Interim results statement

 

Overview

2023 marks the first year of reporting under IFRS 17 and under the new standard, Beazley delivered a profit before tax of $366.4m for the first half of 2023 (30 June 2022: $364.9m). This included an insurance service result of $342.2m (30 June 2022: $540.6m), resulting in a discounted combined ratio of  84% (30 June 2022: 71%) and an undiscounted combined ratio of 88% (30 June 2022: 74%).  Our investment team achieved a strong investment result of $143.9m (30 June 2022: loss of $193.0m) or 3.0% annualised (30 June 2022: loss of 5.0%). In Property,  Insurance written premiums grew by 65% to $805.2m, alongside ongoing growth in Cyber which saw insurance written premiums increase by 14%. We have also achieved this growth at returns exceeding our long-term targets, with an annualised return on equity  of 18% (30 June 2022: 26%).

 

2023 has been a moment of opportunity for Beazley allowing us to demonstrate the success of our diversified strategy, and our ability to adapt and effectively allocate capital to the best growth and return opportunities as the underwriting price cycle changes.

 

So far this year, this has seen us lean into the significant upswing in the property market with premiums up 65%, with stronger than expected growth seen in the direct property market, while reinsurance performed very positively, as expected. We continue to grow our cyber business, with a growth rate of 14%, even as the cyber war wordings issue has created unsettled market dynamics, in particular we are pleased with the growth we are generating internationally. Equally importantly, we have maintained our position in our key liability businesses within Specialty Risks despite the highly competitive market conditions in certain lines that we have highlighted since late 2022. Our MAP Risks division continued to deliver as expected with gross growth being curtailed as planned due to our portfolio underwriting no longer needing to be fronted by the Group as syndicate 5623 became a standalone syndicate.

 

It is at moments like these, when the economic situation is unpredictable and technology is asking challenging questions of us, that the strength and benefits of our diversified platform, product and geography strategy comes to the fore. In May 2023, we added a US domestic Excess & Surplus lines carrier to our North American platform. Subject to obtaining approvals, we will begin underwriting excess and surplus lines insurance originating from the US in 2024 in addition to transferring to it similar business already written within our managed syndicates. We expect approximately $600m of premiums by the end of 2024 with a further $1.38bn by the end of 2026.

 

Combining this environment with our diversified product and tri-platform strategy, and the increased awareness of, and demand for, our underwriting and claims expertise, allows me to remain confident in our ability to deliver high growth and strong profits, not just at the full year but consistently as we move forward.

 

World leading innovation

We led the market in January 2023 with the launch of the first cyber catastrophe bond, followed by a second tranche in May. This innovation was recognised at the British Insurance Awards, where Beazley received the 2023 Industry Impact award for the cyber catastrophe bond. Although relatively small at this stage, we have a strong pipeline of investor demand and expect further issuance through 2024. In April we gained widespread praise for projecting the world's first QR code into the sky, a way to showcase our brand attributes at an event on the River Thames making use of 400 sustainable drones for the projection, rather than an environmentally costly fireworks display.

 

Changes to management

I want to welcome two new senior colleagues to Beazley. The first is Clive Bannister, who became Chair at our AGM on 20 April 2023 and brings a wealth of public company and insurance sector experience. The second is Fred Kleiterp who joined as European General Manager on 01 June 2023 and will lead the next phase of growth in our European business, which will accelerate in the coming years.

 

After 18 years at Beazley, Sally Lake has decided to leave in 2024. For the last five years she has been Group Finance Director and has made an important contribution to Beazley's performance. We have started an external search for her successor.

 

 

Cyber Risks

Cyber Risks performed well in the year-to-date with 14% growth, despite a slight reduction in rates. The headwinds around war wordings began to recede, although the market remains competitive. We continue to view cyber as having exciting long-term growth prospects, particularly in Europe, where performance was strong in the first half of 2023.

 

Digital

Digital remained broadly stable for the first half, as we continued the build out of our Specialty insurance offering for small businesses around the world.

 

Marine, Accident and Political ("MAP") Risks

MAP Risks continues to grow in line with expectations. As expected, insurance written premiums reduced as a result of syndicate 5623 becoming a standalone syndicate, where we now only take a circa 18% share of its underwriting, as it is predominantly backed by third party capital.

