Beautifully designed insurance Beazley plc Interim report
Beautifully designed insurance At Beazley, our commitment is to deliver beautifully designed insurance to our clients around the world. Beautiful designs require beautifully designed insurance. Our architects and engineers professional indemnity team is just one of the many teams at Beazley that work closely with brokers to design customised insurance, backed by expert service, to address our clients most pressing needs. We are proud to have insured the architects behind the Jeddah Tower and many other pioneering designs, Adrian Smith + Gordon Gill Architecture, since 2008 and the building s structural engineers, Thornton Tomasetti, since 2006. When complete in 2020, the Jeddah Tower will be the world s tallest building, soaring more than a kilometre (3,281 feet) above Jeddah, a Red Sea port and Saudi Arabia s second largest city. Artist s impression of Jeddah Tower. Design architect: Adrian Smith + Gordon Gill Architecture Contents 1 Highlights and key performance indicators 3 Interim results statement 6 31 years of profitable growth 8 Performance by division 10 Condensed consolidated statement of profit or loss 11 Condensed consolidated statement of comprehensive income 11 Condensed consolidated statement of changes in equity 12 Condensed consolidated statement of financial position 13 Condensed consolidated statement of cash flows 14 Notes to the condensed consolidated interim financial statements 35 Responsibility statement of the directors in respect of the interim report 36 Independent review report to Beazley plc 37 Glossary 40 Company information Beazley Interim report
About Beazley Beazley plc is the parent company of our specialist insurance business with operations in Europe, North America, Latin America, Asia and the Middle East. Beazley is a proud participant in the Lloyd s market, one of the largest and oldest insurance markets in the world. Through the Lloyd s broker network and the market s trading licences, we are able to access a wide range of insurance and reinsurance business from around the world. Many of the lines of business we underwrite, such as marine and energy, political risks and contingency, were pioneered at Lloyd s. Beazley manages six Lloyd s syndicates: syndicates 2623 and 623 underwrite a broad range of insurance and reinsurance business worldwide; syndicate 3623 focuses on personal accident and sport business along with providing reinsurance to Beazley Insurance Company, Inc. in the US; 3622 is a Highlights and key performance indicators Continued growth and increased profit dedicated life syndicate; 6107, a special purpose syndicate, which writes reinsurance business; and 6050, another special purpose syndicate, which reinsures syndicates 623 and 2623. We also underwrite business directly in the US admitted market through Beazley Insurance Company, Inc., an admitted carrier licensed to write in all 50 states. In 2009 we incorporated an Irish reinsurer, Beazley Re Designated Activity Company (dac), which reinsures a proportion of the group s business. In June, Beazley Re dac became Beazley Insurance dac after receiving a licence to transact insurance business. Further information about us is available at: Highlights and interim results Highlights Full year Gross premiums written () 1,149.3 1,124.1 2,195.6 Net premiums written () 936.4 930.4 1,854.0 Net earned premiums () 886.7 861.4 1,768.2 Profit before income tax () 158.7 150.2 293.2 Claims ratio 49 51 48 Expense ratio 41 39 41 Combined ratio 90 90 89 Basic earnings per share (cents) 25.3 25.1 48.6 Net assets per share (cents) 289.3 267.0 286.8 Net tangible assets per share (cents) 264.8 249.6 268.2 Basic earnings per share (pence) 20.2 17.3 35.5 Net assets per share (pence) 226.0 199.3 225.9 Net tangible assets per share (pence) 206.9 186.3 211.2 Proposed dividend per share (pence) 3.7 3.5 20.5 Return on equity (annualised) 18 19 18 Premium renewal rate change (2) (2) (2) Investment return (annualised) 3.4 2.8 2.0 Interim report Beazley 1
Highlights and key performance indicators continued KPIs Financial highlights Earnings per share (c) 60 50 40 30 20 10 0 25.3 25.1 48.6 HY HY FY Net assets per share (c) 300 250 200 150 100 50 0 24.5 18.6 17.4 264.8 Tangible 249.6 Intangible 268.2 HY HY FY Gross premiums written () 2500 2000 1500 1000 500 1,149.3 1,124.1 2,195.6 0 HY HY FY Dividends per share (p) 30 25 20 15 10 5 0 3.7 3.5 Interim and final 10.0 10.5 HY HY FY Special Return on equity () 20 15 18 19 18 10 5 0 HY HY FY Combined ratio () 100 80 60 40 20 0 90 90 89 41 39 41 49 51 48 HY HY FY Claims ratio Expense ratio 2 Beazley Interim report
Interim results statement Andrew Horton Chief executive We are pleased to deliver rising profits in an environment that remains challenging Beazley performed well during the first half of, with a strong underwriting result boosted by an excellent investment return. Pre-tax profits rose 6 to $158.7 m (: $150.2 m) on gross premiums that, at $1,149.3 m, were 2 higher than for the comparable period last year (: $1,124.1 m). Our combined ratio was 90 (: 90). With market conditions for large, catastrophe exposed risks continuing to deteriorate, our specialty lines division, which is less focused on such risks, has been growing as a proportion of our underwriting portfolio. Specialty lines is itself a very diversified book, comprising professional liability, management liability, and environmental business as well as our marketleading cyber insurance practice. Earlier, in March, Lloyd s announced plans to establish a new Brussels-based insurance company capable of writing European business for the 1 January 2019 renewal season, subject to regulatory approval. We should accordingly be able to grow our presence in Europe unimpeded, offering clients the specialist products and service we know they value. Despite