Interim Management Statement

RNS Number : 8175F

Beazley Group PLC

14 October 2008

 



Press 

Release

Beazley Group plc Interim management statement for the 9 months ended 30th September 2008

London, 14 October 2008

Overview

The past three months have presented significant investment management challenges, combined with an increase in hurricane-related insurance and reinsurance claims. Core underwriting activity remains robust and we continue to see healthy growth in the business underwritten by our US operations. However, the group has sustained losses both from the global turbulence in the financial markets and through our exposure to the recent hurricanes in the Gulf of Mexico.   

	30 Sep 2008	30 Sep 2007	% increase
Gross premiums written (£m)	595.4	588.9	1
Net premiums written (£m)	494.5	486.3	2
Investments and cash (£m)	1,705	1,398	22
Investment return (% YTD) - annualised	-1.1%	5.0%	-
Rate (decrease)/ increase	-7%	-3%	-

We believe that the scale of both the underwriting and investment losses incurred by insurers in recent months rank them as market changing developments. As the impact of these developments becomes clearer, we believe there will be upward pressure on rates and significant business opportunities. We will be reviewing our business plans for 2009 accordingly. 

Premiums

Gross premiums written to the end of September were £595.4m, which is in line with our expectations, and around 1% above 2007 at the same stage.  As highlighted in our interim report, premium rates have fallen in our core Lloyd's business from the record high levels of recent years and our underwriters have accordingly been highly selective in the risks they underwrite. However, the decline in premiums from our Lloyd's business is more than offset by the growth of our US operations, where premiums increased 62% to $199.0m by the end of September 2008 (2007: $123.0m).  

As we anticipated, most of our lines of business have seen increasing competition in 2008. Overall, the premiums charged for business we renewed fell by around 7%, in line with our previous market announcements.  The steepest declines were in our offshore energy and commercial property accounts where rates fell by 17% and 12% respectively. We expect rates in our offshore energy business to recover significantly based on the costs of the 2008 hurricane season referred to below; there is still uncertainty surrounding the impact on rates of the hurricanes on our property and reinsurance businesses. Our largest business, specialty lines - which comprises professional and management liability lines - has seen rates decrease by 8%.  

Below is an extract of our performance to the end of September 2008 by business division:

	Gross premiums written (GBP m) 9months to 30 September 2008	Gross premiums written (GBP m) 9months to 30 September 2007	% increase / (decrease)	2008  Rate change
Marine	104.3	110.2	(5)	-7%
Political risk and contingency	47.1	46.9	-	-6%
Property	128.2	147.9	(13)	-7%
Reinsurance	62.6	54.8	14	-6%
Specialty lines	253.2	229.1	11	-8%
OVERALL	595.4	588.9	1	-7%

US operations

The business we underwrote locally in the United States totalled $199.0m to 30 September 2008 (2007 - $123.0m). This business has largely been generated through our US admitted insurance company, Beazley Insurance Company Inc (BICI), which underwrote $122.5m. The remaining $76.5m was underwritten by our US underwriters on a surplus lines basis for the account of our Lloyd's syndicates.  Particularly strong growth was recorded in our professional liability account for the architects and engineers account, where we wrote $74.8m, and in our technology and media professional liability business, where $23.2m has been written year to date.  Our full year target for premiums for the US business remains $250m.

Hurricane activity

The 3rd quarter saw significant hurricane activity in the Gulf of Mexico. Since the season started in May, there have been 13 named windstorms, 6 of which reached hurricane strength. As in 2005, a number of these have caused catastrophic damage to the southern US and islands in and around the Gulf of Mexico. 

Beazley has been impacted by Hurricanes Gustav and Ike. We estimate the net profit impact to the group of these two events to be around £20m. In calculating this number we have applied the same reserving methodology for hurricanes as in 2005 - i.e. we are still retaining part of the 2008 catastrophe reserving margin for the possibility of other events occurring.  Both hurricanes caused significant damage to the Gulf region. Gustav, which occurred at the end of August, may ultimately result in insurance market losses of up to $5bn, while Ike in early September has a loss estimate of up to $20bn - making it one of the largest US hurricane losses in history.  We insure against hurricane damages through a number of our divisions, notably reinsurance, US commercial property, and offshore energy insurance accounts. 

We believe our loss estimate to be conservative based on the information that is currently available. We continue to monitor the extent of our exposure to these claims while working closely with our brokers to support our insureds.  

Sub-prime exposure update

We remain satisfied with our overall reserving levels. As we explained in our interim report, we established an internal working party in 2007 tasked with monitoring the risks to and opportunities for Beazley. Since the late 1990's Beazley has had a limited appetite for professional liability risks within the financial institution sector. Whilst the number of sub-prime related lawsuits (as reported by Advisen) has recently been updated to exceed 400, we provide directors and officers (D&O) coverage for only six of the affected entities and other types of professional or liability related coverage for a further seven.  

