Beazley PLC

LSE:BEZ

Earnings Call Transcript 2021-Q3

[Operator]

Good morning, everyone, and welcome to Beazley's Q3 2021 IMS Earnings Call. My name is Seb, and I'll be the operator on your call today. [Operator Instructions] I will now hand the floor over to Adrian Cox to begin. Please go ahead.

[Adrian Peter Cox, CEO & Executive Director]

Thank you, Seb. Good morning, everyone. Welcome, and thank you for taking the time to dial in to our Q3 IMS. Overall, I think a reasonably positive quarter for us. We indicated back in the half year, our desire to grow exposure in this market. Year-to-date, now that's plus 6%, up from 2% at the half year and now our original plan, which is pleasing. Our net to gross premiums are roughly the same ratio that they were in the half year.Overall, I think the pricing environment going into 2022 is slightly firmer than we had thought at the beginning of the summer, driven really by property and reinsurance. There are still bits of rate increase tapering across the business, but they are fewer than they were in Q2. I think that's encouraging going into next year. We continue to reduce our overall [ cycle ] aggregates and the rate change in cyber continues where it was back in the summer at the levels we shared there. And we have less cyber as a portion of our overall business than we did 12 months ago. However, we are still finalizing our 2022 plan for cyber. And if the favorable loss trends persist and the demand-supply dynamics remain, there may well be an opportunity to regrow that business again, which is very exciting for us.I'm pleased with our performance in the -- in terms of cat for Q2, Q3. There are quite a number of them, but we have done quite a lot of work on our property and reinsurance books, and that appears to be paying off. When we look at the overall cash activity for the year, the costs for us are running ahead of the cap margin that we had, and that's the driver of the reason for smoothing our guidance from low 90s to mid-90s. However, our capital position remains strong and within the preferred range, contemplating all the loss activity to date and the growth plan we have for next year, which is fully funded for.Don't often highlight investments. And I think the team has done a very good job this year, generating 1.4% year-to-date. That's remaining within risk appetite and not changing our risk appellate. However, it is a difficult environment. And I'm not sure how much more they're going to make between now and the end of the year. I want to mention quickly Beazley Benefits, the business that we sold earlier in the year. It was a good business. It's all we had for a while, but the [ admitted ] benefits business in the U.S. is very disappointing from P&C markets. And we had hopes to define some synergies between that product and the rest of our product set, which we can never quite do. And so strategically made sense for us to sell it. It was about a $30 million book for us overall. So not a significant amount of premium.Lastly, I'd like to welcome Bob Quane on to Beazley as CUO, and I look forward to introducing you --- to you all at the year-end. And with that said, I'd like to open up to Q&A.

[Operator]

[Operator Instructions] The first question today comes from Andrew Ritchie from Autonomous.

[Andrew James Ritchie, Partner, Insurance]

First question, just on the cat losses, just clarify the breakdown between property and reinsurance. I guess I'm trying to understand, I think you said with the Uri loss in Q1, you were a bit surprised that the property exposure on that through sort of binders, et cetera, how has that played out for the Q3 losses? Secondly, on capital planning. Is there a meaningful benefit to capital beyond the gain from selling Global Life? And also on capital planning, is there any planned change into the gross versus net, given the amount of growth you're seeing, I'm thinking on a projected basis or also related to that, do you anticipate meaningfully higher reinsurance costs, which could also affect the gross to net ratio?

[Adrian Peter Cox, CEO & Executive Director]

Okay. I'll try and remember all those. And on the first question on catastrophes, we don't break down the mix of losses between various books or various parts of our business. I did share that we thought we were slightly disappointed with our Uri loss in Q1. We are relatively pleased with our performance in the cats across the globe in Q2 and Q3. They're much more in line with what we anticipated. Capital planning, gross versus net, we'll probably continue in the same portion over the proportions over the near term. Our ambition is to reduce the amount of reinsurance that we buy over the cycle. And we intend to do that as we grow our capital base, retain more earnings and so on and so forth. We're certainly not intending to buy more reinsurance as a proportion of the whole next year but as the growth opportunities continue to roll to make sure that we seize the opportunity to build a business with clients that we want to retain over the long-term because that's how we create value.

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

Andrew, this is Sally here. I think you asked around the Beazley Benefits or benefit to capital. There isn't any -- it's not -- it wasn't a significant capital driver in terms of the business that we wrote. So the benefit to capital would broadly be the sale proceeds. That wasn't -- it wasn't a drive. The reason for the sale wasn't to do with the capital. It wasn't driven by capital.

[Operator]

Okay. Next question is from Freya Kong at Bank of America.

