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Earnings Call Transcript 2021-Q1

[Operator]

Ladies and gentlemen, hello, and welcome to Beazley's Q1 2021 IMS Earnings Call. My name is Maxine, and I'll be coordinating the call today. [Operator Instructions] I will now hand you over to your host, Adrian Cox, CEO, to begin. Adrian, please go ahead when you're ready.

[Adrian Peter Cox, CEO & Executive Director]

Thank you, Maxine. Good morning, everyone. Welcome to the earnings call. Thank you for calling in. So I'd like to start with the overall. So we've had some good targeted growth this quarter, I think, of around 16% supported by rates that were slightly above expectations also at 16%. So that's flat overall exposure is because we're taking risk off in some areas, but really growing where we've targeted that growth, which we're pleased with. I think our expectations for the full year are fairly similar to what we said at the beginning. So growth in the mid-teens and rates there as well.Pleased to say also the capital remains in the range, and therefore, allows us to capture the opportunities that we see in front of us, which we're pleased with. And we have not used the contingent quota share that we put in place for this year nor the additional LOC facility. The plan for the year will remain dynamic as it did last year as we continue to adjust to changing risk awards, both as far as pricing and the claims environment are concerned.On to claims then, first, I'd like to say that our COVID provisions remain unchanged at $340 million plus the $50 million contingent if the lockdowns continue into the second half of the year, which appear to be slightly less likely as the vaccination programs progress well in our core markets of the U.S. and the U.K. Our first quarter cat claims, driven by the big freeze in Texas, at $70 million are well within our annual cat margin. And so haven't caused us to change any of our expectations there. And I mentioned also that the ransomware in our cyber business remains the biggest issue, I think, with an increasing profile, both in the media and government levels, which I think is -- who are increasingly concerned about the damage that it is causing. And so from a macro perspective, I think that's a good development. From our perspective, the core of the ransomware issue remains risk management, and our role there, I think, is to set and enforce prudent network security and have the capability of independently monitoring our clients' execution of that. We've invested much over the last 2 years to build that capability, which we launched last September. It's still very early, especially in insurance terms, but we are seeing the first encouraging signs that this approach is having a marked impact on frequency and severity. And that, plus significant repricing in 2021, I think are good facts. All in all, therefore, our full year guidance for the combined ratio is unchanged to that which we gave it at the end of the year in the early '90s. I think when we look at the half 1, the first half, I think the combined ratio will be slightly higher than that because of the way that our claims release patterns generally work and because of that early winter freeze that we had in Texas. And that I think is the highlights of what we wanted to say this morning.So over to questions and answers, please, if we may.

[Operator]

[Operator Instructions] Our first question comes from Kamran Hossain from RBC.

[Kamran Hossain, Analyst]

Just one quick -- first question on the combined ratio. I mean, I guess you've talked about the $70 million being within your expected cat margin for the year, but I would assume that Q1 probably starts off a little bit worse than it would in whatever an average year looks like these days. So do you have slightly less flexibility, I guess, on the combined ratio given the higher cat in the first quarter? Or is there -- I guess, with rates coming in better than you'd expected, is there more of an offset against that?And the second question is on the, I guess, on the $70 million itself. Was this top down, bottom up? And if it's top down, what's the industry loss you're receiving?

[Adrian Peter Cox, CEO & Executive Director]

Thanks very much, indeed, for those 2 questions. I'll answer the second one first, if we may. It's really mostly a bottom-up procedure that we go -- that we build the $70 million from. We do read across to what the market loss is. And for us, it's in -- it's sort of $15 billion, $16 billion-ish is the sort of equivalent. I think you answered your own question fairly well on the first one. So yes, the $70 million was slightly more than our Q1 earned cat margin, but we are seeing things, particularly on the rate side, that are more positive than we had predictive first thing in the year. And in the round, those 2 things offset each other, and that's why we're leaving the guidance for the combined ratio unchanged.

[Operator]

Our next question comes from Andrew Ritchie from Autonomous.

