are
available to shareholders on the company’s website (www.beazley.com). A mailed copy of the accounts is also available on request.
The company responds to individual letters from shareholders and maintains a separate investor relations centre within the existing
www.beazley.com website, as a repository for all investor relations matters.
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 syndicates 623 and 5623 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.
The company’s shares are listed on the London Stock Exchange. Prices are given daily in newspapers including the Financial Times,
The Times, the Daily Telegraph, the Daily Mail and the Evening Standard.
Shareholding by type of investor
Mutual Funds
Retail
Pensions
SWF
Insurance
Investment Trusts
Trading
ETF
Directors
Charities
51%
14%
10%
8%
6%
4%
3%
2%
1%
1%
There are currently 13 analysts publishing research notes on the group. In addition to research coverage from Numis and JP Morgan,
the company’s joint corporate broker, coverage is provided by Autonomous, Berenberg, Canaccord, Credit Suisse, Jefferies, Keefe
Bruyette & Woods, Peel Hunt, Shore Capital, Investec, UBS and RBC.
Share price performance
700
600
500
400
300
200
100
0
Jan
2006
Jan
2007
Jan
2008
Jan
2009
Jan
2010
Jan
2011
Jan
2012
Jan
2013
Jan
2014
Jan
2015
Jan
2016
Jan
2017
Jan
2018
Jan
2019
Beazley
MCX Index
ASX Index
FTSE 350 Index
Financial calendar
1 March 2019
21 March 2019
27 March 2019
23 July 2019
Second interim dividend record date
Annual general meeting
Second interim dividend payment date for the six months ended 31 December 2018
First interim dividend announcement for the six months ended 30 June 2019
www.beazley.com
Annual report 2018 Beazley 85
Statement of corporate governance
Compliance with Code provisions
The board confirms that the company and the group have complied with the provisions set out in the 2016 version of the Financial
Reporting Council’s UK Corporate Governance Code (the Code) throughout the year ended 31 December 2018. The new reporting
requirements of the UK Corporate Governance Code 2018 will be fully reported on in the 2019 annual report.
The Code can be viewed on the www.frc.org.uk website. The governance section, together with the directors’ and remuneration
reports, describes how we have applied the main principles of the Code and complied with its detailed provisions.
The board considers that the annual report and accounts, taken as a whole, are fair, balanced and understandable; and that they
provide the information necessary for shareholders to assess the company’s performance, business model and strategy. The
company’s auditors have reviewed the company’s compliance to the extent required by the UK listing rules for review by auditors
of UK listed companies.
The board is accountable to the company’s shareholders for good governance and the statements set out below describe how
the main principles identified in the Code have been applied by the group.
Governance framework
The company operates through the main board, the managing agent board, the board of the Irish insurance company (that accepts
non-life reinsurance premiums ceded by the corporate member, Beazley Underwriting Limited), the board of the US admitted
insurance company and their board committees. The group has established properly constituted audit and risk, remuneration,
nomination and disclosure committees of the board. There are terms of reference for each committee and details of their main
responsibilities and activities in 2018 are set out on pages 86 to 99. The board has also appointed an executive committee that is
chaired by Andrew Horton and acts under delegated authority from the board. The executive committee meets on a monthly basis
and is responsible for managing all activities of the operational group. The governance framework of the main board and its
committees is shown in the diagram on the following page.
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The roles of the chairman and chief executive are separate, with each having clearly defined responsibilities. They maintain a close
working relationship to ensure the integrity of the board’s decision making process and the successful delivery of the group’s
strategy. The board evaluates the membership of its individual board committees on an annual basis and the board committees
are governed by terms of reference which detail the matters delegated to each committee and for which they have authority to
make decisions. The terms of reference for the board committees can be found on www.beazley.com.
86
Beazley Annual report 2018
www.beazley.com
Statement of corporate governance continued
Company secretary
Christine Oldridge
Key responsibilities
The company secretary’s responsibilities
include ensuring good information flows within
the board and its committees and between
senior management and non-executive
directors, as well as advising the board through
the chairman on all governance matters.
Shareholders
Chairman
David Roberts
Key responsibilities
The chairman leads the board, managing constructive dialogue
between executive and non-executive directors. He is responsible
for ensuring that the board discharges its duties effectively.
The board
Key responsibilities
Leadership, strategic aims, risks, values and standards.
Chairman
David Roberts
Members
George Blunden
Martin Bride
Adrian Cox
Angela Crawford-Ingle
Audit and risk
committee
Chairman
Angela Crawford-Ingle
Members
George Blunden
Christine LaSala
Robert Stuchbery
Catherine Woods
Key responsibilities
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.
Andrew Horton
Christine LaSala
Sir Andrew Likierman
John Sauerland
Robert Stuchbery
Catherine Woods
Nomination
committee
Chairman
David Roberts
Members
George Blunden
Sir Andrew Likierman
Catherine Woods
Key responsibilities
The nomination committee
is focused on evaluating the
board of directors, ensuring
an appropriate balance of
skills, considering and
recommending board and
committee candidates and
considering board succession.
Remuneration
committee
Chairman
Sir Andrew Likierman
Members
George Blunden
John Sauerland
Catherine Woods
Key responsibilities
The remuneration committee
ensures that remuneration
arrangements support the
strategic aims of the
business and enable
the recruitment, motivation
and retention of senior
executives while complying
with the requirements of
regulatory and governance
bodies, satisfying the
expectations of shareholders
and remaining consistent
with the expectations of the
wider employee population.
The information above is as at 6 February 2019.
Chief executive
Andrew Horton
Key responsibilities
The chief executive is
responsible for the
implementation and delivery
of the strategy agreed by
the board and the day to day
management of the business.
Disclosure
committee
Chairman
Group finance director
or their nominee
Members
Chief executive officer (or their
nominee)
Chief risk officer
Company secretary
Key responsibilities
The disclosure committee
has responsibility to oversee
the implementation of the
governance and procedures
associated with the
assessment, control and
disclosure of inside information
in relation to the company.
Executive
committee
Chairman
Andrew Horton
Members
Mark Bernacki
Martin Bride
Adrian Cox
Mike Donovan
James Eaton
Ian Fantozzi
Patrick Hartigan
Anthony Hobkinson
Dan Jones
Lou Ann Layton
Andrew Pryde
Jerry Sullivan
Christian Tolle
Tim Turner
Pippa Vowles
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.
www.beazley.com
Annual report 2018 Beazley 87
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.
The board consists of a non-executive chairman, David Roberts, together with seven independent non-executive directors, of
whom George Blunden is the senior independent non-executive director, and four executive directors, of whom Andrew Horton
is chief executive. Following the retirement of Neil Maidment on 31 December 2018, there are now three executive directors.
The non-executive directors, who have been appointed for specified terms, are considered by the board to be independent of
management and free of any relationship which could materially interfere with the exercise of their independent judgement.
George Blunden has served a term in excess of six years and continues to bring strong challenge and insight to the board and its
committees. His appointment was extended for a further three years at the 2016 AGM, subject to annual reappointment at the
AGM. The nomination committee carried out a rigorous assessment of George Blunden’s continuing independence, taking into
account the length of his tenure on the boards of both Beazley plc and Beazley Furlonge Ltd, and concluded that he remained
independent. As senior independent director George will, if required, deputise for the chairman. He is available to talk to
shareholders if they have any issues or concerns or if there are any unresolved matters that shareholders believe should be
brought to his attention. As George Blunden has served a further three year term, he will stand down at the 2019 AGM.
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Christine LaSala has been appointed as the senior independent non-executive director with effect from 21 March 2019. She will
take over the role from George Blunden, who will step down from the board at the conclusion of the AGM. Christine LaSala had
a long and distinguished career in the insurance industry and has already made a significant contribution to the Beazley board.
Neil Maidment retired from the board on 31 December 2018 and Adrian Cox has assumed his executive management responsibilities.
In accordance with the Code, the board has recommended that all directors should submit themselves for election or re-election
on an annual basis and as such all directors will stand for election or re-election at the forthcoming AGM.
Biographies of current board members appear in the board of directors section of this report. The biographies indicate the high
level and wide range of business experience that are essential to manage a business of this size and complexity. A well defined
operational and management structure is in place and the roles and responsibilities of senior executives and key members of staff
are clearly defined.
Board meeting attendance
The full board meets at least five times each year and more frequently where business needs require. In 2018, in addition to the five
regular board meetings, there were further meetings to consider the Solvency II annual return and the Q3 2018 interim statement.
There was nearly full attendance at all meetings. All the directors also attend an annual strategy day. The remuneration, nomination,
and audit and risk committees had additional ad hoc meetings with full attendance. The chairman holds regular meetings with the
non-executive directors without the executive directors being present.
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Beazley Annual report 2018
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Statement of corporate governance continued
Attendance at the regular board and committee meetings is set out in the table below:
Director
George P Blunden
Martin L Bride
Adrian P Cox
Angela D Crawford-Ingle
Dennis Holt1
D Andrew Horton
Christine LaSala
Sir J Andrew Likierman
Neil P Maidment
John P Sauerland
Robert A Stuchbery
Catherine Woods2
David Roberts3
Board
Audit and risk
committee
Remuneration
committee
Nomination
committee
No. of
meetings
5
5
5
5
1
5
5
5
5
5
5
5
5
No.
attended
5
5
5
5
1
5
5
5
5
5
5
5
5
No. of
meetings
7
–
–
7
–
–
7
–
–
–
7
7
–
No.
attended
7
–
–
7
–
–
7
–
–
–
7
7
–
No. of
meetings
6
–
–
–
–
–
–
6
–
6
–
1
–
No.
attended
6
–
–
–
–
–
–
6
–
6
–
1
–
No. of
meetings
6
–
–
–
2
–
–
6
–
–
–
1
4
No.
attended
6
–
–
–
2
–
–
6
–
–
–
1
4
1 Dennis Holt resigned at a director on 22 March 2018.
2 Catherine Woods was appointed to the remuneration committee and nomination committee on 1 October 2018.
3 David Roberts was appointed to the nomination committee on 22 March 2018.
Where a director joined or stood down from the board or board committee during the year only the number of meetings following appointment or before standing
down are shown.
Board discussions during the year
At each scheduled meeting the board receives reports from the chief executive and finance director on the performance and results
of the group and also receives reports from the chief underwriting officer and the chief risk officer and any board committees
following their meetings. In addition the board receives updates from the group operating functions on major projects and corporate
governance matters.
There is an annual schedule of rolling agenda items to ensure that all matters are given due consideration and are reviewed at the
appropriate point in the financial and regulatory cycle. Meetings are structured to ensure that there is sufficient time for consideration
and debate of all matters.
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 developments and responding to requirements for Brexit;
• understanding the General Data Protection Regulation implemented in May 2018;
• review of the Own Risk and Solvency Assessment (ORSA);
• discussion on capital position and dividends;
• cyber product development and cyber security;
• review of developments in corporate governance and receipt of key legal and regulatory updates including the PRA/FCA Senior
Managers and Certification Regime, gender pay gap, and the new UK Corporate Governance Code 2018; and
• discussion of the outcome of the board evaluation and effectiveness review and agreement of improvement opportunities.
In July 2018 Beazley backed the Inclusion Behaviours Pledge. This is a public commitment made by members of the insurance
sector, which reinforces Beazley’s promise to challenge inappropriate behaviour and create increasingly welcoming and inclusive
workplaces in our sector. In the UK, Beazley has joined the Women in Banking & Finance forum to share best practice and offer
networking and development opportunities to our female talent through their programme.
www.beazley.com
Annual report 2018 Beazley 89
Beazley is 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. We are
also a member of the 30% Club, which further demonstrates our commitment to gender diversity.
The Beazley diversity and inclusion steering group provides diversity and inclusion support for all employees and aims to foster open
dialogue about gender, social, ethnicity, LGBT+, disability and parental/carer inclusion. Beazley currently has an LGBT+ network and
young professionals network in place.
Beazley continue to work with Stonewall and the Business Disability Forum. Both organisations work closely with Beazley to identify
the best 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.
Training, information and support
New directors receive appropriate induction training when they join the board of Beazley plc. They are asked to complete a skills
and knowledge assessment and the company secretary, in conjunction with talent management, arranges and coordinates the
appropriate training. There are a number of modules available to the directors which are regularly reviewed to ensure they meet best
practice and the changing business environment. Where appropriate, mentoring is provided to new directors by an external provider.
Annual training is provided for all directors. The training sessions include business and industry specific topics and information on
changes to director duties and responsibilities and to legal, accounting, information security and tax matters. Bespoke training will
also be provided if requested by any director.
To enable the board to function effectively and directors to discharge their responsibilities, full and timely access is given to all
relevant information. In the case of board meetings, this consists of a comprehensive set of papers, including regular business
progress reports and discussion documents regarding specific matters. Directors have access to an electronic information repository
to support their activities. During 2018 the board continued to support the maintenance and development of Beazley’s information
security programme to address changing and emerging cyber security threats. Director training included sessions on IFRS 17,
Senior Managers and Certification Regime and refresher training on Solvency II. All directors allocate sufficient time to the company
to enable them to discharge their responsibilities effectively. The terms and conditions of appointment for all the non-executive
directors set out the expected time commitment and they agree that they have sufficient time to provide what is expected of them.
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. The board and its
committees consider their effectiveness regularly. An assessment was externally facilitated in 2018 by Boardroom Review Limited;
The review concluded that the board and its committees continue to operate effectively. However, it is intended that the
recommendations of the Boardroom Review Limited review will be implemented and reported on in the 2019 annual report.
Audit and internal control
A comprehensive audit tender was carried out in 2018 (details of this process can be found in the audit committee report on
pages 94 and 95) and EY have been appointed as the new external auditor for the 2019 accounting year, subject to shareholder
approval at the 2019 AGM.
The respective responsibilities of the directors and the auditors in connection with the accounts are explained in the statement
of directors’ responsibilities and the independent auditor’s report, together with the statement of the directors on going concern
in the directors’ report.
The board confirms that there is a continuous process for identifying, evaluating and managing any significant compliance issues
and risks facing the group. All significant known risks are captured in the Beazley risk register and monitored on a monthly basis.
The risk register and the related internal capital assessment process are subject to review, challenge and approval by the board.
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Beazley Annual report 2018
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Statement of corporate governance continued
The board agreed the 2018 risk appetite for the group at the end of 2017 and, throughout 2018, the board has considered and
acted upon the information presented to it in order to make risk based decisions against the 2018 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 is responsible for the group’s system of internal control and for reviewing its effectiveness. However, such a system can
only provide reasonable, not absolute, assurance against material misstatement or loss. The system is designed to manage, rather
than eliminate, the risk of failure to achieve business objectives within the risk appetite set by the board.
The key procedures that the board has established to ensure that internal controls are effective and commensurate with a group
of Beazley’s size include:
• day-to-day supervision of the business by the executive directors;
• review and analysis by the various group committees of standard monthly, quarterly and periodic reporting, as prescribed
by the board;
• review of financial, operational and assurance reports from management; and
• review of any significant issues arising from internal and external audits.
The board therefore confirms that it has, during 2018, reviewed the effectiveness of the group’s risk management and internal
controls (including financial, operational and compliance controls), which have been in place throughout the year under review
and continue to operate up to the date of approval of the annual report and accounts.
The chairman of the audit and risk committee also had regular contact with external and internal auditors during 2018 and
members of the audit and risk committee met individually with the Central Bank of Ireland and the Prudential Regulation Authority.
Further information on the role of the audit and risk committee is set out on page 91 and further information on risk management at
Beazley is set out in the risk management report.
Shareholder engagement
The company places great importance on communication with shareholders. The annual report and accounts and the interim report
are available from www.beazley.com and, where elected or on request, will be mailed to shareholders and to stakeholders who
have an interest in the group’s performance. The company responds to individual letters from shareholders and maintains a
separate investor relations centre within the existing www.beazley.com website, as a repository for all investor relations matters.
There is regular dialogue with institutional shareholders, as well as general presentations attended by executive directors, 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 forward questions at the
company’s annual general meeting.
The company has the authority within its articles to communicate with its shareholders using electronic and website communication
and to allow for electronic proxy voting.
The key procedures that the board has established to ensure that internal controls are effective and commensurate with a group
of Beazley’s size include:
• day-to-day supervision of the business by the executive directors;
• review and analysis by the various group committees of standard monthly, quarterly and periodic reporting, as prescribed
by the board;
• review of financial, operational and assurance reports from management; and
• review of any significant issues arising from internal and external audits.
www.beazley.com
Annual report 2018 Beazley
91
Statement of corporate governance continued
Audit and risk committee
Membership and attendance
Angela Crawford-Ingle
George Blunden
Christine LaSala
Robert Stuchbery
Catherine Woods
Appointment
27 March 2013
1 October 2010
1 July 2016
11 August 2016
11 March 2016
Attendance at full
meetings during 2018
7/7
7/7
7/7
7/7
7/7
The board has delegated
oversight of audit and risk
matters to the audit and risk
committee which currently
comprises Angela Crawford-
Ingle (chairman), George
Blunden, Catherine Woods,
Christine LaSala and Robert
Stuchbery.
The role of the committee is to assist the
board of directors in fulfilling its oversight
duties 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 Code of Conduct.
This role is unchanged from previous
years and in order to perform this role
effectively the committee works with
management and key stakeholders to
ensure that the risk and control framework
within Beazley remains robust and
appropriate for the group in the current
environment. In addition to assessing
the risk and control framework, in 2018
the committee also considered a number
of specific topics such as the external
audit tender process, monitoring
of changes in regulatory and tax
environments, and assessing emerging
risks such as Brexit.
As part of the appointments process
the nomination committee reviewed the
membership of the committee during the
year. Taken as a whole, the committee
has an appropriate balance of skills
specific to the industry within which the
group operates, including recent and
relevant financial experience, as required
by the UK Corporate Governance Code.
Details of the members’ financial,
accounting and other relevant financial
experience are given in their biographies
under ‘board of directors’ on pages 82
and 83. All committee members are
independent non-executives.
There is regular attendance by plc audit
and risk committee members at the
group’s regulated subsidiary audit and/or
risk committees. The committee also
receive regular updates from the audit
and risk committees of the group’s
regulated subsidiaries. This further
demonstrates 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 chairman, 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 audit and risk committee is required
to meet at least quarterly, with meetings
scheduled at appropriate intervals in
the reporting and audit cycle. Additional
meetings are held as required. In 2018
there were a total of 7 meetings in the
year compared to 6 meetings in 2017,
with an additional meeting required for
approval of Solvency II returns.
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The internal and external auditors attend
committee meetings and regularly meet
in private with the committee. In addition
the chairman 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 2018.
Responsibilities of the committee
The committee’s main audit-related
responsibilities are broadly unchanged
from the prior year and are detailed in
the section below.
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.
Angela Crawford-IngleNon-executive director
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Statement of corporate governance continued
Audit and risk committee continued
Specific committee responsibilities are
set out below:
Audit and financial reporting
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
• advise the board on whether, taken
as a whole, the annual report is fair,
balanced and understandable and
provides the information necessary for
shareholders to assess the company’s
performance, business model and
strategy.
b) Internal audit
• recommend the appointment or
termination of appointment of the
head of internal audit;
• monitor and review the effectiveness
of the company’s internal audit
function;
• receive a report on the results of
the internal auditor’s work, review
internal audit reports and make
recommendations to the board on
a periodic basis; and
• review and approve the internal audit
plan, charter and ensure the function
has the necessary resources and
access to information.
c) External audit
• recommend to the board, to be put
to the shareholders for approval,
the appointment, reappointment
and removal of the external auditors;
• oversee the relationship with the
external auditor including planning,
reviewing of findings and assessing
overall effectiveness;
• approve auditor’s remuneration
for audit, assurance and non-audit
services.
• 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
• review the findings of the audit with
the external auditor.
Full details of the terms of reference
of the committee are available at
www.beazley.com
Principal activities
The principal activities undertaken by the
committee in discharging its responsibilities
in 2018 are described below:
d) 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
• monitor performance, determine
independence and approve fees.
Risk management and compliance
a) 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 the remit of the risk
management function and ensure
it has adequate resources and
appropriate access to information
to enable it to perform its function
effectively.
b) Compliance
• review the arrangements by which
employees of the company may, in
confidence, raise concerns about
possible improprieties in matters
of financial reporting or other areas;
• review procedures and systems
relating to fraud detection, prevention
of bribery and money laundering; and
• review the regular reports from the
compliance officer and keep under
review the adequacy and effectiveness
of the group’s compliance function.
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. In both 2017 and
2018, 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.
The audit and risk committee receives
regular reports from both the internal
group actuary and the external audit
team, as the output of independent
projections are reviewed at key reporting
quarters. In the latter part of the year, the
group actuary has reported both informally
and formally on the results of the third
quarter reserving process, which the
committee considers to be a key control
as this process provides a level of
informed independent challenge for the
reserve position. To support the year
end view, the committee has received
a detailed paper in support of the level
of margin held within technical reserves
in the group’s statement of financial
position. Management confirmed that
they remain satisfied that the outstanding
claims reserves included in the financial
statements provide an appropriate
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Annual report 2018 Beazley 93
margin over 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.
As with the prior years, the committee
also considers the report of the external
auditor following its re-projection of
reserves using its own methodologies.
On the basis of the work the auditor
undertook, it reported no material
misstatements in respect of the level
of reserves held by the group at the
balance sheet date.
On the basis of the information provided
by the group actuary throughout the
year and at the year end, the consistent
application of Beazley’s reserving
philosophy, and the review work carried
out by our external auditor, the committee
was satisfied that the reserves held on
the group statement of financial position
at 31 December 2018 are reasonable.
ii) Financial close process
The audit and risk committee continues
to focus on the group’s close and
estimation processes generally, and
the related controls carried out by the
business and specifically the finance
team. The close process is particularly
important in the current environment
where insurers are being required to
adhere to increasingly tight regulatory
reporting timelines and the audit and
risk committee remains committed to
ensuring that the robust nature of our
control environment is not compromised
during this period of change.
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.
On the basis of the reporting received
and reviewed during the last 12 months,
the audit and risk committee remains
satisfied that the estimation and control
processes deployed by the group 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 that
there is a proposed delay in the
implementation to 1 January 2022.
As such the committee will continue to
monitor the progress for implementing
IFRS 17 during 2019.
iii) Valuation of financial assets at
fair value
As the group’s business model is to
predominantly issue insurance contracts,
the group have taken the option to defer
the effective date of IFRS 9 until January
2021, as per the amendment to IFRS 4.
As such the group continues to report 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 2018 that
the investment portfolio is in line with
the board approved risk appetite, that
carrying values of the portfolio as at
31 December 2018 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.
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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
2018.
iv) Recoverability of insurance receivables
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
are appropriate and do not require
adjustment.
v) Recoverability of reinsurance assets
The committee received confirmation
from management that the majority of
Beazley’s reinsurance receivables are
due from highly rated institutions. Based
on previous experience, the committee
has not noted any instances where poor
quality reinsurers have led to a material
financial loss and is comfortable with the
monitoring processes management have
described and put in place to ensure this
continues.
Considering management updates
and supported by the external auditor’s
report on the output of their work over
assessing the recoverability of the group’s
reinsurance assets, the committee was
satisfied that the judgements applied
by management in making provision
for bad debts are appropriate.
vi) Dividends, going concern and viability
During key reporting periods, management
outlined to the committee in detail their
support for the basis of preparation
adopted in the financial statements and
any statements around the future viability
of the group. In addition, the committee
considers the appropriateness of
management’s dividend strategy of
growing the ordinary dividend each year
and the appropriateness of applying this
strategy in the current year.
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Statement of corporate governance continued
Audit and risk committee continued
The committee reviews detailed
projections of future cash flows, profit
forecasts and capital requirements under
various scenarios, including scenarios
stressed in terms of claims frequency
and liquidity. In the current year, we
considered in particular the impact of the
natural catastrophe activity during the
second half of 2018, which compounded
the impact of the catastrophes seen
in 2017. We also consider the
appropriateness of management’s
viability statement and the period over
which this analysis is performed. The
committee was satisfied by the level
of analysis presented during the year,
and the related approach taken and
statements made in the group’s key
external reporting.
vii) Tax
The committee continues to monitor
the evolving tax environment and in
particular considered management’s
approach to Diverted Profits Tax in the
UK. The committee is of the view that
the approach taken by management,
as outlined in note 9 to the financial
statements, is reasonable.
viii) Intangible asset valuation
The audit and risk committee received
an overview of management’s valuation
of intangibles. The committee was
satisfied that management’s approach in
respect of the carrying value of all of the
group’s intangible assets, is reasonable.
b) Other updates
During 2018, 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 implementation
of General Data Protection Regulation
in particular;
• compliance, financial crime and
assurance reporting including risk
incident information;
• the group’s external audit tender
(discussed further below);
• quarterly reserving and actuarial data;
• the consideration of strategic,
emerging and heightened risks
identified by management and the
group’s risk management team, along
side the processes and controls
in place to mitigate these risks; and
• the impact of Brexit was discussed and
monitored during the year. Potential
outcomes were considered and
actions taken to mitigate the impact
where possible. The impact on the
estimates and judgements contained
within this report were considered and
deemed immaterial.
Committee meetings are scheduled to
ensure that they support the financial and
regulatory reporting timetables and the
internal audit and risk cycle.
Function updates
The Beazley plc board has delegated
a number of oversight responsibilities
to the audit and risk committee in relation
to the risk management framework,
compliance, internal audit and external
audit.
The work undertaken and key matters
considered during the year in these areas
are set out below:
Audit and financial reporting
a) Internal audit
The group’s internal audit function
reports directly, and is accountable to
the committee, and the head of internal
audit has direct access to the committee
chairman. The committee has reviewed
the effectiveness of the function and
remains satisfied that the internal audit
function had sufficient resources during
the year to undertake its duties.
During 2018, the committee:
• considered the results of all internal
audit reports, and the findings and
themes emerging from them;
• monitored the implementation
of the 2018 internal audit plan;
• reviewed and approved the basis for
internal audit planning. This included
reviewing and approving the group’s
risk-based audit universe and the
internal audit plan, and reviewing other
business developments which could
also potentially be the subject of
internal audit work in the coming year.
This included challenging the
frequency of audits in certain areas
of the business, and challenging the
balance between thematic reviews
and full end-to-end audits;
• reviewed and approved the internal
audit charter;
• reviewed and approved the internal
audit budget for 2019;
• received information relating to the
internal audit functions quality
assurance activities;
• reviewed how the internal audit,
risk management and compliance
functions contributed information
and assurance relating to the group’s
control effectiveness;
• received and reviewed an overall
summary assessment of 2018 internal
audit activity;
• monitored the timely implementation
of agreed management actions and
reviewing the status of the same;
• following the resignation of the head of
internal audit who left in August 2018,
representatives from the committee
interviewed candidates to fill the
vacancy. An appointment was agreed
subject to regulatory approval required
by Beazley’s UK and Irish regulators;
and
• requested and reviewed a report
regarding the group’s control
environment as a whole.
During the course of 2018 a number
of internal audit recommendations were
made to management in relation to
its systems of control which have been
subsequently implemented. Overall
the internal audit function was able to
report that for those areas it reviewed,
the design and operation of our risk
management framework, controls and
processes have supported the group
in operating within its risk appetite.
b) External audit
i) Audit tender
As disclosed in the group’s annual report
for the year ended 31 December 2016,
the board committed to changing group
auditor no later than for the 2019
financial year.
During 2017 the audit committee reviewed
management’s tender strategy and
in 2018 a comprehensive audit tender
was conducted by a selection panel,
acting with delegated responsibility
and authority of the audit committee.
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Annual report 2018 Beazley 95
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This selection panel included a director of
each of the Public Interest Entities (‘PIEs’)
and regulated entities in the group alongside
the group actuary and chief risk officer.
audit process. Audit quality is assessed
throughout the year, with a focus on
strong audit governance and the quality
of the team.
The tender process can be summarised
as follows:
• six firms were invited to participate
in the tender; this was split evenly
between the three ‘Big 4’ firms not
currently providing audit services to
the group and three mid-tier insurance
audit firms;
The effectiveness of the audit is
assessed through discussion throughout
the year, taking into account
considerations such as:
• reviewing the quality and scope of the
audit planning and its responsiveness
to changes in the business;
• monitoring of the auditor’s
• three firms confirmed their interest
and independence and moved into
the first round which included both
a written application outlining the
strength and depth of the firm and
a technical case study;
• the selection panel identified two firms
to move into the second round which
required a written response to a
request for proposal (RFP), two case
studies, partner interviews and a
presentation to the selection panel;
• each firm was assessed by the
selection panel based on the following
transparent and non-discriminatory
decision-making criteria: overall audit
quality and service proposition;
coordination and communication;
additional value; and capability and
competence of the lead partner,
team and the firm; and
• the audit committee received a
recommendation from the selection
panel and arrived at a
recommendation for the board.
The recommendation, which has been
accepted by the board, is that EY be
proposed for appointment at this year’s
annual general meeting as Beazley’s
external auditor for financial periods
commencing on or after 1 January 2019.
A period of knowledge transfer will occur
during the first half of 2019.
Throughout the tender the committee
were pleased to receive reassurance that
the current audit framework within
Beazley is aligned with market
expectations.
ii) Assessing the effectiveness of the
external auditor
The committee places great emphasis
on ensuring there are high standards of
quality and effectiveness in the external
independence;
• considering the level of challenge
evidenced in discussions and
reporting; and
• discussing the output of the FRC’s
Audit Quality Review (‘AQR’) with our
auditor.
These considerations are taken in to
account by the committee when
determining whether to reappoint the
external auditor. Due to the appointment
of EY as the group’s external auditor for
financial periods on or after 1 January
2019, KPMG is deemed to not be
reappointed by the committee.
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 2018, our non-audit
services policy was updated, enhanced
and reviewed by the committee.
The objective is to ensure that the
provision of such services does not
impair the external auditor’s objectivity.
The policy specifically disallows certain
activities from being provided by the
auditor, such as bookkeeping and
accounting services, internal actuarial
services and executive remuneration
services. The policy requires consideration
and pre-approval for all other material
services such as due diligence
assistance, tax services and advice
on accounting and audit matters.
The committee reviews the terms of such
proposed services to ensure they have
been robustly justified.
The committee receives a report from
the external auditors three times a year
setting out all non-audit services
undertaken, so that it can monitor the
types of services being provided, and
the fees incurred for that work. The aim
is to limit the total spend on non-audit
services to a maximum of the annual
audit fee, unless it is deemed that not
doing so is in shareholders’ interest from
an efficiency and effectiveness point
of view.
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 and audit
related services for 2018 were $1.6m
(2017: $1.6m). 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.
KPMG is a panel member eligible to
provide services under our cyber breach
response service to policy holders. The
committee receives regular updates to
monitor the level of activity and to ensure
conflicts of interest do not occur.
None of the non-audit services provided
are considered by the audit and risk
committee to affect the auditor’s
independence or objectivity.
Fair, balanced and understandable
assessment
It is a key compliance requirement of
the group’s financial statements to
be fair, balanced and understandable.
The annual report is prepared following
a well-documented process and is
performed in parallel with the formal
process undertaken by the external
auditor. The committee has reviewed
a report presenting the approach taken
during the preparation of the annual
report. Following its review, the
committee is satisfied that the annual
report is fair, balanced and
understandable, and provides the
information necessary for shareholders
and other stakeholders to assess the
company’s position and performance,
business model and strategy, and has
advised the board accordingly.
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Statement of corporate governance continued
Audit and risk committee continued
Risk management and compliance
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 2018
and can confirm that Beazley plc has
been operating within risk appetite as
at 31 December 2018. The committee
has also reviewed the proposed 2019
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 2018, 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;
• emerging risk: The committee
supported the identification of
strategic and emerging risks which
were discussed at the board
meeting in May 2018 and have been
subsequently monitored and reported
in the quarterly Own Risk and Solvency
Assessment (ORSA);
• oversight of the control environment:
The committee has received a
quarterly consolidated assurance
report which provides commentary on
the status of the control environment
with perspective from the business,
risk management, compliance and
internal audit. It also includes
entries from the risk incident log;
• reverse stress testing: The committee
has received the results of the reverse
stress testing exercise, which explores
what would have to happen for the
group to be unviable and has been
able to provide assurance to the board
that this work has been performed
with the appropriate level of depth
and expertise; and
• oversight of the internal model: The
committee and the risk committees
of the subsidiary boards have reviewed
regular reports associated with the
internal model. These have included
a standing report on internal model
output, and a validation
report featuring both internal and
independent validation and themed
reviews, for example, on the approach
used to aggregate risk in individual
entities which consolidate up to
the group level. These assessments
have supported the boards’ use of
the internal model; and
• quarterly ORSA: The committee has
received a quarterly ORSA report and
has reviewed it as part of the quality
assurance process before commending
it to the board.
b) Compliance
The group head of compliance has
direct access to the committee members
and attends all committee meetings.
To assist the board the committee
receives reports and updates from the
compliance function on various issues
including, but not limited to, regulatory
developments, routine and non-routine
interactions with the group’s regulators,
any significant instances of non-
compliance with regulatory or internal
compliance requirements.
During 2018, the committee:
• monitored the implementation
of the 2018 compliance plan;
• reviewed and approved the 2019
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 anti-bribery and
corruption and anti-fraud;
• received updates on the structure
and effectiveness of the company’s
compliance function; and
• received updates on the framework,
training and policy put in place
regarding whistleblowing.
In reviewing the effectiveness of the
function the audit and risk committee
remained satisfied that the compliance
function had sufficient resources during
the year to undertake its duties.
In addition, the risk committees and/
or boards of the group’s regulated
subsidiaries receive more locally-focused
compliance reports which are specific
to those entities.