[Freya Kong, Research Analyst]

Two questions, if I can. So firstly, the cyber book has always been around, I think, 15% of your overall portfolio in terms of premiums. Given the move that we've seen in rates, how are you thinking about your premium mix going forward? And what about from a capital allocation perspective? Second question, you've talked extensively about the attractive growth opportunities in '22 and having enough capital to fund this. How do you weigh up the attractiveness of the growth opportunities versus a return of dividend?

[Adrian Peter Cox, CEO & Executive Director]

Thank you for the interesting questions. So your cyber question is very pertinent. We've always talked about diversification and reports of it, and the traditional [ measure ] of it has been on the income. We are in this interesting position where we're taking aggregate exposure off the book, but the rate changes so extreme that the overall diversification if we measure it to premium hasn't really been impacted as much. And so we're thinking about how to think about that going forward. I do think there's an opportunity for us to grow our cyber business next year in a way that's positive for both our clients and our shareholders. If there is an opportunity, we may go over the 15% temporarily. It's important, we retain that diversification but at the same time, there is a very exciting opportunity. We may break that guidance from time to time. And so that's very large thinking at the moment about what we want to do next year and how we want to think and communicate about diversification. So if you ask me again at year-end, I'll probably have a better answer to speak than I do now. With regards to dividends, our guidance remains unchanged. We're committed to resuming a dividend at year-end. Having said that, we want to be able to do both. We want to be able to continue to see growth opportunities and restart the dividend. I'm hopeful that we will be able to do both.

[Operator]

Next question comes from Ming Zhu from Panmure Gordon.

[Ming Zhu, Analyst]

Just 2 questions, please. First is, could you just give some color in terms of your U.S. and the ML book and the sort of the overall environment there, please? And my second question is with all the sort of net cat losses, we've seen in the past couple of decades, are you still -- how are you pricing these? Are you still pricing them as 1 in 100 event or one that there should be an industry debate in terms of going to a 1 in 100 event?

[Adrian Peter Cox, CEO & Executive Director]

Do you mind clarifying what color you'd like on our U.S. management liability book?

[Ming Zhu, Analyst]

I mean just in terms of how you manage the tail risk, so at the moment and in terms of the rate environment?

[Adrian Peter Cox, CEO & Executive Director]

Okay. So we have grown our management liability book, both in the U.S. and internationally, these last couple of years. In a period, I think where there is elevated risk imaginal ability, which we've been talking about for a number of years now. The difference, though, between now and the 4 years ago is that we're able to underwrite and price for that elevated risk both in the U.S. and internationally. I think that the price environment remains strong in both sets of markets. So although the rate of growth increase is tapering currently for D&O, I think the market is fairly unanimous, and it's thinking that we remain in a period of elevated risk that D&O is exposed to social inflation and event-based risks, which continue to happen and underwriting price accordingly. And whilst that imaginal ability remains, I think we remain positive about the product. On pricing catastrophe risk, it's a very pertinent one also. We have added a load to our proxy and reinsurance businesses next year for unmodeled and under modeled perils and have kicked off a project to update our underwriting and our pricing to look forward at climate change risk, which I think -- I think a lot of insurers have started to do at the moment. It's a complicated project, but a very important one to us. And I think something we'll be able to talk a little bit more about at year-end.

[Operator]

Our next question comes from Will Hardcastle at UBS.

[William Fraser Hardcastle, Analyst]

Two questions. The first one would be Beazley Benefits very quickly. Would I be right in thinking that future earnings impacts lost sort of less than 1% in expectations, presumably on [indiscernible]. And then the second one is more on the cyber. How should I view the incremental capital requirement year-to-date? Because presumably, there's been a lot of it in rates, not exposure, so it shouldn't have been absorbing too much capital, but there's somewhat of a industry debate about the appropriate capital level. So is this -- obviously, we've got very big premium growth. Are you seeing incremental capital requirements on that this year or not?

[Adrian Peter Cox, CEO & Executive Director]

Well, thank you for those questions. The first one on Beazley Benefits, yes, you're right. From an earnings perspective, de minimis impact looking forward. Cyber and its impact on capital, again, you're right. The increase in price that we've been able to charge this year and the reduction in aggregate the marginal impact on capital from the premium growth this year has been very much offset. And as we looking forward, those dynamics remain, I think. Yes, we continue to make sure that we are setting the appropriate levels of capital aside as a [ class ] looking at both the attritional risks but also the tail risk and the accumulation risk, which continues to evolve and change as we go. And we -- and in fact, the industry are continually looking at what systemic risk means for cyber and both how to manage that risk and how to make sure we are appropriately capitalized for it.