our continued success in generating strong underwriting profits, conditions for many of our underwriters remain exceptionally difficult. Premium rates for our business as a whole decreased by 2 but this masked steep declines for war (8), energy (9) and terrorism (11). Rates for these lines of business have been falling steadily for several years. Our underwriters continue to succeed in writing profitable business against the backdrop of ever more challenging conditions, particularly in the marine market, but they are having to walk away from underpriced business with increasing frequency. Highlights and interim results Most of our specialty lines clients are currently located in the US with large risks frequently underwritten in London and smaller risks commonly underwritten locally in the US. Our other divisions are also represented in the US, although on a smaller scale. We saw locally underwritten US premiums grow 9 in the first half of the year, relative to the same period last year. We have also been laying the foundations for future growth elsewhere. In February we expanded our presence in Canada with the acquisition of the specialist managing general agent, Creechurch International Underwriters Limited (now Beazley Canada Limited). We have also continued to hire underwriters in Europe, Singapore and Miami: the latter two locations are now well recognised regional hubs for Asian and Latin American business respectively. These investments in the future of the business have led to an increased expense ratio, but we remain focused on managing costs actively in order to minimise such effects. Continental Europe currently accounts for just over 5 of our total business, but we have growth ambitions there too, supported by the establishment of a new Dublin-based insurance company and by the measures Lloyd s is taking to preserve the market s access to European business following Britain s future departure from the European Union. We were therefore pleased to receive approval from the Central Bank of Ireland for our Irish-domiciled reinsurance company, Beazley Re dac, to transact insurance. To that end the company has been renamed Beazley Insurance dac. For as long as current market conditions prevail we expect growth opportunities for our London underwriters, who often specialise in catastrophe exposed risks, to be limited. By contrast, we continue to see attractive growth opportunities across our specialty lines portfolio. Demand continues for high quality cyber insurance, a market in which Beazley is very well known. Regulations concerning the handling of data breaches are tightening: the long awaited General Data Protection Regulation will come into force across the European Union next spring. Also, illustrations of why companies need to have protection continue, most recently with the internationally coordinated WannaCry malware attacks. Together these trends continue to drive demand for cyber insurance among businesses of all sizes. Beazley is well equipped to meet this demand. Our Beazley Breach Response product is adapted to the needs of small and mid-sized businesses and Vector, our partnership with Munich Re, helps the world s largest companies build the substantial towers of insurance they are now seeking. When underwriting cyber insurance we recognise the potential for systemic events, as we do in areas exposed to natural catastrophes, and seek to limit our aggregate exposure as well as purchasing substantial reinsurance. In cyber, as in other business areas, our risk management team, led by Andrew Pryde, works closely with our underwriters to monitor and manage aggregation risk. Interim report Beazley 3
Interim results statement continued Cumulative renewal rate changes since 2008 () Rate change 120 100 80 60 08 09 10 11 12 13 14 15 16 17HY Underwriting year Marine Reinsurance Property Political, accident & contingency Specialty lines All divisions Investments portfolio split Cash and cash equivalents 9.9 Government, quasi-government and supranational 20.6 Corporate debt 52.4 Senior secured loans 2.0 Asset backed securities 0.2 Derivative financial assets 0.3 Capital growth assets 14.6 Other growth markets for Beazley in the first half, and areas in which we see continuing strong potential, were healthcare risks and environmental risks. Healthcare expenditures account for nearly 18 of the US economy and the market is constantly evolving, generating new risks for healthcare providers. Earlier this year, our US healthcare team launched Beazley Virtual Care, a pioneering insurance policy to cover organisations involved in the provision of telemedicine, a fast growing sector of the healthcare market. Outside the US, financial institutions business is another market that we see as offering strong growth potential for our specialty lines underwriters. In May we launched a new package product in London for financial institutions, combining crime and professional indemnity cover with Beazley s data breach capability. We have also opened a new office in Barcelona and our hiring plans for the underwriters who will write business for the newly formed Beazley Insurance dac across Europe are well advanced. Not all markets offer equal promise of course. In May we sold the renewal rights to our Australian accident and health business to Blend Insurance Solutions, a Sydney-based Lloyd s service company. We will continue to focus on the growth of our accident and health business in London as well as in the US where, in May, we welcomed Brian Thompson to lead our US A&H team. These measures should enable us to improve the combined ratio of the team which has been higher than planned. The divisional structure of Beazley also changed in the first half of the year, spurred by the decision of Adrian Lewers, head of our political risks and contingency division, to retire from the