Committee effectiveness
The committee considers its
effectiveness regularly. An assessment
was externally facilitated in 2018.
Whilst the review concluded that the
committee was operating effectively,
a recommendation is being considered
regarding the establishment of a separate
risk committee.
Competition and Markets Authority Order
2014 statement of compliance
The committee confirms that during 2018
the group complied with the mandatory
audit processes and audit committee
responsibilities provisions of the
Competition and Markets Authority
Statutory Audit Services Order 2014
as presented in this report.
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Annual report 2018 Beazley 97
Statement of corporate governance continued
Remuneration committee
Membership and attendance
Sir Andrew Likierman
George Blunden
John Sauerland
Catherine Woods
Appointment
25 March 2015
1 January 2011
11 May 2016
1 October 2018
Attendance at scheduled
meetings during 2018
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• ensured incentives continued to be
appropriate and to align company
and shareholders;
• reviewed methodology of reporting
of bonus disclosures with the objective
of improving transparency;
• approved the grant of share awards
under the group’s deferred, retention
and LTIP plans;
• considered the salary and bonus
awards for 2018 for executive
directors, heads of control functions,
material risk takers and other officers;
• approved the gender pay gap report;
• approved the chairman’s fees;
• reviewed the executive director
employment contracts; and
• considered the effects of the 2018
UK Corporate Governance Code
requirements on the committee’s
responsibilities.
Further information on the work of the
remuneration committee is set out in
the directors’ remuneration report.
Currently the membership of
the remuneration committee
comprises Sir Andrew
Likierman (chairman), George
Blunden, John Sauerland
and Catherine Woods.
Responsibilities of the committee
The committee’s main responsibilities
are to, inter alia:
• set the remuneration policy for the
group for approval at the annual
general meeting. The objective of such
policy shall be to ensure that members
of the executive management of the
company are provided with appropriate
incentives to encourage enhanced
performance and are, in a fair and
responsible manner, rewarded for their
individual contributions to the success
of the company;
• recommend and where appropriate
approve targets for performance
related pay schemes and seek
shareholder approval for any long term
incentive arrangements;
• recommend and approve the
remuneration of the chairman of the
company;
• recommend the remuneration of the
chief executive, the other executive
directors, the direct reports to the
chief executive, the company secretary
and such other members of the
executive management as it is
designated to consider. No director
or manager shall be involved in any
decisions as to his or her own
remuneration;
• obtain reliable, up-to-date information
about remuneration in other
companies; and
• appoint and review the performance of
remuneration committee consultants,
currently Deloitte LLP.
Key activities in 2018
During 2018 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 which confirmed that the design
of remuneration promotes appropriate
risk behaviour throughout the
organisation. In addition, the analysis
considered the performance of the
control environment, profit related pay
targets, calculation of the bonus pool,
share awards, a suite of risk metrics
for each Solvency II member of staff
and any individual who has created
a higher than expected level of risk;
Sir Andrew LikiermanNon-executive director
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Beazley Annual report 2018
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Statement of corporate governance continued
Nomination committee
Membership and attendance
Appointment
Resigned
Attendance at scheduled
meetings during 2018
Dennis Holt
David Roberts
George Blunden
Sir Andrew Likierman
Catherine Woods
21 July 2011
22 March 2018
1 January 2010
25 March 2015
1 October 2018
22 March 2018
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The nomination committee
is chaired by David Roberts,
who took over from Dennis Holt
in March 2018, and currently
also comprises George
Blunden, Sir Andrew Likierman
and Catherine Woods.
The nomination committee meets at
least twice annually and at such other
times during the year as are necessary
to discharge its duties. In 2018 there
were six 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
September 2018 and reflect the new
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.
Responsibilities of the committee
The committee’s main responsibilities
are to, inter alia:
• regularly review the structure, size
and composition (including the skills,
knowledge, experience and diversity)
required by the board compared to
its current and projected position;
• give full consideration to succession
planning for executive and non-
executive directors and in particular
for the key roles of chairman and
chief executive, senior executives
and any other member of the senior
management that it is relevant to
consider whilst considering a diverse
pipeline of talent;
• ensure the directors have the required
skills and competencies;
• 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 chairman
as well as membership of board
committees; and
• recommend, if appropriate, all
directors for re-election by
shareholders under the annual
re-election provisions of the UK
Corporate Governance Code.
Policy on gender, diversity and inclusion
We believe having a diverse and inclusive
workplace will support our vision for
growth and outperforming the market.
We continually review our approach to
diversity and our aim is to have nurtured
diverse employees across the business
who are given the tools and opportunities
to progress their career within Beazley.
We believe employing individuals with
wider perspectives and from a broader
skill base will lead to a more dynamic,
innovative, responsive organisation in
touch with changes and developments
in our business environment.
We have a defined policy and strategy
that will enable us to:
• nurture diverse individuals across all
areas of the business and encourage
them to grow into senior positions
within our organisation;
• develop plans on how to best support
diversity in a way that is both locally
relevant and globally impactful;
• support, mentor and encourage
individuals from diverse backgrounds
to grow and develop within Beazley;
• have leadership and sponsorship of
our vision at the most senior level
of our organisation;
• regularly review our employment
policies and practices. We expect
our people to work with us to further
enhance our diversity objectives; and
• ensure all employees receive equality
of opportunity in recruitment, training,
development, promotion and
remuneration.
David RobertsChairman www.beazley.com
Annual report 2018 Beazley 99
• 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;
• consider the wider executive
management succession; and
• consider and approve proposals for
individuals to be included in the new
Senior Managers and Certification
Regime.
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The committee has agreed the
establishment of goals for gender
diversity for both the board and the
broader organisation. The board achieved
its goals for gender diversity for the
Beazley plc board of two female members
by AGM 2016, and a third female member
by AGM 2017. Female representation on
the board went from zero to three in five
years. The committee reviewed progress
against the group’s 2020 goals for there
being a minimum of 35% female senior
managers within the organisation by
2020 and 33% female board members
at group level by 2021.
The 2018 board effectiveness review
was overseen by the committee and
was externally facilitated in October/
November 2018 by Boardroom Review
Limited. As part of the review, Boardroom
Review Limited interviewed directors
in one to one meetings; observed board
and committee meetings; and reviewed
meeting packs together with corporate
information. Boardroom Review Limited
provided feedback to each director and
to the chair of each committee. The
review resulted in a robust board
discussion on the areas in which action
should be taken to strengthen the
board’s overall effectiveness. The key
areas of focus will be:
• reviewing the governance structure
and information flows between our
regulated subsidiary boards in light
of the changing business and political
landscape;
• considering whether a risk committee
should be established, separating out
the risk and audit agendas and
continued development of the role
of internal audit; and
• continuing monitoring of corporate
culture, and board engagement with
executive development, diversity and
talent.
The committee will oversee the
implementation of the resulting action
plan and will report on the progress made
in implementing the recommendations
made in the 2019 annual report.
Boardroom Review Limited has no other
connection with the company.
In addition to the formal board evaluation,
the board chairman met with each
individual director during the year to
discuss their contribution to the board.
The senior independent director met with
the chairman to discuss his performance.
Key activities in 2018
Tasks which the committee carried
out in 2018 were to:
• The committee commenced the
search for a successor of Angela
Crawford-Ingle (chair of the audit and
risk committee) in accordance with the
group’s policy on director independence
and rotation. Angela will be stepping
down from the board during 2019
following the conclusion of 2018
accounting year and a full handover
to her successor. The committee
has been assisted by JCA Group,
recruitment consultants, for this
search;
• commence the search process for
a new group finance director with
a view to appointing in Q1 2019. The
appointment of Sally Lake as finance
director following the conclusion of
2018 accounting year was announced
in January 2019. For the recruitment
process the committee was assisted
by Russell Reynolds Associates,
recruitment consultants;
• commence the search for a
non-executive director with expertise
in technology, operations and data.
It is anticipated an appointment will
be made in 2019. For the recruitment
process the committee has been
assisted by Audeliss Executive Search;
• review the performance of
management by inviting all
non- executive directors to attend
a nomination committee meeting
to review the performance of the
executive management team;
100 Beazley Annual report 2018
www.beazley.com
Letter from the
chairman of our
remuneration committee
Dear shareholder
The basis of the remuneration policy remains to attract and keep those who are among the best in the world in specialist insurance,
rewarding sustained performance and keeping the company competitive.
Business performance and incentive out-turns
The commercial background to this year’s remuneration report is, as you will have seen from the results, strong premium growth
but profitability affected by increased claims and a decline in investment returns. The decline in the average director’s bonus from
38% to 18% of the maximum reflects these results.
Directors will receive the second tranche (instalment) of the 2014 LTIP and the first tranche of the LTIP for 2016. The tranches are
due to vest (pay out) at 63.4% and 17.8% of the maximum respectively. These percentages reflect sustained growth in net asset
value per annum of 14.2% and 10.6% respectively for the five and three year performance periods.
Executive salaries for 2019
The average executive director salary increase for 2019, excluding the effects of the promotion to chief underwriting officer (see
below), was 3.0%, less than the average salary increase for the rest of the organisation.
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%.
As announced after the year end, Sally Lake has been promoted from group actuary to be the new group finance director,
effective from May 2019. Sally’s compensation will be in line with our remuneration policy and will be announced when she takes
up her appointment.
There have been no special remuneration arrangements for the retirements of Neil Maidment and Martin Bride.
Corporate Governance Developments
Following the publication of the new UK Corporate Governance Code, the committee is reviewing the remuneration policy to ensure that
Beazley is aligned with best practice.
A number of changes have already been made and taking into account the new Code, the 2019 LTIP awards will be awarded with
a post-vesting holding period. The first tranche of the LTIP, which vests after three years, will now have an additional two-year
holding period. Executive directors will therefore be required to wait until five years from grant to receive any shares under the LTIP.
In addition, the recovery provisions have been strengthened and an additional clause has been introduced to the LTIP to enable
the committee to apply independent judgement and discretion to out-turns taking into account wider company and individual
performance. The committee is also mindful of evolving market practice in relation to post-employment shareholding guidelines.
Currently on cessation, in the case of a “good leaver”, all outstanding share awards subsist to their normal release/vesting dates
providing considerable alignment with shareholders post-employment.
The committee will be considering other matters, including the remuneration reporting requirements and the approach to
post-employment shareholding guidelines. There will be an opportunity to vote on a revised remuneration policy at the 2020
Annual General Meeting.
Gender pay
During the year Beazley published its second gender pay gap report. While we were pleased to see a minor improvement, we are
determined to do more. Details of the work in progress are set out in the 2018 UK gender pay report.
Shareholders
In light of our shareholders’ feedback this year we have provided more detail of the corporate performance and individual contributions
that resulted in the annual bonus outturns. This, as well as a graph that compares financial out-turns, is on page 107.
The committee continues to welcome the views of our shareholders. We were pleased to see another strong vote of 96% on last year’s
directors’ remuneration report and look forward to receiving our shareholders’ support for this year’s report.
Sir Andrew Likierman
Remuneration committee chairman
www.beazley.com
Annual report 2018 Beazley 101
Directors’ remuneration report
Remuneration in brief
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
balanced against risk considerations;
• the structure of packages should support meritocracy, an important part of Beazley’s culture;
• reward potentials should be market-competitive; and
• executives’ pay should include an element of downside risk.
Remuneration policy
Our policy, which remains unchanged for 2019, has two guiding principles: alignment to shareholders’ interests and performance
of the group. The key features and basis of alignment are:
• Key performance indicators used in incentives. Two important factors in the determination of the annual bonus pool are profit
before tax and return on equity, both of which are key performance indicators for the company. In addition the long term
incentive plan (LTIP) uses another key performance indicator, net asset value per share (NAVps) growth, since it is aligned to
shareholders’ interest. For the maximum awards to vest, NAVps growth of 15% above the risk-free return has to be sustained
for five years;
• Five year performance. For a number of years we have operated an LTIP where performance is measured over five years as well
as three. This aligns reward with the long term performance of the business including malus and clawback provisions taking
reclaim provisions to seven years. In addition, for executive directors, a further two year holding period on the three year award
applies from 2019 and ensures alignment with longer term decision-taking. Further strengthening alignment with longer term
decision making is the company’s policy to defer a portion of annual bonuses into shares and our shareholding guidelines; and
• Risk. The features which align remuneration with risk include a long time horizon, deferral of bonus into shares and personal
shareholding requirements. The committee receives an annual report from the chief risk officer on remuneration policy to
ensure it is consistent with, and promotes, effective risk management.
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A full copy of the remuneration policy can be found on our website at www.beazley.com.
102 Beazley Annual report 2018
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Directors’ remuneration report continued
Remuneration in brief continued
Performance in 2018
Beazley had strong premium growth in a challenging year with an exceptional series of natural catastrophes and the incentive
outcomes reflect this.
Profit before tax ($m)
350
300
250
200
150
100
50
0
293
168
2016
2017
76
2018
Net assets and cumulative dividend per share (p)
350
300
250
200
150
100
50
0
326.6
56.3
50.6
219.6
310.9
56.3
39.3
215.3
300.8
46.3
28.6
225.9
Return on equity (%)
24
20
16
12
8
4
0
18
9
2016
2017
Share price (p)
5
2018
600
500
400
300
200
100
0
230.3
273.1
149.3
354.1
2016
■ Special dividend
■ Interim and second interim dividend
■ Net asset per share
2017
2018
2014 award
2016 award
■ Share price at grant
■ Share price appreciation
The group’s performance over the longer term was strong in terms of NAVps growth and total shareholder return, as illustrated
in the charts below.
LTIP performance 2015-2018 NAV and TSR growth
100%
LTIP performance 2013-2018 NAV and TSR growth
250%
75%
50%
25%
0%
-25%
31 Dec
2015
31 Dec
2016
31 Dec
2017
31 Dec
2018
■ NAV target range (RFR +7.5% p.a. to RFR +15% p.a.)
■ TSR growth (1 month average)
■ NAV growth (including dividends)
200%
150%
100%
50%
0%
31 Dec
2013
31 Dec
2014
31 Dec
2015
31 Dec
2016
31 Dec
2017
31 Dec
2018
■ NAV target range (RFR +7.5% p.a. to RFR +15% p.a.)
■ TSR growth (1 month average)
■ NAV growth (including dividends)
www.beazley.com
Annual report 2018 Beazley 103
Directors’ remuneration report continued
Outcomes for 2018 and implementation for 2019
Element
Base salary
Overview of policy
Salaries are set at a level to appropriately
recognise responsibilities and to be broadly
market competitive.
Any salary increases will generally reflect
our standard approach to all-employee salary
increases across the group.
Implementation and
outcomes during 2018
Salaries for 2018 were as follows:
• D A Horton:
• M L Bride:
• A P Cox:
• N P Maidment:
£468,500
£330,000
£351,000
£351,000
Benefits
To provide market levels of benefits.
Pension
Annual
bonus
To provide market levels of pension provision
through contributions to a defined contribution
pension plan.
Discretionary annual bonus determined by
reference to both financial and individual
performance.
Benefits include private medical
insurance, travel insurance,
and company car or monthly
car allowance.
Existing executive directors receive
a pension contribution or cash
payment in lieu of pension of 15%
of base salary.
Maximum bonus opportunity
for executive directors was 400%
of salary.
A portion is generally deferred into shares for
three years (between 0% and 37.5% of bonus)
dependent on level of bonus.
ROE in the year was 5%.
Profit for the year was $76.4m.
Implementation for 2019
D A Horton and M L Bride each
received a salary increase of c.3%,
below the average for the wider
employee workforce.
The role of the chief underwriting
officer has been restructured to
include additional responsibilities.
The role already included responsibility
for treaty and political, accident and
contingency and will now include
oversight of property, marine and
specialty lines. To recognise the
increased responsibility and scope of
the role, A P Cox’s salary was increased
by c.8.3%.
Salaries for 2019 will be as follows:
£482,500
• D A Horton:
£340,000
• M L Bride:
• A P Cox:
£380,000
In line with policy.
In line with policy.
In line with policy.
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Long term
incentive plan
(LTIP)
Vesting of LTIP awards is dependent on net
asset value per share (NAVps) performance
against the risk-free rate of return.
50% of awards are subject to performance
over three years and 50% over five years.
NAVps performance
% of award vesting
< average risk-free rate +7.5% p.a.
= average risk-free rate +7.5% p.a.
= average risk-free rate +10% p.a.
= average risk-free rate +15% p.a.
Straight-line vesting between points
0%
10%
25%
100%
Shareholding
guidelines
Executive directors are expected to build up
and maintain a shareholding of 150% of salary
(200% for the CEO).
LTIP awards may be forfeited if shareholding
requirements are not met.
Bonus outcomes range from
15% to 21% of maximum.
The first tranche of the 2016 LTIP
award vested at 17.8% of maximum
following three year NAVps
performance of 10.6% p.a.
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 2018, the following grants as
a percentage of base salary were
made, subject to the usual NAVps
performance condition:
• D A Horton:
• M L Bride:
• A P Cox:
• N P Maidment:
All executive directors met their
shareholder guidelines.
200%
150%
150%
150%
In 2019, the following grants as
a percentage of base salary will be
made, subject to the usual NAVps
performance condition:
• D A Horton:
• A P Cox:
200%
150%
In accordance with the updated UK
Corporate Governance Code the first
tranche of the 2019 LTIP award will be
subject to a further two year holding
period taking the total time frame for
the entire award to five years.
In line with policy.
104 Beazley Annual report 2018
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Directors’ remuneration report continued
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 2018 (and how these relate to our
performance in the year) and details of the operation of our policy for 2019.
Single total figure of remuneration ▪
The tables below set out the single figure of total remuneration for executive directors and non-executive directors for the financial
years ending 31 December 2018 and 31 December 2017.
Executive directors
£
Martin L Bride
Adrian P Cox
D Andrew Horton
Neil P Maidment3
Fixed pay
Pay for performance
2018
2017
2018
2017
2018
2017
2018
2017
Salary
330,000
320,000
351,000
342,500
468,500
457,000
351,000
342,500
Benefits
11,949
11,548
10,602
12,226
16,762
17,399
15,949
16,383
Pension
43,497
42,179
46,265
45,145
61,753
60,237
46,265
45,145
Total
Long term
annual
Total
incentives
bonus1
remuneration 2
(LTI)
931,645
200,000
346,199
997,144 1,770,871
400,000
372,594 1,080,461
300,000
600,000 1,066,415 2,066,286
662,055 1,559,070
350,000
700,000 1,905,509 3,140,145
372,594 1,035,808
250,000
1,072,326 1,976,354
500,000
1 A portion of the bonus awards shown in the table above is deferred into shares for three years. Details of the deferral in respect of 2018 awards can be found
on page 109.
2 A significant portion of the single figure values shown arises from the substantial share price appreciation over the period. For 2018 the share price at the time
LTI awards were made was, 273.13p for the 2014 award and 354.10p for the 2016 award, while the average share price in the last three months of 2018 was
533.00p. This represents share price growth of 95% and 51% over the five and three year periods respectively.
3 Neil Maidment stepped down from the board on 31 December 2018.
The figures in the preceding table reflect the following:
• salaries for 2018 increased by an average of 2.6%, 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 2014 LTI award vested at 63.4% of maximum and that the first tranche of the
2016 LTI award vested at 17.8% of maximum. Beazley achieved sustained NAV growth of 10.6% per annum and 14.2% 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.
www.beazley.com
Annual report 2018 Beazley 105
Non-executive directors
George P Blunden2
Angela D Crawford-Ingle
Dennis Holt3
Christine LaSala 4
Sir J Andrew Likierman
David L Roberts5
John P Sauerland6
Robert A Stuchbery
Catherine M Woods7
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
Total fees £1
87,750
85,500
95,000
92,500
47,695
204,000
67,192
58,000
76,000
74,000
211,462
13,072
67,192
58,000
86,250
84,000
76,788
73,696
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1 Other than for the chairman, fees include fees paid for chairmanship of the audit and risk and remuneration committees, and for the role of senior independent
director, as well as fees, where relevant, for membership of the subsidiary boards of Beazley Furlonge Limited (BFL) and Beazley Insurance dac, the chairmanship
of the BFL risk committee and BICI.
2 George Blunden will be stepping down from the plc board and as SID effective 21 March 2019.
3 Dennis Holt stepped down as chairman on 22 March 2018 and the figure in the table above represents his fees until this date.
4 Christine LaSala was appointed to the BICI board on 1 January 2018 and received fees of $10,000 from this date which are represented in the table above. The
fees for this role have been converted at an exchange rate of 1.30. Christine will also be joining the remuneration committee and nomination committee as well as
becoming the senior independent director (SID) effective 21 March 2019. She will receive additional fees for the SID role from this date of £8,546 (pro-rated).
5 David Roberts was appointed as chairman of Beazley plc and Beazley Furlonge Limited on 22 March 2018 and the figure in the table above represents his increase
in fees from this date.
6 John Sauerland was appointed to the BICI board on 1 January 2018 and received fees of $10,000 from this date which are represented in the table above. The fees
for this role have been converted at an exchange rate of 1.30.
7 Catherine Woods joined the remuneration committee and nomination committee effective 1 October 2018. Her non-executive director fee was based on €87,000
(2017: €84,750) and has been converted into sterling for this table at the average exchange rate of 1.13 (2017: the fee was converted into £73,696 at the average
exchange rate of 1.15).
106 Beazley Annual report 2018
www.beazley.com
Directors’ remuneration report continued
Annual remuneration report continued
Salary ▪
The committee reviews salaries annually taking into consideration any changes in role and responsibilities, development of the
individual in the role, and levels in comparable positions in similar financial service companies. It also considers the performance
of the group and the individual as well as the average salary increase for employees across the whole group. Salary reviews take
place in December of each year, with new salaries effective from 1 January.
For 2019, the average salary increase for Martin Bride and Andrew Horton was 3%, below the average salary increase across the
group. Adrian Cox, transitioned from his role as head of specialty lines to chief underwriting officer. As part of this transition, the role
of the chief underwriting officer has been restructured to include additional responsibilities. The role already included responsibility
for Treaty and Political, Accident and Contingency and will now include oversight of Property, Marine and Specialty lines. To recognise
the increased responsibility and scope of the role, Adrian’s salary was increased by c.8.3%.
The base salaries for the executive directors in 2018 and 2019 are as set out below:
Martin L Bride
Adrian P Cox
D Andrew Horton
Neil P Maidment
2018
base salary
£
330,000
351,000
468,500
351,000
2019
base salary
£
340,000
380,000
482,500
n/a
Increase
%
3.0
8.3
3.0
n/a
Benefits ▪
Benefits include private medical insurance for the director and their immediate family, income protection insurance, death in service
benefit at four times annual salary, travel insurance, health-club membership, season ticket and the provision of either a company
car or a monthly car allowance.
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.
This ensures that outcomes are strongly aligned with shareholders’ interests.
A broad senior management team, beyond executive directors, participate in the bonus pool, reinforcing the company’s collegiate
culture.
Bonus calculation
Recommended awards to individuals from the available pool are determined by taking into account performance based on each
individual’s contribution to the group, including a review of performance against individual objectives. For heads of the business
divisions, divisional performance is also taken into account. The bonus is discretionary and, rather than adopting a prescriptive
formulaic framework, the committee considers wider factors in its deliberations at the end of the year: for example quality of profit
and risk considerations.
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).
The approach to the calculation of bonuses is aligned to shareholders’ interests and ensures that bonuses are affordable, while the
ROE targets increase the performance gearing. The committee reviews the bonus pool framework each year to ensure it remains
appropriate, taking into account the prevailing environment, interest rates and expected investment returns, headcount and any
other relevant factors.
www.beazley.com
Annual report 2018 Beazley 107
Annual bonus out-turn for 2018
The process for determining 2018 bonuses is described below, including full details of the ROE targets underpinning our bonus
approach along with the guideline levels which are used by the committee in its determination for each executive director.
Financial performance
At the beginning of the financial year, the risk-free return (RFR) was set at 2% 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:
2018 ROE hurdles and guideline bonus awards
100
m
u
m
i
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a
m
f
o
%
a
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a
75
50
25
0
d
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a
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a
s
u
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o
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v
i
t
a
r
t
s
u
l
l
i
e
n
i
l
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d
u
G
0%
5%
10%
15%
ROE performance
20%
25%
30%
ROE performance hurdles
ROE performance
Guideline/illustrative bonus award as a % of maximum
Threshold
2.0%
0%
5.0%
12.5%
12.0%
37.5%
19.5%
75%
Maximum
27.0%
100%
These percentages are indicative only and based on broad group results. Within the pool framework bonus out-turns may be higher
or lower taking into account divisional, strategic and personal performance.
ROE for 2018 was 5% and the overall enterprise bonus pool (in which executive directors as well as other senior employees
participate) was calculated based on this.
2018 ROE performance (%)
2017 ROE performance (%)
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5
0
■ 2018 performance range
■ 2018 ROE performance
10
15
20
25
30
5
0
■ 2017 performance range
■ 2017 ROE performance
10
15
20
25
30
The framework is used by the committee as a broad guideline rather than being formulaic and applies to a broader group of
executives than board directors. A key principle of the process is that the committee exercises its judgement in determining
individual awards taking into account the individual’s contribution and performance. In particular, there may be a diverse spread
of returns earned across the various divisions within the business which will be reflected in bonus out-turns achieved. The table
therefore provides full retrospective disclosure of all the group financial targets that determine the annual bonuses.
108 Beazley Annual report 2018
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Directors’ remuneration report continued
Annual remuneration report continued
Corporate achievements
Corporate achievements that the committee took into account for the year included the following:
Financial performance
• The delivery of a profit after tax of $68.2m and the return of $67.6m to shareholders by way of dividend despite paying
out substantial claims due to the natural catastrophes in the second half of the year and low investment income.
• Delivery of growth in our gross premiums written of 12% in a market where premium rates continued to be under pressure.
US performance
• Achieved the goal of underwriting a billion dollars of US business. Locally underwritten US premiums grew 20% during the year.
• Extending the reach of our market leading products in the US, such as cyber, healthcare liability, accident and health, and
environmental liability.
Investment performance
• Achieved a portfolio return of 0.8%.
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.
Individual contributions
While a number of the specific individual objectives of the executive directors are considered commercially sensitive, the following
provides details of executive director achievements which the committee took into account.
Executive
Martin L Bride
(group finance director)
Objectives
• Pursue expense improvements and containment
Achievements
• Strong momentum across the business on expense
of expense ratio
management focus
• Lead European strategic initiative
• Ensure Beazley is prepared for IFRS 17 and achieve
• Achieved premium growth of 3.1% in the European business
for 2018 and governance in place for future growth
one year deliverables
• Manage US legislative changes for reinsurance
• Plans in place for IFRS 17 and one year deliverables achieved
• RI structure and capital delivered in line with US legislative
structure and capital
changes
• Ensure focus on agreed elements of Women in
• Strong leadership and plans in place to help Beazley achieve
Finance Charter
• Define five year vision for Beazley operations with
executive committee colleagues and establish key
projects for delivery
Women in Finance Charter commitments – increase in
number of women in senior management from 32 to 37
• Target operating model principles agreed and plan in place.
Adrian P Cox
(head of specialty lines)
• Deliver specialty lines 2018 plan and continue
the development of international business
• Execute on year one of life sciences plan
• Promote and raise capital for syndicate 5623
• Deliver smooth processes within specialty lines and
support delivery of target operating model in Beazley.
• Co-lead the business plan with Neil Maidment ahead
of assuming CUO role at the end of 2018
D Andrew Horton
(chief executive officer)
• Grow the business outside the US
• Manage strategy refresh and determine actions
as a result
• Manage executive succession
• Continue to build culture with a focus on digital
and agile working
Neil P Maidment
(chief underwriting
officer)
• Deliver 2018 business plan GAAP and YoA
profitability targets and key business objectives
• Support development and launch of new products
• Ensure claims offering continues to be the best,
including people, processes and systems
• Support Lloyd’s PPL initiative to drive modernisation
across London market
• Create 2019 business plan
• Transition of CUO role to Adrian Cox
• Delivered specialty lines 2018 plan in all areas other than
opening loss ratios due to pressure on reserve surplus. Grew
international line of business and delivered excellent growth
in the US. Overall premiums up 12.9%
• Completed year one of life sciences plan
• Capital raising for Beazley smart tracker completed.
• Target operating model principles agreed
• Plan successfully created for 2019
• Good progress and momentum with business growing
outside of the US by 7%
• Led a very strong team effort with board support of the new
strategic initiatives, focusing on data and technology.
• Smooth transition of CUO role from Neil Maidment to Adrian
Cox, successful recruitment of Lou-Ann Layton to succeed
Dan Jones as head of broker relations. New group finance
director appointed effective from May 2019
• Internal audit of culture shows good progress has been made
• Plans in place for digital and agile culture
• Premiums are in line with plan however increased claims
have impacted the GAAP plan
• Several key products launched during 2018 including
reputational harm
• Strong leadership of claims team and support of initiatives
underway to improve operational aspects including improved
feedback for the claims team in annual broker survey
• Beazley is in top quartile for adoption rates of Lloyd’s PPL
initiative
• Strong business plan in place for 2019 with Lloyd’s approval
• Successful transition of CUO role during the year
www.beazley.com
Annual report 2018 Beazley 109
Bonus awards for 2018
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:
Martin L Bride
Adrian P Cox
D Andrew Horton
Neil P Maidment
Bonus (delivered as
a mix of cash and
deferred shares) % of maximum
15%
21%
19%
18%
£200,000
£300,000
£350,000
£250,000
% of salary
61%
85%
75%
71%
The following graph and table set out the out-turn for 2018 against performance and illustrate the way in which bonuses over time
reflect profit and ROE performance.
Average executive director bonus (% of salary)
400
350
300
250
200
150
100
50
0
2012
2013
2014
2015
2016
2017
2018
■ Profit before tax (PBT) $
Average executive director bonus as a % of salary
400%
350%
300%
250%
200%
150%
100%
50%
0%
G
o
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n
a
n
c
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Pre-tax profit
Post-tax ROE
Average executive director bonus
as a percentage of salary
2011
$63m
6%
2012
$251m
19%
2013
$313m
21%
2014
$262m
17%
2015
$284m
19%
2016
$293m
18%
2017
$168m
9%
2018
$76m
5%
c.64%
c.272%
c.333%
c.294%
c.291%
c.272%
c.150%
c.73%
Bonus deferral ▪
A portion of the bonus will generally be deferred into shares for three years. The deferral will range from 0% to 37.5% dependent
on the level of bonus. Deferred shares are generally subject to continued employment.
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 2018 (see investment in underwriting section on pages 110 for further
details).
For 2018, the portion of each director’s annual bonus deferred into shares was as follows:
Martin L Bride
Adrian P Cox
D Andrew Horton
Neil P Maidment
Deferred
into shares
£0
£45,000
£52,500
£0
110 Beazley Annual report 2018
www.beazley.com
Directors’ remuneration report continued
Annual remuneration report continued
Bonus awards for 2019
The annual bonus for 2019 will operate within the same framework as set out above with reference to both corporate and
individual performance.
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.
The key features of the plan are as follows:
• 50% of the award is measured after three years and 50% after five years;
• awards are in the form of nil-cost options with a 10-year term;
• participants are expected to build a shareholding in Beazley equal to their annual award level. For example the CEO has
a shareholding requirement of 200% of salary. Participants have three years to build this shareholding. LTIP awards may be
forfeited if shareholding requirements are not met; and
• three year awards to executive directors are subject to a further two year holding period from 2019.
In accordance with the updated UK Corporate Governance Code, from 2019, the first tranche of LTIP awards will be subject
to a further two year holding period taking the total time frame for all awards to five years.
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.
Growth in NAVps is calculated taking into account any payment of dividends by the company. In line with our reporting to
shareholders, NAVps is denominated in US dollars.
LTIP awards vesting in respect of the year ▪
The LTIP awards shown in the single total figure of remuneration for 2018 include:
• the second tranche of awards granted on 11 February 2014. These are due to vest on 11 February 2019, subject to the
achievement of a NAVps growth performance condition over the five years ended 31 December 2018; and
• the first tranche of awards granted on 9 February 2016. These are due to vest on 11 February 2019, subject to the achievement
of a NAVps growth performance condition over the three years ended 31 December 2018.
The results were independently calculated by Deloitte LLP.
The NAVps performance conditions for both these awards are as follows:
NAVps performance
NAVps growth < average risk-free rate +7.5% p.a.
NAVps growth = average risk-free rate +7.5% p.a.
NAVps growth = average risk-free rate +10% p.a.
NAVps growth = average risk-free rate +15% p.a.
Straight-line vesting between points
% of
award vesting
0%
10%
25%
100%
Actual NAVps growth achieved in the five years to 31 December 2018 was 14.2% p.a. which resulted in 63.4% of the second
tranche of the 2014 awards vesting.
Actual NAVps growth achieved in the three years to 31 December 2018 was 10.6% p.a. which resulted in 17.8% of the first tranche
of the 2016 awards vesting.
www.beazley.com
Annual report 2018 Beazley 111
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.
Share awards granted during the year ▪
Basis
on which
award made
Number
of shares
awarded
Face value of
shares (£)1
% vesting
at threshold
Performance period end
Three years (50%)
Five years (50%)
Type of interest
Nil cost option (LTIP)
Nil cost option (LTIP)
Nil cost option (LTIP)
Nil cost option (LTIP)
Individual
LTIP
Martin L Bride
Adrian P Cox
D Andrew Horton
Neil P Maidment
Deferred bonus (in respect of 2017 bonus)
Martin L Bride
Adrian P Cox
D Andrew Horton
Neil P Maidment
Deferred shares
Deferred shares
Deferred shares
Deferred shares
150% of salary
150% of salary
200% of salary
150% of salary
n/a
n/a
n/a
n/a
89,458
95,151
169,338
95,151
18,072
27,108
30,723
22,590
495,000
526,500
937,000
526,500
100,000
150,000
170,000
125,000
10% 31/12/2020 31/12/2022
10% 31/12/2020 31/12/2022
10% 31/12/2020 31/12/2022
10% 31/12/2020 31/12/2022
–
–
–
–
–
–
–
–
1 The face value of shares awarded was calculated using the three day average share price prior to grant, which was 553.33p.
