Preliminary Results
Beazley Group PLC
26 February 2008
Beazley Announces Record Results
Beazley Group plc results for year ended 31st December 2007
London, 26 February 2008
• Profit before tax of £138.5m (2006: £86.8m)
• Profit before tax and foreign exchange on non monetary items increased
to £130.3m (2006: £96.2m)
• Return on equity of 28.0% (2006: 20.0%)
• Final dividend of 4.0p per share, plus a special dividend of 4.0p per share
Growth across the business
• Gross written premiums up 5% to £780.5m; net written premiums up 14%
to £652.2m
• US$175.2m of business written through US operations (2006: US$68.9m)
Healthy financial position
• Investment and cash balances up to £1,490.6m (2006 year end £1,167.8m)
• Investment income at £64.9m (2006: £48.3m)
• Prior year reserve releases of £64.1m (2006: £31.0m)
Year ended Year ended % increase
31 Dec 31 Dec
2007 2006
Gross written premiums (£m) 780.5 745.1 5
Net written premiums (£m) 652.2 574.3 14
Net earned premiums (£m) 617.2 509.6 21
Profit before tax (£m) 138.5 86.8 60
Comprises:
Profit before tax and foreign 130.3 96.2 35
exchange adjustments on non
monetary items (£m)
Foreign exchange on non monetary 8.2 (9.4) N/A
items (£m)
Earnings per share 28.1p 16.7p 68
Dividend per share - interim and 6.0p 4.8p 25
final
Special dividend per share 4.0p - -
Net assets per share 112.1p 89.8p 25
Beazley Group Chief Executive Andrew Beazley said:
'The company delivered excellent results across the board in 2007. Our Lloyd's
underwriters demonstrated strong risk analysis and selection skills and
delivered very good returns as rates in most of our lines of business began to
fall from historic highs. Our claims staff continued to win praise for their
service from clients and brokers - as well as industry awards.
'In the United States, our operations grew rapidly, more than doubling the
premiums written locally in that market. Our US-based underwriters are able to
access smaller scale and less volatile business than is available to our
underwriters at Lloyd's. This diversification of our business should stand us in
good stead as the property/casualty market as a whole continues to soften.'
ENDS
For further information, please contact:
Beazley Group plc
Andrew Beazley
T: +44 (0)20 7667 0623
Andrew Horton
T: +44 (0)20 7667 0623
Finsbury
Simon Moyse
Amanda Lee
T: +44 (0)20 7251 3801
CHAIRMAN'S STATEMENT
The group has had another tremendous year and we are delighted to announce
record profits of £138.5m.
Overall
The board is delighted to announce record profits before tax of £138.5m (2006:
£86.8m). We are confident that our controlled approach to risk taking leaves us
well placed to build on this result going forward.
Underwriting performance
We continued to grow the business during 2007. Gross premiums written increased
by 5% to £780.5m. This was achieved in part through increasing the share of the
premiums we write through the combined Lloyd's syndicates from 78% to 81% in
2007. The US business also increased its gross premiums contribution
significantly to $175.2m (2006: $68.9m).
The group's net premiums written rose by 14% to £652.2m in 2007, mainly as a
result of a change in the way the group buys reinsurance. In 2007, we increased
the group's risk appetite to reflect the stronger capital base by buying less
reinsurance. For example, in the specialty lines business reinsurance spend fell
from 26% of gross premium in 2006 to 17% in 2007.
Market conditions
On average, the rate charged for business we renewed fell by 4% in 2007 (2006:
increase of 6%). Rating levels generally still compare favourably to the early
2000's. The specialty lines business performed better than initially expected
with decreases in rates of only 5%. Our shorter tail property insurance
businesses enjoyed a reasonable start to the year but saw rates come under
pressure in the second half. Property reinsurance rates eased but not to the
same extent as the insurance business.
US business development
The US business continued to gather momentum during 2007. Premiums written by
US-based underwriters were $175.2m - more than two and a half times the $68.9m
written in 2006. The business was established in 2005, writing business through
our managing general agent (MGA) on behalf of both our syndicates at Lloyd's and
our domestic insurance company, Beazley Insurance Company Inc (BICI). This
platform enables us to access business that would not traditionally have come to
the Lloyd's market. To supplement the existing business, we acquired in February
2007 an MGA in Chicago called Sapphire Blue, which writes professional and
general liability insurance for long term care institutions.
During 2007 $64.3m was written directly to our Lloyd's syndicates and $110.9m
was generated by BICI, the admitted market insurance company. During the year
the US operations extended their product range from professional and management
liability insurance to include mid-sized commercial property.
In April 2007 we increased the capital of BICI by a further $45m, bringing the
total capital retained to $105m. In November A.M. Best upgraded the company's
financial strength rating from A- to A. This rating improvement should provide
further support for the development of the underwriting platform in the US.
Combined ratio
The group's combined ratio remained stable at 88%. The claims ratio fell to 50%
(2006: 53%). In 2007 we released £64.1m (2006: £31.0m) of the 2006 year end
claims reserves. These reductions have been from reserves in both catastrophe
exposed businesses and specialty lines business. The absence of major
catastrophes enabled us to release £30.7m from our property, reinsurance, and
marine accounts, while in specialty lines we were able to release £33.4m due to
the continuing positive development of claims experience. We are hopeful that
this positive claims development will continue in 2008.
We continue to invest in our US platform, which was one of the factors which
increased our expenses ratio by 3% to 38%. During 2007 US employee numbers rose
by 42 to 153.
Investment performance
Investment markets were particularly difficult in 2007 with the fallout from the
global credit crisis beginning in the summer followed by volatile equity markets
in the second half of the year. In spite of this instability, we were able to
record increased investment income of £64.9m (2006: £48.3m) -a return of 4.9%
(2006: 4.9%). We were impacted only marginally by the sub-prime mortgage bonds
mark down - holding around 1% of our investments in these assets - none of which
were collateralised debt obligations (CDO's), and all are AAA-rated. The
portfolio comprises mainly fixed income bonds and cash, with less than 10%
invested in other investments such as equities and hedge funds.
Capital
The group's capital position remains strong. In the financial review section of
this report, we describes the composition of the capital base - a mixture of
shareholders funds, long term debt and short term banking facilities. The last
of these, a syndicated £50m short term letter of credit facility, was recently
renewed. The capital is used to support Lloyd's underwriting, the US insurance
company, and to fund acquisitions of small insurance companies and MGA's which
fit strategically with the business.
In November 2007, following a review of the group's capital position, the board
authorised a rolling on-market share buyback programme to return excess capital
to shareholders. We announced that 5% of our shares would be bought back and
held as treasury shares within the group. At the end of 2007, £5.1m of shares
representing 0.9% of our share capital had been repurchased.
We were pleased that Standard & Poors (S&P) upgraded our enterprise risk
management (ERM) rating to 'strong'. This places us in the top 14% of insurers
and reinsurance companies worldwide. A strong enterprise risk management culture
throughout the organisation is a key asset to take us through the market cycle.
Dividend
The board propose a final dividend of 4.0p per share bringing the full year
dividend to 6.0p per share (2006: 4.8p). In addition, the board proposes a
special dividend of 4.0p per share. The final dividend and the special dividend
will be paid on 9 May 2008 to shareholders registered on 18 April 2008.
Management update
Since August 2007, Andrew Beazley has been undergoing medical treatment. This is
progressing well and has only reduced to a limited extent his day to day
involvement in the business. As and when required during this period, Nicholas
Furlonge, co-founder of Beazley, has taken on Andrew's responsibilities as Chief
Executive and Chairman of the Executive Committee. Johnny Rowell has taken over
from Andrew as chairman of the group's underwriting committee. This committee
looks at all underwriting related matters within the group. The specialty lines
division is undergoing a development of management structure that includes the
formation of a new division, the political and contingency group (PCG).
Conclusion
We generated record profits in 2007 - a testament to the skill and hard work of
our people. We continue to search out opportunities for growth and profit
through carefully targeted initiatives, particularly in relation to US
operations. We monitor developments closely in all our markets and will respond
to the market cycle in the same disciplined fashion as we have done in the past.
BUSINESS REVIEW
2007 has been another excellent year for the group. We have continued to grow
the business - searching out strategic openings, pursuing vigorously the most
profitable opportunities as well as building on long term client relationships.
Strategy
Our vision is to build a premium risk-taking business measured by results and
reputation. Underpinning this vision are the following four principles:
• We are a specialist insurance and reinsurance business focusing on
underwriting and claims handling
• The portfolio will comprise both large and small risks, with a
geographical spread, and a balance between short and long tail businesses
• Products will be distributed through brokers
• We will provide an excellent service to brokers
The enablers that will help us achieve this are:
• Access to business worldwide
Developing new ways of providing customers with access to insurance products
will help us grow the business profitably.