business. This division has now been merged with our life, accident & health division under the leadership of Christian Tolle. My colleagues and I are enormously grateful to Adrian for his many contributions to Beazley, not least the creation of three successful specialist underwriting teams focusing on political, terrorism and contingency risks. Our recruitment and business development efforts around the world continue to be supported by the strength of the Beazley brand within our markets. We have largely grown organically, with rare exceptions for relatively small scale acquisitions of firms, such as Creechurch, that we know well and with which we have long term relationships. The success of this strategy has fostered Beazley s reputation across our industry as an entrepreneurial company where talented individuals can build rewarding long term careers. At times of market dislocation, such as we have recently seen, this makes us a magnet for talent. Although talent is a necessary condition for success in today s insurance markets, we are well aware that it is not a sufficient condition. The way in which insurers amass and interpret data, to support underwriting and enhance customer service, is also of critical importance. Our chief operating officer, Ian Fantozzi, has been leading our newly established data and analytics strategic initiative to ensure that Beazley is a beneficiary of the exciting developments in this arena. Investment performance Our investments returned $79.4 m, or 1.7 in the first half of ( : $62.7 m, 1.4). Investments have been volatile in this period, largely as a result of political uncertainty in the US. Overall however, US sovereign yields are little changed from the beginning of the year whilst credit spreads have continued to narrow and equity markets have risen strongly, reflecting underlying optimism about global economic prospects. As a result, our return in the year to date is higher than we had anticipated, helped by the shift from sovereign to corporate bond investments that we made in as well as modest additions to our equity exposures in and. However, risk assets have been rallying for an extended period and are increasingly vulnerable to disappointing economic news. The breakdown of our investment portfolio at was: Cash and cash equivalents 461.4 9.9 441.8 10.0 Fixed and floating rate debt securities Government, quasi-government and supranational 955.0 20.6 1,293.0 29.4 Asset backed securities 11.3 0.2 3.6 0.1 Corporate bonds Investment grade 2,322.1 50.1 1,928.8 43.9 High yield 106.0 2.3 118.7 2.7 Senior secured loans 91.3 2.0 83.3 1.9 Derivative financial assets 12.6 0.3 5.3 0.1 Core portfolio 3,959.7 85.4 3,874.5 88.1 4 Beazley Interim report
Equity linked funds 167.0 3.6 98.9 2.3 Hedge funds 344.0 7.4 295.4 6.7 Illiquid credit assets 168.4 3.6 125.8 2.9 Capital growth assets 679.4 14.6 520.1 11.9 Investment portfolio total 4,639.1 100.0 4,394.6 100.0 At the average duration of our fixed income portfolios was 2.0 years (31 December : 1.2 years) and the average credit rating of these exposures was A. Investment return by asset type Analysis of returns on the core portfolio and the capital growth assets are set out below: annualised return annualised return Core portfolio 44.2 2.2 60.0 3.1 Capital growth assets 35.2 10.4 2.7 1.0 Overall return 79.4 3.4 62.7 2.8 The increased return on capital growth assets is driven by: a much improved return from equities compared to the first six months of on a larger portfolio; and an increasing return on the illiquid credit assets as this portfolio matures. Capital position Our funding comes from a mixture of our own equity (on a Solvency II basis) alongside $248.4 m of tier 2 subordinated debt, $18.0 m of subordinated long term debt and a $95.5 m retail bond. We also have an undrawn banking facility of $225.0 m. The following table sets out the group s sources of funds: Shareholders funds 1,506.1 1,379.2 Tier 2 subordinated debt (2026) recalled in 103.0 Tier 2 subordinated debt (2026) issued in 248.4 Retail bond (2019) 95.5 99.8 Long term subordinated debt (2034) 18.0 18.0 Total 1,868.0 1,600.0 In November we issued $250.0 m of subordinated debt to facilitate this planned growth, and these funds remain available to meet our increasing capital requirement. The following table sets out the group s capital requirement including a provisional projection based upon the first version of our 2018 business plan of the year end Lloyd s ECR which is 7 higher than the previous year. Projected 31 December 31 December Lloyd s economic capital requirement (ECR) 1,590.0 1,489.2 Capital for US insurance company 107.7 107.7 Total 1,697.7 1,596.9 At we have surplus capital (on a Solvency II basis) of 31 of the projected year end ECR. Dividend The board has declared a first interim dividend of 3.7 pence (: 3.5 pence), in line with our strategy of delivering 5-10 dividend growth. This will be paid on 31 August to shareholders on the register at 5.00pm on 4 August. Outlook For most insurers, current market conditions are not conducive to growth. For some, any growth at all is proving elusive. I believe that Beazley can continue to grow in the mid single digits while generating underwriting profits. However in the absence of any market-turning catastrophe events (which would of course generate sizeable short term losses), the challenge of achieving this growth will increase. Our priorities in this environment are clear. We will not sacrifice profitability for growth, which means that we will continue to walk away from underpriced business. We will also continue to invest in the skills and infrastructure needed to succeed in any rating environment. We hired 29 people in the first half of the year to fill newly created underwriting roles but this was just one facet of our investment in the future of our business. It takes many skills to compete effectively in a crowded insurance market that is awash with capacity and targeted by numerous would-be disrupters. To meet both short term and long term challenges, we will continue to invest broadly in talent from inside and outside our industry. Highlights and interim results Our specialty lines business is likely to play a larger role in driving our capital requirements in the future as it is becoming a larger percentage of the total, thanks to its own growth, and because we continue to reduce our peak natural catastrophe exposure to reflect the rating environment. As a consequence, we would expect the rate of growth of our Lloyd s ECR to be close to double digits over the next few years. Andrew Horton Chief executive 20 July Interim report Beazley 5
