15th Mar 2005 07:02
Beazley Group PLC15 March 2005 15 March 2005 Beazley Group plc Preliminary results for the year ended 31 December 2004 Beazley Group plc ("Beazley"), one of the Lloyd's market leaders, todayannounces its preliminary results. 2004 Performance * Profit before tax £33.4m (2003: £17.1m)* Earnings per share 9.3p (2003: 5.0p)* Net assets per share increased to 77p (2003: 67p)* Total dividend 1p (2003: 0.75p); committed to 4p minimum dividend for 2005* Gross premiums written £751m (2003: £708m)* Combined ratio of 90% (2003: 82%) 2004 Business Highlights * Strengthened capital position* US business launched and underwriting both property and specialty lines business* Increased ownership of managed capacity to 70% (from 54%)* Recruitment of high calibre, experienced teams Andrew Beazley, chief executive, said: "I am delighted to report results that demonstrate the operational and financialgrowth of our business. While trading conditions remain good in many of our keyareas, the strategy to widen access through our US operations will providegrowth opportunities throughout the rating cycle. In the absence of unforeseencircumstances, we expect that 2005 will be another excellent year for the group." Contacts Beazley Group plc Tel: 020 7667 0623Andrew BeazleyAndrew HortonNicholas Furlonge Finsbury Tel: 020 7251 3801Melanie GerlisNicola Hobday Chairman's statement I am delighted to report an excellent set of results for a year during which wecontinued our strategy of growing the business through building on ourunderwriting expertise. The successful rights issue raising net proceeds of £105m has put us in a strongfinancial position to pursue this strategy. We have acquired for the group £125mof additional Lloyd's syndicate underwriting capacity for a cost of £1m and usedsome of the proceeds of the rights issue to capitalise this capacity for 2005.We are in the process of acquiring an insurance company in the US with licencesto operate in fifty states enabling us to grow our US small business portfolioin our existing lines of business. Whilst we have done this the underwriting conditions have remained good. Thishas manifested itself in an increase in the group's profit before tax for theyear to £33.4m despite the group incurring a net loss of £15m from the fourhurricanes which impacted Florida in the third quarter of the year. Net assetsper share have increased to 77p and our earnings per share were 9.3p from whichthe board is proposing a final dividend 0.7p. This together with the interimdividend of 0.3p per share brings the total dividend for 2004 to 1.0p in linewith our commitment at the time of the rights issue. The final dividend of 0.7pwill be paid on 24 June 2005 to shareholders on the register on 27 May 2005. We expect that the 2005 full year dividend will increase significantly to aminimum of 4p per share. Our aim is to pay a reasonable level of dividendthroughout the underwriting cycle which will be increased when conditions allow. Our managed syndicate results for 2004 show a profit of £37m despite the impactof the hurricanes on the managed syndicates of £43m. Premiums written in 2004were £751m (2003: £708m). Net premiums written were up 13% to £617m, the claimsratio was 60% and the combined ratio was 90% (the impact of the hurricanes onthe claims ratio and combined ratio was 8%). We have achieved a 13.3% return on the 2002 year of account and our estimatedreturn for the 2003 year of account has improved from an initial estimate ofbetween 8% and 15% to a current estimate of between 10% and 15%. We expect areturn on stamp capacity of between 3% and 10% on our 2004 year of account,after a reduction in the return of 6% resulting from the hurricanes. We have continued to see increased rates in the Specialty Lines business withgenerally stable rating environments in Marine, Property and Reinsurance, withthe exception of commercial property insurance where we saw some easing ofrates. When we announced our interim results, we were seeing pressure on ratesin offshore energy insurance, large commercial property insurance andcatastrophe reinsurance. The impact of the four hurricanes has had a positiveeffect on steadying rates in the energy and catastrophe reinsurance sectors butnon-catastrophe exposed large commercial property has continued to ease. Within the Property Group we have added an engineering team which is consistentwith our strategy of adding specialist areas within our four business areas. Themembers of the engineering team have many years experience within their marketsand are market leaders. We have also added a UK cargo team to our Marinebusiness. The environment in which our employees operate is of paramount importance to usand we have been able to retain and attract people of excellent calibre. Theirskills, energy and enthusiasm is key to the delivery of everything which we haveachieved in 2004. During 2004 we have been able to add various building blocks to maintain andenhance the success of the company. In the absence of unforeseen circumstances,we expect that 2005 will be another excellent year for the group. Jonathan Agnew Chairman Chief executive's review Highlights • Growth in earned premiums and profit before tax as 2004 is the second year of activity for syndicate 2623. • Profit before tax for the group increased to £33.4m (2003: £17.1m). • Total managed capacity for 2005 is £742m (2004: £741m); group's share of total capacity increased to 70% (£522m). • Successful rights issue raising £105m net of expenses, subordinated debt issue raising $18m and increase in debt facility to £70m. • Acquisition of US insurance company. • AM Best rating for syndicate 2623 reaffirmed as A (excellent). • Engineering underwriting team joined the Property Group. • Renewed focus on technology. Market Overview Rating environment As predicted, after a number of years of substantial rate increases and arelatively benign loss climate, 2004 witnessed the easing of premiums in certainsectors. However reinsurance markets have remained firm and largely resisted thetemptation to reduce pricing in order to gain market share, maintainingdiscipline in the primary market. Many of the older and larger companies arestill plagued by reserve deficiencies which have