• Claims management
An exceptional claims management capability can be a source of competitive
advantage for the group. Consequently, we are making a significant investment in
this area.
• Informed underwriting decisions
The knowledge and expertise of underwriters is central to our ability to develop
the classes of business we write.
Access to business worldwide
The Lloyd's broker network provides us with access to large complex specialist
insurance risks from throughout the world and Lloyd's and London continue to be
the hub for this type of business. We have also established offices in a number
of overseas locations to access business that would not normally come to London.
US business
The US is by far the largest non-life insurance market in the world and has one
of the highest levels of penetration by brokers through whom we deal. The US
business is fully integrated with our London business and our underwriting is
managed on a product line basis. We regard our US operations as a natural
extension of the Lloyd's business - we target markets we know well. Having a
presence on the ground enables us to insure middle market and small scale risks
which we would not normally insure through London.
During 2007 the business grew with premiums increasing to $175.2m for the year
(2006: $68.9m). Of the US$175.2m, $110.9m (2006: $35.9m) was written through
BICI, with the remainder being written directly to our two syndicates.igh H
During 2007 we extended the branch network in the US, expanding both specialty
lines and property businesses. Our head office is in Farmington, Connecticut and
we have offices in 8 other US states.
Specialty lines, wrote $134.6m in 2007 (2006: $57.3m). Of this, $90.4m was
written on behalf of BICI and a further $44.2m for the Lloyd's syndicates. The
specialty lines team in the US targets small to mid-sized customers offering a
variety of professional indemnity insurance (the current biggest segment being
architects and engineers), and management liability insurances (principally
directors' and officers' liability and employment practices liability). In
February 2007, we acquired Sapphire Blue, a Chicago-based MGA, which writes
professional and general liability insurance for long term care institutions. We
knew the organisation well, having supported the agency's business for a number
of years. In 2007 we wrote $16.1m through Sapphire Blue.
The property group, which writes both commercial property insurance and
high-value homeowners business in the US, wrote premiums of US$39.3m in 2007
(2006: $10.3m). We write US commercial property business on both an admitted
basis through BICI, and on a surplus lines basis for the account of our Lloyd's
syndicates. The admitted market business, which underwrites mid-sized commercial
risks, was launched in February 2007 and is supported by our internally
developed Beazley Trade underwriting system and offers brokers and clients
service standards rarely matched in the domestic market. The high value
homeowners' business, based in Florida, continues to develop a reputation as a
high quality local insurer, writing business on a surplus lines basis. In 2007
it wrote premiums of $14.3m (2006: $10.3m).
Accessing markets worldwide
We continued to search out new geographical opportunities in 2007, writing
business for the first time through our new branch offices in Paris and
Singapore, complementing those offices already established in Hong Kong and the
US. The France and Singapore offices both operate on the same basis, sourcing
business locally on behalf of the Lloyd's syndicates. Building these branch
operations enables us to access business we would not normally see, diversifying
the portfolio geographically. In France we write professional indemnity
insurance, within our specialty lines team, mainly focusing on protection for
insurance brokers and agents. In Singapore, a team within the property group
writes specialist engineering risks and is managed through the UK.
Claims management
Unlocking the value in claims
We continued investing in the claims service during 2007. The results to date
have been positive, delivering improved underwriting and pricing capabilities,
high client retention rates, lower cost of the claims, and improved confidence
in results and reserving. Clients - both insureds and brokers - along with
competitors recognise the benefits of this investment. In a poll of over 3,000
risk managers, insurers, reinsurers and brokers conducted by Reactions magazine,
Beazley was awarded Best Insurance Company for Claims Handling. Furthermore,
the specialty lines claims team won Insurance Day's Claims Team of the Year
award where the team was described by Insurance Day as having 'demonstrated an
enviable track record in handling complex claims and a clear structure
highlighting the relationship between underwriting and claims professionals'.
We have chosen to differentiate our approach to claims service from competitors.
We do not have a separate claims department -claims managers and underwriters
are integrated by product line. We pride ourselves on high quality,
appropriately sized teams, with specialist skills. For example, in specialty
lines many of our claims managers are sourced from partner and senior associate
roles in top law firms. Most have over 10 years' experience and expertise in
specialist areas, such as the insurance of architects and engineers,
professional and general liability and employment practices. In the property
division, claims managers each have at least 14 years' experience. In the
marine division, we employ a chief engineer of ships to evaluate the claims,
finding alternative solutions to clients' exposures and our own.
We adopt a team based approach to claims, particularly in specialty lines where
third party claims can generate significant complexity, and have developed
analytical tools to support our efforts. We have also refined our approach in
the selection of counsel and adjusters and are working closely with them to
improve their practices. Last year, we decided to set up claims operations in
the US to manage US professional and management liability claims emanating out
of both Lloyd's business and BICI. This has enabled us to tap into new talent
pools for claims managers, to develop closer relationships with clients, and to
achieve better results on claims by supporting clients in person at mediations
and arbitrations. As a consequence, we have continued to grow these operations.
We remain confident that the energy invested in this important area will
continue to benefit both clients and shareholders. We believe that there is
potential to add more value in this core area.
Informed underwriting decisions
Rating Environment
Cumulative rate changes since 2001
2001 2002 2003 2004 2005 2006 2007 2008
% % % % % % % %
Specialty 100 134 160 166 167 166 158 151
lines
Property 100 127 132 126 124 139 137 118
Reinsurance 100 142 148 148 148 190 199 180
Marine 100 118 128 128 131 141 132 123
Total 100 131 145 146 146 155 149 138
Overall the rates charged for business we renewed fell by 4% in 2007 (2006: an
increase of 6%). This reduction should be viewed in the context of the
historically high rates seen in the market at the end of 2006, as demonstrated
by the chart above. Since 2001 rates across all our lines of business have
increased by 49%.
In the property division, rates reduced by 2%. The reductions are a reflection
of a relatively benign claims environment, particularly on the catastrophe
exposed parts of this account. Similar rating pressure was also experienced by
our reinsurance team in the later stages of 2007. Despite this, overall, this
business saw rates increase by 5%. In 2006 the catastrophe parts of these
insurance accounts saw significant rate increases as a result of the high level
of claims following the devastating hurricane season in 2005.
Similarly the marine business has faced increasing competition across all lines,
particularly in marine cargo and energy, where rates have fallen by 7% and 9%
respectively. These are insurance risks we know well, and their pricing reflects
this knowledge.
The largest line of business, specialty lines saw a 5% rate reduction. The
overall specialty lines account has been trading at historically high levels for
a number of years. Premiums achieved in 2007 were 58% higher than that for
comparable risks in 2001. We are confident of the level of profitability in
specialty lines supported by the pricing methods employed, risk management
approaches adopted, and claims handling techniques applied.
Growth and balance
In 2007 gross premiums written increased by 5% to £780.5m. This is only partly
explained by the increase in ownership of the managed premium capacity at
Lloyd's, where we now own 81% (2006: 78%). The main reason for the increase is
the growth of our premiums written through our operations in the US.
The balance between our locally underwritten US business and our Lloyd's
business (of which US risks are also a major component) is a key part of our
strategy to manage the insurance cycle. By marketing insurance products through
these separate, but complementary, distribution channels we can achieve a less
volatile business mix than a 'Lloyd's only' strategy.
Outlook
2008 will be a more challenging year for the insurance industry and will give us
the opportunity to distinguish ourselves from the competition. We have built a
platform that is differentiated from peers in the products we offer (we are the
largest insurer of US professional liability business at Lloyd's); the way we
access business through our US operations; and our approach to claims
management.
Over the past two years, strong market conditions and an absence of significant
catastrophe losses have contributed to excellent results across the sector. The
area of most competition is the large catastrophe-exposed syndicated property
business where there are few barriers to entry. Although our income in this area
is expected to fall in 2008, these lines will still form a significant part of
our portfolio and represent one of our core competencies. We expect this decline
to be counterbalanced by the growth of the US operations. We continue to
constantly monitor the cycle across lines of business as 'eternal vigilance' is
the key to success and market conditions may alter rapidly.
The US strategy is to source business that is not subject to the same
competitive pressures as the Lloyd's market business. The US operations are now
well established and we expect this business to continue to grow substantially
in 2008. We have set a target for premiums underwritten locally in the US of
$250m.
Our people are closely aligned to the interests of our shareholders. Management
and staff own 15.6 million shares (4% of the company), and underwrite £10m of
capacity through our Lloyd's syndicate.