31 years of profitable growth Beazley s vision is to become, and be recognised as, the highest performing specialist insurer 2007 $1,919.6m Managed gross premiums $1,561.0m Group share 2008 $1,984.9m Managed gross premiums $1,620.0 m Group share Beazley opens new office in Munich Political risks & contingency group formed as new division Acquisition of Momentum Underwriting Management Accident & life formed as a new division US hurricane Ike $20 bn 2009 2010 2011 $2,121.7m Managed gross premiums $1,751.3m Group share Raised 150 m 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 $2,108.5m Managed gross premiums $1,741.6m Group share 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 Special purpose syndicate 6107 formed to grow reinsurance business Chile and NZ earthquakes $14 bn Deepwater Horizon explosion triggers biggest oil spill in history $2,079.2m Managed gross premiums $1,712.5m Group share 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 Beazley remains profitable in worst year ever for insured natural catastrophe losses Tohoku earthquake in Japan $37 bn Floods in Thailand $16 bn US tornadoes $15 bn NZ earthquake $16 bn Trading 1986 began 1991 1992 1997 1986 $13.4 m $42.5 m Managed gross premiums Managed gross premiums Began trading at the old 1958 Lloyd s building in 1986 with a capacity of 8.3 m $58.8 m $128.4 m Managed gross premiums Managed gross premiums Management buyout of Hiscox share Beazley, Furlonge & Hiscox established and takes over managing syndicate 623 Specialty lines and treaty accounts started UK windstorms $3.5 bn European storms $10 bn Commercial property account 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 US hurricane Andrew $17 bn UK Bishopsgate explosion $750 m US Northridge earthquake $12.5 bn 6 Beazley Interim report
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. While we have weathered some of the toughest times the Lloyd s market has seen in more than three centuries, our underwriting operations continue to maintain a strong record of profitability. 2012 $2,278.0m Managed gross premiums $1,895.9m Group share Expansion into aviation and kidnap & ransom markets 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 $25-30 bn 2013 $2,373.0m Managed gross premiums $1,970.2m Group share Construction Consortium launched at Lloyd s 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 $2,424.7m Managed gross premiums $2,021.8m Group share Construction Consortium extended to Lloyd s Asia Middle East office opened to access local political risk and violence, terrorism, trade credit and contingency business Space and satellite insurance account started D&O Consortium launched at Lloyd s Locally underwritten US business grows 19 to $537 m 2015 $2,525.6 m Managed gross premiums $2,080.9 m Group share Entered into a reinsurance agreement with Korean Re US underwritten premium grows by 21 Cyber consortium launched at Lloyd s Beazley welcomes its 1,000th employee globally $2,666.5 m Managed gross premiums $2,195.6 m Group share Beazley celebrated its 30th anniversary 10th anniversary of operations in Singapore and Paris Beazley plc becomes the new holding company for the group, incorporated in England & Wales and tax-resident in the United Kingdom Established a partnership with Munich Re to broaden and enhance the cyber cover available to the world s largest companies Highlights and interim results Versatile specialists since 1986 1998 2000 2001 2006 Flotation 2002 $168.8 m $256.1 m Managed gross premiums Managed gross premiums $431.6 m $1,762.0 m Managed gross premiums Managed gross premiums Recall, contingency and political risks accounts started Marine account started European storms $12 bn Management buyout of minority shareholders EPL and UK PI accounts started Flotation raised 150 m to set up Beazley Group plc D&O healthcare, energy, cargo and specie accounts started Established local representation in the US Beazley MGA started in the US Beazley acquires Omaha P&C and renames it Beazley Insurance Company, Inc. (BICI) Beazley expands presence in Asia and Europe US 9/11 terrorist attack $20.3 bn SARS outbreak in Asia $3.5 bn US hurricanes Katrina, Rita and Wilma $101 bn Interim report Beazley 7
Performance by division Good performance despite declining rates MarineProperty Political, accident & contingency Clive Washbourn Head of marine Combined ratio () 100 80 60 40 20 0 Claims ratio 43 45 53 52 HY HY Expense ratio Gross premiums written 145.6 134.0 Net premiums written 118.9 107.9 Results from operating activities 10.9 9.4 Claims ratio 53 52 Expense ratio 43 45 Combined ratio 96 97 Rate change (4) (7) Christian Tolle Head of political, accident & contingency Combined ratio () 120 100 80 60 40 20 0 Claims ratio 53 48 53 49 HY HY Expense ratio Gross premiums written 108.4 149.3 Net premiums written 94.9 128.8 Results from operating activities (0.6) 6.5 Claims ratio 53 49 Expense ratio 53 48 Combined ratio 106 97 Rate change (5) (4) Mark Bernacki Head of property Combined ratio () 100 80 60 40 20 0 42 51 Claims ratio 46 41 HY HY Expense ratio Gross premiums written 194.1 173.0 Net premiums written 149.6 142.1 Results from operating activities 18.4 26.0 Claims ratio 51 41 Expense ratio 42 46 Combined ratio 93 87 Rate change (1) (4) 8 Beazley Interim report