NAVps performance
NAVps growth < risk-free rate +7.5% p.a.
NAVps growth = risk-free rate +7.5% p.a.
NAVps growth = risk-free rate +10% p.a.
NAVps growth = risk-free rate +15% p.a.
Straight-line vesting between points
–
–
–
–
G
o
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n
a
n
c
e
% of
award vesting
0%
10%
25%
100%
LTIP awards for 2019
It is intended that the performance conditions for the LTIP awards for 2019 will be in line with those granted in 2018 (see table
above). LTIP awards will be 200% of salary for the CEO and 150% for other executive directors. In response to the updated UK
Corporate Governance Code, for awards in 2019 an additional clause has been introduced that would enable the committee to
adjust the vesting outcome if it is not considered to be a fair representation of the underlying financial or non-financial performance.
Dilution
The share plans permit 10% of the company’s issued share capital to be issued pursuant to awards under the LTIP, SAYE and option
plan in a 10-year period.
The company adheres to a dilution limit of 5% in a 10 year period for executive schemes.
112 Beazley Annual report 2018
www.beazley.com
Directors’ remuneration report continued
Annual remuneration report continued
Investment in underwriting ▪
Traditionally, Lloyd’s underwriters contributed their personal capital to syndicates in which they worked. With the move to corporate
provision of capital, individual membership of Lloyd’s has declined significantly. The committee feels that having personal capital
at risk in the syndicate is an important part of the remuneration policy and provides a healthy counterbalance to incentivisation
through bonuses and long term incentive awards. The company has operated the Beazley staff underwriting plan for this purpose
since 2004 and executive directors and other selected staff are invited to participate through bonus deferral with an element of their
cash incentives ‘at risk’ as capital commitments. These capital commitments can be lost in full if underwriting performance is poor.
The group funds the capital for the plan. The individual capital commitment is then funded through individual bonus deferral.
The aim is for individuals to fund their capital within three years.
To date over 300 employees of the group have committed to put at risk £14.8m of bonuses to the underwriting results of syndicate
623. Of the total at risk, £12.5m has already been deferred from the bonuses awarded.
The following executive directors participated in syndicate 623 through Beazley Staff Underwriting Limited:
Martin L Bride1
Adrian P Cox
D Andrew Horton
Neil P Maidment1
2017
year of
account
underwriting
capacity
£
400,000
400,000
400,000
400,000
2018
year of
account
underwriting
capacity
£
400,000
400,000
400,000
400,000
2019
year of
account
underwriting
capacity
£
n/a
400,000
400,000
n/a
Total
bonuses
deferred
£
191,600
191,600
191,600
191,600
1 Neil Maidment and Martin Bride have not been invited to participate on the 2019 plan due to their respective retirements.
The executive directors are currently fully funded in the plan and no further bonus deferral was made in 2018.
Malus and clawback
Clawback provisions have operated for incentives in respect of 2015 and onwards. Under these provisions the committee
has the discretion to require clawback in certain circumstances for a defined period following payment or vesting.
Annual bonus and LTIP awards may be subject to clawback in the event of:
• material misstatement of results;
• gross misconduct;
• factual error in calculating vesting or award;
• any reputational damage or;
• a material corporate failure in any Group Member or a relevant business unit.
Annual bonus awards may be subject to clawback for a period of three years following payment of the cash bonus. These clawback
provisions will also extend to any deferred shares delivered before the end of the three year period and to any bonus which is
voluntarily deferred as notional capital into the staff underwriting plan (excluding any returns on the investment, which will not
be subject to clawback).
LTIP awards may be subject to clawback for a period of two years following vesting.
Malus provisions have applied to the LTIP and deferred share plan for a number of years. The committee has the discretion
to reduce or withhold an award in circumstances of:
• conduct which justifies summary dismissal;
• an exceptional development which has a material adverse impact on the company, including but not limited to reputational
damage, material failure of risk management, a material misstatement or any significant sanction from a government agency
or regulatory authority; or
• where the committee considers it is necessary in order to comply with a law or regulatory requirement.
www.beazley.com
Annual report 2018 Beazley 113
Pensions ▪
The pension benefits for executive directors and staff are provided by way of a defined contribution scheme arranged through
Fidelity, which is non-contributory. The company contributes 15% of salary for directors.
Following changes to pension tax legislation that came into force from April 2011, an equivalent cash alternative may be offered
if an individual exceeds the lifetime or annual allowance.
Prior to 31 March 2006 the company provided pension entitlements to directors that are defined benefit in nature, based on its
legacy policy under the Beazley Furlonge Limited Final Salary Pension Scheme. Future service accruals ceased on 31 March 2006.
Only base salary is pensionable, subject to an earnings cap. The normal retirement age for pension calculation purposes is
60 years. A spouse’s pension is the equivalent of two-thirds of the member’s pension (before any commutation) payable on
the member’s death after retirement.
Details of the defined benefit entitlements of those who served as directors during the year are as follows:
Accrued
benefit at
31 Dec
2018
£
13,582
46,365
Increase
in accrued
benefits
excluding
inflation (A)
£
–
–
Increase
in accrued
benefits
including
inflation
£
467
1,595
Transfer value
of (A) less
directors’
contributions
£
–
–
Transfer
value
of accrued
benefits at
31 Dec
2018
£
413,572
1,476,894
Transfer
value less
directors’
contributions
£
Normal
retirement date
13,194 12 Mar 2031
37,442 21 Oct 2022
G
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Adrian P Cox
Neil P Maidment
Under the Beazley Furlonge Limited Final Salary Pension Scheme, on early retirement the director receives a pension which is
reduced to reflect early payment in accordance with the rules of the scheme.
No other pension provisions are made.
Risk and reward at Beazley
The committee regularly reviews developing remuneration governance in the context of Solvency II remuneration guidance,
other corporate governance developments and institutional shareholders’ guidance. The chief risk officer reports annually to the
remuneration committee on risk and remuneration as part of the regular agenda. The committee believes the group is adopting
an approach which is consistent with, and takes account of, the risk profile of the group.
We believe reward at Beazley is appropriately balanced in light of risk considerations, particularly taking into account the following
features:
Features aligned with risk considerations
Share deferral
A portion of bonus is normally deferred into shares for three years. These deferred shares, together with shares
awarded under the LTIP, mean that a significant portion of total remuneration is delivered in the form of shares
deferred for a period of years
From 2019 the first tranche of the LTIP will be subject to a further two-year holding period.
LTIP holding period
Extended performance periods A portion of the LTIP has performance measured over an extended five-year period.
Shareholding requirements
Investment in underwriting
Underwriters’ remuneration
aligned with profit achieved
Executive directors are expected to build up and maintain a shareholding of 150% of salary (200% for the CEO).
LTIP awards may be forfeited if shareholding requirements are not met.
Management and underwriters may defer part of their bonuses into the Beazley staff underwriting plan,
providing alignment with capital providers. Capital commitments can be lost if underwriting performance is poor.
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.
If the account deteriorates then payouts are ‘clawed back’ through adjustments to future payments. Since 2012
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.
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.
Clawback and malus
provisions for annual bonus
and LTIP shares
114 Beazley Annual report 2018
www.beazley.com
Directors’ remuneration report continued
Annual remuneration report continued
Service contracts and payments for loss of office
No loss of office payments have been made in the year.
Having been with Beazley since 1990, Neil Maidment retired from Beazley effective 31 December 2018 and stepped down from
the board. Neil’s outstanding share awards subsist to their normal release/vesting date subject to performance where applicable.
During the year Martin Bride also announced his intention to retire from the group. Martin will step down in Q2 2019 and treatment
of his cessation will be disclosed in next year’s remuneration report.
The current contracts in place for executive directors are as follows:
Martin L Bride
Adrian P Cox
D Andrew Horton
Neil P Maidment
Date of contract
2 Nov 2015
2 Nov 2015
2 Nov 2015
22 Feb 2016
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 2018 were £92,500.
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 2018 were £52,500.
Non-executive directors’ fees
The fees of non-executive directors are determined by the board. 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. The board reviews fees annually.
During the year the chairman and non-executive director fees were reviewed and increased reflecting the responsibilities and time
commitment of the roles. Details of the non-executive directors’ fees payable for plc board responsibilities are set out below:
Chairman fee
Basic fee
Senior independent director fee (additional)
Chairman of audit and risk committee fee (additional)
Chairman of remuneration committee fee (additional)
2018 fee
£200,000
£59,500
£10,500
£17,750
£16,500
2019 fee
£206,000
£61,500
£11,000
£18,500
£17,000
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. Non-executive directors may receive additional
fees for sitting on subsidiary boards. 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.
No non-executive director participates in the group’s incentive arrangements or pension plan.
Non-executive directors are appointed for fixed terms, normally for three years, and may be reappointed for future terms.
Non-executive directors are typically appointed through a selection process that assesses whether the candidate brings the desired
competencies and skills to the group. The board has identified several key competencies for non-executive directors to complement
the existing skill-set of the executive directors. These competencies may include:
• insurance sector expertise;
• asset management skills;
• public company and corporate governance experience;
• risk management skills;
• finance skills; and
• IT and operations skills.
www.beazley.com
Annual report 2018 Beazley 115
Non-executive directors’ service contracts ▪
Details of the non-executive directors’ terms of appointment are set out below:
George P Blunden
Angela D Crawford-Ingle
Christine LaSala
Sir J Andrew Likierman
David L Roberts
John P Sauerland
Robert A Stuchbery
Catherine M Woods
Commencement
of appointment
Expires
1 Jan 2010 AGM 2019
27 Mar 2013 AGM 2019
1 Jul 2016 AGM 2020
AGM 2021
25 Mar 2015
1 Nov 2017
AGM 2021
5 May 2016 AGM 2020
11 Aug 2016 AGM 2020
1 Jan 2016 AGM 2019
The standard approach for non-executive director appointments is that the appointment expires at the AGM following the end
of a three year term, notwithstanding the fact that each non-executive director is subject to annual re-election at each AGM.
Approach to remuneration for employees other than directors
The committee also has oversight of remuneration arrangements elsewhere in the group. The following tables set out the additional
incentive arrangements for other staff within the organisation.
Other incentive arrangements at Beazley (not applicable to executive directors):
Element
Profit related
pay plan
Support
bonus plan
Retention shares
Objective
To align underwriters’ reward with
the profitability of their account.
To align staff bonuses with individual
performance and achievement of
objectives.
To retain key staff.
Summary
Profit on the relevant underwriting account as measured at three years and later.
Participation is limited to staff members not on the executive or in receipt of
profit related pay bonus. The support bonus pool may be enhanced by a
contribution from the enterprise bonus pool.
Used in certain circumstances. Full vesting dependent on continued employment
over six years.
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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.
The objective of the plan is to align the interests of the group and the individual through aligning an underwriter’s reward to the
long term profitability of their portfolio. Underwriters who have significant influence over a portfolio may be offered awards under
the plan. There is no automatic eligibility. Profit related pay is awarded irrespective of the results of the group. Awards are capped.
This bonus is awarded as cash and is based upon a fixed proportion of profit achieved on the relevant underwriting account as
measured at three years and later. Any movements in prior years are reflected in future year payments as the account develops
after three years. For long-tail accounts the class is still relatively immature at the three-year stage and therefore payments will
be modest. Underwriters may receive further payouts in years four, five and six (and even later) as the account matures.
Therefore each year they could be receiving payouts in relation to multiple underwriting years.
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.
The fixed proportion is calculated based upon profit targets which are set through the business planning process and reviewed
by a committee formed of executive committee members and functional specialists including the group actuary. Underwriting
risk is taken into account when setting profit targets.
In addition to profit related pay, underwriters are also eligible to receive a discretionary bonus, based upon performance, from the
enterprise bonus pool. A proportion of this bonus may be paid in deferred shares, which vest after three years subject to continued
employment.
116 Beazley Annual report 2018
www.beazley.com
Directors’ remuneration report continued
Annual remuneration report continued
Support bonus plan
Employees who are not members of the executive and who do not participate in the underwriters’ profit related pay plan participate
in a discretionary bonus pool. This pool provides employees with a discretionary award of an annual performance bonus that
reflects overall individual performance including meeting annual objectives.
A proportion of this award may also be dependent on the group’s ROE and therefore allocated from the enterprise bonus pool.
A proportion of this bonus may be paid in deferred shares, which vest after three years subject to continued employment.
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.
CEO pay increase in relation to all employees
CEO
All employees
Percentage change in remuneration from 31 Dec 2017 to 31 Dec 2018
Percentage change in base salary %
2.5%
3.0%
Percentage change in benefits %
1.14%
2.07%
Percentage change in annual bonus %
(50%)
(26.2%)
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.
Statement of directors’ shareholdings 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
(see chart below).
Directors’ shareholdings (% of salary)
4,800
4,000
3,200
2,400
1,600
800
0
A Horton
M Bride
A Cox
N Maidment
■ Actual holding as % of salary
■ Holding requirement as % of salary
www.beazley.com
Annual report 2018 Beazley 117
The table below shows the total number of directors’ interests in shares as at 31 December 2018 or date of cessation as a director.
Unvested awards
Conditional
shares not
subject to
performance
conditions
(deferred
shares and
retention
shares)
–
140,399
186,925
–
226,052
–
–
–
174,118
–
–
–
–
Number of
shares owned
(including
by connected
persons)
40,000
169,643
785,756
50,000
1,716,766
34,207
35,000
10,000
2,917,188
41,300
30,000
62,500
30,000
Vested awards
Nil cost options
subject to
performance
conditions (LTIP
awards)
–
493,867
548,962
–
940,913
–
–
–
529,248
–
–
–
–
Options over
shares subject
to savings
contracts
(SAYE)
–
–
6,742
–
4,603
–
–
–
5,413
–
–
–
–
Unexercised
nil cost options
–
–
–
–
–
–
–
–
–
–
–
–
–
Options
exercised in
the year
–
167,051
300,253
–
490,918
–
–
–
305,709
–
–
–
–
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Name
George P Blunden
Martin L Bride
Adrian P Cox
Dennis Holt1
D Andrew Horton
Angela D Crawford-Ingle
Christine LaSala
Sir J Andrew Likierman
Neil P Maidment
David L Roberts
John P Sauerland
Robert A Stuchbery
Catherine M Woods
1 Dennis Holt ceased to be a director on 22 March 2018.
No changes in the interests of directors have occurred between 31 December 2018 and 7 February 2019.
CEO pay versus performance
The following graph sets out Beazley’s 10 year total shareholder return performance to 31 December 2018, 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.
Total shareholder return performance
Value of £100 invested on 31 December 2008
1,000
800
600
400
200
0
08 09
10
11
12
13
14
15
16
17
18
■ Beazley ■ FTSE All Share ■ FTSE 350 Non-Life Insurance
118 Beazley Annual report 2018
www.beazley.com
Directors’ remuneration report continued
Annual remuneration report continued
Historical CEO payouts
Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
CEO single
figure of total
remuneration
£1,458,131
£1,525,102
£1,008,669
£2,339,573
£2,922,392
£3,745,989
£3,711,647
£3,715,146
£3,140,145
£1,559,070
Annual
variable
award
(% of maximum
opportunity)1
71%
63%
14%
71%
93%
74%
73%
70%
38%
19%
Long term
incentives
vesting
(% of maximum
opportunity)
50%
50%
99%
84%
100%
100%
100%
100%
98%
41%
1 An individual overall cap of 400% of salary was introduced from 2013. Prior to this date and in line with industry practice, there was no formal limit on individual
bonuses. To enable comparison, the above table assumes that a maximum annual variable award of 400% of salary also applied for years prior to 2013.
Relative importance of spend on pay
The following table shows the relative spend on pay compared to distributions to shareholders:
2017
2018
Directors’ share plan interests ▪
Details of share plan interests of those directors who served during the period are as follows:
Shareholder
distributions
(dividends
in respect of
the year)
$76.5m
$67.6m
Overall
expenditure
on pay
$223.4m
$208.8m
Martin L Bride
Deferred bonus:
LTIP (see notes):
SAYE:
Adrian P Cox
Deferred bonus:
LTIP (see notes):
SAYE:
D Andrew Horton
Deferred bonus:
LTIP (see notes):
SAYE:
Neil P Maidment
Deferred bonus:
LTIP (see notes):
SAYE:
Options
granted
Options
exercised
Lapsed
unvested
Outstanding
options at
31 Dec 2018
Outstanding
options at
1 Jan 2018
203,482
593,214
–
261,260
655,744
6,742
18,072
89,458
–
27,108
95,151
–
327,206
1,132,365
6,361
30,723
169,338
2,042
252,971
637,132
3,371
22,590
95,151
2,042
81,155
185,896
–
101,443
198,810
–
131,877
355,241
3,800
101,443
199,912
4,354
–
2,909
–
–
3,123
–
–
5,549
–
–
3,123
–
140,399
493,867
–
186,925
548,962
6,742
226,052
940,913
4,603
174,118
529,248
1,059
www.beazley.com
Annual report 2018 Beazley 119
Notes to share plan interests table
Deferred bonus
LTIP 2013 – 3/5 year
Deferred bonus awards are made in the form of conditional shares that normally vest three years after the date of award.
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.
Awards expire in February 2023.
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.
Awards expire in February 2024.
Awards were made on 10 February 2015 at a mid-market share price of 295.73p.
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 2025.
Awards were made on 9 February 2016 at a mid-market share price of 354.1p.
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 2026.
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.
Awards expire in February 2027.
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.
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LTIP 2014 – 3/5 year
LTIP 2015 – 3/5 year
LTIP 2016 – 3/5 year
LTIP 2017 – 3/5 year
LTIP 2018 – 3/5 year
Share prices
The market price of Beazley ordinary shares at 31 December 2018 (the last trading day of the year) was 503.5p and the range
during the year was 493.2p to 619.5p.
Remuneration committee
The committee consists of only non-executive directors and during the year the members were Sir Andrew Likierman (chairman),
George Blunden, John Sauerland and Catherine Woods. The board views each of these directors as independent.
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.
During the year the committee was advised by remuneration consultants from Deloitte LLP. Total fees in relation to executive
remuneration consulting were £103,100. Deloitte LLP also provided advice in relation to share schemes, tax, internal audit and
compliance support.
Deloitte LLP was appointed by the committee. Deloitte LLP is a member of the Remuneration Consultants’ Group and as such
voluntarily operates under a code of conduct in relation to executive remuneration consulting in the UK. The committee agrees each
year the protocols under which Deloitte LLP provides advice, to support independence. The committee is satisfied that the advice
received from Deloitte LLP has been objective and independent.
Input was also received by the committee during the year from the chief executive, head of talent management, company secretary
and chief risk officer. However, no individual plays a part in the determination of their own remuneration.
120 Beazley Annual report 2018
www.beazley.com
Directors’ remuneration report continued
Annual remuneration report continued
Statement of shareholder voting
The voting outcomes of the 2017 annual remuneration report and 2016 remuneration policy were as follows:
2017 annual remuneration report
2016 remuneration policy
Votes for
368,446,491
382,443,087
% for
96.11
94.63
Votes against
14,909,623
21,721,581
% against
Total votes cast
3.89 383,356,114
5.37 404,164,668
Votes withheld
(abstentions)
14,573,813
103,464
Annual general meeting
At the forthcoming annual general meeting to be held on 21 March 2019, an advisory resolution will be proposed to approve this
annual remuneration report.
I am keen to encourage an ongoing dialogue with shareholders. Accordingly, please feel free to contact me if you would like to
discuss any matter arising from this report or remuneration issues generally, either by writing to me at the company’s head office
or by email through Christine Oldridge at christine.oldridge@beazley.com.
By order of the board
J A Likierman
Chairman of the remuneration committee
6 February 2019
www.beazley.com
Annual report 2018 Beazley 121
Statement of directors’ responsibilities in respect
of the annual report and financial statements
The directors are responsible for preparing the annual report and the group and parent company financial statements in accordance
with applicable law and regulations.
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.
Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair
view of the state of affairs of the group and parent company and of their profit or loss for that period. In preparing each of the group
and parent company financial statements, the directors are required to:
• select suitable accounting policies and then apply them consistently;
• make judgements and estimates that are reasonable, relevant and reliable;
• state whether they have been prepared in accordance with IFRSs as adopted by the EU;
• assess the group and parent company’s ability to continue as a going concern, disclosing, as applicable, matters related to
going concern; and
• use the going concern basis of accounting unless they either intend to liquidate the group or the parent company or to cease
operations, or have no realistic alternative but to do so.
The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the parent company’s
transactions and disclose with reasonable accuracy at any time the financial position of the parent company and enable them to
ensure that its financial statements comply with the Companies Act 2006. They are responsible for such internal control as they
determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due
to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of
the Group and to prevent and detect fraud and other irregularities.
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.
The directors are responsible for the maintenance and integrity of the corporate and financial information included on the
company’s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from
legislation in other jurisdictions.
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
• the strategic report/directors’ report includes a fair review of the development and performance of the business and the
position of the issuer and the undertakings included in the consolidation taken as a whole, together with a description of
the principal risks and uncertainties that they face.
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.
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D Roberts
Chairman
M L Bride
Finance director
6 February 2019
122
Independent
auditor’s report
to the members of Beazley plc
1. Our opinion is unmodified
We have audited the financial statements of
Beazley plc (“the Company”) for the year ended 31
December 2018 which comprise the consolidated
statement of profit or loss, statement of
comprehensive income, statement of changes in
equity, statements of financial position, statements
of cash flows, and the related notes, including the
accounting policies.
In our opinion:
— the financial statements give a true and fair
view of the state of the Group’s and of the
parent Company’s affairs as at 31 December
2018 and of the Group’s profit for the year then
ended;
— the Group financial statements have been
properly prepared in accordance with
International Financial Reporting Standards as
adopted by the European Union (IFRSs as
adopted by the EU);
— the parent Company financial statements have
been properly prepared in accordance with
IFRSs as adopted by the EU and as applied in
accordance with the provisions of the
Companies Act 2006; and
— the financial statements have been prepared in
accordance with the requirements of the
Companies Act 2006 and, as regards the Group
financial statements, Article 4 of the IAS
Regulation.
Basis for opinion
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 first appointed as auditor by the shareholders
on 6 November 2002. The period of total uninterrupted
engagement is for the 16 financial years ended 31
December 2018. 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.
Overview
Materiality:
Group financial
statements as a
whole
Coverage
$20m (2017:$20m)
1% (2017: 1%) of Gross
premiums written
99% (2017: 99%) of Group
revenue
Key audit matters vs 2017
Recurring risks
Valuation of insurance
liabilities
Recoverability of
insurance and
reinsurance debtors
Valuation of hard to
value investments
Valuation of premium
estimates
Parent: Recoverability
of parent company’s
investment in
subsidiaries
◄►
◄►
◄►
◄►
◄►
2. Key audit matters: including our assessment of risks of material misstatement
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 2017), 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.
The risk
Our response
123
Valuation of insurance
liabilities
($2,869.5m, gross,
$2,149.7m, net; 2017:
$2,852.3m, gross,
$2,078.5m, net)
Refer to page 92 (Audit
and Risk Committee
Report), page 142
(Statement of accounting
policies) and page 181
(financial disclosures).
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.
These judgemental and complex calculations
for insurance liabilities are also used to derive
the valuation of the related reinsurance assets.
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.
The effect of these matters is that, as part of
our risk assessment, we determined that the
valuation of insurance liabilities has a high
degree of estimation uncertainty, with a
potential range of reasonable outcomes
greater than our materiality for the financial
statements as a whole, and possibly many
times that amount.
Completeness and accuracy of data:
The valuation of insurance liabilities depends
on complete and accurate data about the
volume, amount and pattern of current and
historical claims since they are often used to
form expectations about future claims. If the
data used in calculating the insurance
liabilities, or for forming judgements over key
assumptions, is not complete and accurate
then material impacts on the valuation of
insurance liabilities may arise.
We used our own actuarial specialists to assist us
in performing our procedures in this area.
Our procedures included:
— Sector experience and benchmarking:
Performed benchmarking of the Group’s
ultimate loss ratios, initial expected loss ratios,
premium rate change and expectations of total
losses on natural catastrophes, in order to
identify specific trends and outliers;
— Re-projections: Used our projection of
premiums and claims (on a gross and net basis)
and compared these with the Group’s
estimates to assess their reasonableness.
— Methodology assessment: Assessed the
reserving assumptions and methodology (on a
gross basis and net of outwards reinsurance) for
reasonableness and consistency year on year,
including inspecting the Group’s margin paper.
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— Actual versus expected testing: Challenged
the quality of the Group’s historical reserving
estimates by monitoring progression of loss
ratios against expectations.
— Assessing transparency: Considered the
adequacy of the Group’s disclosures in respect
of the valuation of insurance liabilities.
In addition to the procedures 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 by performing substantive testing over
data reconciliations.
Our results
— We found the resulting estimate of insurance
liabilities to be acceptable. (2017 result:
acceptable).
124
2. Key audit matters: our assessment of risks of material misstatement (cont.)
2. Key audit matters: our assessment of risks of material misstatement (cont.)
The risk
The risk
Our response
Our response
Valuation of hard to
value investments
Recoverability of insurance
receivables and reinsurance
assets
($523.8m; 2017:
$557.8m)
(Insurance receivables $943.3m;
2017: $918.0m, Reinsurance
assets: $1,192.8m; 2016:
Refer to page 93 (Audit
$1,231.1m)
and Risk Committee
Report), page 145
(Statement of
accounting policies) and
page 171 (financial
disclosures).
Refer to page 93 (Audit and Risk
Committee Report), page 145
(Statement of accounting policies)
and page 177 (financial
disclosures).
Subjective valuation:
Recoverability of debtors
Our procedures included:
Our procedures included:
— Insurance receivables:
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 ability to identify, monitor and age
insurance debtors relies on the timely
availability of reliable data. The
availability of this data is also impacted
by the source, being either settled direct
through intermediaries or through
Xchanging.
— Reinsurance assets:
The valuation of the investments are based
Major catastrophes could impair the
on third party valuation reports which are
Group’s ability to recover incurred losses
received at dates other than the year end
from its reinsurers, depending on the
date. The investments are subject to
financial strength of the counterparties,
variations in value between the date of the
which would then impact the
valuation report and the period end date.
recoverability of reinsurance assets.
These variations where applicable require
judgement to assess whether adjustments
are required to the valuation of the
investments at the period end date.
In recent years, Beazley has adopted a
consistent approach in determining the
bad debt provisions to be booked in the
financial statements. However,
The effect of these matters is that, as part
judgement is required in ensuring this
of our risk assessment, we determined that
approach remains relevant and that any
the valuation of hard to value investments
aged balances are being given
has a high degree of estimation uncertainty,
appropriate attention.
with a potential range of reasonable
outcomes greater than our materiality for
the financial statements as a whole, and
possibly many times that amount.
The effect of these matters is that, as
part of our risk assessment, we
determined that the recoverability of
insurance receivables and reinsurance
assets has a high degree of estimation
uncertainty, with a potential range of
reasonable outcomes greater than our
materiality for the financial statements
as a whole, and possibly many times
that amount.
The risk
— Data reconciliation: Reperformed the
— Reconciliation controls: Tested the design and
Group’s prepared reconciliations between
operating effectiveness of the controls associated
Xchanging and the Group’s financial
with the existence and valuation of the hedge
systems;
funds and illiquid credit assets.
— Assessing future premium debtors:
— Comparing valuations: For investments in hedge
Performed an analysis over the unsigned
funds we inspected the financial statements of
debtors within the insurance receivables
the underlying funds to assess that the valuation
balance in order to assess the valuation and
approach was acceptable.
recoverability of the debtors.
— Historical accuracy: For illiquid credit assets and
— Provisioning analysis: Critically assessed,
investments in hedge funds the historical accuracy
of the valuations was assessed by comparing
interim valuation reports to the final year-end
reports for prior periods.
based on our sector expertise, the adequacy
of the provisioning policy in place for
Beazley by assessing and investigating any
material movements in policy and the overall
percentage of bad debt during the reporting
period.
— Roll forward testing: Assessed the quantum of
change in the valuation of investments between
the early close date and the period end date to
consider whether there was a material movement
post the early close date that required adjustment.
— Recoverability assessment: Considered
potential indications of non-recovery for a
sample of reinsurance assets, in light of the
credit standing of the counterparty and age
of the debt.
adequacy of the Group’s disclosures in respect of
the valuation of hard to value investments.
— Assessing transparency: Considered the
Our results
— Assessing transparency: Considered the
adequacy of the Group’s disclosures in
respect of the recoverability of insurance
— We found the resulting estimate of the valuation
receivables and reinsurance assets.
of hard to value investments to be acceptable.
(2017 result: acceptable).
Our results
— We found the resulting estimate of the
recoverability of insurance and reinsurance
debtors to be acceptable (2017 result:
acceptable).
Our response
2. Key audit matters: our assessment of risks of material misstatement (cont.)
Valuation of hard to
value investments
($523.8m; 2017:
$557.8m)
Refer to page 93 (Audit
and Risk Committee
Report), page 145
(Statement of
accounting policies) and
page 171 (financial
disclosures).
Subjective valuation:
Our procedures included:
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.
The effect of these matters is that, as part
of our risk assessment, we determined that
the valuation of hard to value investments
has a high degree of estimation uncertainty,
with a potential range of reasonable
outcomes greater than our materiality for
the financial statements as a whole, and
possibly many times that amount.
— Reconciliation controls: Tested the design and
operating effectiveness of the controls associated
with the existence and valuation of the hedge
funds and illiquid credit assets.
— Comparing valuations: For investments in hedge
funds we inspected the financial statements of
the underlying funds to assess that the valuation
approach was acceptable.
— Historical accuracy: For illiquid credit assets and
investments in hedge funds the historical accuracy
of the valuations was assessed by comparing
interim valuation reports to the final year-end
reports for prior periods.
— Roll forward testing: Assessed the quantum of
change in the valuation of investments between
the early close date and the period end date to
consider whether there was a material movement
post the early close date that required adjustment.
— Assessing transparency: Considered the
adequacy of the Group’s disclosures in respect of
the valuation of hard to value investments.
Our results
— We found the resulting estimate of the valuation
of hard to value investments to be acceptable.
(2017 result: acceptable).
2. Key audit matters: our assessment of risks of material misstatement (cont.)
125
Valuation of gross
premium written
estimates
($2615.3m; 2017:
$2,343.8m)
Refer to page 93
(Audit and Risk
Committee Report),
page 141 (Statement
of accounting
policies) and page
161 (financial
disclosures).
Parent:
Recoverability of
parent company’s
investment in
subsidiaries
($724.6m; 2017:
$724.6m)
Refer to page 140
(Statement of
accounting policies)
and page 196
(financial
disclosures).
The risk
Our response
Subjective valuation:
Our procedures included:
There are adjustments 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.
There is a large proportion of premium is
written through the Group syndicates via
binders. Such premiums are uncertain at
inception and the model used in the recognition
and earning of such premiums is subject to
judgement and estimation.
There is an increased risk of premium estimates
being misstated as a result of the early close
process which requires Beazley to estimate the
premiums relating to the month of December
and where necessary make adjustments at the
period end.
The effect of these matters is that, as part of
our risk assessment, we determined that
valuation of gross premium written estimates
has a high degree of estimation uncertainty,
with a potential range of reasonable outcomes
greater than our materiality for the financial
statements as a whole, and possibly many
times that amount.
— Retrospective analysis: Critically assessed the
Group’s past expertise in making premium
estimates by comparing the 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.
— Methodology assessment: Inspected the binder
adjustment calculation and agreed that the
methodology remains consistent and appropriate
in the context of the timing of business written
throughout the year.
— Independent reperformance: Recalculated, on a
sample basis, the earning of premium and
investigated any changes to earnings patterns.
— Assessing transparency: Considered the
adequacy of the Group’s disclosures in respect of
the valuation of gross premium written estimates.
Our results
— We found the resulting estimate of the valuation
of estimated premium to be acceptable. (2017
result: acceptable).
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Low risk, high value
Our procedures included:
The carrying amount of the parent company’s
investments in subsidiaries represents 99%
(2017: 97%) of the company’s total assets.
Their recoverability is not at a high risk of
significant misstatement or subject to
significant judgement. However, due to their
materiality in the context of the parent company
financial statements, this is considered to be
the area that had the greatest effect on our
overall parent company audit.
— Tests of detail: Comparing the carrying amount of
100% of investments with the relevant
subsidiaries’ financial statements/draft balance
sheet to identify whether their net assets, being
an approximation of their minimum recoverable
amount, were in excess of their carrying amount
and assessing whether those subsidiaries have
historically been profit-making.
— Assessing subsidiary audits: Assessing the
findings of the audit work performed by the
relevant component auditors and whether these
findings provide any indicators that the value of
the subsidiaries may be impaired.
Our results
— We found the Group’s assessment of the
recoverability of the parent company’s investment
in subsidiaries to be acceptable. (2017 result:
acceptable).
126
3. Our application of materiality and an overview
of the scope of our audit
Materiality for the Group financial statements as a
whole was set at $20m (31 December 2017: $20m),
determined with reference to a benchmark of 2017
Group gross premiums written (of which it represents
1%; 31 December 2017: 1%). Gross premiums written
was used as the benchmark as it is a more stable
metric year on year than profit before tax. In addition,
we applied materiality of $10m (31 December 2017:
$10m) for UK balances other than insurance and
reinsurance technical balances and investments, for
which we believe misstatements of lesser amounts
than materiality for the financial statements as a whole
could be reasonably expected to influence the
company’s members’ assessment of the financial
performance of the Group.