[Operator]

Our next question is from Tryfonas Spyrou from Berenberg.

[Tryfonas Spyrou, Analyst]

Can you have -- I mean, can you give us a sense on where is -- given where and which areas are more likely to have exposure next year, in which areas you are more likely [ close ] to rate. The second is on the cyber, very pleased to hear that it is actually paying off. Can you give us a sense of where overall cyber [ target ] down in the market? And how do these compare with the experience you're seeing on new book? And thirdly, any comments on the underlying claims environment on the rest of the group, particularly in specialty lines given economies have reopened [indiscernible] have resumed in the U.S., I'd appreciate it.

[Adrian Peter Cox, CEO & Executive Director]

Do you mind repeating your second question?

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

I think I've got it, about where you grow exposure and where are you taking price next year. The second one, I think, is around, how are trends in cyber comparing to what the wider market is seeing? And the third one is outside the cyber, what are the trends that we seeing in terms of claims.

[Adrian Peter Cox, CEO & Executive Director]

Yes. All right. Exposure growth, our plans for next year are contemplating the sort of same mix of enthusiasm and defensiveness that we've had this year, the sort of 85%, 15% mix we've been talking about before, driven by our thoughts around aggregate pricing for social inflation in areas that are particularly exposed and on adequacy of that [ repricing ]. And so I think your -- the sort of growth rates you see and differences between exposure and rate change is persistent next year. I think cyber loss trends, it's an interesting question. And actually, we were discussing yesterday at the Board. It's difficult to -- we're getting very mixed signals as to what the claims environment is doing overall. And so some evidences that there the claims environment remains as it was in the first half of the year. Other signal show us that it may be down a little bit. All we can say with confidence is what we see with our own numbers. So I can't give you a completely certain answer on that, but it's a very good question. With regards to claims in the specialty lines book, we are seeing as the courts reopen sign that sort of behaviors and strategies that are driving social inflation that we saw before pandemic are beginning to emerge again, which is exactly what we had thought. And in the areas that were exposed to social inflation, which were as we thought. And so our position across our liability book is -- it's exactly as it was at the beginning of the year, which is that we have to underwrite for it, just as we did in 2019 and prior.

[Operator]

The next question is from Iain Pearce at Credit Suisse.

[Iain Pearce, Research Analyst]

The first one is on the diversification impact in cyber. The first point is, I'm just wondering why you look at it on a premium basis and not on a capital basis, especially when you're seeing rate increases like you are, it doesn't feel that the premium diversification is the right way to assess this. And I guess following on from that, what sort of rough allocation is cyber in your sort of capital requirement? Has it historically been roughly in line with premiums? And then I guess, thirdly, which also follows on is when you look at options to grow this book, what is the potential to sort of grow the premium number and not necessarily grow the capital requirement around great use of reinsurance pricing on someone else's balance sheet. What sort of options are you looking at here to potentially capitalize on what might be a really attractive opportunity?

[Adrian Peter Cox, CEO & Executive Director]

Thank you. I couldn't phrase the question of diversification better myself. So we've always [ excited ] on the premium and never really confronted the sort of dynamics that we're seeing here before. And I think that is forcing us to rethink how we should -- how we should think about their diversification, and we are doing that right now because as you say, when it's all done by rate change, the whole thing breaks down a little bit. And I think we will have some thoughts for you by the year-end, about how we think about diversification and therefore, what we're going to do with that opportunity, assuming that there is one. And again, we'll share more about that ever at the year-end. Not going to share details of how much capital is required across other business but I can't really help you, I'm afraid. And we are looking at different ways that we can capitalize on the cyber opportunity. And you're right. One of the things we want to try and do is to make sure that we capture as much of that opportunity for ourselves as we can rather than writing or what would that capital provide us. Although as you know, we do plan with reinsurers and others sort of where it makes sense, we want to make sure that we kept as much as we can for the [ base ] next year. That's important to us.

[Iain Pearce, Research Analyst]

Perfect. No, that sounds great. So just one follow-up, if I can. I mean, it sort of sounds like there is a potential that this sort of 15% to 20% threshold that you've had historically might move? I know sort of you said there's going to be more guidance at year-end, but there is potential for that.

[Adrian Peter Cox, CEO & Executive Director]

Yes, I think there is both for 2 reasons. One, when there's a distinct and fairly rare opportunity to capture business like this, we obviously need to think about that, and whether we can temporarily move from that and -- but also, and equally importantly, I think, the way that we've historically measured diversification doesn't really stand up at the moment with the rate change that we're seeing. So we have to think about it in a slightly different way. But yes.