Neil Maidment Chief underwriting officer Reinsurance Specialty lines Patrick Hartigan Head of reinsurance Adrian Cox Head of specialty lines Combined ratio () 100 80 60 40 20 0 37 38 Claims ratio 36 27 HY HY Expense ratio Gross premiums written 140.8 150.2 Net premiums written 82.9 92.9 Results from operating activities 19.6 29.8 Claims ratio 38 27 Expense ratio 37 36 Combined ratio 75 63 Rate change (2) (4) Combined ratio () 100 80 60 40 20 0 38 49 Claims ratio 34 57 HY HY Expense ratio Gross premiums written 560.4 517.6 Net premiums written 490.1 458.7 Results from operating activities 121.3 85.8 Claims ratio 49 57 Expense ratio 38 34 Combined ratio 87 91 Rate change (1) 1 Performance by division Interim report Beazley 9
Condensed consolidated statement of profit or loss for the six months ended ended ended Year to 31 December Note Gross premiums written 2 1,149.3 1,124.1 2,195.6 Written premiums ceded to reinsurers (212.9) (193.7) (341.6) Net premiums written 2 936.4 930.4 1,854.0 Change in gross provision for unearned premiums (100.1) (103.5) (83.4) Reinsurer s share of change in the provision for unearned premiums 50.4 34.5 (2.4) Change in net provision for unearned premiums (49.7) (69.0) (85.8) Net earned premiums 2 886.7 861.4 1,768.2 Net investment income 3 79.4 62.7 93.1 Other income 4 17.0 15.8 32.7 96.4 78.5 125.8 Revenue 2 983.1 939.9 1,894.0 Insurance claims 541.3 535.3 1,027.3 Insurance claims recovered from reinsurers (102.4) (99.1) (171.7) Net insurance claims 2,11 438.9 436.2 855.6 Expenses for the acquisition of insurance contracts 241.5 219.6 472.5 Administrative expenses 121.7 117.2 247.8 Foreign exchange loss 2 11.5 9.6 9.5 Operating expenses 374.7 346.4 729.8 Expenses 2 813.6 782.6 1,585.4 Share of profit/(loss) in associates 2 0.1 0.2 (0.2) Results of operating activities 169.6 157.5 308.4 Finance costs 5 (10.9) (7.3) (15.2) Profit before income tax 158.7 150.2 293.2 Income tax expense 8 (27.0) (21.4) (42.2) Profit after income tax all attributable to equity shareholders 131.7 128.8 251.0 Earnings per share (cents per share): Basic 6 25.3 25.1 48.6 Diluted 6 24.6 24.3 47.3 Earnings per share (pence per share): Basic 6 20.2 17.3 35.5 Diluted 6 19.7 16.8 34.5 10 Beazley Interim report
Condensed consolidated statement of comprehensive income for the six months ended ended ended Year to 31 December Profit after income tax 131.7 128.8 251.0 Other comprehensive income Items that will never be reclassified to profit or loss: Loss on remeasurement of retirement benefit obligations (6.1) Items that may be reclassified subsequently to profit or loss: Foreign currency translation differences (0.8) (5.6) (10.1) Total other comprehensive income (0.8) (5.6) (16.2) Total comprehensive income recognised 130.9 123.2 234.8 Condensed consolidated statement of changes in equity for the six months ended Share capital Merger reserve Foreign currency translation reserve Other reserves Retained earnings Total Balance as at 1 January 666.7 (628.5) (87.3) 6.7 1,483.8 1,441.4 Total comprehensive income recognised (5.6) 128.8 123.2 Dividends paid (188.3) (188.3) Issue of shares 1 2.5 (2.3) 0.2 Capital reduction 2 (631.5) 630.8 0.7 Equity settled share-based payments 12.2 12.2 Acquisition of own shares held in trust (9.7) (9.7) Transfer of shares to employees (2.1) 2.3 0.2 Balance as at 37.7 (92.2) 7.1 1,426.6 1,379.2 Total comprehensive income recognised (4.5) 116.1 111.6 Dividends paid (23.9) (23.9) Equity settled share-based payments 13.8 13.8 Acquisition of own shares held in trust Tax on share option vestings 2.1 2.1 Transfer of shares to employees 2.5 (1.6) 0.9 Balance as at 31 December 37.7 (96.7) 23.4 1,519.3 1,483.7 Total comprehensive income recognised (0.8) 131.7 130.9 Dividends paid (110.8) (110.8) Equity settled share-based payments 15.3 15.3 Issue of shares 0.1 0.1 Acquisition of own shares held in trust (16.2) (16.2) Tax on share option vestings 3.2 3.2 Transfer of shares to employees (7.7) 7.6 (0.1) Balance as at 37.8 (97.5) 18.0 1,547.8 1,506.1 Financial statements 1 During the first half of, 1.9 m new ordinary shares were issued, as well as 0.1m of preference shares prior to the scheme of arrangement. 2 The subsequent capital reduction involved a reduction in the nominal value of the shares in the new parent to 5 pence per share. Interim report Beazley 11
Condensed consolidated statement of financial position as at 31 December Note Assets Intangible assets 15 127.1 89.8 96.6 Plant and equipment 5.4 4.5 5.4 Deferred tax asset 11.8 6.8 11.0 Investments in associates 10.0 10.2 9.9 Deferred acquisition costs 274.1 247.1 242.8 Reinsurance assets 1,153.3 1,136.6 1,082.1 Financial assets at fair value 9 4,177.7 3,952.8 4,195.4 Insurance receivables 868.6 881.7 794.7 Current income tax assets 4.7 10.0 17.0 Other receivables 81.6 39.8 46.4 Cash and cash equivalents 10 461.4 441.8 507.2 Total assets 7,175.7 6,821.1 7,008.5 Equity Share capital 37.8 37.7 37.7 Foreign currency translation reserve (97.5) (92.2) (96.7) Other reserves 18.0 7.1 23.4 Retained earnings 1,547.8 1,426.6 1,519.3 Total equity 1,506.1 1,379.2 1,483.7 Liabilities Insurance liabilities 4,802.4 4,704.1 4,657.7 Financial liabilities 9 380.2 232.4 363.8 Retirement benefit liability 5.0 0.6 6.2 Deferred tax liabilities 7.0 0.9 12.8 Other payables 475.0 503.9 484.3 Total liabilities 5,669.6 5,441.9 5,524.8 Total equity and liabilities 7,175.7 6,821.1 7,008.5 D A Horton Chief executive M L Bride Finance director 20 July 12 Beazley Interim report
