Final Results

Beazley Group PLC 15 March 2005 15 March 2005 Beazley Group plc Preliminary results for the year ended 31 December 2004 Beazley Group plc ('Beazley'), one of the Lloyd's market leaders, today announces its preliminary results. 2004 Performance * Profit before tax Â£33.4m (2003: Â£17.1m) * Earnings per share 9.3p (2003: 5.0p) * Net assets per share increased to 77p (2003: 67p) * Total dividend 1p (2003: 0.75p); committed to 4p minimum dividend for 2005 * Gross premiums written Â£751m (2003: Â£708m) * Combined ratio of 90% (2003: 82%) 2004 Business Highlights * Strengthened capital position * US business launched and underwriting both property and specialty lines business * Increased ownership of managed capacity to 70% (from 54%) * Recruitment of high calibre, experienced teams Andrew Beazley, chief executive, said: 'I am delighted to report results that demonstrate the operational and financial growth of our business. While trading conditions remain good in many of our key areas, the strategy to widen access through our US operations will provide growth opportunities throughout the rating cycle. In the absence of unforeseen circumstances, we expect that 2005 will be another excellent year for the group.' Contacts Beazley Group plc Tel: 020 7667 0623 Andrew Beazley Andrew Horton Nicholas Furlonge Finsbury Tel: 020 7251 3801 Melanie Gerlis Nicola Hobday Chairman's statement I am delighted to report an excellent set of results for a year during which we continued our strategy of growing the business through building on our underwriting expertise. The successful rights issue raising net proceeds of Â£105m has put us in a strong financial position to pursue this strategy. We have acquired for the group Â£125m of additional Lloyd's syndicate underwriting capacity for a cost of Â£1m and used some of the proceeds of the rights issue to capitalise this capacity for 2005. We are in the process of acquiring an insurance company in the US with licences to operate in fifty states enabling us to grow our US small business portfolio in our existing lines of business. Whilst we have done this the underwriting conditions have remained good. This has manifested itself in an increase in the group's profit before tax for the year to Â£33.4m despite the group incurring a net loss of Â£15m from the four hurricanes which impacted Florida in the third quarter of the year. Net assets per share have increased to 77p and our earnings per share were 9.3p from which the board is proposing a final dividend 0.7p. This together with the interim dividend of 0.3p per share brings the total dividend for 2004 to 1.0p in line with our commitment at the time of the rights issue. The final dividend of 0.7p will be paid on 24 June 2005 to shareholders on the register on 27 May 2005. We expect that the 2005 full year dividend will increase significantly to a minimum of 4p per share. Our aim is to pay a reasonable level of dividend throughout the underwriting cycle which will be increased when conditions allow. Our managed syndicate results for 2004 show a profit of Â£37m despite the impact of the hurricanes on the managed syndicates of Â£43m. Premiums written in 2004 were Â£751m (2003: Â£708m). Net premiums written were up 13% to Â£617m, the claims ratio was 60% and the combined ratio was 90% (the impact of the hurricanes on the claims ratio and combined ratio was 8%). We have achieved a 13.3% return on the 2002 year of account and our estimated return for the 2003 year of account has improved from an initial estimate of between 8% and 15% to a current estimate of between 10% and 15%. We expect a return on stamp capacity of between 3% and 10% on our 2004 year of account, after a reduction in the return of 6% resulting from the hurricanes. We have continued to see increased rates in the Specialty Lines business with generally stable rating environments in Marine, Property and Reinsurance, with the exception of commercial property insurance where we saw some easing of rates. When we announced our interim results, we were seeing pressure on rates in offshore energy insurance, large commercial property insurance and catastrophe reinsurance. The impact of the four hurricanes has had a positive effect on steadying rates in the energy and catastrophe reinsurance sectors but non-catastrophe exposed large commercial property has continued to ease. Within the Property Group we have added an engineering team which is consistent with our strategy of adding specialist areas within our four business areas. The members of the engineering team have many years experience within their markets and are market leaders. We have also added a UK cargo team to our Marine business. The environment in which our employees operate is of paramount importance to us and we have been able to retain and attract people of excellent calibre. Their skills, energy and enthusiasm is key to the delivery of everything which we have achieved in 2004. During 2004 we have been able to add various building blocks to maintain and enhance the success of the company. In the absence of unforeseen circumstances, we expect that 2005 will be another excellent year for the group. Jonathan Agnew Chairman Chief executive's review Highlights â€¢ Growth in earned premiums and profit before tax as 2004 is the second year of activity for syndicate 2623. â€¢ Profit before tax for the group increased to Â£33.4m (2003: Â£17.1m). â€¢ Total managed capacity for 2005 is Â£742m (2004: Â£741m); group's share of total capacity increased to 70% (Â£522m). â€¢ Successful rights issue raising Â£105m net of expenses, subordinated debt issue raising $18m and increase in debt facility to Â£70m. â€¢ Acquisition of US insurance company. â€¢ AM Best rating for syndicate 2623 reaffirmed as A (excellent). â€¢ Engineering underwriting team joined the Property Group. â€¢ Renewed focus on technology. Market Overview Rating environment As predicted, after a number of years of substantial rate increases and a relatively benign loss climate, 2004 witnessed the easing of premiums in certain sectors. However reinsurance markets have remained firm and largely resisted the temptation to reduce pricing in order to gain market share, maintaining discipline in the primary market. Many of the older and larger companies are still plagued by reserve deficiencies which have to be funded out of current operating results. Whilst this in itself will not influence market pricing, when combined with a disciplined reinsurance market and a historically low interest rate environment, expectation is for a reasonably stable market during 2005. Hurricanes Four hurricanes in the third quarter of 2004 amounting to an estimated insured loss of up to $30bn are a reminder of nature's power and unpredictability. The losses were spread amongst many insurers and a material amount borne by the Florida state funded vehicles. Although a substantial loss in total, it is a testament to the financial health of the market that they were met without a major dislocation in pricing. The Asian tsunami, a great tragedy in terms of loss of life, gave rise to an insured loss that was within the group's planned claims ratios. Distribution The group operates in the brokered market with all business traded through insurance or reinsurance brokers. An investigation by the New York attorney general and others has resulted in allegations of improper practice being made against certain broking firms and a call for reforms in the way brokers operate. Recent undertakings by the major brokers to make their charges more transparent is a welcome move and should result in the market becoming more efficient. US acquisition In October 2004, the group entered into an agreement to purchase Omaha Property and Casualty Insurance Company (OPAC) from the Mutual of Omaha. OPAC is a licensed carrier in fifty states. Full indemnities have been obtained from the vendor for all past liabilities. In addition an agreement has been entered into for the administration by the vendor of the past portfolio. In essence, the group will purchase the licences. The group has set up its own underwriting company based in Hartford, Connecticut, with an office in Ponte Vedra, Florida and hired key underwriting staff who will underwrite on behalf of the group's Lloyd's syndicate and the new insurance company. The key aims of this initiative are to attract business within our Specialty Lines sector that does not currently come to Lloyd's, and to increase our share of the middle market and small customers. We already trade some of this business and see it as less volatile on both rates and loss ratios compared to the equivalent large risk business. So where does this leave us for 2005? Our Lloyd's stamp capacity is Â£742m (2004: Â£741m) - within this there are reductions across some lines of business compensated by growth from the recently recruited engineering team and our US underwriting company. On the investment side we implemented our strategy of diversifying some of our investments into alternative assets in 2004 with the aim of getting incremental returns with little extra risk undertaken. The investment balance has grown considerably over 2004 and our aim is to maximise the returns on this portfolio within strictly defined conservative risk criteria. In the regulatory environment in 2004 the FSA issued their guidelines on individual capital assessment (ICA). This requires all insurance companies to assess all the risks within their businesses and allocate capital to those risks. We have prepared our initial assessment and are in the process of discussing this with Lloyd's and the FSA. At this stage we do not expect the ICA calculation to have a material impact on the group. Group overview Capacity at Lloyd's has reduced to Â£13.7bn in total for 2005 and we have seen a reduction in capital provided by third party capital providers. The group took advantage of this in the Lloyd's auction process acquiring Â£109m of capacity from our third party capital syndicate 623 for a reasonable price of Â£1m; a further Â£16m was not taken up by the capital providers of syndicate 623 and taken up by the group. This will allow the group to grow with modest risk by writing a larger proportion of the renewal portfolio which is business we already know. Our goals and objectives What makes Beazley different? Our whole operation, from the board down, is built on an unparalleled depth of insurance experience. Our growth has been built wholly on our areas of expertise. Core to our strategy is bringing in new people who have innovative and challenging ways of making the way we approach business better. Specialist approach We have achieved the following within our four business divisions: â€¢ Specialty Lines - our main focus has been on the claims process. We have added to the claims team during the year by recruiting high grade experts. The aim is to restructure our process of claims handling so as to bring greater efficiency in speed of resolution and lower ultimate