[Andrew James Ritchie, Partner, Insurance]

Thanks for holding this call. Just on cyber, Adrian, I just wanted to dig into the comment. You're saying emerging claims trends are better. I mean, clearly, they're not an industry level. So I'm just saying are you observing lower frequency and presumably your -- the loss picks you put in place are holding? And in fact, are the loss picks on that business slightly to full in 2021? Is there enough of an early sign on that front? And I guess, a connected question, some of your competitors are now excluding ransomware payments as part of cover on new business. Is that something you think is a viable way forward? Do you think there would still be good demand for the product? Were that specifically excluded? My second area of questioning, just on capital. Could you give us an update? I think the implication from your opening statements was that the composition of capital hasn't changed as in the amount of drawn facility hasn't changed. And am I to read anything into -- I think, at the beginning of the year, you were at the upper end of your target capital. You're now in the middle. Do I read anything into that? Or is that just you're trying to leave the language open?

[Sally Michelle Lake, Group Finance Director & Executive Director]

Andrew, I'll take the last one and then I'll hand over to the expert on the cyber question. So the competition hasn't changed at all. So we haven't done anything different. We would have told you if we have. So we've still got the levers that we talked about in detail at year-end. We don't update on where we are, particularly within the range of Q1 and Q3. So I would just reiterate that we remain within the range and are able to capitalize on the opportunities ahead of us. So I can't give more detail than that at this stage. I'll pass over to Adrian for the other questions.

[Adrian Peter Cox, CEO & Executive Director]

Thank you, Sally. Andrew, thank you for those questions. I'll -- again, I'll answer them and refer to order, I think. So we are not excluding extortion payments from our policies. For us, what we're trying to deal with is approximate cause of the issue, which is the fact that, generally speaking, network security is not good enough at the moment and not dynamic enough. And our role is to tackle that proximate calls, which I think is a good role for insurers. I think it is a question for government as to whether or not ransomware payments are against or for public policy and our arguments for or against. I think our duty is to protect our clients. So there's a lot more to it than just paying the extortion, of course, that we're paying business interruption losses, we're paying to reconstitute the data, to fix the backups and so on and so forth. So there's a lot more sort of private cover than just the extortion payments itself. And as I say, we're really focused on risk management, which is the proximate cause of all this. I think you're right at an industry level or a total level, ransomware frequency is unchanged. It is still a high-frequency issue. What we have done, looking at what we call the emerging trends is to look at the frequency and severity of ransomware and extortion payments on business that we've written, either new or renewed since we did our re-underwriting launch in September. And for business written since then, both frequency and severity have come down when we look at it on both a policy count and an earned premium basis. Having said that, that's only business written in September and it's only May. So it is early. But we do run those stats because it's important to us to figure out as quickly as we can, whether this new approach has legs or not because we're intending to continue to build out that infrastructure. So it's important for us to get that monitoring in as soon as we possibly can.

[Operator]

Our next question comes from Iain Pearce from Crédit Suisse.

[Iain Pearce, Research Analyst]

The first one, I was just hoping if you could give a little bit more detail around some of the new capabilities you've added around improving the cyber defenses at some of your companies. And then sort of following on from that, just thinking about the cyber sort of loss ratio if you're seeing less frequency and less severity on the new business you're writing and you're seeing significant rate increases on that business. And then you also have reinsurance protection against further deterioration on the sort of on the back book of the enforced cyber policies should we be expecting material improvements in the combined ratio in the sites division going forward? Or is it still sort of higher loss picks and more reserving conservatism here?

[Adrian Peter Cox, CEO & Executive Director]

Okay. Again, I'll take these in reverse order. I mean, you make some very good points, and all that you say is true about rates. Reinsurance loss picks and so on and so forth. And as I said to Andrew, it's still very early but if those trends do continue, and the approach that we have does have legs and we continue to build out on that, hopefully, those trends that you mentioned will come through and that will reflect in the P&L in due course. It's relatively short-tail businesses. So we will see that sooner than we would on the rest of our liability book.Talk a little bit more about the capabilities, I think they come in sort of threefold. The first is that we are working very hard to make sure that we understand the threat landscape, which continues to change. And that when we find out about vulnerabilities, we then scan our clients to see if they have any of those vulnerabilities. And if they do, we make sure that they remediate them and cure them. And if they don't, then we don't buy them or don't renew them. And then lastly, we listen quite carefully for chatter on the dark web in other areas because you can often hear what's happening to companies before they actually get attacked. So we have a sort of a capability of live scanning with active threat detection and then the ability to scan our clients. And that is the capability that we're building, and that's what we began to launch and continue to improve on.

[Operator]

The next question comes from Ming Zhu from Panmure.

