26th Feb 2008 07:01
Beazley Group PLC26 February 2008 Beazley Announces Record Results Beazley Group plc results for year ended 31st December 2007London, 26 February 2008 • Profit before tax of £138.5m (2006: £86.8m)• Profit before tax and foreign exchange on non monetary items increased to £130.3m (2006: £96.2m)• Return on equity of 28.0% (2006: 20.0%)• Final dividend of 4.0p per share, plus a special dividend of 4.0p per share Growth across the business • Gross written premiums up 5% to £780.5m; net written premiums up 14% to £652.2m• US$175.2m of business written through US operations (2006: US$68.9m) Healthy financial position • Investment and cash balances up to £1,490.6m (2006 year end £1,167.8m)• Investment income at £64.9m (2006: £48.3m)• Prior year reserve releases of £64.1m (2006: £31.0m) Year ended Year ended % increase 31 Dec 31 Dec 2007 2006 Gross written premiums (£m) 780.5 745.1 5 Net written premiums (£m) 652.2 574.3 14 Net earned premiums (£m) 617.2 509.6 21 Profit before tax (£m) 138.5 86.8 60 Comprises: Profit before tax and foreign 130.3 96.2 35 exchange adjustments on non monetary items (£m) Foreign exchange on non monetary 8.2 (9.4) N/A items (£m) Earnings per share 28.1p 16.7p 68 Dividend per share - interim and 6.0p 4.8p 25 final Special dividend per share 4.0p - - Net assets per share 112.1p 89.8p 25 Beazley Group Chief Executive Andrew Beazley said: "The company delivered excellent results across the board in 2007. Our Lloyd'sunderwriters demonstrated strong risk analysis and selection skills anddelivered very good returns as rates in most of our lines of business began tofall from historic highs. Our claims staff continued to win praise for theirservice from clients and brokers - as well as industry awards. "In the United States, our operations grew rapidly, more than doubling thepremiums written locally in that market. Our US-based underwriters are able toaccess smaller scale and less volatile business than is available to ourunderwriters at Lloyd's. This diversification of our business should stand us ingood stead as the property/casualty market as a whole continues to soften." ENDS For further information, please contact: Beazley Group plcAndrew BeazleyT: +44 (0)20 7667 0623Andrew HortonT: +44 (0)20 7667 0623 FinsburySimon MoyseAmanda LeeT: +44 (0)20 7251 3801 CHAIRMAN'S STATEMENT The group has had another tremendous year and we are delighted to announcerecord profits of £138.5m. Overall The board is delighted to announce record profits before tax of £138.5m (2006:£86.8m). We are confident that our controlled approach to risk taking leaves uswell placed to build on this result going forward. Underwriting performance We continued to grow the business during 2007. Gross premiums written increasedby 5% to £780.5m. This was achieved in part through increasing the share of thepremiums we write through the combined Lloyd's syndicates from 78% to 81% in2007. The US business also increased its gross premiums contributionsignificantly to $175.2m (2006: $68.9m). The group's net premiums written rose by 14% to £652.2m in 2007, mainly as aresult of a change in the way the group buys reinsurance. In 2007, we increasedthe group's risk appetite to reflect the stronger capital base by buying lessreinsurance. For example, in the specialty lines business reinsurance spend fellfrom 26% of gross premium in 2006 to 17% in 2007. Market conditions On average, the rate charged for business we renewed fell by 4% in 2007 (2006:increase of 6%). Rating levels generally still compare favourably to the early2000's. The specialty lines business performed better than initially expectedwith decreases in rates of only 5%. Our shorter tail property insurancebusinesses enjoyed a reasonable start to the year but saw rates come underpressure in the second half. Property reinsurance rates eased but not to thesame extent as the insurance business. US business development The US business continued to gather momentum during 2007. Premiums written byUS-based underwriters were $175.2m - more than two and a half times the $68.9mwritten in 2006. The business was established in 2005, writing business throughour managing general agent (MGA) on behalf of both our syndicates at Lloyd's andour domestic insurance company, Beazley Insurance Company Inc (BICI). Thisplatform enables us to access business that would not traditionally have come tothe Lloyd's market. To supplement the existing business, we acquired in February2007 an MGA in Chicago called Sapphire Blue, which writes professional andgeneral liability insurance for long term care institutions. During 2007 $64.3m was written directly to our Lloyd's syndicates and $110.9mwas generated by BICI, the admitted market insurance company. During the yearthe US operations extended their product range from professional and managementliability insurance to include mid-sized commercial property. In April 2007 we increased the capital of BICI by a further $45m, bringing thetotal capital retained to $105m. In November A.M. Best upgraded the company'sfinancial strength rating from A- to A. This rating improvement should providefurther support for the development of the underwriting platform in the US. Combined ratio The group's combined ratio remained stable at 88%. The claims ratio fell to 50%(2006: 53%). In 2007 we released £64.1m (2006: £31.0m) of the 2006 year endclaims reserves. These reductions have been from reserves in both catastropheexposed businesses and specialty lines business. The absence of majorcatastrophes enabled us to release £30.7m from our property, reinsurance, andmarine accounts, while in specialty lines we were able to release £33.4m due tothe continuing positive development of claims experience. We are hopeful thatthis positive claims development will continue in 2008. We continue to invest in our US platform, which was one of the factors whichincreased our expenses ratio by 3% to 38%. During 2007 US employee numbers roseby 42 to 153. Investment performance Investment markets were particularly difficult in 2007 with the fallout from theglobal credit crisis beginning in the summer followed by volatile equity marketsin the second half of the year. In spite of this instability, we were able torecord increased investment income of £64.9m (2006: £48.3m) -a return of 4.9%(2006: 4.9%). We were impacted only marginally by the sub-prime mortgage bondsmark down - holding around 1% of our investments in these assets - none of whichwere collateralised debt obligations (CDO's), and all are AAA-rated. Theportfolio comprises mainly fixed income bonds and cash, with less than 10%invested in other investments such as equities and hedge funds. Capital The group's capital position remains strong. In the financial review section ofthis report, we describes the composition of the capital base - a mixture ofshareholders funds, long term debt and short term banking facilities. The lastof these, a syndicated £50m short term letter of credit facility, was recentlyrenewed. The capital is used to support Lloyd's underwriting, the US insurancecompany, and to fund acquisitions of small insurance companies and MGA's whichfit strategically with the business. In November 2007, following a review of the group's capital position, the boardauthorised a rolling on-market share buyback programme to return excess capitalto shareholders. We announced that 5% of our shares would be bought back andheld as treasury shares within the group. At the end of 2007, £5.1m of sharesrepresenting 0.9% of our share capital had been repurchased. We were pleased that Standard & Poors (S&P) upgraded our enterprise riskmanagement (ERM) rating to "strong". This places us in the top 14% of insurersand reinsurance companies worldwide. A strong enterprise risk management culturethroughout the organisation is a key asset to take us through the market cycle. Dividend The board propose a final dividend of 4.0p per share bringing the full yeardividend to 6.0p per share (2006: 4.8p). In addition, the board proposes aspecial dividend of 4.0p per share. The final dividend and the special dividendwill be paid on 9 May 2008 to shareholders registered on 18 April 2008. Management update Since August 2007, Andrew Beazley has been undergoing medical treatment. This isprogressing well and has only reduced to a limited extent his day to dayinvolvement in the business. As and when required during this period, NicholasFurlonge, co-founder of Beazley, has taken on Andrew's responsibilities as ChiefExecutive and Chairman of the Executive Committee. Johnny Rowell has taken overfrom Andrew as chairman of the group's underwriting committee. This committeelooks at all underwriting related matters within the group. The specialty linesdivision is undergoing a development of management structure that includes theformation of a new division, the political and contingency group (PCG). Conclusion We generated record profits in 2007 - a testament to the skill and hard work ofour people. We continue to search out opportunities for growth and profitthrough carefully targeted initiatives, particularly in relation to USoperations. We monitor developments closely in all our markets and will respondto the market cycle in the same disciplined fashion as we have done in the past. BUSINESS REVIEW 2007 has been another excellent