Investment performance

Despite our conservative investment policy, our investment portfolio in the third quarter incurred an estimated loss of £26m, derived from mark-to-market losses in our equity, hedge fund and bond portfolios.  For the nine months to the end of September, our cumulative investment losses have been £13m (2007: investment income - £52m). Under International Financial Reporting Standards all mark to market losses on our investment portfolio are taken through the income statement. Given the extreme volatility and uncertainty in markets, it is difficult to quantify the impact of further losses on likely investment income for the remainder of 2008. However, the weighted average yield to maturity of our portfolio is currently over 5% and our target for the full year is to break even.

The third quarter of 2008 saw unprecedented levels of stress in financial markets and witnessed the take-over or nationalisation of many financial institutions. Beazley hold Lehman senior debt with a nominal (par) value of £14.0m, which on a mark to market basis at the end of September was valued at £1.7m. Estimated recovery values are above this level, and we are working with our asset managers to ensure maximum practicable value from these holdings.  

Throughout the year, and especially in the third quarter, we have been working closely with our managers to limit the risk profile of our portfolios. However, the indiscriminate nature of the sell-off in credit and equity markets, particularly since the failure of Lehman Brothers, has resulted in an unprecedented degree of risk aversion and widening of spreads in securities that are not government guaranteed, bringing substantial mark-to-market losses. 

We are optimistic that with the support of recent Government efforts around the world, losses on these bonds will ultimately be recovered, and many may offer exceptional value at current levels. Even so, given the likelihood that economies will take some time to recover from the effects of deleveraging, we are continuing to review our portfolios with our managers to try to limit further value erosion.

As of the end of September, our portfolio breakdown was:

Cash + Money Market	18.7%
Government	15.7%
Government Agency	6.1%
Regional and Supranational	0.3%
Asset Backed	3.0%
CMBS	1.8%
MBS (Non-Agency)	1.3%
MBS (Agency)	1.0%
Corporate Bond (non Financial)	8.6%
Corporate Bond (Financial)	27.4%
Fixed income pooled vehicles	8.1%
Equities	2.4%
Hedge Funds	5.6%

The breakdown of our bond portfolios was:

Government and Agency	33.5%
AAA	17.6%
AA+ to AA-	22.0%
A+ to A-	20.7%
BBB+ to BBB-	5.9%
Sub investment grade	0.3%

Our holdings of sub-prime and Alt-A securities combined were 0.2% of the portfolio as of the end of September, all of which were AAA rated. Beazley does not and has not owned any CDOs and has no direct exposure to Iceland or Icelandic banks.

The average duration of our overall portfolio was 0.8 years as of the end of September.

Momentum Underwriting Management Limited

In September we acquired Momentum Underwriting Management Limited (MUM), a managing general agent. Established in 2000, MUM is a leading specialist personal accident and life underwriting management agency based in London with an office in Australia. Momentum is led by its founders Christopher Branch, Martin Power, Marc Frost and Mark Edwards. MUM plans to underwrite around $100 million of gross premium for 2009 and Beazley's support gives MUM new growth opportunities. The transaction is subject to the approval of Lloyd's and the Financial Services Authority.

Outlook

We recently submitted our business plan to Lloyd's for 2009. Including the $100m of Momentum Underwriting Management business referred to above, we expected to underwrite £750m in business in 2009 (2008: £814m).  Since submission of the plan our expectation is that pricing levels will improve, particularly in the classes of business affected by the recent hurricanes.  

Beazley Group Chief Executive Andrew Horton said: 

'The third quarter has presented tough challenges to Beazley and to the insurance industry in general. We have a very well diversified business, strong balance sheet, highly experienced underwriters and a clear focus on underwriting profitability to help us weather the current market conditions. It is our belief that the events of the third quarter will prove a turning point in the market. In all capital markets the price of risk is rightly being reassessed. With our talent, access and operational platform the future looks very promising.'

ENDS

For further information, please contact:

Beazley Group plc

Andrew Horton

T: [phone]

Finsbury

Vanessa Neill / Andrew Holt

T: [phone]

Note to editors:

Beazley Group, plc (BEZ.L), based in London, is the parent company of global, specialist insurance businesses with operations in the UK, US, France, Singapore and Hong Kong.  Beazley manages two Lloyd's syndicates (Syndicate 2623 and Syndicate 623) with aggregate underwriting capacity in 2008 of £814m (US$1.6bn). Both syndicates are rated A by A.M. Best. In the US, Beazley's underwriters focus on writing specialist insurance products in the admitted market, backed by Beazley Insurance Company, Inc., an admitted carrier in all 50 states; and surplus lines risks, backed by the Beazley syndicates at Lloyd's. Beazley Insurance Company, Inc. is rated A by A.M. Best. 

Beazley is a market leader in many of its chosen lines, which include professional indemnity, commercial property, marine, reinsurance, and personal lines. 

For more information please go to: www.beazley.com

 

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