costs. â€¢ Property Group - we acquired a well respected engineering team who are writing engineering and construction business mainly in the UK, Europe and the Middle East. We also set up an office in Florida to write high value homeowners business. â€¢ Reinsurance - we continue to maintain our position as a lead catastrophe reinsurance and risk excess division and have added expertise particularly in the European markets. â€¢ Marine - we have built our position within the cargo and energy markets following our recruitment in 2003. We have also added a UK cargo underwriter to our cargo team. Flow of business Our aim as a group is to access sources of business from as many suppliers as possible with the proviso that we want to ensure that we have sustainable good relationships with our brokers. Our expansion into the US will increase our access to the large regional brokers. Experienced management and underwriting team Our experienced and well-regarded management team remains in place. We have successfully recruited a new chief information officer (CIO), Dominic Shine, and a new head of ceded reinsurance, Christian Schirmer. Dominic has come from the fund management industry whilst Christian has joined us from McKinsey where he was a consultant within their insurance arm. Our people Our ongoing aim is to provide an environment in which our staff can thrive. This means openness and clarity around accountabilities and responsibilities and a clear decision making process. We have continued to recruit high calibre staff both in the UK and in the US. The recruitment of the highly experienced and highly regarded engineering team of four people in September 2004 adds both breadth and depth to our property portfolio. In the US we have recruited experienced personnel in all areas of business and support functions. In line with our desire to attract and retain the best we have appointed a head of talent management. The role encompasses sourcing our needs, investing in existing people and designing the career structures to allow performance. Claims The quality of the claims process is extremely important to us as it is fundamental to the relationship we have with our clients. During the year we have been building our claims management team bringing in extra skills and resources to compliment our existing highly experienced staff. Risk management We have added to our risk management processes in 2004 a detailed and comprehensive risk matrix outlining all risks that the business is running. We monitor that controls are undertaken within the right timescales and these are reported to the appropriate executive committee and ultimately the audit committee. Our risk based internal audit process targets the higher risk areas for regular review. This work is integrated into our individual capital assessment mentioned earlier where we assign capital to risk types. Insurance risk is our biggest risk - we continue to run with a benchmark tolerance of 15% of capacity for a 1 in 250 year US catastrophe on a net basis. Our risk models aggregate risks and determine the likely impact of various catastrophes. To manage our underwriting, we assign maximum gross and net line sizes by underwriter by type of risk. We vary the limit according to the nature of the business being underwritten and the experience of the underwriter. These limits can only be exceeded if appropriately authorised. In addition to the tight underwriting controls, we employ peer review across a selection of our underwriting decisions. This review is intended to challenge underwriting decisions and ensure our decisions are robust. A rigorous process is adopted to review the adequacy of our reserves and we continue with our detailed quarterly peer review. Through this process each underwriting team and the syndicate actuary independently proposes movements if required from the previous quarter's reserves. A meeting of the underwriting division team leader, the chief executive or director of risk management, the finance director and the syndicate actuary review the various inputs and conclude on any reserve movements required. Annually the syndicate actuary's analyses are reviewed by an external actuary. Outsourcing We continue with our commitment to outsourcing of non-core business activities. These include data entry, syndicate bookkeeping, credit control and asset management. Due to our increased size and the importance we place on our staff we have decided to insource our human resources function which now reports to the head of talent management. All outsourced activities are monitored regularly by management to ensure that required service levels are maintained. Innovation We are continuing to invest in technology in order to provide our clients with improved access to our products and services, and to ensure our staff have leading edge capabilities to perform their functions efficiently and effectively. In recognition of the growing importance of technology as an enabler to our business, we have strengthened our Information Technology (IT) team. A new CIO, Dominic Shine, came on board in July 2004, and is a member of the Executive committee to ensure that we are fully considering the opportunities that technology brings to our business. We are insourcing in areas where we feel that IT can differentiate Beazley from our competitors and are continuing to improve our capabilities for our core business at Lloyd's. We have launched an improved version of our e-trading platform (www.beazleytrade.com) which will replace our Eazypro platform. The new, more flexible platform, developed by Beazley's IT team using leading edge .NET technology, allows us to deploy a range of sophisticated products and capabilities to support our new business initiatives in the US. It will also open up new ways of doing business in the UK, particularly in the area of small risks, where automation offers the ability to perform a high volume of lower value transactions efficiently. Its rating engine capabilities will also be applicable to our traditional business at Lloyd's where a greater degree of transparency is now required. To support our US strategy, we have opened offices in Ponte Vedra, Florida and Farmington, Connecticut. We will also be supporting a number of regional producers working throughout the US. Our investment in centralised web based platforms and deployment of a leading edge IP telephony solution for voice and video will allow cost effective and efficient communication between our US operation and the UK. We continue to be actively involved in initiatives to improve efficiency in the Lloyd's market and are supporting the ongoing Kinnect initiative to introduce straight through processing and improved data exchange. Our approach will be to develop a flexible gateway to allow Beazley to link to whatever platforms are developed in the future. Financial performance Managed syndicates results 2004 2003 2002 2001 on an annual accounted basis Â£m Â£m Â£m Â£m 751 708 438 355 Gross premiums written Net premiums written 617 544 289 269 Net premiums earned 587 401 292 179 Net claims incurred (350) (197) (174) (134) Net operating expenses (200) (165) (102) (71) Profit/(loss) for the period 37 47 22 (17) Claims ratio 60% 49% 60% 75% Expense ratio 30% 33% 34% 33% Combined ratio 90% 82% 94% 108% Overview and results Although Beazley has been managing syndicate operations since 1986, 2004 is only the second year in which the underwriting results of syndicate 2623 are reflected within the group's operating results. Being in the second year of operation, earned premiums, profit and earnings per share have all increased considerably in 2004 over 2003 despite the Â£15m impact of the hurricanes. The group made a pre-tax profit of Â£33.4m (2003: Â£17.1m) delivering an after tax earnings per share of 9.3p (2003 restated: 5.0p). As the group is only in its second year of operation the table above shows the managed syndicate results i.e. the total capacity managed by the group being syndicates 623 and 2623. This shows that in 2004 profit for the managed syndicates was Â£37m (2003: Â£47m) and the combined ratio has moved to 90% (2003: 82%). The hurricanes impacted the profit by Â£43m adding 8% to the combined ratio. The managed syndicates' gross written premium increased to Â£751m (2003: Â£708m). This is despite the devaluation of the dollar and is caused by the increased capacity in 2004. The rate increase on renewals across the whole business was 1% - within this, Specialty Lines showed an increase of 4% whilst rates in Marine and Reinsurance were stable and rates fell by 5% in the Property Group. Capacity Structure Managed syndicate capacity for the 2005 year of account is Â£742m (2004: Â£741m). Within this apparent stability there are various movements. The 2004 year of account capacity is calculated using a sterling/dollar rate of exchange of 1.56, the 2005 using a sterling/dollar rate of exchange of 1.74 meaning that in real terms capacity has increased by approximately 9%. We have added an engineering team in 2005 and our US business will add premiums in 2005. The ownership of total managed capacity has increased from 54% in 2004 to 70% for 2005. The group bought Â£109m of capacity in the Lloyd's auctions in the third quarter of 2004 at a total cost of Â£1m with an extra Â£16m not taken up by the capital providers of syndicate 623, taken up by the group. For 2005 the group's share of the total managed capacity will be Â£522m (2004: Â£397m). It is expected that the extra capacity owned by the group will generate significant profits from 2006 onwards. Capital Requirements For 2005 the group has two requirements for capital. Firstly for its underwriting at Lloyd's it has to deposit capital, know as funds at Lloyd's (FAL), at a level of 46.2% of premiums. As the group in 2005 owns Â£522m of capacity this requires Â£228m of capital after allowing for Â£13.5m of credits allowed by Lloyd's. The second requirement for capital is to capitalise the US insurance company. Our aim is to get at least a rating of A- from AM Best and this will require at least $50m of capital to be injected into the company. The funds available to the group have grown during 2004 as we have raised Â£105m net through a rights issue, increased our syndicated letter of credit facility to Â£70m and issued $18m of long term subordinated debt. The debt has a final maturity of 30 years but can be repaid after 5 years. Reinsurance Beazley purchases significant amounts of reinsurance to mitigate the impact of catastrophes such as the recent hurricanes in Florida, to provide lead line capabilities to our underwriters and to help manage the group's capital position. Reinsurance is only valuable if reinsurers are still solvent when collection is required. Given the long tail nature of Beazley's book this is particularly important. Beazley's reinsurance security committee meets monthly to assess and review our reinsurance counterparties. Not surprisingly financial strength is a key