[Operator]

Next question is from Ben Cohen at Investec.

[Benjamin Cohen, Analyst]

I have 2 questions, please. Firstly, on the catastrophe parts of the business in property and reinsurance. I just wondered if you could comment as to how adequate you saw rates in general and maybe as a side comment, strategically, just remind us, in particular, what the catastrophe reinsurance portfolio brings to tease it apart from the sort of volatility we're seeing in years like this one? And the second question. On the new ESG syndicate that you're talking about, any sense in terms of how big that might become. And I suppose, does that help offset some of the sort of legacy type [ leasing ] industries that you're ensuring, I suppose, particularly on the marine side. Is there -- would we need to think about that syndicate in terms of offsetting a decline in other parts of the business at the time?

[Adrian Peter Cox, CEO & Executive Director]

Thank you, Ben, and thanks for calling in. The [indiscernible] is a very live question. And I think, broadly speaking, yes, more so on the insurance side and the reinsurance side, as we previously commented. However, I think we do need to update our tools so that we can think properly and contemplate properly the impact of plan change, which we started to do. And that will obviously change both at a macro level and a [ spending ] level how adequate pricing may be when we've done that work. Interestingly, we submitted a return earlier in Q3 on something called CBES, which did some -- was a climate change stress test for the insurance industry. And that has really helped us think about how to model and then start the price for climate change. And we're using some of that -- those tools that we've built and bought to help do that. So I'm encouraged by our journey there. The rationale for reinsurance on the property side, a couple of reasons. I think it does help diversify our property book, both geographically. Our insurance book is very North American concentrated and our reinsurance book is much more diverse than that. But also in terms of [ tails ] because our property insurance business is very primary and our reinsurance business is mostly excess of loss, pretty much 100% excess loss which allows us to manage our overall portfolio in a slightly smarter way having both those reinsurance and insurance options. So there's good reasons to have both in our book. ESG syndicate, how big of an opportunity is that over the long term? I think it's quite big. We started out relatively small because we wanted to see whether it resonated with our clients and our brokers and our underwriters. And to give ourselves a sort of mandate of clients engagements -- with clients on ESG because we had something available for them. And I think that gives us that ability to start the conversation and to learn more of assets and to figure out how we can help both in terms of new products we can develop services so we can offer and ways we can help our clients transition from where we are now to a low-carbon environment. And that's very much the attitude we have as the company. So rather than thinking about the ESG syndicate offsetting sort of polluting main business, what we're trying to do is use the new syndicate as a way that we can learn to help our clients do that transition at all parts of the business. I don't think it's responsible for the insurance industry to turn its back on, say oil and gas because we've got to get from here to there, which we can't do immediately, and that's really the game of the new syndicate.

[Operator]

Next question is from Derald Goh from Citigroup.

[Teik L. Goh, Assistant VP & Associate]

Just a couple of questions, please. The first one is on cyber, again, I'm afraid. I'm just keen to here, but could you remind us what are the forms of reinsurance that you have in place and also related to that, what are you hearing from your reinsurance counterparties? Can you give us a sense around the rate expectations or any changes, terms and conditions and things like that? And secondly, just on the COVID losses. How is the reserve that you set aside largely developed and also the exposure that you previously indicated for the second half of this year, is this has to assume that those have filled up for now?

[Adrian Peter Cox, CEO & Executive Director]

I'll deal with the second one first, if I may. So we haven't said nothing about COVID in our IMS, and that's because there's nothing to say. And I think going forward, we'll continue with that strategy. So we'll update you when there's something to say. So that is to say that our [ casualty ] number remains unchanged. As you say, our aggregate is running off now. Broadly speaking, the world has opened up a little bit. And so with that hopefully things are running off pretty much on expectations. And we will update as and when anything changes there. So as a reinsurance, we buy both proportional reinsurance and excess of loss reinsurance. We've mentioned the systemic cash that we buy before. That program remains impact, both from what we're able to buy some. And that's the coverage that it provides remain relevant and appropriate for cyber, and we're pleased that we've managed to retain both [ base ] of partnership. So on the excess of loss side and on the proportional side. I think reinsurance, what we're talking to are interested and engaged in the opportunity. I think they're becoming more selective as to who they want to partner with. And I think that is the story that we tell around how we're approaching cyber as a business and the ecosystem that we're building and the skills and tools we need to be able to navigate the changing certain environments have resonated with them. And I think we've got a good set of reinsurance partners who are keen to figure out how we can make the most of the opportunity ahead.