Materiality for the parent company financial statements
as a whole was set at $7m (31 December 2017: $7m),
determined with reference to a benchmark of 2017
total assets (of which it represents 1%, 31 December
2017 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.
We agreed to report to the Audit and Risk Committee
any corrected or uncorrected identified misstatements
exceeding $1m ($0.5m for non-technical) (31
December 2017: $1m ($0.5m for non-technical)) in
addition to other identified misstatements that
warranted reporting on qualitative grounds.
Of the Group’s 32 (2017: 33) reporting components,
we subjected 16 (2017: 17) to full scope audits for
Group purposes and 3 (2017: 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. The work on 3 of the 16
components (2017: 3 of the 17 components) was
performed by component auditors and the rest,
including the audit of the parent company, was
performed by the Group team. The Group audit team
instructed the component team as to the significant
areas to be covered, including the relevant risks
detailed above and the information to be reported back.
The Group team visited 3 (2017: 0) component
locations in the United States of America (2017: none)
to assess the audit risk and scoping. Telephone
conference meetings were also held with these
component auditors. At these visits and meetings, the
findings reported to the Group team were discussed in
more detail, and any further work required by the
Group team was then performed by the component
auditor
Gross written premium
$2.6bn (2017: $2.3bn)
Group Materiality
$20m (2017: $20m)
$20m
Whole financial
statements materiality
(2017: $20m)
$18m
Range of materiality at 16
components ($0.1m-$16m)
(2017: $0.1m to $16m)
Gross written premium
Group materiality
$1m
Misstatements reported to the
audit committee (2017: $1m)
Group revenue
Group profit before tax
22
12
99%
(2017 99%)
29
8
100%
(2017 100%)
87
77
92
71
Group total assets
Group total liabilities
9
8
97%
(2017 97%)
89
88
12
11
100%
(2017 100%)
89
88
The Group audit team approved the component
materialities, which ranged from $0.1m to $16m (31
December 2017: $0.1m to $16m), having regard to the
mix of size and risk profile of the Group across the
components. All other work, including the audit of the
parent company, was performed by the Group audit
team.
Key:
Full scope for Group audit purposes 2018
Specified risk-focused audit procedures 2018
Full scope for Group audit purposes 2017
Specified risk-focused audit procedures 2017
Residual components
127
4. We have nothing to report on going concern
5. We have nothing to report on the other information in
The Directors have prepared the financial statements on the
going concern basis as they do not intend to liquidate the
Company or the Group or to cease their operations, and as
they have concluded that the Company’s and the Group’s
financial position means that this is realistic. They have also
concluded that there are no material uncertainties that
could have cast significant doubt over their ability to
continue as a going concern for at least a year from the
date of approval of the financial statements (“the going
concern period”).
Our responsibility is to conclude on the appropriateness of
the Directors’ conclusions and, had there been a material
uncertainty related to going concern, to make reference to
that in this audit report. However, as we cannot predict all
future events or conditions and as subsequent events may
result in outcomes that are inconsistent with judgements
that were reasonable at the time they were made, the
absence of reference to a material uncertainty in this
auditor's report is not a guarantee that the Group and the
Company will continue in operation.
In our evaluation of the Directors’ conclusions, we
considered the inherent risks to the Group’s and
Company’s business model and analysed how those risks
might affect the Group’s and Company’s financial resources
or ability to continue operations over the going concern
period. The risks that we considered most likely to
adversely affect the Group’s and Company’s available
financial resources over this period were:
— adverse insurance reserves development;
the Annual Report
The directors are responsible for the other information
presented in the Annual Report together with the financial
statements. Our opinion on the financial statements does
not cover the other information and, accordingly, we do not
express an audit opinion or, except as explicitly stated
below, any form of assurance conclusion thereon.
Our responsibility is to read the other information and, in
doing so, consider whether, based on our financial
statements audit work, the information therein is materially
misstated or inconsistent with the financial statements or
our audit knowledge. Based solely on that work we have
not identified material misstatements in the other
information.
Strategic report and directors’ report
Based solely on our work on the other information:
— we have not identified material misstatements in the
strategic report and the directors’ report;
— in our opinion the information given in those reports for
the financial year is consistent with the financial
statements; and
— in our opinion those reports have been prepared in
accordance with the Companies Act 2006.
Directors’ remuneration report
In our opinion the part of the Directors’ Remuneration
Report to be audited has been properly prepared in
accordance with the Companies Act 2006.
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— a deterioration in claims experience, potentially caused
Disclosures of principal risks and longer-term viability
by market wide catastrophe event(s); and
— a deterioration in the valuation of the Group and
Company’s investments.
As these were risks that could potentially cast significant
doubt on the Group’s and the Company's ability to continue
as a going concern, we considered sensitivities over the
level of available financial resources indicated by the
Group’s financial forecasts taking account of reasonably
possible (but not unrealistic) adverse effects that could arise
from these risks individually and collectively and evaluated
the achievability of the actions the Directors consider they
would take to improve the position should the risks
materialise. We also considered less predictable but
realistic second order impacts, such as the impact of Brexit
and the impact on the economic environment, which could
result in a rapid reduction of available financial resources.
Based on this work, we are required to report to you if:
— we have anything material to add or draw attention to in
relation to the directors’ statement in Note 1 to the
financial statements on the use of the going concern
basis of accounting with no material uncertainties that
may cast significant doubt over the Group and
Company’s use of that basis for a period of at least
twelve months from the date of approval of the financial
statements; or
— the related statement under the Listing Rules set out on
page 74 is materially inconsistent with our audit
knowledge.
We have nothing to report in these respects, and we did
not identify going concern as a key audit matter.
Based on the knowledge we acquired during our financial
statements audit, we have nothing material to add or draw
attention to in relation to:
— the directors’ confirmation within the viability statement
page 56 that they have carried out a robust assessment
of the principal risks facing the Group, including those
that would threaten its business model, future
performance, solvency and liquidity;
— the Principal Risks disclosures describing these risks
and explaining how they are being managed and
mitigated; and
— the directors’ explanation in the viability statement of
how they have assessed the prospects of the Group,
over what period they have done so and why they
considered that period to be appropriate, and their
statement as to whether they have a reasonable
expectation that the Group will be able to continue in
operation and meet its liabilities as they fall due over the
period of their assessment, including any related
disclosures drawing attention to any necessary
qualifications or assumptions.
Under the Listing Rules we are required to review the
viability statement. We have nothing to report in this
respect.
Our work is limited to assessing these matters in the
context of only the knowledge acquired during our financial
statements audit. As we cannot predict all future events or
conditions and as subsequent events may result in
outcomes that are inconsistent with judgments that were
reasonable at the time they were made, the absence of
anything to report on these statements is not a guarantee
as to the Group’s and Company’s longer-term viability.
128
Corporate governance disclosures
7. Respective responsibilities
We are required to report to you if:
Directors’ responsibilities
— 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
— the section of the annual report describing the work of
the Audit Committee does not appropriately address
matters communicated by us to the Audit Committee.
We are required to report to you if the Corporate
Governance Statement does not properly disclose a
departure from the eleven provisions of the UK Corporate
Governance Code specified by the Listing Rules for our
review.
We have nothing to report in these respects.
6. We have nothing to report on the other matters on
which we are required to report by exception
Under the Companies Act 2006, we are required 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.
We have nothing to report in these respects.
As explained more fully in their statement set out on page
121, the directors are responsible for: the preparation of the
financial statements including being satisfied that they give
a true and fair view; such internal control as they determine
is necessary to enable the preparation of financial
statements that are free from material misstatement,
whether due to fraud or error; assessing the Group and
parent Company’s ability to continue as a going concern,
disclosing, as applicable, matters related to going concern;
and using the going concern basis of accounting unless
they either intend to liquidate the Group or the parent
Company or to cease operations, or have no realistic
alternative but to do so.
Auditor’s responsibilities
Our objectives are to obtain reasonable assurance about
whether the financial statements as a whole are free from
material misstatement, whether due to fraud or other
irregularities (see below), or error, and to issue our opinion
in an auditor’s report. Reasonable assurance is a high level
of assurance, but does not guarantee that an audit
conducted in accordance with ISAs (UK) will always detect
a material misstatement when it exists. Misstatements can
arise from fraud, other irregularities or error and are
considered material if, individually or in aggregate, they
could reasonably be expected to influence the economic
decisions of users taken on the basis of the financial
statements.
A fuller description of our responsibilities is provided on the
FRC’s website at www.frc.org.uk/auditorsresponsibilities.
Irregularities – ability to detect
We identified areas of laws and regulations that could
reasonably be expected to have a material effect on the
financial statements from our general commercial and
sector experience and through discussion with the directors
and other management (as required by auditing standards),
and from inspection of the Group’s regulatory
correspondence and discussed with the directors and other
management the policies and procedures regarding
compliance with laws and regulations. We communicated
identified laws and regulations throughout our team and
remained alert to any indications of non-compliance
throughout the audit. This included communication from the
Group to component audit teams of relevant laws and
regulations identified at Group level.
The potential effect of these laws and regulations on the
financial statements varies considerably.
Firstly, the Group is subject to laws and regulations that
directly affect the financial statements including financial
reporting legislation (including related companies
legislation), distributable profits legislation and taxation
legislation and we assessed the extent of compliance with
these laws and regulations as part of our procedures on the
related financial statement items.
129
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Secondly, the Group is subject to many other laws and
regulations where the consequences of non-compliance
could have a material effect on amounts or disclosures in
the financial statements, for instance through the
imposition of fines or litigation or the loss of the Group’s
licence to operate. We identified the following areas as
those most likely to have such an effect: UK listing rules,
Companies Act, Prudential Regulatory Authority and Lloyd’s
of London prudential regulation recognising the financial
and regulated nature of the Group’s activities and its legal
form. Auditing standards limit the required audit
procedures to identify non-compliance with these laws and
regulations to enquiry of the directors and other
management and inspection of regulatory correspondence,
if any. These limited procedures did not identify actual or
suspected non-compliance.
Owing to the inherent limitations of an audit, there is an
unavoidable risk that we may not have detected some
material misstatements in the financial statements, even
though we have properly planned and performed our audit
in accordance with auditing standards. For example, the
further removed non-compliance with laws and regulations
(irregularities) is from the events and transactions reflected
in the financial statements, the less likely the inherently
limited procedures required by auditing standards would
identify it. In addition, as with any audit, there remained a
higher risk of non-detection of irregularities, as these may
involve collusion, forgery, intentional omissions,
misrepresentations, or the override of internal controls. We
are not responsible for preventing non-compliance and
cannot be expected to detect non-compliance with all laws
and regulations.
8. The purpose of our audit work and to whom we owe
our responsibilities
This report is made solely to the Company’s members, as a
body, in accordance with Chapter 3 of Part 16 of the
Companies Act 2006. Our audit work has been undertaken
so that we might state to the Company’s members those
matters we are required to state to them in an auditor’s
report and for no other purpose. To the fullest extent
permitted by law, we do not accept or assume
responsibility to anyone other than the Company and the
Company’s members, as a body, for our audit work, for this
report, or for the opinions we have formed.
Daniel Cazeaux (Senior Statutory Auditor)
for and on behalf of KPMG LLP, Statutory Auditor
Chartered Accountants
15 Canada Square
London, E14 5GL
6 February 2019
130 Beazley Annual report 2018
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Financial
statements
131 Consolidated statement of profit or loss
132 Statements of comprehensive income
133 Statements of changes in equity
135 Statements of financial position
136 Statements of cash flows
137 Notes to the financial statements
198 Glossary
www.beazley.com
Annual report 2018 Beazley 131
Consolidated statement of profit or loss
for the year ended 31 December 2018
Gross premiums written
Written premiums ceded to reinsurers
Net premiums written
Change in gross provision for unearned premiums
Reinsurer’s share of change in the provision for unearned premiums
Change in net provision for unearned premiums
Net earned premiums
Net investment income
Other income
Revenue
Insurance claims
Insurance claims recoverable from reinsurers
Net insurance claims
Expenses for the acquisition of insurance contracts
Administrative expenses
Foreign exchange loss
Operating expenses
Expenses
Share of profit in associates
Impairment of investment in associate
Results of operating activities
Finance costs
Profit before income tax
Income tax expense
Profit for the year attributable to equity shareholders
Earnings per share (cents per share):
Basic
Diluted
Earnings per share (pence per share):
Basic
Diluted
Notes
3
3
3
4
5
3
3
3
3
3
14
14
8
9
10
10
10
10
2018
$m
2,615.3
(366.8)
2,248.5
(167.6)
3.7
(163.9)
2017
$m
2,343.8
(365.0)
1,978.8
(118.4)
9.0
(109.4)
2,084.6
1,869.4
41.1
33.7
74.8
138.3
35.5
173.8
2,159.4
2,043.2
1,463.9
(236.1)
1,227.8
1,388.0
(312.3)
1,075.7
561.9
250.7
13.2
825.8
519.7
254.7
3.1
777.5
2,053.6
1,853.2
–
(7.0)
98.8
0.1
–
190.1
(22.4)
(22.1)
76.4
168.0
(8.2)
68.2
(38.0)
130.0
13.0
12.8
9.7
9.5
25.0
24.4
19.5
19.0
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Statement of comprehensive income
for the year ended 31 December 2018
Group
Profit for the year attributable to equity shareholders
Other comprehensive income
Items that will never be reclassified to profit or loss:
Loss on remeasurement of retirement benefit obligations
Items that may be reclassified subsequently to profit or loss:
Foreign exchange translation differences
Total other comprehensive income
Total comprehensive income recognised
Statement of comprehensive income
for the year ended 31 December 2018
Company
Profit for the year attributable to equity shareholders
Total comprehensive income recognised
2018
$m
2017
$m
68.2
130.0
(1.5)
(0.6)
(2.1)
(3.6)
64.6
2.9
2.3
132.3
2018
$m
2017
$m
81.7
134.8
81.7
134.8
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Annual report 2018 Beazley 133
Statement of changes in equity
for the year ended 31 December 2018
Share
capital
$m
Share
premium
$m
Notes
Foreign
currency
translation
reserve
$m
Other
reserves
$m
Retained
earnings
$m
Total
$m
Group
Balance at 1 January 2017
Total comprehensive income recognised
Dividends paid
Issue of shares
Equity settled share based payments
Acquisition of own shares in trust
Tax on share option vestings
Transfer of shares to employees
Balance at 31 December 2017
Total comprehensive income recognised
Dividends paid
Issue of shares
Equity settled share based payments
Acquisition of own shares in trust
Tax on share option vestings
Transfer of shares to employees
Balance at 31 December 2018
11
22
22
9
22
11
21
22
22
9
22
37.7
–
–
0.1
–
–
–
–
37.8
–
–
0.2
–
–
–
–
38.0
–
–
–
–
–
–
–
–
–
–
–
1.6
–
–
–
–
1.6
(96.7)
23.4
1,519.3
1,483.7
2.9
–
–
–
–
–
–
(93.8)
(2.1)
–
–
–
–
–
–
(95.9)
–
–
–
24.5
(16.2)
4.3
(4.0)
32.0
–
–
–
18.7
(44.9)
4.1
6.6
16.5
129.4
(135.9)
–
–
–
4.0
6.1
1,522.9
66.7
(80.5)
–
–
–
6.1
(8.5)
1,506.7
132.3
(135.9)
0.1
24.5
(16.2)
8.3
2.1
1,498.9
64.6
(80.5)
1.8
18.7
(44.9)
10.2
(1.9)
1,466.9
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Statement of changes in equity
for the year ended 31 December 2018
Share
capital
$m
Share
premium
$m
Merger
reserve
$m
Notes
Foreign
currency
translation
reserve
$m
Company
Balance at 1 January 2017
Total comprehensive income recognised
Dividends paid
Issue of shares
Equity settled share based payments
Acquisition of own shares in trust
Transfer of shares to employees
Balance at 31 December 2017
Total comprehensive income recognised
Dividends paid
Issue of shares
Equity settled share based payments
Acquisition of own shares in trust
Transfer of shares to employees
Balance at 31 December 2018
11
22
22
22
11
21
22
22
22
37.7
–
–
0.1
–
–
–
37.8
–
–
0.2
–
–
–
38.0
–
–
–
–
–
–
–
–
–
–
1.6
–
–
–
1.6
55.4
–
–
–
–
–
–
55.4
–
–
–
–
–
–
55.4
0.7
–
–
–
–
–
–
0.7
–
–
–
–
–
–
0.7
Other
reserves
$m
Retained
earnings
$m
Total
$m
19.9
623.3
737.0
–
–
–
24.5
(16.2)
(4.0)
24.2
–
–
–
18.7
(44.9)
6.6
4.6
134.8
(135.9)
–
–
–
6.1
628.3
81.7
(80.5)
–
–
–
(8.5)
621.0
134.8
(135.9)
0.1
24.5
(16.2)
2.1
746.4
81.7
(80.5)
1.8
18.7
(44.9)
(1.9)
721.3
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Annual report 2018 Beazley 135
Statements of financial position
as at 31 December 2018
Assets
Intangible assets
Plant and equipment
Deferred tax asset
Investment in subsidiaries
Investment in associates
Deferred acquisition costs
Reinsurance assets
Financial assets at fair value
Insurance receivables
Other receivables
Current income tax asset
Cash and cash equivalents
Total assets
Equity
Share capital
Share premium
Merger reserve
Foreign currency translation reserve
Other reserves
Retained earnings
Total equity
Liabilities
Insurance liabilities
Financial liabilities
Retirement benefit liability
Deferred tax liability
Other payables
Total liabilities
Total equity and liabilities
2018
2017
Notes
Group
$m
Company
$m
Group
$m
Company
$m
12
13
28
31
14
15
19, 24
16, 17
18
20
21
22
24
16, 17, 25
27
28
26
126.5
4.9
28.9
–
–
307.4
1,192.8
4,716.3
943.3
58.5
19.0
336.3
7,733.9
38.0
1.6
–
(95.9)
16.5
1,506.7
1,466.9
5,456.2
356.7
2.4
9.1
442.6
6,267.0
7,733.9
–
–
–
724.6
–
–
–
–
–
–
0.3
2.4
727.3
38.0
1.6
55.4
0.7
4.6
621.0
721.3
–
–
–
–
6.0
6.0
727.3
133.5
4.4
6.9
–
7.0
281.4
1,231.1
4,449.6
918.0
68.6
17.7
440.5
7,558.7
37.8
–
–
(93.8)
32.0
1,522.9
1,498.9
5,167.8
367.3
2.3
9.9
512.5
6,059.8
7,558.7
–
–
–
724.6
–
–
–
–
–
21.0
0.5
0.7
746.8
37.8
–
55.4
0.7
24.2
628.3
746.4
–
–
–
–
0.4
0.4
746.8
The financial statements were approved by the board of directors on 6 February 2019 and were signed on its behalf by:
D Roberts
Chairman
M L Bride
Finance director
6 February 2019
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Statements of cash flows
for the year ended 31 December 2018
Cash flow from operating activities
Profit before income tax
Adjustments for:
Amortisation of intangibles
Equity settled share based compensation
Net fair value loss/(gain) on financial assets
Share of profit in associates
Impairment of investment in associate
Depreciation of plant and equipment
Impairment of reinsurance assets (written back)/recognised
Increase/(decrease) in insurance and other payables1
Decrease/(increase) in insurance, reinsurance and other receivables
Increase in deferred acquisition costs
Financial income
Financial expense
Foreign exchange on financial liabilities
Income tax paid
Net cash generated from operating activities
Cash flow from investing activities
Purchase of plant and equipment
Expenditure on software development
Purchase of investments
Proceeds from sale of investments
Sale of associate
Sale of LAH renewal rights
Acquisition of subsidiaries (net of cash)
Interest and dividends received
Issuance of shares
Net cash (used in)/from investing activities
Cash flow from financing activities
Acquisition of own shares in trust
Repayment of borrowings
Finance costs
Dividend paid
Net cash used in financing activities
Net (decrease)/increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Effect of exchange rate changes on cash and cash equivalents
Cash and cash equivalents at end of year
Notes
12
22
14
14
13
6
4
8
13
12
14
4
22
25
20
Group
$m
76.4
12.6
18.7
53.7
–
7.0
2.1
(1.0)
216.7
23.9
(26.0)
(102.6)
22.4
(4.1)
(21.1)
278.7
(2.6)
(7.2)
(2,686.2)
2,376.9
–
–
–
102.6
1.8
(214.7)
(44.9)
(18.0)
(22.0)
(80.5)
(165.4)
(101.4)
440.5
(2.8)
336.3
2018
2017
Company
$m
Group
$m
Company
$m
81.2
168.0
133.3
–
18.7
–
–
–
–
–
5.6
19.8
–
(82.9)
0.9
–
–
43.3
–
–
–
–
–
–
–
82.9
1.8
84.7
(44.9)
–
(0.9)
(80.5)
(126.3)
1.7
0.7
–
2.4
11.6
23.6
(69.6)
(0.1)
–
2.7
0.6
534.4
(295.9)
(38.6)
(76.6)
22.1
4.6
(27.9)
258.9
(1.7)
(9.3)
(3,299.3)
3,093.7
3.0
0.8
(31.8)
74.5
2.2
(167.9)
(16.2)
–
(20.7)
(135.9)
(172.8)
(81.8)
507.2
15.1
440.5
–
24.5
–
–
–
–
–
(0.2)
(7.0)
–
(136.8)
0.9
–
–
14.7
–
–
–
–
–
–
–
136.8
2.2
139.0
(16.2)
–
(0.9)
(135.9)
(153.0)
0.7
–
–
0.7
1 2018 increase in insurance and other payables is net of $1.9m of dividend accruals on share schemes settled through equity.
www.beazley.com
Annual report 2018 Beazley 137
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 2018 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.
The financial statements of the parent company, Beazley plc, and the group financial statements have been prepared and approved
by the directors in accordance with IFRSs as adopted by the EU (‘Adopted IFRSs’). On publishing the parent company financial
statements together with the group financial statements, the company is taking advantage of the exemption in s408 of the
Companies Act 2006 not to present its individual statement of profit or loss and related notes that form a part of these approved
financial statements.
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 2018. The new effective requirements are:
• IFRS 2: Amendment: Classification and Measurement of Share-based Payment Transactions (EU effective date: 1 January 2018);
• IFRS 4: Amendment: Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts (EU effective date: 1 January 2018);
• IFRIC 22: Foreign Currency Transactions and Advance Consideration (EU effective date: 1 January 2018);
• IAS 40: Amendment: Transfers of Investment Property (EU effective date: 1 January 2018);
• Annual Improvements to IFRS Standards 2014-2016 Cycle (EU effective date: 1 January 2018); and
• Clarifications to IFRS 15: Revenue from Contracts with Customers (EU effective date: 1 January 2018).
These amendments did not result in a material impact on the financial statements of the company.
An additional standard, IFRS 15: Revenue from Contracts with Customers, has been applied when preparing these financial
statements. The new standard has no material impact on the financial statements. Note 5 provides an income breakdown for each
contract type within the scope of IFRS 15. When recognising profit commission from syndicate 623, the revenue is recognised
on a year of account basis as soon as the year of account becomes profitable. No other significant judgements were made when
recognising income from other contracts. All related balances are classified as receivables and included within the other receivables
line in the statement of financial position.
A number of new standards and interpretations adopted by the EU which are not mandatorily effective, as well as standards and
interpretations issued by the IASB but not yet adopted by the EU, have not been applied in preparing these financial statements.
The group does not plan to adopt these standards early; instead it will apply them from their effective dates as determined by their
dates of EU endorsement. The group is still reviewing the upcoming standards to determine their impact:
• IFRS 9: Financial Instruments (EU effective date: 1 January 2018, deferred in line with implementation of IFRS 17);
• IFRS 9: Amendment: Prepayment Features with Negative Compensation (EU effective date: 1 January 2019);
• IFRIC 23: Uncertainty over Income Tax Treatments (EU effective date: 1 January 2019);
• IFRS 17: Insurance Contracts (IASB effective date: 1 January 2021);1
• IAS 19: Amendment: Plan Amendment, Curtailment or Settlement (IASB effective date: 1 January 2019);1
• IAS 28: Amendment: Long-term Interests in Associates and Joint Ventures (IASB effective date: 1 January 2019);1
• Annual Improvements to IFRS Standards IFRS Standards 2015-2017 Cycle (IASB effective date: 1 January 2019);1
• Amendments to References to the Conceptual Framework in IFRS Standards (IASB effective date: 1 January 2020);
• IFRS 3: Amendment: Business Combinations (IASB effective date: 1 January 2020);1 and
• IAS 1 and IAS 8: Amendment: Definition of Material (IASB effective date: 1 January 2020).1
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1 Have not been endorsed by EU.
The following upcoming standards have been reviewed:
• IFRS 16: Leases (EU effective date: 1 January 2019).
138 Beazley Annual report 2018
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Notes to the financial statements continued
1 Statement of accounting policies continued
Of the upcoming accounting standard changes that we are aware of, we anticipate that IFRS 17, IFRS 9 and IFRS 16 will have the
most material impact on the financial statements’ presentation and disclosures. For IFRS 16 a full impact assessment has been
carried out and processes put in place for transition on 1 January 2019. The accounting developments and implementation
timelines of IFRS 17 and IFRS 9 are being closely monitored and the impacts of the standards themselves are being assessed. A
brief overview of each of these standards is provided below:
• IFRS 17, effective from 1 January 2021, will fundamentally change the way insurance contracts are accounted for and reported.
Revenue will no longer be equal to premiums written but instead reflect a change in the contract liability on which consideration
is expected. On initial assessment the major change will be on the presentation of the statement of profit or loss, with premium
and claims figures being replaced with insurance contract revenue, insurance service expense and insurance finance income
and expense. It is not currently known what impact the new requirements will have on the group’s profit and financial position,
but it is expected that profit recognition will be altered with expenses for onerous contracts being accelerated and recognised
upfront rather than being spread over the term of the insurance contract. During 2018, the group undertook a number of tasks
in preparation for IFRS 17. These tasks included completing various modelling exercises to understand the data requirements
needed under IFRS 17. Various assumptions have also been agreed upon such as unit of account and whether to pursue the
general measurement model (building block approach) or the simplified model (premium allocation approach) or to use both for
different contracts. A more detailed update will be provided after the implementation has been completed.
• As was stated in the 2017 annual report, the group chose to apply the temporary exemption permitted by IFRS 4 from applying
IFRS 9: Financial Instruments. The group qualifies for this exemption as at 31 December 2015 $5,040.7m or 95% of its total
liabilities were connected with insurance. There has been no change in the group’s activities since 31 December 2015,
therefore the exemption still remains. The group has also disclosed information in relation to specific types of financial
instruments to ensure the comparability with the entities applying IFRS 9. As such, fair values are disclosed separately for
the group’s financial assets which are managed and evaluated on a fair value basis and those which meet the solely payments
of principal and interest (SPPI) test under IFRS 9. Beazley plc as a standalone company adopted IFRS 9 from 1 January 2018.
However, as the standalone company has no financial investments the adoption had no effect on its financial statements. Below
is a table outlining the fair value of assets which are managed and evaluated on a fair value basis and those which meet the
SPPI test under IFRS 9. The information on credit exposures can be found in note 2 to the financial statements on page 156.
Financial assets managed and evaluated on a fair value basis
Cash and cash equivalent
Fixed and floating rate debt securities:
– Government issued
– Quasi-government
– Supranational
– Corporate bonds
– Investment grade
– High yield
– Senior secured loans
Equity funds
Hedge funds
Illiquid credit assets
Derivative financial assets
Total financial assets managed and evaluated on a fair value basis
Financial assets meeting the SPPI test
Insurance receivables
Other receivables
Total financial assets meeting the SPPI test
2018
$m
2017
$m
336.3
440.5
1,384.2
25.9
–
2,525.3
32.7
132.1
85.4
337.2
186.6
6.9
5,052.6
943.3
58.5
1,001.8
1,345.4
24.1
21.1
2,179.7
58.8
85.6
168.3
377.4
180.4
8.8
4,890.1
918.0
68.6
986.6
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Annual report 2018 Beazley 139
1 Statement of accounting policies continued
• IFRS 16, effective from 1 January 2019, replaces the existing leases standard IAS 17: Leases, and introduces a single,
on-balance-sheet accounting model for leases, where distinction between operating and finance leases is eliminated. The
standard will 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 2018 the group’s future minimum
estimated payments under non-cancellable lease contracts amounted to $35.6m. This represents the value of the opening
lease liability on the statement of financial position as at 1 January 2019. The group has three portfolios of leases: IT
equipment, vehicles and property. The group does not have any instances where it is a lessor or is involved in a sublease
arrangement. The group has taken the approach of recognising a right-of-use asset of the same amount as the lease liability on
initial recognition as at 1 January 2019. With regard 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 with interest expense now being
contained within finance costs, but the depreciation of the right-of-use asset going through administrative expenses. This is
expected to have the overall impact of reducing administrative expenses and increasing finance costs. The net impact is a
reduction to profit before tax. On transition to the new standard the group will opt to retain prior period figures as reported under
the previous standards as per the modified retrospective approach of transition. The cumulative effect of applying IFRS 16 will
have an immaterial impact on the opening balance in equity as at the date of initial application.
Basis of presentation
The group financial statements are prepared using the historical cost convention, with the exception of financial assets and
derivative financial instruments which are stated at their fair value. All amounts presented are in US dollars and millions, unless
stated otherwise.
The financial statements of Beazley plc have been prepared on a going concern basis. The directors of the company have
a reasonable expectation that the group and the company have adequate resources to continue in operational existence for
the foreseeable future. In accordance with the requirements of IAS 1 the financial statements’ assets and liabilities have been
presented in order of liquidity which provides information that is more reliable and relevant for a financial institution.
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.
a) Estimates
Estimates are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate
is revised and in any future periods affected.
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 in
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 2018 is
$2,869.5m (2017: $2,852.3m). The total estimate for insurance losses incurred but not reported net of reinsurers’ share as at
31 December 2018 is $2,149.7m (2017: $2,078.5m) and is included within total insurance liabilities and reinsurance assets in the
statement of financial position and in note 24.
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The claims handling expense provision is based on a set percentage of IBNR which is reviewed on an annual basis.
The best estimate of the most likely ultimate outcome is used when calculating notified claim. This estimate is based upon the facts
available at the time, in conjunction with the claims manager’s view of likely future developments.
Another significant area of estimation is the group’s financial assets and liabilities. Information about estimation uncertainty related
to the group’s financial assets and liabilities is described in this statement of accounting policies and note 16: financial assets and
liabilities (valuations based on models and unobservable inputs).
140 Beazley Annual report 2018
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Notes to the financial statements continued
1 Statement of accounting policies continued
Other key estimates contained within our close process are premium estimates and the earning pattern of recognising premium
over the life of the contract. In the syndicates the premium written is initially based on the estimated premium income (EPI) of each
contract. Where premium is sourced through binders, the binder EPI is pro-rated across the binder period. This is done on a
straight-line basis unless the underlying writing pattern from the prior period indicates the actual underlying writing pattern is
materially different. The underwriters adjust their EPI estimates as the year of account matures. As the year of account closes
premiums are adjusted to match the actual signed premium. An accrual for estimated future reinstatement premiums is retained.
Premiums are earned on a straight-line basis over the life of each contract. At a portfolio level this is considered to provide a
reasonable estimate for the full year of the pattern of risk over the coverage period.
b) Judgements
Information about significant areas of critical judgements in applying accounting policies that have the most significant effect on
the amounts recognised in the financial statements are described in this statement of accounting policies and also specifically in
the following notes:
• note 1a: accounting treatment for the group’s interest in managed syndicates; and
• note 12: intangible assets including goodwill (assumptions underlying recoverable amounts).
Consolidation
a) Subsidiary undertakings
Subsidiary undertakings are entities controlled by the group. The group controls an entity when it is exposed to, or has rights to,
variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity.
In assessing control, the group takes into consideration potential voting rights that are currently exercisable. The acquisition
date is the date on which control is transferred to the acquirer. The financial statements of subsidiaries are included in the
consolidated financial statements from the date that control commences until the date that control ceases. Losses applicable
to the non-controlling interests in a subsidiary are allocated to the non-controlling interests even if doing so causes the non-
controlling interests to have a deficit balance.
The group has used the acquisition method of accounting for business combinations arising on the purchase of subsidiaries. Under
this method, the cost of acquisition is measured as the fair value of assets given, shares issued or liabilities undertaken at the
date of acquisition directly attributable to the acquisition. The excess of the cost of an acquisition over the net fair value of the
identifiable assets, liabilities and contingent liabilities of the subsidiary acquired is recorded as goodwill. The accounting treatment
of acquisition expenses per IFRS 3 (2008) has changed; however, as the group applied the revised standard prospectively to all
business combinations from 1 January 2010 there is no impact on accounting for the acquisition of subsidiaries made in previous
periods.
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.
Such amounts are recognised in profit or loss; and
(iii) any contingent consideration is measured at fair value at the acquisition date.
Equity financial investments made by the parent company in subsidiary undertakings and associates are stated at cost in its
separate financial statements and are reviewed for impairment when events or changes in circumstances indicate the carrying
value may be impaired.
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 it is entitled. In 2018, Beazley also
consolidated a 33.85% of the business written through syndicate 5623, which is aligned with Beazley Corporate Member No.3
Limited’s participation in the syndicate.
www.beazley.com
Annual report 2018 Beazley 141
1 Statement of accounting policies continued
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.
