Andrew Horton describes the trends, risks and opportunities that he foresees in 2011.
Chief executive Q&A
Q: Many of the lines of business Beazley specialises in are seeing intense competition. How soft will the soft market get?
I see the overall profitability of the insurance sector as being on a downward trend at present – and that’s before considering the potential impact of catastrophe losses. We have seen a significant influx of new competitors into some of our core lines of business, including lines that are known to be challenging to underwrite, like professional liability for lawyers or for architects and engineers. We would expect a number of these companies to withdraw in due course but the challenge with writing some of the longer tail business in a soft market is that it’s a little like frostbite – you don’t know anything's wrong until it’s too late. So they may think they’re currently writing at a profit and not discover otherwise for a few years.
That said, there is a very obvious constraint on the ability of the market to continue to chase rates downward, and that is the meagre investment return they are currently earning. The biggest enemy of prudent underwriting has historically been a buoyant investment market; we must hope that the opposite statement also holds true. If it does, we would expect reductions in rates to bottom out some time next year.
Q: In a market such as this, how do you keep faith with your clients while maintaining profitability?
In a nutshell, by focusing on the reason people buy insurance in the first place. You’re buying a promise to pay – you’re buying claims service. And it continues to amaze me how little senior executives in our industry talk about that.
When you’re in a tough market like today’s, claims service is really your main bulwark against price-driven competition. We say to our clients and to our brokers: yes, we may be a little more expensive but remember what you’re buying. We have made and continue to make major investments in highly skilled claims people who can provide prompt and supportive service in the event of a claim.
And the good news about this from an investor's perspective is that the best clients are generally the ones who care most about claims service. And they also care most about prudent risk management, which is another service we focus on. So the clients that are less price sensitive and do not see what we offer as a commodity often represent the best risks.
Q: Do you see growth opportunities in the year ahead?
Beazley has grown significantly in recent years and we will grow in future, but we’re going to be very careful about sizing up growth opportunities in the current environment. We’re going to continue to look out for them. There may be good people we can hire – either individually or in teams – in lines of business that are complementary to business we currently write. But our business plan for 2011 does not envisage strong organic growth because in markets that are not themselves growing we would need to underprice the competition to achieve that.
Q: In the current market is profitable growth best achieved organically or through M&A?
Both are challenging, frankly. We were described in some sections of the press as being ‘opportunistic’ in making an offer for another Lloyd’s business last year. My response was, show me an offer that does not have some element of opportunism in it. So I hope we will continue to be opportunistic in that sense. But if one thinks of opportunism as off-the-cuff decision making, then our approach is the reverse of opportunistic. For us, potential acquisitions have to meet some tough criteria. They have to be in specialist lines of business that we really like. They have to have a stellar track record in underwriting. And we have to be confident about the culture of the organisation and the prospective fit with our culture. We look at dozens of potential acquisitions annually that do not meet one or other of these criteria.
And finally of course the price must be right. Our investors have the right to expect that we will keep our feet on the ground and not get carried away by bid fever.
Q: Should insurers be returning capital to investors at this point in the cycle?
There is of course not just one insurance cycle and in fact it is unusual for the property cycle and the casualty cycle and the marine cycle, for example, to be fully in synch with one another. So there may be growth opportunities in one area while there is a dearth of opportunities in another. That said the group actively manages the capital it holds and in the absence of favourable underwriting conditions will rellease it to investors if the time is right. We are determined to give our investors a healthy return on capital.
Q: What is your perspective on the admission of new capital to the Lloyd’s market?
The Lloyd’s market is constantly renewed and reinvigorated by the arrival of new capital providers and the creation of new syndicates. We welcome that and believe that the franchise board monitors prospective new entrants effectively. The question really is: what are the new entrants bringing? If they are looking to build a new market that isn’t there already at Lloyd’s or is relatively small and inactive, that’s great. That’s what we did in 2008 when we established the first life syndicate at Lloyd’s in twenty years – and five more life syndicates have since been formed. But if you’re just setting up a me-too syndicate to write exactly the same business as everyone else, we’re less keen. I hope and believe that’s something that Tom Bolt the performance director and the franchise board at Lloyd's are alert to.
Q: What opportunities do you see to develop business in continental Europe in 2011?
Europe, including the UK, is currently the source of 15% of our premiums. In the past five years we have opened offices in Paris, Munich and Oslo, focusing on the local development of our professional liability, reinsurance and energy insurance business respectively. Going forward, we plan to use these local offices – supported by the marketing and business development efforts of our London-based underwriters – to grow our business across a broader spectrum. The experience of insurers from London seeking to build large scale businesses in Europe has not been uniformly positive so we are proceeding cautiously, but we have been encouraged by the support we have received from local brokers in many countries for a stronger Beazley presence.
Q: Beazley’s investment returns were lower than many peers in 2010. Why was this?
Beazley has a very capital efficient business model. The balance of our underwriting portfolio means we underwrite $2 of premiums for each $1 of capital and, as a result of our portfolio mix, generate $4 of invested assets for each $1 of capital (our peers are more like 3:1). Beazley follows a relatively cautious investment strategy which will result in lower than average investment returns in some market conditions. However, this strategy still translates into a good return for shareholders due to the gearing.
2010 was a year where we saw significant risks in asset markets. As a result we positioned our portfolio very conservatively.
Q: Beazley celebrates its 25th anniversary this year. What reflections does that prompt in you?
The main reflection it prompts in me is a sense of pride that the spirit that animated the company from the beginning is still alive and strong. The company that Andrew Beazley and Nick Furlonge founded 25 years ago is recognisably the same company. We’re writing many of the same lines of business, such as professional liability and catastrophe. The only difference now is that we’re leaders in those markets rather than new entrants.
But the way we’ve grown and diversified is consistent too. Like all businesses we can often find ourselves talking in quite abstract terms about things like scalability or capital allocation. But the real key to Beazley’s success has been hiring good and knowledgeable people and giving them the entrepreneurial freedom to build a team and build a business within the broader company. I’ve seen that happen countless times since I joined Beazley in 2003. It’s a winning formula.
8 February 2011