Managing the insurance cycle remains our key objective, and with more than 21
years' experience of market cycles, the challenges are not unfamiliar to us. We
look forward to 2008 based on our current market position, strategic focus and
experienced team of underwriters, claims and support staff. No one likes to see
a market soften, but we expect the cycle to create opportunities for
established, well diversified, underwriting focused businesses like ours to
create substantial long term profits.
FINANCIAL REVIEW
2007 2006 Movement
£m £m %
Gross premiums written 780.5 745.1 5
Net premiums written 652.2 574.3 14
Net earned premiums 617.2 509.6 21
Net investment income 64.9 48.3 34
Other income 10.1 7.1 42
Revenue 692.2 565.0 23
Net insurance claims 307.4 270.7 14
Acquisition and administrative 237.4 179.6 32
expenses
Foreign exchange (gain)/ loss (3.1) 22.3 -
Expenses 541.7 472.6 15
Finance costs 12.0 5.6 114
Profit before tax 138.5 86.8 60
Claims ratio 50% 53% -
Expense ratio 38% 35% -
Combined ratio 88% 88% -
Rate (reduction) / increase (4%) 6% -
Investment return 4.9% 4.9% -
The group has reported record profits of £138.5m, a 60% increase on 2006. This
is achieved despite increasing competition in underwriting markets and
volatility in investment returns. Highlights include:
• Gross premiums increased by 5%
• Reinsurance purchased by the group reduced from 22.9% of premiums
written to 16.4% in 2007
• Claims releases of £64.1m (2006: £31.0m), of which £15.6m related to
releases from the catastrophe exposed accounts from the 2006
underwriting year
• Investment return of 4.9%, generating income of £64.9m
Gross premiums written
During 2007, gross premiums written rose by 5% to £780.5m. This growth was
achieved despite the 4% devaluation of the US dollar in 2007 and 4% reduction in
insurance renewal rates. Around 70% of our business is written in US dollars -
hence the importance of this exchange rate. The main reasons for the increase in
premiums were the growth in the US operations - which wrote $175.2m of premiums
in 2007 (2006: $68.9m), together with the increase in the group's ownership of
the combined syndicates which rose to 81% in 2007 from 78% in 2006.
As highlighted in the business review section, the business is well diversified
- both by class of business and geographical location. As well as protecting us
from exceptional events, it also enables us to hold lower levels of capital to
support the business.
We continue to write 51% (2006: 48%) of gross premiums through our largest team
- specialty lines.
The charts below show the composition of our portfolio in 2007, across types of
insurance, settlement terms, classes of business and geographical regions.
Reinsurance
Reinsurance is purchased for a number of reasons:
• To minimise the impact of catastrophes such as hurricanes;
• To provide lead line capabilities to underwriters; and
• As a way of managing capital
In 2007, reinsurance costs decreased by 24.9% to £128.3m. As a percentage of the
gross premiums written, it fell from 22.9% to 16.4% during the year. This was
largely the result of two decisions the group made around it's appetite to
retain risks. Firstly, in the specialty lines business we rebalanced the
proportional treaty arrangements by taking on a larger share of the risks.
Secondly, in the treaty reinsurance business we re-underwrote the account in
2007 to be less reliant on the third party reinsurance market.
Combined ratio
The group's combined ratio remained at 88% in 2007. Within this the claims ratio
reduced from 53% to 50%, while the expenses ratio increased from 35% to 38% in
2007.
Claims
The claims ratio decreased from 53% to 50% in 2007. This arose due to two
principal factors:
• Releases of claims reserves held in the short tail accounts, particularly
against catastrophe type risks, following benign claims activity mainly from
the 2006 underwriting year; and
• Releases from our specialty lines account reduced the claims ratio by 5.4%
(2006: 3.5%).
As the business has matured over the past five years, we have gradually been
able to increase the levels of reserve releases across all classes of business.
We found 2007 to be a quiet year in terms of claims activity. There were a small
number of events which caused modest claims in the early to mid-part of 2007.
Windstorm Kyrill caused losses across a wide area in Europe in January. The UK
floods in the summer, firstly in Yorkshire and parts of Northern England and
then the west of England, caused losses within the UK homeowners' insurance
account. All these events were contained within the reserves established for
anticipated losses.
Claims arising from sub-prime exposures
Against the backdrop of increased market commentary about sub-prime mortgages
and related issues, we set up an internal working party during 2007 tasked with
monitoring the risks to and opportunities for Beazley. As was demonstrated in
the late 1990s, Beazley has limited appetite for professional liability risks
within the financial institution sector. This has remained the case and whilst
the number of sub-prime related cases (as reported recently by Advisen) is
approaching 200, the number of claims to Beazley arising out of those cases
remains in single figures. As such, we currently expect that our exposure will
remain within our reserves and we don't anticipate a change to our reserving
philosophy. Our underwriters and claims managers are skilled at measuring,
predicting, diversifying and mitigating the risks to Beazley.
2006 catastrophe reserves
We were able to release £15.6m in 2007 in respect of claims reserves held at the
end of 2006 for potential catastrophes. We were unable to release these reserves
at the end of 2006 because at that stage we were still on risk for a number of
policies we covered. These releases were in the reinsurance (£5.2m), property
(£5.3m), and marine energy (£5.1m) accounts.
Total releases from the short tail accounts, where claims are settled within two
years of the policy period expiring, totalled £30.7m. The table in note 7 sets
out in which accounts these claims releases originated, but as you will notice,
all lines of business reported favourable adjustments. The reserving approach in
these accounts remains consistent with prior years. We take a conservative view
of the unexpired policies within portfolios, only making releases once a
substantial part of the account has expired.
Specialty lines claims reserve releases
The specialty lines claims reserves continued to develop well in 2007 enabling
us to release a further £33.4m during the year (2006: £18.0m). We have
consistently adopted a cautious approach towards reserving in this business. The
nature of these claims is that for the majority of classes of business the
corridor of uncertainty surrounding potential losses is wide in the first three
years of development following the premium being written. As we gain more
certainty in years four and five, we have a better view as to where claims are
likely to settle and we can adjust reserves accordingly.
Across all underwriting years the ultimate claims reserves we were holding have
reduced during 2007, enabling these releases. This can be seen in the loss
development tables within the notes to the accounts. These show loss ratios at
various points in time - after 1 year, after 2 years, after 3 years, at the end
of 2006, and current. These tables also give the size of release made by
underwriting year. The majority of the releases come from the earlier years -
£25.5m relating to the 2004 underwriting year and prior.
Expenses
The expenses ratio has been restated in 2007 (and for 2006 comparatives) so that
it includes all costs. We believe that by including all costs within the ratio,
this is a fairer representation.
The expense ratio has increased by 3% to 38% in 2007. This was largely due to
the growth in the US operation and increased profit related variable
compensation. In the US we have increased the number of people employed from 111
to 153. As the business is in a start-up phase where costs are currently growing
faster than premiums being written, this has an adverse impact on our expenses
ratio. The first few years of building the US operation have involved a number
of one off costs such as information technology (IT) development on underwriting
systems and facilities costs in establishing new offices.
It is likely that certain of these costs, such as IT, will continue into 2008 -
as we search out more efficient longer term IT platforms to support the
business. It was always known that building offices on the ground in the US
would be a more expensive approach than running a pure Lloyd's operation. The
reward for this spend will come from the quality and type of business we are
able to write (i.e. business that would not come to Lloyd's). These benefits
won't be seen initially, however, but rather are investments for the future.
Employee numbers
In 2007 we continued to build the business through growth in talent,
particularly in the US. By the end of 2007 we had 153 people in the US (2006:
111), of which 53 were underwriters and a further 18 were claims managers. In
the UK the headcount level stabilised in line with the premiums being written.
The largest growth areas were in specialty lines in the US, and support staff in
the US - both in response to the increased premiums and volumes being written.
The claims team within specialty lines also increased from 25 to 35 people in
line with our service strategy around claims highlighted in the business review
section in this report.
Employee numbers 2007 2006
Specialty lines 205 172
Property 71 55
Reinsurance 10 9
Marine 25 28
Finance (including actuarial, compliance and 63 55
internal audit)
IT 52 43
Ceded reinsurance 13 15
Talent management 12 11
General management and other support 39 31
Total 490 419
UK 326 298
US 153 111
Other (Hong Kong, Singapore, and Paris) 11 10
490 419
Investment performance
2007 was a year of exceptional volatility in financial markets, marked by a
collapse of confidence in credit markets during the second half of the year.
Despite this investment income grew to £64.9m (2006: £48.3m), providing a return
of 4.9% (2006: 4.9%).
During the first half of 2007, strong economic growth globally, together with
rising commodity prices, continued to provide upward pressure on interest rates
as inflation concerns mounted. However, the effect of monetary tightening and
the escalating crisis stemming from increasing defaults in the sub-prime sector
in the US caused a collapse in confidence in financial assets during the second
half, as multi-billion dollar write-downs were announced by leading banks and
investment houses. This particularly exhibited itself in the sharp increase in
money market spreads over official rates as money market funding dried up.