part of the analysis, but other factors such as management quality and willingness to pay are also considered. As a result, our exposure to failing reinsurers and poor quality reinsurers has been kept to a minimum. Beazley also has strict processes in place to manage reinsurance debt, to ensure collection occurs as quickly as possible. The combination of our security vetting, our strict policy wordings and our reinsurance collection processes has helped manage our aged debt exposure. During 2004 prices for reinsurance remained high and this is likely to continue in 2005. Those lines most impacted by the hurricanes, such as energy and property catastrophe, are likely to experience firming of rates whilst for the specialty book rates are likely to remain high following shrinkage of capacity during the last few years. Investments The group earns investment income on its FAL and its operating cash-flows within syndicate 2623. Both these elements have grown during the year, the FAL through the rights issue and the syndicate funds as we have received more cash in premiums than we have paid out in claims, reinsurance and expenses. As stated in last year's annual report, the group has invested approximately 3.5% of its funds in alternative assets (high yield bonds, equities and hedge funds). We are expecting our syndicate funds to continue to grow throughout 2005 due to the nature of our Specialty Lines portfolio and the increase in group owned capacity. As far as foreign currency hedging is concerned, during the year we sold $54m at an average rate of $1.82. This was done monthly to reflect the fact that dollar denominated profit are earned throughout the year. The aim of the group is to minimise foreign exchange risks as they arise. Dividends The board is proposing a final dividend of 0.7p which, with the interim dividend of 0.3p per share brings the total dividend for 2004 to 1p per share. Dividends are expected to increase significantly in 2005 as we will have the cash available as profits are released from Lloyd's. Outlook Our expectation is that underwriting profits will be good in 2005 as rates across all classes remain at profitable levels. Although investment yields are not expected to increase dramatically next year, the average investment balance will be considerably greater and therefore our investment income will increase. Our capital position gives us the financial strength to continue with our strategy of investing in further opportunities to grow our business in our defined disciplined way. Andrew Beazley Chief Executive Specialist underwriting Specialty Lines Underwriting results 31 December 31 December 31 December (managed syndicates) 2004 2003 2002 Â£'m Â£'m Â£'m Gross premiums written 381 341 166 Net premiums written 315 260 79 Net premiums earned 290 162 93 Claims ratio 68% 63% 80% Rate increase achieved 4% 21% 38% Percentage of lead business 73% 77% 77% Profile Specialty Lines led by Johnny Rowell, comprises 3 teams - large risks, programme and smaller risks, and political and contingency. It accounts for just over 50% of the group's total gross premiums written. The profile of business written has stabilised from 2003 and business written during 2003 and 2004 is developing positively. The team continues to concentrate on business where a depth of underwriter understanding and knowledge of their industry leads to results that better the market average. Market overview The team has begun to consolidate its market position and complete the build of infrastructure that will provide its foundation for the next few years. Following several years of rapid growth, the rate of expansion in the portfolio has reduced and the plan is for a stable overall portfolio in 2005. The mix of business written has not changed significantly from 2003 and, with the exception of the US initiative discussed earlier, is not expected to do so in 2005. The market environment has remained favourable in 2004, with rate increases still achieved across most classes of business. The exceptions have been in areas where the market perception of available margin has been greatest, for example terrorism, but this business is in the minority. The key objectives for the team now are in improving the average quality of risk and the effectiveness of claims management. The first target can be met through better risk selection and loss control, and the business plans for 2005 are focussing on improving the intelligence networks that the teams employ to get access to the latest information on legal, economic, social and industry trends that affect their business to give them the ability to make the most informed decisions. We are also extending the use of individual risk review and client feedback as we believe that this produces material selection and loss control benefits to both us and the insureds. We have continued to build the claims management team and plan to do so again in 2005. The team currently consists of ----12 people and the team will increase to around 20 by the end of 2005. As well as improving claims management, this will also enable an increase in claims and underwriting integration and coordination which should improve both underwriters' and claims managers' knowledge and decision-making. The team will also complete its build of the marketing team which has an important role to play in the coordination and management of our production network, especially with the initiative in the US. Outlook for 2005 There is some evidence that the rate increases achieved in recent years will not be available in 2005 and the team is predicting a broadly flat rate environment. We will continue to recruit high calibre talent to the team for claims management, business development and business management, as we still believe firmly that it is the recruitment and retention of intellectual capital to the team with interests aligned with the group's that is the core driver for profit and success in the future. Strategies Underwriting remains the focus of the team. In a dynamic environment it is the ability to understand the trends and problems that are yet to emerge that will make the difference. Our strategy is to ensure that our people get access to this information and the ability to distil and use that information effectively. We have created an underwriting management team that will complete its recruitment process in early 2005 with skills in underwriting, legal research and development and actuarial analysis. It is the goal of this team to implement this strategy. Value creating activities Our objective of recruitment and retention of the best in the industry through provision of a motivating environment is unchanged for 2005. We intend to improve the quality of service we provide to our clients both from the way that we give access to our products and also through the implementation of our risk improvement initiatives. Property Group Underwriting results 31 December 31 December 31 December (managed syndicates) 2004 2003 2002 Â£'m Â£'m Â£'m Gross premiums written 171 188 145 Net premiums written 141 153 115 Net premiums earned 142 131 114 Claims ratio 60% 37% 41% Rate increase achieved (5%) 4% 27% Percentage of lead business 63% 53% 51% Profile Jonathan Gray heads Beazley's Property Group which generates almost a quarter of the syndicate's gross premiums written. The team contains acknowledged lead underwriters in many classes of property insurance ranging from homeowners to large corporate clients. Our geographic reach encompasses business from all parts of the globe. This diversity allied to our strong underwriting experience enables us to provide our investors with a well balanced portfolio. Market Overview Throughout 2004 the US and international market place has experienced pressure on rates due to increased competition, attracted by favourable trading conditions. The hurricane season in the US has been unprecedented with the South-Eastern states battered by a sequence of major windstorms. Whilst these events have not 'turned' the market, it should ease the downward pressure. In the UK, the commercial market has experienced notable rate reductions although the severity reduced in the latter part of 2004. As ever in situations such as this, the expertise of the underwriting team to navigate through these challenges is critical and our underwriters' experience is invaluable. The UK homeowners market has seen a stable rating structure. This is also true of our covers account which handles small business on a delegated authority basis, although in recent months there have been some signs of pressure on pricing. Outlook for 2005 We anticipate that whilst pricing has not bottomed out, the rate of downward pricing pressure in most of the global market place has eased in the last quarter of 2004. The level of catastrophes and their impact on the reinsurance market may contribute to the consolidation process. The homeowners and jewellers block accounts should continue to maintain stability in 2005. Strategies In the UK, as part of ongoing domestic development, we have acquired a major portfolio of homeowner business. This has increased significantly our market position and sterling income. As part of the group's US strategy, we have opened an underwriting office in Florida. Our initial offering has been high valued homeowner insurance, successfully launched in December. Throughout 2005 we will be developing new products to further increase our market penetration. We have also sought ways to broaden our range of products at the Lloyd's syndicate to balance and grow the portfolio. To this end we successfully recruited a highly respected and experienced engineering/construction team in September 2004. We firmly believe this team gives us a differentiator within Lloyd's as well as an additional revenue stream. Value creating activities We are satisfied that throughout 2004 we have prudently underwritten our way through a period of increased market competition in several sectors, and maintained key trading relationships. In addition we have expanded revenues in areas that have experienced stable rating conditions. Perhaps more importantly the year has seen us create new business access alternatives in the US and a significant new product line in London with our engineering team's arrival. Our group has evolved in 2004 and we have an improved business platform for 2005. Marine Underwriting results 31 December 31 December 31 December (managed syndicates) 2004 2003 2002 Â£'m Â£'m Â£'m Gross premiums written 117 88 60 Net premiums written 97 66 46 Net premiums earned 88 47 39 Claims ratio 44% 29% 55% Rate increase achieved - 10% 16% Percentage of lead business 53% 53% 51% Profile The Marine team is led by Clive Washbourn and in 2004 accounted for 15% of the managed syndicate's gross premiums written. Since 1998 our developed knowledge of the marine and energy sector, together with lead capability, has enabled us to provide clients with comprehensive and competitive risk solutions. Market overview