year for the group. We have continued to growthe business - searching out strategic openings, pursuing vigorously the mostprofitable opportunities as well as building on long term client relationships. Strategy Our vision is to build a premium risk-taking business measured by results andreputation. Underpinning this vision are the following four principles: • We are a specialist insurance and reinsurance business focusing on underwriting and claims handling • The portfolio will comprise both large and small risks, with a geographical spread, and a balance between short and long tail businesses • Products will be distributed through brokers • We will provide an excellent service to brokers The enablers that will help us achieve this are: • Access to business worldwide Developing new ways of providing customers with access to insurance productswill help us grow the business profitably. • Claims management An exceptional claims management capability can be a source of competitiveadvantage for the group. Consequently, we are making a significant investment inthis area. • Informed underwriting decisions The knowledge and expertise of underwriters is central to our ability to developthe classes of business we write. Access to business worldwide The Lloyd's broker network provides us with access to large complex specialistinsurance risks from throughout the world and Lloyd's and London continue to bethe hub for this type of business. We have also established offices in a numberof overseas locations to access business that would not normally come to London. US business The US is by far the largest non-life insurance market in the world and has oneof the highest levels of penetration by brokers through whom we deal. The USbusiness is fully integrated with our London business and our underwriting ismanaged on a product line basis. We regard our US operations as a naturalextension of the Lloyd's business - we target markets we know well. Having apresence on the ground enables us to insure middle market and small scale riskswhich we would not normally insure through London. During 2007 the business grew with premiums increasing to $175.2m for the year(2006: $68.9m). Of the US$175.2m, $110.9m (2006: $35.9m) was written throughBICI, with the remainder being written directly to our two syndicates.igh H During 2007 we extended the branch network in the US, expanding both specialtylines and property businesses. Our head office is in Farmington, Connecticut andwe have offices in 8 other US states. Specialty lines, wrote $134.6m in 2007 (2006: $57.3m). Of this, $90.4m waswritten on behalf of BICI and a further $44.2m for the Lloyd's syndicates. Thespecialty lines team in the US targets small to mid-sized customers offering avariety of professional indemnity insurance (the current biggest segment beingarchitects and engineers), and management liability insurances (principallydirectors' and officers' liability and employment practices liability). InFebruary 2007, we acquired Sapphire Blue, a Chicago-based MGA, which writesprofessional and general liability insurance for long term care institutions. Weknew the organisation well, having supported the agency's business for a numberof years. In 2007 we wrote $16.1m through Sapphire Blue. The property group, which writes both commercial property insurance andhigh-value homeowners business in the US, wrote premiums of US$39.3m in 2007(2006: $10.3m). We write US commercial property business on both an admittedbasis through BICI, and on a surplus lines basis for the account of our Lloyd'ssyndicates. The admitted market business, which underwrites mid-sized commercialrisks, was launched in February 2007 and is supported by our internallydeveloped Beazley Trade underwriting system and offers brokers and clientsservice standards rarely matched in the domestic market. The high valuehomeowners' business, based in Florida, continues to develop a reputation as ahigh quality local insurer, writing business on a surplus lines basis. In 2007it wrote premiums of $14.3m (2006: $10.3m). Accessing markets worldwide We continued to search out new geographical opportunities in 2007, writingbusiness for the first time through our new branch offices in Paris andSingapore, complementing those offices already established in Hong Kong and theUS. The France and Singapore offices both operate on the same basis, sourcingbusiness locally on behalf of the Lloyd's syndicates. Building these branchoperations enables us to access business we would not normally see, diversifyingthe portfolio geographically. In France we write professional indemnityinsurance, within our specialty lines team, mainly focusing on protection forinsurance brokers and agents. In Singapore, a team within the property groupwrites specialist engineering risks and is managed through the UK. Claims management Unlocking the value in claims We continued investing in the claims service during 2007. The results to datehave been positive, delivering improved underwriting and pricing capabilities,high client retention rates, lower cost of the claims, and improved confidencein results and reserving. Clients - both insureds and brokers - along withcompetitors recognise the benefits of this investment. In a poll of over 3,000risk managers, insurers, reinsurers and brokers conducted by Reactions magazine,Beazley was awarded Best Insurance Company for Claims Handling. Furthermore,the specialty lines claims team won Insurance Day's Claims Team of the Yearaward where the team was described by Insurance Day as having "demonstrated anenviable track record in handling complex claims and a clear structurehighlighting the relationship between underwriting and claims professionals". We have chosen to differentiate our approach to claims service from competitors. We do not have a separate claims department -claims managers and underwritersare integrated by product line. We pride ourselves on high quality,appropriately sized teams, with specialist skills. For example, in specialtylines many of our claims managers are sourced from partner and senior associateroles in top law firms. Most have over 10 years' experience and expertise inspecialist areas, such as the insurance of architects and engineers,professional and general liability and employment practices. In the propertydivision, claims managers each have at least 14 years' experience. In themarine division, we employ a chief engineer of ships to evaluate the claims,finding alternative solutions to clients' exposures and our own. We adopt a team based approach to claims, particularly in specialty lines wherethird party claims can generate significant complexity, and have developedanalytical tools to support our efforts. We have also refined our approach inthe selection of counsel and adjusters and are working closely with them toimprove their practices. Last year, we decided to set up claims operations inthe US to manage US professional and management liability claims emanating outof both Lloyd's business and BICI. This has enabled us to tap into new talentpools for claims managers, to develop closer relationships with clients, and toachieve better results on claims by supporting clients in person at mediationsand arbitrations. As a consequence, we have continued to grow these operations. We remain confident that the energy invested in this important area willcontinue to benefit both clients and shareholders. We believe that there ispotential to add more value in this core area. Informed underwriting decisions Rating Environment Cumulative rate changes since 2001 2001 2002 2003 2004 2005 2006 2007 2008 % % % % % % % % Specialty 100 134 160 166 167 166 158 151 lines Property 100 127 132 126 124 139 137 118 Reinsurance 100 142 148 148 148 190 199 180 Marine 100 118 128 128 131 141 132 123 Total 100 131 145 146 146 155 149 138 Overall the rates charged for business we renewed fell by 4% in 2007 (2006: anincrease of 6%). This reduction should be viewed in the context of thehistorically high rates seen in the market at the end of 2006, as demonstratedby the chart above. Since 2001 rates across all our lines of business haveincreased by 49%. In the property division, rates reduced by 2%. The reductions are a reflectionof a relatively benign claims environment, particularly on the catastropheexposed parts of this account. Similar rating pressure was also experienced byour reinsurance team in the later stages of 2007. Despite this, overall, thisbusiness saw rates increase by 5%. In 2006 the catastrophe parts of theseinsurance accounts saw significant rate increases as a result of the high levelof claims following the devastating hurricane season in 2005. Similarly the marine business has faced increasing competition across all lines,particularly in marine cargo and energy, where rates have fallen by 7% and 9%respectively. These are insurance risks we know well, and their pricing reflectsthis knowledge. The largest line of business, specialty lines saw a 5% rate reduction. Theoverall specialty lines account has been trading at historically high levels fora number of years. Premiums achieved in 2007 were 58% higher than that forcomparable risks in 2001. We are confident of the level of profitability inspecialty lines supported by the pricing methods employed, risk managementapproaches adopted, and