Central banks reacted to the increasing strains in the financial system by
reducing rates and injecting funds, but this did not prevent credit spreads,
even of high quality assets, from widening sharply in the second half. However,
for the group, the high quality of our fixed income portfolios largely insulated
our returns. At 31 December 2007 the weighted average duration of our bond and
cash portfolio was one year.
The group's investments in alternative assets and equities added to the
investment returns. Hedge funds achieved a return of 7.5%. Meanwhile, the
group's equity investments achieved a return of 7.7%.
The US fixed income portfolios had a limited exposure to US sub-prime assets
throughout 2007. These are all AAA-rated asset backed securities and comprised
around 1% of group assets as of 31 December 2007. The group does not permit
investment in collateralised debt obligations (CDOs). All these securities have
been consistently marked-to-market throughout the year.
We remain comfortable with the overall position of the group's investment
portfolios, and anticipate that during 2008 some of the spread widening that has
dampened fixed income returns in 2007 may reverse as the current credit concerns
are worked through. We continue to look for opportunities to enhance returns
while limiting volatility of the overall portfolio, both through investment in
diverse asset classes and by utilising managers with different skill sets. To
this end we have appointed a new manager, BlackRock Investment Management, to
manage a portion of the sterling fixed income assets from January 2008.
For regulatory and legal reasons, certain trust funds and deposits are required
to be managed centrally by Lloyd's on behalf of the syndicates. These funds are
invested in high-grade, fixed income securities and their performance is
detailed separately in the table below.
The group maintains funds in cash for various operational purposes. The majority
of these cash balances are invested in money market funds.
The table below highlights the returns received by currency and by investment
type.
2007 2007 2006 2006
Average Annualised Average Annualised
£m return £m return
% %
Fixed interest securities
UK£ 550.4 4.7 383.0 4.5
US $ 523.3 5.0 425.7 4.4
Lloyd's managed and other 67.2 3.7 56.6 3.9
Hedge funds 60.7 7.5 45.3 11.1
Equities 47.7 7.7 22.5 11.9
Cash and money market funds 79.9 2.8 57.5 3.7
TOTAL 1,329.2 4.9 990.6 4.9
Investment income has also increased as a result of larger cash and investment
balances being managed by the group. The group's cash and investment balance
grew during 2007 mainly due to additional underwriting of syndicate 2623 in 2007
and a benign 2 years for major claims.
Foreign exchange differences arising on non-monetary items
In 2007 the impact of the foreign exchange adjustment on non-monetary items is a
credit to our income statement of £8.2m (2006: a charge of £9.4m). Non-monetary
items include unearned premium reserves, reinsurers' share of unearned premium
reserves, and deferred acquisition costs. Under International Financial
Reporting Standards (IFRS), these balances are carried at historic exchange
rates, while monetary items are translated at closing rates. This imbalance
creates volatility in our accounts which cannot be hedged as the mismatch is not
monetary in nature.
In 2007, the historic US dollar rates applicable to the non-monetary balances
are weaker relative to sterling than the closing dollar exchange rate applied.
This has a positive effect on net assets as the non-monetary net liability is
valued lower than when using the closing rate.
BALANCE SHEET MANAGEMENT
Summary balance sheet 2007 2006 Movement
£m £m %
Intangible assets 28.7 21.9 31
Investments and cash 1,490.6 1,167.8 28
Insurance receivables 199.9 244.0 (18)
Reinsurance assets 353.3 353.1 -
Other assets 108.2 97.4 11
Total assets 2,180.7 1,884.2 16
Insurance liabilities 1,471.9 1,225.6 20
Borrowings 156.7 154.9 1
Other liabilities 153.5 184.2 (17)
Total liabilities 1,782.1 1,564.7 14
Net assets 398.6 319.5 25
Net assets per share 112.1p 89.8p 25
Intangible assets
Intangible assets consist of goodwill on acquisitions (£15.5m), purchased
capacity in the combined syndicate (£4.4m), licences (£4.6m) and capitalised
expenditure on IT projects (£8.0m). The total balance on intangibles increased
by £6.8m in 2007 to £28.7m as a result of both the acquisition of Sapphire Blue,
a US based MGA that writes professional and general liability insurance and the
capitalisation of additional IT expenditure in 2007. The IT capitalisation
relates mainly to building the large commercial property underwriting platform
in the US, ongoing development of the specialty lines underwriting platform in
the US, and development of systems to better manage claims processes. Our
accounting policy is to depreciate these items over their useful economic life
(3 years).
Investments and cash
The group's portfolio remains mainly invested in high quality, short duration
bonds. We invest 10.6% (2006: 11.8%) in alternative investments and equities to
enhance returns and further diversify risks associated with investing solely in
bonds.
The group's strategy is to use a number of specialists to manage the portfolios
in order to diversify manager risk and to give us access to different investment
styles and skill sets.
Manager Investment Type 2007 2007
£m % of
total
AllianceBernstein US $, £, Euro €, CAD $ 917.5 61.5
Fixed income, equity
Conning Asset Management US fixed income 179.9 12.0
Wellington Management US fixed income 106.8 7.2
Union Bancaire Privee Alternative investments 157.9 10.6
including hedge funds
Lloyd's Corporation Fixed income 73.0 4.9
Scottish Widows Money market funds 20.3 1.4
Investment Partnership
AIM Global Money market funds 7.1 0.5
Bank of America Money market funds 16.2 1.1
Other cash balances Current account and 11.9 0.8
deposits
TOTAL 1,490.6
The performance of the managers and the structure of the investment portfolio is
monitored by the chief investment officer who reports to the investment
committee, which holds delegated responsibility from the board for all
investment matters.
Insurance receivables
Insurance receivables represent broker balances receivable in respect of
premiums we have written. During 2007, broker balances decreased by 15% to
£199.9m. We continue to outsource the collection of our premium broker balances
to JMD Specialist Insurance Services Limited, which operates within the Lloyd's
market as specialist credit controllers.
Reinsurance assets
Reinsurance assets represent recoveries from reinsurers in respect of incurred
claims (£280.4m), and the unearned premiums reserve on reinsurance (£72.9m).
Of the recoveries from our reinsurers, £89.1m is in respect of claims paid or
reported to us, and a further £191.3m is an actuarial estimate of the recoveries
on claims not yet reported. These assets are managed through:
• Minimising risk through selection of reinsurers who meet strict financial
criteria (e.g. minimum net assets, minimum 'A' rating by S&P when initially
selected). These criteria vary by type of business (short vs. medium tail).
The chart below shows the profile (based on S&P rating) of these assets at
the end of 2006;
• Timely calculation and issuance of reinsurance collection notes from our
ceded reinsurance team; and
• Regular monitoring of outstanding debtor position by our reinsurance
security committee.
We continue to provide against impairment of reinsurance recoveries, and at the
end of 2007 we had provided £5.7m (2006: £4.8m) in respect of reinsurance
recoveries.
Other assets
The largest items included in the balance are:
• Deferred acquisition costs (£82.0m)
• Deferred tax assets, either against UK or US taxes paid (£4.5m); and
• Profit commissions receivable from syndicate 623 (£7.6m);
Insurance liabilities
Insurance liabilities of £1,471.9m consist of two main elements; unearned
premiums reserve ('UPR'), and gross insurance claims.
• Our unearned premiums reserve (UPR) has increased by 7% in 2007 to
£384.3m, mainly due to increased premiums written. The bulk of the UPR
relates to the current year. Current indicators are that this is profitable
and will earn through to the income statement in 2008.
• Gross insurance claims are made up of claims which have been notified to
us but not yet paid and an estimate of incurred but not yet reported claims
(IBNR). These are estimated by both the underwriter and the syndicate
actuary through the quarterly peer review process. Gross insurance claims
increased by 26% in 2007 to £1,087.6m mainly due to the increase in business
written.
Borrowings
The group utilises two long term debt facilities:
• In 2006 we raised £150m of lower tier 2 unsecured fixed rate debt
that is payable in 2026 and callable in 2016. The initial interest rate payable
is 7.25%; and
• An US$18m subordinated debt facility raised in 2004. This loan is
also unsecured and interest is payable at the US interbank offered rate (LIBOR)
plus 3.65%. These subordinated notes are due in 2034 and callable in 2009.
At the time of the £150m bond issue we entered into a derivative transaction,
whereby we matched our investment and currency risk by swapping the sterling
fixed rate loan into the equivalent of:
• £108m of floating rate sterling loans; and
• US$80m of floating rate US dollar loans.