to be funded out of currentoperating results. Whilst this in itself will not influence market pricing, whencombined with a disciplined reinsurance market and a historically low interestrate environment, expectation is for a reasonably stable market during 2005. Hurricanes Four hurricanes in the third quarter of 2004 amounting to an estimated insuredloss of up to $30bn are a reminder of nature's power and unpredictability. Thelosses were spread amongst many insurers and a material amount borne by theFlorida state funded vehicles. Although a substantial loss in total, it is atestament to the financial health of the market that they were met without amajor dislocation in pricing. The Asian tsunami, a great tragedy in terms of loss of life, gave rise to aninsured loss that was within the group's planned claims ratios. Distribution The group operates in the brokered market with all business traded throughinsurance or reinsurance brokers. An investigation by the New York attorneygeneral and others has resulted in allegations of improper practice being madeagainst certain broking firms and a call for reforms in the way brokers operate.Recent undertakings by the major brokers to make their charges more transparentis a welcome move and should result in the market becoming more efficient. US acquisition In October 2004, the group entered into an agreement to purchase Omaha Propertyand Casualty Insurance Company (OPAC) from the Mutual of Omaha. OPAC is alicensed carrier in fifty states. Full indemnities have been obtained from thevendor for all past liabilities. In addition an agreement has been entered intofor the administration by the vendor of the past portfolio. In essence, thegroup will purchase the licences. The group has set up its own underwritingcompany based in Hartford, Connecticut, with an office in Ponte Vedra, Floridaand hired key underwriting staff who will underwrite on behalf of the group'sLloyd's syndicate and the new insurance company. The key aims of this initiativeare to attract business within our Specialty Lines sector that does notcurrently come to Lloyd's, and to increase our share of the middle market andsmall customers. We already trade some of this business and see it as lessvolatile on both rates and loss ratios compared to the equivalent large riskbusiness. So where does this leave us for 2005? Our Lloyd's stamp capacity is £742m (2004:£741m) - within this there are reductions across some lines of businesscompensated by growth from the recently recruited engineering team and our USunderwriting company. On the investment side we implemented our strategy of diversifying some of ourinvestments into alternative assets in 2004 with the aim of getting incrementalreturns with little extra risk undertaken. The investment balance has grownconsiderably over 2004 and our aim is to maximise the returns on this portfoliowithin strictly defined conservative risk criteria. In the regulatory environment in 2004 the FSA issued their guidelines onindividual capital assessment (ICA). This requires all insurance companies toassess all the risks within their businesses and allocate capital to thoserisks. We have prepared our initial assessment and are in the process ofdiscussing this with Lloyd's and the FSA. At this stage we do not expect the ICAcalculation to have a material impact on the group. Group overview Capacity at Lloyd's has reduced to £13.7bn in total for 2005 and we have seen areduction in capital provided by third party capital providers. The group tookadvantage of this in the Lloyd's auction process acquiring £109m of capacityfrom our third party capital syndicate 623 for a reasonable price of £1m; afurther £16m was not taken up by the capital providers of syndicate 623 andtaken up by the group. This will allow the group to grow with modest risk bywriting a larger proportion of the renewal portfolio which is business wealready know. Our goals and objectives What makes Beazley different? Our whole operation, from the board down, is built on an unparalleled depth ofinsurance experience. Our growth has been built wholly on our areas ofexpertise. Core to our strategy is bringing in new people who have innovativeand challenging ways of making the way we approach business better. Specialist approach We have achieved the following within our four business divisions: • Specialty Lines - our main focus has been on the claims process. Wehave added to the claims team during the year by recruiting high grade experts.The aim is to restructure our process of claims handling so as to bring greaterefficiency in speed of resolution and lower ultimate costs. • Property Group - we acquired a well respected engineering team who arewriting engineering and construction business mainly in the UK, Europe and theMiddle East. We also set up an office in Florida to write high value homeownersbusiness. • Reinsurance - we continue to maintain our position as a leadcatastrophe reinsurance and risk excess division and have added expertiseparticularly in the European markets. • Marine - we have built our position within the cargo and energy marketsfollowing our recruitment in 2003. We have also added a UK cargo underwriter toour cargo team. Flow of business Our aim as a group is to access sources of business from as many suppliers aspossible with the proviso that we want to ensure that we have sustainable goodrelationships with our brokers. Our expansion into the US will increase ouraccess to the large regional brokers. Experienced management and underwriting team Our experienced and well-regarded management team remains in place. We havesuccessfully recruited a new chief information officer (CIO), Dominic Shine, anda new head of ceded reinsurance, Christian Schirmer. Dominic has come from thefund management industry whilst Christian has joined us from McKinsey where hewas a consultant within their insurance arm. Our people Our ongoing aim is to provide an environment in which our staff can thrive. Thismeans openness and clarity around accountabilities and responsibilities and aclear decision making process. We have continued to recruit high calibre staff both in the UK and in the US.The recruitment of the highly experienced and highly regarded engineering teamof four