Condensed consolidated statement of cash flows for the six months ended ended ended Year to 31 December Cash flow from operating activities Profit before income tax 158.7 150.2 293.2 Adjustments for: Amortisation of intangibles 6.2 2.1 5.3 Equity settled share based compensation 12.7 11.4 23.0 Net fair value gain on financial investments (45.1) (34.8) (28.9) Share of (profit)/loss in associates (0.1) (0.2) 0.2 Depreciation of plant and equipment 1.2 0.8 1.8 Impairment of reinsurance assets recognised/(written back) 0.7 (1.1) Increase in insurance and other liabilities 150.6 143.0 72.4 Increase in insurance, reinsurance and other receivables (181.8) (194.1) (59.3) Increase in deferred acquisition costs (31.3) (20.9) (16.6) Financial income (37.4) (31.8) (71.5) Finance expense 10.9 7.3 15.2 Income tax paid (17.9) (20.0) (39.8) Net cash from operating activities 27.4 13.0 193.9 Cash flow from investing activities Purchase of plant and equipment (1.2) (1.1) (2.9) Expenditure on software development (0.7) (1.9) (4.7) Purchase of investments (1,215.4) (3,573.4) (5,985.4) Proceeds from sale of investments 1,272.8 3,501.6 5,666.0 Investment in associate (0.1) Cash acquired on sale of Australian accident and health business 0.8 Net cash spent in business combinations (31.2) (8.0) Interest and dividends received 37.4 31.8 71.5 Net cash from investing activities 62.5 (43.0) (263.6) Cash flow from financing activities Acquisition of own shares in trust (16.2) (9.7) (9.7) Proceeds from issue of shares 0.3 Repayment of borrowings (107.1) Proceeds of debt issue 248.7 Interest paid (10.9) (7.3) (15.2) Dividends paid (110.8) (188.3) (212.2) Net cash used in financing activities (137.9) (205.0) (95.5) Net decrease in cash and cash equivalents (48.0) (235.0) (165.2) Cash and cash equivalents at beginning of period 507.2 676.9 676.9 Effect of exchange rate changes on cash and cash equivalents 2.2 (0.1) (4.5) Cash and cash equivalents at end of period 461.4 441.8 507.2 Financial statements Interim report Beazley 13
Notes to the condensed consolidated interim financial statements for the six months ended 1 Statement of accounting policies Beazley plc is a company incorporated in England and Wales and is resident for tax purposes in the United Kingdom. The condensed consolidated interim financial statements of the group for the six months ended comprise the parent company, its subsidiaries and the group s interest in associates. The condensed consolidated interim financial statements have been prepared and approved by the directors in accordance with IAS 34 Interim Financial Reporting as adopted by the EU ( Adopted IFRS ). The condensed consolidated interim 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. The principal risks and uncertainties faced by the group remain consistent with those risks and uncertainties discussed and disclosed on pages 52 to 57 of the group s annual report and accounts. The preparation of condensed consolidated interim financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expenses. Actual results may differ from these estimates. The significant judgements made by management in applying the group s accounting policies and the key sources of estimation uncertainty were the same as those that applied to the consolidated financial statements as at, and for, the year ended 31 December. As required by IFRS 13 (Fair Value Measurement) information relating to the fair value measurement of financial assets and liabilities is outlined in note 9 to the condensed consolidated interim financial statements. The accounting policies applied in the condensed consolidated interim financial statements are the same as those applied in the group s consolidated financial statements for the year ended 31 December. There have been no additional standards endorsed by the EU since the year ended 31 December, thus no additional standards have been applied by the group. The financial information included in this document does not comprise statutory financial statements within the meaning of Companies Act 2006. New holding company On 13 April, under a scheme of arrangement involving a share exchange with the members of Beazley Ireland Holdings plc, Beazley plc became the new holding company for the Beazley group. For further details on this please refer to pages 135 and 136 of the group s annual report and accounts. 14 Beazley Interim report
2 Segmental analysis Segment information is presented in respect of reportable segments. This is based on the group s management and internal reporting structures and represents the level at which financial information is reported to the board, being the chief operating decision maker as defined in IFRS 8. Finance costs and taxation have not been allocated to operating segments as these items are determined by group level factors and do not relate to operating performance. Marine Political, accident & contingency 1 Property Reinsurance Specialty lines Gross premiums written 145.6 108.4 194.1 140.8 560.4 1,149.3 Net premiums written 118.9 94.9 149.6 82.9 490.1 936.4 Total Net earned premiums 114.0 91.5 147.6 55.6 478.0 886.7 Net investment income 7.1 4.0 8.0 5.6 54.7 79.4 Other income 0.7 2.1 2.4 0.6 11.2 17.0 Revenue 121.8 97.6 158.0 61.8 543.9 983.1 Net insurance claims 60.5 48.8 74.9 20.9 233.8 438.9 Expenses for the acquisition of insurance contracts 33.6 32.6 43.2 14.2 117.9 241.5 Administrative expenses 15.3 15.4 19.6 6.4 65.0 121.7 Foreign exchange loss 1.5 1.2 1.9 0.7 6.2 11.5 Expenses 110.9 98.0 139.6 42.2 422.9 813.6 Share of (loss)/profit in associates (0.2) 0.3 0.1 Segment result 10.9 (0.6) 18.4 19.6 121.3 169.6 Finance costs (10.9) Profit before income tax 158.7 Income tax expense (27.0) Profit after income tax 131.7 Claims ratio 53 53 51 38 49 49 Expense ratio 43 53 42 37 38 41 Combined ratio 96 106 93 75 87 90 Segment assets and liabilities Segment assets 1,239.8 1,061.1 1,104.1 451.8 3,318.9 7,175.7 Segment liabilities (899.0) (913.2) (887.1) (264.6) (2,705.7) (5,669.6) Net assets 340.8 147.9 217.0 187.2 613.2 1,506.1 1 During, the life, accident and health division and political risks and contingency division were combined to form the political, accident and contingency division. Comparative figures for and 31 December have been re-presented to reflect this change in structure and allow comparability. Financial statements Interim report Beazley 15