During the past year underwriting conditions have stabilised but remain favourable in most areas. During 2004 we were able to sustain rate rises in some areas of the portfolio, particularly within the marine liability account and sectors of the hull account. Mid year the energy account was showing signs of increasing competition but this trend has been reversed in the wake of hurricane Ivan. The past year saw some notable claims activity. Hurricane Ivan caused the largest ever marine and energy market loss approaching $2bn. Our gross share of loss currently stands in the region of $12m, the net loss after reinsurance recoveries at $1.6m. We believe this to be disproportionately small in relation to our market share and is the result of selective underwriting. Outlook for 2005 Last year we mentioned the acquisition of an established cargo and specie team. They now have a full year of underwriting at the company and they are on target to meet their first year income forecasts and loss ratios. A specialist energy underwriter was employed during 2003 and a comprehensive portfolio of business has now been established. During 2005 it is our aim to further capitalise upon current positive underwriting conditions in the energy market and write more business, focusing on high quality accounts well known to the underwriting team. Although the majority of our portfolio continues to consist of individual risks underwritten at the box at Lloyd's, we shall continue to develop opportunities to transact business through e-trading and service companies. Strategies We do not anticipate the same degree of expansion in 2005 as we have witnessed in 2004. There are two reasons for this. Firstly 2004 benefited from being the first full year of development for the new cargo and energy teams. Secondly the levelling off of rating in some sectors means that conditions particularly within the hull and cargo account may not be right for aggressive acquisition of new business. In 2005 we have employed a UK cargo team. The aim is to access this account which is historically profitable and of low claims volatility. The portfolio of business is not generally placed within Lloyd's and is to be accessed through provincial rather than London market brokers. The team will have a regional office in Birmingham. In the first year emphasis will be on raising awareness and marketing their product. We anticipate using the economies and efficiencies of a bespoke product on our electronic trading platform. Claims management on the hull and machinery account has been further enhanced by the employment of an in-house surveyor. He will principally be involved in attending marine casualties as the underwriter's representative, ascertaining cause and facilitating swift and economic repairs. Value creating activities We seek to utilise our leading market position and the knowledge of the sector to access the highest quality business. This combined with selective underwriting allows us to write a profitable account of business whilst limiting the potential downside in the event of catastrophic losses. Whilst we have always been specialists we feel that we continue to strengthen our base. We now have a broader spectrum of expertise both in terms of claims management and underwriting. Reinsurance Underwriting results 31 December 31 December 31 December (managed syndicates) 2004 2003 2002 Â£'m Â£'m Â£'m Gross premiums written 82 91 67 Net premiums written 64 65 49 Net premiums earned 67 62 46 Claims ratio 64% 54% 68% Rate increase achieved - 4% 44% Percentage of lead business 26% 27% 20% Profile The Reinsurance team is led by Neil Maidment and represents 11% of the managed syndicate's 2004 gross premiums written. We have been a leading provider of protection for insurance companies worldwide for 19 years. The team specialises in writing property catastrophe, property risk excess and casualty catastrophe and maintains an established lead profile in the market. Market overview Underwriting conditions remained stable during 2004 in the property catastrophe and risk and casualty catastrophe reinsurance markets. After three years of rate increases beginning in 2000 and accelerating post World Trade Center disaster in 2001, rates in 2004 were stable in total on the renewal portfolio. 2004 was marked by a frequency of landfalling hurricanes in the North Atlantic and typhoons in the North West Pacific. Total insured losses from these events is expected to be over $30 billion. Although the impact on the reinsurance market was not as great as if a single event of $30 billion had occurred, it was enough to stall downward pressure on rates ahead of the January 2005 renewal season. Although it is still too early to be certain, the tsunami tragedy on 26 December is not expected to affect the property/casualty reinsurance market materially. The renewal retention ratio remained high in 2004 and we successfully increased both our share and our profile on target business. Western Europe, in particular Germany, France and Italy have yielded opportunities for new business along with Australia and Canada. Central and Eastern Europe remains an area of potential development. As in previous years, the department's main exposures outside of the US emanate from the UK and Japan where Beazley has an established lead profile. Outlook for 2005 The team intends to take advantage of its position in the Lloyd's market during the current cycle, through consolidation and targeted development particularly in Europe, thus increasing the portfolio efficiency. The January 2005 renewal season demonstrated a slight easing in market conditions in general, the exception being accounts which suffered loss activity in 2004. Rates, terms and conditions are expected to remain at a level that will allow Beazley to continue to promote our strengths with both brokers and clients alike. To this end the estimated premiums for 2005 will build upon the portfolio development achieved in 2004. Strategies The team will continue to advance our long-term objective of developing a well diversified portfolio focusing on larger non-life insurance markets. Modelled data is now the norm within the market and we remain at the forefront of developments in this area, actively employing IT capabilities that surpass market standards. The effectiveness of our modelling and analytical expertise has led to improved catastrophe management and capacity utilisation. We attach particular importance to client visits and meetings in order to develop a proper understanding of each risk. Value creating activities The reinsurance team is recognised as a leading writer of the class and has built strong access through a range of brokers. The team is known for its ability to provide long-term continuity and enjoys a reputation for handling claims efficiently, enabling settlements to be made promptly. Consolidated profit and loss account - technical account General business for the year ended 31 December 2004 Year ended 31 Year ended 31 December December 2004 2003 Notes Â£'000 Â£'000 -------------------------------- ------ --------- --------- Earned premiums, net of reinsurance Gross premiums written 4 402.3 333.6 Outward reinsurance premiums (73.3) (68.9) -------------------------------- ------ --------- --------- Net premiums written 329.0 264.7 Change in the gross provision for unearned (39.5) (165.6) premiums Change in the provision for unearned 4.2 32.7 premiums, reinsurers' share ------ --------- --------- -------------------------------- Change in the net provision for unearned (35.3) (132.9) premiums ------ --------- --------- -------------------------------- Earned premiums, net of reinsurance 293.7 131.8 -------------------------------- ------ --------- --------- Allocated investment return transferred from the non-technical account 6 14.8 8.7 -------------------------------- ------ --------- --------- Claims incurred, net of reinsurance Claims paid: Gross amount (40.4) (5.8) Reinsurers' share 2.2 0.2 Net claims paid (38.2) (5.6) Change in the provision for claims: Gross amount (184.4) (99.6) Reinsurers' share 40.6 27.6 -------------------------------- ------ --------- --------- Change in the net provision for claims (143.8) (72.0) -------------------------------- ------ --------- --------- Claims incurred, net of reinsurance (182.0) (77.6) -------------------------------- ------ --------- --------- Net operating expenses 5 (87.4) (43.0) -------------------------------- ------ --------- --------- Balance on the technical account 4 39.1 19.9 -------------------------------- ------ --------- --------- All operations of the group are continuing Consolidated profit and loss account - non-technical account For the year ended 31 December 2004 Year ended 31 Year ended 31 December December 2004 2003 Notes Â£m Â£m -------------------------------- ------ --------- --------- Balance on the technical account 39.1 19.9 ------------------------------- ------ --------- --------- Investment income 6 12.4 6.7 Unrealised gains/(losses) on investments - (0.7) Investment expenses and charges (0.6) (0.3) ------------------------------- ------ --------- --------- 11.8 5.7 Allocated investment return transferred to the technical account 6 (14.8) (8.7) ------------------------------- ------ --------- --------- (3.0) (3.0) Other income 7 11.3 11.2 Other charges 8 (14.0) (11.0) ------------------------------- ------ --------- --------- Profit on ordinary activities before tax 33.4 17.1 ------------------------------- ------ --------- --------- ------------------------------- ------ --------- --------- Comprising: Operating profit based on longer term investment return 4 36.3 18.7 Share of operating profit of associate 0.1 1.4 Short term fluctuations in investment return (3.0) (3.0) ------------------------------- ------ --------- --------- Tax on profit 11 (10.0) (5.3) ------------------------------- ------ --------- --------- Profit on ordinary activities after tax 23.4 11.8 ------------------------------- ------ --------- --------- Dividends - interim paid (0.7) (0.6) Dividends - final payable (2.5) (1.1) ------------------------------- ------ --------- --------- 12 (3.2) (1.7) ------------------------------- ------ --------- --------- Retained profit for the period 20.2 10.1 ------------------------------- ------ --------- --------- Earnings per share(*): - Basic, based on profit on ordinary activities after tax 13 9.3p 5.0p - Diluted, based on profit on ordinary activities after tax 13 9.3p 5.0p (*) Earnings per share has been restated to reflect the effect of the share issue, see note 13 Statement of historical cost profits and losses In accordance with the amendment to Financial Reporting Standards ('FRS') 3 'Reporting financial performance', no note of historical cost profits or losses has been prepared as the group's only material gains and losses on assets relate to the holding and disposal of investments. Consolidated statement of total recognised gains and losses for the year ended 31 December 