people in September 2004 adds both breadth and depth to our propertyportfolio. In the US we have recruited experienced personnel in all areas ofbusiness and support functions. In line with our desire to attract and retain the best we have appointed a headof talent management. The role encompasses sourcing our needs, investing inexisting people and designing the career structures to allow performance. Claims The quality of the claims process is extremely important to us as it isfundamental to the relationship we have with our clients. During the year wehave been building our claims management team bringing in extra skills andresources to compliment our existing highly experienced staff. Risk management We have added to our risk management processes in 2004 a detailed andcomprehensive risk matrix outlining all risks that the business is running. Wemonitor that controls are undertaken within the right timescales and these arereported to the appropriate executive committee and ultimately the auditcommittee. Our risk based internal audit process targets the higher risk areasfor regular review. This work is integrated into our individual capital assessment mentioned earlierwhere we assign capital to risk types. Insurance risk is our biggest risk - we continue to run with a benchmarktolerance of 15% of capacity for a 1 in 250 year US catastrophe on a net basis.Our risk models aggregate risks and determine the likely impact of variouscatastrophes. To manage our underwriting, we assign maximum gross and net line sizes byunderwriter by type of risk. We vary the limit according to the nature of thebusiness being underwritten and the experience of the underwriter. These limitscan only be exceeded if appropriately authorised. In addition to the tightunderwriting controls, we employ peer review across a selection of ourunderwriting decisions. This review is intended to challenge underwritingdecisions and ensure our decisions are robust. A rigorous process is adopted to review the adequacy of our reserves and wecontinue with our detailed quarterly peer review. Through this process eachunderwriting team and the syndicate actuary independently proposes movements ifrequired from the previous quarter's reserves. A meeting of the underwritingdivision team leader, the chief executive or director of risk management, thefinance director and the syndicate actuary review the various inputs andconclude on any reserve movements required. Annually the syndicate actuary'sanalyses are reviewed by an external actuary. Outsourcing We continue with our commitment to outsourcing of non-core business activities.These include data entry, syndicate bookkeeping, credit control and assetmanagement. Due to our increased size and the importance we place on our staffwe have decided to insource our human resources function which now reports tothe head of talent management. All outsourced activities are monitored regularly by management to ensure thatrequired service levels are maintained. Innovation We are continuing to invest in technology in order to provide our clients withimproved access to our products and services, and to ensure our staff haveleading edge capabilities to perform their functions efficiently andeffectively. In recognition of the growing importance of technology as an enabler to ourbusiness, we have strengthened our Information Technology (IT) team. A new CIO,Dominic Shine, came on board in July 2004, and is a member of the Executivecommittee to ensure that we are fully considering the opportunities thattechnology brings to our business. We are insourcing in areas where we feelthat IT can differentiate Beazley from our competitors and are continuing toimprove our capabilities for our core business at Lloyd's. We have launched an improved version of our e-trading platform(www.beazleytrade.com) which will replace our Eazypro platform. The new, moreflexible platform, developed by Beazley's IT team using leading edge .NETtechnology, allows us to deploy a range of sophisticated products andcapabilities to support our new business initiatives in the US. It will alsoopen up new ways of doing business in the UK, particularly in the area of smallrisks, where automation offers the ability to perform a high volume of lowervalue transactions efficiently. Its rating engine capabilities will also beapplicable to our traditional business at Lloyd's where a greater degree oftransparency is now required. To support our US strategy, we have opened offices in Ponte Vedra, Florida andFarmington, Connecticut. We will also be supporting a number of regionalproducers working throughout the US. Our investment in centralised web basedplatforms and deployment of a leading edge IP telephony solution for voice andvideo will allow cost effective and efficient communication between our USoperation and the UK. We continue to be actively involved in initiatives to improve efficiency in theLloyd's market and are supporting the ongoing Kinnect initiative to introducestraight through processing and improved data exchange. Our approach will be todevelop a flexible gateway to allow Beazley to link to whatever platforms aredeveloped in the future. Financial performance Managed syndicates results 2004 2003 2002 2001on an annual accounted basis £m £m £m £m 751 708 438 355Gross premiums writtenNet premiums written 617 544 289 269Net premiums earned 587 401 292 179Net claims incurred (350) (197) (174) (134)Net operating expenses (200) (165) (102) (71)Profit/(loss) for the period 37 47 22 (17) Claims ratio 60% 49% 60% 75%Expense ratio 30% 33% 34% 33%Combined ratio 90% 82% 94% 108% Overview and results Although Beazley has been managing syndicate operations since 1986, 2004 is onlythe second year in which the underwriting results of syndicate 2623 arereflected within the group's operating results. Being in the second year ofoperation, earned premiums, profit and earnings per share have all increasedconsiderably in 2004 over 2003 despite the £15m impact of the hurricanes. The group made a pre-tax profit of £33.4m (2003: £17.1m) delivering an after taxearnings per share of 9.3p (2003 restated: 5.0p). As the group is only in its second year of operation the table above shows themanaged syndicate results i.e. the total capacity