These items have been accounted for using hedge accounting for both the floating
rate and currency elements of the transaction.
In addition to these borrowings we operate a £50m syndicated short-term banking
facility, managed through Lloyds TSB. The facility was successfully renegotiated
for two years in November 2007.
Currency profit hedging
We minimise currency exposure to the US dollar, which represents the group's
largest currency risk, by estimating US dollar profits each year and selling a
proportion each month. By the end of each year we aim for US dollar exposure to
be minimal. At the end of 2007 we had £67.8m of US dollar net assets, which
mainly relates to our investment in the US. In 2007, the group sold US$332m at
an average exchange rate of 2.00 (2006: 1.88). We also sell year-end unhedged
profits for the second largest currency exposure, Euros, once a year.
CAPITAL POSITION
The group has several requirements for capital:
1. To support underwriting at Lloyd's through syndicate 2623. This is based
on the group's individual capital assessment. This may be provided in the form
of either the group's cash and investments or debt facilities;
2. To support underwriting in Beazley Insurance Company, Inc. in the US;
and
3. To make small acquisitions, such as the Sapphire Blue acquisition in
2007, of insurance companies or MGA's whose strategic goals are aligned with our
own.
Our funding comes from a variety of sources:
1. £398.6 comes from shareholders funds (i.e. net assets). Of this balance,
£113.3m is unavailable to the group because it relates to intangible assets,
fixed assets or undistributable syndicate profits.
2. £150m was raised in 2006 through a tier 2 subordinated debt issue;
3. An $18m subordinated long term debt with a maturity in 2034; and
4. An undrawn banking facility of £50m provided by a syndicate of banks led
by Lloyds TSB.
In November 2007 we announced a rolling on-market share buyback programme to
repurchase up to 5% of the company's issued share capital, representing
approximately £30m. By the end of 2007, £5.1m (representing 0.9% of the
company's shares) had been repurchased. The special dividend of 4.0p per share
will distribute an additional £14.5m.
2007 2006
£m £m
Sources of funds
Shareholders funds 398.6 319.5
Tier 2 subordinated debt 150.0 150.0
Long term subordinated debt 9.0 9.2
(US$18m)
557.6 478.7
Uses of funds
Lloyd's underwriting 306.2 292.0
Capital for US insurance 55.5 30.6
company
361.7 322.6
Surplus 195.9 156.1
Unavailable surplus (113.3) (81.0)
Available surplus 82.6 75.1
Individual capital assessment
The group is required to produce an individual capital assessment (ICA) which
sets out the amount of capital that is required to reflect the risks contained
within the business. Lloyd's reviews this assessment to ensure that ICAs are
consistent across the market.
In order to determine the ICA, we made significant investment in both models and
process:
• We use sophisticated mathematical models that reflect the key risks
in the business allowing for probability of occurrence, impact if they do occur,
and interaction between risk types. A key focus of these models is to
understand the risk posed to individual teams, and to the business as a whole,
of a possible deterioration in the underwriting cycle; and
• The ICA process is embedded so that the teams can see the direct and
objective link between underwriting decisions and the capital allocated to that
team. This gives a consistent and comprehensive picture of the risk reward
profile of the business and allows teams to focus on strategies that improve
return on capital.
The ICA has increased from £292m to £306m which reflects changes in the amount
and mix of business in the plan, the impact of falling rates, and the positive
development of claims reserves from prior years.
CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED 31 DECEMBER 2007
Notes 2007 2006
£m £m
Gross premiums written 780.5 745.1
Written premiums ceded to reinsurers (128.3) (170.8)
Net premiums written 652.2 574.3
Change in gross provision for unearned (24.7) (84.9)
premiums
Reinsurer's share of change in the (10.3) 20.2
provision for unearned premiums
Change in net provision for unearned (35.0) (64.7)
premiums
Net earned premiums 2 617.2 509.6
Net investment income 3 64.9 48.3
Other income 4 10.1 7.1
75.0 55.4
Revenue 692.2 565.0
Insurance claims 338.6 357.0
Insurance claims recoverable from (31.2) (86.3)
reinsurers
Net insurance claims 2 307.4 270.7
Expenses for the acquisition of 179.2 133.8
insurance contracts
Administrative expenses 58.2 45.8
Foreign exchange (gain)/ loss (3.1) 22.3
Operating expenses 234.3 201.9
Expenses 2 541.7 472.6
Results of operating activities 2 150.5 92.4
Finance costs (12.0) (5.6)
Profit before tax 138.5 86.8
Comprises:
Profit before tax and foreign exchange 130.3 96.2
adjustments on non-monetary items
Foreign exchange on non-monetary items 8.2 (9.4)
Income tax expense (38.1) (26.9)
Profit after tax 100.4 59.9
Earnings per share (pence per share):
Basic 5 28.1 16.7
Diluted 5 27.4 16.6
BALANCE SHEET
AS AT 31 DECEMBER 2007
2007 2006
Group Company Group Company
£m £m £m £m
Assets
Intangible assets 28.7 - 21.9 -
Plant and equipment 7.2 - 7.0 -
Investment in - 97.9 - 65.1
subsidiaries
Investment in associates 1.3 - 1.3 -
Deferred acquisition 82.0 - 78.9 -
costs
Deferred income tax 4.5 - 3.5 -
Financial investments 1,132.3 341.8 958.4 340.0
Derivative financial 1.2 1.2 - -
instrument
Insurance receivables 199.9 - 236.1 -
Reinsurance assets 353.3 - 353.1 -
Current income tax - 3.0 - 0.7
Other receivables 12.0 105.6 14.6 25.4
Cash and cash 358.3 20.9 209.4 29.8
equivalents
Total assets 2,180.7 570.4 1,884.2 461.0
Equity
Share capital 18.4 18.4 18.1 18.1
Reserves 223.1 224.1 225.8 230.9
Retained earnings 157.1 129.3 75.6 14.9
Total equity 398.6 371.8 319.5 263.9
Liabilities
Insurance liabilities 1,471.9 - 1,225.6 -
Borrowings 156.7 158.8 154.9 157.0
Derivative financial - - 2.4 2.4
instruments
Other payables 106.6 39.8 152.7 37.7
Retirement benefit 0.9 - 1.9 -
obligations
Deferred income tax 34.0 - 11.6 -
Current income tax 12.0 - 15.6 -
liabilities
Total liabilities 1,782.1 198.6 1,564.7 197.1
Total equity and 2,180.7 570.4 1,884.2 461.0
liabilities
STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 2007
Group Share Reserves Retained Total
capital earnings
£m £m £m £m
Balance at 1 January 2006 18.0 232.1 30.3 280.4
Retained profits for the - - 59.9 59.9
year
Change in net investment - (0.6) - (0.6)
hedge
Foreign exchange translation - (2.8) - (2.8)
differences
Dividends paid - - (14.6) (14.6)
Issue of shares 0.1 0.3 - 0.4
Equity settled share based - 0.8 - 0.8
payments
Acquisition of own shares in - (4.0) - (4.0)
trust
Balance at 31 December 2006 18.1 225.8 75.6 319.5
Retained profits for the - - 100.4 100.4
year
Change in net investment - - - -
hedge
Foreign exchange translation - 0.1 - 0.1
differences
Dividends paid - - (18.6) (18.6)
Issue of shares 0.3 4.0 - 4.3
Equity settled share based - 3.4 (0.3) 3.1
payments
Acquisition of own shares in - (5.4) - (5.4)
trust
Purchase of treasury shares - (5.1) - (5.1)
Transfer of shares to - 0.3 - 0.3
employees
Balance at 31 December 2007 18.4 223.1 157.1 398.6
Company Share Reserves Retained Total
capital earnings
£m £m £m £m
Balance at 1 January 2006 18.0 229.4 16.1 263.5
Retained profits for the - - 13.4 13.4
year
Foreign exchange translation - 1.3 - 1.3
differences
Dividends paid - - (14.6) (14.6)
Issue of shares 0.1 0.2 - 0.3
Balance at 31 December 2006 18.1 230.9 14.9 263.9
Retained profits for the - - 131.9 131.9
year
Dividends paid - - (18.6) (18.6)
Issue of shares 0.3 4.0 - 4.3
Equity settled share based - 5.0 1.1 6.1
payments
Purchase of treasury shares - (5.1) - (5.1)
Acquisition of own shares in - (11.0) - (11.0)
trust
Transfer of shares to - 0.3 - 0.3
employees
Balance at 31 December 2007 18.4 224.1 129.3 371.8
CASH FLOW STATEMENT
FOR THE YEAR ENDED 31 DECEMBER 2007
2007 2006
Group Company Group Company
£m £m £m £m
Cash flow from operating
activities
Profit before tax 138.5 132.3 86.8 14.4
Adjustments for non-cash items
Amortisation of intangibles 2.4 - 1.4 -
Equity settled share based 3.1 6.2 0.8 -
compensation
Foreign exchange translation of (1.2) - (4.6) -
foreign subsidiary
Net fair value losses/(gains) (14.3) (4.6) (8.8) 0.8