Property Risks

There was significant growth in Property Risks (65% in the first half), as we continued to take advantage of the excellent market conditions. As expected, property reinsurance performed well in the first six months, while our property insurance book of business delivered stronger than anticipated growth, as the hardening reinsurance market drove increases in the primary market.

 

Specialty Risks

In Specialty Risks the very challenging conditions continued in Directors and Officers ("D&O"). We remained focused on areas which are less exposed to social inflation, such as environmental liability and programs business, as we continued our work to diversify the division's mix of business.

 

Cumulative rate change

	2018	2019	2020	2021	2022	2023HY
Cyber Risks	100%	100%	108%	203%	285%	277%
Digital	100%	103%	103%	112%	135%	134%
MAP Risks	100%	106%	118%	129%	135%	143%
Property Risks	100%	109%	125%	138%	153%	187%
Specialty Risks	100%	108%	130%	145%	147%	146%
All divisions	100%	106%	122%	151%	172%	181%

 

Platform and product strength

Beazley's strategy is to achieve a successful intersection of platforms and products and we believe that a mix of international, wholesale and domestic business will deliver better access to the highest quality risks in markets where we can add real value.

 

There are three core elements to our platform strategy - our North America platform, European platform and our wholesale platforms. These represent 36%, 9% and 55% of our 2023 half year premiums respectively.

 

Our wholesale platforms in London, Singapore and Miami continue to perform well, and seize growth opportunities as they emerge. In the domestic markets we see substantial opportunities for growth, where we are at different development stages of building significant domestic platforms in the two largest regions, North America and Europe.

 

Our US domestic business has underwritten $1,051.6m of insurance written premiums in the first half 2023, and has over 800 staff. There remain plenty of opportunities for growth and I am confident that we have the right infrastructure and product suite to capitalise on them.

 

In Europe, our business is at an earlier stage of development, in the first half 2023 it achieved insurance written premiums of $262.9m and we see positive opportunities across the rest of the year. We are committed to long term investment across Europe and strongly believe that having more direct access to risk which provides us with a more diverse portfolio and less volatile results is an investment worth making.

 

This platform strength is complemented by a product set focused on markets such as technology, healthcare, environmental, political risks, events and cyber, that have key attributes we covet such as long-term demand growth and which present specialist risks, where we can add value and good margin over the cycle.

 

By investing over time in strengthening our position from both a platform and product perspective we believe we have ensured we are primed for growth and are confident in our ability to achieve it.

 

IFRS 17

2023 is the first year we have reported our results under the new Insurance accounting standard, IFRS 17.

 

This has no impact on strategy or cash generation. This also has no impact on our regulatory capital position or our dividend paying capacity. Separately to IFRS 17 we have also chosen to make changes to our capital disclosures.

 

We have taken a fully retrospective approach to transition and prior period comparable numbers have been restated.

 

Reserving

With the transition from IFRS 4 to IFRS 17, we took the opportunity to revisit our reserving strategy and have set a preferred confidence level range of between the 80th and 90th percentile. This metric gives an indication about where the reserves sit compared to the best estimate and the capital requirement. IFRS 17 requires that the level of this additional amount above a best estimate reserve, known as the risk adjustment for non-financial risk, needs to be considered against a number of principles of which two are dominant. First, the level needs to be consistent with how risk is managed, contracts are priced and the portfolios are managed. The second principle states that the risk adjustment level should make the firm neutral to running off the obligations or selling them.

 

As at 30 June 2023, our reserve confidence level was at the 89th percentile (30 June 2022: 85th percentile, 31 December 2022: 85th percentile), which is towards the upper end of our preferred confidence level range.

 

Performance

Both underwriting and investment performance have been strong in the first half of 2023, leading to generation of own funds increasing our solvency ratio.  Under IFRS 17, there have been some effects which have reduced the insurance result when compared to our IFRS4 measure.  In Property Risks, where there has been a significant increase in expected returns on this division, as well as increasing the risk appetite for this business, the IFRS 17 risk adjustment increased significantly. This is because the cost of capital approach leads to the risk adjustment correlating to the expected return on capital on each line of business.  At the same time, with large rate increases within the market, and continued good attritional experience, we see an improvement on best estimate loss ratios. Given the short tail nature of the class we anticipate that this risk adjustment will reduce between now and the end of the year. On MAP Risks, whilst we have seen positive claims development leading to improvements within the best estimate, we have also increased the risk adjustment in specific areas to ensure that the underlying risks are fully reflected.