Investments in associates are accounted for using the equity method of accounting. Under this method the investments are
initially measured at cost and the group’s share of post-acquisition profits or losses is recognised in the statement of profit or loss.
Therefore the cumulative post-acquisition movements in the associates’ net assets are adjusted against the cost of the investment.
When the group’s share of losses equals or exceeds the carrying amount of the associate, the carrying amount is reduced to nil and
recognition for the losses is discontinued except to the extent that the group has incurred obligations in respect of the associate.
Equity accounting is discontinued when the group no longer has significant influence over the investment.
c) Intercompany balances and transactions
All intercompany transactions, balances and unrealised gains or losses on transactions between group companies are eliminated
in the group financial statements. Transactions and balances between the group and associates are not eliminated.
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.
b) Transactions and balances
Foreign currency transactions are translated into the functional currency using average exchange rates applicable to the period in
which the transactions take place and where the group considers these to be a reasonable approximation of the transaction rate.
Foreign exchange gains and losses resulting from the settlement of such transactions and from translation at the period end of
monetary assets and liabilities denominated in foreign currencies are recognised in the statement of profit or loss. Non-monetary
items recorded at historical cost in foreign currencies are translated using the exchange rate on the date of the initial transaction.
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.
On disposal of foreign operations, cumulative exchange differences previously recognised in other comprehensive income are
recognised in the statement of profit or loss as part of the gain or loss on disposal.
Insurance contracts
Insurance contracts (including inwards reinsurance contracts) are defined as those containing significant insurance risk. Insurance
risk is considered significant if, and only if, an insured event could cause Beazley to pay significant additional benefits in any
scenario, excluding scenarios that lack commercial substance. Such contracts remain insurance contracts until all rights and
obligations are extinguished or expire.
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.
b) Unearned premiums
A provision for unearned premiums (gross of reinsurance) represents that part of the gross premiums written that it is estimated
will be earned in the following financial periods. It is calculated using the daily pro-rata method, under which the premium is
apportioned over the period of risk.
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142 Beazley Annual report 2018
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Notes to the financial statements continued
1 Statement of accounting policies continued
Deferred acquisition costs (DAC)
Acquisition costs comprise brokerage, premium levy and staff-related costs (excluding performance related pay) of the underwriters
acquiring new business and renewing existing contracts. The proportion of acquisition costs in respect of unearned premiums is
deferred at the reporting date and recognised in later periods when the related premiums are earned.
Claims
These include the cost of claims and claims handling expenses paid during the period, together with the movements in provisions
for outstanding claims, claims incurred but not reported (IBNR) and claims handling provisions. The provision for claims comprises
amounts set aside for claims advised and IBNR, including claims handling expenses.
The IBNR amount is based on estimates calculated using widely accepted actuarial techniques which are reviewed quarterly by
the group actuary and annually by Beazley’s independent syndicate reporting actuary. The techniques generally use projections,
based on past experience of the development of claims over time, to form a view on the likely ultimate claims to be experienced.
For more recent underwriting years, attention is paid to the variations in the business portfolio accepted and the underlying terms
and conditions. Thus, the critical assumptions used when estimating provisions are that past experience is a reasonable predictor
of likely future claims development and that the rating and business portfolio assumptions are a fair reflection of the likely level
of ultimate claims to be incurred for the more recent years.
Liability adequacy testing
At each reporting date, liability adequacy tests are performed by segment to ensure the adequacy of the claims liabilities net of
DAC and unearned premium reserves. In performing these tests, current best estimates of future contractual cash flows, claims
handling and administration expenses, and investment income from the assets backing such liabilities are used. Any deficiency
is immediately charged to the statement of profit or loss, initially by writing off DAC and subsequently by establishing a provision
for losses arising from liability adequacy tests (‘unexpired risk provision’).
Ceded reinsurance
These are contracts entered into by the group with reinsurers under which the group is compensated for losses on contracts issued
by the group that meet the definition of an insurance contract. Insurance contracts entered into by the group under which the
contract holder is another insurer (inwards reinsurance) are included within insurance contracts.
Any benefits to which the group is entitled under its reinsurance contracts held are recognised as reinsurance assets. These
assets consist of balances due from reinsurers and include reinsurers’ share of provisions for claims. These balances are based on
calculated amounts of outstanding claims and projections for IBNR, net of estimated irrecoverable amounts, having regard to the
reinsurance programme in place for the class of business, the claims experience for the period and the current security rating of
the reinsurer involved. Reinsurance liabilities are primarily premiums payable for reinsurance contracts and are recognised as an
expense when due.
The group assesses its reinsurance assets for impairment. If there is objective evidence of impairment, then the carrying amount
is reduced to its recoverable amount and the impairment loss is recognised in the statement of profit or loss.
Revenue
Revenue consists of net earned premiums, net investment income and other income (made up of commissions received from
Beazley service companies, profit commissions, managing agent’s fees and service fees). Profit commissions are recognised as
profit is earned. Managing agent’s fees are recognised as the services are provided.
Dividends paid
Dividend distributions to the shareholders of the group are recognised in the period in which the dividends are paid, as a first
interim dividend, second interim dividend or special dividend. The second and special dividends are approved by the group’s
shareholders at the group’s annual general meeting.
www.beazley.com
Annual report 2018 Beazley 143
1 Statement of accounting policies continued
Plant and equipment
All plant and equipment is recorded at cost less accumulated depreciation and any impairment losses. Depreciation is calculated
using the straight-line method to allocate the cost of the assets to their residual values over their estimated useful lives as follows:
Fixtures and fittings
Computer equipment
Three to ten years
Three years
These assets’ residual values and useful lives are reviewed at each reporting date and adjusted if appropriate.
The carrying values of plant and equipment are reviewed for impairment when events or changes in circumstances indicate that the
carrying value may be impaired. If any such condition exists, the recoverable amount of the asset is estimated in order to determine
the extent of impairment and the difference is charged to the statement of profit or loss.
Intangible assets
a) Goodwill
Goodwill represents the excess of the cost of an acquisition over the fair value of the group’s share of the fair value of the
identifiable assets, liabilities and contingent liabilities of the acquired subsidiary at the date of acquisition. Goodwill is carried at
cost less accumulated impairment losses.
Goodwill has an indefinite life and is annually tested for impairment. Goodwill is allocated to each cash-generating unit (CGU, being
the group’s operating segments) for the purpose of impairment testing. Goodwill is impaired when the net carrying amount of the
relevant CGU exceeds its recoverable amount, being the higher of its value in use or fair value less costs to sell. Value in use is
defined as the present value of the future cash flows expected to be derived from the CGU. On transition to IFRS at 1 January 2004,
any goodwill previously amortised or written off was not reinstated.
In respect of equity accounted associates, the carrying amount of any goodwill is included in the carrying amount of the associate,
and any impairment is allocated to the carrying amount of the associate as a whole.
b) Syndicate capacity
The syndicate capacity represents the cost of purchasing the group’s participation in the combined syndicates. The capacity
is capitalised at cost in the statement of financial position. It has an indefinite useful life and is carried at cost less accumulated
impairment. It is annually tested for impairment by reference to the latest auction prices provided by Lloyd’s.
c) Licences
Licences have an indefinite useful life and are initially recorded at fair value. Licences are annually tested for impairment and
provision is made for any impairment when the recoverable amount, being the higher of its value in use and fair value, is less
than the carrying value.
d) IT development costs
Costs that are directly associated with the development of identifiable and unique software products and that are anticipated
to generate economic benefits exceeding costs beyond one year, are recognised as intangible assets. Costs include external
consultants’ fees, certain qualifying internal staff costs and other costs incurred to develop software programs. These costs
are amortised over their estimated useful life (three years) on a straight-line basis and subject to impairment testing annually.
Other non-qualifying costs are expensed as incurred.
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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 an impairment review
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 10 years.
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 are cancelled.
144 Beazley Annual report 2018
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Notes to the financial statements continued
1 Statement of accounting policies continued
a) Financial assets
On acquisition of a financial asset, the group is required to classify the asset into one of the following categories: financial assets
at fair value through the statement of profit or loss, loans and receivables, assets held to maturity and assets available for sale.
The group does not make use of the held to maturity and available for sale categories.
b) Financial assets at fair value through profit or loss
Except for derivative financial instruments and other financial assets listed in policies (f) and (g) below, all financial assets are
designated as fair value through the statement of profit or loss upon initial recognition because they are managed and their
performance is evaluated on a fair value basis. Information about these financial assets is provided internally on a fair value basis
to the group’s key management. The group’s investment strategy is to invest and evaluate their performance with reference to their
fair values.
c) Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active
market. Loans and receivables are carried at amortised cost less any impairment losses.
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.
When available, the group measures the fair value of an instrument using quoted prices in an active market for that instrument.
A market is regarded as active if quoted prices are readily and regularly available as well as representing actual and regularly
occurring market transactions on an arm’s length basis.
If a market for a financial instrument is not active, the group establishes fair value using a valuation technique. Valuation techniques
include using recent orderly transactions between market participants (if available), reference to the current fair value of other
instruments that are substantially the same, discounted cash flow analyses and option pricing models. The chosen valuation
technique makes maximum use of market inputs, relies as little as possible on estimates specific to the group, incorporates all
factors that market participants would consider in setting a price, and is consistent with accepted economic methodologies for
pricing financial instruments. Inputs to valuation techniques reasonably represent market expectations and measures of the risk
return factors inherent in the financial instrument. The group calibrates valuation techniques and tests them for validity using prices
from observable current market transactions in the same instrument or based on other available observable market data.
The best evidence of the fair value of a financial instrument at initial recognition is the transaction price, i.e. the fair value of the
consideration given or received, unless the fair value of that instrument is evidenced by comparison with other observable current
market transactions in the same instrument (i.e. without modification or repackaging) or based on a valuation technique whose
variables include only data from observable markets. When the transaction price provides the best evidence of fair value at initial
recognition, the financial instrument is initially measured at the transaction price and any difference between this price and
the value initially obtained from a valuation model is subsequently recognised in profit or loss depending on the individual facts
and circumstances of the transaction but before the valuation is supported wholly by observable market data or the transaction
is closed out.
Assets and long positions are measured at a bid price; liabilities and short positions are measured at an asking price. These prices
are monitored and deemed to approximate exit price. Where the group has positions with offsetting risks, mid-market prices are
used to measure the offsetting risk positions and a bid or asking price adjustment is applied only to the net open position as
appropriate. Fair values reflect the credit risk of the instrument and include adjustments to take account of the credit risk of the
group entity and counterparty where appropriate. Fair value estimates obtained from models are adjusted for any other factors,
such as liquidity risk or model uncertainties, to the extent that the group believes a third-party market participant would take them
into account in pricing a transaction.
Upon initial recognition, attributable transaction costs relating to financial instruments at fair value through profit or loss are
recognised in the statement of profit or loss when incurred. Financial assets at fair value through profit or loss are continuously
measured at fair value, and changes therein are recognised in the statement of profit or loss. Net changes in the fair value of
financial assets at fair value through profit or loss exclude interest and dividend income, as these items are accounted for
separately as set out on the next page.
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1 Statement of accounting policies continued
e) Hedge funds, equity funds and illiquid credit assets
The group invests in a number of hedge funds, equity funds and illiquid credit assets for which there are no available quoted market
prices. The valuation of these assets is based on fair value techniques as described above. The fair value of our hedge fund
portfolio is calculated by reference to the underlying net asset values (NAVs) of each of the individual funds. Consideration is also
given to adjusting such NAV valuations for any restriction applied to distributions, the existence of side pocket provisions and the
timing of the latest available valuations. At certain times, we will have uncalled unfunded commitments in relation to our illiquid
credit assets. These uncalled unfunded commitments are actively monitored by the group and are disclosed in the notes 2 and 16
to the financial statements. The additional investment into our illiquid credit asset portfolio is recognised on the date that this
funding is provided by the group.
f) Insurance receivables and payables
Insurance receivables and payables are recognised when due. These include amounts due to and from agents, brokers and
insurance contract holders. Insurance receivables are classified as ‘loans and receivables’ as they are non-derivative financial
assets with fixed or determinable payments that are not quoted on an active market. Insurance receivables are measured at
amortised cost less any impairment losses. Insurance payables are stated at amortised cost.
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.
i) Borrowings
Borrowings are initially recorded at fair value less transaction costs incurred. Subsequently borrowings are stated at amortised cost
and interest is recognised in the statement of profit or loss over the period of the borrowings using the effective interest method.
Finance costs comprise interest, fees paid for the arrangement of debt and letter of credit facilities, and commissions charged for
the utilisation of letters of credit. These costs are recognised in the statement of profit or loss using the effective interest method.
In addition, finance costs include gains on the early redemption of the group’s borrowings. These gains are recognised in the
statement of profit or loss, being the difference between proceeds paid plus related costs and the carrying value of the borrowings
redeemed.
j) Other payables
Other payables are stated at amortised cost determined according to the effective interest rate method.
k) Hedge accounting and derivative financial instruments
Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently
remeasured at their fair value. The best evidence of fair value of a derivative at initial recognition is the transaction price. The
method of recognising the resulting fair value gains or losses depends on whether the derivative is designated as a hedging
instrument and, if so, the nature of the item being hedged. Fair values are obtained from quoted market prices in active markets,
recent market transactions, and valuation techniques which include discounted cash flow models. All derivatives are carried as
assets when fair value is positive and as liabilities when fair value is negative.
Derivative assets and liabilities are offset and the net amount reported in the statement of financial position when there is a legally
enforceable right to set off the recognised amounts and the parties intend to settle on a net basis, or realise the assets and settle
the liability simultaneously.
The group has not designated any derivatives as fair value hedges, cash flow hedges or net investment hedges and therefore all
fair value movements are recorded through profit or loss.
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Notes to the financial statements continued
1 Statement of accounting policies continued
l) Impairment of financial assets
The group considers evidence of impairment for financial assets measured at amortised cost at both a specific asset and a
collective level. The group assesses at each reporting date whether there is objective evidence that a specific financial asset
measured at amortised cost is impaired. A financial asset is impaired and impairment losses are incurred only if there is objective
evidence of impairment as a result of one or more events that have occurred after the initial recognition of the assets and that event
has an impact on the estimated cash flows of the financial asset that can be reliably estimated. Assets that are not individually
significant are collectively assessed for impairment by grouping together assets with similar risk characteristics.
If there is objective evidence that impairment exists, the amount of the loss is measured as the difference between the asset’s
carrying amount and the value of the estimated future cash flows discounted at the financial asset’s original effective interest rate.
The amount of the loss is recognised in the statement of profit or loss.
In assessing collective impairment, the group uses historical trends of the probability of default, the timing of recoveries and the
amount of loss incurred, adjusted for management’s judgement as to whether current economic and credit conditions are such that
the actual losses are likely to be greater or lesser than those suggested by historical trends.
m) Cash and cash equivalents
Cash and cash equivalents consist of cash held at bank, cash in hand, deposits held at call with banks, cash held in Lloyd’s trust
accounts and other short term highly liquid investments that are readily convertible to known amounts of cash and which are
subject to an insignificant risk of changes in value. These investments have less than three months maturity from the date of
acquisition. Cash and cash equivalents are measured at fair value through the profit and loss account.
n) Unfunded commitment capital
Unfunded committed capital arising in relation to certain financial asset investments is not shown on the statement of financial
position as unfunded committed capital represents a loan commitment that is scoped out of IAS 39.
Leases
Leases where a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating
leases. Payments made by the group for operating leases are charged to the statement of profit or loss on a straight-line basis over
the period of the lease.
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.
A defined benefit plan is a pension plan that defines an amount of pension benefit that an employee will receive on retirement,
usually dependent on one or more factors such as age, years of service and compensation. The pension costs are assessed using
the projected unit credit method. Under this method the costs of providing pensions are charged to the statement of profit or loss so
as to spread the regular costs over the service lives of employees in accordance with the advice of the qualified actuary, who values
the plans annually. The net pension obligation is measured at the present value of the estimated future net cash flows and is stated
net of plan assets.
Remeasurements of the net defined benefit liability, which comprise actuarial gains and losses, the return on plan assets (excluding
interest) and the effect of the asset ceiling (if any, excluding interest), are recognised immediately in other comprehensive income.
The group also determines the net interest expense/(income) for the period on the net defined benefit liability/(asset) by applying
the discount rate used to measure the defined benefit obligation at the beginning of the annual period to the net defined benefit
liability/(asset) at the beginning of the annual period, taking into account any changes in the net defined benefit liability/(asset)
during the period as a result of contributions and benefit payments. Consequently, the net interest on the defined benefit liability/
(asset) comprises:
• interest cost on the defined benefit obligation;
• interest income on plan assets; and
• interest on the effect of the asset ceiling.
Net interest expense/(income) is recognised in the statement of profit or loss.
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1 Statement of accounting policies continued
Past service costs are recognised as an expense at the earlier of the date when a plan amendment or curtailment occurs and
the date when an entity recognises any termination benefits.
For the defined contribution plan, the group pays contributions to a privately administered pension plan. Once the contributions
have been paid, the group has no further obligations. The group’s contributions are charged to the statement of profit or loss in
the period to which they relate.
b) Share based compensation
The group offers option plans over Beazley plc’s ordinary shares to certain employees, including the save-as-you-earn (SAYE)
scheme.
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 to cover SAYE vestings, the proceeds received, net of any transaction
costs, are credited to share capital (nominal value) with the excess amount going to share premium. For other plans, when no
proceeds are received, the nominal value of shares issued is to share capital and debited to 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, and
the value of shares held within the trust, are credited to retained earnings.
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.
Current tax is the expected tax payable on the taxable income for the year using tax rates enacted or substantively enacted at the
year end reporting date and any adjustments to tax payable in respect of prior periods.
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.
Deferred tax assets are recognised in the statement of financial position to the extent that it is probable that future taxable profit
will be available against which the temporary differences can be utilised.
Earnings per share
Basic earnings per share are calculated by dividing profit after tax available to shareholders by the weighted average number of
ordinary shares in issue during the period.
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.
The shares held in the employee share options plan (ESOP) and treasury shares are excluded from both the calculations, until such
time as they vest unconditionally with the employees.
Provisions and contingencies
Provisions are recognised when the group has a present legal or constructive obligation as a result of a past event, it is probable
that an outflow of resources or economic benefits will be required to settle the obligation, and a reliable estimate of the obligation
can be made. Where the group expects a provision to be reimbursed, the reimbursement is recognised as a separate asset but
only when the reimbursement is virtually certain.
Contingent liabilities are present obligations that are not recognised because it is not probable that an outflow of resources will
be required to meet the liabilities or because the amount of the obligation cannot be measured with sufficient reliability.
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Notes to the financial statements continued
2 Risk management
The group has identified the risks arising from its activities and has established policies and procedures to manage these items
in accordance with its risk appetite. The group categorises its risks into eight areas: insurance, strategic, market, operational, credit,
regulatory and legal, liquidity and group risk. The sections below outline the group’s risk appetite and explain how it defines and
manages each category of risk.
The eight categories of risk have also been considered in the context of the company (Beazley plc). The following areas are
applicable to the company: market, operational, regulatory and legal, and liquidity. The following disclosures cover the company to
the extent that these areas are applicable.
The symbol † by a heading indicates that the information in that section has not been audited.
2.1 Insurance risk
The group’s insurance business assumes the risk of loss from persons or organisations that are directly exposed to an underlying
loss. Insurance risk arises from this risk transfer due to inherent uncertainties about the occurrence, amount and timing of
insurance liabilities. The four key components of insurance risk are underwriting, reinsurance, claims management and reserving.
Each element is considered below.
a) Underwriting risk
Underwriting risk comprises four elements that apply to all insurance products offered by the group:
• cycle risk – the risk that business is written without full knowledge as to the (in)adequacy of rates, terms and conditions;
• event risk – the risk that individual risk losses or catastrophes lead to claims that are higher than anticipated in plans and pricing;
• pricing risk – the risk that the level of expected loss is understated in the pricing process; and
• expense risk – the risk that the allowance for expenses and inflation in pricing is inadequate.
We manage and model these four elements in the following three categories: attritional claims, large claims and catastrophe events.
The group’s underwriting strategy is to seek a diverse and balanced portfolio of risks in order to limit the variability of outcomes.
This is achieved by accepting a spread of business over time, segmented between different products, geographies and sizes.
The annual business plans for each underwriting team reflect the group’s underwriting strategy, and set out the classes of business,
the territories and the industry sectors in which business is to be written. These plans are approved by the board and monitored by
the underwriting committee.
Our underwriters calculate premiums for risks written based on a range of criteria tailored specifically to each individual risk.
These factors include but are not limited to financial exposure, loss history, risk characteristics, limits, deductibles, terms and
conditions and acquisition expenses.
The group also recognises that insurance events are, by their nature, random, and the actual number and size of events during
any one year may vary from those estimated using established statistical techniques.
To address this, the group sets out the exposure that it is prepared to accept in certain territories to a range of events such as
natural catastrophes and specific scenarios which may result in large industry losses. This is monitored through regular calculation
of realistic disaster scenarios (RDSs). The aggregate position is monitored at the time of underwriting a risk, and reports are
regularly produced to highlight the key aggregations to which the group is exposed.
The group uses a number of modelling tools to monitor its exposures against the agreed risk appetite set and to simulate
catastrophe losses in order to measure the effectiveness of its reinsurance programmes. Stress and scenario tests are also run
using these models. The range of scenarios considered includes natural catastrophe, cyber, marine, liability, political, terrorism
and war events.
One of the largest types of event exposure relates to natural catastrophe events such as windstorm or earthquake. Where possible
the group measures geographic accumulations and uses its knowledge of the business, historical loss behaviour and commercial
catastrophe modelling software to assess the expected range of losses at different return periods. Upon application of the
reinsurance coverage purchased, the key gross and net exposures are calculated on the basis of extreme events at a range of
return periods.
The group’s high level catastrophe risk appetite is set by the board and the business plans of each team are determined within
these parameters. The board may adjust these limits over time as conditions change. In 2018 the group operated to a catastrophe
risk appetite for a probabilistic 1-in-250 years US event of $416.0m (2017: $370.0m) net of reinsurance. This represented an
increase in our catastrophe risk appetite of 12% compared to 2017.
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2 Risk management continued
Lloyd’s has also defined its own specific set of RDS events for which all syndicates with relevant exposures must report. Of these
the three largest, net of reinsurance, events which could have impacted Beazley in 2017 and 2018 are:
Unaudited †
Lloyd’s prescribed natural catastrophe event (total incurred losses)
San Francisco quake (2018: $78.0bn)
Gulf of Mexico windstorm (2018: $112.0bn)
Los Angeles quake (2018: $78.0bn)
Unaudited †
Lloyd’s prescribed natural catastrophe event (total incurred losses)
San Francisco quake (2017: $78.0bn)
Gulf of Mexico windstorm (2017: $112.0bn)
Los Angeles quake (2017: $78.0bn)
1 Probable market loss.
2018
Modelled
PML1 (before
reinsurance)
$m
704.4
595.1
697.2
2017
Modelled
PML1 (before)
reinsurance)
$m
676.9
609.0
637.3
Modelled
PML1 (after
reinsurance)
$m
236.9
199.0
235.9
Modelled
PML1 (after)
reinsurance)
$m
228.2
163.3
218.5
The net of reinsurance exposures for all three scenarios have increased during 2018, with the Gulf of Mexico windstorm increasing
the most, by 22%. These increases are being driven by less reinsurance being purchased by the reinsurance division, which was in
line with the plan to increase the natural catastrophe risk appetite in 2018.
The net exposure of the group to each of these modelled events at a given point in time is a function of assumptions made about
how and where the event occurs, its magnitude, the amount of business written that is exposed to each event and the reinsurance
arrangements in place.
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 15 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, the failure of a cloud provider, the failure of a financial transaction system and four property damage related
scenarios. These scenarios include all aspects of coverage, including dependent business interruption. 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 2018. 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.
Beazley also reports on cyber exposure to Lloyd’s using the three largest internal realistic disaster scenarios and three prescribed
scenarios which include both data breach and property damage related cyber exposure. Given Beazley’s risk profile, the quantum
from the internal data breach scenarios is larger than any of the cyber property damage related scenarios.
To manage underwriting exposures, the group has developed limits of authority and business plans which are binding upon all staff
authorised to underwrite and are specific to underwriters, classes of business and industry. In 2018, the maximum line that any
one underwriter could commit the managed syndicates to was $100m. In most cases, maximum lines for classes of business were
much lower than this.
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2 Risk management continued
These authority limits are enforced through a comprehensive sign-off process for underwriting transactions including dual sign-off
for all line underwriters and peer review for all risks exceeding individual underwriters’ authority limits. Exception reports are also
run regularly to monitor compliance.
All underwriters also have a right to refuse renewal or change the terms and conditions of insurance contracts upon renewal.
Rate monitoring details, including limits, deductibles, exposures, terms and conditions and risk characteristics are also captured
and the results are combined to monitor the rating environment for each class of business.
Binding authority contracts
A proportion of the group’s insurance risks are transacted by third parties under delegated underwriting authorities. Each third party
is thoroughly vetted by our coverholder approval group before it can bind risks, and is subject to rigorous monitoring to maintain
underwriting quality and confirm ongoing compliance with contractual guidelines.
Operating divisions
In 2018, 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.
2018
Marine
Political, accident & contingency
Property
Reinsurance
Specialty lines
Total
2017
Marine
Political, accident & contingency
Property
Reinsurance
Specialty lines
Total
UK
(Lloyd’s)
11%
8%
16%
8%
40%
83%
UK
(Lloyd’s)
11%
9%
15%
9%
44%
88%
US
(Non-Lloyd’s)
–
1%
–
–
16%
17%
US
(Non-Lloyd’s)
–
–
–
–
12%
12%
Europe
(Non-Lloyd’s)
–
–
–
–
–
–
Europe
(Non-Lloyd’s)
–
–
–
–
–
–
Total
11%
9%
16%
8%
56%
100%
Total
11%
9%
15%
9%
56%
100%
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 155.
The group’s reinsurance programmes complement the underwriting team business plans and seek to protect group capital from
an adverse volume or volatility of claims on both a per risk and per event basis. In some cases the group deems it more economic
to hold capital than purchase reinsurance. These decisions are regularly reviewed as an integral part of the business planning
and performance monitoring process.
The reinsurance security committee examines and approves all reinsurers to ensure that they possess suitable security.
The group’s ceded reinsurance team ensures that these guidelines are followed, undertakes the administration of reinsurance
contracts and monitors and instigates our responses to any erosion of the reinsurance programmes.
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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.
d) Reserving and ultimate reserves risk
Reserving and ultimate reserves risk occurs within the group where established insurance liabilities are insufficient through
inaccurate forecasting, or where there is inadequate allowance for expenses and reinsurance bad debts in provisions.
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.
The objective of the group’s reserving policy is to produce accurate and reliable estimates that are consistent over time and
across classes of business. The estimates of gross premiums written and claims prepared by the actuarial department are used
through a formal quarterly peer review process to independently test the integrity of the estimates produced by the underwriting
teams for each class of business. These meetings are attended by senior management, senior underwriters, and actuarial, claims,
and finance representatives.
2.2 Strategic risk †
This is the risk that the group’s strategy is inappropriate or that the group is unable to implement its strategy. Where events
supersede the group’s strategic plan this is escalated at the earliest opportunity through the group’s monitoring tools and
governance structure.
Senior management performance
Management stretch is the risk that business growth might result in an insufficient or overly complicated management team
structure, thereby undermining accountability and control within the group. As the group expands its worldwide business in the
UK, North America, Europe, South America and Asia, management stretch may make the identification, analysis and control
of group risks more complex.
On a day-to-day basis, the group’s management structure encourages organisational flexibility and adaptability, while ensuring
that activities are appropriately coordinated and controlled. By focusing on the needs of their customers and demonstrating both
progressive and responsive abilities, staff, management and outsourced service providers are expected to excel in service and
quality. Individuals and teams are also expected to transact their activities in an open and transparent way. These behavioural
expectations reaffirm low group risk tolerance by aligning interests to ensure that routine activities, projects and other initiatives
are implemented to benefit and protect resources of both local business segments and the group as a whole.
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 2018, this
permitted variance from the forecast investment return was set at $150.0m (unaudited). For 2019, 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.
Changes in interest rates also impact the present values of estimated group liabilities, which are used for solvency and capital
calculations. Our investment strategy reflects the nature of our liabilities, and the combined market risk of investment assets
and estimated liabilities is monitored and managed within specified limits.
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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.
The group operates in four main currencies: US dollars, sterling, Canadian dollars and euros. Transactions in all currencies are
converted to US dollars on initial recognition with any resulting monetary items being translated to the US dollar spot rate at the
reporting date. If any foreign exchange risk arises it is actively managed as described below.
In 2018, 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.
The group’s underwriting capital is matched by currency to the principal underlying currencies of its written premiums. This helps
to mitigate the risk that the group’s capital required to underwrite business is materially affected by any future movements in
exchange rates.
The group also has foreign operations with functional currencies that are different from the group’s presentational currency.
The effect of this on foreign exchange risk is that the group is exposed to fluctuations in exchange rates for US dollar denominated
transactions and net assets arising in those foreign currency operations. It also gives rise to a currency translation exposure for the
group to sterling, euro, Norwegian krone, Canadian dollars, Singapore dollars and Australian dollars on translation to the group’s
presentational currency. These exposures are minimal and are not hedged.
The following table summarises the carrying value of total assets and total liabilities categorised by the group’s main currencies:
31 December 2018
Total assets
Total liabilities
Net assets
31 December 2017
Total assets
Total liabilities
Net assets
UK £
$m
506.3
(511.8)
(5.5)
UK £
$m
549.0
(514.4)
34.6
CAD $
$m
131.6
(138.9)
(7.3)
CAD $
$m
130.8
(110.0)
20.8
EUR €
$m
290.3
(305.6)
(15.3)
EUR €
$m
333.6
(304.6)
29.0
Subtotal
$m
928.2
(956.3)
(28.1)
Subtotal
$m
1,013.4
(929.0)
84.4
US $
$m
6,805.7
(5,310.7)
1,495.0
US $
$m
6,545.3
(5,130.8)
1,414.5
Total
$m
7,733.9
(6,267.0)
1,466.9
Total
$m
7,558.7
(6,059.8)
1,498.9
Sensitivity analysis
Fluctuations in the group’s trading currencies against the US dollar would result in a change to profit after tax and net asset value.
The table below gives an indication of the impact on profit after tax and net assets of a percentage change in the relative strength
of the US dollar against the value of sterling, the Canadian dollar and the euro, simultaneously. The analysis is based on information
on net asset positions as at the balance sheet date.
Change in exchange rate of sterling, Canadian dollar and euro relative to US dollar
Dollar weakens 30% against other currencies
Dollar weakens 20% against other currencies
Dollar weakens 10% against other currencies
Dollar strengthens 10% against other currencies
Dollar strengthens 20% against other currencies
Dollar strengthens 30% against other currencies
Impact on profit after
tax for the year ended
2017
2018
$m
$m
19.6
(7.5)
13.0
(5.0)
6.5
(2.5)
(6.5)
2.5
(13.0)
5.0
(19.6)
7.5
Impact on net assets
2017
2018
$m
$m
11.8
(11.5)
7.9
(7.7)
3.9
(3.8)
(3.9)
3.8
(7.9)
7.7
(11.8)
11.5
www.beazley.com
Annual report 2018 Beazley 153
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 group manages interest rate risk by primarily investing in short duration financial assets along with cash and cash equivalents.
The investment committee monitors the duration of these assets on a regular basis.
The group also entered into bond futures contracts to manage the interest rate risk on bond portfolios.
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.
Duration
31 December 2018
Fixed and floating rate debt securities
Cash and cash equivalents
Derivative financial instruments
Borrowings
Total
31 December 2017
Fixed and floating rate debt securities
Cash and cash equivalents
Derivative financial instruments
Borrowings
Total
<1 yr
$m
1,566.0
336.3
6.9
(95.6)
1,813.6
<1 yr
$m
1,447.4
440.5
8.8
–
1,896.7
1-2 yrs
$m
831.0
–
–
–
831.0
1-2 yrs
$m
851.7
–
–
(99.5)
752.2
2-3 yrs
$m
963.8
–
–
–
963.8
2-3 yrs
$m
571.1
–
–
–
571.1
3-4 yrs
$m
467.4
–
–
–
467.4
3-4 yrs
$m
366.3
–
–
–
366.3
4-5 yrs
$m
188.2
–
–
–
188.2
4-5 yrs
$m
382.0
–
–
–
382.0
5-10 yrs
$m
83.8
–
–
(248.7)
(164.9)
5-10 yrs
$m
96.2
–
–
(248.5)
(152.3)
>10 yrs
$m
–
–
–
–
–
Total
$m
4,100.2
336.3
6.9
(344.3)
4,099.1
Total
>10 yrs
$m
$m
3,714.7
–
440.5
–
8.8
–
(18.0)
(366.0)
(18.0) 3,798.0
Borrowings consist of two items as at 31 December 2018. The first is $250.0m of subordinated tier 2 debt raised in November
2016. This debt is due in 2026 and has annual interest of 5.875% payable in May and November of each year. The second
comprises £75m of sterling denominated 5.375% notes due in 2019 with interest payable in March and September each year.
As at 31 December 2017, borrowings included $18.0m subordinated debt that was due in October 2034 and callable at the group’s
option since 2009. The group exercised its call option in October 2018. As the debt was recalled in November 2018 it is not
included within any of the categories in the 31 December 2018 table (2017: >10 yrs category).
