Financial review

Martin Bride, Finance director

In our 25th year, we achieved a profit of $250.8m, maintaining our unbroken track record of profitability.

Group performance

Income statement







Gross premiums written 1,741.6 1,751.3 (1%)
Net premiums written 1,402.1 1,331.3 5%
Net earned premiums 1,405.2 1,313.6 7%
Net investment income 37.5 88.1 (57%)
Other income 28.1 19.6 43%
Revenue 1,470.8 1,421.3 3%
Net insurance claims 738.2 742.6 (1%)
Acquisition and administrative expenses 500.6 472.4 6%

One off foreign exchange gain *  


Foreign exchange(gain)/loss


Expenses 1,204.2 1,249.4 (4%)
Share of loss of associate (0.9)
Finance costs (14.9) (13.8) 8%
Profit before tax 250.8 158.1 59%
Claims ratio 52% 55%
Expense ratio 36% 35%
Combined ratio 88% 90%
Rate (reduction)/ increase (2%) 3%
Investment return 1.0% 2.7%

* The $33.7m non-recurring foreign exchange gain arose as a result of the decision to more closely match our regulatory capital position in US dollars prior to the change in our functional currency from sterling to US dollars, for further details please refer to note 4 to the financial statements. 


Gross premiums written have reduced by 1% in 2010 to $1,741.6m. Renewal rates held up better than expected, but on average fell by 2% across the portfolio. We have continued to adjust our underwriting appetite in areas where competition is most intense.

The balance of our business has continued to evolve providing further diversification by type of business and geographical location. Our life accident & health business continued to grow in 2010 writing $78.1m. Our reinsurance division has also grown supported by business underwritten by our special purpose syndicate (6107), writing $16.4m on behalf of this syndicate in 2010. Locally underwritten US business has continued to grow from $370.7m in 2009 to $393.6m in 2010.

The charts above highlight how we achieve diversification by product mix, geography and type of business.

Premium retention rates

Retention of business from existing brokers and clients is a key feature of Beazley’s strategy. It enables us to maintain a deep understanding of our clients’ businesses and requirements, affording greater insight into the risks involved in each policy we write, enabling us to price risk most accurately to achieve profit. The table below shows our retention rates by division compared to 2009.

Retention rates*                        2010 2009
Life, accident & health 83% N/A
Marine 78% 74%
Political & contingency group 60% 63%
Property 73% 78%
Reinsurance 93% 89%
Specialty lines 84% 87%
Overall 80% 81%

* based on premiums due for renewal in each calendar year

Rating environment

As anticipated, rates charged for business we renewed decreased by 2% during 2010 across the portfolio (2009: an increase of 3%). The largest rate changes were seen within our marine business (3% decrease), property business (4% decrease) and reinsurance teams (3% decrease). Whilst market conditions remain competitive, we have recently seen signs of recovery in a number of classes – notably energy, UK homeowners and political risks. Our specialty lines division saw rates reduce overall by 2% in 2010.


Reinsurance purchased

The group reduced the amount it spent on reinsurance in 2010 to $339.5m (2009: $420.0m). Reinsurance is purchased for a number of reasons:

  • to mitigate the impact of catastrophes such as hurricanes;
  • to enable the group to write large or lead lines on risks we underwrite; and
  • to manage capital to lower levels.

The cost of reinsurance purchased in 2010 has reduced due to a number of factors:

  • 2009 included First State’s reinsurance programme as a standalone; efficiencies were made when this was combined with Beazley’s own property reinsurance programme;
  • Our specialty lines reinsurance programme was reduced in 2010 through an increased retention of losses on certain risks;
  • Some of our admitted lines US business was no longer ceded to our third party syndicate 623; and
  • A continued strategy to reduce reinsurance purchases in areas where Beazley has risk appetite to remain business and rating is attractive.

Combined ratio

The combined ratio of an insurance company is a measure of its operating performance and represents the ratio of its total costs (including claims and expenses) to total net earned premium. Consistent delivery of operating performance across the market cycle is clearly a key objective for an insurer and Beazley’s combined ratio has reduced in 2010 to 88% (2009: 90%). It is worth pointing out that the calculation of the combined ratio for Beazley includes all claims and other costs to the group but excludes foreign exchange effects. We believe this represents the most transparent and useful measure of operating performance as it ensures that all of the costs of being in business are captured, whether directly linked to underwriting activity or not.


The two most prominent claims to have been reported to the Lloyd’s market in 2010, related to earthquakes in Chile and New Zealand. As explained in our interim management statement earthquakes typically have a longer reporting pattern than hurricanes.

The Chilean earthquake, which occurred in February 2010, caused a significant insured loss. We estimated the market loss to be around $5bn-$8bn, which we still maintain. This equated to a loss of between $55m and $75m to the Beazley group.

The New Zealand earthquake in September 2010 proved more difficult to quantify. Original market estimates of the loss of between $2bn-$4bn, have recently been updated to $3bn-$5bn with our own estimate update to reflect this. We have increased our held reserves on New Zealand to $35m from an initial estimate of $15m-$30m.

2010 has been a benign year for hurricane related claims. Despite significant hurricane activity, with some 18 named windstorms, the majority of hurricanes have remained offshore.

The level of claims notifications from our political risks account fell to normal levels at the start of 2010 and we retain the view that the level of reserves we hold for this class is strong. At this stage we have maintained the reserves we initially established in 2009 although we are optimistic that we will see positive developments in 2011 and beyond.