 

Investments

Our investments returned $143.9m, or 1.5% in the first half of 2023 (30 June 2022: a loss of $193.0m, or (2.5%)). Yields on our fixed income investments are higher than for many years and this has supported returns in the period. However, risk-free yields remain volatile and have continued to rise in recent months, generating some capital losses and reducing fixed income returns below yield based expectations. This development has been most significant in Sterling bond markets, where 2-year Gilt yields have risen by nearly 2 percentage points in the year-to-date, generating losses of 1.4% on these bonds. This has impacted our overall return, notwithstanding that only 7.6% of our investments are in Sterling denominated bonds. Corporate credit exposures within our fixed income portfolio have added to returns as credit spreads generally declined in this period. Overall, our fixed income investments, which make up 79% of the total, returned 1.2% in the first half of 2023. Elsewhere, our capital growth investments have performed well, returning 4.6% overall in this period, led by our equity exposures, which returned 16.5%. Looking ahead, our fixed income portfolio yield (5.3% at 30 June 2023) continues to promise a good level of return, but the macro environment remains uncertain, characterised by significant volatility, making it particularly difficult to predict investment outcomes.

 

Investment performance

	30 June 2023	30 June 2023	30 June 2022	30 June 2022
	$m	%	$m	%
Cash and cash equivalents	964.3	10.0	629.0	7.9
Fixed and floating rate debt securities
- Government	4,724.1	49.0	4,344.2	54.8
- Corporate bonds
- Investment grade	2,500.9	25.9	1,811.2	22.8
- High yield	362.7	3.8	304.9	3.8
Syndicate loans	33.2	0.3	32.2	0.4
Derivative financial assets	6.8	0.1	20.0	0.3
Core portfolio	8,592.0	89.1	7,141.5	90.0
Equity funds	251.2	2.6	63.7	0.8
Hedge funds	564.5	5.8	482.6	6.0
Illiquid credit assets	236.4	2.5	250.8	3.2
Capital growth assets	1,052.1	10.9	797.1	10.0
Investment portfolio total	9,644.1	100.0	7,938.6	100.0

 

	30 June 2023	30 June 2023 annualised return	30 June 2022	30 June 2022 annualised return
	$m	%	$m	%
Core portfolio	100.7	2.5	(177.7)	(5.1)
Capital growth assets	43.2	9.1	(15.3)	(3.5)
Overall return	143.9	3.0	(193.0)	(5.0)

 

 

 

 

 

 

Expenses

The expense ratio, which under IFRS 17 includes only expenses directly attributed to insurance activities, increased to 35% for the first half of the year (30 June 2022: 32%). For the first six months of the year, non-directly attributable expenses of $137.6m (30 June 2022: $103.0m) fall outside the insurance result. Taking these items together, total expenses for the first six months of the year were $862.7m (30 June 2022: $686.7m).

 

We continue to focus on our total expense base, allowing for additional expenses where aligned to underlying business growth or to enhancement to our business model. The latter includes execution of our three platform strategy, modernisation of our underwriting and finance platforms, setting up of on an onshore E&S carrier and digital trading capabilities.

 

Interest rate sensitivity

The Group has conducted a sensitivity analysis for debt and fixed income holdings, and recalculated the discounting impact for the reinsurance contract assets and insurance contract liabilities, to estimate that a movement in interest rates may affect the Group's profit after tax for the period/year as follows:

 

 

	Assets
	30 June 2023	31 December 2022
	$m	$m
Shift in yield (basis points)
150 basis point increase	(157.3)	(185.8)
100 basis point increase	(104.9)	(123.8)
50 basis point increase	(52.5)	(61.9)
50 basis point decrease	52.5	61.9
100 basis point decrease	104.9	123.8
150 basis point decrease	157.3	185.8

 

	Liabilities
	30 June 2023	31 December 2022
	$m	$m
Shift in yield (basis points)
150 basis point increase	122.4	133.5
100 basis point increase	82.5	110.1
50 basis point increase	41.7	45.6
50 basis point decrease	(42.7)	(46.7)
100 basis point decrease	(86.5)	(94.6)
150 basis point decrease	(132.7)	(143.7)

 

Capital

We have a number of requirements for capital at a Group and subsidiary level. Capital is required to support underwriting at Lloyd's, within the US and through our European company and is subject to prudential regulation by local regulators (PRA, Lloyd's, CBI, and the US state level supervisors). Further capital requirements come from rating agencies who provide ratings for BICI and BIdac. Beazley aims to manage its capital and leverage levels to obtain the ratings necessary to trade with its preferred client base. As at 30 June 2023, the Group's leverage was 15% (31 December 2022: 16%).

