Balance sheet management

Summary statement of financial position

2010

$m

2009

$m

Movement

%

Intangible assets

117.0

113.5

3%

Reinsurance assets

 

1,034.9

1,156.1

  (10%)

Insurance receivables

527.1

498.0

6%

Other assets

253.0

214.7

18%

Investments and cash

3,842.3

3,661.7

5%

     

 

 

Total assets

5,774.3

5,644.0

2%

Insurance liabilities

4,046.8

4,023.7

1%

Borrowings

268.2

278.7

(4%)

Other liabilities

376.4

345.7

9%

Total liabilities

4,691.4

4,648.1

1%

Net assets

1,082.9

995.9

9%

Net assets per share (cents)

214.6c

191.7c

12%

Net tangible assets per share (cents)

191.4c

169.8c

13%

Net assets per share (pence)

139.5p

119.0p

17%

Net tangible assets per share (pence)

124.4p

105.5p

18%

Number of shares *

504.6m

519.6m

* excludes shares held in the employees share trust and treasury shares

Intangible assets

Intangible assets consist of goodwill on acquisitions $77.1m, purchased syndicate capacity $9.4m, US admitted licences $9.3m and capitalised expenditure on IT projects $21.2m. The increase in intangibles in the period is primarily due to spending on IT projects of $7.9m.

Reinsurance assets

Reinsurance assets represent recoveries from reinsurers in respect of incurred claims $823.8m, and the unearned reinsurance premiums reserve $211.1m. The reinsurance receivables from reinsurers are split between recoveries on claims paid or notified of $202.4m and an actuarial estimate of recoveries on claims that have not yet been reported of $621.4m. The group’s exposure to reinsurers is managed through:

  • Minimising risk through selection of reinsurers who meet strict financial criteria (eg. minimum net assets, minimum ‘A’ rating by S&P). These criteria vary by type of business (short vs. medium tail). The chart below shows the profile of these assets (based on S&P rating) of these assets at the end of 2010;

  • 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 and credit control committees.

We continue to provide against impairment of reinsurance recoveries, and at the end of 2010 we had provided $17.3m (2009: $15.8m) in respect of reinsurance recoveries.

Insurance receivables

Insurance receivables are amounts receivable from brokers in respect of premiums written. The balance at 31 December 2010 was $527.1m, a growth of 5.8% over 2009 ($498.0m). We continue to outsource the collection of our Lloyd’s premium broker balances to JMD Specialist Insurance Services Limited, which operates within the Lloyd’s market as specialist credit controllers.

Other assets

Other assets are analysed separately in the notes to the accounts. The largest items included comprise:

  • Deferred acquisition costs of $164.0m;

  • Deferred tax assets available for use against future taxes payable of $9.5m; and

  • Profit commissions receivable from syndicate 623 of $13.2m.

Insurance liabilities

Insurance liabilities of $4,046.8m consist of two main elements being the unearned premium reserve (UPR) and gross insurance claims liabilities.

Our unearned premiums reserve has reduced by 6% to $824.2m. The majority of the UPR balance relates to current year premiums that have been deferred and will be earned in future periods. Current indicators are that this business is profitable.

Gross insurance claims reserves are made up of claims which have been notified to us but not yet paid and an estimate of claims incurred but not yet reported (IBNR). These are estimated as part of the quarterly reserving process involving the underwriters and group actuary. Gross insurance claims reserves have increased by 2.4% to $3,222.6m.

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 the current carrying value of this debt is $250.2m; and

  • A 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 have been callable at the group's option since 2009. 

In April 2010 we traded out of the interest and currency derivatives transactions resulting in a cash gain of $1.4m without any impact on the income statement. The effect of exiting the derivative on the group’s cost of financing the £150m of debt was to move from paying a floating rate of interest, based on LIBOR plus a margin, to a fixed interest payment with an annualised effective rate of less than 6%. We traded out of the currency component of the original derivative transaction since this was originally intended to act as a hedge against the group’s investment in its US subsidiaries. Following the switch in functional currency to US dollars this hedge was no longer required

In October 2010 we renewed our existing syndicated short-term banking facility led by Lloyds Banking Group Plc. The facility provides potential borrowings up to $150m. The new agreement is based on a commitment fee of 0.7% per annum and any amounts drawn are charged at a margin of 1.75% per annum. The cash element of the facility will last for three years, expiring on 31 December 2013, whilst letters of credit issued under the facility can be used to provide support for the 2010, 2011 and 2012 underwriting years. The facility is currently unutilised.

Capital structure

(forming intergal part of financial statements)

Beazley has a number of requirements for capital at a group and subsidiary level. Primarily capital is required to support underwriting at Lloyd’s and in the US and is subject to prudential regulation by local regulators (FSA, Lloyd’s, Central Bank of Ireland, and the US state level supervisors).