2004 Year ended 31 Year ended 31 December December 2004 2003 Â£m Â£m -------------------------------- ------ --------- --------- Profit on ordinary activities after tax 23.4 11.8 Exchange differences taken to reserves (0.2) (1.6) -------------------------------- ------ --------- --------- Total recognised gains for the financial year 23.2 10.2 -------------------------------- ------ --------- --------- Balance sheet at 31 December 2004 2004 2003 Group Company Group Company Notes Â£m Â£m Â£m Â£m ---------------------- ------ -------- -------- ------- -------- Assets Intangible assets 14 7.7 - 7.1 1.1 --------------------- ------ -------- -------- -------- -------- --------------------- ------ -------- -------- -------- -------- Investments Investment in associated undertaking 1.3 - 1.2 - Investments in subsidiary undertaking - 5.1 - 5.1 Other financial investments 578.0 228.3 241.0 131.7 --------------------- ------ -------- -------- -------- -------- 15 579.3 233.4 242.2 136.8 --------------------- ------ -------- -------- -------- -------- Reinsurers' share of technical provisions Provisions for unearned premiums 19 33.6 - 31.0 - Claims outstanding 19 152.2 - 25.8 - --------------------- ------ -------- -------- -------- -------- 185.8 - 56.8 - --------------------- ------ -------- -------- -------- -------- Debtors Debtors arising out of direct - insurance operations 16 74.8 - 58.8 Debtors arising out of - reinsurance operations 16 14.2 - 19.9 Other debtors 17 6.5 44.6 1.6 8.0 --------------------- ------ -------- -------- -------- -------- 95.5 44.6 80.3 8.0 --------------------- ------ -------- -------- -------- -------- Other assets Cash at bank and in hand 68.6 1.7 19.4 0.4 --------------------- ------ -------- -------- -------- -------- --------------------- ------ -------- -------- -------- -------- Prepayments and accrued income Accrued interest 0.2 - 0.2 - Deferred acquisition costs 37.0 - 30.5 - Other prepayments and accrued income 18.3 - 9.2 0.2 --------------------- ------ -------- -------- -------- -------- --------------------- ------ -------- -------- -------- -------- Total assets 992.4 279.7 445.7 146.5 --------------------- ------ -------- -------- -------- -------- 2004 2003 Group Company Group Company Notes Â£m Â£m Â£m Â£m ---------------------- ------ -------- -------- -------- -------- Liabilities Capital and reserves Called up share capital 21 18.0 18.0 11.5 11.5 Share premium account 230.5 230.5 132.4 132.4 Merger reserve 1.6 - 1.6 - Profit and loss account 27.9 17.9 7.9 0.2 --------------------- ------ -------- -------- -------- -------- Shareholders' funds attributable to equity interests 22 278.0 266.4 153.4 144.1 --------------------- ------ -------- -------- -------- -------- Technical provisions Provision for unearned premiums 19 187.4 - 155.8 - Claims outstanding 19 450.8 - 93.4 - --------------------- ------ -------- -------- -------- -------- --------------------- ------ -------- -------- -------- -------- Provision for other risks and 20 7.2 - 3.5 - charges ------ -------- -------- -------- -------- --------------------- Creditors Creditors arising out of direct insurance operations 0.5 - 0.1 - Creditors arising out of reinsurance operations 23.8 - 28.3 - Amounts owed to credit institutions 9.4 9.4 - - --------------------- ------ -------- -------- -------- -------- Other creditors including taxation and social security 18 16.9 3.9 3.6 2.1 --------------------- ------ -------- -------- -------- -------- --------------------- ------ -------- -------- -------- -------- Accruals and deferred income 18.4 - 7.6 0.3 --------------------- ------ -------- -------- -------- -------- Total liabilities 992.4 279.7 445.7 146.5 --------------------- ------ -------- -------- -------- -------- The financial statements were approved by the board of directors on 14 March 2005 and were signed on its behalf by: J G W Agnew, Chairman A F Beazley, Group Chief Executive D A Horton, Group Finance Director Consolidated cash flow statement for the year ended 31 December 2004 Year ended 31 Year ended 31 December December 2004 2003 Notes Â£m Â£m Net cash flow from operating activities 23 278.3 125.8 Taxation paid (3.3) (1.1) Capital expenditure - purchase of syndicate capacity (1.0) (1.1) Equity dividends paid (1.8) (0.6) Increase in debt 9.4 - Issue of ordinary shares 104.6 - -------------------------------- ------ --------- --------- Net cash flows 386.2 123.0 -------------------------------- ------ --------- --------- Cash flows were invested as follows: Increase in cash holdings 24 49.2 14.4 Increase in shares and other variable yield - securities 20.1 -------------------------------- ------ --------- --------- Increase in debt securities and other fixed asset investments 24 316.9 108.6 -------------------------------- ------ --------- --------- Net investment cash flows 24 386.2 123.0 -------------------------------- ------ --------- --------- Notes to the financial statements 1. Basis of preparation The financial information has been prepared in accordance with applicable accounting standards and under the historical cost convention rules, modified by the revaluation of investments, and in compliance with the Statement of Recommended Practice on accounting for insurance business issued by the Association of British Insurers in November 2003 ('the ABI SORP'). The annual basis of accounting as described in the ABI SORP has been adopted. The group also complies with section 255A of, and schedule 9A to the Companies Act 1985. The balance sheet of the parent company is prepared in accordance with the provisions of section 226 of, and schedule 4 to, the Companies Act 1985. 2. Basis of consolidation The consolidated financial statements include the assets, liabilities and results of the company and its subsidiary undertakings up to 31 December each year. Unless otherwise stated, the acquisition method of accounting has been adopted. Under this method, the results of subsidiary undertakings acquired or disposed of in the year are included in the consolidated profit and loss account from the date of acquisition or up to the date of disposal. Certain group subsidiaries underwrite as corporate members of Lloyd's on the syndicate managed by Beazley Furlonge Limited (the 'managing agent'). In view of the several liability of underwriting members at Lloyd's for the transactions of syndicates in which they participate, the attributable share of the transactions, assets and liabilities of the syndicate has been included in the financial statements. 3. Accounting policies a. Premiums Gross premiums written represent premiums on business incepting in the financial year together with adjustments to premiums written in previous accounting periods and estimates for pipeline premiums. Gross premiums written are stated before deduction of commissions but net of taxes, duties levied on premiums and other deductions. b. Unearned premiums A provision for unearned premiums is made which represents that part of the gross premiums written, and reinsurers' share of premiums written, that is estimated will be earned in the following financial periods. It is calculated using the daily pro rata method where the premium is apportioned over the period of risk. c. Acquisition costs Acquisition costs comprise brokerage, staff and staff related costs of the underwriters acquiring the business, and premium levy. The proportion of acquisition costs in respect of unearned premiums is deferred at the balance sheet date and recognised in later periods when the related premiums are earned. d. Claims Claims incurred represent the cost of claims and claims handling expenses paid during the financial year, together with the movement in provisions for outstanding claims, claims incurred but not reported (IBNR) and future claims handling provisions. Reinsurance recoveries are accounted for in the same period as the incurred claims for the related business. The provision for claims comprises amounts set aside for claims advised and IBNR. The IBNR amount is based on estimates calculated using widely accepted statistical techniques (e.g. 'chain ladder') which are reviewed annually by external consulting actuaries. 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, regard is given to the variations in the business portfolio accepted and the underlying terms and conditions. Thus, the critical assumptions used when estimating claims provisions are that the past experience is a reasonable predictor of likely future claims development and that the rating and other models used to analyse current business are a fair reflection of the likely level of ultimate claims to be incurred. The reinsurers' share of provisions for claims is based on calculated amounts for 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 year and the current security rating of the reinsurance companies involved. Every effort is made to ensure that all claims incurred are adequately provided for but adjustments may be necessary in later periods as a result of subsequent information and events. Any adjustments to claims provisions established in prior years are made in the financial period in which the need for a further provision or reduction in the level of provision required becomes apparent. e. Investments Listed group investments are stated at market value. Other group investments are stated at directors' valuation. Investment income, interest receivable and investment management expenses on these items are included in the profit and loss account on an accruals basis. All gains and losses on group investments representing the difference between the current value of investments at the balance sheet date and their purchase price are taken to the profit and loss account. Realised gains and losses on group interests representing the difference between net sales proceeds and purchase price are accounted for in the non-technical account. On disposals during the accounting period, an adjustment is made for previously recognised unrealised gains and losses. Investments included in the company balance sheet are stated at market value or directors' valuation. To the extent that unrealised gains are made on these investments these are taken to a revaluation reserve. Investments in subsidiary undertakings included in the company's own balance sheet are stated at cost less premiums for any impairment. f. Allocation of investment return All of the investment returns arising in the year are reported in the non-technical account. In accordance with the ABI SORP, a transfer is made from the non-technical account to the technical account which represents the income earned on the investments held for underwriting purposes to reflect the longer term rate of return on the group/syndicate investment funds. In Beazley Group's case, all the investments are held for underwriting purposes. The long-term rate of return is an estimate of the long-term investment return for each relevant category of asset with regard to past performance, current