Notes to the interim financial statements continued 2 Segmental analysis continued Marine Political, accident & contingency 1 Property Reinsurance Specialty lines Gross premiums written 134.0 149.3 173.0 150.2 517.6 1,124.1 Net premiums written 107.9 128.8 142.1 92.9 458.7 930.4 Net earned premiums 110.7 103.2 144.1 63.9 439.5 861.4 Net investment income 5.6 3.9 6.7 4.4 42.1 62.7 Other income 1.2 1.2 2.9 3.1 7.4 15.8 Revenue 117.5 108.3 153.7 71.4 489.0 939.9 Net insurance claims 56.9 51.1 59.7 17.5 251.0 436.2 Expenses for the acquisition of insurance contracts 32.1 32.0 43.8 16.0 95.7 219.6 Administrative expenses 18.0 17.5 22.7 7.1 51.9 117.2 Foreign exchange loss 1.1 1.3 1.5 1.0 4.7 9.6 Expenses 108.1 101.9 127.7 41.6 403.3 782.6 Share of profit in associates 0.1 0.1 0.2 Segment result 9.4 6.5 26.0 29.8 85.8 157.5 Finance costs (7.3) Profit before income tax 150.2 Income tax expense (21.4) Profit after income tax 128.8 Claims ratio 52 49 41 27 57 51 Expense ratio 45 48 46 36 34 39 Combined ratio 97 97 87 63 91 90 Segment assets and liabilities Segment assets 1,153.1 1,026.1 1,063.0 411.3 3,167.6 6,821.1 Segment liabilities (804.9) (872.6) (849.3) (247.9) (2,667.2) (5,441.9) Net assets 348.2 153.5 213.7 163.4 500.4 1,379.2 1 During, the life, accident and health division and political risks and contingency division were combined to form the political, accident and contingency division. Comparative figures for and 31 December have been re-presented to reflect this change in structure and allow comparability. Total 16 Beazley Interim report
2 Segmental analysis continued Marine Political, accident & contingency 1 31 December Property Reinsurance Specialty lines Gross premiums written 247.4 245.3 329.7 213.4 1,159.8 2,195.6 Net premiums written 220.7 215.6 277.1 141.2 999.4 1,854.0 Net earned premiums 223.2 221.1 287.0 138.4 898.5 1,768.2 Net investment income 8.9 4.9 10.2 6.4 62.7 93.1 Other income 3.8 2.9 6.4 6.2 13.4 32.7 Revenue 235.9 228.9 303.6 151.0 974.6 1,894.0 Net insurance claims 98.9 99.7 115.3 40.2 501.5 855.6 Expenses for the acquisition of insurance contracts 65.9 67.1 88.8 34.7 216.0 472.5 Administrative expenses 35.5 33.4 46.6 14.5 117.8 247.8 Foreign exchange loss 1.1 1.1 1.4 0.7 5.2 9.5 Expenses 201.4 201.3 252.1 90.1 840.5 1,585.4 Share of loss in associates (0.2) (0.2) Segment result 34.5 27.6 51.5 60.9 133.9 308.4 Finance costs (15.2) Profit before income tax 293.2 Income tax expense (42.2) Profit after income tax 251.0 Claims ratio 44 45 40 29 56 48 Expense ratio 46 46 47 36 37 41 Combined ratio 90 91 87 65 93 89 Segment assets and liabilities Segment assets 1,203.2 1,052.2 1,086.5 431.7 3,234.9 7,008.5 Segment liabilities (840.2) (880.1) (859.3) (245.4) (2,699.8) (5,524.8) Net assets 363.0 172.1 227.2 186.3 535.1 1,483.7 1 During, the life, accident and health division and political risks and contingency division were combined to form the political, accident and contingency division. Comparative figures for and 31 December have been re-presented to reflect this change in structure and allow comparability. Total Financial statements Interim report Beazley 17
Notes to the interim financial statements continued 3 Net investment income ended ended Year to 31 December Interest and dividends on financial investments at fair value through profit or loss 37.2 31.5 70.9 Interest on cash and cash equivalents 0.2 0.3 0.6 Net realised gains/(losses) on financial investments at fair value through profit or loss 5.4 (4.0) (4.9) Net unrealised fair value gains on financial investments at fair value through profit or loss 39.7 38.8 33.8 Investment income from financial investments 82.5 66.6 100.4 Investment management expenses (3.1) (3.9) (7.3) 79.4 62.7 93.1 4 Other income ended ended Year to 31 December Commission income 10.6 9.6 15.5 Profit commissions 4.5 5.2 14.9 Agency fees 1.1 1.0 2.0 Other income 1 0.8 0.3 17.0 15.8 32.7 1 In May the group sold its Australian accident and health business, previously included in the PAC segment, to Blend Insurance Solutions PTY Limited, a Sydney-based Lloyd s service company, for total consideration of $0.8 m. The gain on the disposal of $0.8 m is included in the other income line. 5 Finance costs ended ended Year to 31 December Interest expense 10.9 7.3 15.2 10.9 7.3 15.2 18 Beazley Interim report
6 Earnings per share ended ended Year to 31 December Basic (cents) 25.3 25.1 48.6 Diluted (cents) 24.6 24.3 47.3 Basic (pence) 20.2 17.3 35.5 Diluted (pence) 19.7 16.8 34.5 Basic Basic earnings per share are calculated by dividing profit after income tax of $131.7 m ( : $128.8 m; 31 December : $251.0 m) by the weighted average number of shares in issue during the six months of 520.8 m ( : 513.7 m; 31 December : 516.3 m). The shares held in the Employee Share Options Plan (ESOP) of 5.0 m ( : 6.8 m; 31 December : 6.1 m) 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 income tax of $131.7 m ( : $128.8 m; 31 December : $251.0 m) by the adjusted weighted average number of shares of 535.5 m ( : 529.3 m; 31 December : 531.0 m). The adjusted weighted average number of shares assumes conversion of dilutive potential ordinary shares, being shares from the SAYE (Save As You Earn), retention and deferred share schemes. The shares held in the ESOP of 5.0 m ( : 6.8 m; 31 December : 6.1 m) have been excluded from the calculation until such time as they vest unconditionally with the employees. 7 Dividends A first interim dividend of 3.7p per ordinary share (: 3.5p) is payable in respect of the six months to. These financial statements do not provide for this dividend as a liability. The first interim dividend will be payable on 31 August to shareholders registered at 5.00pm on 4 August. A second interim dividend of 7.0p per ordinary share and a special dividend of 10.0p was paid on 29 March to shareholders registered at 5.00pm on 3 March in respect of the six months ended 31 December. Financial statements Interim report Beazley 19