Further capital requirements come from rating agencies on a group wide basis and for Beazley Insurance Company Inc. (BICI) and the Lloyd’s syndicates on a standalone basis. In both cases we aim to manage our capital to obtain a financial ‘A’ rating from the rating agencies for these entities.

Beazley also holds a level of capital over and above its regulatory requirements and targets a level of surplus capital that would enable it to take advantage of new underwriting opportunities such as the acquisition of insurance companies or managing general agents (MGA’s) whose strategic goals are aligned with our own.

The group actively seeks to manage its capital base to target capital levels. Our preferred use of capital is to re-deploy it on opportunities to underwrite profitably. However there may be times in the cycle when the company will generate excess capital and not have the opportunity to deploy it. If such a point were reached the board would consider returning capital to shareholders.

During the year to date Beazley plc has acquired 16.8m of its own shares at an average price of 112.1p, the total cost to the group was $28.9m.

In January 2010, we matched our capital base to the principal underlying currencies of our written premiums. This ensures that the group's capacity to underwrite business is unaffected by any future movements in exchange rates. To achieve this, the group has increased the US dollar component of its capital base by US$492.7m with an equivalent decrease in the sterling component.

Our funding comes from a mixture of our own equity of $1,082.9m alongside £150m of tier 2 subordinated debt and $18m subordinated long-term debt and an undrawn banking facility of $150m mentioned above.This facility was renewed in October 2010 to cover the 2011 and 2012 underwriting years and converted to a $150m facility.   Prior to this date the facility was £100m and has been disclosed at a USD rate of 1.61 (31 December 2009 spot rate) in the table below for comparative purposes.

The following table sets out the group’s sources and uses of capital:

 

2010

$m

2009

$m

     
Sources of funds    
Shareholders’ funds 1,082.9 995.9
Tier 2 subordinated debt 230.8 241.5
Long term subordinated debt 18.0 18.0
  1,331.7 1,255.4
Uses of funds    
Lloyd’s underwriting 776.9 792.4
Capital for US insurance company 107.7 110.9
  884.6 903.3
Surplus 447.1 352.1
Unavailable surplus* (80.2) (74.2)
Fixed and intangible assets (126.6) (125.9)
Available surplus 240.3 152.0
Un-utilised banking facility $150.0 $161.0

*Unavailable surplus primarily represents profits earned that have not yet been transferred from the Lloyd’s syndicates. The cash transfers occur half yearly in arrears and are reflected as unavailable until the cash is received into Beazley corporate accounts. In addition certain items other than fixed and intangible assets such as deferred tax assets are not immediately realisable as cash and have also accordingly been reflected as unavailable surplus.

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 in line with the premium and catastrophe risk appetite. The increase from £494.4m to £505.0m reflects the changes in the rating environment and the reduction in expected interest rates. These numbers are presented in the table above in US dollars being $776.9m and $792.4m respectively which have been translated at the spot rate at reporting dates.

Solvency II

Solvency II is an EU-wide proposal on capital adequacy and risk management for insurers due to come into effect from 1 January 2013. The central elements of Solvency II are:

Pillar 1: Demonstrating adequate financial resources – quantification

Pillar 2: Demonstrating an adequate system of governance – risk assessment

Pillar 3: Public disclosure and regulatory reporting requirements

The Beazley Board has set two guiding principles for Solvency II, namely:

  • to develop a framework that can be used to inform management and assist with business decision making; and

  • to hold an appropriate and efficient level of capital for the agreed risk appetite through risk identification and mitigation.

At Beazley, the strong risk management framework already embedded throughout the business means that Solvency II is an evolution rather than a new direction. As such, we continue to sponsor and closely monitor the programme of work that is building the framework required for such a Solvency II implementation against the 38 identified objectives. This programme is fully resourced and comprises subject matter experts that have been with Beazley for many years working alongside a dedicated project management team. Throughout this process, we have maintained a collaborative dialogue with all our regulators, including Lloyd’s, the FSA and the Irish Financial Regulator to demonstrate that our proposed approach meets the requirements of the Solvency II Directive. We continue to meet the regulatory deadlines, having recently submitted QIS5 results and the remaining qualitative submissions for the Lloyd’s Dry Run process.  

Activity undertaken so far during 2010 has meant that we have made significant progress in our Pillar II activities by enhancing our corporate governance and developing our assurance functions. We have refreshed our expression of risk appetite to not only control risk but exploit it and have updated our control environment and risk management reporting to reflect that.  We have also embarked on a programme of detailed training sessions tailored to educate all our staff on what business as usual will look like under Solvency II.

Although we are still in the detailed phase of the implementation plan, we are already seeing benefits from Solvency II in terms of improved data quality and enhanced management information that feeds our strategic and tactical decision making. We continue to tackle Solvency II implementation in the same determined way that we tackle underwriting opportunities.