trends and expectations as to future income, taking into account economic and investment forecasts. g. Goodwill Purchased goodwill (representing the excess of the fair value of the consideration given over the fair value of the separable net assets acquired) arising on consolidation in respect of acquisitions is capitalised. Positive goodwill is amortised to nil by equal annual instalments over the directors' estimate of its useful economic life, 20 years. Provision is made for any impairment. h. Other intangible assets Other intangible assets are the cost of purchasing the group's participation in syndicate 2623. In accordance with FRS 10, this capacity is capitalised at cost in the balance sheet and amortised over its useful economic life which the directors consider to not exceed 20 years. Provision is made for any impairment. i. Rates of exchange Profit and loss transactions have been translated into sterling at the average rate of exchange for the period. Assets and liabilities included on the balance sheet have been translated into sterling at the rate of exchange at the balance sheet date. Any differences arising from this conversion have been taken into the profit and loss reserve via the statement of total recognised gains and losses. j. Pension costs Pension contributions in respect of defined benefit schemes are charged against profits, with pension surpluses and deficits allocated over the remaining service periods of current employees. Pension contributions for defined contribution schemes are charged to the profit and loss account on an accrual basis. k. Leases Rentals payable under operating leases are charged on a straight line basis over the term of the lease. l. Taxation Current tax, including UK corporation tax and foreign tax, is provided at amounts expected to be paid (or recovered) using the tax rates and laws that have been enacted or substantively enacted by the balance sheet date. m. Deferred taxation Except where otherwise required by accounting standards, full provision without discounting is made for all timing differences which have arisen but not reversed at the balance sheet date. 4. Segmental analysis An analysis of the balance on the technical account of the group (syndicate 2623 only) is as follows: 2004 ------------------------------------------------------------ Marine Property Specialty Lines Reinsurance Total Â£m Â£m Â£m Â£m Â£m ----------------- -------- -------- -------- --------- -------- Gross premiums written 62.1 93.1 203.7 43.4 402.3 Net premiums written 50.8 77.0 168.4 32.8 329.0 Net earned premiums 43.5 72.6 143.7 33.9 293.7 Investment income 1.5 2.7 9.1 1.5 14.8 Net claims (20.9) (38.9) (98.0) (24.2) (182.0) Expenses (14.4) (24.7) (39.6) (8.7) (87.4) ----------------- -------- -------- -------- --------- -------- Balance on technical account 9.7 11.7 15.2 2.5 39.1 ----------------- -------- -------- -------- --------- -------- Claims ratio 48% 54% 68% 71% 62% Expense ratio 32% 35% 27% 26% 30% Combined ratio 80% 89% 95% 97% 92% 2003 ------------------------------------------------------------ Marine Property Specialty Lines Reinsurance Total Â£m Â£m Â£m Â£m Â£m ----------------- -------- -------- -------- --------- ------- Gross premiums written 41.9 93.0 155.3 43.4 333.6 Net premiums written 33.5 77.7 119.1 34.4 264.7 Net earned premiums 12.6 37.9 54.1 27.2 131.8 Investment income 0.7 2.0 5.0 1.0 8.7 Net claims (5.3) (18.1) (37.5) (16.7) (77.6) Expenses (5.1) (11.7) (18.6) (7.6) (43.0) ----------------- -------- -------- -------- --------- -------- Balance on technical account 2.9 10.1 3.0 3.9 19.9 ----------------- -------- -------- -------- --------- -------- Claims ratio 42% 48% 69% 61% 59% Expense ratio 32% 31% 29% 31% 30% Combined ratio 74% 79% 98% 92% 89% The operating profit and net assets of the managing agency have not been disclosed as these are deemed immaterial as defined by the Statement of Standard Accounting Practice (SSAP) Number 25. 5. Net operating expenses Year ended 31 Year ended 31 December December 2004 2003 Â£m Â£m ---------------------------------- --------- --------- Acquisition costs 77.6 64.0 Change in deferred acquisition costs (7.8) (32.2) Administrative expenses 17.6 11.2 ---------------------------------- --------- --------- 87.4 43.0 ---------------------------------- --------- --------- 6. Investment return a. The total actual investment return before taxation comprises: Year ended 31 Year ended 31 December December 2004 2003 Â£m Â£m ---------------------------------- --------- --------- Investment return on funds at Lloyd's and other corporate funds: Investment income 7.4 5.9 Unrealised gains/(losses) on investments (0.4) (0.4) Realised gains/(losses) on investments (0.5) (0.3) ---------------------------------- --------- --------- 6.5 5.2 ---------------------------------- --------- --------- Investment return on syndicate funds: Investment income 5.8 1.2 Unrealised gains/(losses) on investments 0.4 (0.3) Realised gains/(losses) on investments (0.3) (0.1) ---------------------------------- --------- --------- 5.9 0.8 ---------------------------------- --------- --------- Investment management expenses (0.6) (0.3) ---------------------------------- --------- --------- Total investment return 11.8 5.7 ---------------------------------- --------- --------- Allocation to the technical account based on the longer term rate (14.8) (8.7) ---------------------------------- --------- --------- Short term fluctuations in investment return retained in the non-technical account (3.0) (3.0) ---------------------------------- --------- --------- b. Longer term investment return The longer term return is based on a combination of historical experience and current expectations for each category of investments. The longer term return is calculated by applying the following yields to the weighted average of each category of assets. 2004 2003 % % ---------------------------------- --------- --------- Debt securities and other fixed interest securities - Sterling 5 5 - Dollar 4 4 Shares and other variable yield securities 4 n/a The actual return on investment since 1 January 2003 when the group syndicate 2623 started operating of Â£17.5m compares to the aggregate longer term return over that period of Â£23.5m 7. Other income Year ended 31 Year ended 31 December December 2004 2003 Â£m Â£m -------------------------------- ---------- ---------- Profit commissions 8.7 8.0 Agency fees 2.0 1.9 Other income (including share of profit in associated companies) 0.6 1.3 -------------------------------- ---------- ---------- 11.3 11.2 -------------------------------- ---------- ---------- Included within profit commission recognised in this period is Â£2.6m (2003: Â£6.3m) payable to the directors and employees under the terms of the pre-IPO agreement. 8. Other charges The operating profit is stated after charging: Year ended 31 Year ended 31 December December 2004 2003 Â£m Â£m -------------------------------- ---------- --------- Amortisation of goodwill/syndicate capacity 0.4 0.3 Auditors remuneration - Company audit fee 0.1 0.1 - Group audit fee 0.1 0.1 - Tax service 0.2 - - Non-audit service - 0.2 Other operating leases (group/2623 share) 0.5 0.4 Bank charges 1.2 0.2 Profit commission related bonus payments - 2002 year of account 2.6 6.2 - 2003 year of account 4.2 1.1 -------------------------------- ---------- --------- 9. Directors and employees Year ended 31 Year ended 31 December December 2004 2003 Â£m Â£m -------------------------------- ---------- ----------- Payroll costs (all in payroll, including non-executive directors) Wages and salaries 12.8 9.4 Short-term incentive payments 6.6 5.5 Social security 2.4 1.8 Pension costs 2.5 1.2 -------------------------------- ---------- ----------- 24.3 17.9 -------------------------------- ---------- ----------- Recharged to syndicate 623 (8.7) (7.0) -------------------------------- ---------- ----------- 15.6 10.9 -------------------------------- ---------- ----------- Amounts relating to directors' emoluments, share options, short-term incentive scheme interests and pension entitlements are set out within the report on directors' remuneration and form part of these settlements. 10. Employee information The average number of persons employed by the group, including directors, was: Year ended 31 Year ended 31 December December 2004 2003 -------------------------------- ---------- ---------- Underwriting 62 52 Administrative 98 70 -------------------------------- ---------- ---------- 160 122 -------------------------------- ---------- ---------- 11. Taxation on ordinary activities Year ended 31 Year ended 31 December December 2004 2003 Â£m Â£m -------------------------------- ---------- ---------- UK company tax Current tax on income for the year 4.6 1.4 Adjustments in respect of prior periods (0.5) (0.0) -------------------------------- ---------- ---------- Total current tax 4.1 1.4 -------------------------------- ---------- ---------- Deferred tax (see note 20) Origination and reversal of timing differences 5.8 3.5 Share of associated tax 0.1 0.4 -------------------------------- ---------- ---------- Tax on profit on ordinary activities 10.0 5.3 -------------------------------- ---------- ---------- Factors affecting the current tax charge ------------------------------------------ The corporation tax charge differs from the standard rate of corporation tax due to the timing difference explained below: Profit before tax 33.4 17.1 -------------------------------- ---------- ---------- Current tax at 30% (2003: 30%) 10.0 5.1 Effects of: - Underwriting result (6.4) (2.1) - Expenses not deductible for tax 0.4 0.1 - Profit commission timing difference 0.6 (1.3) - Associated company share of profits (0.1) (0.4) - Amortisation 0.1 - -------------------------------- ---------- ---------- Current tax on income for the year 4.6 1.4 -------------------------------- ---------- ---------- 12. Dividends paid and proposed Year ended 31 Year ended 31 December December 2004 2003 Â£m Â£m -------------------------------- ---------- ---------- Interim dividend of 0.3p per share paid (2003: 0.25p) 0.7 0.6 Final dividend of 0.7p per share (2003: 0.5p) 2.5 1.1 -------------------------------- ---------- ---------- Total dividend of 1.0p per share (2003: 0.75p) 3.2 1.7 -------------------------------- ---------- ---------- 13. Earnings per ordinary share Year ended 31 Year ended 31 December December 2004 2003 -------------------------------- ---------- ---------- Basic 9.3 5.0 Diluted 9.3 5.0 The calculation of basic earnings per share is based on earnings of Â£23.4m, being the profit for the year on 251.1 million shares, being the weighted average number of shares in issue during the period. The diluted earnings per share is based on earnings of Â£23.4m and on 251.6 million ordinary shares. The 2003 comparatives have been adjusted to reflect the additional issue of 131.1m shares on 18 November 2004. Earnings per share in the 2003 annual accounts were: Basic 5.2p Diluted 