Sensitivity analysis
Changes in yields, with all other variables constant, would result in changes in the capital value of debt securities as well as
subsequent interest receipts and payments. This would affect reported profits and net assets as indicated in the table below:
i
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n
a
n
c
i
a
l
s
t
a
t
e
m
e
n
t
s
Shift in yield (basis points)
150 basis point increase
100 basis point increase
50 basis point increase
50 basis point decrease
100 basis point decrease
Impact on profit after
income tax for the year
2017
2018
$m
$m
Impact on net assets
2017
2018
$m
$m
(93.8)
(62.6)
(31.3)
31.3
62.6
(50.9)
(33.9)
(17.0)
17.0
33.9
(93.8)
(62.6)
(31.3)
31.3
62.6
(50.9)
(33.9)
(17.0)
17.0
33.9
154 Beazley Annual report 2018
www.beazley.com
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.
Financial assets include fixed and floating rate debt securities, hedge funds, illiquid credit assets, equity investments and derivative
financial assets. The price of debt securities is affected by interest rate risk, as described above, and also by issuer's credit risk.
The sensitivity to price risk that relates to the group’s hedge fund, illiquid credit and equity investments is presented below.
Listed investments that are quoted in an active market are recognised in the statement of financial position at quoted bid price,
which is deemed to be approximate exit price. If the market for the investment is not considered to be active, then the group
establishes fair value using valuation techniques (refer to note 16). This includes comparison of orderly transactions between
market participants, reference to the current fair value of other investments that are substantially the same, discounted cash flow
models and other valuation techniques that are commonly used by market participants.
Change in fair value of hedge funds, equity funds and illiquid credit assets
30% increase in fair value
20% increase in fair value
10% increase in fair value
10% decrease in fair value
20% decrease in fair value
30% decrease in fair value
Impact on profit after
income tax for the year
2017
2018
$m
$m
Impact on net assets
2017
2018
$m
$m
163.2
108.8
54.4
(54.4)
(108.8)
(163.2)
168.6
112.4
56.2
(56.2)
(112.4)
(168.6)
163.2
108.8
54.4
(54.4)
(108.8)
(163.2)
168.6
112.4
56.2
(56.2)
(112.4)
(168.6)
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 uses an Economic Scenario Generator (ESG) to simulate multiple simulations of financial conditions, to support stochastic
analysis of market risk. Beazley uses these outputs to assess the value at risk (VAR) of its investments, at different confidence
levels, including ‘1 in 200’, which reflects Solvency II modelling requirements, and ‘1 in 10’, reflecting scenarios which are more
likely to occur in practice. Risk is typically considered to a 12 month horizon. It is assessed for investments in isolation and also in
conjunction with the present value of our liabilities, to help us monitor and manage market risk for solvency and capital purposes.
By its nature, stochastic modelling does not provide a precise measure of risk, ESG outputs are regularly validated against actual
market conditions, and Beazley also uses a number of other, qualitative, measures to support the monitoring and management of
investment risk. These include stress testing and scenario analysis.
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 2018, the permitted deviation was $150.0m. 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.
2.4 Operational risk †
Operational risk arises from the risk of losses due to inadequate or failed internal processes, people, systems, service providers
or external events.
There are a number of business activities for which the group uses the services of a third-party company, such as investment
management, data entry and credit control. These service providers are selected against rigorous criteria and formal service level
agreements are in place, and regularly monitored and reviewed.
www.beazley.com
Annual report 2018 Beazley 155
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.
The group actively manages operational risks and minimises them where appropriate. This is achieved by implementing and
communicating guidelines to staff and other third parties. The group also regularly monitors the performance of its controls and
adherence to these guidelines through the risk management reporting process.
Key components of the group’s operational control environment include:
• modelling of operational risk exposure and scenario testing;
• management review of activities;
• documentation of policies and procedures;
• preventative and detective controls within key processes;
• contingency planning; and
• other systems controls.
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; and
• cash and cash equivalents.
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.
The group limits exposure to a single counterparty or a group of counterparties and analyses the geographical locations of
exposures when assessing credit risk.
An approval system also exists for all new brokers, and broker performance is carefully monitored. Regular exception reports
highlight trading with non-approved brokers, and the group’s credit control function frequently assesses the ageing and collectability
of debtor balances. Any large, aged items are prioritised and where collection is outsourced incentives are in place to support
these priorities.
The investment committee has established comprehensive guidelines for the group’s investment managers regarding the type,
duration and quality of investments acceptable to the group. The performance of investment managers is regularly reviewed
to confirm adherence to these guidelines.
The group has developed processes to formally examine all reinsurers before entering into new business arrangements. New
reinsurers are approved by the reinsurance security committee, which also reviews arrangements with all existing reinsurers at least
annually. Vulnerable or slow-paying reinsurers are examined more frequently.
To assist in the understanding of credit risks, A.M. Best, Moody’s and Standard & Poor’s (S&P) ratings are used. These ratings have
been categorised below as used for Lloyd’s reporting:
i
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n
a
n
c
i
a
l
s
t
a
t
e
m
e
n
t
s
Tier 1
Tier 2
Tier 3
Tier 4
A.M. Best
Moody’s
S&P
AAA to A-
Aaa to A3
A++ to A-
B++ to B- Baa1 to Ba3 BBB+ to BB-
B+ to CCC
C++ to C-
B1 to Caa
R, (U,S) 3
D, E, F, S
Ca to C
156 Beazley Annual report 2018
www.beazley.com
Notes to the financial statements continued
2 Risk management continued
The following tables summarise the group’s concentrations of credit risk:
31 December 2018
Financial assets at fair value
– fixed and floating rate debt securities
– equity funds
– hedge funds
– illiquid credit assets
– derivative financial instruments
Insurance receivables
Reinsurance assets
Other receivables
Cash and cash equivalents
Total
31 December 2017
Financial assets at fair value
– fixed and floating rate debt securities
– equity funds
– hedge funds
– illiquid credit assets
– derivative financial instruments
Insurance receivables
Reinsurance assets
Other receivables
Cash and cash equivalents
Total
Tier 1
$m
Tier 2
$m
Tier 3
$m
Tier 4
$m
Unrated
$m
Total
$m
3,041.2
–
–
–
–
–
1,192.8
58.5
336.3
4,628.8
Tier 1
$m
2,840.0
–
–
–
–
–
1,231.1
68.6
440.5
4,580.2
1,059.0
–
–
–
–
–
–
–
–
1,059.0
Tier 2
$m
874.7
–
–
–
–
–
–
–
–
874.7
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
85.4
337.2
186.6
6.9
943.3
–
–
–
1,559.4
4,100.2
85.4
337.2
186.6
6.9
943.3
1,192.8
58.5
336.3
7,247.2
Tier 3
$m
Tier 4
$m
Unrated
$m
Total
$m
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
168.3
377.4
180.4
8.8
918.0
–
–
–
1,652.9
3,714.7
168.3
377.4
180.4
8.8
918.0
1,231.1
68.6
440.5
7,107.8
The largest counterparty exposure within tier 1 is $1,106.5m of US treasuries (2017: $936.7m).
Financial investments falling within the unrated category comprise hedge 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.
Insurance receivables and other receivables balances held by the group have not been impaired, based on all evidence available,
and no impairment provision has been recognised in respect of these assets. Insurance receivables in respect of coverholder
business are credit controlled by third-party managers. We monitor third party coverholders’ performance and their financial
processes through the group’s coverholder management team. These assets are individually impaired after considering information
such as the occurrence of significant changes in the counterparties’ financial position, patterns of historical payment information
and disputes with counterparties.
www.beazley.com
Annual report 2018 Beazley 157
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 total impairment in respect of the reinsurance assets, including reinsurer's share of outstanding claims, at 31 December
2018 was as follows:
Balance at 1 January 2017
Impairment loss recognised
Balance at 31 December 2017
Impairment loss written back
Balance at 31 December 2018
Individual
impairment
$m
2.4
0.5
2.9
(0.1)
2.8
Collective
impairment
$m
10.2
0.1
10.3
(0.9)
9.4
Total
$m
12.6
0.6
13.2
(1.0)
12.2
The group has insurance receivables and reinsurance assets that are past due at the reporting date. An aged analysis of these
is presented below:
31 December 2018
Insurance receivables
Reinsurance assets
31 December 2017
Insurance receivables
Reinsurance assets
Up to 30 days
past due
$m
49.6
1.0
Up to 30 days
past due
$m
57.5
20.4
30-60 days
past due
$m
13.9
2.3
30-60 days
past due
$m
13.7
2.9
60-90 days
past due
$m
5.3
0.3
60-90 days
past due
$m
5.3
0.5
Greater than
90 days
past due
$m
18.8
3.4
Greater than
90 days
past due
$m
18.9
5.2
Total
$m
87.6
7.0
Total
$m
95.4
29.0
The total impairment provision in the statement of financial position in respect of reinsurance assets past due (being reinsurance
recoverables due on paid claims) by more than 30 days at 31 December 2018 was $3.1m (2017: $3.1m). This $3.1m provision
in respect of overdue reinsurance recoverables is included within the total provision of $12.2m shown in the table at the top of
the page.
The group believes that the unimpaired amounts that are past due more than 30 days are still collectable in full, based on historic
payment behaviour and analyses of credit risk.
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.
2.7 Liquidity risk
Liquidity risk arises where cash may not be available to pay obligations when due at a reasonable cost. The group is exposed
to daily calls on its available cash resources, principally from claims arising from its insurance business. In the majority of the cases,
these claims are settled from the premiums received.
The group’s approach is to manage its liquidity position so that it can reasonably survive a significant individual or market loss
event (details of the group’s exposure to realistic disaster scenarios are provided on page 149). This means that the group
maintains sufficient liquid assets, or assets that can be converted into liquid assets at short notice and without any significant
capital loss, to meet expected cash flow requirements. These liquid funds are regularly monitored using cash flow forecasting to
ensure that surplus funds are invested to achieve a higher rate of return. The group also makes use of loan facilities and borrowings,
details of which can be found in note 25. Further information on the group’s capital resources is contained on pages 48 to 49.
i
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n
c
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a
l
s
t
a
t
e
m
e
n
t
s
158 Beazley Annual report 2018
www.beazley.com
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:
31 December 2018
Marine
Political, accident & contingency
Property
Reinsurance
Specialty lines
Net claims liabilities
1 For a breakdown of net claims liabilities refer to note 24.
31 December 2017
Marine
Political, accident & contingency
Property
Reinsurance
Specialty lines
Net claims liabilities
Within
1 year
$m
116.3
59.5
179.9
88.4
431.3
875.4
Within
1 year
$m
100.6
62.6
134.5
70.8
542.7
911.2
1-3 years
$m
97.3
44.2
111.9
71.5
731.2
1,056.1
1-3 years
$m
89.3
45.8
101.2
66.1
713.8
1,016.2
3-5 years
$m
28.6
12.2
29.0
22.8
471.9
564.5
3-5 years
$m
26.7
9.9
29.2
20.8
360.4
447.0
Greater than
5 years
$m
21.8
16.8
27.0
21.3
506.1
593.0
Greater than
5 years
$m
20.4
12.0
32.8
19.8
456.0
541.0
Weighted
average term
to settlement
(years)
2.0
2.4
1.8
2.2
3.5
Weighted
average term
to settlement
(years)
2.0
2.3
2.2
2.3
3.4
Total
$m
264.0
132.7
347.8
204.0
2,140.5
3,089.0
Total
$m
237.0
130.3
297.7
177.5
2,072.9
2,915.4
The following table is an analysis of the net contractual cash flows based on all the liabilities held at 31 December:
31 December 2018
Net claims liabilities
Borrowings
Other payables
31 December 2017
Net claims liabilities
Borrowings
Other payables
Within
1 year
875.4
95.6
442.6
Within
1 year
911.2
–
512.5
1-3 years
1,056.1
–
–
1-3 years
1,016.2
99.5
–
3-5 years
564.5
–
–
3-5 years
447.0
–
–
Greater than
5 years
593.0
248.7
–
Greater than
5 years
541.0
266.5
–
Total
3,089.0
344.3
442.6
Total
2,915.4
366.0
512.5
The group makes additional interest payments for borrowings. Further details are provided in notes 8 and 25.
The next two tables summarise the carrying amount at reporting date of financial instruments analysed by maturity date.
Maturity
31 December 2018
Fixed and floating rate debt securities
Derivative financial instruments
Cash and cash equivalents
Insurance receivables
Other receivables
Other payables
Borrowings
Total
<1 yr
$m
1,114.0
6.9
336.3
943.3
58.5
(442.6)
(95.6)
1,920.8
1-2 yrs
$m
909.1
–
–
–
–
–
909.1
2-3 yrs
$m
1,050.2
–
–
–
–
–
–
1,050.2
3-4 yrs
$m
516.6
–
–
–
–
–
–
516.6
4-5 yrs
$m
322.1
–
–
–
–
–
–
322.1
5-10 yrs
$m
188.2
–
–
–
–
–
(248.7)
(60.5)
>10 yrs
$m
–
–
–
–
–
–
–
–
Total
$m
4,100.2
6.9
336.3
943.3
58.5
(442.6)
(344.3)
4,658.3
www.beazley.com
Annual report 2018 Beazley 159
2 Risk management continued
31 December 2017
Fixed and floating rate debt securities
Derivative financial instruments
Cash and cash equivalents
Insurance receivables
Other receivables
Other payables
Borrowings
Total
<1 yr
$m
926.5
8.8
440.5
918.0
68.6
(512.5)
–
1,849.9
1-2 yrs
$m
967.1
–
–
–
–
–
(99.5)
867.6
2-3 yrs
$m
653.0
–
–
–
–
–
–
653.0
3-4 yrs
$m
511.9
–
–
–
–
–
–
511.9
4-5 yrs
$m
454.3
–
–
–
–
–
–
454.3
5-10 yrs
$m
201.9
–
–
–
–
–
(248.5)
(46.6)
>10 yrs
$m
–
–
–
–
–
–
(18.0)
(18.0)
Total
$m
3,714.7
8.8
440.5
918.0
68.6
(512.5)
(366.0)
4,272.1
Borrowings consist of two items as at 31 December 2018. The first is $250m of subordinated tier 2 debt raised in November 2016.
This debt is due in 2026 and has annual interest of 5.875% payable in May and November of each year. The second comprises
a of £75m sterling denominated 5.375% notes due in 2019 with interest payable in March and September each year.
As at 31 December 2017, borrowings included $18.0m subordinated debt that was due in October 2034 and callable at the group’s
option since 2009. The group exercised its call option in October 2018. As the debt was recalled in November 2018 it is not
included within any of the categories in the 31 December 2018 table (2017: >10 yrs category).
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.
2.8 Group risk †
Group risk occurs where business units fail to consider the impact of their activities on other parts of the group, as well as the
risks arising from these activities. There are two main components of group risk which are explained below.
a) Contagion
Contagion risk is the risk arising from actions of one part of the group which could adversely affect any other part of the group.
As the two largest components of the group, this is of particular relevance for actions in any of the US operations, which could
adversely affect the UK operations, and vice versa. The group has limited appetite for contagion risk and minimises the impact
of this occurring by operating with clear lines of communication across the group to ensure all group entities are well informed
and working to common goals.
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, 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.
2.9 Capital management
The group follows a risk-based approach to determine the amount of capital required to support its activities. Recognised stochastic
modelling techniques are used to measure risk exposures, and capital to support business activities is allocated according to risk
profile. Stress and scenario analysis is regularly performed and the results are documented and reconciled to the board’s risk
appetite where necessary.
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 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
own.
The Internal Model Solvency Capital Requirement is a dedicated quantitative review of syndicate models and it sets outs to be a key
input to the Lloyd’s Internal Model.
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160 Beazley Annual report 2018
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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
2018 we have surplus capital of 26% of ECR (unaudited, on a Solvency II basis). Following payment of the second interim dividend
of 7.8p per share, the surplus reduces to 23% (unaudited) compared to our current target range of 15% to 25% of ECR.
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.
3 Segmental analysis
a) Reporting segments
Segment information is presented in respect of reportable segments. These are based on the group’s management and internal
reporting structures and represent the level at which financial information is reported to the board, being the chief operating
decision-maker as defined in IFRS 8.
The operating segments are based upon the different types of insurance risk underwritten by the group, as described below:
Marine
This segment underwrites a broad spectrum of marine classes including hull, energy, cargo and specie, piracy, satellite, aviation,
kidnap & ransom and war risks.
Political, accident & contingency
This segment underwrites terrorism, political violence, expropriation and credit risks as well as contingency and risks associated
with contract frustration. In addition, this segment underwrites life, health, personal accident, sports and income protection risks.
Property
The property segment underwrites commercial and high-value homeowners’ property insurance on a worldwide basis.
Reinsurance
This segment specialises in writing property catastrophe, property per risk, casualty clash, aggregate excess of loss and
pro-rata business.
Specialty lines
This segment underwrites professional liability, management liability and environmental liability, including architects and engineers,
healthcare, cyber, lawyers, technology, media and business services, directors and officers and employment practices risks.
Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on
a reasonable basis. The reporting segments do not cross-sell business to each other. There are no individual policyholders who
comprise greater than 10% of the group’s total gross premiums written.
www.beazley.com
Annual report 2018 Beazley 161
3 Segmental analysis continued
b) Segment information
2018
Segment results
Gross premiums written
Net premiums written
Net earned premiums
Net investment income
Other income
Revenue
Net insurance claims
Expenses for the acquisition
of insurance contracts
Administrative expenses
Foreign exchange loss
Expenses
Impairment of associate1
Segment result
Finance costs
Profit before income tax
Income tax expense
Profit for the year attributable to equity shareholders
Claims ratio
Expense ratio
Combined ratio
Segment assets and liabilities
Segment assets
Segment liabilities
Net assets
Additional information
Impairment of associate1
Capital expenditure
Increase in intangibles
Amortisation and depreciation
Net cash flow
Political,
accident &
contingency
$m
238.7
212.7
194.3
2.3
3.8
200.4
Marine
$m
284.8
255.0
249.5
3.3
2.9
255.7
Property
$m
Reinsurance
$m
Specialty
lines
$m
Total
$m
415.4
360.2
344.1
3.1
6.4
353.6
207.4
137.3
1,469.0
1,283.3
2,615.3
2,248.5
139.5
1.8
1.7
143.0
1,157.2
30.6
18.9
1,206.7
2,084.6
41.1
33.7
2,159.4
134.0
90.2
289.4
97.7
616.5
1,227.8
74.5
25.1
1.6
235.2
63.3
21.5
1.2
176.2
103.5
38.9
2.2
434.0
33.2
13.0
0.9
144.8
287.4
152.2
7.3
1,063.4
561.9
250.7
13.2
2,053.6
–
–
–
–
(7.0)
(7.0)
20.5
24.2
(80.4)
(1.8)
136.3
54%
40%
94%
46%
44%
90%
84%
41%
125%
70%
33%
103%
53%
38%
91%
98.8
(22.4)
76.4
(8.2)
68.2
59%
39%
98%
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689.7
(571.9)
117.8
445.4
(347.2)
98.2
882.1
(726.1)
156.0
666.4
(505.8)
160.6
5,050.3
(4,116.0)
934.3
7,733.9
(6,267.0)
1,466.9
–
0.8
–
(2.1)
(8.3)
–
0.7
–
(0.4)
(7.0)
–
1.0
–
(0.6)
(11.1)
–
1.1
–
(0.6)
(11.4)
(7.0)
6.2
–
(11.0)
(66.4)
(7.0)
9.8
–
(14.7)
(104.2)
1 In 2018, management received information which led them to conclude that the recoverable amount of the group’s investment in Capson was lower than its carrying
value. In March 2018 the group took the decision to write down its investment in Capson Corp., Inc to $2.8m. In December the group took the further decision to fully
write down its investment in Capson Corp., Inc to nil. This is deemed to be an appropriate value for Beazley’s share in Capson.
162 Beazley Annual report 2018
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Notes to the financial statements continued
3 Segmental analysis continued
2017
Segment results
Gross premiums written
Net premiums written
Net earned premiums
Net investment income
Other income
Revenue
Net insurance claims
Expenses for the acquisition
of insurance contracts
Administrative expenses
Foreign exchange loss
Expenses
Share of loss of associates
Segment result
Finance costs
Profit before income tax
Income tax expense
Profit for the year attributable to equity shareholders
Claims ratio
Expense ratio
Combined ratio
Segment assets and liabilities
Segment assets
Segment liabilities
Net assets
Additional information
Investment in associates1
Capital expenditure
Increase in intangibles
Amortisation and depreciation
Net cash flow
Political,
accident &
contingency
$m
Property
$m
Reinsurance
$m
Specialty
lines
$m
Total
$m
214.3
190.8
188.7
6.7
3.6
199.0
362.9
300.0
293.8
14.1
7.3
315.2
206.8
134.6
1,292.2
1,120.2
2,343.8
1,978.8
136.9
9.4
3.7
150.0
1,022.1
95.4
17.7
1,135.2
1,869.4
138.3
35.5
2,043.2
Marine
$m
267.6
233.2
227.9
12.7
3.2
243.8
124.7
96.2
251.6
97.5
505.7
1,075.7
68.9
30.5
0.4
224.5
–
19.3
67.2
27.8
0.3
191.5
0.4
7.9
95.3
36.1
0.5
383.5
32.9
15.6
0.2
146.2
255.4
144.7
1.7
907.5
519.7
254.7
3.1
1,853.2
–
–
(0.3)
0.1
(68.3)
3.8
227.4
190.1
(22.1)
168.0
(38.0)
130.0
58%
41%
99%
55%
43%
98%
51%
50%
101%
86%
44%
130%
71%
36%
107%
50%
39%
89%
694.1
(574.2)
119.9
448.9
(344.0)
104.9
841.7
(676.8)
164.9
665.4
(485.5)
179.9
4,908.6
(3,979.3)
929.3
7,558.7
(6,059.8)
1,498.9
–
0.9
–
(2.1)
(2.6)
–
0.8
–
(0.4)
(2.3)
–
1.2
–
(0.7)
(3.6)
–
1.3
–
(0.7)
(3.9)
7.0
6.8
34.4
(10.4)
(54.3)
7.0
11.0
34.4
(14.3)
(66.7)
1 In July 2017 the group sold its share in associate, Equinox Global Limited, to Nexus Underwriting Management Limited.
www.beazley.com
Annual report 2018 Beazley 163
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; US earned premium represents all risks placed at the group’s US insurance company, Beazley
Insurance Company, Inc; and Europe earned premium represents all risks placed at the group’s European insurance company,
Beazley Insurance dac. An analysis of gross premiums written split geographically by placement of risk and by reportable segment
is provided in note 2 on page 150.
Net earned premiums
UK (Lloyd’s)
US (Non-Lloyd’s)1
Europe (Non-Lloyd’s)
Segment assets
UK (Lloyd’s)
US (Non-Lloyd’s)1
Europe (Non-Lloyd’s)
2018
$m
2017
$m
1,821.8
260.2
2.6
2,084.6
1,807.8
61.6
–
1,869.4
2018
$m
2017
$m
7,213.2
482.1
38.6
7,733.9
7,207.3
351.4
–
7,558.7
1 Increase in US net earned premiums and assets is driven by a change of internal reinsurance contract. As a result of this, more premiums are retained in the US.
Segment assets are allocated based on where the assets are located.
Capital expenditure
Non-US
US
4 Net investment income
Interest and dividends on financial investments at fair value through profit or loss
Interest on cash and cash equivalents
Net realised gains on financial investments at fair value through profit or loss
Net unrealised fair value (losses)/gains on financial investments at fair value through profit or loss
Investment income from financial investments
Investment management expenses
2018
$m
9.5
0.3
9.8
2018
$m
102.1
0.5
12.4
(66.1)
48.9
(7.8)
41.1
2017
$m
10.2
0.8
11.0
2017
$m
76.1
0.5
23.1
46.5
146.2
(7.9)
138.3
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164 Beazley Annual report 2018
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Notes to the financial statements continued
5 Other income
Commissions received by Beazley service companies
Profit commissions from syndicates 623/6107
Agency fees from 623
Other income
2018
$m
20.7
7.5
2.5
3.0
33.7
2017
$m
22.7
8.0
2.2
2.6
35.5
As at 31 December 2018 there was no accrued profit commission at risk of being reversed if there were to be an adverse impact on
syndicate 623’s profit (31 December 2017: $0.7m). We have not experienced any deterioration to profits on this contract recognised
previously.
6 Operating expenses
Operating expenses include:
Amounts receivable by the auditor and associates in respect of:
– audit services for the group and subsidiaries
– audit-related assurance services
– taxation compliance services
– other non-audit services
Impairment loss (written back)/recognised on reinsurance assets
Operating leases
Other than the fees disclosed above, no other fees were paid to the company’s auditor.
7 Employee benefit expenses
Wages and salaries
Short term incentive payments
Social security
Share based remuneration
Pension costs 1
Recharged to syndicate 623
2018
$m
2017
$m
1.0
0.6
0.1
0.8
2.5
(1.0)
11.4
2018
$m
156.0
38.0
21.0
17.7
11.7
244.4
(35.6)
208.8
0.9
0.7
0.1
0.6
2.3
0.6
9.3
2017
$m
142.4
70.2
18.2
21.1
10.9
262.8
(39.4)
223.4
1 Pension costs refer to the contributions made under the defined contribution scheme. Further information on the defined benefit pension scheme can be found
in note 27.
www.beazley.com
Annual report 2018 Beazley 165
8 Finance costs
Interest expense
2018
$m
22.4
22.4
2017
$m
22.1
22.1
During 2018, Beazley redeemed debt with a nominal value of $18.0m and a market value of $18.0m in the form of subordinated
debt using its call right. 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.
9 Income tax expense
Current tax expense
Current year
Prior year adjustments
Deferred tax expense
Origination and reversal of temporary differences
Impact of change in UK/US tax rates
Prior year adjustments
Income tax expense
2018
$m
32.3
(5.3)
27.0
(14.6)
0.7
(4.9)
(18.8)
8.2
2017
$m
35.4
(0.6)
34.8
(3.6)
5.3
1.5
3.2
38.0
Reconciliation of tax expense
The weighted average of statutory tax rates applied to the profits earned in each country in which the group operates is 18.6%
(2017: 18.7%), whereas the tax charged for the year 31 December 2018 as a percentage of profit before tax is 10.7% (2017: 22.6%).
The reasons for the difference are explained below:
Profit before tax
Tax calculated at the weighted average of statutory tax rates
Effects of:
– non-deductible expenses
– non-taxable losses/(gains) on foreign exchange
– tax relief on share based payments – current and future years
– (over)/under provided in prior years
– change in UK/US tax rates 1
Tax charge for the period
2018
$m
76.4
14.2
3.0
0.3
0.2
(10.2)
0.7
8.2
2018
%
–
18.6
3.9
0.4
0.3
(13.4)
0.9
10.7
2017
$m
168.0
31.4
0.9
(0.5)
–
0.9
5.3
38.0
2017
%
–
18.7
0.5
(0.3)
–
0.5
3.2
22.6
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1 The Finance Act 2016, which provides for reduction in the UK Corporation tax rate down to 17% effective from 1 April 2020, was substantively enacted on
6 September 2016. This 17% tax rate will reduce the company’s future current tax charge and has been reflected in the calculation of the deferred tax balance
as at 31 December 2018.
A change in the effective corporation tax in the US from 35% to 21% was substantively enacted in December 2017 and has been reflected in the calculation of the
deferred tax balance as at 31 December 2018.
As noted on page 45, the group has assessed the potential impact of the diverted profits tax (DPT) following the enactment of
new legislation in April 2015 and is of the view that no liability arises. The ultimate outcome may differ and any profits that did fall
within the scope of the DPT would potentially be taxed at a rate of 25% rather than 12.5% (the current rate of tax on corporate
earnings in Ireland). The earnings that would potentially be taxed at 25% are the relevant earnings from 2015 to 2018. The relevant
earnings are determined in relation to 75% of the profits and losses in Beazley’s syndicates potentially starting with a proportion
of the profits on the 2013, 2014 and 2015 years of account and 75% of all profits and losses in Beazley’s syndicates on years of
account from 2016 onwards.
166 Beazley Annual report 2018
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Notes to the financial statements continued
10 Earnings per share
Basic (cents)
Diluted (cents)
Basic (pence)
Diluted (pence)
2018
13.0c
12.8c
9.7p
9.5p
2017
25.0c
24.4c
19.5p
19.0p
Basic
Basic earnings per share are calculated by dividing profit after tax of $68.2m (2017: $130.0m) by the weighted average number
of shares in issue during the year of 523.2m (2017: 520.5m). The shares held in the Employee Share Options Plan (ESOP) of 4.7m
(2017: 3.8m) have been excluded from the calculation, until such time as they vest unconditionally with the employees.
Diluted
Diluted earnings per share are calculated by dividing profit after tax of $68.2m (2017: $130.0m) by the adjusted weighted average
number of shares of 533.1m (2017: 533.6m). The adjusted weighted average number of shares assumes conversion of dilutive
potential ordinary shares, being shares from the SAYE, retention and deferred share schemes. The shares held in the ESOP of 4.7m
(2017: 3.8m) have been excluded from the calculation, until such time as they vest unconditionally with the employees.
11 Dividends per share
A second interim dividend of 7.8p per ordinary share (2017: 7.4p) will be payable on 27 March 2019 to Beazley plc shareholders
registered at 5.00pm on 1 March 2019 in respect of the six months ended 31 December 2018. No special dividend was declared
in 2018 (2017: nil). The company expects the total amount to be paid in respect of the second interim dividend to be approximately
£40.6m. These financial statements do not provide for the second interim dividend as a liability.
Together with the interim dividend of 3.9p (2017: 3.7p) this gives a total dividend for the year of 11.7p (2017: 11.1p).
www.beazley.com
Annual report 2018 Beazley 167
12 Intangible assets
Cost
Balance at 1 January 2017
Other additions
Foreign exchange gain
Balance at 31 December 2017
Balance at 1 January 2018
Other additions
Foreign exchange loss
Balance at 31 December 2018
Amortisation and impairment
Balance at 1 January 2017
Amortisation for the year
Foreign exchange loss
Balance at 31 December 2017
Balance at 1 January 2018
Amortisation for the year
Foreign exchange gain
Balance at 31 December 2018
Carrying amount
31 December 2018
31 December 2017
Goodwill
$m
Syndicate
capacity
$m
Licences
$m
IT
development
costs
$m
Renewal
rights
$m
72.0
–
–
72.0
72.0
–
–
72.0
(10.0)
–
–
(10.0)
(10.0)
–
–
(10.0)
10.7
–
–
10.7
10.7
–
–
10.7
–
–
–
–
–
–
–
–
9.3
–
–
9.3
9.3
–
–
9.3
–
–
–
–
–
–
–
–
57.0
9.3
4.8
71.1
71.1
7.2
(3.3)
75.0
(49.4)
(3.5)
(1.9)
(54.8)
(54.8)
(3.8)
2.9
(55.7)
24.6
34.4
2.0
61.0
61.0
–
(2.0)
59.0
(17.6)
(8.1)
(0.1)
(25.8)
(25.8)
(8.8)
0.8
(33.8)
Total
$m
173.6
43.7
6.8
224.1
224.1
7.2
(5.3)
226.0
(77.0)
(11.6)
(2.0)
(90.6)
(90.6)
(12.6)
3.7
(99.5)
62.0
62.0
10.7
10.7
9.3
9.3
19.3
16.3
25.2
35.2
126.5
133.5
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Notes to the financial statements continued
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:
2018
Goodwill
Capacity
Licences
Total
2017
Goodwill
Capacity
Licences
Total
Political,
accident &
contingency
$m
29.6
1.0
–
30.6
Political,
accident &
contingency
$m
29.6
1.0
–
30.6
Marine
$m
2.3
1.6
–
3.9
Marine
$m
2.3
1.6
–
3.9
Property
$m
24.9
2.5
1.9
29.3
Property
$m
24.9
2.5
1.9
29.3
Reinsurance
$m
0.8
0.8
–
1.6
Reinsurance
$m
0.8
0.8
–
1.6
Specialty
lines
$m
4.4
4.8
7.4
16.6
Specialty
lines
$m
4.4
4.8
7.4
16.6
Total
$m
62.0
10.7
9.3
82.0
Total
$m
62.0
10.7
9.3
82.0
Value in use is defined as the present value of the future cash flows expected to be derived from the CGU and represents
recoverable amount for goodwill. It is estimated by discounting future cash flows sourced from financial budgets approved by
management which cover specific estimates for a five year period. A terminal growth rate of 0% has been used to extrapolate
projections beyond the covered five year period. The key assumptions used in the preparation of future cash flows are: premium
growth rates, claims experience, retention rates and expected future market conditions.
A discount rate, based on weighted average cost of capital (WACC) of 9% (2017: 6%) 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.
Significant changes in the economic and regulatory environment, such as US legislation and Brexit, could impact the amount of
premiums written and investment income for each CGU. This could potentially have an impact on the carrying value of the CGU,
however this remains remote.
To test the segment’s sensitivity to variances (including those caused by the factors listed above) from forecast profits, the discount
rate has been flexed to 5% above and 5% below the central assumption. Within this range, the recovery of goodwill was stress
tested and remains supportable across all CGUs. Headroom was calculated in respect of the value in use of all the group’s other
intangible assets.
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.
US insurance authorisation licences represent the privilege to write insurance business in particular states in the US. Licences
are allocated to the relevant CGU. There is no active market for licences, therefore value in use is deemed to be fair value.
As described above, a WACC rate is applied to projected future cash flows sourced from management approved budgets.