[Ming Zhu, Analyst]

Two questions, please. Could you give me some color in terms of the U.S. casualty line, please? And second question is around the dividend. I mean, what sort of timetable do you have in mind in terms of reinstate for dividend?

[Adrian Peter Cox, CEO & Executive Director]

Thank you for those 2 questions. I'm going to continue with the theme of answering your last one first. So we said at year-end that we are determined to begin to read again dividend payments as soon as possible, and that is an issue that we'll be looking at as a Board at the half year. And so we don't have anything to say on that other than to reiterate what we said at year-end. When it comes to the U.S. casualty lines, what we've been saying up until now is that we are writing that business with the assumption that social inflation, and the resulting claims inflation and that environment that we talked about in 2019 will reemerge as the economies and courts open up again. And that is the stance that we're taking. I think the rest of the casualty market is in a similar position. And so when you look at the rate changes by division, you can see an acceleration in specialty lines, which is where the bulk of our U.S. casualty business is written as well as continued strength in the executive risk side of cyber. So whilst we're beginning, I think others have commented to see a slight tapering off of rate increases in some of the short-tail lines, the long-tail lines, particularly those exposed to U.S. are still going the other way.

[Operator]

Our next question comes from Freya Kong from Bank of America.

[Freya Kong, Research Analyst]

So you guys have been -- you guys reported, I guess, higher-than-expected rate improvements. The overall premium growth is at the lower end of that 15% to 20% plan that you targeted. Should we expect to catch up in volumes later in the year? And just secondly, on -- do you have any comments around the Colonial pipeline cyber attack that we saw recently?

[Adrian Peter Cox, CEO & Executive Director]

Thank you for those questions. We don't comment on individual issues. But I think, as I mentioned at the beginning, the U.S. government's reaction to the Colonial pipeline attack has been quite severe. And that's what I think I was alluding to when I say that governments are beginning to take this issue extremely seriously and regard it as a potential threat to national security, which I think means that our interest as insurers and governments become ever closer. I think that's a positive for both of us. It's important to note, I think, that Colonial is just a single loss, single risk loss. So we only have a single net retention exposure to any individual loss, which in the context of a book, that's why $700 million is immaterial to us. Going back to your first question, you're right. The rate change and premium growth are sort of the same number. I think that the growth that we had guided to at the beginning of the year was mid-teens, which is sort of what we have. But as I said at the beginning, if the risk reward environment continues to improve, then I'm hopeful that our growth rate will reflect that. And we have the capital in place to be able to grow at a faster rate if we choose to do so. And that may well happen, but we'll see how the rest of the year pans out.

[Operator]

Our next question comes from Ashik Musaddi from JPMorgan.

[Ashik Musaddi, Executive Director and Co]

Yes. Just one simple question. I mean, if I look at the pricing momentum, last year, it was up 15% in 2020. So far, it's up 16% in first quarter. I mean, do you have any thoughts as to how it is going in the near future? I mean the reason I'm trying to check is because some of the reinsurers and some of the commercial lines insurers are suggesting that there is a bit more -- there's a bit of normalization on the pricing, but it still stays a bit firm. So any thoughts from your side would be helpful, especially on the specialty lines given that cyber probably would most likely continue in the same fashion?

[Adrian Peter Cox, CEO & Executive Director]

So thank you, Ashik. The -- so I think the makeup of the rate increases is slightly different this year from last year. So again, if you look at the rate change by division, which we show on the second page of the IMS there, the rate increases on the shorter sale lines, particularly across property and marine, are lower than they were last year, but the rate changes on the liability lines in specialty lines and cyber are higher. I think that's broadly what we are doing. So we are more comfortable with where risk reward is on the shorter tail lines, and therefore, pushing for slightly lower rate increases now. And that's -- I sort of mentioned that earlier with beginning to taper off rate increases in some of those areas. So I think that's consistent with what others have said. But yes, we are pushing for bigger rate increases in our liability business. And the 32% that you see in cyber executive risk is driven more by the cyber now than the executive risk, and we expect that to continue until the market is over, the ransomware issue.

[Operator]

Our next question comes from Will Hardcastle from UBS.

[William Fraser Hardcastle, Analyst]

Certainly other than that, at the end of that question actually, but maybe just a bit more color. Just trying to work out within the cyber and executive risk -- sorry, line of business there. Any color between rate and volume differentiating the two, so differentiating between cyber and then executive risk would be really helpful.And then the second one is just looking at the evergreen losses, Suez Canal, you said it's negligible. I guess is there anything that could happen here that could change that from being negligible if things are held for longer or something along those lines? Or do you feel very comfortable with the totality of that risk is not a major development here.