managed by the group beingsyndicates 623 and 2623. This shows that in 2004 profit for the managedsyndicates was £37m (2003: £47m) and the combined ratio has moved to 90% (2003:82%). The hurricanes impacted the profit by £43m adding 8% to the combinedratio. The managed syndicates' gross written premium increased to £751m (2003: £708m).This is despite the devaluation of the dollar and is caused by the increasedcapacity in 2004. The rate increase on renewals across the whole business was 1%- within this, Specialty Lines showed an increase of 4% whilst rates in Marineand Reinsurance were stable and rates fell by 5% in the Property Group. Capacity Structure Managed syndicate capacity for the 2005 year of account is £742m (2004: £741m).Within this apparent stability there are various movements. The 2004 year ofaccount capacity is calculated using a sterling/dollar rate of exchange of 1.56,the 2005 using a sterling/dollar rate of exchange of 1.74 meaning that in realterms capacity has increased by approximately 9%. We have added an engineeringteam in 2005 and our US business will add premiums in 2005. The ownership of total managed capacity has increased from 54% in 2004 to 70%for 2005. The group bought £109m of capacity in the Lloyd's auctions in thethird quarter of 2004 at a total cost of £1m with an extra £16m not taken up bythe capital providers of syndicate 623, taken up by the group. For 2005 thegroup's share of the total managed capacity will be £522m (2004: £397m). It isexpected that the extra capacity owned by the group will generate significantprofits from 2006 onwards. Capital Requirements For 2005 the group has two requirements for capital. Firstly for itsunderwriting at Lloyd's it has to deposit capital, know as funds at Lloyd's(FAL), at a level of 46.2% of premiums. As the group in 2005 owns £522m ofcapacity this requires £228m of capital after allowing for £13.5m of creditsallowed by Lloyd's. The second requirement for capital is to capitalise the US insurance company.Our aim is to get at least a rating of A- from AM Best and this will require atleast $50m of capital to be injected into the company. The funds available to the group have grown during 2004 as we have raised £105mnet through a rights issue, increased our syndicated letter of credit facilityto £70m and issued $18m of long term subordinated debt. The debt has a finalmaturity of 30 years but can be repaid after 5 years. Reinsurance Beazley purchases significant amounts of reinsurance to mitigate the impact ofcatastrophes such as the recent hurricanes in Florida, to provide lead linecapabilities to our underwriters and to help manage the group's capitalposition. Reinsurance is only valuable if reinsurers are still solvent when collection isrequired. Given the long tail nature of Beazley's book this is particularlyimportant. Beazley's reinsurance security committee meets monthly to assess andreview our reinsurance counterparties. Not surprisingly financial strength is akey part of the analysis, but other factors such as management quality andwillingness to pay are also considered. As a result, our exposure to failingreinsurers and poor quality reinsurers has been kept to a minimum. Beazley also has strict processes in place to manage reinsurance debt, to ensurecollection occurs as quickly as possible. The combination of our securityvetting, our strict policy wordings and our reinsurance collection processes hashelped manage our aged debt exposure. During 2004 prices for reinsurance remained high and this is likely to continuein 2005. Those lines most impacted by the hurricanes, such as energy andproperty catastrophe, are likely to experience firming of rates whilst for thespecialty book rates are likely to remain high following shrinkage of capacityduring the last few years. Investments The group earns investment income on its FAL and its operating cash-flows withinsyndicate 2623. Both these elements have grown during the year, the FAL throughthe rights issue and the syndicate funds as we have received more cash inpremiums than we have paid out in claims, reinsurance and expenses. As stated in last year's annual report, the group has invested approximately3.5% of its funds in alternative assets (high yield bonds, equities and hedgefunds). We are expecting our syndicate funds to continue to grow throughout 2005 due tothe nature of our Specialty Lines portfolio and the increase in group ownedcapacity. As far as foreign currency hedging is concerned, during the year we sold $54m atan average rate of $1.82. This was done monthly to reflect the fact that dollardenominated profit are earned throughout the year. The aim of the group is tominimise foreign exchange risks as they arise. Dividends The board is proposing a final dividend of 0.7p which, with the interim dividendof 0.3p per share brings the total dividend for 2004 to 1p per share. Dividendsare expected to increase significantly in 2005 as we will have the cashavailable as profits are released from Lloyd's. Outlook Our expectation is that underwriting profits will be good in 2005 as ratesacross all classes remain at profitable levels. Although investment yields arenot expected to increase dramatically next year, the average investment balancewill be considerably greater and therefore our investment income will increase.Our capital position gives us the financial strength to continue with ourstrategy of investing in further opportunities to grow our business in ourdefined disciplined way. Andrew Beazley Chief Executive Specialist underwriting Specialty Lines Underwriting results 31 December 31 December 31 December(managed syndicates) 2004 2003 2002 £'m £'m £'m Gross premiums written 381 341 166Net premiums written 315 260 79Net premiums earned 290 162 93 Claims ratio 68% 63% 80% Rate increase achieved 4% 21% 38%Percentage of lead business 73% 77% 77% Profile Specialty Lines led by Johnny Rowell, comprises 3 teams - large risks, programmeand smaller risks, and political and contingency. It accounts for just over 50%of the group's total gross premiums written. The profile of business written hasstabilised from 2003 and business written during 2003 and 2004 is developingpositively. The team continues to concentrate on business where a depth