 

The following table sets out the Group's capital requirements of our Lloyd's and US businesses.

 

 

 

 

	Projected 31 December 2023	31 December 2022
	$m	$m
Lloyd's economic capital requirement (ECR)	3,289.8	2,577.1
Capital for US insurance company	180.4	180.9
Total	3,470.2	2,758.0

 

We estimate the surplus above ECR to be 23% at 31 December 2023 pre-dividend (31 December 2022: 40% post dividend). The Lloyd's capital requirement shown includes an initial view of the 2024 business plan, and thus already takes into account the additional growth expected next year. We are in the early stages of the 2024 business planning process, and the current estimate included within the ECR calculation assumes  growth net of reinsurance of around 20%. We will conclude the business planning process later this year. The surplus capital ratio also takes into account adjustments made under Solvency II.

 

We continue to utilise $225m of the $450m banking facility as a letter of credit to support our Funds at Lloyd's ("FAL").

 

Going forward, we will no longer be disclosing our capital surplus position above Lloyd's ECR. As we continue growing our business in the US and Europe, we have taken the decision to evolve our approach toward capital disclosures and focus primarily on the capital measure that covers the Group's business across a number of territories. We have chosen to use Group Solvency II coverage ratio (Solvency II ratio) as the key capital measure for the Group going forward. The calculation of Solvency II ratio is regulated and is subject to the capital adequacy requirements of the European Union Solvency II regime. This makes it comparable with Solvency II Capital disclosures made by our peers both in the UK and Europe, and aligned with the market practice.

 

We aim to maintain a Solvency II ratio in excess of 170% of Solvency Capital Requirement ("SCR"). As we remain committed to active capital management, the level of excess capital will continue to be driven by opportunities for organic growth, market environment, prudence, regulatory framework and a desire to maximise returns for investors.

 

As at 31 December 2022, our Solvency II coverage ratio was 244%. We estimate our 30 June 2023 Solvency II ratio to be at 273%. We generally expect half year Solvency II ratios to be higher than those at the end of the year, due to the end of year ratios including a projection for the following year's growth.

 

The half year ratio is a result of good underwriting performance and a strong return on investments driving significant own funds generation, while capital requirements are aligned with 2022 year end and  represent the current year business plan.

 

 

	30 June 2023 Estimate	31 December  2022 Actual
	$m	$m
Eligible Tier-1 capital after foreseeable distributions	3,782.5	3,330.5
Eligible Tier-2 capital - subordinated debt	516.7	506.2
Total Solvency II Eligible own funds	4,299.2	3,836.7
Capital requirement	1,573.8	1,573.8
Group Solvency II ratio	273%	244%

 

In the second half of the year, our capital requirements will be recalculated to reflect the growth expected in the business during 2024 as well as own fund generation in the period. We also expect to make a number of model changes/refinements at that time. When considered together, these factors are expected to increase our capital requirements, which will result in a decreased Solvency II ratio at 31 December 2023 when compared to 30 June 2023. Our current expectation is that the Solvency II ratio at year end 2023 will be below that for year end 2022.

 

Scenario sensitivity analysis

The table below shows the impact on the Group's estimated Solvency II ratio in the event of the following scenarios as at 30 June 2023.

 

	Impact on solvency II ratio
Cyber Largest RDS	(7)%
One-off Catastrophe loss equivalent to a 1-in-250 US windstorm	(32)%
50 bps decrease in interest rates1	(13)%

 

1This considers the impact on the SCR in isolation to the impact on eligible own funds.

 

The changes in capital disclosures do not impact our dividend strategy. When determining the level of dividend, the Board will continue to consider the Group's capital position, future investment and growth opportunities and our ability to generate cash flows. To the extent that our capital levels are significantly in excess of what we need to invest in profitable growth, we will look to return capital to shareholders.

 

Outlook

We have confidence in the ability of our diversified platform, product and geographic strategy to continue to deliver and look forward to achieving mid-teens growth. We also reiterate our guidance for the full year combined ratio on an IFRS 4 basis of high eighties. This is equivalent to a combined ratio guidance of low eighties on an undiscounted IFRS 17 basis.

 

Adrian Cox

Chief Executive Officer