claims handling techniques applied. Growth and balance In 2007 gross premiums written increased by 5% to £780.5m. This is only partlyexplained by the increase in ownership of the managed premium capacity atLloyd's, where we now own 81% (2006: 78%). The main reason for the increase isthe growth of our premiums written through our operations in the US. The balance between our locally underwritten US business and our Lloyd'sbusiness (of which US risks are also a major component) is a key part of ourstrategy to manage the insurance cycle. By marketing insurance products throughthese separate, but complementary, distribution channels we can achieve a lessvolatile business mix than a "Lloyd's only" strategy. Outlook 2008 will be a more challenging year for the insurance industry and will give usthe opportunity to distinguish ourselves from the competition. We have built aplatform that is differentiated from peers in the products we offer (we are thelargest insurer of US professional liability business at Lloyd's); the way weaccess business through our US operations; and our approach to claimsmanagement. Over the past two years, strong market conditions and an absence of significantcatastrophe losses have contributed to excellent results across the sector. Thearea of most competition is the large catastrophe-exposed syndicated propertybusiness where there are few barriers to entry. Although our income in this areais expected to fall in 2008, these lines will still form a significant part ofour portfolio and represent one of our core competencies. We expect this declineto be counterbalanced by the growth of the US operations. We continue toconstantly monitor the cycle across lines of business as "eternal vigilance" isthe key to success and market conditions may alter rapidly. The US strategy is to source business that is not subject to the samecompetitive pressures as the Lloyd's market business. The US operations are nowwell established and we expect this business to continue to grow substantiallyin 2008. We have set a target for premiums underwritten locally in the US of$250m. Our people are closely aligned to the interests of our shareholders. Managementand staff own 15.6 million shares (4% of the company), and underwrite £10m ofcapacity through our Lloyd's syndicate. Managing the insurance cycle remains our key objective, and with more than 21years' experience of market cycles, the challenges are not unfamiliar to us. Welook forward to 2008 based on our current market position, strategic focus andexperienced team of underwriters, claims and support staff. No one likes to seea market soften, but we expect the cycle to create opportunities forestablished, well diversified, underwriting focused businesses like ours tocreate substantial long term profits. FINANCIAL REVIEW 2007 2006 Movement £m £m % Gross premiums written 780.5 745.1 5Net premiums written 652.2 574.3 14 Net earned premiums 617.2 509.6 21 Net investment income 64.9 48.3 34Other income 10.1 7.1 42 Revenue 692.2 565.0 23 Net insurance claims 307.4 270.7 14Acquisition and administrative 237.4 179.6 32expenses Foreign exchange (gain)/ loss (3.1) 22.3 - Expenses 541.7 472.6 15 Finance costs 12.0 5.6 114 Profit before tax 138.5 86.8 60 Claims ratio 50% 53% -Expense ratio 38% 35% -Combined ratio 88% 88% - Rate (reduction) / increase (4%) 6% -Investment return 4.9% 4.9% - The group has reported record profits of £138.5m, a 60% increase on 2006. Thisis achieved despite increasing competition in underwriting markets andvolatility in investment returns. Highlights include: • Gross premiums increased by 5% • Reinsurance purchased by the group reduced from 22.9% of premiums written to 16.4% in 2007 • Claims releases of £64.1m (2006: £31.0m), of which £15.6m related to releases from the catastrophe exposed accounts from the 2006 underwriting year • Investment return of 4.9%, generating income of £64.9m Gross premiums written During 2007, gross premiums written rose by 5% to £780.5m. This growth wasachieved despite the 4% devaluation of the US dollar in 2007 and 4% reduction ininsurance renewal rates. Around 70% of our business is written in US dollars -hence the importance of this exchange rate. The main reasons for the increase inpremiums were the growth in the US operations - which wrote $175.2m of premiumsin 2007 (2006: $68.9m), together with the increase in the group's ownership ofthe combined syndicates which rose to 81% in 2007 from 78% in 2006. As highlighted in the business review section, the business is well diversified- both by class of business and geographical location. As well as protecting usfrom exceptional events, it also enables us to hold lower levels of capital tosupport the business. We continue to write 51% (2006: 48%) of gross premiums through our largest team- specialty lines. The charts below show the composition of our portfolio in 2007, across types ofinsurance, settlement terms, classes of business and geographical regions. Reinsurance Reinsurance is purchased for a number of reasons: • To minimise the impact of catastrophes such as hurricanes; • To provide lead line capabilities to underwriters; and • As a way of managing capital In 2007, reinsurance costs decreased by 24.9% to £128.3m. As a percentage of thegross premiums written, it fell from 22.9% to 16.4% during the year. This waslargely the result of two decisions the group made around it's appetite toretain risks. Firstly, in the specialty lines business we rebalanced theproportional treaty arrangements by taking on a larger share of the risks.Secondly, in the treaty reinsurance business we re-underwrote the account in2007 to be less reliant on the third party reinsurance market. Combined ratio The group's combined ratio remained at 88% in 2007. Within this the claims ratioreduced from 53% to 50%, while the expenses ratio increased from 35% to 38% in2007. Claims The claims ratio decreased from 53% to 50% in 2007. This arose due to twoprincipal factors: • Releases of claims reserves held in the short tail accounts, particularly against catastrophe type risks, following benign claims activity mainly from the 2006 underwriting year; and • Releases from our specialty lines account reduced the claims ratio by 5.4% (2006: 3.5%). As the business has matured over the past five years, we have gradually beenable to increase the levels of reserve releases across all classes of business. We found 2007 to be a quiet year in terms of claims activity. There were a smallnumber of events which caused modest claims in the early to mid-part of 2007.Windstorm Kyrill caused losses across a wide area in Europe in January. The UKfloods in the summer, firstly in Yorkshire and parts of Northern England andthen the west of England, caused losses within the UK homeowners' insuranceaccount. All these events were contained within the reserves established foranticipated losses. Claims arising from sub-prime exposures Against the backdrop of increased market commentary about sub-prime mortgagesand related issues, we set up an internal working party during 2007 tasked withmonitoring the risks to and opportunities for Beazley. As was demonstrated inthe late 1990s, Beazley has limited appetite for professional liability riskswithin the financial institution sector. This has remained the case and whilstthe number of sub-prime related cases (as reported recently by Advisen) isapproaching 200, the number of claims to Beazley arising out of those casesremains in single figures. As such, we currently expect that our exposure willremain within our reserves and we don't anticipate a change to our reservingphilosophy. Our underwriters and claims managers are skilled at measuring,predicting, diversifying and mitigating the risks to Beazley. 2006 catastrophe reserves We were able to release £15.6m in 2007 in respect of claims reserves held at theend of 2006 for potential catastrophes. We were unable to release these reservesat the end of 2006 because at that stage we were still on risk for a number ofpolicies we covered. These releases were in the reinsurance (£5.2m), property(£5.3m), and marine energy (£5.1m) accounts. Total releases from the short tail accounts, where claims are settled within twoyears of the policy period expiring, totalled £30.7m. The table in note 7 setsout in which accounts these claims releases originated, but as you will notice,all lines of business reported favourable adjustments. The reserving approach inthese accounts remains consistent with prior years. We take a conservative viewof the unexpired policies within portfolios, only making releases once asubstantial part of the account has expired. Specialty lines claims reserve releases The specialty lines claims reserves continued to develop well in 2007 enablingus to release a further £33.4m during the year (2006: £18.0m). We haveconsistently adopted a cautious approach towards reserving in this business. Thenature of these claims is that for the majority of classes of business thecorridor of uncertainty surrounding potential losses is wide in the first threeyears of development following the premium being written. As we gain morecertainty in years four and five, we have a better view as to where claims arelikely to settle and we can adjust reserves accordingly. Across all underwriting years the ultimate claims