ofunderwriter understanding and knowledge of their industry leads to results thatbetter the market average. Market overview The team has begun to consolidate its market position and complete the build ofinfrastructure that will provide its foundation for the next few years.Following several years of rapid growth, the rate of expansion in the portfoliohas reduced and the plan is for a stable overall portfolio in 2005. The mix ofbusiness written has not changed significantly from 2003 and, with the exceptionof the US initiative discussed earlier, is not expected to do so in 2005. The market environment has remained favourable in 2004, with rate increasesstill achieved across most classes of business. The exceptions have been inareas where the market perception of available margin has been greatest, forexample terrorism, but this business is in the minority. The key objectives for the team now are in improving the average quality of riskand the effectiveness of claims management. The first target can be met throughbetter risk selection and loss control, and the business plans for 2005 arefocussing on improving the intelligence networks that the teams employ to getaccess to the latest information on legal, economic, social and industry trendsthat affect their business to give them the ability to make the most informeddecisions. We are also extending the use of individual risk review and clientfeedback as we believe that this produces material selection and loss controlbenefits to both us and the insureds. We have continued to build the claims management team and plan to do so again in2005. The team currently consists of ----12 people and the team will increase toaround 20 by the end of 2005. As well as improving claims management, this willalso enable an increase in claims and underwriting integration and coordinationwhich should improve both underwriters' and claims managers' knowledge anddecision-making. The team will also complete its build of the marketing team which has animportant role to play in the coordination and management of our productionnetwork, especially with the initiative in the US. Outlook for 2005 There is some evidence that the rate increases achieved in recent years will notbe available in 2005 and the team is predicting a broadly flat rate environment.We will continue to recruit high calibre talent to the team for claimsmanagement, business development and business management, as we still believefirmly that it is the recruitment and retention of intellectual capital to theteam with interests aligned with the group's that is the core driver for profitand success in the future. Strategies Underwriting remains the focus of the team. In a dynamic environment it is theability to understand the trends and problems that are yet to emerge that willmake the difference. Our strategy is to ensure that our people get access tothis information and the ability to distil and use that information effectively.We have created an underwriting management team that will complete itsrecruitment process in early 2005 with skills in underwriting, legal researchand development and actuarial analysis. It is the goal of this team to implementthis strategy. Value creating activities Our objective of recruitment and retention of the best in the industry throughprovision of a motivating environment is unchanged for 2005. We intend toimprove the quality of service we provide to our clients both from the way thatwe give access to our products and also through the implementation of our riskimprovement initiatives. Property Group Underwriting results 31 December 31 December 31 December(managed syndicates) 2004 2003 2002 £'m £'m £'m Gross premiums written 171 188 145Net premiums written 141 153 115Net premiums earned 142 131 114 Claims ratio 60% 37% 41% Rate increase achieved (5%) 4% 27%Percentage of lead business 63% 53% 51% Profile Jonathan Gray heads Beazley's Property Group which generates almost a quarter ofthe syndicate's gross premiums written. The team contains acknowledged leadunderwriters in many classes of property insurance ranging from homeowners tolarge corporate clients. Our geographic reach encompasses business from all parts of the globe. Thisdiversity allied to our strong underwriting experience enables us to provide ourinvestors with a well balanced portfolio. Market Overview Throughout 2004 the US and international market place has experienced pressureon rates due to increased competition, attracted by favourable tradingconditions. The hurricane season in the US has been unprecedented with theSouth-Eastern states battered by a sequence of major windstorms. Whilst these events have not 'turned' the market, it should ease the downwardpressure. In the UK, the commercial market has experienced notable ratereductions although the severity reduced in the latter part of 2004. As ever insituations such as this, the expertise of the underwriting team to navigatethrough these challenges is critical and our underwriters' experience isinvaluable. The UK homeowners market has seen a stable rating structure. This isalso true of our covers account which handles small business on a delegatedauthority basis, although in recent months there have been some signs ofpressure on pricing. Outlook for 2005 We anticipate that whilst pricing has not bottomed out, the rate of downwardpricing pressure in most of the global market place has eased in the lastquarter of 2004. The level of catastrophes and their impact on the reinsurancemarket may contribute to the consolidation process. The homeowners and jewellersblock accounts should continue to maintain stability in 2005. Strategies In the UK, as part of ongoing domestic development, we have acquired a majorportfolio of homeowner business. This has increased significantly our marketposition and sterling income. As part of the group's US strategy, we have opened an underwriting office inFlorida. Our initial offering has been high valued homeowner insurance,successfully launched in December. Throughout 2005 we will be developing newproducts to further increase our market penetration. We have also sought ways to broaden our range of products at the Lloyd'ssyndicate to balance and grow the portfolio. To this end we successfullyrecruited