[Adrian Peter Cox, CEO & Executive Director]

We're very comfortable with de minimis exposure we have ever given in totality. Yes, sort of deconstruct cyber and executive risk a little bit. So one of the things I mentioned around our cyber strategy was that we are scanning our clients for vulnerabilities and taking action to try to help them cure them or not ensure them if they won't cure them. That has meant that we have taken some risk off with a section of our policies enforced like our clients that aren't securing those vulnerabilities. And overall, our cyber exposure is down this year, both in terms of aggregate and policy count. That's something that we expect to change a little bit as risk management does begin to permeate across the corporate world. But for now, our exposure is down in cyber, but rates are up significantly. What we're seeing on executive risk is a rate change that is slightly less than the 32% that there because we've been increasing rates for longer and we're near adequacy. We are putting exposure on the books in D&O, both in the U.S. and internationally, which is part of the specialty lines portfolio. Is that -- does that help at all?

[William Fraser Hardcastle, Analyst]

Yes. That's exactly what I was asking -- looking for really. I guess, is there any color on the executive risk where even more granular rather than just national, but specific segments of the market or that you can provide at this one where you're way more comfortable with.

[Adrian Peter Cox, CEO & Executive Director]

Well, I think we are -- the D&O book that we are building, we want to be quite balanced. So a mixture of ABC and side A, existing and IPO and SPAC, primary and excess, good balance across geography and across broking house, and that's what we're actively trying to do. So risk by risk, we're very cognizant of what margin we think we have and what return on capital we have, but we want -- but we're looking to build and end up with when this market dislocation is over of a good book of balanced business. So it is in a particular segment or sector that we're targeting or steering away from particularly.

[Operator]

Our next question comes from Nick Johnson from Numis.

[Nicholas Harcourt Johnson, Analyst]

I've got 2 questions on specialty lines, please. Firstly, the rate increases for specialty lines, 14% is a good number. Just wondering how that compares to expected loss cost or your loss cost assumptions in that segment. Are you putting on margin? Or is that sort of a margin flat situation? Perhaps you could comment on that, please? And then secondly, on specialty lines, on the back book performance. So normally, I think you wait 3 years before releasing margin onto new business. Just wondering what you're seeing on the older vintages in terms of claims trends and specifically whether or not the impact of COVID on the U.S. court system might sort of slow release of that margins on older years, if there are delays in sort of getting visibility on claims costs for those vintages?

[Adrian Peter Cox, CEO & Executive Director]

Thank you. Thank you, Nick. So I'll change my habit, and I'll answer your first question first. Our claims inflation assumptions in specialties overall are not 14%. So they're high, but they're not that high. In terms of looking at the back book and claims trends and so on and so forth, we did settle a lot of claims in the last 15 months. Although courts were closed and the like, we continue to work as hard as we could to settle claims because we thought it was a good -- the right thing to do because it helps our clients. What we saw from a new claims perspective during the pandemic was because of the reduction in economic activity. And because courts were closed, we did see a temporary lull in new claims activity. So although our claims team was as busy as ever that we're really settling claims from older years rather than dealing with new claims in the new year. But as I mentioned at the beginning, this is an activity that we expect to resume as before once the economies and courts are fully open again. But yes, there was a slight lull last year in new claims activity. In terms of the weight before we begin to release margin, that 3-year number you quoted is exactly right, and we don't intend to change that behavior.

[Operator]

[Operator Instructions] Our next question comes from Emanuele Musio from Morgan Stanley.

[Emanuele Musio, Equity Analyst]

I have a quick one on capital. Given the current outlook on casualty and some loss trends alongside the rate improvements, how should we think about funds at Lloyd's requirements and Lloyd's capital charges. Do you expect this to come down a bit this year? Or maybe it should not be material?

[Sally Michelle Lake, Group Finance Director & Executive Director]

I don't think -- thanks, Emanuele. I don't think I've got a view on that. We definitely haven't assumed anything around that within our capital projections. So we would -- it would be imprudent to do that. I think that the way that we always approach, the way that we model capital, we wouldn't take those kind of benefits in it. That said, we'd wait for any kind of true confirmation of that. So clearly, as we're growing the book where our capital model recently have an internal model, our capital model is taking account of the growth that we're seeing, the trends that we're having and the rates that we're getting in the same way that it always has, and so nothing's changed there.