on financial assets
Depreciation of plant & 1.6 - 1.2 -
equipment
Transfer of own shares in trust - (5.6)
Transfer of shares to employees 0.3 0.3
Changes in operating assets and
liabilities
Increase in insurance 246.4 - 129.2 -
liabilities
Decrease/(increase) in 36.2 - (85.1) -
insurance receivables
Decrease/(increase) in other 2.4 (80.2) 13.9 22.9
receivables
Increase in deferred (3.1) - (26.2) -
acquisition costs
Decrease/(increase) in (0.2) - 49.2 -
reinsurance assets
Increase in other payables (49.2) 2.0 37.6 6.5
Income tax paid (18.7) (2.7) (11.5) (3.1)
Contribution to pension fund (1.0) - (1.0) -
Acquisition of own shares in (5.4) (5.4) (4.0) -
trust
Net cash from operating 337.8 42.3 178.9 41.5
activities
Cash flow from investing
activities
Purchase of plant and equipment (1.8) - (5.7) -
Purchase of syndicate capacity - - (0.2) -
Acquisition of subsidiary (net - - (2.2) -
of cash acquired)
Purchase of goodwill (5.7) - - -
Purchase of investments (2,522.5) (411.8) (2,125.1) (412.4)
Expenditure on software (1.7) - (3.1) -
development
Proceeds from sale of 2,363.0 414.5 1,947.2 293.5
investments
Capital injection in subsidiary - (32.8) - (33.4)
Net cash used in investing (168.7) (30.1) (189.1) (152.3)
activities
Cash flow from financing
activities
Proceeds from issue of shares 4.4 4.4 0.4 0.4
Purchase of treasury shares (5.1) (5.1) - -
Repayment of syndicated loan - (1.8) (18.6) -
Proceeds from Tier 2 - - 148.1 148.1
subordinated debt
Dividends paid (18.6) (18.6) (14.6) (14.6)
Net cash used in financing (19.3) (21.1) 115.3 133.9
activities
Net increase in cash and cash 149.8 (8.9) 105.1 23.1
equivalents
Cash and cash equivalents at 209.4 29.8 112.6 6.7
beginning of year
Effect of exchange rate changes (0.9) - (8.3) -
on cash and cash equivalents
Cash and cash equivalents at 358.3 20.9 209.4 29.8
end of year
NOTES
1. Statement of accounting policies
Beazley Group plc is a group domiciled in England and Wales. The consolidated
financial statements of the group for the year ended 31 December 2007 comprise
the parent company and its subsidiaries and the group's interest in associates.
The consolidated financial statements of the group have been prepared and
approved by the directors in accordance with IFRSs as adopted by the EU
('Adopted IFRSs') that are effective or available for early adoption at 31
December 2007.
The group has adopted IFRS 8 'Operating Segments' prior to its required
application date of 1 January 2009. The adoption of IFRS 8 has impacted the type
and amount of disclosures made, but had no impact on the reported profits or
financial position of the group or the parent company. In accordance with the
transitional requirements of the standards, the group and the parent company
have provided full comparative information.
IFRIC 11 'Group and Treasury Share Transactions' has been early adopted. This
did not have an impact on the group's current treatment of recording share
incentives awarded to employees as equity settled share based payment
transactions of the parent company.
The following new standard and interpretation released by the International
Accounting Standards Board (IASB) have not been early adopted but are expected
to be of relevance to future financial years. Neither of these are expected to
have any significant impact on the future consolidated financial statements of
the group:
• IAS 23 (amended) 'Borrowing costs'
• IFRIC 14 'The Limit on a Defined Benefit Asset, Minimum Funding
Requirements and their Interaction'
Apart from the new accounting policies referred to above, the accounting
policies applied by the group and parent company are the same as those applied
in the consolidated financial statements for the year ended 31 December 2006.
These accounting policies are set out in the group's 2006 annual report.
2 Segmental analysis
Segment information is presented in respect of reportable segments. This is
based on the group's management and internal reporting structures and represents
the level at which financial information is reported to the Board, being the
chief operating decision maker as defined in IFRS 8. The operating segments are
based upon the different types of insurance risk underwritten by the group.
Segment results include items directly attributable to a segment as well as
those that can be allocated on a reasonable basis.
Foreign exchange differences on non-monetary items have been left unallocated.
This has been separately disclosed as it provides a fairer representation of the
loss ratios, which would otherwise be distorted by the mismatch arising under
IFRSs whereby unearned premium reserve, reinsurers share of unearned premium
reserve and DAC are treated as non-monetary items and claims reserves are
treated as monetary items. Non-monetary items are carried at historic exchange
rates, while monetary items are translated at closing rates. This imbalance
creates volatility in our accounts which cannot be hedged as the mismatch is not
monetary in nature.
Finance costs and taxation have not been allocated to operating segments as
these items are determined by entity level factors and do not relate to
operating performance.
2007 Specialty Property Reinsurance Marine Total Unallocated Total
Lines reportable
segments
£m £m £m £m £m £m £m
Segment results
Gross premiums 394.9 188.0 57.8 139.8 780.5 - 780.5
written
Net premiums 326.2 157.4 49.6 119.0 652.2 - 652.2
written
Net earned 286.5 158.0 45.9 116.1 606.5 10.7 617.2
premiums
Net investment 43.2 8.6 7.1 6.0 64.9 - 64.9
income
Other income 5.1 2.1 1.3 1.6 10.1 - 10.1
Revenue 334.8 168.7 54.3 123.7 681.5 10.7 692.2
Net insurance 169.4 76.6 16.2 45.2 307.4 - 307.4
claims
Expenses for the
acquisition of
insurance 76.2 56.3 10.1 33.6 176.2 3.0 179.2
contracts
Administrative 32.3 13.7 3.9 8.3 58.2 - 58.2
expenses
Foreign exchange (1.0) (0.4) (0.5) (0.7) (2.6) (0.5) (3.1)
(gain)/ loss
Expenses 276.9 146.2 29.7 86.4 539.2 2.5 541.7
Segments result 57.9 22.5 24.6 37.3 142.3 8.2 150.5
Finance costs (12.0)
Profit before tax
138.5
Income tax (38.1)
expense
Profit after tax 100.4
Claims ratio 59% 48% 35% 39% 51% - 50%
Expense ratio 38% 44% 31% 36% 39% - 38%
Combined ratio 97% 92% 66% 75% 90% - 88%
2006 Specialty Property Reinsurance Marine Total Unallocated Total
Lines reportable
segments
£m £m £m £m £m £m £m
Segment results
Gross premiums 361.0 187.8 58.4 137.9 745.1 - 745.1
written
Net premiums 267.3 149.9 40.5 116.6 574.3 - 574.3
written
Net earned 234.6 123.1 42.1 101.5 501.3 8.3 509.6
premiums
Net investment 35.9 4.2 4.1 4.1 48.3 - 48.3
income
Other income 4.0 1.3 0.7 1.1 7.1 - 7.1
Revenue 274.5 128.6 46.9 106.7 556.7 8.3 565.0
Net insurance 146.3 66.3 13.7 44.4 270.7 - 270.7
claims
Expenses for the
acquisition of
insurance 54.0 40.8 10.3 28.6 133.7 0.1 133.8
contracts
Administrative 24.1 11.9 4.4 5.4 45.8 - 45.8
expenses
Foreign exchange 2.2 1.2 0.4 0.9 4.7 17.6 22.3
(gain)/ loss
Expenses 226.6 120.2 28.8 79.3 454.9 17.7 472.6
Segments result 47.9 8.4 18.1 27.4 101.8 (9.4) 92.4
Finance costs (5.6)
Profit before tax 86.8
Income tax expense (26.9)
Profit after tax 59.9
Claims ratio 62% 54% 33% 44% 54% - 53%
Expense ratio 33% 43% 35% 34% 36% - 35%
Combined ratio 95% 97% 68% 78% 90% - 88%
3 Net investment income
2007 2006
£m £m
Investment income at fair value through
income statement
- Interest income 53.1 28.0
Realised gains/(losses) on financial
investments at fair value through income
statement
- Realised gains 18.9 22.9
- Realised losses (11.5) (9.9)
Net fair value gains/(losses) on financial
investments through income statement
- Fair value gains 22.9 24.4
- Fair value losses (16.0) (15.6)
Investment management expenses (2.5) (1.5)
64.9 48.3
4 Other income
2007 2006
£m £m
Profit commissions 7.6 5.5
Agency fees 1.0 1.1
Other income 1.5 0.5
10.1 7.1
5 Earnings per share
2007 2006
Basic 28.1p 16.7p
Diluted 27.4p 16.6p
Basic
Basic earnings per share are calculated by dividing profit after tax of £100.4m
(2006: £59.9m) by the weighted average number of issued shares during the year
of 357.4m (2006: 357.9m). The shares held in the Employee Share Options Plan
(ESOP) have been excluded from the calculation, until such time as they vest
unconditionally with the employees. In addition, the treasury shares have been
excluded from the calculation.