a highly respected and experienced engineering/construction team inSeptember 2004. We firmly believe this team gives us a differentiator withinLloyd's as well as an additional revenue stream. Value creating activities We are satisfied that throughout 2004 we have prudently underwritten our waythrough a period of increased market competition in several sectors, andmaintained key trading relationships. In addition we have expanded revenues inareas that have experienced stable rating conditions. Perhaps more importantlythe year has seen us create new business access alternatives in the US and asignificant new product line in London with our engineering team's arrival. Ourgroup has evolved in 2004 and we have an improved business platform for 2005. Marine Underwriting results 31 December 31 December 31 December(managed syndicates) 2004 2003 2002 £'m £'m £'m Gross premiums written 117 88 60Net premiums written 97 66 46Net premiums earned 88 47 39 Claims ratio 44% 29% 55% Rate increase achieved - 10% 16%Percentage of lead business 53% 53% 51% Profile The Marine team is led by Clive Washbourn and in 2004 accounted for 15% of themanaged syndicate's gross premiums written. Since 1998 our developed knowledgeof the marine and energy sector, together with lead capability, has enabled usto provide clients with comprehensive and competitive risk solutions. Market overview During the past year underwriting conditions have stabilised but remainfavourable in most areas. During 2004 we were able to sustain rate rises in someareas of the portfolio, particularly within the marine liability account andsectors of the hull account. Mid year the energy account was showing signs ofincreasing competition but this trend has been reversed in the wake of hurricaneIvan. The past year saw some notable claims activity. Hurricane Ivan caused thelargest ever marine and energy market loss approaching $2bn. Our gross share ofloss currently stands in the region of $12m, the net loss after reinsurancerecoveries at $1.6m. We believe this to be disproportionately small in relationto our market share and is the result of selective underwriting. Outlook for 2005 Last year we mentioned the acquisition of an established cargo and specie team.They now have a full year of underwriting at the company and they are on targetto meet their first year income forecasts and loss ratios. A specialist energy underwriter was employed during 2003 and a comprehensiveportfolio of business has now been established. During 2005 it is our aim tofurther capitalise upon current positive underwriting conditions in the energymarket and write more business, focusing on high quality accounts well known tothe underwriting team. Although the majority of our portfolio continues to consist of individual risksunderwritten at the box at Lloyd's, we shall continue to develop opportunitiesto transact business through e-trading and service companies. Strategies We do not anticipate the same degree of expansion in 2005 as we have witnessedin 2004. There are two reasons for this. Firstly 2004 benefited from being the first fullyear of development for the new cargo and energy teams. Secondly the levellingoff of rating in some sectors means that conditions particularly within the hulland cargo account may not be right for aggressive acquisition of new business. In 2005 we have employed a UK cargo team. The aim is to access this accountwhich is historically profitable and of low claims volatility. The portfolio ofbusiness is not generally placed within Lloyd's and is to be accessed throughprovincial rather than London market brokers. The team will have a regionaloffice in Birmingham. In the first year emphasis will be on raising awarenessand marketing their product. We anticipate using the economies and efficienciesof a bespoke product on our electronic trading platform. Claims management on the hull and machinery account has been further enhanced bythe employment of an in-house surveyor. He will principally be involved inattending marine casualties as the underwriter's representative, ascertainingcause and facilitating swift and economic repairs. Value creating activities We seek to utilise our leading market position and the knowledge of the sectorto access the highest quality business. This combined with selectiveunderwriting allows us to write a profitable account of business whilst limitingthe potential downside in the event of catastrophic losses. Whilst we have always been specialists we feel that we continue to strengthenour base. We now have a broader spectrum of expertise both in terms of claimsmanagement and underwriting. Reinsurance Underwriting results 31 December 31 December 31 December(managed syndicates) 2004 2003 2002 £'m £'m £'m Gross premiums written 82 91 67Net premiums written 64 65 49Net premiums earned 67 62 46 Claims ratio 64% 54% 68% Rate increase achieved - 4% 44%Percentage of lead business 26% 27% 20% Profile The Reinsurance team is led by Neil Maidment and represents 11% of the managedsyndicate's 2004 gross premiums written. We have been a leading provider ofprotection for insurance companies worldwide for 19 years. The team specialisesin writing property catastrophe, property risk excess and casualty catastropheand maintains an established lead profile in the market. Market overview Underwriting conditions remained stable during 2004 in the property catastropheand risk and casualty catastrophe reinsurance markets. After three years of rateincreases beginning in 2000 and accelerating post World Trade Center disaster in2001, rates in 2004 were stable in total on the renewal portfolio. 