reserves we were holding havereduced during 2007, enabling these releases. This can be seen in the lossdevelopment tables within the notes to the accounts. These show loss ratios atvarious points in time - after 1 year, after 2 years, after 3 years, at the endof 2006, and current. These tables also give the size of release made byunderwriting year. The majority of the releases come from the earlier years -£25.5m relating to the 2004 underwriting year and prior. Expenses The expenses ratio has been restated in 2007 (and for 2006 comparatives) so thatit includes all costs. We believe that by including all costs within the ratio,this is a fairer representation. The expense ratio has increased by 3% to 38% in 2007. This was largely due tothe growth in the US operation and increased profit related variablecompensation. In the US we have increased the number of people employed from 111to 153. As the business is in a start-up phase where costs are currently growingfaster than premiums being written, this has an adverse impact on our expensesratio. The first few years of building the US operation have involved a numberof one off costs such as information technology (IT) development on underwritingsystems and facilities costs in establishing new offices. It is likely that certain of these costs, such as IT, will continue into 2008 -as we search out more efficient longer term IT platforms to support thebusiness. It was always known that building offices on the ground in the USwould be a more expensive approach than running a pure Lloyd's operation. Thereward for this spend will come from the quality and type of business we areable to write (i.e. business that would not come to Lloyd's). These benefitswon't be seen initially, however, but rather are investments for the future. Employee numbers In 2007 we continued to build the business through growth in talent,particularly in the US. By the end of 2007 we had 153 people in the US (2006:111), of which 53 were underwriters and a further 18 were claims managers. Inthe UK the headcount level stabilised in line with the premiums being written.The largest growth areas were in specialty lines in the US, and support staff inthe US - both in response to the increased premiums and volumes being written.The claims team within specialty lines also increased from 25 to 35 people inline with our service strategy around claims highlighted in the business reviewsection in this report. Employee numbers 2007 2006 Specialty lines 205 172Property 71 55Reinsurance 10 9Marine 25 28 Finance (including actuarial, compliance and 63 55internal audit) IT 52 43Ceded reinsurance 13 15Talent management 12 11General management and other support 39 31 Total 490 419 UK 326 298US 153 111Other (Hong Kong, Singapore, and Paris) 11 10 490 419 Investment performance 2007 was a year of exceptional volatility in financial markets, marked by acollapse of confidence in credit markets during the second half of the year.Despite this investment income grew to £64.9m (2006: £48.3m), providing a returnof 4.9% (2006: 4.9%). During the first half of 2007, strong economic growth globally, together withrising commodity prices, continued to provide upward pressure on interest ratesas inflation concerns mounted. However, the effect of monetary tightening andthe escalating crisis stemming from increasing defaults in the sub-prime sectorin the US caused a collapse in confidence in financial assets during the secondhalf, as multi-billion dollar write-downs were announced by leading banks andinvestment houses. This particularly exhibited itself in the sharp increase inmoney market spreads over official rates as money market funding dried up.Central banks reacted to the increasing strains in the financial system byreducing rates and injecting funds, but this did not prevent credit spreads,even of high quality assets, from widening sharply in the second half. However,for the group, the high quality of our fixed income portfolios largely insulatedour returns. At 31 December 2007 the weighted average duration of our bond andcash portfolio was one year. The group's investments in alternative assets and equities added to theinvestment returns. Hedge funds achieved a return of 7.5%. Meanwhile, thegroup's equity investments achieved a return of 7.7%. The US fixed income portfolios had a limited exposure to US sub-prime assetsthroughout 2007. These are all AAA-rated asset backed securities and comprisedaround 1% of group assets as of 31 December 2007. The group does not permitinvestment in collateralised debt obligations (CDOs). All these securities havebeen consistently marked-to-market throughout the year. We remain comfortable with the overall position of the group's investmentportfolios, and anticipate that during 2008 some of the spread widening that hasdampened fixed income returns in 2007 may reverse as the current credit concernsare worked through. We continue to look for opportunities to enhance returnswhile limiting volatility of the overall portfolio, both through investment indiverse asset classes and by utilising managers with different skill sets. Tothis end we have appointed a new manager, BlackRock Investment Management, tomanage a portion of the sterling fixed income assets from January 2008. For regulatory and legal reasons, certain trust funds and deposits are requiredto be managed centrally by Lloyd's on behalf of the syndicates. These funds areinvested in high-grade, fixed income securities and their performance isdetailed separately in the table below. The group maintains funds in cash for various operational purposes. The majorityof these cash balances are invested in money market funds. The table below highlights the returns received by currency and by investmenttype. 2007 2007 2006 2006 Average Annualised Average Annualised £m return £m return % %Fixed interest securities UK£ 550.4 4.7 383.0 4.5US $ 523.3 5.0 425.7 4.4 Lloyd's managed and other 67.2 3.7 56.6 3.9 Hedge funds 60.7 7.5 45.3 11.1 Equities 47.7 7.7 22.5 11.9 Cash and money market funds 79.9 2.8 57.5 3.7 TOTAL 1,329.2 4.9 990.6 4.9 Investment income has also increased as a result of larger cash and investmentbalances being managed by the group. The group's cash and investment balancegrew during 2007 mainly due to additional underwriting of syndicate 2623 in 2007and a benign 2 years for major claims. Foreign exchange differences arising on non-monetary items In 2007 the impact of the foreign exchange adjustment on non-monetary items is acredit to our income statement of £8.2m (2006: a charge of £9.4m). Non-monetaryitems include unearned premium reserves, reinsurers' share of unearned premiumreserves, and deferred acquisition costs. Under International FinancialReporting Standards (IFRS), these balances are carried at historic exchangerates, while monetary items are translated at closing rates. This imbalancecreates volatility in our accounts which cannot be hedged as the mismatch is notmonetary in nature. In 2007, the historic US dollar rates applicable to the non-monetary balancesare weaker relative to sterling than the closing dollar exchange rate applied.This has a positive effect on net assets as the non-monetary net liability isvalued lower than when using the closing rate. BALANCE SHEET MANAGEMENT Summary balance sheet 2007 2006 Movement £m £m % Intangible assets 28.7 21.9 31Investments and cash 1,490.6 1,167.8 28Insurance receivables 199.9 244.0 (18)Reinsurance assets 353.3 353.1 -Other assets 108.2 97.4 11Total assets 2,180.7 1,884.2 16 Insurance liabilities 1,471.9 1,225.6 20Borrowings 156.7 154.9 1Other liabilities 153.5 184.2 (17)Total liabilities 1,782.1 1,564.7 14 Net assets 398.6 319.5 25 Net assets per share 112.1p 89.8p 25 Intangible assets Intangible assets consist of goodwill on acquisitions (£15.5m), purchasedcapacity in the combined syndicate (£4.4m), licences (£4.6m) and capitalisedexpenditure on IT projects (£8.0m). The total balance on intangibles increasedby £6.8m in 2007 to £28.7m as a result of both the acquisition of Sapphire Blue,a US based MGA that writes professional and general liability insurance and thecapitalisation of additional IT expenditure in 2007. The IT capitalisationrelates mainly to building the large commercial property underwriting platformin the US, ongoing development of the specialty lines underwriting platform inthe US, and development of systems to better manage claims processes. Ouraccounting policy is to depreciate these items over their useful economic life(3 years). Investments and cash The group's portfolio remains mainly invested in high quality, short durationbonds. We invest 10.6% (2006: 11.8%) in alternative investments and equities toenhance returns and further diversify risks associated with investing solely inbonds. The group's strategy is to use a number of specialists to manage the portfoliosin order to diversify manager risk and to give us access to different investmentstyles and skill sets. Manager Investment Type 2007 2007 £m % of totalAllianceBernstein US $, £, Euro •, CAD $ 917.5 61.5 Fixed income, equity Conning Asset Management US fixed income 179.9 12.0Wellington Management US fixed income 106.8 7.2Union Bancaire Privee Alternative investments 157.9 10.6 including hedge funds Lloyd's Corporation Fixed income 73.0 4.9Scottish Widows Money market