Diluted
Diluted earnings per share are calculated by dividing profit after tax of
£100.4m (2006: £59.9m) by the adjusted weighted average number of shares of
366.0m (2006: 361.5m). The adjusted weighted average number of shares assumes
conversion of dilutive potential ordinary shares, being shares from the SAYE,
retention and deferred share schemes. The shares held in the ESOP have been
excluded from the calculation, until such time as they vest unconditionally with
the employees. In addition, the treasury shares have been excluded from the
calculation.
6 Dividends per share
The final dividend of 4.0p (2006: 3.2p) per ordinary share and the special
dividend of 4.0p per share, will be payable on 9 May 2008 to shareholders
registered on 18 April 2008 in respect of the year ended 31 December 2007.
Together with the interim dividend of 2.0p (2006: 1.6p) this brings the total
ordinary dividend to 6.0p (2006: 4.8p). The total dividend payable for the year
is 10.0p per ordinary share. These financial statements do not provide for the
final dividend as a liability.
7 Insurance liabilities
To illustrate the robustness of our reserves, the loss development tables below
provide information about historical claims development by the four segments -
specialty lines, property, reinsurance and marine. The tables are by
underwriting year which in our view provides the most transparent reserving
basis. We have supplied tables for both ultimate gross claims and ultimate net
claims.
The top part of the table illustrates how the group's estimate of claims ratio
for each underwriting year has changed at successive year-ends. The bottom half
of the table reconciles the gross and net claims to the amount appearing in the
balance sheet.
While the information in the table provides a historical perspective on the
adequacy of the claims liabilities established in previous years, users of these
financial statements are cautioned against extrapolating redundancies or
deficiencies of the past on current claims liabilities. The group believes that
the estimate of total claims liabilities as at 31 December 2007 are adequate.
However, due to inherent uncertainties in the reserving process, it cannot be
assured that such balances will ultimately prove to be adequate.
Gross ultimate 2002ae 2003 2004 2005 2006 2007
claims
% % % % %
Specialty Lines
12 months 71.4 71.4 71.1 68.9 68.4
24 months 67.3 69.9 68.3 65.7
36 months 65.0 66.3 65.2 - -
48 months 57.4 62.0 - - -
60 months 51.3 - - - -
Property
12 months 51.3 65.2 84.9 59.3 59.0
24 months 38.5 65.1 82.3 46.7 -
36 months 35.8 65.4 80.6 - -
48 months 35.2 63.6 - - -
60 months 34.7 - - - -
Reinsurance
12 months 58.5 86.7 191.2 52.5 59.8
24 months 33.5 79.6 181.1 24.5 -
36 months 28.0 74.8 181.4 - -
48 months 28.2 72.4 - - -
60 months 25.2 - - - -
Marine
12 months 59.8 62.6 82.4 57.3 57.3
24 months 44.6 64.1 79.1 43.9 -
36 months 39.0 61.8 69.8 - -
48 months 36.2 61.5 - - -
60 months 35.8 - - - -
Total
12 months 62.9 70.1 89.7 63.2 63.5
24 months 52.5 69.0 86.7 53.8 -
36 months 49.4 66.3 83.3 - -
48 months 45.1 63.4 - - -
60 months 41.7 - - - -
Total ultimate 1,048.4 269.9 467.3 663.1 484.2 611.1 3,544.0
losses (£m)
Less paid claims (849.6) (157.4) (272.0) (338.8) (87.5) (19.9) (1,725.2)
net of
reinsurance (£m)
Less unearned - - - - (41.0) (309.1) (350.1)
portion of
ultimate losses
(£m)
Gross claims 198.8 112.5 195.3 324.3 355.7 282.1 1,468.7
liabilities
(100% level)
(£m)
Less unaligned (59.6) (33.8) (58.6) (97.3) (78.2) (53.6) (381.1)
share (£m)
Gross claims 139.2 78.7 136.7 227.0 277.5 228.5 1,087.6
liabilities,
group share (£m)
Net ultimate 2002ae 2003 2004 2005 2006 2007
claims
% % % % %
Specialty lines
12 months 68.1 68.6 69.1 67.1 67.4
24 months 64.9 67.8 67.4 64.8 -
36 months 63.0 65.0 64.6 - -
48 months 55.9 60.4 - - -
60 months 51.3 - - - -
Property
12 months 49.2 59.7 64.8 62.3 61.8
24 months 42.6 61.6 62.6 51.8 -
36 months 40.4 60.7 58.8 - -
48 months 39.8 59.2 - - -
60 months 39.4 - - - -
Reinsurance
12 months 60.4 88.0 153.6 54.4 55.3
24 months 38.2 83.6 126.7 35.9 -
36 months 33.4 80.9 124.9 - -
48 months 34.1 75.2 - - -
60 months 31.2 - - - -
Marine
12 months 55.5 58.3 55.6 54.1 54.6
24 months 44.3 52.5 48.9 43.0 -
36 months 39.7 48.7 42.8 - -
48 months 39.2 48.1 - - -
60 months 39.1 - - - -
Total
12 months 60.3 66.6 73.5 62.5 63.1
24 months 53.1 65.5 68.7 55.2 -
36 months 50.5 62.9 65.2 - -
48 months 46.8 59.6 - - -
60 months 44.2 - - - -
Total ultimate 560.4 231.8 360.7 412.2 392.8 514.9 2,472.8
losses (£m)
Less paid claims
net of
reinsurance (£m) (483.9) (136.6) (194.9) (174.5) (82.8) (19.3) (1,092.0)
Less unearned
portion of
ultimate losses
(£m) - - - - (30.7) (266.7) (297.4)
Net claims
liabilities
(100% level) 76.5 95.2 165.8 237.7 279.3 228.9 1,083.4
228.9
(£m)
Less unaligned (23.0) (28.6) (49.7) (71.3) (60.1) (43.5) (276.2)
share (£m)
Net claims 53.5 66.6 116.1 166.4 219.2 185.4 807.2
liabilities,
group share (£m)
Analysis of movements in loss development tables
General
We have updated our loss development tables to show the loss ratios as at 31
December 2007 for each underwriting year.
The benign claims experience during 2007 has produced a general trend of
reducing loss ratios across the underwriting years of our business and we
comment on the main movements by team below.
In addition, the catastrophe loading on the 2006 underwriting year has been
removed as at 31 December 2007. We note that the 2006 underwriting year loss
ratios are relatively consistent with the 2003 underwriting year at the same
stage of development.
The opening positions for the 2007 underwriting years are similar to the opening
positions of the 2006 underwriting years, reflecting the relatively consistent
rating environment.
Specialty Lines
The changes to the opening positions across underwriting years have arisen from
variations in the mix of business.
The development of the 2004 underwriting year has not replicated the 2003
underwriting year at the fourth year of development. This is largely driven by a
higher level of claims uncertainty on the 2004 underwriting year of two classes
at this stage of development. As our reserving policy is to move the ultimate
loss ratios only when we have sufficient evidence to do so, the timing of
release is likely to differ between underwriting years.
Property
The 2006 underwriting year ultimate loss ratios have reduced as the catastrophe
loading has been removed.
The ultimate loss ratios on the 2006 underwriting year are higher than the
ultimate loss ratios on the 2003 underwriting year at the same stage of
development, mainly as a result of claims arising from our homeowners account.
Reinsurance
The 2006 underwriting year ultimate loss ratios have reduced as the catastrophe
loading has been removed.
Whilst the gross ultimate loss ratio on the 2005 underwriting year is relatively
unchanged since 31 December 2006, we note that the net ultimate loss ratio has
reduced caused by an increase in estimated net premium during the year. The
increase has arisen as we do not expect to pay as much outwards reinstatement
premium as we had originally cautiously anticipated.
The 2003 and 2004 underwriting years have continued to develop favourably.
Marine
The 2006 underwriting year ultimate loss ratios have reduced as the catastrophe
loading has been removed.
The 2005 underwriting year ultimate loss ratios have reduced as the claims
experience has been favourable.