[Operator]

Our next question is from Nick Johnson at Numis.

[Nicholas Harcourt Johnson, Analyst]

Two questions. Firstly, on pricing, the rates running ahead of expectations. How much of that would you expect to drop-through to the bottom line? And is it sort of already in combined ratio guidance, perhaps you could remind us on the timing of rates working through to the combined ratio? And secondly, just could you perhaps have a quick update on the event cancellation market. I'm just wondering whether you're seeing business start to return in the event cancellation, do you expect that to be a growth segment next year?

[Adrian Peter Cox, CEO & Executive Director]

Thank you. It seems with those questions when we look at excess rates compared to plan broadly speaking, that's in part of our liability business and our cyber business. So that will take some time [Technical Difficulty] more short tail, of course, also for us and third-party drivers in cyber. So there is a large element of short tail for that. If there is excess margin there, that we'll do relatively quickly, not this year, let's say, but relatively quickly. Of course, when we look at our capital, which we do on a solvency II 2 basis, that may have some capital impacts slightly earlier than that as we recognize these things on a [indiscernible] basis rather than on a prudential basis. But as far as the [ sale ] is concerned, I think it would be right, as I described. The event cancellation business is beginning to take off again. I think it's slower than we had hoped, but it is beginning, and we are very hopeful for next year. I'll encourage that we are also working with various initiatives -- and the government is about trying to figure out how to provide communicable disease coverage going forward because it's very important for that industry as -- the government to cooperate with confidence has sort of coverage. And interestingly, we're one of the leaders in the government U.K. in industry insurance game, which allows communicable disease coverage to repurchase. And we've just written, I think, 3 new risks to support that industry, I think will help encourage to regrow and should be opportunity for us.

[Operator]

[Operator Instructions] We have a question from Faizan Lakhani from HSBC.

[Faizan Ahmed Lakhani, Associate Director of Insurance Research]

One on cyber. There's been a lot of talk around cyber and the work you've done around that. But the industry is pointing to quite a lot of large increases in severity. Have you seen any reduction in severity on your side? And the second question is that you've got a new Chief Underwriting Officer. Does that change your strategy or are you reported to -- looking to change it a little bit.

[Adrian Peter Cox, CEO & Executive Director]

Thank you for those. We've seen reduction in severity. It's a bit early to say that. Yes, we can see frequency trends much more pertinent than severity trends because claims take time to fully settle. So I can provide less clarity on that. What I can say is that we haven't noted severity increasing in the one that we had last year. But as that -- as claims begin to settle more, I think we'll be able to share more about that in the future, but we haven't seen anything getting worse and it was as expected. The new CUO, not necessarily a change of underwriting strategy at all. I think it's always interesting to bring someone in from outside with a different perspective, different experience. And I think that will help to continue to challenge and I'm looking forward to folding that. But we haven't brought [ $40 million ] specifically to do a particular -- to drive a particular change of direction.

[Faizan Ahmed Lakhani, Associate Director of Insurance Research]

Okay. It's more of the same that maybe a refinement.

[Adrian Peter Cox, CEO & Executive Director]

Sorry, say that again.

[Faizan Ahmed Lakhani, Associate Director of Insurance Research]

It's more the same, but sort of a refinement, I guess, on the underwriting.

[Adrian Peter Cox, CEO & Executive Director]

Yes.

[Operator]

We have a follow-up question from Freya Kong at Bank of America.

[Freya Kong, Research Analyst]

Just another question, please. How are you guys thinking about potential wage inflation in the U.S. market? And what's the outlook here?

[Adrian Peter Cox, CEO & Executive Director]

Good question. We -- so we've been spending a lot [indiscernible] inflation this year. I've been relatively bearish on inflation for a while now. Of course, it impacts all elements of our business, underwriting costs and the asset side. And so we have put in specific plans and loads into next year to contemplate inflation. I think it impacts our cost base, which we need to plan for. And it does have an impact on the cost of claims. And we have both increased --- looking for both social inflation and inflation into our business and actually to compensate for that. But personally speaking, the essential assumption for the business that we don't see the drivers of inflation, particularly at ending next year and so we haven't planned for that.

[Operator]

This time, we have no further questions on the call. I'll hand it back to the team to conclude.

[Adrian Peter Cox, CEO & Executive Director]

Super. Thanks so much indeed. Thank you, everyone, for calling in and for the questions. If you have any further, please don't hesitate to contact Sarah Booth, and we'll answer as much as we can. Once again, thank you much, indeed, and have a good day.

[Operator]

This concludes today's conference call. Thank you all very much for joining, and you may now disconnect your lines.