5.2p 14. Intangible assets Goodwill Syndicate Total capacity purchased Â£m Â£m Â£m ------------------------- --------- --------- --------- Cost 1 January 2004 7.0 1.1 8.1 Additions for the year - 1.0 1.0 ------------------------- --------- --------- --------- At 31 December 2004 7.0 2.1 9.1 ------------------------- --------- --------- --------- Amortisation 1 January 2004 1.0 - 1.0 Charge for the year 0.3 0.1 0.4 ------------------------- --------- --------- --------- At 31 December 2004 1.3 0.1 1.4 ------------------------- --------- --------- --------- Net book value 31 December 2004 5.7 2.0 7.7 31 December 2003 6.0 1.1 7.1 15. Investments 2004 2003 Market Value Cost Market Value Cost Â£m Â£m Â£m Â£'m ------------------ ---------- ---------- ---------- -------- Group Associated undertakings (a) 1.3 - 1.2 - Shares and other variable yield securities 20.1 19.0 - - Debt securities & other fixed interest securities 557.9 559.2 241.0 241.5 ------------------ ---------- ---------- ---------- -------- 579.3 578.2 242.2 241.5 ------------------ ---------- ---------- ---------- -------- Of which Listed 567.7 567.9 240.5 241.0 Unlisted 11.6 10.3 1.7 0.5 ------------------ ---------- ---------- ---------- -------- 579.3 578.2 242.2 241.5 ------------------ ---------- ---------- ---------- -------- Company Subsidiary undertakings 5.1 5.1 5.1 5.1 Debt securities & other fixed interest securities 228.3 227.3 131.7 132.2 ------------------ ---------- ---------- ---------- -------- 233.4 232.4 136.8 137.3 ------------------ ---------- ---------- ---------- -------- Of which Listed 228.3 227.3 131.2 131.7 Unlisted 5.1 5.1 5.6 5.6 ------------------ ---------- ---------- ---------- -------- 233.4 232.4 136.8 137.3 ------------------ ---------- ---------- ---------- -------- a. Associated undertakings: Brought forward value of subsidiary 1.2 - 5.2 5.0 Share of profit retained by associated undertakings 0.1 - 1.4 - Tax on shares of profits retained by associated undertakings - - (0.4) - -------------------- --------- --------- --------- -------- Netting off of brought forward creditor - - (5.0) (5.0) -------------------- --------- --------- --------- -------- 1.3 - 1.2 - -------------------- --------- --------- --------- -------- Beazley Finance Limited has been treated as an associated company as the directors of Beazley Group plc are represented on the board of Beazley Finance Limited and take a role in the day-to-day running of the company. They are therefore in a position to exert significant influence. Beazley Furlonge Holdings Limited owns 5,000,000 ordinary shares in Beazley Finance Limited, the holding company of Beazley Dedicated Limited, a dedicated corporate member of syndicate 623. This shareholding represents 22.7% of the entire share capital of Beazley Finance Limited. Beazley Furlonge Holdings Limited has guaranteed a letter of credit of Â£2m to support underwriting of Beazley Dedicated Limited on syndicate 623. The proportion of profits receivable by the group is determined by agreement between Aon (the majority shareholder in Beazley Finance Limited) and the group and varies by year of account. Beazley Dedicated Limited participates in syndicate 623 for all years of account up to 2002. Reflected in these accounts is the result for the 2002 year of account together with the results of Beazley Finance Limited to 31 December 2004. b. Subsidiary undertakings - unlisted ------------- ----------- ------------ -------- ------------ Country of Class of share Proportion held Nature of incorporation business and operation ------------- ----------- ------------ -------- ------------ Beazley England Ordinary 100% Intermediate Furlonge holding company Holdings Limited Beazley England Ordinary 100% Lloyd's Furlonge underwriting Limited agents BFHH Limited England Ordinary 100% Dormant from 30 June 1994 Beazley England Ordinary 100% Investment Investments company Limited Beazley England Ordinary 100% Underwriting at Corporate Lloyd's Member Limited Beazley England Ordinary 100% Underwriting at Dedicated No. 2 Lloyd's Limited Global Two England Ordinary 100% Underwriting at Limited Lloyd's Beazley England Ordinary 100% Underwriting at Underwriting Lloyd's Limited Beazley England Ordinary 100% Intermediate Management management Limited company Beazley Staff England Ordinary 100% Underwriting at Underwriting Lloyd's Limited Cover Solutions England Ordinary 100% UK Service Ltd Company Beazley England Ordinary 100% Dormant Corporate Member No.2 Beazley England Ordinary 100% Dormant Corporate Member No.3 Beazley USA USA Ordinary 100% Insurance Services Inc. services Beazley USA Ordinary 100% Holding company Holdings Inc. Beazley Group USA n/a 100% General (USA) General partnership Partnership During 2001, the group incorporated a corporate member, allocating to it capacity for participation in syndicate 623 for the 2002 year of account. Capacity held % of total Â£ capacity -------------------------------- ---------- --------- Global Two Limited 12,000,000 3.7% Funds at Lloyd's to support this company's underwriting are provided by investing companies who have option agreements in place with the group. These agreements give the investors the opportunity to purchase the entire share capital of the corporate member and the group the option to require the purchase of the entire share capital. The group's investment in Global Two Limited has been included in the consolidated balance sheet at the lower of cost and net realisable value. The assets, liabilities and results of Global Two Limited have not been consolidated due to the existence of the group's option and quota share agreement with Gerling Global General and Reinsurance Limited. c. Other fixed asset investments Funds at Lloyd's Funds have been lodged with Lloyd's of London to support syndicate 2623 via its corporate member Beazley Underwriting Limited as follows: 2004 2003 Â£m Â£m Debt securities and other fixed interest securities 227.8 131.2 Letters of credit 2.0 19.5 ---------------------------------- --------- --------- 229.8 150.7 ---------------------------------- --------- --------- Collateralised guarantee at Lloyds TSB plc An amount of Â£0.5m (31 December 2003: Â£0.5m) has been deposited with Lloyds TSB bank as collateral for that banks guarantee of a subsidiary's solvency position with Lloyd's of London. 16. Debtors arising out of direct insurance operations and reinsurance operations 2004 2003 Â£m Â£m ---------------------------------- --------- --------- Group Debtors arising out of direct insurance operations 74.8 58.8 Debtors arising out of reinsurance operations 14.2 19.9 ---------------------------------- --------- --------- 89.0 78.7 ---------------------------------- --------- --------- All insurance debtors relate to business transacted with brokers and intermediaries. 17. Other debtors 2004 2003 Group Company Group Company Â£m Â£m Â£m Â£m ------------------------- -------- -------- -------- -------- Amounts due from group companies - 44.4 - 7.2 Amounts due from associated undertakings 0.3 - 0.3 0.0 Other debtors 6.2 0.2 1.3 0.8 ------------------------- -------- -------- -------- -------- 6.5 44.6 1.6 8.0 ------------------------- -------- -------- -------- -------- Included within other debtors is a debtor greater than one year of Â£0.4m (2003: Â£0.4m) in respect of loans to employees. 18. Creditors: amounts falling due within one year 2004 2003 Group Company Group Company Â£m Â£m Â£m Â£m Corporation tax payable 3.2 0.7 0.4 - Proposed dividend (note 12) 2.5 2.5 1.1 1.1 Other creditors and social security 11.2 0.7 2.1 1.0 ------------------------- -------- -------- -------- -------- 16.9 3.9 3.6 2.1 ------------------------- -------- -------- -------- -------- 19. Technical provisions Provision for unearned Claims premium outstanding Â£'m Â£m --------------------------------- ---------- --------- Gross technical provisions At 1 January 2004 155.8 93.4 --------------------------------- ---------- --------- Exchange adjustments (7.9) (10.6) Reinsurance to close received - 183.6 Movement in the provision 39.5 184.4 --------------------------------- ---------- --------- At 31 December 2004 187.4 450.8 --------------------------------- ---------- --------- Reinsurers' share of technical provisions At 1 January 2004 31.0 25.8 Exchange adjustments (1.6) (3.0) Reinsurance to close received - 88.8 Movement in the provision 4.2 40.6 --------------------------------- ---------- --------- At 31 December 2004 33.6 152.2 --------------------------------- ---------- --------- Net technical provisions At 31 December 2004 153.8 298.6 --------------------------------- ---------- --------- At 31 December 2003 124.8 67.6 --------------------------------- ---------- --------- The group has included within its accounts the reinsurance to close from syndicate 623 at Lloyd's for the 2002 year of account. The assets and liabilities transferred as a result of this transaction were Â£94.7m representing 50% of the 2002 year of account reserves. Prior periods' claims provisions Material over provisions for net claims at the beginning of the period as compared with net payments and provisions at the end of the year in respect of prior periods' claims for continuing business amounted to Â£7.4m. 20. Provision for other risks and charges Deferred tax 2004 2003 Â£m Â£m ---------------------------------- --------- --------- Group Opening (asset)/liability for deferred tax 3.5 - Reclassification to current tax (1.4) - Additions during the year 6.4 3.5 Profit commission timing difference (1.1) - Fx differences on deferred tax (0.2) - ---------------------------------- --------- --------- Closing (asset)/liability for deferred tax 7.2 3.5 ---------------------------------- --------- --------- The deferred tax liability is attributable to timing differences arising on the following: Other timing differences Underwriting results Total Â£m Â£m Â£m --------------------------- --------- --------- -------- At 1 January 2004 3.5 - 3.5 Deferred tax charge for the year 6.4 (0.6) 5.8 Reclassification to current tax (1.4) (0.5) (1.9) Fx differences on deferred tax (0.2) - (0.2) --------------------------- --------- --------- -------- At 31 December 2004 8.3 (1.1) 7.2 --------------------------- --------- --------- -------- The reclassification of the deferred tax creditor to current tax relates to provision made in 2003 in respect of profit commission and bonuses payable on these. These have since been charged to current tax following the issue of FRS 5 Application Note G by the Accounting Standards Board. 