2004 was marked by a frequency of landfalling hurricanes in the North Atlanticand typhoons in the North West Pacific. Total insured losses from these eventsis expected to be over $30 billion. Although the impact on the reinsurancemarket was not as great as if a single event of $30 billion had occurred, it wasenough to stall downward pressure on rates ahead of the January 2005 renewalseason. Although it is still too early to be certain, the tsunami tragedy on 26 Decemberis not expected to affect the property/casualty reinsurance market materially. The renewal retention ratio remained high in 2004 and we successfully increasedboth our share and our profile on target business. Western Europe, in particularGermany, France and Italy have yielded opportunities for new business along withAustralia and Canada. Central and Eastern Europe remains an area of potentialdevelopment. As in previous years, the department's main exposures outside ofthe US emanate from the UK and Japan where Beazley has an established leadprofile. Outlook for 2005 The team intends to take advantage of its position in the Lloyd's market duringthe current cycle, through consolidation and targeted development particularlyin Europe, thus increasing the portfolio efficiency. The January 2005 renewal season demonstrated a slight easing in marketconditions in general, the exception being accounts which suffered loss activityin 2004. Rates, terms and conditions are expected to remain at a level that willallow Beazley to continue to promote our strengths with both brokers and clientsalike. To this end the estimated premiums for 2005 will build upon the portfoliodevelopment achieved in 2004. Strategies The team will continue to advance our long-term objective of developing a welldiversified portfolio focusing on larger non-life insurance markets. Modelled data is now the norm within the market and we remain at the forefrontof developments in this area, actively employing IT capabilities that surpassmarket standards. The effectiveness of our modelling and analytical expertisehas led to improved catastrophe management and capacity utilisation. We attach particular importance to client visits and meetings in order todevelop a proper understanding of each risk. Value creating activities The reinsurance team is recognised as a leading writer of the class and hasbuilt strong access through a range of brokers. The team is known for itsability to provide long-term continuity and enjoys a reputation for handlingclaims efficiently, enabling settlements to be made promptly. Consolidated profit and loss account - technical accountGeneral business for the year ended 31 December 2004 Year ended 31 Year ended 31 December December 2004 2003 Notes £'000 £'000-------------------------------- ------ --------- --------- Earned premiums, net of reinsuranceGross premiums written 4 402.3 333.6Outward reinsurance premiums (73.3) (68.9)-------------------------------- ------ --------- ---------Net premiums written 329.0 264.7 Change in the gross provision for unearned (39.5) (165.6)premiumsChange in the provision for unearned 4.2 32.7premiums, reinsurers' share ------ --------- -----------------------------------------Change in the net provision for unearned (35.3) (132.9)premiums ------ --------- -----------------------------------------Earned premiums, net of reinsurance 293.7 131.8-------------------------------- ------ --------- ---------Allocated investment return transferred fromthe non-technical account 6 14.8 8.7-------------------------------- ------ --------- --------- Claims incurred, net of reinsuranceClaims paid:Gross amount (40.4) (5.8)Reinsurers' share 2.2 0.2Net claims paid (38.2) (5.6) Change in the provision for claims:Gross amount (184.4) (99.6)Reinsurers' share 40.6 27.6-------------------------------- ------ --------- ---------Change in the net provision for claims (143.8) (72.0)-------------------------------- ------ --------- ---------Claims incurred, net of reinsurance (182.0) (77.6)-------------------------------- ------ --------- ---------Net operating expenses 5 (87.4) (43.0)-------------------------------- ------ --------- ---------Balance on the technical account 4 39.1 19.9-------------------------------- ------ --------- --------- All operations of the group are continuing Consolidated profit and loss account - non-technical account For the year ended 31 December 2004 Year ended 31 Year ended 31 December December 2004 2003 Notes £m £m-------------------------------- ------ --------- ---------Balance on the technical account 39.1 19.9------------------------------- ------ --------- ---------Investment income 6 12.4 6.7Unrealised gains/(losses) on investments - (0.7)Investment expenses and charges (0.6) (0.3)------------------------------- ------ --------- --------- 11.8 5.7Allocated investment return transferred to the technical account 6 (14.8) (8.7) ------------------------------- ------ --------- --------- (3.0) (3.0) Other income 7 11.3 11.2Other charges 8 (14.0) (11.0)------------------------------- ------ --------- ---------Profit on ordinary activities before tax 33.4 17.1 ------------------------------- ------ --------- --------- ------------------------------- ------ --------- ---------Comprising:Operating profit based on longer term investment return 4 36.3 18.7Share of operating profit of associate 0.1 1.4Short term fluctuations in investment return (3.0) (3.0) ------------------------------- ------ --------- --------- Tax on profit 11 (10.0) (5.3)------------------------------- ------ --------- ---------Profit on ordinary activities after tax 23.4 11.8------------------------------- ------ --------- --------- Dividends - interim paid (0.7) (0.6)Dividends - final payable (2.5) (1.1)------------------------------- ------ --------- --------- 12 (3.2) (1.7)------------------------------- ------ --------- ---------Retained profit for the period 20.2 10.1------------------------------- ------ --------- --------- Earnings per share(*):- Basic, based on profit on ordinary activities after tax 13 9.3p 5.0p - Diluted, based on profit on ordinary activities after tax 13 9.3p 5.0p (*) Earnings per share has been restated to reflect the effect of the shareissue, see note 13 Statement of historical cost profits and losses In accordance with the amendment to Financial Reporting Standards ("FRS") 3"Reporting financial performance", no note of historical cost profits or losseshas been prepared as the group's only material gains and losses on assets relateto the holding and disposal of investments. Consolidated statement of total recognised gains and lossesfor the year ended 31 December 2004 Year ended 31 Year ended 31 December December 2004 2003 £m £m-------------------------------- ------ --------- ---------Profit on ordinary activities after tax 23.4 11.8Exchange differences taken to reserves (0.2) (1.6) -------------------------------- ------ --------- ---------Total recognised gains for the financial year 23.2 10.2 -------------------------------- ------ --------- --------- Balance sheet at 31 December 2004 2004 2003 Group Company Group Company Notes £m £m £m £m---------------------- ------ -------- -------- ------- --------AssetsIntangible assets 14 7.7 - 7.1 1.1--------------------- ------ -------- -------- -------- ----------------------------- ------ -------- -------- -------- --------InvestmentsInvestment in associated undertaking 1.3 - 1.2 -Investments in subsidiary undertaking - 5.1 - 5.1Other financial investments 578.0 228.3 241.0 131.7--------------------- ------ -------- -------- -------- -------- 15 579.3 233.4 242.2 136.8--------------------- ------ -------- -------- -------- -------- Reinsurers' share of technicalprovisionsProvisions for unearned premiums 19 33.6 - 31.0 -Claims outstanding 19 152.2 - 25.8 ---------------------- ------ -------- -------- -------- -------- 185.8 - 56.8 ---------------------- ------ -------- -------- -------- -------- DebtorsDebtors arising out of direct -insurance operations 16 74.8 - 58.8Debtors arising out of -reinsurance operations 16 14.2 - 19.9Other debtors 17 6.5 44.6 1.6 8.0--------------------- ------ -------- -------- -------- -------- 95.5 44.6 80.3 8.0--------------------- ------ -------- -------- -------- -------- Other assetsCash at bank and in hand 68.6 1.7 19.4 0.4--------------------- ------ -------- -------- -------- ----------------------------- ------ -------- -------- -------- --------Prepayments and accruedincomeAccrued interest 0.2 - 0.2 -Deferred acquisition costs 37.0 - 30.5 -Other prepayments and accrued income 18.3 - 9.2 0.2--------------------- ------ -------- -------- -------- -------- --------------------- ------ -------- -------- -------- --------Total assets 992.4 279.7 445.7 146.5--------------------- ------ -------- -------- -------- -------- 2004 2003 Group Company Group Company Notes £m £m £m £m---------------------- ------ -------- -------- -------- --------LiabilitiesCapital and reservesCalled up share capital 21 18.0 18.0 11.5 11.5Share premium account 230.5 230.5 132.4 132.4Merger reserve 1.6 - 1.6 -Profit and loss account 27.9 17.9 7.9 0.2--------------------- ------ -------- -------- -------- --------Shareholders' fundsattributable to equityinterests 22 278.0 266.4 153.4 144.1--------------------- ------ -------- -------- -------- --------Technical provisionsProvision for unearned premiums 19 187.4 - 155.8 -Claims outstanding 19 450.8 - 93.4 ---------------------- ------ -------- -------- -------- ----------------------------- ------ -------- -------- -------- -------- Provision for other risks and 20 7.2 - 3.5 -charges ------ -------- -------- -------- ----------------------------- CreditorsCreditors arising out ofdirect insurance operations 0.5 - 0.1 -Creditors arising out ofreinsurance operations 23.8 - 28.3 -Amounts owed to credit institutions 9.4 9.4 - - --------------------- ------ -------- -------- -------- --------Other creditors includingtaxation and social security 18 16.9 3.9 3.6 2.1 --------------------- ------ -------- -------- -------- ----------------------------- ------ -------- -------- -------- -------- Accruals and deferred income 18.4 - 7.6 0.3--------------------- ------ -------- -------- -------- --------Total liabilities 992.4 279.7 445.7 146.5--------------------- ------ -------- -------- -------- -------- The financial statements were approved by the board of directors on 14 March2005 and were signed on its behalf by: J G W Agnew, ChairmanA F Beazley, Group Chief ExecutiveD A Horton, Group Finance Director Consolidated cash flow statementfor the year ended 31 December 2004 Year ended 31 Year ended 31 December December 2004 2003 Notes £m £mNet cash flow from operating activities 23 278.3 125.8Taxation paid (3.3) (1.1)Capital expenditure - purchase of syndicate capacity (1.0) (1.1)Equity dividends paid (1.8) (0.6)Increase in debt 9.4 -Issue of ordinary shares 104.6 --------------------------------- ------ --------- ---------Net cash flows 386.2 123.0-------------------------------- ------ --------- --------- Cash flows were invested as follows:Increase in cash holdings 24 49.2 14.4Increase in shares and other variable yield -securities 20.1 -------------------------------- ------ --------- --------- Increase in debt securities and other fixed asset investments 24 316.9 108.6 -------------------------------- ------ --------- ---------Net investment cash flows 24 386.2 123.0-------------------------------- ------ --------- --------- Notes to the financial statements 1. Basis of preparation The financial information has been prepared in accordance with applicableaccounting standards and under the historical cost convention rules, modified bythe revaluation of investments, and in compliance with the Statement ofRecommended Practice on accounting for insurance business issued by theAssociation of British Insurers in November 2003 ('the ABI SORP'). The annualbasis of accounting as described in the ABI SORP has been adopted. The groupalso complies with section 255A of, and schedule 9A to the Companies Act 1985. The balance sheet of the parent company is prepared in accordance with theprovisions of section 226 of, and schedule 4 to, the Companies Act 1985. 2. Basis of consolidation The consolidated financial statements include the assets, liabilities andresults of the company and its subsidiary undertakings up to 31 December eachyear. Unless otherwise stated, the acquisition method of accounting has beenadopted. Under this method, the results of subsidiary undertakings acquired ordisposed of in the year are included in the consolidated profit and loss accountfrom the date of acquisition or up to the date of disposal. Certain group subsidiaries underwrite as corporate members of Lloyd's on thesyndicate managed by Beazley Furlonge Limited (the "managing agent"). In view ofthe several liability of underwriting members at Lloyd's for the transactions ofsyndicates in which they participate, the attributable share of thetransactions, assets and liabilities of the syndicate has been included in thefinancial statements. 3. Accounting policies a. PremiumsRelated Shares:
Beazley