funds 20.3 1.4Investment Partnership AIM Global Money market funds 7.1 0.5Bank of America Money market funds 16.2 1.1Other cash balances Current account and 11.9 0.8 deposits TOTAL 1,490.6 The performance of the managers and the structure of the investment portfolio ismonitored by the chief investment officer who reports to the investmentcommittee, which holds delegated responsibility from the board for allinvestment matters. Insurance receivables Insurance receivables represent broker balances receivable in respect ofpremiums we have written. During 2007, broker balances decreased by 15% to£199.9m. We continue to outsource the collection of our premium broker balancesto JMD Specialist Insurance Services Limited, which operates within the Lloyd'smarket as specialist credit controllers. Reinsurance assets Reinsurance assets represent recoveries from reinsurers in respect of incurredclaims (£280.4m), and the unearned premiums reserve on reinsurance (£72.9m). Of the recoveries from our reinsurers, £89.1m is in respect of claims paid orreported to us, and a further £191.3m is an actuarial estimate of the recoverieson claims not yet reported. These assets are managed through: • Minimising risk through selection of reinsurers who meet strict financial criteria (e.g. minimum net assets, minimum 'A' rating by S&P when initially selected). These criteria vary by type of business (short vs. medium tail). The chart below shows the profile (based on S&P rating) of these assets at the end of 2006; • Timely calculation and issuance of reinsurance collection notes from our ceded reinsurance team; and • Regular monitoring of outstanding debtor position by our reinsurance security committee. We continue to provide against impairment of reinsurance recoveries, and at theend of 2007 we had provided £5.7m (2006: £4.8m) in respect of reinsurancerecoveries. Other assets The largest items included in the balance are: • Deferred acquisition costs (£82.0m) • Deferred tax assets, either against UK or US taxes paid (£4.5m); and • Profit commissions receivable from syndicate 623 (£7.6m); Insurance liabilities Insurance liabilities of £1,471.9m consist of two main elements; unearnedpremiums reserve ("UPR"), and gross insurance claims. • Our unearned premiums reserve (UPR) has increased by 7% in 2007 to £384.3m, mainly due to increased premiums written. The bulk of the UPR relates to the current year. Current indicators are that this is profitable and will earn through to the income statement in 2008. • Gross insurance claims are made up of claims which have been notified to us but not yet paid and an estimate of incurred but not yet reported claims (IBNR). These are estimated by both the underwriter and the syndicate actuary through the quarterly peer review process. Gross insurance claims increased by 26% in 2007 to £1,087.6m mainly due to the increase in business written. Borrowings The group utilises two long term debt facilities: • In 2006 we raised £150m of lower tier 2 unsecured fixed rate debt that is payable in 2026 and callable in 2016. The initial interest rate payable is 7.25%; and • An US$18m subordinated debt facility raised in 2004. This loan is also unsecured and interest is payable at the US interbank offered rate (LIBOR) plus 3.65%. These subordinated notes are due in 2034 and callable in 2009. At the time of the £150m bond issue we entered into a derivative transaction,whereby we matched our investment and currency risk by swapping the sterlingfixed rate loan into the equivalent of: • £108m of floating rate sterling loans; and • US$80m of floating rate US dollar loans. These items have been accounted for using hedge accounting for both the floatingrate and currency elements of the transaction. In addition to these borrowings we operate a £50m syndicated short-term bankingfacility, managed through Lloyds TSB. The facility was successfully renegotiatedfor two years in November 2007. Currency profit hedging We minimise currency exposure to the US dollar, which represents the group'slargest currency risk, by estimating US dollar profits each year and selling aproportion each month. By the end of each year we aim for US dollar exposure tobe minimal. At the end of 2007 we had £67.8m of US dollar net assets, whichmainly relates to our investment in the US. In 2007, the group sold US$332m atan average exchange rate of 2.00 (2006: 1.88). We also sell year-end unhedgedprofits for the second largest currency exposure, Euros, once a year. CAPITAL POSITION The group has several requirements for capital: 1. To support underwriting at Lloyd's through syndicate 2623. This is based on the group's individual capital assessment. This may be provided in the form of either the group's cash and investments or debt facilities; 2. To support underwriting in Beazley Insurance Company, Inc. in the US; and 3. To make small acquisitions, such as the Sapphire Blue acquisition in 2007, of insurance companies or MGA's whose strategic goals are aligned with our own. Our funding comes from a variety of sources: 1. £398.6 comes from shareholders funds (i.e. net assets). Of this balance, £113.3m is unavailable to the group because it relates to intangible assets, fixed assets or undistributable syndicate profits. 2. £150m was raised in 2006 through a tier 2 subordinated debt issue; 3. An $18m subordinated long term debt with a maturity in 2034; and 4. An undrawn banking facility of £50m provided by a syndicate of banks led by Lloyds TSB. In November 2007 we announced a rolling on-market share buyback programme torepurchase up to 5% of the company's issued share capital, representingapproximately £30m. By the end of 2007, £5.1m (representing 0.9% of thecompany's shares) had been repurchased. The special dividend of 4.0p per sharewill distribute an additional £14.5m. 2007 2006 £m £mSources of funds Shareholders funds 398.6 319.5Tier 2 subordinated debt 150.0 150.0Long term subordinated debt 9.0 9.2(US$18m) 557.6 478.7Uses of funds Lloyd's underwriting 306.2 292.0Capital for US insurance 55.5 30.6company 361.7 322.6 Surplus 195.9 156.1Unavailable surplus (113.3) (81.0)Available surplus 82.6 75.1 Individual capital assessment The group is required to produce an individual capital assessment (ICA) whichsets out the amount of capital that is required to reflect the risks containedwithin the business. Lloyd's reviews this assessment to ensure that ICAs areconsistent across the market. In order to determine the ICA, we made significant investment in both models andprocess: • We use sophisticated mathematical models that reflect the key risks in the business allowing for probability of occurrence, impact if they do occur, and interaction between risk types. A key focus of these models is to understand the risk posed to individual teams, and to the business as a whole, of a possible deterioration in the underwriting cycle; and • The ICA process is embedded so that the teams can see the direct and objective link between underwriting decisions and the capital allocated to that team. This gives a consistent and comprehensive picture of the risk reward profile of the business and allows teams to focus on strategies that improve return on capital. The ICA has increased from £292m to £306m which reflects changes in the amountand mix of business in the plan, the impact of falling rates, and the positivedevelopment of claims reserves from prior years. CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2007 Notes 2007 2006 £m £m Gross premiums written 780.5 745.1Written premiums ceded to reinsurers (128.3) (170.8)Net premiums written 652.2 574.3 Change in gross provision for unearned (24.7) (84.9)premiums Reinsurer's share of change in the (10.3) 20.2provision for unearned premiums Change in net provision for unearned (35.0) (64.7)premiums Net earned premiums 2 617.2 509.6 Net investment income 3 64.9 48.3Other income 4 10.1 7.1 75.0 55.4Revenue 692.2 565.0 Insurance claims 338.6 357.0Insurance claims recoverable from (31.2) (86.3)reinsurers Net insurance claims 2 307.4 270.7 Expenses for the acquisition of 179.2 133.8insurance contracts Administrative expenses 58.2 45.8Foreign exchange (gain)/ loss (3.1) 22.3Operating expenses 234.3 201.9Expenses 2 541.7 472.6Results of operating activities 2 150.5 92.4 Finance costs (12.0) (5.6) Profit before tax 138.5 86.8 Comprises: Profit before tax and foreign exchange 130.3 96.2adjustments on non-monetary items Foreign exchange on non-monetary items 8.2 (9.4) Income tax expense (38.1) (26.9)Profit after tax 100.4 59.9 Earnings per share (pence per share): Basic 5 28.1 16.7Diluted 5 27.4 16.6 BALANCE SHEET AS AT 31 DECEMBER 2007 2007 2006 Group Company Group Company £m £m £m £m Assets Intangible assets 28.7 - 21.9 -Plant and equipment 7.2 - 7.0 -Investment in - 97.9 - 65.1subsidiaries Investment in associates 1.3 - 1.3 -Deferred acquisition 82.0 - 78.9 -costs Deferred income tax 4.5 - 3.5 -Financial investments 1,132.3 341.8 958.4 340.0Derivative financial 1.2 1.2 - -instrument Insurance receivables 199.9 - 236.1 -Reinsurance assets 353.3 - 353.1 -Current income tax - 3.0 - 0.7Other receivables 12.0 105.6 14.6 25.4Cash and cash 358.3 20.9 209.4 29.8equivalents Total assets 2,180.7 570.4 1,884.2 461.0 Equity Share capital 18.4 18.4 18.1 18.1Reserves 223.1 224.1 225.8 230.9Retained earnings 157.1 129.3 