Interim Management Statement

RNS Number : 8212R

Beazley Group PLC

07 May 2009

 



Press 

Release

Beazley Group plc Interim management statement for the 3 months ended 31st March 2009

London, 7 May 2009

Overview

The first three months of 2009 have seen the positive changes to underwriting conditions that we anticipated in our 2008 annual report. Premium rates have risen significantly in our short tail catastrophe exposed classes, while rate declines are bottoming out in our medium tail casualty business. Investment markets have remained challenging, resulting in a small negative investment return for the first quarter. 

Early 2009 has also seen a number of strategic measures designed to capitalise on attractive growth opportunities and enhance the profitability of the group. These included:

• The rights issue, which has raised £150m of equity capital;

• Further expansion in the US through the acquisition of First State Management Group, Inc. ('First State'), which specialises in US surplus lines commercial property insurance; and

• The incorporation of a new holding company and reinsurer, tax domiciled in the Republic of Ireland. It is expected that the restructuring will be effective from May 21st. 
  

	31 Mar 2009	31 Mar 2008	% increase
Gross premiums written (£m)	256.2	201.2	27%
Investments and cash (£m)	2,006.9	1,544.6	30%
Investment return (% YTD) - annualised	(0.6)%	0.5%	-
Rate increase / (decrease)	2%	(6%)	-

Andrew Horton, Chief Executive Officer, said:  

'We continue to grow our business taking advantage of the more attractive rating environment that now prevails, particularly for catastrophe exposures. The investment environment remains extremely challenging but we continue to take measures to de-risk our portfolio and supplement the healthy underwriting profits now in prospect.'  

Rights issue

On 3rd April the group reported the result of the fully underwritten 9 for 19 rights issue announced on 13th February. Rights were accepted at the offer price of 86.0 pence in respect of 138,428,098 (83.6%) of new shares offered, with the balance of 21,200,606 (16.4%) of shares not accepted being placed with investors at a price of 90.0 pence. The overall proceeds from the rights issue and placing was £150m net of fees. 

The proceeds from the rights issue will be used to fund the expansion of existing underwriting at Lloyd's in order to take advantage of the improving rating conditions, and to fund the acquisition of First State. Following deployment of new capital, the group's surplus capital position remains broadly unchanged from that reported in December 2008, which is around £50m. In addition, the group has access to an undrawn syndicated letter of credit facility, through a consortium of banks of up to £100m.

Acquisition of First State

On 1st April the group completed the acquisition of the entire share capital and renewal rights of First State from the Hartford Financial Services Group, Inc. for cash consideration of $34.0m, which includes $1.4m of net assets on acquisition.

First State is a leading US underwriting manager specialising in surplus lines commercial property insurance and is expected to write around $150m of gross premium for 2009.

Redomiciliation to Dublin

On 24 March 2009 we provided details of the proposed re-domiciling of the group, which followed on from the original announcement on 13 February 2009. 

We are intending to change the corporate structure of the group by putting in place a new parent company for the group, Beazley plc, which will be UK listed, incorporated in Jersey and tax resident in the Republic of Ireland ('the Proposal'). We will also be establishing a new reinsurer in the Republic of Ireland, Beazley Re Ltd.

Plans for the Proposal are progressing in line with the published timetable. Shareholder approval for the Proposal was received at an Extraordinary General Meeting on 28 April 2009 and Beazley Re received authorisation in principle from the Irish Financial Regulator on 29 April 2009. The Proposal is still subject to Court approval, with a target scheme effective date of 21 May 2009. 

Premiums

Gross premiums written to the end of March were £256.2m, which was 27% above 2008 at the same stage.  The increase is largely attributable to the appreciation in the US dollar relative to sterling since the first quarter of 2008: 75% of our premiums are US dollar denominated.  Most of our lines have shown increases year on year, the largest increases being in our reinsurance account (an increase of 52% to £45.8m), and political risks and contingency (an increase of 70% to £25.3m). Our largest account, specialty lines, increased written premium by 31% to £98.8m. The accident and life business, which was acquired in the fourth quarter of 2008, has also made a solid start, contributing £8.9m to gross premiums written in the first quarter. The fall in property premium is due to a rebalancing of the portfolio with the non-renewal of a number of unprofitable homeowner insurance contracts leading to a distortion in the first quarter. We still anticipate that property business will show strong premium growth over the year as a whole.