[Operator]

Our next question comes from Ben Cohen from Investec.

[Benjamin Cohen, Analyst]

I just wanted to ask a broader question. Given how spooks the equity market is getting at the moment about rising inflation, I just wondered if you could remind us how sensitive your different lines are to sort of long-term sort of broad inflation expectations? And I suppose maybe talk particularly about the areas that would be more exposed to the sort of squeezes that there have been on raw material prices and commodities and the rest of it?

[Adrian Peter Cox, CEO & Executive Director]

Okay. So the squeeze on lumber prices at all would have an impact on rebuild costs for our property business. They also have an impact on the values that we ensure. So that is something that we should get premium for. So we get the chance to rate for it, which is a good thing.On the liability side, we are assuming claims inflation anyway. So I think we're sort of hedged against that in the way that we're underwriting that business. If we were to get a burst of inflation, there's also a natural offset between our discounted liabilities and the change in investment income.

[Operator]

[Operator Instructions] We have a follow-up question from Andrew Ritchie from Autonomous.

[Andrew James Ritchie, Partner, Insurance]

Sorry, just a short follow-up. The $70 million cat loss in the quarter was a bit higher than I would have expected for the footprint of the loss. So I'm just a bit curious to know where it came from. Is it more coming from sort of property binder type books than on the reinsurance side? And I mean, were you a bit surprised by the size of it? I'm just trying to understand the reason. It's helpful to know as if we have a sort of similar event in that kind of region. Is this the kind of level of loss we would expect? Or was there something particularly unusual about the footprint of it?

[Adrian Peter Cox, CEO & Executive Director]

Yes. So I think you made some good observations there, Andrew. It is more of an insurance loss for us than a reinsurance loss. And our insurance -- the proxy insurance book is much bigger than our reinsurance book. It's -- although it is a modeled loss, it's a very extreme one as far as RMS is concerned. So it fits into one of those sort of unexpected loss events. And I think, actually, it's a question we're going to have to deal with about how we deal with that increasing frequency of unexpected natural catastrophes and how we price an underwriting model for that. I think when we look at where it comes from in our insurance book, it's actually in our open market book, and our open market book is very primary, both at what we write in London and in the U.S. And so when you have an open market book, that's very primary. And we do have a fair amount of business in Texas, and something like that happens. We will pay some losses, and that's what you've seen there.

[Andrew James Ritchie, Partner, Insurance]

Or just share excess of loss or does it -- I mean, did you get much recovery on it? Or is it that not quite big enough for that?

[Adrian Peter Cox, CEO & Executive Director]

No, we have not recovered from our property catastrophe program on this. No, it's not quite big enough.

[Andrew James Ritchie, Partner, Insurance]

Okay. So that's annoying, that's the kind of level of loss. I got it. Okay. Right. That might explain why.

[Adrian Peter Cox, CEO & Executive Director]

Now if it was to get much bigger, it would do. So we weren't far off, but we didn't -- we did a couple of them, yes.

[Operator]

We have another follow-up question from Iain Pearce from Crédit Suisse.

[Iain Pearce, Research Analyst]

Just a quick one. Just a quick one on the COVID losses for H2. We have seen some things start to be canceled for H2. I'm just wondering if you can give us any detail on sort of exposure, either geographically or the type of event just so we can sort of get an idea of whether you're looking potentially on risk for these or not?

[Adrian Peter Cox, CEO & Executive Director]

Yes. So as I mentioned, our core markets are in the U.K. and the U.S., but we do have some business in Europe and the Far East. Yes, there are some things that have been canceled. There are also a number of things that are going ahead, either behind closed doors or with people present. We did a bottom-up exercise a couple of weeks ago on this, and I think we are comfortable both the $340 million and the $50 million. But yes, you're right, there are some things that are being canceled. But there are also some things that are going ahead, and that's the offset that we've seen today. It's a mixture of conferences and sporting events.

[Operator]

We have no further questions, so I'll hand it back to you, Adrian.

[Adrian Peter Cox, CEO & Executive Director]

Well, thank you very much indeed, everyone, for calling in this morning and for the questions. I hope that was useful. If you have any follow-up questions, please don't hesitate to get in touch with us and enjoy the rest of your day. Thank you very much, indeed.

[Operator]

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.