Reserve releases

Beazley has a consistent reserving philosophy with initial reserves being set to include risk margins which may be released over time as and when any uncertainty reduces. Historically these margins have given rise to held reserves within the range 5-10% above the actuarial best estimate.

Reserve monitoring is performed at a quarterly ‘peer review’, which involves a consultative process between the underwriters who take a detailed claim by claim view, and the actuarial team who provide statistical analysis. This process allows early identification of areas where claims reserves may need adjustment.

During 2010 we were able to make the following prior year reserve adjustments across divisions, with the overall net impact being a release to the group.



  $m $m

Life, accident & health






Political risks & contingency









Specialty lines






Releases as a percentage of net earned premium



Reserve releases remained steady on specialty lines reflecting the continuing satisfactory development of the significant volumes of business underwritten over the last ten years. The releases in 2009 came mainly from the 2004 and 2005 underwriting years, which seem to be following the profitable outcomes already experienced in 2003 and confirming that all the underwriting years from 2003 to 2006 are exceptionally profitable.

The political and contingency reserve release increased significantly as the 2009 underwriting year has developed very favourably, while the impact of last year’s increased claims provision on our trade credit book has not been repeated.  Marine and property reserve releases also increased following the unwinding of catastrophe reserves on the relatively benign 2009 underwriting year. Despite the impact of earthquakes, the treaty account released in line with last year.


Acquisition and administrative expenses

Business acquisition costs and administrative expenses increased to $500.6m from $472.4m in 2009. The breakdown of these costs is shown below:

  2010 2009
  $m $m
Brokerage costs 292.9 268.8
Other acquisition costs 88.5 73.8
Total acquisition costs 381.4 342.6
Administrative expenses 119.2 129.8
Total acquisition costs and administrative expenses 500.6 472.4

Brokerage costs are the premium commissions paid to insurance intermediaries for providing business. As a percentage of net earned premium they remain around 21%. Brokerage costs are deferred and expensed over the life of the associated premiums in accordance with accounting guidelines.

Other acquisition costs comprise costs that have been identified as being directly related to underwriting activity (eg. underwriters salaries and Lloyd’s box rental). These costs are also deferred in line with premium earning patterns.

Administrative expenses comprise primarily IT costs, facilities costs, Lloyd’s central costs and other support costs. These reduced in 2010 due to:

  • Legal fees incurred in 2009 as part of the First State acquisition and redomiciliation to the Republic of Ireland, not recurring in 2010; and
  • Increased re-insurance written through programmes attracting over-rider commission. Certain types of reinsurance contract provide a contribution as part of the fee to our expenses. Under IFRS these contributions are required to be accounted for as a credit within adminstration expenses.

Investment performance

Investment income for the period ended 31 December 2010 was $37.5m, or an annualised return of 1.0%, compared with $88.1m (2.7%) over the same period in 2009.

Falcon Money Management Ltd ("Falcon"), an associate firm providing investment management services, was founded in 2009.  It is an FSA authorised investment management firm, comprising an experienced team of 15 professionals.

Falcon is aiming to enhance our investment returns whilst at the same time minimising risk. Initially, investment management and advisory services are offered solely to Beazley and only at a later stage to third party institutional investors. Falcon’s approach to managing the assets has been to hold the bulk (88.7% at the end of 2010) in a core portfolio consisting primarily of sovereign fixed income assets, or short duration high quality credit with a duration not exceeding that of Beazley’s insurance liabilities. The balance will be invested in a diversified portfolio of capital growth assets. Falcon’s benchmark is to deliver an absolute return equal to T-bills plus a margin which depends upon the capital growth asset allocation.

In the last quarter the bond portfolio duration has been moderately increased. At 31 December 2010 the weighted average duration of our core portfolio was 12 months (31 December 2009: 8 months). The weighted average yield to maturity of our overall portfolio was 0.7% (31 December 2009: 0.7%). Our portfolio duration is currently short to protect against a sudden rise in interest rates as the outlook remains challenging with interest rates close to all time lows.

The table below details the breakdown of our portfolio by asset class:

31 Dec 2010 

31 Dec 2009





Cash and cash equivalents





Government, Agency and Supranational










AA+ to AA-





A+ to A-





BBB+ to BBB-





Core portfolio





Capital growth assets










31 Dec 2010

31 Dec 2010

31 Dec 2009

31 Dec 2009





Core portfolio





Capital growth assets





Overall return






The funds managed by the Beazley group have continued to grow in 2010, with cash and investments of $3,842m at the end of the year (an increase of 5% over 2009). The chart below shows the increase in our group funds since 2003.

Change in functional currency

In April 2010, we announced a change in our functional currency of Beazley plc and its principal operating entities to the US dollar, reflecting the growth of our dollar denominated premiums and the fact that the regulatory capital supporting the business is largely held in dollars. We believe that this change will give investors and other stakeholders a clearer understanding of the group's performance over time. Accounting in dollars will significantly reduce the future volatility of Beazley's reported earnings due to foreign exchange movements – and in particular due to foreign exchange on non-monetary items.

As reported in previous annual and interim reports significant foreign exchange volatility arising from the translation of ‘non-monetary’ items exists under IFRS, has been substantially reduced as a result of the change our functional currency to the US dollar. The foreign exchange adjustment on non-monetary items gave rise to a modest decrease in group profit of $4.3m in 2010.


Beazley plc and Beazley Re Limited, our Irish reinsurance company are both tax resident in Ireland. Our ongoing tax rate is consequently a blended rate of around 13%.