As discussed in our 2008 Annual Report, catastrophe exposed lines of business have seen strong rate increases following the 2008 hurricane activity. Since the beginning of the year rate increases have been most prevalent within our energy account (13% increase), US commercial property (13% increase) and our reinsurance lines (9% increase). The full extent of these rate increases, particularly in our offshore energy account, will be more evident in the second quarter as April 1st is a key renewal date for policies in these sectors. 

The impact of rate increases on premium growth has been mitigated in certain lines (for example, marine cargo), due to reduced trade volumes caused by the current economic environment. 

Within our medium tail specialty lines business, rates are down slightly (2% decrease) since the beginning of the year. The pace of declines has slowed significantly, however, and we continue to expect that rates will begin to rise in the second half of 2009 and into 2010, as the impact of the economic downturn continues to exert upward pressure on the cost of coverage.  

Below is an extract of our performance to the end of March 2009 by business division:

	Gross premiums written  3 months to 31 March 2009	Gross premiums written 3 months to 31 March 2008	% increase / (decrease)	Q1 2009 Rate change
	£m	£m	%	%
Accident & Life	8.9	-	-	-
Marine	41.1	35.9	14%	4%
Political Risks & Contingency	25.3	14.9	70%	(3)%
Property	36.3	44.8	(19)%	5%
Reinsurance	45.8	30.2	52%	9%
Specialty Lines	98.8	75.4	31%	(2)%
OVERALL	256.2	201.2	27%	2%

US operations

The business underwritten locally in the US in the first quarter totalled $63.2m, of which $20.7m was written for the account of our Lloyd's business and $42.5m was admitted business underwritten by Beazley Insurance Company, Inc. Overall premium is down 11% from $71.4m at the same stage of 2008. The reduction, which was expected, is primarily due to a large multi-year policy that is non-renewing and was written in Q1 2008 but will be earned over the five years of the policy life. Excluding this one large policy, premium growth was 9%. Year on year premium growth for the first quarter was particularly strong for our director's and officer's (D&O) and commercial property accounts, which showed increases of 39% and 42% respectively. The premium target for locally underwritten US business for 2009 is $450m, including premium written by First State.

Claims update

Our 2008 hurricane claims reserves remain unchanged from those provided at the time of announcing our 2008 results, as these continue to develop in line with expectations.

All our trading teams continue to monitor underwriting and claims trends that may arise from the current economic environment. Particular focus has been on monitoring and reacting to any increase in claims frequency and claims inflation. Our emphasis on cycle management and recession planning during 2008 has laid the groundwork to enable our teams to react rapidly to change in order to deliver consistent underwriting profitability throughout the economic cycle.

The most significant catastrophes during the first quarter of 2009 have been the Australian bushfires, Italian earthquake and European windstorms. None of these events are expected to give rise to material insured losses for the group. 

Investment performance

Investment income for the first quarter was an estimated loss of £2.7m, or an annualised loss of 0.6% net of fees.  Positive returns from our equity and hedge fund investments partially compensated for the modest increase in government bond yields which, together with continuing pressure on financial corporate spreads, resulted in mark-to-market losses in our bond portfolios.  

The economic backdrop continued to deteriorate over the quarter with all indicators pointing to a deep global recession. We are continuing to work with our managers to reduce the investment risk in our portfolios and to concentrate primarily on the safety and liquidity of our portfolios, even if such action is at the expense of higher potential returns.  

The asset breakdown below shows a reduction in investments in the lower investment grade securities and in financials that are not guaranteed by governments. Meanwhile exposure to financial institutions which are supported by governments has increased sharply. 