Key assumptions are the same as those outlined above. Based upon all available evidence the results of the testing indicate
that no impairment is required.
www.beazley.com
Annual report 2018 Beazley 169
13 Plant and equipment
Cost
Balance at 1 January 2017
Additions
Write off
Foreign exchange gain
Balance at 31 December 2017
Balance at 1 January 2018
Additions
Write off
Foreign exchange loss
Balance at 31 December 2018
Accumulated depreciation
Balance at 1 January 2017
Depreciation charge for the year
Write off
Foreign exchange loss
Balance at 31 December 2017
Balance at 1 January 2018
Depreciation charge for the year
Write off
Foreign exchange gain
Balance at 31 December 2018
Carrying amounts
31 December 2018
31 December 2017
Company
Fixtures &
fittings
$m
Fixtures &
fittings
$m
Group
Computer
equipment
$m
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
21.5
1.1
(0.1)
0.4
22.9
22.9
2.1
(1.2)
(0.4)
23.4
(17.3)
(1.8)
0.1
(0.3)
(19.3)
(19.3)
(1.5)
1.2
0.3
(19.3)
4.1
3.6
9.2
0.6
(2.2)
–
7.6
7.6
0.5
(0.1)
(0.1)
7.9
(8.0)
(0.9)
2.2
(0.1)
(6.8)
(6.8)
(0.6)
0.1
0.2
(7.1)
0.8
0.8
Total
$m
30.7
1.7
(2.3)
0.4
30.5
30.5
2.6
(1.3)
(0.5)
31.3
(25.3)
(2.7)
2.3
(0.4)
(26.1)
(26.1)
(2.1)
1.3
0.5
(26.4)
4.9
4.4
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Notes to the financial statements continued
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.
Group
As at 1 January
Sale of share in Equinox Global Limited
Impairment of Capson Corp., Inc.
Share of profit after tax
As at 31 December
The group’s investment in associates consists of:
2018
Falcon Money Management Holdings Limited (and subsidiaries)
Capson Corp., Inc. (and subsidiary)
1 259 St Paul Street, Valletta, Malta.
2 221 West 6th Street, Suite 301, Austin TX 78701, USA.
2018
$m
7.0
–
(7.0)
–
–
2017
$m
9.9
(3.0)
–
0.1
7.0
Country of
incorporation
% interest
held
Carrying value
$m
Malta 1
USA 2
25%
31%
–
–
–
In March 2018 the group took the decision to write down its investment in Capson Corp., Inc. to $2.8m. In December the group took
the further decision to fully write down its investment in Capson Corp., Inc. to nil. This is deemed to be an appropriate value for
Beazley’s share in Capson.
The aggregate financial information for all associates (100%) held at 31 December 2018 is as follows:
Assets
Liabilities
Equity
Revenue
Profit/(loss) after tax
Share of other comprehensive income
Share of total comprehensive income
2018
$m
36.7
24.6
12.1
18.8
0.9
–
0.9
2017
$m
35.1
21.2
13.9
17.1
(1.0)
–
(1.0)
All of the investments in associates are unlisted and are equity accounted using available financial information as at 31 December
2018. Falcon Money Management Holdings Limited is an investment management company which also acts in an intermediary capacity.
15 Deferred acquisition costs
Balance at 1 January
Additions
Amortisation charge
Balance at 31 December
2018
$m
281.4
587.9
(561.9)
307.4
2017
$m
242.8
558.3
(519.7)
281.4
www.beazley.com
Annual report 2018 Beazley 171
16 Financial assets and liabilities
Financial assets at fair value
Fixed and floating rate debt securities:
– Government issued
– Quasi-government
– Supranational
– Corporate bonds
– Investment grade
– High yield
– Senior secured loans
Total fixed and floating rate debt securities
Equity funds
Hedge funds
Illiquid credit assets
Total capital growth assets
Total financial investments at fair value through statement of profit or loss
Derivative financial assets
Total financial assets at fair value
2018
$m
2017
$m
1,384.2
25.9
–
2,525.3
32.7
132.1
4,100.2
85.4
337.2
186.6
609.2
4,709.4
1,345.4
24.1
21.1
2,179.7
58.8
85.6
3,714.7
168.3
377.4
180.4
726.1
4,440.8
6.9
4,716.3
8.8
4,449.6
Quasi-government securities include securities which are issued by non-sovereign entities but which have an explicit sovereign
guarantee. Supranational securities are issued by institutions sponsored by more than one sovereign issuer. Investment corporate
bonds are rated BBB-/Baa3 or higher by at least one major rating agency, while high yield corporate bonds have lower credit ratings.
Senior secured loans are tradeable, floating rate debt obligations of corporate issuers, with credit ratings of BB+/Ba1 or below.
Hedge funds are investment vehicles pursuing alternative investment strategies, structured to have minimal correlation to
traditional asset classes. Equity funds are investment vehicles which invest in equity securities and provide diversified exposure
to global equity markets. Illiquid credit assets are investment vehicles that predominantly target private lending opportunities,
often with longer investment horizons. The fair value of these assets at 31 December 2018 excludes an unfunded commitment
of $81.8m (2017: $63.0m).
The amounts expected to mature within and after one year are:
Within one year
After one year
Total
2018
$m
1,121.0
2,986.1
4,107.1
2017
$m
935.3
2,788.2
3,723.5
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.
As noted on page 145 consideration is also given when valuing the hedge funds to the timing of the latest valuations, and the
impact of any significant market stress events. The adjustment to the underlying net asset value of the funds as a result of these
considerations was $nil at 31 December 2018 (2017: $nil).
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172 Beazley Annual report 2018
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Notes to the financial statements continued
16 Financial assets and liabilities continued
Financial liabilities
Retail bond
Subordinated debt
Tier 2 subordinated debt (2026)
Derivative financial liabilities
Total financial liabilities
The amounts expected to mature before and after one year are:
Within one year
After one year
A breakdown of the group’s investment portfolio is provided on page 45.
A breakdown of derivative financial instruments is disclosed in note 17.
2018
$m
95.6
–
248.7
12.4
356.7
108.0
248.7
356.7
2017
$m
99.5
18.0
248.5
1.3
367.3
1.3
366.0
367.3
The retail bond was issued in 2012. The subordinated debt was issued in 2004 and redeemed in 2018. Tier 2 subordinated debt
was issued in 2016. Please refer to note 25 for further details of our borrowings and associated repayment terms.
The group has given a fixed and floating charge over certain of its investments and other assets to secure obligations to Lloyd’s
in respect of its corporate member subsidiary. Further details are provided in note 32.
Valuation hierarchy
The table below summarises financial assets carried at fair value using a valuation hierarchy that reflects the significance of the
inputs used in making the measurements. The fair value hierarchy has the following levels:
Level 1 – Valuations based on quoted prices in active markets for identical instruments. An active market is a market in which
transactions for the instrument occur with sufficient frequency and volume on an ongoing basis such that quoted prices reflect
prices at which an orderly transaction would take place between market participants at the measurement date. Included within
level 1 are bonds, treasury bills of government and government agencies, corporate bonds and equity funds which are measured
based on quoted prices in active markets.
Level 2 – Valuations based on quoted prices in markets that are not active, or based on pricing models for which significant
inputs can be corroborated by observable market data (e.g. interest rates, exchange rates). Included within level 2 are government
bonds and treasury bills, equity funds and corporate bonds, which are not actively traded, hedge funds and senior secured loans.
Level 3 – Valuations based on inputs that are unobservable or for which there is limited market activity against which to measure
fair value.
The availability of financial data can vary for different financial assets and is affected by a wide variety of factors, including the type
of financial instrument, whether it is new and not yet established in the marketplace, and other characteristics specific to each
transaction. To the extent that valuation is based on models or inputs that are unobservable in the market, the determination of fair
value requires more judgement. Accordingly the degree of judgement exercised by management in determining fair value is greatest
for instruments classified in level 3. The group uses prices and inputs that are current as of the measurement date for valuation of
these instruments.
If the inputs used to measure the fair value of an asset or a liability can be categorised in different levels of the fair value hierarchy,
then the fair value measurement is categorised in its entirety in the same level of the fair value hierarchy as the lowest level input
that is significant to the entire measurement.
The group has an established control framework and valuation policy with respect to the measurement of fair values.
www.beazley.com
Annual report 2018 Beazley 173
16 Financial assets and liabilities continued
Level 2 investments
For the group’s level 2 debt securities our fund administrator obtains the prices used in the valuation from independent pricing
vendors such as Bloomberg, Standard and Poor’s, Reuters, Markit and International Data Corporation. The independent pricing
vendors derive an evaluated price from observable market inputs. The market inputs include trade data, two-sided markets,
institutional bids, comparable trades, dealer quotes, and other relevant market data. These inputs are verified in their pricing
engines and calibrated with the pricing models to calculate spread to benchmarks, as well as other pricing assumptions such
as weighted average life (WAL), discount margins (DM), default rates, and recovery and prepayment assumptions for mortgage
securities. While such valuations are sensitive to estimates, it is believed that changing one or more of the assumptions to
reasonably possible alternative assumptions would not change the fair value significantly.
The group records the unadjusted price provided and validates the price through various tolerance checks such as comparison
with the investment custodians and the investment managers to assess the reasonableness and accuracy of the price to be used
to value the security. In the rare case that the price fails the tolerance test, it is escalated and discussed internally. We would not
override the price on a retrospective basis, but we would work with the administrator and pricing vendor to investigate the
difference. This generally results in the vendor updating their inputs. We also review the valuation policy on a regular basis to
ensure it is fit for purpose. No adjustments have been made to the prices obtained from the administrator at the current year end.
For our hedge funds and equity funds, the pricing and valuation of each fund is undertaken by administrators in accordance
with each underlying fund’s valuation policy. For the equity funds, the individual fund prices are published on a daily, weekly or
monthly basis via Bloomberg and other market data providers such as Reuters. For the hedge funds, the individual fund prices
are communicated by the administrators to all investors via the monthly investor statements. The fair value of the hedge fund
and equity fund portfolios are calculated by reference to the underlying net asset values of each of the individual funds.
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.
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.
Level 3 investments
During 2018, the group’s investment committee approved additional allocations to an illiquid asset portfolio comprising
investments in funds managed by third party managers (generally closed end limited partnerships or open ended funds). While
the funds provide full transparency on their underlying investments, the investments themselves are in many cases private and
unquoted, and are therefore classified as level 3 investments.
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.
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.
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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.
2018
Financial assets measured at fair value
Fixed and floating rate debt securities
– Government issued
– Quasi-government
– Corporate bonds
– Investment grade
– High yield
– Senior secured loans
Equity funds
Hedge funds
Illiquid credit assets
Derivative financial assets
Total financial assets measured at fair value
Financial liabilities measured at fair value
Derivative financial liabilities
Financial liabilities not measured at fair value
Retail bond
Tier 2 subordinated debt (2026)
Total financial liabilities not measured at fair value
2017
Financial assets measured at fair value
Fixed and floating rate debt securities
– Government issued
– Quasi-government
– Supranational
– Corporate bonds
– Investment grade
– High yield
– Senior secured loans
Equity funds
Hedge funds
Illiquid credit assets
Derivative financial assets
Total financial assets measured at fair value
Level 1
$m
Level 2
$m
Level 3
$m
Total
$m
–
–
–
–
1,384.2
25.9
1,384.2
25.9
–
–
–
–
–
–
6.9
1,417.0
2,525.3
32.7
132.1
85.4
337.2
–
–
3,112.7
12.4
–
–
–
–
Level 1
$m
1,345.4
24.1
21.1
15.2
–
–
–
–
–
8.8
1,414.6
98.2
249.4
347.6
Level 2
$m
–
–
–
2,164.5
58.8
85.6
168.3
377.4
–
–
2,854.6
–
–
–
–
–
186.6
–
186.6
–
–
–
–
Level 3
$m
–
–
–
–
–
–
–
–
180.4
–
180.4
2,525.3
32.7
132.1
85.4
337.2
186.6
6.9
4,716.3
12.4
98.2
249.4
347.6
Total
$m
1,345.4
24.1
21.1
2,179.7
58.8
85.6
168.3
377.4
180.4
8.8
4,449.6
www.beazley.com
Annual report 2018 Beazley 175
16 Financial assets and liabilities continued
2017
Financial liabilities measured at fair value
Derivative financial liabilities
Financial liabilities not measured at fair value
Retail bond
Tier 2 subordinated debt (2026)
Total financial liabilities not measured at fair value
Level 1
$m
Level 2
$m
Level 3
$m
1.3
–
–
–
–
104.1
266.6
370.7
–
–
–
–
Total
$m
1.3
104.1
266.6
370.7
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.
Transfers and level 3 investment reconciliations
There were no transfers in either direction between Level 1, 2 and 3 in either 2017 or 2018.
The table below shows a reconciliation from the opening balances to the closing balances of level 3 fair values.
As at 1 January
Purchases
Sales
Total net gains recognised in profit or loss
As at 31 December
2018
$m
180.4
46.3
(52.4)
12.3
186.6
2017
$m
126.1
55.4
(21.1)
20.0
180.4
Total unrealised loss on level 3 investments included into net gains above was $0.7m (2017: gain of $16.4m).
Unconsolidated structured entities
A structured entity is defined as an entity that has been designed so that voting or similar rights are not the dominant factor in
deciding who controls the entity, such as when any voting rights relate to administrative tasks only, or when the relevant activities
are directed by means of contractual arrangements.
As part of its standard investment activities the group holds fixed interest investments in high yield bond funds, as well as capital
growth investments in equity funds, hedge funds and illiquid credit assets which in accordance with IFRS 12 are classified as
unconsolidated structured entities. The group does not sponsor any of the unconsolidated structured entities. The assets classified
as unconsolidated structured entities are held at fair value on the statement of financial position.
As at 31 December the investments comprising the group’s unconsolidated structured entities are as follows:
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s
High yield bond funds
Equity funds
Hedge funds
Illiquid credit assets
Investments through unconsolidated structured entities
2018
$m
32.7
85.4
337.2
186.6
641.9
2017
$m
58.8
168.3
377.4
180.4
784.9
Apart from a relatively small exposure to high yield bond funds, our unconsolidated structured entity exposures fall within our capital
growth assets. The capital growth assets are held in investee funds managed by asset managers who apply various investment
strategies to accomplish their respective investment objectives. The group’s investments in investee funds are subject to the terms
and conditions of the respective investee fund’s offering documentation and are susceptible to market price risk arising from
uncertainties about future values of those investee funds. Investment decisions are made after extensive due diligence on the
underlying fund, its strategy and the overall quality of the underlying fund’s manager and assets.
176 Beazley Annual report 2018
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Notes to the financial statements continued
16 Financial assets and liabilities continued
All the investee funds in the investment portfolio are managed by portfolio managers who are compensated by the respective
investee funds for their services. Such compensation generally consists of an asset-based fee and a performance-based incentive
fee and is reflected in the valuation of the fund’s investment in each of the investee funds. The right to sell or request redemption
of investments in high yield bond funds, asset backed securities, equity funds and hedge funds ranges in frequency from daily
to semi-annually. The group did not sponsor any of the respective structured entities.
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.
As described in note 2 to the financial statements, the group monitors and manages its currency exposures to net assets and
financial assets held at fair value.
Currency exposures
The currency exposures of our financial assets held at fair value are detailed below:
2018
Financial assets at fair value
Fixed and floating rate debt securities
Equity funds
Hedge funds
Illiquid credit assets
Derivative financial assets
Total
2017
Financial assets at fair value
Fixed and floating rate debt securities
Equity funds
Hedge funds
Illiquid credit assets
Derivative financial assets
Total
UK £
$m
6.6
–
–
–
–
6.6
UK £
$m
12.4
–
–
–
–
12.4
CAD $
$m
184.5
–
–
–
–
184.5
CAD $
$m
161.1
–
–
–
–
161.1
EUR €
$m
–
22.2
–
16.2
–
38.4
EUR €
$m
–
39.9
–
13.7
–
53.6
Subtotal
$m
191.1
22.2
–
16.2
–
229.5
Subtotal
$m
173.5
39.9
–
13.7
–
227.1
US $
$m
Total
$m
3,909.1
63.2
337.2
170.4
6.9
4,486.8
4,100.2
85.4
337.2
186.6
6.9
4,716.3
US $
$m
Total
$m
3,541.2
128.4
377.4
166.7
8.8
4,222.5
3,714.7
168.3
377.4
180.4
8.8
4,449.6
The above qualitative and quantitative disclosure along with the risk management discussions in note 2 enable more comprehensive
evaluation of Beazley’s exposure to risks arising from financial instruments.
www.beazley.com
Annual report 2018 Beazley 177
17 Derivative financial instruments
In 2018 and 2017 the group entered into over-the-counter and exchange traded derivative contracts. The group had the right and
the intention to settle each contract on a net basis.
The assets and liabilities of these contracts at 31 December are detailed below:
Derivative financial instrument assets
Foreign exchange forward contracts
Bond futures contract
Derivative financial instrument liabilities
Foreign exchange forward contracts
Bond futures contract
2018
2017
Gross contract
amount
$m
365.1
–
365.1
Market value
of derivative
position
$m
6.9
–
6.9
Gross contract
amount
$m
446.7
(341.4)
105.3
Market value
of derivative
position
$m
7.2
1.6
8.8
2018
2017
Gross contract
amount
$m
205.6
189.2
394.8
Market value
of derivative
position
$m
9.6
2.8
12.4
Gross contract
amount
$m
361.7
–
361.7
Market value
of derivative
position
$m
1.3
–
1.3
Foreign exchange forward contracts
The group entered into over-the-counter foreign exchange forward agreements in order to economically hedge the foreign currency
exposure resulting from transactions and balances held in currencies that are different to the functional currency of the group.
Bond futures positions
The group entered in bond futures transactions for the purpose of efficiently managing the term structure of its interest rate
exposures. A negative gross contract amount represents a notional short position that generates positive fair value as interest
rates rise.
18 Insurance receivables
Insurance receivables
2018
$m
943.3
943.3
2017
$m
918.0
918.0
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.
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Notes to the financial statements continued
19 Reinsurance assets
Reinsurers’ share of claims
Impairment provision
Reinsurers’ share of unearned premium reserve
Further analysis of the reinsurance assets is provided in note 24.
20 Cash and cash equivalents
Group
Cash at bank and in hand
Short term deposits and highly liquid investments
2018
$m
963.9
(12.2)
951.7
241.1
1,192.8
2017
$m
1,006.4
(13.2)
993.2
237.9
1,231.1
2018
$m
291.3
45.0
336.3
2017
$m
376.2
64.3
440.5
Total cash and cash equivalents include $10.4m (2017: $9.0m) 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
Cash at bank and in hand
21 Share capital
Ordinary shares of 5p each
Issued and fully paid
Balance at 1 January
Issue of shares
Balance at 31 December
2018
$m
2.4
2.4
2018
2017
No. of
shares (m)
$m
No. of
shares (m)
527.8
38.0
525.8
525.8
2.0
527.8
37.8
0.2
38.0
523.3
2.5
525.8
2017
$m
0.7
0.7
$m
37.8
37.7
0.1
37.8
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Annual report 2018 Beazley 179
22 Other reserves
Group
Balance at 1 January 2017
Share based payments
Acquisition of own shares held in trust
Tax on share option vestings
Transfer of shares to employees
Balance at 31 December 2017
Share based payments
Acquisition of own shares held in trust
Tax on share option vestings
Transfer of shares to employees
Balance at 31 December 2018
Company
Balance at 1 January 2017
Share based payments
Acquisition of own shares held in trust
Transfer of shares to employees
Balance at 31 December 2017
Share based payments
Acquisition of own shares held in trust
Transfer of shares to employees
Balance at 31 December 2018
Employee
share options
reserve
$m
Employee
share trust
reserve
$m
45.0
24.5
–
4.3
(24.4)
49.4
18.7
–
4.1
(25.5)
46.7
(21.6)
–
(16.2)
–
20.4
(17.4)
–
(44.9)
–
32.1
(30.2)
Employee
share options
reserve
$m
Employee
share trust
reserve
$m
19.8
24.5
–
(24.4)
19.9
18.7
–
(25.5)
13.1
0.1
–
(16.2)
20.4
4.3
–
(44.9)
32.1
(8.5)
Total
$m
23.4
24.5
(16.2)
4.3
(4.0)
32.0
18.7
(44.9)
4.1
6.6
16.5
Total
$m
19.9
24.5
(16.2)
(4.0)
24.2
18.7
(44.9)
6.6
4.6
The merger reserve is shown within the statement of changes in equity as a separate category and as such has been excluded from
the other reserves note.
The employee share options reserve is held in accordance with IFRS 2: Share-based payment. For more information refer to note 23.2.
More information on the employee share trust reserve is included in note 23.
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Notes to the financial statements continued
23 Equity compensation plans
23.1 Employee share trust
Costs debited to employee share trust reserve
Balance at 1 January
Additions
Transfer of shares to employees
Balance at 31 December
2018
2017
Number (m)
$m
Number (m)
$m
3.8
6.0
(5.1)
4.7
17.4
44.9
(32.1)
30.2
6.1
3.0
(5.3)
3.8
21.6
16.2
(20.4)
17.4
The shares are owned by the employee share trust to satisfy awards under the group’s deferred share plan, retention plan, one-off
share incentive plan and long term incentive plan (LTIP). These shares are purchased on the market and carried at cost.
On the third anniversary of an award the shares under the deferred share plan are transferred from the trust to the employee. Under
the retention plan, on the third anniversary, and each year after that up to the sixth anniversary, 25.0% of the shares awarded are
transferred to the employee.
The deferred share plan is recognised in the statement of profit or loss on a straight-line basis over a period of three years, while the
retention share plan is recognised in the statement of profit or loss on a straight-line basis over a period of six years.
23.2 Employee share option plans
The group has a long term incentive plan (LTIP), one-off share incentive plan, deferred share plan, retention plan and save-as-you-
earn (SAYE) plan that entitle employees to purchase shares in the group.
The terms and conditions of the grants are as follows:
Share option plan
One-off share incentive plan
LTIP
LTIP
SAYE (UK)
SAYE (US)
SAYE (Others)
Total share options outstanding
Grant date
10/02/2015
13/02/2018
17/02/2017
09/02/2016
10/02/2015
11/02/2014
13/02/2018
17/02/2017
09/02/2016
04/04/2018
13/04/2017
09/05/2016
01/06/2018
01/06/2017
09/05/2016
No. of options
(m)
0.2
1.5
1.9
2.1
2.1
1.4
1.5
1.9
2.0
0.5
0.6
0.5
0.1
0.1
0.1
16.5
Vesting conditions
Five years’ service + ROE
Five years’ service + NAV +
minimum shareholding requirement
Contractual life
of options
10 years
10 years
Three years’ service + NAV +
minimum shareholding requirement
10 years
Three years’ service
N/A
Two years’ service
Three years’ service
N/A
N/A
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.
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23 Equity compensation plans continued
Further details of equity compensation plans can be found in the directors’ remuneration report on pages 101 to 120. The total gain
on directors’ exercises of share-option plans during the period was £6.3m.
The number and weighted average exercise prices of share options are as follows:
Outstanding at 1 January
Forfeited during the year
Exercised during the year
Granted during the year
Outstanding at 31 December
Exercisable at 31 December
2018
2017
Weighted
average
exercise
price (pence
per share)
34.6
122.0
28.5
80.0
44.7
–
Weighted
average
exercise
price (pence
per share)
27.8
68.6
35.7
71.1
34.6
–
No. of
options
(m)
18.0
(0.5)
(5.0)
4.0
16.5
–
No. of
options
(m)
19.6
(0.6)
(5.7)
4.7
18.0
–
The share option programmes allow group employees to acquire shares of the company. The fair value of options granted is recognised
as an employee expense with a corresponding increase in the employee share options reserve. The fair value of the options granted
is measured at grant date and spread over the period in which the employees become unconditionally entitled to the options. The fair
value of the options granted is measured using the Black Scholes model, taking into account the terms and conditions upon which
the options were granted. The amount recognised as an expense is adjusted to reflect the actual number of share options that vest.
The following is a summary of the assumptions used to calculate the fair value:
Share options charge to employee share options reserve
Weighted average share price (pence per option)
Weighted average exercise price (pence per option)
Average expected life of options
Expected volatility
Expected dividend yield
Average risk-free interest rate
The expected volatility is based on historic volatility over a period of at least two years.
24 Insurance liabilities and reinsurance assets
Gross
Claims reported and loss adjustment expenses
Claims incurred but not reported
Gross claims liabilities
Unearned premiums
Total insurance liabilities, gross
Recoverable from reinsurers
Claims reported and loss adjustment expenses
Claims incurred but not reported
Reinsurers’ share of claims liabilities
Unearned premiums
Total reinsurers’ share of insurance liabilities
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2018
$m
17.7
404.0
44.7
4.4 yrs
23.5%
1.3%
0.9%
2017
$m
21.1
333.4
34.6
4.3 yrs
24.4%
1.9%
1.1%
2018
$m
2017
$m
1,171.2
2,869.5
4,040.7
1,415.5
5,456.2
231.9
719.8
951.7
241.1
1,192.8
1,056.3
2,852.3
3,908.6
1,259.2
5,167.8
219.4
773.8
993.2
237.9
1,231.1
182 Beazley Annual report 2018
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Notes to the financial statements continued
24 Insurance liabilities and reinsurance assets continued
Net
Claims reported and loss adjustment expenses
Claims incurred but not reported
Net claims liabilities
Unearned premiums
Total insurance liabilities, net
2018
$m
2017
$m
939.3
2,149.7
3,089.0
1,174.4
4,263.4
836.9
2,078.5
2,915.4
1,021.3
3,936.7
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
Claims incurred but not reported
Balance at 1 January
Gross
$m
1,056.3
2,852.3
3,908.6
2018
Reinsurance
$m
(219.4)
(773.8)
(993.2)
Net
$m
836.9
2,078.5
2,915.4
Gross
$m
949.5
2,567.4
3,516.9
2017
Reinsurance
$m
(201.8)
(652.1)
(853.9)
Net
$m
747.7
1,915.3
2,663.0
Claims paid
(1,301.1)
261.5
(1,039.6)
(1,028.2)
179.1
(849.1)
Increase in claims
– Arising from current year claims
– Arising from prior year claims
Net exchange differences
Balance at 31 December
Claims reported and loss adjustment expenses
Claims incurred but not reported
Balance at 31 December
b) Unearned premiums reserve
Balance at 1 January
Increase in the year
Release in the year
Balance at 31 December
1,844.7
(380.8)
(30.7)
4,040.7
1,171.2
2,869.5
4,040.7
(501.9)
265.8
16.1
(951.7)
(231.9)
(719.8)
(951.7)
1,342.8
(115.0)
(14.6)
3,089.0
939.3
2,149.7
3,089.0
1,737.4
(349.4)
31.9
3,908.6
1,056.3
2,852.3
3,908.6
(457.8)
145.5
(6.1)
(993.2)
(219.4)
(773.8)
(993.2)
Gross
$m
1,259.2
2,615.3
(2,459.0)
1,415.5
2018
Reinsurance
$m
(237.9)
(375.6)
372.4
(241.1)
Net
$m
1,021.3
2,239.7
(2,086.6)
1,174.4
Gross
$m
1,140.8
2,343.8
(2,225.4)
1,259.2
2017
Reinsurance
$m
(228.2)
(375.4)
365.7
(237.9)
1,279.6
(203.9)
25.8
2,915.4
836.9
2,078.5
2,915.4
Net
$m
912.6
1,968.4
(1,859.7)
1,021.3
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Annual report 2018 Beazley 183
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.
A formal internal peer review process is then undertaken to determine the reserves held for accounting purposes which, in totality,
are not lower than the actuarially established figure. The group also commissions an annual independent review to ensure that the
reserves established are reasonable or within a reasonable range.
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.
Chain-ladder techniques are most appropriate for classes of business that have a relatively stable development pattern.
Chain-ladder techniques are less suitable in cases in which the insurer does not have a developed claims history for a particular
class of business, or for underwriting years that are still at immature stages of development where there is a higher level of
assumption volatility.
The Bornhuetter-Ferguson method uses a combination of a benchmark/market-based estimate and an estimate based on claims
experience. The former is based on a measure of exposure such as premiums; the latter is based on the paid or incurred claims
observed to date. The two estimates are combined using a formula that gives more weight to the experience-based estimate as
time passes. This technique has been used in situations where developed claims experience was not available for the projection
(e.g. recent underwriting years or new classes of business).
The expected loss ratio method uses a benchmark/market-based estimate applied to the expected premium and is used for
classes with little or no relevant historical data.
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.
We also review triangulations of the paid/outstanding claim ratios as a way of monitoring any changes in the strength of the
outstanding claim estimates between underwriting years so that adjustments can be made to mitigate any subsequent over/(under)
reserving. To date, this analysis indicates no systematic change to the outstanding claim strength across underwriting years.
Where significant large losses impact an underwriting year (e.g. the events of 11 September 2001, the hurricanes in 2004,
2005, 2008, 2012, 2017 and 2018 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.
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Notes to the financial statements continued
24 Insurance liabilities and reinsurance assets continued
b) Major assumptions
The main assumption underlying these techniques is that the group’s past claims development experience (with appropriate
adjustments for known changes) can be used to project future claims development and hence ultimate claims costs. As such these
methods extrapolate the development of premiums, paid and incurred losses, average costs per claim and claim numbers for each
underwriting year based on the observed development of earlier years.
Throughout, judgement is used to assess the extent to which past trends may or may not apply in the future; for example, to reflect
changes in external or market factors such as economic conditions, public attitudes to claiming, levels of claims inflation, premium
rate changes, judicial decisions and legislation, as well as internal factors such as portfolio mix, policy conditions and claims
handling procedures.
c) Changes in assumptions
As already discussed, general insurance business requires many different assumptions. The diagram below illustrates the main
categories of assumptions used for each underwriting year and class combination.
– Marine
– Political, accident & contingency
– Property
– Reinsurance
– Specialty lines
Classes
Underwriting years
s
n
o
i
t
p
m
u
s
s
A
– Premium rate change
– Claims inflation
– Mix of business
– Reporting patterns
– Settlement patterns
– Judicial decisions
– Professional judgement
1993 1994 ... 2016 2018
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 such volatility including the purchase of reinsurance. In addition,
the group holds capital to absorb volatility.
d) Claims reserve strength analysis
The estimation of IBNR reserves for future claim notifications is subject to a greater degree of uncertainty than the estimation of
the outstanding claims already notified. This is particularly true for the specialty lines business, which will typically display greater
variations between initial estimates and final outcomes as a result of the greater degree of difficulty in estimating these reserves.
The estimation of IBNR reserves for other business written is generally subject to less variability as claims are generally reported
and settled relatively quickly.
As such, our reserving assumptions contain a reasonable margin for prudence given the uncertainties inherent in the insurance
business underwritten, particularly on the longer tailed specialty lines classes.
Since year end 2004, we have identified a range of possible outcomes for each class and underwriting year combination
directly from our internal model (previously our individual capital assessment (ICA)) process. Comparing these with our pricing
assumptions and reserving estimates gives our management team increased insight into our perceived reserving strength and
the relative uncertainties of the business written.
To illustrate the robustness of our reserves, the loss development tables below provide information about historical claims
development by the five segments – marine, political, accident & contingency, property, reinsurance and specialty lines.
The tables are by underwriting year which in our view provides the most transparent reserving basis. We have supplied tables
for both ultimate gross claims and ultimate net claims.
The top part of the table illustrates how the group’s estimate of the claims ratio for each underwriting year has changed at
successive year ends. The bottom half of the table reconciles the gross and net claims to the amount appearing in the statement
of financial position.
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 2018 is adequate. However, due to
inherent uncertainties in the reserving process, it cannot be assured that such balances will ultimately prove to be adequate.