75.6 14.9Total equity 398.6 371.8 319.5 263.9 Liabilities Insurance liabilities 1,471.9 - 1,225.6 -Borrowings 156.7 158.8 154.9 157.0Derivative financial - - 2.4 2.4instruments Other payables 106.6 39.8 152.7 37.7Retirement benefit 0.9 - 1.9 -obligations Deferred income tax 34.0 - 11.6 -Current income tax 12.0 - 15.6 -liabilities Total liabilities 1,782.1 198.6 1,564.7 197.1 Total equity and 2,180.7 570.4 1,884.2 461.0liabilities STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2007 Group Share Reserves Retained Total capital earnings £m £m £m £m Balance at 1 January 2006 18.0 232.1 30.3 280.4 Retained profits for the - - 59.9 59.9year Change in net investment - (0.6) - (0.6)hedge Foreign exchange translation - (2.8) - (2.8)differences Dividends paid - - (14.6) (14.6)Issue of shares 0.1 0.3 - 0.4Equity settled share based - 0.8 - 0.8payments Acquisition of own shares in - (4.0) - (4.0)trust Balance at 31 December 2006 18.1 225.8 75.6 319.5 Retained profits for the - - 100.4 100.4 year Change in net investment - - - - hedge Foreign exchange translation - 0.1 - 0.1 differences Dividends paid - - (18.6) (18.6) Issue of shares 0.3 4.0 - 4.3 Equity settled share based - 3.4 (0.3) 3.1 payments Acquisition of own shares in - (5.4) - (5.4) trust Purchase of treasury shares - (5.1) - (5.1) Transfer of shares to - 0.3 - 0.3 employees Balance at 31 December 2007 18.4 223.1 157.1 398.6 Company Share Reserves Retained Total capital earnings £m £m £m £m Balance at 1 January 2006 18.0 229.4 16.1 263.5 Retained profits for the - - 13.4 13.4 year Foreign exchange translation - 1.3 - 1.3 differences Dividends paid - - (14.6) (14.6) Issue of shares 0.1 0.2 - 0.3 Balance at 31 December 2006 18.1 230.9 14.9 263.9 Retained profits for the - - 131.9 131.9 year Dividends paid - - (18.6) (18.6) Issue of shares 0.3 4.0 - 4.3 Equity settled share based - 5.0 1.1 6.1 payments Purchase of treasury shares - (5.1) - (5.1) Acquisition of own shares in - (11.0) - (11.0) trust Transfer of shares to - 0.3 - 0.3 employees Balance at 31 December 2007 18.4 224.1 129.3 371.8 CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2007 2007 2006 Group Company Group Company £m £m £m £m Cash flow from operating activities Profit before tax 138.5 132.3 86.8 14.4Adjustments for non-cash items Amortisation of intangibles 2.4 - 1.4 -Equity settled share based 3.1 6.2 0.8 -compensation Foreign exchange translation of (1.2) - (4.6) -foreign subsidiary Net fair value losses/(gains) (14.3) (4.6) (8.8) 0.8on financial assets Depreciation of plant & 1.6 - 1.2 -equipment Transfer of own shares in trust - (5.6) Transfer of shares to employees 0.3 0.3 Changes in operating assets and liabilities Increase in insurance 246.4 - 129.2 -liabilities Decrease/(increase) in 36.2 - (85.1) -insurance receivables Decrease/(increase) in other 2.4 (80.2) 13.9 22.9receivables Increase in deferred (3.1) - (26.2) -acquisition costs Decrease/(increase) in (0.2) - 49.2 -reinsurance assets Increase in other payables (49.2) 2.0 37.6 6.5Income tax paid (18.7) (2.7) (11.5) (3.1)Contribution to pension fund (1.0) - (1.0) -Acquisition of own shares in (5.4) (5.4) (4.0) -trust Net cash from operating 337.8 42.3 178.9 41.5activities Cash flow from investing activities Purchase of plant and equipment (1.8) - (5.7) -Purchase of syndicate capacity - - (0.2) -Acquisition of subsidiary (net - - (2.2) -of cash acquired) Purchase of goodwill (5.7) - - -Purchase of investments (2,522.5) (411.8) (2,125.1) (412.4)Expenditure on software (1.7) - (3.1) -development Proceeds from sale of 2,363.0 414.5 1,947.2 293.5investments Capital injection in subsidiary - (32.8) - (33.4)Net cash used in investing (168.7) (30.1) (189.1) (152.3)activities Cash flow from financing activities Proceeds from issue of shares 4.4 4.4 0.4 0.4Purchase of treasury shares (5.1) (5.1) - -Repayment of syndicated loan - (1.8) (18.6) -Proceeds from Tier 2 - - 148.1 148.1subordinated debt Dividends paid (18.6) (18.6) (14.6) (14.6)Net cash used in financing (19.3) (21.1) 115.3 133.9activities Net increase in cash and cash 149.8 (8.9) 105.1 23.1equivalents Cash and cash equivalents at 209.4 29.8 112.6 6.7beginning of year Effect of exchange rate changes (0.9) - (8.3) -on cash and cash equivalents Cash and cash equivalents at 358.3 20.9 209.4 29.8end of year NOTES 1. Statement of accounting policies Beazley Group plc is a group domiciled in England and Wales. The consolidatedfinancial statements of the group for the year ended 31 December 2007 comprisethe parent company and its subsidiaries and the group's interest in associates. The consolidated financial statements of the group have been prepared andapproved by the directors in accordance with IFRSs as adopted by the EU('Adopted IFRSs') that are effective or available for early adoption at 31December 2007. The group has adopted IFRS 8 "Operating Segments" prior to its requiredapplication date of 1 January 2009. The adoption of IFRS 8 has impacted the typeand amount of disclosures made, but had no impact on the reported profits orfinancial position of the group or the parent company. In accordance with thetransitional requirements of the standards, the group and the parent companyhave provided full comparative information. IFRIC 11 "Group and Treasury Share Transactions" has been early adopted. Thisdid not have an impact on the group's current treatment of recording shareincentives awarded to employees as equity settled share based paymenttransactions of the parent company. The following new standard and interpretation released by the InternationalAccounting Standards Board (IASB) have not been early adopted but are expectedto be of relevance to future financial years. Neither of these are expected tohave any significant impact on the future consolidated financial statements ofthe group: • IAS 23 (amended) "Borrowing costs" • IFRIC 14 "The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction" Apart from the new accounting policies referred to above, the accountingpolicies applied by the group and parent company are the same as those appliedin the consolidated financial statements for the year ended 31 December 2006.These accounting policies are set out in the group's 2006 annual report. 2 Segmental analysis Segment information is presented in respect of reportable segments. This isbased on the group's management and internal reporting structures and representsthe level at which financial information is reported to the Board, being thechief operating decision maker as defined in IFRS 8. The operating segments arebased upon the different types of insurance risk underwritten by the group. Segment results include items directly attributable to a segment as well asthose that can be allocated on a reasonable basis. Foreign exchange differences on non-monetary items have been left unallocated.This has been separately disclosed as it provides a fairer representation of theloss ratios, which would otherwise be distorted by the mismatch arising underIFRSs whereby unearned premium reserve, reinsurers share of unearned premiumreserve and DAC are treated as non-monetary items and claims reserves aretreated as monetary items. Non-monetary items are carried at historic exchangerates, while monetary items are translated at closing rates. This imbalancecreates volatility in our accounts which cannot be hedged as the mismatch is notmonetary in nature. Finance costs and taxation have not been allocated to operating segments asthese items are determined by entity level factors and do not relate tooperating performance. 2007 Specialty Property Reinsurance Marine Total Unallocated Total Lines reportable segments £m £m £m £m £m £m £m Segment results Gross premiums 394.9 188.0 57.8 139.8 780.5 - 780.5written Net premiums 326.2 157.4 49.6 119.0 652.2 - 652.2written Net earned 286.5 158.0 45.9 116.1 606.5 10.7 617.2premiums Net investment 43.2 8.6 7.1 6.0 64.9 - 64.9income Other income 5.1 2.1 1.3 1.6 10.1 - 10.1Revenue 334.8 168.7 54.3 123.7 681.5 10.7 692.2 Net insurance 169.4 76.6 16.2 45.2 307.4 - 307.4claims Expenses for the acquisition of insurance 76.2 56.3 10.1 33.6 176.2 3.0 179.2contracts Administrative 32.3 13.7 3.9 8.3 58.2 - 58.2expenses Foreign exchange (1.0) (0.4) (0.5) (0.7) (2.6) (0.5) (3.1)(gain)/ loss Expenses 276.9 146.2 29.7 86.4 539.2 2.5 541.7 Segments result 57.9 22.5 24.6 37.3 142.3 8.2 150.5Finance costs (12.0)Profit before tax 138.5 Income tax (38.1)expense Profit after tax 100.4 Claims ratio 59% 48% 35% 39% 51% - 50%Expense ratio 38% 44% 31% 36% 39% - 38%Combined ratio 97% 92% 66% 75% 90% - 88% 2006 Specialty Property Reinsurance Marine Total Unallocated Total Lines reportable segments £m £m £m £m £m £m £m Segment results Gross premiums 361.0 187.8 58.4 137.9 745.1 - 745.1written Net premiums 267.3 149.9 40.5 116.6 574.3 - 574.3written Net earned 234.6 123.1 42.1 101.5 501.3 8.3 509.6premiums Net investment 35.9 4.2 4.1 4.1 48.3 - 48.3income Other income 4.0 1.3 0.7 1.1 7.1 - 7.1Revenue 274.5 128.6 46.9 106.7 556.7 8.3 565.0 Net insurance 146.3 66.3 13.7 44.4 270.7 - 270.7claims Expenses for the acquisition of insurance 54.0 40.8 10.3 28.6 133.7 0.1 133.8contracts Administrative 24.1 11.9 4.4 5.4 45.8 - 45.8expenses Foreign exchange 2.2 1.2 0.4 0.9 4.7 17.6 22.3(gain)/ loss Expenses 226.6 120.2 28.8 79.3 454.9 17.7 472.6 Segments result 47.9 