Investment Portfolio

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

Asset class	31 March 2009			31 December 2008
	£m	%		£m	%
Government	396	19.7%		429	21.5%
Government Agency	77	3.8%		58	2.9%
Regional and Supranational	59	3.0%		20	1.0%
Asset Backed	46	2.3%		56	2.8%
Commercial mortgage backed securities	26	1.3%		28	1.4%
MBS (Non-Agency)	13	0.6%		26	1.3%
MBS (Agency)	19	0.9%		12	0.6%
Corporate Bond (non Financial)	104	5.2%		115	5.8%
Corporate Bond (Financial - Govt supported *)	206	10.3%		106	5.3%
Corporate Bond (Financial - other)	311	15.5%		377	18.9%
Total bond portfolio	1,257	62.6%		1,227	61.5%
Fixed income pooled vehicles	191	9.5%		181	9.1%
Equities	16	0.8%		18	0.9%
Hedge Funds	90	4.5%		103	5.2%
Cash + Money Market + Overseas Deposits	453	22.6%		465	23.3%
Total	2,007	100.0%		1,994	100.0%

* These represent corporate bond issues that receive sovereign support. Depending on jurisdiction and / or institution involved this support may take the form of a direct guarantee or a guarantee from a state sponsored vehicle.

The breakdown of our bond portfolio was:

	31 March 2009	31 March 2009		31 December 2008	31 December 2008
	£m	%		£m	%
Government, Agency and Supranational	532	26.5%		508	25.5%
AAA	320	15.9%		246	12.3%
AA+ to AA-	110	5.5%		136	6.8%
A+ to A-	228	11.4%		269	13.5%
BBB+ to BBB-	57	2.8%		68	3.4%
Sub investment grade	10	0.5%		-	-
% of total portfolio	1,257	62.6%		1,227	61.5%

The weighted average duration of our overall portfolio was 9 months (31 December 2008: 9 months). The weighted average yield to maturity of our overall portfolio was 2.6% (31 December 2008: 3.4%).

Investment Return

Comparison of return by major asset class:

	31 March 2009	31 March 2009  annualised return		31 December 2008	31 December 2008  annual return
	£m	%		£m	%
Bond - $	(1.5)	(0.6%)		(5.3)	(0.7%)
Bond - Sterling	(3.2)	(1.5%)		17.5	1.9%
Equities	-	0.5%		(20.9)	(57.5%)
Hedge Funds	1.7	7.5%		(18.1)	(20.8%)
Cash	0.3	0.9%		1.0	1.33%
Overall return	(2.7)	(0.6)%		(25.8)	(1.5%)

Foreign exchange on non-monetary items

Within our annual results for 2008 we reported a foreign exchange gain on non-monetary items of £46.2m for the year. This resulted from a cumulative valuation difference between non-monetary balances (unearned premium reserve and deferred acquisition costs at historic exchange rates) and the monetary balances to which they correspond (cash, debtors and creditors at closing exchange rates) of £50m. 

If foreign exchange rates were to remain constant at December 2008 levels then this cumulative difference would unwind over a two year period from December 2008. Furthermore the majority of this difference would be expected to unwind in 2009. An estimate of the impact to the full year income statement for 2009 assuming zero FX volatility would be in the region of a £40m foreign exchange loss. The majority of this adjustment will be made in the first half of 2009.

Board changes

We are pleased to announce that Martin Bride has joined Beazley and was appointed to the board of Beazley plc on 5th May 2009 and the board of Beazley Group plc on 6th May 2009 as finance director. Martin joins us from Zurich Financial Services where he was CFO of the UK Life business. Prior to joining Zurich, he was CFO of Aviva France and his career includes a number of senior level finance and general management roles in insurance.

Padraic O'Connor has also been appointed as a non-executive director of Beazley plc. Padraic is currently chairman of the Irish Stock Exchange, chairman of Hewitt Associates in Ireland and a non-executive director of a number of companies including ACC Bank. 

ENDS

For further information, please contact:

Beazley Group plc

Andrew Horton

T: [phone]

Finsbury

Vanessa Neill / Andrew Holt

T: [phone]

 

END

 

 

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