Notes to the interim financial statements continued 8 Income tax expense ended ended Year to 31 December Current tax expense Current year 32.6 25.2 37.1 Prior year adjustments 0.8 1.7 2.1 33.4 26.9 39.2 Deferred tax expense Origination and reversal of temporary differences (6.0) (4.6) 2.1 Impact of change in UK tax rates (0.2) (0.8) Prior year adjustments (0.4) (0.7) 1.7 (6.4) (5.5) 3.0 Income tax expense 27.0 21.4 42.2 ended ended ended ended Year to 31 December Year to 31 December Profit before tax 158.7 150.2 293.2 Tax calculated at the weighted average of statutory tax rates 26.7 16.8 22.8 15.2 43.6 14.9 Effects of: Non-deductible expenses 0.6 0.4 1.2 0.8 1.8 0.6 Non-taxable gains on foreign exchange (0.7) (0.4) (3.4) (2.3) (5.6) (1.9) Tax relief on share based payments current and future years (0.6) (0.2) Under/(over) provided in prior years 0.4 0.2 1.0 0.7 3.8 1.3 Change in UK tax rates 1 (0.2) (0.1) (0.8) (0.3) Tax charge for the period 27.0 17.0 21.4 14.3 42.2 14.4 1 The Finance Act 2015, which provides for reduction in the UK Corporation tax rate down to 19 effective from 1 April was substantively enacted on 26 October 2015. The Finance Act, which provides for reduction in the UK Corporation tax rate down to 17 effective from 1 April 2020 was substantively enacted on 6 September. These rate reductions to 19 and 17 will reduce the company s future current tax charge and have been reflected in the calculation of the deferred tax balance as at. The group has assessed the potential impact of 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 scope of DPT would potentially be taxed at a rate of 25 rather than 12.5 (the current rate of tax on corporate earning in Ireland). 20 Beazley Interim report
9 Financial assets and liabilities 31 December Financial assets at fair value Government issued 908.2 1,170.4 1,180.0 Quasi-government 28.7 121.7 62.0 Supranational 18.1 0.9 19.5 Asset backed securities 11.3 3.6 4.6 Senior secured loans 91.3 83.3 96.2 Corporate bonds Investment grade 2,322.1 1,928.8 2,158.0 High yield 106.0 118.7 97.1 Total fixed and floating rate debt securities 3,485.7 3,427.4 3,617.4 Equity linked funds 167.0 98.9 116.3 Hedge funds 344.0 295.4 317.1 Illiquid credit assets 168.4 125.8 132.4 Total capital growth 679.4 520.1 565.8 Total financial investments at fair value through statement of profit or loss 4,165.1 3,947.5 4,183.2 Derivative financial assets 12.6 5.3 12.2 Total financial assets at fair value 4,177.7 3,952.8 4,195.4 Quasi-government securities include securities which are issued by government agencies or entities supported by government guarantees. Supranational securities are issued by institutions sponsored by more than one sovereign issuer. Asset backed securities are backed by financial assets, including corporate loans. Investment grade corporate bonds include debt instruments of corporate issuers rated BBB-/Baa3 or better by one or more major rating agency and high yield corporate bonds have credit ratings below this level. Equity linked funds are investment vehicles which are predominantly exposed to equity securities. Our illiquid credit assets are described in further detail below. The fair value of these assets at excludes an unfunded commitment of $59.6m ( : $91.0 m). 31 December The amount expected to mature before and after one year are: Within one year 981.2 1,069.4 937.2 After one year 2,517.1 2,363.3 2,692.4 Total 3,498.3 3,432.7 3,629.6 Our capital growth assets have no defined maturity dates and have thus been excluded from the above maturity table. However, 92 ( : 89) of equity linked funds could be liquidated within two weeks and 8 within six months, 80 ( : 96) of hedge fund assets within six months and the remaining 20 ( : 4) of hedge fund assets within 18 months. Illiquid credit assets are not readily realisable and principal will be returned over the life of these assets, which may be up to ten years. Financial statements Interim report Beazley 21
Notes to the interim financial statements continued 9 Financial assets and liabilities continued 31 December Financial liabilities Retail bond 95.5 99.8 94.7 Subordinated debt 18.0 18.0 18.0 Tier 2 subordinated debt (2026) recalled in 103.0 Tier 2 subordinated debt (2026) issued in 248.4 248.3 Derivative financial liabilities 18.3 11.6 2.8 Total financial liabilities 380.2 232.4 363.8 31 December The amount expected to mature before and after one year are: Within one year 18.3 114.6 2.8 After one year 361.9 117.8 361.0 Total 380.2 232.4 363.8 Fair value measurement The table on page 24 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 and treasury bills of government and government agencies which are measured based on quoted prices. 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 which are not actively traded, corporate bonds, asset backed securities and mortgage-backed securities. 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 could 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. Level 2 investments The group has an established control framework and valuation policy with respect to the measurement of fair values. 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 & 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, news media, 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 (WM), Discount Margins (DM), Default rates, and recovery and prepayments 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. 22 Beazley Interim report