The table below illustrates movements in our net claims recognised in the income statement in 2007 by both
underwriting year and by business segments:
Specialty Property Reinsurance Marine Total
lines
2007 £m £m £m £m £m
Current year 202.8 87.4 26.1 55.2 371.5
Prior year
- 2004 and earlier (25.5) (2.0) (3.0) (0.3) (30.8)
- 2005 year of account (5.4) (3.5) (1.7) (4.6) (15.2)
- 2006 year of account (2.5) (5.3) (5.2) (5.1) (18.1)
(33.4) (10.8) (9.9) (10.0) (64.1)
Net insurance claims 169.4 76.6 16.2 45.2 307.4
Underwriting year
Specialty Property Reinsurance Marine Total
lines
2006 £m £m £m £m £m
Current year 164.3 68.2 19.6 49.6 301.7
Prior year
- 2003 and earlier (12.3) (0.7) (0.4) (0.4) (13.8)
- 2004 year of account (4.7) (0.7) (0.8) (3.0) (9.2)
- 2005 year of account (1.0) (0.5) (4.7) (1.8) (8.0)
(18.0) (1.9) (5.9) (5.2) (31.0)
Net insurance claims 146.3 66.3 13.7 44.4 270.7
8 Status of financial information
The financial information set out above does not constitute the Company's
statutory accounts for the year ended 31 December 2006 or 2007, but is derived
from those accounts. Statutory accounts for 2006 have been delivered to the
Registrar of Companies and those for 2007 will be delivered following the
Company's Annual General Meeting. The auditors have reported on those accounts;
their reports were unqualified and did not contain statements under Section 237
(2) or (3) of the Companies Act 1985.
Glossary
Admitted carrier
An insurance company authorised to do business in the US. An agreement is
entered into which stipulates the terms and conditions under which a business
must conduct within a state in the US.
Aggregates/aggregations
Accumulations of insurance loss exposures which result from underwriting
multiple risks that are exposed to common causes of loss.
Aggregate excess of loss
The reinsurer indemnifies an insurance company (the reinsured) for an aggregate
(or cumulative) amount of losses in excess of a specified aggregate amount.
A.M. Best
A.M. Best is a worldwide insurance-rating and information agency whose ratings
are recognised as an ideal benchmark for assessing the financial strength of
insurance related organisations, following a rigorous quantitative and
qualitative analysis of a company's balance sheet strength, operating
performance and business profile. Beazley Group plc obtained an A rating, while
Beazley Insurance Company, Inc., received a rating of A.
Binding authority
A contracted agreement between a managing agent and a coverholder under which
the coverholder is authorised to enter into contracts of insurance for the
account of the members of the syndicate concerned, subject to specified terms
and conditions.
Capacity
This is the maximum amount of premiums that can be accepted by a syndicate.
Capacity also refers to the amount of insurance coverage allocated to a
particular policyholder or in the marketplace in general.
Catastrophe reinsurance
A form of excess of loss reinsurance which, subject to a specified limit,
indemnifies the reinsured company for the amount of loss in excess of a
specified retention with respect to an accumulation of losses resulting from a
catastrophic event or series of events.
Claims
Demand by an insured for indemnity under an insurance contract.
Claims ratio
Ratio, in percent, of net insurance claims to net earned premiums.
Combined ratio
Ratio, in percent, of the sum of net insurance claims, expenses for acquisition
of insurance contracts and administrative expenses to net earned premiums. This
is also the sum of the expense ratio and the claims ratio.
Coverholder/managing general agent
A firm either in the United Kingdom or overseas authorised by a managing agent
under the terms of a binding authority to enter into contracts of insurance in
the name of the members of the syndicate concerned, subject to certain written
terms and conditions. A Lloyd's broker can act as a coverholder.
Deferred acquisition costs (DAC)
Costs incurred for the acquisition or the renewal of insurance policies (e.g.
brokerage, premium levy and staff related costs) which are capitalised and
amortised over the term of the contracts.
Earnings per share (EPS) - Basic/Diluted
Ratio, in pence, calculated by dividing the consolidated profit after tax by the
weighted average number of ordinary shares issued, excluding shares owned by the
group. For calculating diluted earnings per share the number of shares and
profit or loss for the year is adjusted for all dilutive potential ordinary
shares like share options granted to employees.
Excess per risk reinsurance
A form of excess of loss reinsurance which, subject to a specified limit
indemnifies the reinsured company against the amount of loss in excess of a
specified retention with respect of each risk involved in each loss.
Expense ratio
Ratio, in percent, of the sum of expenses for acquisition of insurance contracts
and administrative expenses to net earned premiums.
Facultative reinsurance
A reinsurance risk that is placed by means of a separately negotiated contract
as opposed to one that is ceded under a reinsurance treaty.
Gross premiums written
Amounts payable by the insured, excluding any taxes or duties levied on the
premium, including any brokerage and commission deducted by intermediaries.
Hard market
An insurance market where prevalent prices are high, with restrictive terms and
conditions offered by insurers.
Horizontal limits
Reinsurance coverage limits for multiple events.
Incurred but not reported (IBNR)
These are anticipated or likely claims that may result from an insured event
although no claims have been reported so far.
International accounting standards (IAS)/International financial reporting
standards (IFRS)
Standards formulated by the IASB with the intention of achieving internationally
comparable financial statements. Since 2002, the standards adopted by the IASB
have been referred to as International Financial Reporting Standards (IFRS).
Until existing standards are renamed, they continue to be referred to as
International Accounting Standards (IAS).
International accounting standards board (IASB)
An international panel of accounting experts responsible for developing IAS/
IFRS.
Lead underwriter
The underwriter of a syndicate who is responsible for setting the terms of an
insurance or reinsurance contract that is subscribed by more than one syndicate
and who generally has primary responsibility for handling any claims arising
under such a contract.
Line
The proportion of an insurance or reinsurance risk that is accepted by an
underwriter or which an underwriter is willing to accept.
Lloyd's
Lloyd's is the world's leading specialist insurance market and expects to have
the capacity to write £16.1bn of business in 2007. It occupies sixth place in
terms of global reinsurance premium income, and is the second largest surplus
lines insurer in the US. In 2007, 66 syndicates are underwriting insurance at
Lloyd's, covering all classes of business from more than 200 countries and
territories worldwide.
Managed syndicate
The combination of syndicate 2623 and 623 through which the group underwrite
insurance business.
Managing agent
A company that is permitted by Lloyd's to manage the underwriting of a
syndicate.
Managing general agent (MGA)
An insurance intermediary acting as an agent on behalf of an insurer.
Medium tail
A type of insurance where the claims may be made a few years after the period of
insurance has expired.
Net assets per share
Ratio, in pence calculated by dividing the net assets (total equity) by the
number of shares issued.
Net premiums written
Net premiums written is equal to gross premiums written less outward reinsurance
premiums written.
Provision for outstanding claims
Provision for claims that have already been incurred at the balance sheet date
but have either not yet been reported or not yet been fully settled.
Rate
The premium expressed as a percentage of the sum insured or limit of indemnity.
Reinsurance to close (RITC)
A reinsurance which closes a year of account by transferring the responsibility
for discharging all the liabilities that attach to that year of account (and any
year of account closed into that year) plus the right to buy any income due to
the closing year of account into an open year of account in return for a
premium.
Retention limits
Limits imposed upon underwriters for retention of exposures by the group after
the application of reinsurance programmes.
Return on equity (ROE)
Ratio, in percent calculated by dividing the consolidated profit after tax by
the average total equity.
Retrocessional reinsurance
The reinsurance of the reinsurance account. It serves to 'lay-off' risk.
Risk
This term may variously refer to:
a) the possibility of some event occurring which causes injury or loss;
b) the subject matter of an insurance or reinsurance contract; or
c) an insured peril.
Short tail
A type of insurance where claims are usually made during the term of the policy
or shortly after the policy has expired. Property insurance is an example of
short tail business.
Soft market
An insurance market where prevalent prices are low, and terms and conditions
offered by insurers are less restrictive.
Stamp capacity
The volume of business measured in gross written premiums net of acquisition
costs underwritten by the group through its managed syndicates at Lloyd's of
London.
Surplus lines insurer
An insurer that underwrites surplus lines insurance in the USA. Lloyd's
underwriters are surplus lines insurers in all jurisdictions of the USA except
Kentucky and the US Virgin Islands.
Total shareholder return
The increase in the share price plus the value of any dividends paid and
proposed during the year.
Treaty reinsurance
A reinsurance contract under which the reinsurer agrees to offer and to accept
all risks of certain size within a defined class.
Unearned premiums reserve
The portion of premium income in the business year that is attributable to
periods after the balance date is accounted for as unearned premiums in the
underwriting provisions.
This information is provided by RNS
The company news service from the London Stock Exchange
Wednesday, 18th December 2024
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