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Annual report 2018 Beazley 185
24 Insurance liabilities and reinsurance assets continued
2009
%
2008 ae
%
2011
%
2012
%
2010
%
2013
%
2014
%
2015
%
2016
%
2017
%
2018
%
Gross ultimate claims
Marine
12 months
24 months
36 months
48 months
60 months
72 months
84 months
96 months
108 months
120 months
Political, accident
& contingency
12 months
24 months
36 months
48 months
60 months
72 months
84 months
96 months
108 months
120 months
Property
12 months
24 months
36 months
48 months
60 months
72 months
84 months
96 months
108 months
120 months
61.9
68.1
62.6
59.5
70.4
65.6
56.7
54.0
47.3
45.4
59.1
57.9
49.3
61.3
54.3
49.3
59.8
58.8
57.0
57.7
63.4
72.5
88.7
58.9
68.4
71.3
55.0
49.0
45.9
44.8
57.5
46.8
47.1
46.6
55.5
59.2
51.2
46.9
50.1
51.5
53.2
47.7
41.3
40.6
39.7
56.5
52.0
44.4
42.8
42.1
41.5
59.2
49.4
45.0
43.9
46.0
45.8
55.1
49.1
45.7
45.7
45.6
47.3
55.9
46.3
34.7
32.2
31.4
30.6
29.9
60.0
54.4
51.3
48.9
45.8
45.1
44.2
55.4
47.4
39.7
36.6
36.1
35.5
35.4
54.6
47.3
38.9
33.6
35.3
31.6
30.8
29.3
57.5
44.5
44.1
39.3
37.5
35.4
35.0
35.1
58.1
50.3
47.7
46.0
45.1
43.9
43.4
43.1
50.4
49.7
44.0
42.3
40.3
40.1
42.1
40.6
41.0
57.7
44.7
39.0
32.4
31.5
30.3
29.3
29.5
27.4
57.7
60.3
58.3
55.6
52.9
51.9
51.0
50.8
50.7
54.2
50.8
44.0
40.5
40.2
48.5
47.7
49.0
48.9
40.2
58.4
43.4
37.9
33.7
29.3
24.9
25.1
25.1
25.3
24.8
53.6
41.5
36.3
35.1
34.1
33.1
32.5
32.1
31.9
31.8
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Notes to the financial statements continued
24 Insurance liabilities and reinsurance assets continued
2012
%
2008 ae
%
2009
%
2011
%
2010
%
2013
%
2014
%
2015
%
2016
%
2017
%
2018
%
Gross ultimate claims
Reinsurance
12 months
24 months
36 months
48 months
60 months
72 months
84 months
96 months
108 months
120 months
Specialty lines
12 months
24 months
36 months
48 months
60 months
72 months
84 months
96 months
108 months
120 months
Total
12 months
24 months
36 months
48 months
60 months
72 months
84 months
96 months
108 months
120 months
Estimated total
ultimate losses
($m)
Less paid
claims ($m)
Less unearned
portion of ultimate
losses ($m)
Gross claims
liabilities
(100% level) ($m)
Less non-group
share ($m)
Gross claims
liabilities, group
share ($m)
124.6
117.3
95.3
66.8
41.4
40.3
65.8
33.7
25.7
25.5
65.7
63.1
63.2
65.3
65.1
62.1
67.4
67.8
64.6
62.0
67.0
70.5
71.2
63.3
62.9
60.6
62.7
58.4
54.5
52.4
61.5
33.6
31.0
27.8
27.6
68.5
68.4
65.0
63.4
63.6
62.2
55.8
52.5
51.5
52.7
59.1
45.3
42.7
41.4
38.4
38.1
73.4
73.2
72.9
69.3
65.4
62.7
63.8
59.3
56.4
54.4
52.5
51.6
62.9
37.5
32.1
31.2
31.2
31.0
31.0
73.9
74.0
72.1
70.2
67.3
65.8
65.1
64.6
58.2
53.2
51.0
49.1
48.1
47.4
79.1
77.7
69.5
65.7
62.9
62.7
57.9
58.0
75.4
75.5
76.5
75.5
74.2
69.4
68.2
67.8
67.2
62.7
60.4
57.8
56.9
53.7
52.5
52.2
68.0
140.7
127.4
119.7
123.1
121.8
121.8
120.8
118.6
73.7
73.8
72.8
73.3
69.6
69.7
69.4
66.3
63.5
64.4
71.3
67.3
65.2
63.0
62.5
62.4
60.8
59.7
60.7
48.1
40.0
39.4
35.2
32.4
31.7
31.8
31.6
31.0
72.5
72.4
71.6
71.3
71.6
68.7
69.8
70.4
69.1
69.2
62.8
56.9
53.0
51.6
50.7
49.8
49.9
50.3
49.7
48.7
6,508.5 1,003.0 1,232.5
997.5
942.9 1,115.4 1,218.8 1,265.5 1,570.8 2,000.1 1,834.2 19,689.2
(6,262.5)
(900.9)(1,153.9)
(888.1)
(823.7)
(909.1)
(882.2)
(791.5)
(728.4)
(641.2)
(126.6) (14,108.1)
–
–
–
–
–
–
–
–
–
(35.3)
(738.8)
(774.1)
246.0
102.1
78.6
109.4
119.2
206.3
336.6
474.0
842.4 1,323.6
968.8
4,807.0
(43.3)
(15.3)
(14.3)
(19.8)
(21.4)
(35.0)
(55.1)
(79.8)
(121.7)
(206.9)
(153.7)
(766.3)
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
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Annual report 2018 Beazley 187
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2009
%
2008 ae
%
2011
%
2012
%
2010
%
2013
%
2014
%
2015
%
2016
%
2017
%
2018
%
Net ultimate claims
Marine
12 months
24 months
36 months
48 months
60 months
72 months
84 months
96 months
108 months
120 months
Political, accident
& contingency
12 months
24 months
36 months
48 months
60 months
72 months
84 months
96 months
108 months
120 months
Property
12 months
24 months
36 months
48 months
60 months
72 months
84 months
96 months
108 months
120 months
59.4
57.6
61.7
56.7
62.6
61.7
56.7
52.5
47.1
46.7
58.3
56.9
48.6
60.2
53.2
49.7
57.5
56.1
55.2
54.6
64.5
76.5
93.9
57.6
69.6
71.4
55.0
50.2
46.8
44.7
56.4
48.4
46.5
45.5
46.7
56.9
49.8
44.9
49.9
50.3
54.5
51.1
44.2
42.8
41.9
56.1
53.2
47.5
45.9
45.3
44.7
58.6
50.9
47.4
44.8
45.3
45.5
56.7
56.3
52.2
50.1
49.9
51.6
55.4
46.0
37.4
35.0
33.9
33.2
32.8
58.6
52.5
49.9
46.9
43.7
42.9
42.4
58.6
52.9
45.9
41.2
40.6
40.2
39.9
55.5
47.5
38.5
34.3
35.4
32.1
31.2
30.1
54.8
45.1
45.4
42.1
40.1
38.0
37.4
37.5
60.2
57.6
53.5
50.3
48.9
47.8
47.5
47.3
52.0
49.2
44.7
42.6
41.0
40.0
42.2
40.6
41.1
54.4
43.6
39.6
33.2
32.3
31.1
29.6
30.2
28.2
58.8
64.9
65.6
59.7
57.5
56.5
56.0
55.7
55.7
53.1
47.5
38.7
35.0
34.8
38.4
37.7
37.0
36.8
32.7
56.4
41.5
36.5
33.6
29.7
26.1
26.3
26.3
26.4
26.1
53.3
47.2
43.6
41.4
40.8
39.5
39.0
38.8
38.6
38.5
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Notes to the financial statements continued
24 Insurance liabilities and reinsurance assets continued
2009
%
2008 ae
%
2012
%
2011
%
2010
%
2013
%
2014
%
2015
%
2016
%
2017
%
2018
%
Net ultimate claims
Reinsurance
12 months
24 months
36 months
48 months
60 months
72 months
84 months
96 months
108 months
120 months
Specialty lines
12 months
24 months
36 months
48 months
60 months
72 months
84 months
96 months
108 months
120 months
Total
12 months
24 months
36 months
48 months
60 months
72 months
84 months
96 months
108 months
120 months
Estimated total
ultimate
losses ($m)
Less paid claims
($m)
Less unearned
portion of
ultimate losses
($m)
Net claims
liabilities (100%
level) ($m)
Less non-group
share ($m)
Net claims
liabilities, group
share ($m)
107.0
93.6
84.5
60.3
38.6
38.0
61.4
34.1
24.2
24.0
63.5
61.4
61.6
62.9
62.8
59.0
63.6
63.9
60.8
55.6
64.2
66.2
68.1
60.7
61.0
58.8
60.1
56.5
52.7
49.8
58.9
37.5
33.6
30.7
30.5
66.0
65.9
63.6
60.4
60.5
60.7
56.1
52.5
50.9
51.1
57.1
52.0
48.6
47.1
43.5
43.2
69.5
69.0
68.5
63.5
59.7
57.8
62.2
60.2
57.4
54.2
52.1
51.5
67.0
45.5
39.1
37.7
37.7
37.4
37.5
71.0
70.6
68.7
65.8
63.9
63.2
62.8
64.0
58.3
53.7
50.7
49.3
48.6
48.3
89.9
87.9
80.2
74.7
72.4
72.3
67.1
67.1
72.4
72.4
71.7
69.6
70.1
68.9
67.8
67.5
67.0
63.6
60.1
57.0
56.7
55.1
53.9
53.5
76.7
124.6
114.8
108.7
118.5
112.6
112.6
112.1
108.9
70.9
71.0
70.5
69.5
68.9
69.0
68.9
66.5
63.7
64.2
68.3
65.9
62.8
62.8
61.7
61.7
60.4
58.8
55.5
52.7
46.9
46.1
41.3
38.0
37.2
37.2
37.0
36.3
69.5
69.3
68.7
65.8
65.8
64.9
65.5
65.4
64.6
64.3
60.5
56.5
52.8
50.3
49.3
48.6
48.5
48.3
47.9
47.0
4,456.5
759.5 1,011.3
857.1
819.7
945.7 1,008.1 1,018.3 1,273.5 1,616.1 1,516.3 15,282.1
(4,298.6)
(698.4)
(949.0)
(769.7)
(716.8)
(775.6)
(752.8)
(661.5)
(629.1)
(550.7)
(132.5)(10,934.7)
–
–
–
–
–
–
–
–
–
(33.0)
(644.2)
(677.2)
157.9
61.1
62.3
87.4
102.9
170.1
255.3
356.8
644.4 1,032.4
739.6 3,670.2
(28.6)
(9.0)
(11.5)
(15.7)
(17.3)
(29.0)
(39.4)
(59.1)
(93.8)
(160.9)
(116.9)
(581.2)
129.3
52.1
50.8
71.7
85.6
141.1
215.9
297.7
550.6
871.5
622.7 3,089.0
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Annual report 2018 Beazley 189
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 2018 for each underwriting year.
Marine
There have been reserve releases in the energy book in the 2009 underwriting year following the improvement of a specific claim.
The 2010 and 2014 underwriting years have been impacted by specific claims in energy and hull respectively. The 2018
underwriting year has been opened higher than previous years to allow for the recent increased claims activity.
Political, accident & contingency
The 2017 underwriting year has reduced supported by benign claims activity on the terrorism book, and a number of older years of
the political risks account have contributed small claims recoveries.
Property
Minor releases have been seen on a number of underwriting years, with one claim on the commercial property book leading to a
small strengthening in 2013. The recent years have been significantly impacted by higher attritional claims, as well as some
strengthening on the 2017 catastrophe estimates during the year.
Reinsurance
The 2017 underwriting year is showing improvement generated by redundancy in the 2017 catastrophe estimates.
Specialty lines
Releases have been made from underwriting years as they mature and claims crystallise. The more recent years have also
benefited from the release of cyber catastrophe margin. The most recent underwriting year has been opened slightly higher in order
to maintain margin.
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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 2018.
Reserve releases during the year totalled $115.0m (2017: $203.9m). The net of reinsurance estimates of ultimate claims costs
on the 2016 and prior underwriting years have improved by $133.5m during 2018, while 2017 underwriting year strengthened by
$18.5m driven by the deterioration of catastrophe and attritional claims in our property division.
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.
2018
Current year
Prior year
– 2015 underwriting year and earlier
– 2016 underwriting year
– 2017 underwriting year
Net insurance claims
2017
Current year
Prior year
– 2014 underwriting year and earlier
– 2015 underwriting year
– 2016 underwriting year
Net insurance claims
Political,
accident &
contingency
$m
105.0
Property
$m
242.1
Reinsurance
$m
121.5
0.4
(7.9)
(7.3)
(14.8)
90.2
(2.9)
7.4
42.8
47.3
289.4
(5.2)
(0.7)
(17.9)
(23.8)
97.7
Political,
accident &
contingency
$m
100.1
Property
$m
264.8
Reinsurance
$m
152.2
5.8
(3.5)
(6.2)
(3.9)
96.2
(6.3)
(9.1)
2.2
(13.2)
251.6
(16.1)
(12.6)
(26.0)
(54.7)
97.5
Marine
$m
146.5
(11.6)
(2.2)
1.3
(12.5)
134.0
Marine
$m
135.4
(5.8)
(9.3)
4.4
(10.7)
124.7
Specialty
lines
$m
727.7
(88.4)
(22.4)
(0.4)
(111.2)
616.5
Specialty
lines
$m
627.1
(91.1)
(30.5)
0.2
(121.4)
505.7
Total
$m
1,342.8
(107.7)
(25.8)
18.5
(115.0)
1,227.8
Total
$m
1,279.6
(113.5)
(65.0)
(25.4)
(203.9)
1,075.7
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Annual report 2018 Beazley 191
25 Borrowings
The carrying amount and fair values of the non-current borrowings are as follows:
Carrying value
Balance at 1 January 2018
Interest expensed
Interest paid
Debt redemption
Amortisation of capitalised borrowing costs
Foreign exchange gain
Balance at 31 December 2018
Fair value
Balance at 1 January 2018
Change in fair value
Balance at 31 December 2018
Subordinated
debt
$m
18.0
1.0
(1.0)
(18.0)
–
–
–
Subordinated
debt
$m
18.0
(18.0)
–
Tier 2
subordinated
debt
$m
248.5
14.7
(14.7)
–
0.2
–
248.7
Tier 2
subordinated
debt
$m
266.6
(17.2)
249.4
Retail
bond
$m
99.5
5.4
(5.4)
–
0.2
(4.1)
95.6
Retail
bond
$m
104.1
(5.9)
98.2
Total
$m
366.0
21.1
(21.1)
(18.0)
0.4
(4.1)
344.3
Total
$m
388.7
(41.1)
347.6
The fair values of the subordinated debt, the tier 2 subordinated debt and the retail bond are based on quoted market prices.
In November 2004, the group issued subordinated debt of $18m to JPMorgan Chase Bank, N.A., JPMorgan. The loan is unsecured
and interest is payable at the USD London interbank offered rate (LIBOR) plus a margin of 3.65% per annum. In October 2018,
the group exercised its call option and redeemed the full nominal amount of debt of $18.0m on 26 November 2018. Please refer
to note 8 for further detail on debt buyback.
In September 2012, the group issued £75m of sterling denominated 5.375% notes due 2019. Interest at a fixed rate of 5.375%
is payable in March and September each year.
In November 2016, the group issued $250m of subordinated tier 2 notes due in 2026. Annual interest, at a fixed rate of 5.875%,
is payable in May and November each year.
In addition to these borrowings we operate a syndicated short term banking facility, managed through Lloyds Banking Group plc.
In July 2017 we renewed our syndicated short term banking facility led by Lloyds Banking Group plc. The facility provides potential
borrowings up to $225m. The agreement 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 last for three years, expiring 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.
26 Other payables
Group
Reinsurance premiums payable
Accrued expenses including staff bonuses
Other payables
Deferred consideration payable on acquisition of MGAs
Due to syndicate 623
Due to syndicate 6107
Due to syndicate 6050
Due to syndicate 5623
Company
Other payables
2018
$m
183.8
138.3
48.4
–
5.0
65.1
0.4
1.6
442.6
2018
$m
6.0
6.0
2017
$m
182.8
165.7
100.1
0.3
–
52.2
11.4
–
512.5
2017
$m
0.4
0.4
All other payables are payable within one year of the reporting date. The carrying value approximates fair values.
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Notes to the financial statements continued
27 Retirement benefit obligations
Present value of funded obligations
Fair value of plan assets
Retirement benefit liability in the statement of financial position
Amounts recognised in the statement of profit or loss
Interest cost
Expected return on plan assets
2018
$m
47.0
(44.6)
2.4
1.3
(1.3)
–
2017
$m
55.9
(53.6)
2.3
1.4
(1.3)
0.1
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.
This pension is related to salary at the date of death.
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.
The scheme exposes the group to additional actuarial, interest rate and market risk.
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 2018. According to the Schedule of Contributions, the group expects to
contribute approximately $1.3m in each of the next two years.
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.
The most recently completed Actuarial Valuation of the Scheme was carried out at 1 January 2017 including a valuation carried
out in accordance with the Pensions Protection Fund (Valuation) Regulations 2005 and with appropriate section 179 guidance
and assumptions issued by the Board of the Pension Protection Fund.
A recovery plan was agreed between the Trustees and the employer on 27 December 2017 in accordance with OP(SF)R 2005
Regulation 8. These arrangements were formalised in a schedule of contributions which the scheme Actuary certified on
27 December 2017 in accordance with OP(SF)R 2005 Regulation 9.
Movement in present value of funded obligations recognised in the statement of financial position
Balance at 1 January
Interest cost
Actuarial (gain)/loss
Benefits paid
Foreign exchange (gain)/loss
Balance at 31 December
2018
$m
55.9
1.3
(6.8)
(1.1)
(2.3)
47.0
2017
$m
48.2
1.4
4.2
(0.4)
2.5
55.9
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Annual report 2018 Beazley 193
27 Retirement benefit obligations continued
Movement in fair value of plan assets recognised in the statement of financial position
Balance at 1 January
Expected return on plan assets
Actuarial (loss)/gain
Employer contributions
Benefits paid
Foreign exchange (loss)/gain
Balance at 31 December
Plan assets are comprised as follows:
Equities
Bonds
Cash
UCITS funds
Total
The actual loss on plan assets was $6.8m (2017: gain of $5.5m).
Principal actuarial assumptions
Discount rate
Inflation rate
Expected return on plan assets
Future salary increases
Future pensions increases
Life expectancy for members aged 60 at 31 December
Life expectancy for members aged 40 at 31 December
2018
$m
53.6
1.3
(8.0)
1.0
(1.1)
(2.2)
44.6
44.4
–
0.2
–
44.6
2018
$m
2017
$m
42.0
1.3
4.2
4.4
(0.4)
2.1
53.6
34.5
8.6
3.4
7.1
53.6
2017
$m
2.8%
3.5%
2.8%
3.5%
3.0%
90 years
93 years
2.4%
3.4%
2.4%
3.4%
3.3%
90 years
93 years
At 31 December 2018, the weighted-average duration of the defined benefit obligation was 8.8 years (2017: 9.7 years).
Sensitivity analyses
Changes in the relevant actuarial assumptions would result in a change in the value of the funded obligation as shown below:
31 December 2018
Discount rate (0.5% decrease)
Inflation rate (0.3% decrease)
Future salary changes (0.5% decrease)
Life expectancy (1 year increase)
31 December 2017
Discount rate (0.5% decrease)
Inflation rate (0.3% decrease)
Future salary changes (0.5% decrease)
Life expectancy (1 year increase)
Increase
$m
6.0
–
–
1.6
Increase
$m
7.7
–
–
2.0
Decrease
$m
–
(2.2)
(0.5)
–
Decrease
$m
–
(1.1)
(0.7)
–
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Notes to the financial statements continued
28 Deferred tax
Deferred tax asset
Deferred tax liability
The movement in the net deferred income tax is as follows:
Balance at 1 January
Income tax charge
Amounts recorded through equity
Foreign exchange translation differences
Balance at 31 December
Plant and equipment
Intangible assets
Underwriting profits
Deferred acquisition costs
Tax losses carried forward
Share based payments
Other
Net deferred income tax account
Plant and equipment
Intangible assets
Underwriting profits
Deferred acquisition costs
Share based payments
Other
Net deferred income tax account
2018
$m
28.9
(9.1)
19.8
(3.0)
18.8
4.2
(0.2)
19.8
Balance
1 Jan 18
$m
0.3
(1.1)
(16.7)
6.8
–
9.6
(1.9)
(3.0)
Balance
1 Jan 17
$m
0.3
1.2
(23.0)
10.9
6.6
2.2
(1.8)
Recognised
in income
$m
(0.2)
(1.0)
14.8
(9.3)
10.0
0.2
4.3
18.8
Recognised
in income
$m
–
(0.1)
6.3
(4.1)
(1.2)
(4.1)
(3.2)
Recognised
in equity
$m
–
–
–
–
–
4.2
–
4.2
Recognised
in equity
$m
–
(2.2)
–
–
4.4
–
2.2
FX translation
differences
$m
–
–
–
–
–
(0.1)
(0.1)
(0.2)
FX translation
differences
$m
–
–
–
–
(0.2)
–
(0.2)
2017
$m
6.9
(9.9)
(3.0)
(1.8)
(3.2)
2.2
(0.2)
(3.0)
Balance
31 Dec 18
$m
0.1
(2.1)
(1.9)
(2.5)
10.0
13.9
2.3
19.8
Balance
31 Dec 17
$m
0.3
(1.1)
(16.7)
6.8
9.6
(1.9)
(3.0)
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.
29 Operating lease commitments
The group leases land and buildings under non-cancellable operating lease agreements.
The future minimum lease payments under the non-cancellable operating leases are as follows:
No later than one year
Later than one year and no later than five years
Later than five years
2018
$m
9.8
16.6
6.5
32.9
2017
$m
10.3
26.9
8.5
45.7
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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.
30.1 Syndicates 623, 6107, 6050 and 5623
The group received management fees and profit commissions for providing a range of management services to syndicates 623,
6107 and 6050, which are all managed by the group. In addition, the group ceded portions or all of a group of insurance policies
to syndicates 6107, 5623 and 6050. The participants on syndicates 623, 6107 and 6050 are solely third party capital.
Details of transactions entered into and the balances with these syndicates are as follows:
Written premium ceded to syndicates
Other income received from syndicates
Services provided
Balances due:
Due (to)/from syndicate 623
Due to syndicate 6107
Due to syndicate 6050
Due to syndicate 5623
30.2 Key management compensation
Salaries and other short term benefits
Post-employment benefits
Share based remuneration
2018
$m
65.0
29.0
36.3
(5.0)
(65.1)
(0.4)
(1.6)
2018
$m
11.8
0.5
5.9
18.2
2017
$m
66.1
35.7
38.6
30.6
(52.2)
(11.4)
–
2017
$m
16.4
0.6
9.8
26.8
Key management include executive and non-executive directors and other senior management.
The total number of Beazley plc ordinary shares held by key management was 8.4m. 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 101 to 120.
30.3 Other related party transactions
At 31 December 2018, the group had purchased services from the associate of $2.3m (2017: $2.5m) throughout the year.
All transactions with the associate and subsidiaries are priced on an arm’s length basis.
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www.beazley.com
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.
The following is a list of all the subsidiaries in the group as at 31 December 2018:
Beazley Ireland Holdings plc
Beazley Group Limited
Beazley Furlonge Holdings Limited
Beazley Furlonge Limited
Beazley Investments Limited
Beazley Underwriting Limited
Beazley Management Limited
Beazley Staff Underwriting Limited
Beazley Solutions Limited
Beazley Underwriting Services Limited
Beazley Corporate Member (No.2) Limited
Beazley Corporate Member (No.3) Limited
Beazley Corporate Member (No.6) Limited
Beazley Leviathan Limited
Beazley Canada Limited
Beazley Insurance dac
Beazley Solutions International Limited
Beazley Underwriting Pty Ltd
Beazley USA Services, Inc.*
Beazley Holdings, Inc.*
Beazley Group (USA) General Partnership**
Beazley Insurance Company, Inc.***
Beazley America Insurance Company,
Inc.***
Lodestone Securities LLC****
Beazley Limited
Beazley Pte. Limited
Please see page 197 for registered addresses.
Country of
incorporation
Jersey
England
England
England
England
England
England
England
England
England
England
England
England
England
Canada
Ireland
Ireland
Australia
USA
USA
USA
USA
Ownership
Nature of business
interest
Intermediate holding company
100%
Intermediate holding company
100%
Intermediate holding company
100%
Lloyd’s underwriting agents
100%
Investment company
100%
100%
Underwriting at Lloyd’s
100% Intermediate management company
Underwriting at Lloyd’s
100%
Insurance services
100%
100%
Insurance services
Underwriting at Lloyd’s
100%
Underwriting at Lloyd’s
100%
Underwriting at Lloyd’s
100%
Underwriting at Lloyd’s
100%
100%
Insurance services
100% Insurance and reinsurance company
Insurance services
100%
Insurance services
100%
Insurance services
100%
Holding company
100%
100%
General partnership
Underwriting admitted lines
100%
Functional
currency
USD
USD
USD
GBP
USD
USD
GBP
USD
GBP
GBP
USD
USD
USD
GBP
CAD
USD
USD
AUD
USD
USD
USD
USD
USA
USA
Hong Kong
Singapore
100%
100%
100%
100%
Underwriting admitted lines
Consultancy services
Insurance services
Underwriting at Lloyd’s
USD
USD
HKD
SGD
Beazley plc direct
investment in
subsidiary ($m)
724.6
724.6
www.beazley.com
Annual report 2018 Beazley 197
31 Parent company and subsidiary undertakings continued
The following is a list of group registered office locations:
Address
United Kingdom and Continental Europe
60 Great Tower Street
2 Northwood Avenue
22 Grenville Street
North America
1209 Orange Street*
2711 Centerville Road Suite 400**
30 Batterson Park Road***
160 Greentree Drive, Suite 101****
55 University Avenue, Suite 550
Asia
138 Market Street, 03-04 Capita Green
36/F., Tower Two, Times Square,
1 Matheson Street, Causeway Bay
Australia
Level 15, 1 O’Connell Street
City
Postcode
Country
London
Dublin
Saint Helier
Wilmington, Delaware
Wilmington, Delaware
Farmington, Connecticut
Dover, Delaware
Toronto, Ontario
EC3R 5AD
D09 X5N9
JE4 8PX
19801
19808
06032
19904
M5J 2HJ
England
Ireland
Jersey
USA
USA
USA
USA
Canada
Singapore
Hong Kong
Sydney
048946
Singapore
–
Hong Kong
NSW 2000
Australia
32 Contingencies
Funds at Lloyd’s
The following amounts are controlled by Lloyd’s to secure underwriting commitments:
Debt securities and other fixed income securities
Underwriting
year
2019
£m
720.4
Underwriting
year
2018
£m
733.2
Underwriting
year
2017
£m
656.9
The funds are held in trust and can be used to meet claims liabilities should syndicates’ members fail to meet their claims liabilities.
The funds can only be used to meet claim liabilities of the relevant member.
These balances are included within financial assets at fair value on the statement of financial position.
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:
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Pound sterling
Canadian dollar
Euro
2018
2017
Average
0.75
1.29
0.84
Year end spot
0.78
1.36
0.87
Average
0.78
1.30
0.89
Year end spot
0.75
1.29
0.85
34 Subsequent events
There are no events that are material to the operations of the group that have occurred since the reporting date.
198 Beazley Annual report 2018
Glossary
www.beazley.com
Aggregates/aggregations
Accumulations of insurance loss exposures which result from
underwriting multiple risks that are exposed to common causes
of loss.
Aggregate excess of loss
The reinsurer indemnifies an insurance company (the reinsured)
for an aggregate (or cumulative) amount of losses in excess
of a specified aggregate amount.
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.
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.
Binding authority
A contracted agreement between a managing agent and a
coverholder under which the coverholder is authorised to enter
into contracts of insurance for the account of the members
of the syndicate concerned, subject to specified terms
and conditions.
Capacity
This is the maximum amount of premiums that can be
accepted by a syndicate. Capacity also refers to the amount
of insurance coverage allocated to a particular policyholder
or in the marketplace in general.
Capital growth assets
These are assets that do not pay a regular income and target
an increase in value over the long term. They will typically
have a higher risk and volatility than that of the core portfolio.
Currently these are the hedge funds, equity funds and illiquid
credit assets.
Catastrophe reinsurance
A form of excess of loss reinsurance which, subject to a
specified limit, indemnifies the reinsured company for the
amount of loss in excess of a specified retention with respect
to an accumulation of losses resulting from a catastrophic
event or series of events.
Claims
Demand by an insured for indemnity under an insurance
contract.
Claims ratio
Ratio, in percentage terms, of net insurance claims to net
earned premiums. The calculation is performed excluding
the impact of foreign exchange. In 2018, this ratio was
59% (2017: 58%). This represented total claims of $1,227.8m
(2017: $1,075.7m) divided by net earned premiums of
$2,084.6m (2017: $1,869.4m).
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 2018, this ratio was 98% (2017: 99%). This
represents the sum of net insurance claims of $1,227.8m
(2017: $1,075.7m), expenses for acquisition of insurance
contracts of $561.9m (2017: $519.7m) and administrative
expenses of $250.7m (2017: $254.7m) to net earned premiums
of $2,084.6m (2017: $1,869.4m). This is also the sum of the
expense ratio 39% (2017: 41%) and the claims ratio 59%
(2017: 58%).
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.
Deferred acquisition costs (DAC)
Costs incurred for the acquisition or the renewal of insurance
policies (e.g. brokerage, premium levy and staff related
costs) which are capitalised and amortised over the term
of the contracts.
Earnings per share (EPS) – basic/diluted
Ratio, in pence and cents, calculated by dividing the consolidated
profit after tax by the weighted average number of ordinary
shares issued, excluding shares owned by the group. For
calculating diluted earnings per share the number of shares and
profit or loss for the year is adjusted for certain dilutive potential
ordinary shares such as share options granted to employees.
Economic Capital Requirement (ECR)
The capital required by a syndicate’s members to support
their underwriting. Calculated as the uSCR ‘uplifted’ by 35%
to ensure capital is in place to support Lloyd’s ratings and
financial strength.
Excess per risk reinsurance
A form of excess of loss reinsurance which, subject to
a specified limit, indemnifies the reinsured company against
the amount of loss in excess of a specified retention with
respect to each risk involved in each loss.
www.beazley.com
Annual report 2018 Beazley 199
Expense ratio
Ratio, in percentage terms, of the sum of expenses for
acquisition of insurance contracts and administrative
expenses to net earned premiums. The calculation is performed
excluding the impact of foreign exchange on non-monetary
items. In 2018, the expense ratio was 39% (2017: 41%). This
represents the sum of expenses for acquisition of insurance
contracts of $561.9m (2017: $519.7m) and administrative
expenses of $250.7m (2017: $254.7m) to earned premiums
of $2,084.6m (2017: $1,869.4m).
Lead underwriter
The underwriter of a syndicate who is responsible for setting
the terms of an insurance or reinsurance contract that is
subscribed by more than one syndicate and who generally
has primary responsibility for handling any claims arising under
such a contract.
Line
The proportion of an insurance or reinsurance risk that is
accepted by an underwriter or which an underwriter is willing
to accept.
Facultative reinsurance
A reinsurance risk that is placed by means of a separately
negotiated contract as opposed to one that is ceded under
a reinsurance treaty.
Managing agent
A company that is permitted by Lloyd’s to manage the
underwriting of a syndicate.
Gross premiums written
Amounts payable by the insured, excluding any taxes or
duties levied on the premium, but including any brokerage and
commission deducted by intermediaries.
Managing general agent (MGA)
An insurance intermediary acting as an agent on behalf of
an insurer.
Hard market
An insurance market where prevalent prices are high, with
restrictive terms and conditions offered by insurers.
Horizontal limits
Reinsurance coverage limits for multiple events.
Medium tail
A type of insurance where the claims may be made a few years
after the period of insurance has expired.
Net assets per share
Ratio, in pence and cents, calculated by dividing the net assets
(total equity) by the number of shares issued.
Incurred but not reported (IBNR)
These are anticipated or likely claims that may result from
an insured event but which have not yet been reported.
Net premiums written
Net premiums written is equal to gross premiums written less
outward reinsurance premiums written.
International Accounting Standards Board (IASB)
An independent accounting body responsible for developing
IFRS (see below).
International Accounting Standards (IAS)/International
Financial Reporting Standards (IFRS)
Standards formulated by the IASB with the intention of achieving
internationally comparable financial statements. Since 2002,
the standards adopted by the IASB have been referred to as
International Financial Reporting Standards (IFRS). Until existing
standards are renamed, they continue to be referred to as
International Accounting Standards (IAS).
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).
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Private enterprise
The private enterprise team offers specialised professional
and general liability coverage supported by a high service
proposition, focusing on meeting the needs of small businesses
with assets up to $35.0m and up to 500 employees.
Provision for outstanding claims
Provision for claims that have already been incurred at the
reporting date but have either not yet been reported or not yet
been fully settled.
Rate
The premium expressed as a percentage of the sum insured
or limit of indemnity.
Rate change
The percentage change in premium income charged relative
to the level of risk on renewals.
Reinsurance special purpose syndicate
A special purpose syndicate (SPS) created to operate as a
reinsurance ‘sidecar’ to Beazley’s treaty account, capitalising
on Beazley’s position in the treaty reinsurance market.
www.beazley.com
Surplus lines insurer
An insurer that underwrites surplus lines insurance in the US.
Lloyd’s underwriters are surplus lines insurers in all jurisdictions
of the US except Kentucky and the US Virgin Islands.
Total shareholder return (TSR)
The increase in the share price plus the value of any first and
second dividends paid and proposed during the year.
Treaty reinsurance
A reinsurance contract under which the reinsurer agrees to offer
and to accept all risks of a certain size within a defined class.
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.
200 Beazley Annual report 2018
Glossary continued
Reinsurance to close (RITC)
A reinsurance which closes a year of account by transferring the
responsibility for discharging all the liabilities that attach to that
year of account (and any year of account closed into that year),
plus the right to buy any income due to the closing year of
account, into an open year of account in return for a premium.
Retention limits
Limits imposed upon underwriters for retention of exposures
by the group after the application of reinsurance programmes.
Retrocessional reinsurance
The reinsurance of the reinsurance account. It serves to
‘lay off’ risk.
Return on equity (ROE)
Ratio, in percentage terms, calculated by dividing the
consolidated profit after tax by the average daily total equity.
In 2018, this was calculated as profit after tax of $68.2m
(2017: $130.0m) divided by average equity of $1,444.8m
(2017: $1,429.5m).
Risk
This term may refer to:
a) the possibility of some event occurring which causes injury
or loss;
b) the subject matter of an insurance or reinsurance contract; or
c) an insured peril.
Short tail
A type of insurance where claims are usually made during
the term of the policy or shortly after the policy has expired.
Property insurance is an example of short tail business.
Sidecar special purpose syndicate
Specialty reinsurance company designed to provide additional
capacity to a specific insurance company. It operates by
purchasing a portion or all of a group of insurance policies,
typically catastrophe exposures. These companies have
become quite prominent in the aftermath of Hurricane Katrina
as a vehicle to add risk-bearing capacity, and for investors to
participate in the potential profits resulting from sharp price
increases.
Soft market
An insurance market where prevalent prices are low, and
terms and conditions offered by insurers are less restrictive.
Solvency Capital Requirement on an ultimate basis (‘uSCR’)
The capital requirement under Solvency II calculated by
Beazley’s internal model which captures the risk in respect of
the planned underwriting for the prospective year of account in
full, covering ultimate adverse development and all exposures.
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Beazley online annual report
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www.reports.beazley.com/2018
Beazley plc
Plantation Place South
60 Great Tower Street
London
EC3R 5AD
United Kingdom
Phone: +44 (0)20 7667 0623
Fax: +44 (0)20 7674 7100
Registered number: 09763575
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