8.4 18.1 27.4 101.8 (9.4) 92.4Finance costs (5.6)Profit before tax 86.8 Income tax expense (26.9) Profit after tax 59.9 Claims ratio 62% 54% 33% 44% 54% - 53%Expense ratio 33% 43% 35% 34% 36% - 35%Combined ratio 95% 97% 68% 78% 90% - 88% 3 Net investment income 2007 2006 £m £m Investment income at fair value through income statement - Interest income 53.1 28.0 Realised gains/(losses) on financial investments at fair value through income statement - Realised gains 18.9 22.9- Realised losses (11.5) (9.9) Net fair value gains/(losses) on financial investments through income statement - Fair value gains 22.9 24.4- Fair value losses (16.0) (15.6) Investment management expenses (2.5) (1.5) 64.9 48.3 4 Other income 2007 2006 £m £m Profit commissions 7.6 5.5Agency fees 1.0 1.1Other income 1.5 0.5 10.1 7.1 5 Earnings per share 2007 2006 Basic 28.1p 16.7pDiluted 27.4p 16.6p Basic Basic earnings per share are calculated by dividing profit after tax of £100.4m(2006: £59.9m) by the weighted average number of issued shares during the yearof 357.4m (2006: 357.9m). The shares held in the Employee Share Options Plan(ESOP) have been excluded from the calculation, until such time as they vestunconditionally with the employees. In addition, the treasury shares have beenexcluded from the calculation. Diluted Diluted earnings per share are calculated by dividing profit after tax of£100.4m (2006: £59.9m) by the adjusted weighted average number of shares of366.0m (2006: 361.5m). The adjusted weighted average number of shares assumesconversion of dilutive potential ordinary shares, being shares from the SAYE,retention and deferred share schemes. The shares held in the ESOP have beenexcluded from the calculation, until such time as they vest unconditionally withthe employees. In addition, the treasury shares have been excluded from thecalculation. 6 Dividends per share The final dividend of 4.0p (2006: 3.2p) per ordinary share and the specialdividend of 4.0p per share, will be payable on 9 May 2008 to shareholdersregistered on 18 April 2008 in respect of the year ended 31 December 2007.Together with the interim dividend of 2.0p (2006: 1.6p) this brings the totalordinary dividend to 6.0p (2006: 4.8p). The total dividend payable for the yearis 10.0p per ordinary share. These financial statements do not provide for thefinal dividend as a liability. 7 Insurance liabilities To illustrate the robustness of our reserves, the loss development tables belowprovide information about historical claims development by the four segments -specialty lines, property, reinsurance and marine. The tables are byunderwriting year which in our view provides the most transparent reservingbasis. We have supplied tables for both ultimate gross claims and ultimate netclaims. The top part of the table illustrates how the group's estimate of claims ratiofor each underwriting year has changed at successive year-ends. The bottom halfof the table reconciles the gross and net claims to the amount appearing in thebalance sheet. While the information in the table provides a historical perspective on theadequacy of the claims liabilities established in previous years, users of thesefinancial statements are cautioned against extrapolating redundancies ordeficiencies of the past on current claims liabilities. The group believes thatthe estimate of total claims liabilities as at 31 December 2007 are adequate.However, due to inherent uncertainties in the reserving process, it cannot beassured that such balances will ultimately prove to be adequate. Gross ultimate 2002ae 2003 2004 2005 2006 2007 claims % % % % % Specialty Lines 12 months 71.4 71.4 71.1 68.9 68.4 24 months 67.3 69.9 68.3 65.7 36 months 65.0 66.3 65.2 - - 48 months 57.4 62.0 - - - 60 months 51.3 - - - - Property 12 months 51.3 65.2 84.9 59.3 59.0 24 months 38.5 65.1 82.3 46.7 - 36 months 35.8 65.4 80.6 - - 48 months 35.2 63.6 - - - 60 months 34.7 - - - - Reinsurance 12 months 58.5 86.7 191.2 52.5 59.8 24 months 33.5 79.6 181.1 24.5 - 36 months 28.0 74.8 181.4 - - 48 months 28.2 72.4 - - - 60 months 25.2 - - - - Marine 12 months 59.8 62.6 82.4 57.3 57.3 24 months 44.6 64.1 79.1 43.9 - 36 months 39.0 61.8 69.8 - - 48 months 36.2 61.5 - - - 60 months 35.8 - - - - Total 12 months 62.9 70.1 89.7 63.2 63.5 24 months 52.5 69.0 86.7 53.8 - 36 months 49.4 66.3 83.3 - - 48 months 45.1 63.4 - - - 60 months 41.7 - - - - Total ultimate 1,048.4 269.9 467.3 663.1 484.2 611.1 3,544.0losses (£m) Less paid claims (849.6) (157.4) (272.0) (338.8) (87.5) (19.9) (1,725.2)net of reinsurance (£m) Less unearned - - - - (41.0) (309.1) (350.1)portion of ultimate losses (£m) Gross claims 198.8 112.5 195.3 324.3 355.7 282.1 1,468.7liabilities (100% level) (£m) Less unaligned (59.6) (33.8) (58.6) (97.3) (78.2) (53.6) (381.1)share (£m) Gross claims 139.2 78.7 136.7 227.0 277.5 228.5 1,087.6liabilities, group share (£m) Net ultimate 2002ae 2003 2004 2005 2006 2007 claims % % % % % Specialty lines 12 months 68.1 68.6 69.1 67.1 67.4 24 months 64.9 67.8 67.4 64.8 - 36 months 63.0 65.0 64.6 - - 48 months 55.9 60.4 - - - 60 months 51.3 - - - - Property 12 months 49.2 59.7 64.8 62.3 61.8 24 months 42.6 61.6 62.6 51.8 - 36 months 40.4 60.7 58.8 - - 48 months 39.8 59.2 - - - 60 months 39.4 - - - - Reinsurance 12 months 60.4 88.0 153.6 54.4 55.3 24 months 38.2 83.6 126.7 35.9 - 36 months 33.4 80.9 124.9 - - 48 months 34.1 75.2 - - - 60 months 31.2 - - - - Marine 12 months 55.5 58.3 55.6 54.1 54.6 24 months 44.3 52.5 48.9 43.0 - 36 months 39.7 48.7 42.8 - - 48 months 39.2 48.1 - - - 60 months 39.1 - - - - Total 12 months 60.3 66.6 73.5 62.5 63.1 24 months 53.1 65.5 68.7 55.2 - 36 months 50.5 62.9 65.2 - - 48 months 46.8 59.6 - - - 60 months 44.2 - - - - Total ultimate 560.4 231.8 360.7 412.2 392.8 514.9 2,472.8losses (£m) Less paid claims net of reinsurance (£m) (483.9) (136.6) (194.9) (174.5) (82.8) (19.3) (1,092.0) Less unearned portion of ultimate losses (£m) - - - - (30.7) (266.7) (297.4) Net claims liabilities (100% level) 76.5 95.2 165.8 237.7 279.3 228.9 1,083.4 228.9 (£m) Less unaligned (23.0) (28.6) (49.7) (71.3) (60.1) (43.5) (276.2)share (£m) Net claims 53.5 66.6 116.1 166.4 219.2 185.4 807.2liabilities, group share (£m) Analysis of movements in loss development tables General We have updated our loss development tables to show the loss ratios as at 31December 2007 for each underwriting year. The benign claims experience during 2007 has produced a general trend ofreducing loss ratios across the underwriting years of our business and wecomment on the main movements by team below. In addition, the catastrophe loading on the 2006 underwriting year has beenremoved as at 31 December 2007. We note that the 2006 underwriting year lossratios are relatively consistent with the 2003 underwriting year at the samestage of development. The opening positions for the 2007 underwriting years are similar to the openingpositions of the 2006 underwriting years, reflecting the relatively consistentrating environment. Specialty Lines The changes to the opening positions across underwriting years have arisen fromvariations in the mix of business. The development of the 2004 underwriting year has not replicated the 2003underwriting year at the fourth year of development. This is largely driven by ahigher level of claims uncertainty on the 2004 underwriting year of two classesat this stage of development. As our reserving policy is to move the ultimateloss ratios only when we have sufficient evidence to do so, the timing ofrelease is likely to differ between underwriting years. Property The 2006 underwriting year ultimate loss ratios have reduced as the catastropheloading has been removed. The ultimate loss ratios on the 2006 underwriting year are higher than theultimate loss ratios on the 2003 underwriting year at the same stage ofdevelopment, mainly as a result of claims arising from our homeowners account. Reinsurance The 2006 underwriting year ultimate loss ratios have reduced as the catastropheloading has been removed. Whilst the gross ultimate loss ratio on the 2005 underwriting year is relativelyunchanged since 31 December 2006, we note that the net ultimate loss ratio hasreduced caused by an increase in estimated net premium during the year. Theincrease has arisen as we do not expect to pay as much outwards reinstatementpremium as we had originally cautiously anticipated. The 2003 and 2004 underwriting years have continued to develop favourably. Marine The 2006 underwriting year ultimate loss ratios have reduced as the catastropheloading has been removed. The 2005 underwriting year ultimate loss ratios have reduced as the claimsexperience has been favourable. The table below illustrates movements in our net claims recognised in the income statement in 2007 by both underwriting year and by business segments: Specialty Property Reinsurance Marine Total lines 2007 £m £m £m £m £m Current year 202.8 87.4 26.1 55.2 371.5 Prior year - 2004 and earlier (25.5) (2.0) (3.0) (0.3) (30.8) - 2005 year of account (5.4) (3.5) (1.7) (4.6) (15.2) - 2006 year of account (2.5) (5.3) (5.2) (5.1) (18.1) (33.4) (10.8) (9.9) (10.0) (64.1) Net insurance claims 169.4 76.6 16.2 45.2 307.4 Underwriting year Specialty Property Reinsurance Marine Total lines 2006 £m £m £m £m £m Current year 164.3 68.2 19.6 49.6 301.7 Prior year - 2003 and earlier (12.3) (0.7) (0.4) (0.4) (13.8) - 2004 year of account (4.7) (0.7) (0.8) (3.0) (9.2) - 2005 year of account (1.0) (0.5) (4.7) (1.8) (8.0) (18.0) (1.9) (5.9) (5.2) (31.0) Net insurance claims 146.3 66.3 13.7 44.4 270.7 8 Status of financial information The financial information set out above does not constitute the Company'sstatutory accounts for the year ended 31 December 2006 or 2007, but is derivedfrom those accounts. Statutory accounts for 2006 have been delivered to theRegistrar of Companies and those for 2007 will be delivered following theCompany's Annual General Meeting. The auditors have reported on those accounts;their reports were unqualified and did not contain statements under Section 237(2) or (3) of the Companies Act 1985. Glossary Admitted carrier An insurance company authorised to do business in the US. An agreement isentered into which stipulates the terms and conditions under which a businessmust conduct within a state in the US. Aggregates/aggregations Accumulations of insurance loss exposures which result from underwritingmultiple risks that are exposed to common causes of loss. Aggregate excess of loss The reinsurer indemnifies an insurance company (the reinsured) for an aggregate(or cumulative) amount of losses in excess of a specified aggregate amount. A.M. Best A.M. Best is a worldwide insurance-rating and information agency whose ratingsare recognised as an ideal benchmark for assessing the financial strength ofinsurance related organisations, following a rigorous quantitative andqualitative analysis of a company's balance sheet strength, operatingperformance and business profile. Beazley Group plc obtained an A rating, whileBeazley Insurance Company, Inc., received a rating of A. Binding authority A contracted agreement between a managing agent and a coverholder under whichthe coverholder is authorised to enter into contracts of insurance for theaccount of the members of the syndicate concerned, subject to specified termsand conditions. Capacity This is the maximum amount of premiums that can be accepted by a syndicate.Capacity also refers to the amount of insurance coverage allocated to aparticular policyholder or in the marketplace in general. Catastrophe reinsurance A form of excess of loss reinsurance which, subject to a specified limit,indemnifies the reinsured company for the amount of loss in excess of aspecified retention with respect to an accumulation of losses resulting from acatastrophic event or series of events. Claims Demand by an insured for indemnity under an insurance contract. Claims ratio Ratio, in percent, of net insurance claims to net earned premiums. Combined ratio Ratio, in percent, of the sum of net insurance claims, expenses for acquisitionof insurance contracts and administrative expenses to net earned premiums. Thisis also the sum of the expense ratio and the claims ratio. Coverholder/managing general agent A firm either in the United Kingdom or overseas authorised by a managing agentunder the terms of a binding authority to enter into contracts of insurance inthe name of the members of the syndicate concerned, subject to certain writtenterms and conditions. A Lloyd's broker can act as a coverholder. Deferred acquisition costs (DAC) Costs incurred for the acquisition or the renewal of insurance policies (e.g.brokerage, premium levy and staff related costs) which are capitalised andamortised over the term of the contracts. Earnings per share (EPS) - Basic/Diluted Ratio, in pence, calculated by dividing the consolidated profit after tax by theweighted average number of ordinary shares issued, excluding shares owned by thegroup. For calculating diluted earnings per share the number of shares andprofit or loss for the year is adjusted for all dilutive potential ordinaryshares like share options granted to employees. Excess per risk reinsurance A form of excess of loss reinsurance which, subject to a specified limitindemnifies the reinsured company against the amount of loss in excess of aspecified retention with respect of each risk involved in each loss. Expense ratio Ratio, in percent, of the sum of expenses for acquisition of insurance contractsand administrative expenses to net earned premiums. Facultative reinsurance A reinsurance risk that is placed by means of a separately negotiated contractas opposed to one that is ceded under a reinsurance treaty. Gross premiums written Amounts payable by the insured, excluding any taxes or duties levied on thepremium, including any brokerage and commission deducted by intermediaries. Hard market An insurance market where prevalent prices are high, with restrictive terms andconditions offered by insurers. Horizontal limits Reinsurance coverage limits for multiple events. Incurred but not reported (IBNR) These are anticipated or likely claims that may result from an insured eventalthough no claims have been reported so far. International accounting standards (IAS)/International financial reportingstandards (IFRS) Standards formulated by the IASB with the intention of achieving internationallycomparable financial statements. Since 2002, the standards adopted by the IASBhave been referred to as International Financial Reporting Standards (IFRS).Until existing standards are renamed, they continue to be referred to asInternational Accounting Standards (IAS). International accounting standards board (IASB) An international panel of accounting experts responsible for developing IAS/IFRS. Lead underwriter The underwriter of a syndicate who is responsible for setting the terms of aninsurance or reinsurance contract that is subscribed by more than one syndicateand who generally has primary responsibility for handling any claims arisingunder such a contract. Line The proportion of an insurance or reinsurance risk that is accepted by anunderwriter or which an underwriter is willing to accept. Lloyd's Lloyd's is the world's leading specialist insurance market and expects to havethe capacity to write £16.1bn of business in 2007. It occupies sixth place interms of global reinsurance premium income, and is the second largest surpluslines insurer in the US. In 2007, 66 syndicates are underwriting insurance atLloyd's, covering all classes of business from more than 200 countries andterritories worldwide. Managed syndicate The combination of syndicate 2623 and 623 through which the group underwriteinsurance business. Managing agent A company that is permitted by Lloyd's to manage the underwriting of asyndicate. Managing general agent (MGA) An insurance intermediary acting as an agent on behalf of an insurer. Medium tail A type of insurance where the claims may be made a few years after the period ofinsurance has expired. Net assets per share Ratio, in pence calculated by dividing the net assets (total equity) by thenumber of shares issued. Net premiums written Net premiums written is equal to gross premiums written less outward reinsurancepremiums written. Provision for outstanding claims Provision for claims that have already been incurred at the balance sheet datebut have either not yet been reported or not yet been fully settled. Rate The premium expressed as a percentage of the sum insured or limit of indemnity. Reinsurance to close (RITC) A reinsurance which closes a year of account by transferring the responsibilityfor discharging all the liabilities that attach to that year of account (and anyyear of account closed into that year) plus the right to buy any income due tothe closing year of account into an open year of account in return for apremium. Retention limits Limits imposed upon underwriters for retention of exposures by the group afterthe application of reinsurance programmes. Return on equity (ROE) Ratio, in percent calculated by dividing the consolidated profit after tax bythe average total equity. Retrocessional reinsurance The reinsurance of the reinsurance account. It serves to 'lay-off' risk. Risk This term may variously refer to: a) the possibility of some event occurring which causes injury or loss; b) the subject matter of an insurance or reinsurance contract; or c) an insured peril. Short tail A type of insurance where claims are usually made during the term of the policyor shortly after the policy has expired. Property insurance is an example ofshort tail business. Soft market An insurance market where prevalent prices are low, and terms and conditionsoffered by insurers are less restrictive. Stamp capacity The volume of business measured in gross written premiums net of acquisitioncosts underwritten by the group through its managed syndicates at Lloyd's ofLondon. Surplus lines insurer An insurer that underwrites surplus lines insurance in the USA. Lloyd'sunderwriters are surplus lines insurers in all jurisdictions of the USA exceptKentucky and the US Virgin Islands. Total shareholder return The increase in the share price plus the value of any dividends paid andproposed during the year. Treaty reinsurance A reinsurance contract under which the reinsurer agrees to offer and to acceptall risks of certain size within a defined class. Unearned premiums reserve The portion of premium income in the business year that is attributable toperiods after the balance date is accounted for as unearned premiums in theunderwriting provisions. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Beazley