21. Share capital 2004 2003 Authorised Allotted and Authorised Allotted and called-up called-up Â£m Â£m Â£m Â£m ----------------------- -------- --------- -------- -------- 450,000,000 ordinary shares of 5p each 22.5 18.0 15.0 11.5 22. Reconciliation of movement in shareholders' funds Issued share Share premium Merger reserve Profit and loss Total Total capital account 2004 account 2004 shareholders' shareholders' funds funds 2004 2004 2004 2003 Â£m Â£m Â£m Â£m Â£m Â£m -------------- ------- ------- ------- ------- -------- -------- Group Balance brought forward 11.5 132.4 1.6 7.9 153.4 144.9 Retained profit for the period - - - 20.2 20.2 10.1 Foreign exchange (loss) - - - (0.2) (0.2) (1.6) Issue of shares 6.5 - - 6.5 - Share premium on issue of shares - 103.6 - - 103.6 - Capitalised listing costs (5.5) (5.5) - -------------- ------- ------- ------- ------- -------- -------- Shareholders' funds at end of period 18.0 230.5 1.6 27.9 278.0 153.4 -------------- ------- ------- ------- ------- -------- -------- Company Balance brought forward 11.5 132.4 - 0.2 144.1 142.8 Retained profit for the period - - 17.7 17.7 1.3 Issue of shares 6.5 - 6.5 - Share premium on issue of shares - 103.6 - - 103.6 - Capitalised listing costs (5.5) (5.5) - -------------- ------- ------- ------- ------- -------- -------- Shareholders' funds at end of period 18.0 230.5 - 17.9 266.4 144.1 -------------- ------- ------- ------- ------- -------- -------- As permitted by section 230 of the Companies Act 1985, no profit and loss account of the parent company is presented. The profit after taxation for the company for the year was Â£20.9m (2003: loss after tax Â£3m). 23. Reconciliation of operating profit to net cash inflow from operating activities Year ended 31 Year ended 31 December December 2004 2003 Â£m Â£m -------------------------------- ---------- ---------- Operating profit before tax based on longer term rate of investment return 36.4 20.1 Amortisation of goodwill 0.3 0.3 Short-term fluctuations in investment return (3.0) (3.0) Share of operating profit of associate (0.1) (1.4) (Increase) in debtors (30.7) (116.6) (Increase) in reinsurers share of technical provision (129.1) (56.7) Increase in creditors 15.8 35.5 Increase in technical provisions 388.9 249.2 Effect of foreign exchange rate changes (0.2) (1.6) -------------------------------- ---------- ---------- 278.3 125.8 -------------------------------- ---------- ---------- 24. Analysis of net funds/(debt) 2004 Cash flow 2003 Â£m Â£m Â£m -------------------------- --------- -------- -------- Cash at bank and in hand 68.6 49.2 19.4 Shares and other variable yield securities 20.1 20.1 - Debt securities and fixed interest investments 557.9 316.9 241.0 -------------------------- --------- -------- -------- 646.6 386.2 260.4 -------------------------- --------- -------- -------- 25. Pension commitments Beazley Furlonge Limited operates a funded pension scheme ('the Beazley Furlonge Limited Pension Scheme') providing benefits based on final pensionable pay, with contributions being charged to the profit and loss account so as to spread the cost of pensions over employees' working lives with the company. The contributions are determined by a qualified actuary using the projected unit method and the most recent valuation was at 31 December 2004. The assumptions which have the most significant effect on the results of the valuation are those relating to the rate of return on investments and the rates of increase in salaries and pensions. The investment return used was 6.2% (31 December 2003: 6.3%), the rate of earnings increase used was 4.4% (31 December 2003: 4.3%) and the rate of pension increase used was 2.5% (31 December 2003: 2.3%). The most recent company accounting valuation showed that the market value of the scheme's assets was Â£6.6m at 31 December 2004 (31 December 2003: Â£5.3m) and that the market value of those assets represented 60% (31 December 2003: 71%) of the benefits that had accrued to members on an ongoing basis, after allowing for expected future increases in earnings. The contributions of the company on the most recent formal actuarial valuation ongoing basis was estimated at 21% of earnings. The pension charge for the period was Â£0.7m (year to 31 December 2003: Â£0.7m). Each year substantially all of the pension costs are recharged to syndicate 623 and 2623. Whilst the company continues to account for pension costs in accordance with Statement of Standard Accounting Practice 24 'Accounting for Pension costs', under Financial Reporting Standard 17 'Retirement benefits' the following transitional disclosures are required. The valuation of the scheme was calculated by the actuary on a Financial Reporting Standard 17 'Retirement benefits', basis as at 31 December 2004, 31 December 2003 and 31 December 2002. The major assumptions used in these valuations were: 31 December 2004 31 December 2003 31 December 2002 ------------------------- ---------- ---------- ------------ Rate of increase in salaries 4.4% 4.3% 4.0% Rate of increase in pensions 2.5% 2.3% 2.0% Discount rate applied to scheme liabilities 5.2% 5.8% 5.5% Inflation assumption 2.9% 2.3% 2.0% The assumptions used by the actuary are the best estimates chosen from a range of possible actuarial assumptions which, due to the timescale covered, may not necessarily be borne out in practice. Scheme assets The fair value of the scheme's assets, which are not intended to be realised in the short-term and may be subject to significant change before they are realised, and the present value of the scheme's liabilities, which are derived from cash flow projections over long periods and thus inherently uncertain, were: Long term Value at Long term Value at Long term Value at rate of 31 December rate of 31 December rate of 31 December return 2004 return 2003 return 2002 2004 Â£m 2003 Â£m 2002 Â£m ------------------- ------- -------- ------- -------- ------- -------- Equities 6.6% 5.2 6.8% 4.1 6.5% 2.6 Bonds 4.6% 1.4 4.8% 1.1 4.5% 0.7 Cash 2.6% - 2.8% 0.1 2.5% 0.5 ------------------- ------- -------- ------- -------- -------- ------- Fair value of assets 6.6 5.3 3.8 Present value of scheme's liabilities (10.9) (7.4) (6.2) ------------------- ------- -------- ------- Gross pension liability (4.3) (2.1) (2.4) ------------------- ------- -------- ------- Net pension liability (4.3) (2.1) (2.4) ------------------- -------- ------- -------- The amount of this net pension liability would have a consequential effect on the group's reserves. Movement in deficit during the year: Value at Value at Value at 31 December 31 December 31 December 2004 2003 2002 Â£m Â£m Â£m -------------------------- ---------- ---------- ---------- Deficit in the scheme at the beginning of year (2.1) (2.4) (1.6) Current service cost (0.7) (0.7) (0.3) Contributions paid 0.7 0.7 0.5 Past service cost - - - Other finance income/(cost) - (0.1) - Actuarial gain/(loss) (2.2) 0.4 (1.0) -------------------------- ---------- ---------- ---------- Deficit in the scheme at end of year (4.3) (2.1) (2.4) -------------------------- ---------- ---------- ---------- Analysis of amounts included in other finance income/(costs): Expected return on pension scheme assets 0.4 0.2 0.1 Interest on pension scheme liabilities (0.4) (0.3) (0.1) -------------------------- ---------- ---------- ---------- - (0.1) - -------------------------- ---------- ---------- ---------- Analysis of amount which would have been recognised in statement of total recognised gains and losses: 31 December 31 December 31 December 2004 2003 2002 Â£'m Â£'m Â£m -------------------------- ---------- ---------- ---------- Actual return less expected return on scheme assets 0.1 0.5 (0.5) Experience gains arising on scheme liabilities (0.2) (0.1) (0.5) -------------------------- ---------- ---------- ---------- Changes in assumptions underlying the present value of scheme liabilities (2.1) - - -------------------------- ---------- ---------- ---------- Actuarial loss recognised in statement of total recognised gains and losses (2.2) 0.4 (1.0) -------------------------- ---------- ---------- ---------- From 1 April 2001 to 10 August 2002, no benefits accrued under the scheme. During this period, Beazley Furlonge Limited participated in the Lloyd's Superannuation Fund (LSF) and employees accrued benefits under the LSF. Beazley Furlonge Limited terminated its participation in the LSF on 10 August 2002. Beazley Furlonge Limited has confirmed to those of its employees who participated in the LSF that they will be granted continuous pensionable service in the scheme in respect of the period of participation in the LSF. The liability in respect of this period of service is included in the FRS 17 valuation at 31 December 2004. The market value of the estimated transfer value at that date was included in the market value of the scheme's assets in the FRS 17 valuation. The cost to the scheme of providing continuous service using the actuarial valuation basis has been estimated at Â£1.2m as at 31 December 2004. The assets in relation to this liability of the scheme have remained under management of LSF. The value of the assets has been estimated as Â£0.5m at 31 December 2004. This shortfall, together with the overall shortfall in the scheme is to be funded over the next three years. The assets of the scheme of Â£6.6m included the Â£0.5m but not the funding of Â£0.7m shortfall, which had not been made at 31 December 2004. 26. Contingent liabilities and financial commitments At 31 December 2003 Beazley Group plc gave a fixed and floating charge over its assets to Lloyds TSB plc in respect of the loans taken out to finance the purchase of the shares of Beazley Furlonge Holdings Limited and has agreed to guarantee the obligation of Beazley Furlonge Limited in respect of its obligation to Lloyds TSB plc. The group has guaranteed the Â£2m letter of credit issued to Beazley Dedicated Limited which is used as Funds at Lloyd's for underwriting. A subsidiary company entered into a leasehold tenancy agreement on 11 January 2002 in respect of One Aldgate, replacing an old lease on the premises which expired in March 2002. In February 2003, the company entered into a new lease to take an additional floor on the premises, the terms of which are concurrent with the existing lease. As at 31 December 2004 the company was committed to make rental payments amounting in the aggregate to Â£1.8m in respect of the remaining 2 year period of tenancy to the first break clause (31 December 2003: Â£2.7m). Annual operating lease commitments under non-cancellable operating leases are as follows: 2004 Land and 2003 buildings Land and buildings Other Other Â£m Â£m Â£m Â£m ----------------------- -------- -------- -------- --------- Group Operating leases which expire: - Within one year - - - - In the second to fifth years inclusive 0.9 0.9 - - Over five years - - - ----------------------- -------- -------- -------- --------- 0.9 0.9 - ----------------------- -------- -------- -------- --------- The company has no finance lease commitments. 27. Related party disclosure Certain of the directors of the company and its subsidiaries are or have been names on the Lloyd's syndicates which are managed by the group. The details of these participations are disclosed in the directors' remuneration report. This information is provided by RNS The company news service from the London Stock Exchange

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